-----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, H7olbnqwq/TjKOGug51HejctgQZAywfJZbkAuXYb7iGV3JaFeK1ConXgiZWsSezD oAe1nZB47K/fBwmGr8+jdg== 0000805583-96-000028.txt : 19960926 0000805583-96-000028.hdr.sgml : 19960926 ACCESSION NUMBER: 0000805583-96-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960925 SROS: AMEX 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09716 FILM NUMBER: 96634175 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-K 1 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year ended June 29, 1996. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _____________ to _____________ Commission File Number: 1-9716 DONNELLY CORPORATION (Exact name of registrant as specified in its charter) Michigan 38-0493110 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 414 East Fortieth Street, Holland, Michigan 49423 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 786-7000 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered Class A Common Stock American Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / X / No / / Indicate 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 the Form 10-K or any amendment to this Form 10-K. / X / The aggregate market value of voting stock held by non-affiliates of the registrant was $102,811,298 as of August 30, 1996. Number of shares outstanding of each of the registrant's classes of common stock, as of August 30, 1996. 4,261,178 shares of Class A Common Stock par value, $.10 per share 3,575,959 shares of Class B Common Stock par value, $.10 per share 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for its annual meeting of shareholders to be held October 18, 1996, are incorporated by reference into Part III of this report. PART I. ITEM 1. BUSINESS ITEM 1 (a) GENERAL DEVELOPMENT OF BUSINESS The Company is primarily engaged in the design, manufacture, marketing and sale of glass related and plastic molded products for the automotive industry. The Company also supplies glass coatings for the transportation, electronics and computer industries (either solely or through several joint ventures). The Company is committed to improving shareholder value through focused development of core automotive businesses primarily by increasing dollar content per vehicle through introduction of new technologies, increasing volume through penetration into new and emerging markets, improving the efficiency of current operations and the effectiveness by which the Company launches new products. In line with the strategy, the Company has continued in the last few years to build volume growth in all existing businesses; introduced products new to the Company including exterior and interior door handles, modular window systems and encapsulated sunroofs, electrochromic mirrors and interior trim and lighting; completed the largest acquisition in the Company's history through the purchase of an equity share of Hohe GmbH & Co. K.G.; expanded and built production equipment and facilities; and undertaken a major restructuring program. During the fourth quarter of 1996, the Company reached a patent and licensing settlement with Gentex Corporation that resolved patent litigation between the two companies relating to automotive electrochromic rearview mirrors. In the agreement, Gentex agreed to pay the Company a settlement of $6 million, which the Company used largely to offset patent litigation costs that had previously been capitalized in 1996. In the settlement the two companies also agreed to cross licensing of certain patents and agreed not to pursue patent litigation against each other on certain other patents for a period of four years. See Item 3. During 1995, the Company implemented a strategic plan that positioned the Company as one of the world's significant automotive suppliers. As a result, the Company completed the disposition of three non-core businesses: Appliance Products, Heavy Truck Mirrors, and the Company's interest in a joint venture called OSD Envizion, which manufactured electronic lenses for welding helmets. In the fourth quarter of fiscal 1995, the Company completed an acquisition of an interest in Hohe GmbH & Co. KG ("Donnelly Hohe"), a German limited partnership. Based in Collenberg, Germany, Donnelly Hohe serves many of the main auto producers in Europe in exterior automotive mirrors, interior mirrors, door handles, automotive tooling and electronic components related to mirror systems. With the completion of the transaction, the Company and Donnelly Hohe together have become the world's largest producer of automotive mirror systems. Through the Company's joint venture with Asahi Glass Company, D&A Technology, Inc. ("D&A"), the Company provided substantially all the modular windows for General Motors' Saturn cars through the 1995 model year. Due to the loss of the Saturn Modular Window business, the Company dissolved the joint venture in the first quarter of 1996 and acquired Asahi's 40% interest in D&A. D&A represented 5% and 8% of the Company's combined consolidated net sales and net income in 1995. Due to the major loss of business and the 3 inability to attract significant new business for the plant, the Company made a decision in 1996 to close the Tennessee facility. The Company was incorporated in Michigan in 1936. The Company's corporate offices are located at 414 East Fortieth Street, Holland, Michigan, 49423, and its telephone number is (616) 786-7000. Unless otherwise noted or indicated by the context, the term "Company" includes Donnelly Corporation, its wholly owned subsidiaries and Donnelly Export Corporation, a shareholder Domestic International Sales Corporation under the Internal Revenue Code owned entirely by the holders of the Company's Class B Common Stock. ITEM 1 (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company is an international supplier of high quality automotive parts and component systems from manufacturing operations in North America and Europe. The Company supplies automotive customers around the world with interior and exterior mirror systems, window systems and interior lighting and trim systems. The Company also provides products to several non-automotive markets, none of which are reportable segments. ITEM 1 (c) NARRATIVE DESCRIPTION OF BUSINESS PRODUCTS, SERVICES, MARKETS AND METHODS OF DISTRIBUTION Automotive Products Automotive Vision. The Company manufactures a wide range of interior and exterior rearview mirror products. The Company and its European affiliate, Donnelly Hohe, together are the world's largest producer of automotive mirror systems. Interior Rearview Mirrors. The Company began producing prismatic day/night mirror glass in 1939 and has been a leading innovator of interior rearview mirrors in the United States since that time. The Company supplies interior rearview mirror assemblies to General Motors Corporation, Ford Motor Company and Chrysler Corporation (the "Big Three" automakers), the North American facilities of foreign owned automakers (the "New Automotive Manufacturers") and North American joint ventures between the Big Three automakers and foreign automakers. Through Donnelly Mirrors, Limited ("DML"), its Irish subsidiary, the Company supplies interior rearview mirror assemblies to French automotive manufacturers. DML also manufactures and sells prismatic interior rearview mirror glass throughout Europe and to other foreign producers of complete interior rearview mirrors. The interior mirror product line ranges from the day/night flip mirror to rear-vision systems that incorporate a variety of sophisticated electronic features such as complex modular interior mirror assemblies, including mirrors with added features such as lights, electronic compass and other features as specified by the customer. Lighted mirrors direct light down to the laps of the driver and passenger for reading or general lighting The Company is developing and offering for sale, various electrochromic technologies for use in day/night automotive mirror systems that automatically dim when headlights approach from the rear. Some of these electrochromic technologies had been the subject of litigation. See Item 3. The Company is also developing electronic vision systems for vehicles that make use of advanced sensors and video microchip technology to control dimmable interior and exterior mirror systems. Exterior Rearview Mirrors and Exterior Trim. In 1987, the Company began manufacturing complete outside mirror systems. Complete outside mirror systems are more complex than base interior rearview mirror 4 assemblies. The outside rearview mirrors are combined with automatic or manual adjusting mechanisms, wiring harnesses and other hardware into an injection-molded housing that is color painted to match exactly the vehicles' paint color. These complete units are then ready for easy assembly onto the vehicle. In addition, most new vehicles are equipped with two exterior mirrors. Accordingly, the per vehicle sales price of exterior mirror assemblies substantially exceeds that of interior rearview mirror assemblies. The Company supplies exterior rearview mirror assemblies to primarily Honda of America, Ford and Mazda. Through Donnelly Hohe and Donnelly Vision Systems Europe, the Company supplies complete exterior rearview mirrors to all of the main European automotive customers. A new product area for the Company, arising out of established skills in automotive paint and plastic molding, is the manufacture of exterior trim components. While still a small product line for the Company, the Company is now producing a wide variety of exterior door handles for Ford, Honda and Mazda. The Company manufactures and supplies flat and convex chrome-coated mirror glass to other manufacturers of exterior mirror assemblies and to the Company's own internal complete mirror operation. This is a small product line that was relocated to Monterrey, Mexico in 1995. The Company introduced a new mirror system innovation in 1993, trademarked INTELLIGENT VISION(TM). This system combines a unique new electrochromic material with a video microchip that operates as a "smart sensor." This system permits the user to monitor light levels from behind the vehicle and automatically adjusts all three rearview mirrors independently to compensate for glare. This technology had been the subject of patent litigation; See Item 3. In 1996, the Company introduced its Illuminator(TM) ground illumination mirror, the world's first commercial automotive outside mirror that includes remote-control security lighting, electrochromic dimming and exterior turn indicators all integrated into a single unit. INTERIOR LIGHTING AND TRIM. The Company manufactures various interior trim products including dome lights, interior door lights, map lights, courtesy lamps, lighted and non-lighted grab handles and trim components such as overhead consoles. The Company' extensive capabilities in optics, injection molding and electronics provide a distinct competitive advantage for the Company' automotive interior lighting and overhead trim products. The Company' lighting systems have been well received by the marketplace largely because of the Company's expertise in developing precision optical lenses. These skills enable the Company to produce interior lighting that is highly focused and directed within the vehicle, and which sharply reduces unwanted spill-over glare. These lights are incorporated into multi-purpose modulars that can include features such as grab handles, coat hooks, sun visors and vents. The Company believes automakers will increasingly seek the suppliers who can provide complete interior lighting and trim systems. The Company's goal is to be the leading supplier of interior overhead trim that incorporates advanced electronic and lighting systems. Our customers for those products will integrate them into larger, complete interior systems that will then be assembled into the auto manufacturers' final products. The Company currently supplies these products to the Big Three automakers, Honda and Toyota and has orders from Nummi (a joint venture between Toyota and General Motors) and Mercedes Benz. In the fourth quarter of 1996, the Company formed Donnelly Eurotrim, a 100% owned affiliate organized under the laws of Ireland, to offer our interior lighting and overhead trim products to the European market. MODULAR WINDOWS. Modular windows consist of window glass and a plastic molding that encapsulates various components, such as the frame, grommet, trim and hardware. These windows offer improved quality, 5 aerodynamics and performance at a competitive price to conventional window systems. Modular windows can be molded using polyvinyl chloride ("PVC") or a urethane reaction injection molding process ("RIM"). The PVC process is less expensive primarily because the material is less costly and does not require painting. PVC, however, is more difficult to mold, particularly for large windows. The Company believes that its ability to design and mold windows in either process and its expertise in PVC molding are significant competitive factors. Recent additions include hinged windows and "flush surface" windows that involve single sided encapsulation, bonding of hardware directly to glass and the incorporation of color matched body hardware into the window system. The Company's windows are used for rear and liftgate windows, quarter windows, aperture windows, fixed vent windows and windshields on vehicles produced by each of the Big Three automakers and certain of the New Automotive Manufacturers. Increasing use of modular windows by the Big Three reflects trends in the industry towards outsourcing, modularization and reliance on suppliers for design. Considering the number of modular windows that have been specified and are being designed for future models, the Company expects continued expansion of the market for modular windows sold to the Big Three automakers and New Automotive Manufacturers. In addition to its manufacturing facility in Holland, Michigan, the Company also has a modular window manufacturing facility in Mt. Sterling, Kentucky, which focuses on customers in that geographic area. Additionally, construction was completed in 1995 on a facility in Langres, France to produce new windows' systems for Chrysler. In the fourth quarter of 1996, the Company formed a 50-50 joint venture with Shanghai Fu Hua Glass Company, Ltd. to produce framed glass products for the Asian automotive industry. Shanghai Fu Hua Glass Company is itself a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint venture will begin manufacturing encapsulated and framed glass products by the end of 1997. The Company has licensed major automotive glass companies in Europe and Japan to manufacture modular windows for sale in foreign markets using the Company's technology. NON-AUTOMOTIVE BUSINESSES The Company is heavily committed to its core automotive businesses which will remain the Company's central focus. However, the Company has developed a number of significant non-automotive businesses and relationships over the years. These activities developed from core technologies that had applications outside of the automotive industry. The Company's non-automotive businesses have been structured to be operated independently from the Company's core automotive businesses. INFORMATION PRODUCTS. The Company's various, electrically conductive, transparent, thin-film, coated glass products are used in computer applications such as touch screens, contrast enhancement computer screens, computer face plates that shield the operator from terminal emissions and pen-interface electronic devices. OPTICS. A new focus at the Company, this small group is working to commercialize low cost, high quality, advanced diffractive optics in both automotive and non-automotive areas. The Company believes this new optics development significantly improves lighting and imaging systems. 6 NON-CONSOLIDATED JOINT VENTURES HOHE GmbH & CO. KG ("Donnelly Hohe"). In April 1995, the Company acquired an interest in Hohe GmbH & Co. KG, a German limited partnership. Donnelly Hohe, based in Collenberg, Germany, serves many of the main auto producers in Europe in exterior automotive mirrors, interior mirrors, door handles, automotive tooling and electronic components related to mirror systems. The Company acquired 48 % of the controlling general partnership interest and 66 % of the limited partnership interest. SHANGHAI DONNELLY FU HUA WINDOW SYSTEMS LIMITED ("Shanghai Donnelly Fu Hua"). In the fourth quarter of 1996, the Company formed a 50-50 joint venture with Shanghai Fu Hua Glass Company, Ltd. to produce framed glass products for the Asian automotive industry. Shanghai Fu Hua Glass Company is itself a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint venture will begin manufacturing encapsulated and framed glass products by the end of 1997. VISION GROUP PLC ("VISION"). The Company is working with VISION to produce electronic vision systems for the world automotive industry using an innovative video microchip developed by VISION. The Company and VISION have been collaborating to produce "smart" chips that can perform a variety of functions in a vehicle including control of advanced mirror systems, video displays, lighting control and security devices. In the fourth quarter, VISION completed a public offering of its stock, which is listed on the London Stock Exchange. The Company owns 30.4% of VISION, which is located in Edinburgh, Scotland. KAM TRUCK COMPONENTS ("KAM"). In the second quarter of 1995, the Company sold 81% of its heavy truck mirror business to KAM. KAM supplies GLARESTOPPER(R) solid state electrochromic mirrors for large trucks. The mirror permits truck drivers to manually adjust the glare of their mirrors by a range of up to ten times. APPLIED FILMS CORPORATION ("AFC"). AFC is a major manufacturer of thin-film glass coatings used in the production of liquid crystal displays (LCD's). LCD's are widely used in watches, games, calculators and instrumentation. AFC is located in Boulder, Colorado. The Company is currently exploring opportunities to exit this business. The Company is a 50% shareholder of AFC. DONNELLY YANTAI ELECTRONICS CORPORATION, LTD. This 50 % owned venture produces glass coatings similar to those of AFC for use in the Chinese LCD market. This operation is located in the Yantai Peninsula of the People's Republic of China. Ownership of the Joint Venture is expected to eventually transfer to AFC. MARKETING STAFF In North America, the Company markets its automotive products through a sales force of approximately 34 people who, with approximately 146 members of the Company's engineering staff, work with its customers' design teams early in the design process. Nearly all sales are made directly to automakers with the exception of some interior and exterior mirror glass components. The Company's wholly owned European subsidiaries employ 9 sales people, including 2 based in Japan, and also sell through a trading company in Japan. The Company markets its non-automotive products through a sales force of 3 sales people and 12 engineers. The Company works with potential customers on the development of new applications for electronic information display products. 7 NEW PRODUCT OR INDUSTRY SEGMENT INFORMATION The Company has made significant investments in the development of solid-state, thin-film electrochromic technology that has potential for mirror and window applications. Electrochromic coatings allow the user to darken glass to the desired degree through the application of an electrical current to the coating. The Company is committed to its Variable Light Control (VLC) Technology. These technologies allow the user to control the flow of light through, or the reflection of light from, glass. The Company continues to market electrochromic day/night automotive mirror systems that will automatically dim when headlights approach from the rear. This system had been the subject of litigation between the Company and Gentex Corporation for over five years. See Item 3. The Company has continued to actively develop newer and more advanced electrochromic technologies for the automotive marketplace. The Company has developed or licensed a number of promising technologies and several are already available for commercial use. Electrochromic mirror systems are electrically dimmable to reduce the glare from the headlights of other cars approaching from the rear. The Company's GLAREFREE(TM) electrochromic mirror technology offers several advantages over competing technology. The technology has been purchased by Ford, Jaguar, Range Rover, General Motors and others. During 1996, the Company won a number of important new business commitments for interior GLAREFREE(TM) electrochromic mirrors. The commitments include orders in North America and Europe, and they represent a major step forward in the Company's positioning as a strong player in a global market for electrochromic mirrors that industry sources expect to mature at approximately $500 million. With strong technologies to offer and having favorably settled the patent issues that have hampered its ability to compete in recent years, the Company has set ambitious goals for increasing its electrochromic mirror market share in the years ahead. Another major breakthrough in electrochromics came in April 1996, when the Company announced that it has successfully completed Phase I of an electrochromic window development program supported by an $800,000 grant from the United States Department of Energy (DOE). Electrochromic windows can be electronically darkened to screen out unwanted sunlight during the day and returned to a clear state at night or on cloudy days. The Company believes this technology has commercial potential in vehicles and buildings. In fulfilling the terms of the grant, the Company delivered to the DOE large area electrochromic windows that exceeded the agency's specifications for performance, cost and reliability. The completion of Phase I of this program was a major step in establishing the market structure and proving the technology of electrochromic windows. With that step accomplished, the Company is looking forward to the start of Phase II, which the Company anticipates will include a pilot production line and commercialization of the Company's electrochromic window technology. In 1996, the Company introduced its Illuminator(TM) ground illumination mirror, the world's first commercial automotive outside mirror that includes remote-control security lighting, electrochromic dimming and exterior turn indicators all integrated into a single unit. In the fourth quarter of 1996, the Company formed a 50-50 joint venture with Shanghai Fu Hua Glass Company, Ltd. to produce framed glass products for the Asian automotive industry. Shanghai Fu Hua Glass Company is itself a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint venture will begin manufacturing encapsulated and framed glass products by the end of 1997. 8 Also in the fourth quarter of 1996, the Company formed Donnelly Eurotrim, a 100% owned affiliate organized under the laws of Ireland, to offer our interior lighting and overhead trim systems for the European market. Other than the aforementioned items, the Company has not otherwise made any public announcements of, or otherwise made public information about, a new product or industry segment which would require the investment of a material amount of the Company's assets or which otherwise would be material. SOURCES AND AVAILABILITY OF RAW MATERIALS Generally, the Company has multiple sources of supply for the important materials and components used in its products. Where the Company only uses one source for an important material, it believes alternative sources are available or could be readily developed. Because of the commodity nature of common materials such as glass and plastics, the Company is somewhat vulnerable to price fluctuations in many of its material purchases. PATENTS, LICENSES, ETC. While the Company owns approximately 175 patents and considers them important, the Company as a whole is not dependent to any material extent upon any single patent or group of patents. The Company believes its manufacturing know-how, design of its own manufacturing equipment and development of manufacturing processes are more important than its patents. Certain technology of the Company had been the subject of patent litigation. See Item 3. The Company has licensed certain of its own patents and technology and has licenses under certain third party patents and technology. SEASONAL NATURE OF BUSINESS The Company's net sales and net income are subject to significant quarterly fluctuations. These fluctuations are attributable primarily to the production schedules of the Company's major automotive customers. The Company generally reports lower net sales and net income in the first half of its fiscal year than in the second half because domestic automotive production is generally lower during the first two quarters of the Company's fiscal year. WORKING CAPITAL PRACTICES The Company does not believe that it, or industries which it serves in general, have any special practices or special conditions affecting working capital items that are significant for an understanding of the Company's business. 9 IMPORTANCE OF LIMITED NUMBER OF CUSTOMERS In 1996, approximately 81% of the Company's net sales were to the following major automobile manufacturers: Chrysler Corporation 33% Ford Motor Company 22% Honda of America Mfg., Inc. 16% General Motors Corporation 10% ---- Total 81% ---- ---- The loss of any one of these customers would have a material adverse effect on the Company. BACKLOG OF ORDERS As of June 29, 1996, and July 1, 1995, the Company's backlog of orders was approximately $93 million and $80 million, respectively. The Company believes that all of its existing backlog will be delivered during the current fiscal year. The Company generally sells to automakers on the basis of long-term purchase contracts or one-year purchase orders, which generally provide for releases for approximately 30 to 90 days of production. Unshipped products under these releases and short-term purchase orders constitute the Company's backlog. GOVERNMENT CONTRACTS The Company does not believe that any portion of its business is subject to renegotiation of profits or termination of contracts or sub-contracts at the election of the government. COMPETITION AUTOMOTIVE PRODUCTS Competition in the markets for the Company's automotive products is based on manufacturing capabilities, design, quality, cost and delivery. The Company believes that its historical emphasis on research and development and on product design, as well as its high quality ratings and close working relationships with its customers, are important competitive factors for the Company. Its international experience and relationships are also significant competitive factors in the increasingly global market. A number of the Company's competitors are divisions or subsidiaries of larger corporations, including vertically integrated glass companies, with greater financial resources than the Company and with well- established relationships with automakers. Changing technology and design, and modularization/systems integration capabilities to improve product function and lower costs will continue to place pressure on the Company to be a cost competitive producer of quality, functional automotive products, or lose market share and growth opportunities to competitors who meet these demands. AUTOMOTIVE VISION. The level and nature of competition involving the Company's automotive vision products are varied. The Company manufactures and sells complete interior and exterior mirror assemblies and mirror subsystems to the automotive OEM's. The Company also manufactures and sells interior and exterior mirror glass to other mirror manufacturers. 10 INTERIOR REARVIEW MIRRORS. Competition in the U.S. market for interior rearview mirror assemblies and rearview mirror glass is limited. The Company knows of three principal competitors in the U.S. market: one in the market for base interior rearview mirror assemblies, and two in the added-feature mirror market (electrochromic and lighted mirrors). The Company has developed extensive skills and know-how in mirror glass and interior rearview mirror assembly manufacturing. The Company for many years has sold interior mirror glass to Japanese rearview mirror suppliers and now supplies complete interior rearview mirror assemblies to the U.S. facilities of Japanese automakers, a Korean automaker, and joint ventures between Japanese and U.S. automakers. The Company has several potential worldwide competitors for interior mirror glass sales in Japan and Europe. The Company believes each competitor has a smaller market share than the Company. Also in Europe, the Company competes with several other manufacturers of complete interior rearview mirror assemblies. The Company has one competitor in the U.S. market for automatic interior electrochromic mirrors. The Company and that competitor had been involved in patent litigation with respect to certain aspects of electrochromic technology. The litigation has had an adverse impact on the Company's ability to market interior electrochromic mirrors in the United States and Europe. During the fourth quarter of 1996, the Company reached a patent and licensing settlement with the competitor. See Item 3. EXTERIOR REARVIEW MIRRORS. Approximately 12 U.S. companies manufacture exterior mirror assemblies for sale in the U.S. market for similar type assemblies currently made by the Company. The Company entered the exterior mirror assembly market in 1988 and today is a major supplier for these products to Honda Mfg. and Ford Motor Co. The Company has many competitors worldwide, in the sale of exterior mirror glass. With the Company's recent acquisition of an interest in Hohe, the Company and Hohe together have become the world's largest producer of automotive mirror systems. The Company and one competitor in the U.S. market had been involved in patent litigation with respect to certain aspects of automatic exterior electrochromic mirrors. The litigation has had an adverse impact on the Company's ability to market exterior electrochromic mirrors in the United States and Europe. During the fourth quarter of 1996, the Company reached a patent and licensing settlement with the competitor. See Item 3. INTERIOR LIGHTING AND TRIM. There are many competitors in the market for interior lighting and trim products. The Company believes its close customer relationships, program management, technology and design capabilities and basic materials knowledge are significant competitive factors. MODULAR WINDOWS. The Company has many competitors in the domestic modular window market. Three competitors are major automotive glass manufacturers or are closely associated with automobile or glass manufacturers. The Company believes that the glass manufacturers could further vertically integrate into glass molding and that these companies would be significant competitors due to their size. However, the Company believes that it is still the major technology leader for glass encapsulation and metal bonding of attachments to glass. INFORMATION PRODUCTS The Company believes it is the world's leading producer of coated bent glass for the CRT-based electronic display and interactive systems market. Competition in this segment is based on price, service and quality. 11 RESEARCH AND DEVELOPMENT The Company engages in extensive research and development. It believes its technical capabilities have resulted in the development of new and improved products. In 1996, 1995, and 1994, research and development expenditures were $27,728,000, $22,733,000 and $21,362,000, respectively, or 6.3%, 5.9% and 6.3% of the Company's total net sales for those years. While the Company has an active corporate research and development group, approximately 80% of the Company's total research and development expenditures are product specific and conducted by the Company's product engineers. Corporate research and development work is facilitated by advanced technology labs located in Holland, Michigan, and in Tucson, Arizona, where the Company maintains a close linkage with the faculty and students of the University of Arizona, and in Naas, Ireland. HUMAN RESOURCES The Company believes its human resources are one of its fundamental strengths. The Company currently has approximately 3,100 employees in its Michigan, Arizona, Tennessee, Kentucky, Ireland, France and Mexico facilities. Its domestic work force is non-union. While the Company considers its relationship with its employees to be favorable, organization changes during the past year have put a strain on employee relations. Considerable work has been done to make improvements following these changes and many areas of the Company are improving steadily in the area of employee relations. The Company's work forces in Ireland, Mexico and France are unionized, as are the work forces of most companies in these countries. The Company has no collective bargaining agreements in Ireland or Mexico, where non-economic terms of employment are governed by statute. The Company negotiates wages and benefits approximately annually with its Irish work force. The Company negotiates wages approximately annually and benefits approximately bi-annually with its work force in Mexico. The Company's French subsidiary is subject to the salary schedule and conditions collectively agreed to on a national and regional basis between employers and employees in the plastics industry. The Company has operated for over 40 years under a team-based, participative management system. The Company believes that this approach has increased productivity by emphasizing employee opportunity and participation aimed at continuous improvement. The Company believes this emphasis has resulted in enhanced long-term productivity, cost control and product quality and has helped the Company attract and retain capable employees. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements which involve risks and uncertainties. When used in this report, the words "believe," "anticipate," "think," "intend," "goal" and similar expressions identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those anticipated. Readers are cautioned not to place undue reliance on those forward-looking statements which speak only as of the date of this report. ITEM 1 (d) INFORMATION ABOUT FOREIGN OPERATIONS During the last fiscal year, approximately 10% of combined consolidated net sales were derived from the operations of the Company's wholly-owned foreign subsidiaries. Approximately 8% of combined consolidated net sales were derived from export shipments from the Company's United States operations to customers in 12 foreign countries. The Company has licensed major automotive glass companies in Europe and Japan to manufacture modular windows for sale in foreign markets using the Company's technology. Export revenues are foreign revenues produced by identifiable assets located in the United States. Foreign revenues are generated by identifiable assets at the Company's subsidiaries located in Ireland, France and Mexico. The Company operates three subsidiaries in Ireland, Donnelly Mirrors Limited, Donnelly Vision Systems Europe Limited and Donnelly Eurotrim; one in France, Donnelly EuroGlas Systems; and one in Mexico, Donnelly de Mexico, S.A. de C.V. A summary of the Company's operations by geographic area follows:
June 29, July 1, July 2, (in thousands) Year ended 1996 1995 1994 -------- -------- -------- Revenue: United States $331,469 $317,710 $296,226 Foreign 55,998 36,832 18,367 Export: Americas 49,655 25,016 21,557 Asia 532 981 310 Europe 1,917 2,786 785 Other -- 15 17 -------- -------- -------- $439,571 $383,340 $337,262 -------- -------- -------- -------- -------- --------
June 29, July 1, July 2, (in thousands) Year ended 1996 1995 1994 -------- -------- -------- Operating Income (Loss): United States $ 15,641 $ 19,857 $ 16,397 Foreign (2,150) (2,824) (3,276) -------- -------- -------- $ 13,491 $ 17,033 $ 13,121 -------- -------- -------- -------- -------- -------- Identifiable Assets: United States $226,861 $186,743 $165,172 Foreign 44,631 37,045 18,629 -------- -------- -------- $271,492 $223,788 $183,801 -------- -------- -------- -------- -------- --------
Fluctuating exchange rates and other factors beyond the control of the Company, such as tariff and foreign economic policies, may affect future results of the Company's foreign operations. 13 ITEM 2. PROPERTIES The Company and its consolidated subsidiaries own or lease facilities which are located throughout the United States, Ireland, France and Mexico. The location, square footage and use of the most significant facilities at August 30, 1996, were as follows: LOCATION Square Owned Locations Footage Use - --------------- ------- --- Holland, Michigan (8) 870,000 Manufacturing, Warehouse, and Office Grand Haven, Michigan 133,000 Manufacturing, Warehouse, and Office Mt. Sterling, Kentucky 37,000 Manufacturing, Warehouse, and Office Naas, Ireland 84,000 Manufacturing, Warehouse, and Office Manorhamilton, Ireland 21,600 Manufacturing, Warehouse, and Office Monterrey, Mexico 40,000 Manufacturing, Warehouse, and Office Leased Locations - ---------------- Langres, France 40,000 Manufacturing, Warehouse, and Office Mt. Pleasant, Tennessee 58,000 Manufacturing, Warehouse, and Office Newaygo, Michigan 177,000 Manufacturing, Warehouse, and Office Leased Office and Warehouses (6): Holland and Detroit, Michigan; Tucson, Arizona (2); Goteborg, Sweden; and Tokyo, Japan The Company believes its facilities are modern, well-maintained and adequately insured and are primarily utilized. Because of its rapid growth in sales the Company is continually evaluating the need for additional office, manufacturing and warehouse space. As of June 29, 1996, the Company had capital expenditures purchase commitments outstanding of approximately $9 million. ITEM 3. LEGAL PROCEEDINGS PATENT LITIGATION. Certain electrochromic mirror technology of the Company has been the subject of patent litigation between the Company and Gentex Corporation ("Gentex"). Following the settlement of prior litigation, Gentex filed a lawsuit against the Company on June 7, 1993, alleging that the Company's solid polymer film electrochromic mirror infringed a patent owned by Gentex. On March 21, 1994, the Company's motion for summary judgment of non- infringement was granted and the lawsuit was dismissed. Gentex filed an appeal of this ruling. On November 3, 1995, the Court of Appeals for the Federal Circuit affirmed the summary judgment decision and dismissed Gentex's appeal. On December 18, 1995, the Court of Appeals for the Federal Circuit denied Gentex's request for a rehearing. The Company was also a party to three subsequent lawsuits involving ten patents owned by the Company. In one of these suits, the Court granted Gentex's motion for summary judgment that two of the Company's patents relating to lighted mirrors are invalid. The Company believes that its lighted mirror patents are not invalid and has filed on appeal on this issue. The appeal is currently pending. On April 1, 1996, the Company entered into a settlement agreement with Gentex which resolved all aspects of 14 these three lawsuits except for the pending appeal referred to above. Under the agreement, Gentex paid the Company $6.0 million in settlement fees and will pay an additional $200,000 if the Company prevails in its appeal. In addition, the settlement includes cross-licensing of certain patents which each party may practice within its own core technology area, and an agreement that the parties will not pursue litigation against each other on certain other patents for a period of four years. OTHER LITIGATION. 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 (based on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 29, 1996. ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS OF REGISTRANT. The Executive Officers of the Company are as follows: Positions and Year First Elected Name Age Offices Held Executive Officer - ------------------------------------------------------------------------------- J. Dwane Baumgardner, PHD 55 Director,Chairman, 1978 CEO, President Robert C. Hange 44 COO 1996 Donn J. Viola 51 COO 1996 John F. Donnelly, Jr. 43 Senior Vice President 1986 James A. Knister 57 Senior Vice President 1972 Maryam Komejan 45 Senior Vice President, Corporate Secretary 1993 Niall R. Lynam 42 Senior Vice President 1992 William R. Jellison 38 Vice President, Corporate Controller, Treasurer 1991 Russell B. Scaffede 47 Vice President 1995 John F. Donnelly, Jr., is a descendant of Bernard P. Donnelly, Sr., the Company's founder, and is the brother of Joan E. Donnelly, a director of the Company. B. Patrick Donnelly, III, Joan E. Donnelly, Thomas E. Leonard, Gerald T. McNeive and Rudolph B. Pruden, all Directors of the Company, are descendants of, or are married to descendants of Bernard P. Donnelly. There are no other family relationships between or among the above-named executive officers. There are no arrangements or understandings between any of the above-named officers pursuant to which any of them was named an officer. Dr. Baumgardner has been Chief Executive Officer and a director since 1982, Chairman of the Board since 1986 and President since 1994. Robert Hange joined the Company in April 1996 as Chief Operating Officer for the Company's European operations. Prior to joining the Company, Mr. Hange was President of the Plastics Division of Freundenberg-NOK, a major international auto supplier, from 1994 to 1996 and Senior Vice President and General Manager from 1992 to 1996. Donn Viola joined the Company as Chief Operating Officer of the Company's North America operations in August 1996. Prior to joining the Company, he was 15 Senior Executive Vice President, Chief Operating Officer and member of the Board of Directors for Mack Trucks Incorporated from 1994 to 1996 and was Executive Vice President of Manufacturing, Purchasing and Quality from 1990 to 1994. John F. Donnelly, Jr. was elected Senior Vice President in fiscal 1993. Prior to that time he was Vice President from 1986 through 1993. Mr. Knister has been a Senior Vice President since 1988. Maryam Komejan has been Senior Vice President since 1995, Vice President since 1993 and Corporate Secretary since 1989. Niall Lynam was elected Senior Vice President and Chief Technical Officer in fiscal 1996. Prior to that time he was Vice President from 1992 through 1996. William R. Jellison has been Vice President since 1991, Corporate Controller since 1992 and Treasurer since 1988. Russ Scaffede joined the Company in October 1995 as Vice President of Manufacturing. Prior to joining the Company, Mr. Scaffede worked with RWD Technologies, Inc. from 1993 to 1995 as a consultant with several leading U.S. corporations to develop lean manufacturing systems and was Vice President at Toyota Motor Manufacturing U.S.A. Inc. (Powertrain) from 1988 to 1993. All terms of office are on an annual basis which will expire on October 18, 1996. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Common Shares are traded on the American Stock Exchange under the symbol DON. The following table sets forth for the fiscal periods indicating the high and low sale prices of the Common Shares, as reported by the American Stock Exchange, and dividends declared per share.
---------------------------------------------------- Fiscal 1996 Dividends Quarter High Low Declared ---------------------------------------------------- First $16 3/4 $14 1/2 $ .10 Second 15 5/8 13 3/4 .10 Third 14 7/8 13 .10 Fourth 16 1/8 13 3/4 .10
---------------------------------------------------- Fiscal 1995 Dividends Quarter High Low Declared ---------------------------------------------------- First $17 1/2 $15 1/8 $ .08 Second 17 5/8 13 1/4 .08 Third 18 15 1/8 .08 Fourth 17 5/8 14 7/8 .08
As of August 30, 1996, the Company had approximately 1,100 holders of record. 16 ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 ---------------------------------------------------- Net sales $439,571 $383,340 $337,262 $300,927 $271,399 Gross profit $ 81,741 $ 82,568 $ 73,632 $ 68,910 $ 60,752 Restructuring charges (gain) $ 2,399 $ (2,265) $ 1,184 $ 910 Operating income $ 13,491 $ 17,033 $ 13,121 $ 12,458 $ 12,892 Income before taxes on income $ 12,349 $ 16,823 $ 11,008 $ 10,936 $ 10,805 Income from continuing operations $ 8,454 $ 11,009 $ 6,745 $ 7,257 $ 6,893 1996 1995 1994 1993 1992 ---------------------------------------------------- Income from continuing operations per common share $ 1.08 $ 1.42 $ 0.87 $ 0.94 $ 0.98 Dividends declared per common share $ 0.40 $ 0.32 $ 0.32 $ 0.28 $ 0.24 Total assets $271,492 $223,788 $183,801 $139,840 $131,229 Debt including current maturities $101,916 $ 66,802 $ 53,485 $ 33,765 $ 24,882 Preferred stock $ 531 $ 531 $ 531 $ 531 $ 531 Shareholders' equity (total) $ 88,852 $ 82,900 $ 70,826 $ 65,546 $ 61,158
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS GENERAL Donnelly Corporation's (Company) 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 implementation of new joint ventures, alliances and acquisitions. COMPARISON OF 1996 TO 1995 The Company's net sales increased 14.7% to $439.6 million in 1996, from $383.3 million in 1995. Net sales for the Company continued to grow despite a 3% decrease in North American car and light truck production, the loss of Saturn modular window business (which represented approximately 5% of the Company's combined consolidated net sales in 1995) and significant price pressures from the Company's major automotive customers. Price reductions in the automotive industry are expected to continue in the foreseeable future. Sales remained relatively strong throughout the year, but were exceptionally strong during the fourth quarter with an 17 increase of 24% over the fourth quarter of 1995. The Company's growth in net sales has remained strong due to higher sales of modular window systems (particularly for the new Chrysler NS minivans), lighting and trim products, complete exterior mirror products and door handles. Gross profit margin decreased to 18.6% of sales in 1996, from 21.5% in 1995. The gross profit margin for the Company in the first half of the year was adversely impacted by the start-up of various modular window programs, particularly for the Chrysler NS minivan, and the implementation of a new paint line in the Company's Newaygo facility. Gross profit margin performance was also significantly impacted by technical difficulties on a new business program that resulted in significant additional engineering, production and other costs that negatively impacted net earnings by $1.2 million, most of which occurred in the third quarter. Although this problem was largely due to factors not directly under the Company's control, the issue has been resolved in a timely and cooperative way that ensures an uninterrupted source of supply to the customer. Finally, the Company's subsidiary in Naas, Ireland is experiencing lower gross profit margins compared to last year due to pricing pressures from competition in Eastern Europe and Asia. Gross profit margin for the Company improved to 20.6% in the fourth quarter, compared to 19.0% in the third quarter of 1996, primarily due to stronger sales, significantly lower start-up costs and cost containment measures taken on discretionary expenditures. Selling, administrative and general expenses were $38.1 million, or 8.7% of sales in 1996, down from 11.8% in 1995. These expenses were lower primarily due to patent settlement and license fees paid to the Company in the beginning of the fourth quarter. The patent settlement of $6 million was recognized net of legal costs previously capitalized for a gain to the Company of $2.3 million. In addition, these costs were significantly reduced as a result of the restructuring plan implemented in 1995 and continued commitment to leverage these costs through continuous improvement efforts. On April 1, 1996, the Company and Gentex Corporation reached a settlement agreement to resolve patent litigation between the two companies relating to automotive electrochromic (automatic-dimming) rearview mirrors. The parties have signed a definitive agreement, the specific details of which will remain confidential. The agreement does not include any licenses on either companies' current core electrochromic technology, but does include the following provisions: - - Cross licensing of certain patents (for the life of the patents) that each company may practice within its own core electrochromic technology area. - - Gentex is to pay Donnelly $6.2 million ($6.0 million in patent settlement and license fees plus a $0.2 million contingent payment if Donnelly prevails in its lighted mirror patent appeal) as full and complete satisfaction of all Donnelly's patent infringement claims. The $6.0 million in patent settlement and license fees was paid in the beginning of the fourth quarter. - - The two companies agreed not to pursue litigation against each other on certain other patents for a period of four years. Research and development expenses for 1996 were $27.7 million, or 6.3% of sales, compared to 5.9% of sales in the prior year. The increase in research and development costs is due to the technical difficulties on a new business program and costs for the design and development of new window, mirror, door handle and interior trim programs. The Company continues to be committed to developing new and innovative technologies that improve the function, quality and safety of automotive products and supporting new business for complete interior and exterior mirrors, electrochromic mirror systems, door handles, interior systems and modular window systems. 18 Interest expense increased to $8.1 million in 1996, from $5.0 million in 1995. The increase over last year resulted from higher borrowing levels to support the Company's investment in and advances to Donnelly Hohe GmbH & Co. KG (Donnelly Hohe), the Company's equity affiliate in Germany, capital expenditures and higher working capital. The Company has advanced $28 million to Donnelly Hohe under a subordinated loan agreement, $14.3 million in 1995 and $13.7 million in 1996. Amounts advanced to Donnelly Hohe under the subordinated loan agreement provide for 10% interest per annum with no principal payments due until its maturity on April 1, 1998. The advances were financed through the Company's existing borrowing agreements. The increase in interest income realized by the Company is a result of the interest charged on the advances to Donnelly Hohe, which is presented net of amounts eliminated from equity earnings in accordance with generally accepted accounting principles. In the fourth quarter of 1996, the Company recorded a restructuring charge of $2.4 million related to the write-down of certain assets and the closure of the Company's manufacturing facility in Mt. Pleasant, Tennessee. The decision to close the Tennessee facility was based on a number of factors that included a major loss of business one year ago and the inability to attract significant new business for the plant. These costs include accruals for severance and related employee support programs and write-down of certain assets removed from service. The majority of these liabilities should be paid or settled during the first six months of 1997. Royalty income was $5.2 million in 1996 compared to $3.8 million in 1995. This increase resulted from royalty income associated with the sale of the appliance business in 1995. The royalty obligations under this agreement were satisfied during the fourth quarter of 1996. Royalty income in 1997 is expected to be significantly lower due to the completion of this and certain other automotive royalty agreements. Equity in earnings of affiliated companies was $0.1 million in 1996 compared to $0.4 million in 1995. Equity earnings from Donnelly Hohe, after the elimination of intercompany interest, were offset by losses at Applied Films Corporation ("AFC"), the Company's joint venture in Boulder Colorado, and Vision Group, PLC ("VISION"), the Company's joint venture in Scotland. The combined impact on net income for the Company's non-automotive joint ventures was a loss of $1.5 million in 1996, compared to a gain of $0.1 million in 1995. AFC suffered during 1996 from a severe downturn in the market for coated glass used in the production of liquid crystal displays. VISION, producer of video microchips, continued to experience start- up losses during 1996 which the Company expects to continue in the beginning of 1997. Despite the significant negative impact on earnings from VISION, the market value of the Company's investment in VISION increased from $17 million at July 1, 1995 to approximately $44 million at June 29, 1996. The Company reported net income of $8.5 million in 1996 compared to $11.0 million for 1995. Net income in 1996 included $1.1 million of net income associated with the patent and license settlement and a $1.4 million net loss for restructuring costs, while 1995 included $2.0 million of net income associated with the gain on the sale and restructuring of certain non-automotive businesses. Higher sales volumes, higher royalty income, lower selling and administrative costs as a percentage of sales and the Gentex patent and license settlement positively impacted earnings for the year. These improvements were offset by higher than expected start-up costs during the first half of the year, technical difficulties during the third quarter on a new business program, lower profitability at the Company's subsidiary in Naas, Ireland due to pricing pressures, higher research and development costs as a percentage of sales, equity in losses of non-automotive affiliated companies and restructuring charges taken in the fourth quarter. Earnings performance improved greatly in the fourth quarter in which net income of $5.1 million was the highest-ever quarterly earnings for the Company. Earnings in this period were stronger primarily due to higher sales, significantly lower start-up costs and lower selling, administrative and general expenses as a percent to sales. 19 The Company is committed to improving shareholder value through focused development of core automotive businesses primarily by increasing the Company's dollar content per vehicle through introduction of new technologies, increasing volume through penetration into new and emerging markets and improving the efficiency of current operations and the effectiveness of new product launches. Net sales for the Company have increased at a compounded rate of approximately 15% over a 10 year period. The Company expects that 1997 net sales will increase below this level due to lower volumes for domestic modular window business and continued price pressures. Earnings growth from operations have trailed the increase that the Company has experienced in sales revenues. The Company believes that future results of operations will continue to be influenced by the Company's introduction of improved program management and lean manufacturing systems, introduction of new technologies and programs to the Company, significant global pricing pressures and general economic and industry conditions. COMPARISON OF 1995 TO 1994 Donnelly's sales were $383.3 million in 1995, an increase of 14% over the $337.3 million of sales in 1994. North American automotive production increased 5% over the previous year. New business in complete exterior mirrors, door handles, interior systems and modular systems, along with the strong automotive production levels all contributed to the stronger sales level. This growth occurred despite declining prices. Gross profit margin was 21.5% in 1995 compared to 21.8% in 1994. Continuous improvement programs being run throughout the Company, along with higher sales volumes helped the Company offset price pressures from customers and significant increases in raw material costs. Selling, administrative and general expenses were $45.1 million or 11.8% of sales in 1995, an increase from 11.3% in 1994. The increase was primarily due to patent litigation costs that were significantly higher in 1995 as the Company pursued actions to protect its intellectual property. Research and development expenses were $22.7 million or 5.9% of sales in 1995 compared to 6.3% in 1994. In the second quarter of 1995, the Company entered into a plan to restructure and sell certain non-automotive businesses resulting in a pretax gain of $4.7 million. The restructuring plan was implemented in an effort to move the Company toward a closer focus on its automotive business. The gain included the sale of the appliance business, the liquidation of the Company's investment in OSD Envision Company and the sale of 81% of the Company's heavy truck mirror business. These non-automotive businesses represented an insignificant portion of the Company's operations. Restructuring costs were also recognized to cover a severance program and other expenses associated with the restructuring plan. The Company also restructured certain automotive operations resulting in a charge of $2.4 million in the second quarter, primarily for the write-down of operating assets due to the loss of Saturn's business at D&A Technology, Inc. (D&A), the Company's joint venture with Asahi Glass Company. As a result, minority interest in net income of subsidiaries was $0.4 million in 1995 compared to $0.8 million in 1994. In the first quarter of fiscal 1996, the Company dissolved the joint venture and acquired Asahi's 40% interest in D&A for $2.1 million. D&A represented 5% and 8%, respectively, of the Company's combined consolidated net sales and net income in 1995. Interest expense increased to $5.0 million in 1995, from $3.5 million in 1994, due to heavy capital spending and higher interest rates. 20 Royalty income was $3.8 million in 1995 compared to $1.4 million in 1994. The increase primarily resulted from royalty income associated with the sale of the appliance business. Included in other income was a $0.5 million gain on the sale of a warehouse facility in the fourth quarter of 1995. Equity in earnings of affiliated companies increased to $0.4 million in 1995, from a loss of $0.1 million in 1994. Improved earnings at Applied Films Corporation and a slight profit from Donnelly Hohe for the two month period ending May 31, 1995, more than offset start-up costs at VVL. The Company had net income of $11.0 million in 1995, including a $2.0 million gain from the sale of businesses, net of restructuring costs, compared to $7.3 million in 1994. The increase in net income was the result of higher sales volumes, lower research and development costs as a percentage of sales, higher royalty income and improved equity earnings in affiliated companies. Results from foreign operations improved slightly, as improvements in Ireland exceeded start-up losses in Mexico and France. The Company's financial performance in 1995 and 1994 was impacted by unprecedented capital expenditures and expenses incurred in anticipation of meeting existing new customer orders. These projects included the construction and equipping of several new facilities, equipping modular systems for the new Chrysler NS minivan program and transition costs associated with consolidating production equipment from older facilities into a new facility. ACQUISITIONS AND INVESTMENT IN AFFILIATES In the fourth quarter of 1996, the Company formed a 50-50 joint venture with Shanghai Fu Hua Glass Company, Ltd. to produce framed glass products for the Asian automotive industry. Shanghai Fu Hua Glass Company is itself a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint venture will have its equipment and processes in place by September 1996 and will begin manufacturing encapsulated and framed glass products by the end of 1997. Also in the fourth quarter, the Company formed Donnelly Eurotrim Ltd., a 100% owned subsidiary organized under the laws of Ireland, to offer our interior lighting and overhead trim products for the European market. During 1996 and 1995, VVL's parent, VISION Group, PLC (VISION), sold common shares in a private placement and through public offerings reducing the Company's ownership interest from 40% to 30.4%. The Company's equity in the net proceeds of these sales is reflected as an increase in additional paid-in capital in the accompanying financial statements. The aggregate market value of the Company's investment in VISION, based on the quoted market price for VISION's common shares, which are listed on the London Stock Exchange, was approximately $44 million at June 29, 1996. The Company's investment in the net assets of VISION was $4.0 million at June 29, 1996. In April 1995, the Company acquired an interest in Hohe GmbH & Co. KG, since renamed Donnelly Hohe GmbH & Co. KG (Donnelly Hohe), a German limited partnership with operations in Germany and Spain. Donnelly Hohe, based in Collenberg, Germany, serves many of the main auto producers in Europe in exterior automotive mirrors, interior mirrors, door handles, automotive tooling, and electronic components related to mirror systems. The Company acquired 48% of the controlling general partnership interest and 66 2/3% of the limited partnership interest for $3.6 million. Additionally, the Company has advanced $28 million to Donnelly Hohe under a subordinated loan agreement, $14.3 million in 1995 and $13.7 million in 1996. Amounts advanced to Donnelly Hohe under the subordinated loan agreement provide for 10% interest per annum with no principal payments due until its maturity on April 1, 1998. In connection with the Company's acquisition of the 21 Donnelly Hohe interest, refinancing and additional loans of approximately $70 million were provided to Donnelly Hohe by several banks. The terms of the transaction allow Donnelly to purchase the remaining ownership interest in Donnelly Hohe through various options ranging from $3 million to $10 million. The remaining owners have an option to require the Company to buy their interests at any time based upon a formula that results in a price of up to $10 million. LIQUIDITY AND CAPITAL RESOURCES The Company's current ratio was 2.0 and 1.7 at June 29, 1996 and July 1, 1995, respectively. Working capital was $63.5 million at June 29, 1996, compared to $40.5 million at July 1, 1995. This increase included an increase in accounts receivables to support higher sales and higher customer tooling and increased inventories to support new business programs reaching full production in the first quarter of 1997. Accounts receivable were also higher due to the year ending on June 29 and the timing of customer payments. Capital expenditures for 1996 were $20.6 million compared to $29.2 million for 1995 and $35.3 million for 1994. Capital expenditures were lower in 1996 due to the completion of the building additions required the last two years in Langres, France and Newaygo, Michigan to support new business programs, the transfer of the outside mirror glass product line to Mexico and the consolidation of two older interior mirror operations into a new facility in Holland, Michigan. Capital expenditures in 1996 included costs for equipment to support new business for complete exterior mirrors, door handles and modular window encapsulation, bonding and hardware programs. In the second quarter of 1996, the Company amended its revolving credit loan agreement by increasing the amount to $80 million and extending the maturity date to November 2002. The revolving credit agreement had borrowings against it of $35.4 million at June 29, 1996. In November 1995, the Company issued a senior note of $20.0 million with an insurance company. Principal payments commence in 2001 until maturity in 2006. The Company anticipates completing a $50 million asset securitization transaction by the end of the first quarter of 1997. This will be utilized by the Company and Donnelly Hohe to provide additional financing availability and reduce interest and other costs. The Company utilizes interest rate swaps and foreign exchange contracts 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. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of." The Company is required to adopt this statement by its fiscal year ending in 1997. The new statement requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future net cash flows generated by the assets. The Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to continue to account for their stock-based compensation plans in accordance with APB Opinion No. 25, but encourages the adoption of a new accounting method to record compensation expense 22 based on the estimated fair value of employee stock-based compensation. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had adopted the new method. The Statement is required to be adopted by the Company's fiscal year ending in 1997. Management intends to continue to account for its stock-based compensation plans in accordance with APB Opinion No. 25 and provide the supplemental disclosures as required by SFAS No. 123, beginning in 1997. No other recently issued accounting standards are expected to have a material impact on the Company. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COMBINED CONSOLIDATED STATEMENTS OF INCOME
In thousands, except share data June 29, July 1, July 2, Year ended 1996 1995 1994 - ---------------------------------------------------------------------- Net sales $439,571 $383,340 $337,262 Cost of sales 357,830 300,772 263,630 -------- -------- -------- Gross profit 81,741 82,568 73,632 Operating expenses: Selling 8,239 6,538 6,194 Administrative and general 29,884 38,529 31,771 Research and development 27,728 22,733 21,362 Restructuring charges (gain) 2,399 (2,265) 1,184 -------- -------- -------- Total operating expenses 68,250 65,535 60,511 -------- -------- -------- Operating income 13,491 17,033 13,121 -------- -------- -------- Non-operating (income) expenses: Interest expense 8,102 5,010 3,528 Royalty income (5,239) (3,774) (1,370) Interest income (1,017) (514) (153) Other (income) expenses, net (704) (512) 108 -------- -------- -------- Non-operating expenses 1,142 210 2,113 -------- -------- -------- Income before taxes on income 12,349 16,823 11,008 Taxes on income 4,191 5,795 3,334 -------- -------- -------- Income before minority interest and equity earnings 8,158 11,028 7,674 Minority interest in net (income) loss of subsidiaries 186 (371) (825) Equity in earnings (losses) of affiliated companies 110 352 (104) -------- -------- -------- Income before cumulative effect of change in accounting principle 8,454 11,009 6,745 Cumulative effect of adopting SFAS No. 109 -- -- 513 -------- -------- -------- Net income $ 8,454 $ 11,009 $ 7,258 -------- -------- -------- -------- -------- -------- Per share of common stock: Income before cumulative effect of change in accounting principle $ 1.08 $ 1.42 $ 0.87 Cumulative effect of adopting SFAS No. 109 -- -- 0.07 -------- -------- -------- Income per share of common stock $ 1.08 $ 1.42 $ 0.94 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these statements. 24 COMBINED CONSOLIDATED BALANCE SHEETS
In thousands, except share data June 29, July 1, Year ended 1996 1995 - --------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 1,303 $ 5,224 Accounts receivable, less allowance of $571 and $575 73,658 50,866 Inventories 24,228 22,042 Customer tooling to be billed 19,955 17,357 Prepaid expenses 5,639 2,120 Deferred income taxes 1,912 2,197 -------- -------- Total current assets 126,695 99,806 -------- -------- Property, plant and equipment: Land 3,327 3,329 Buildings 33,000 32,556 Machinery and equipment 112,761 98,149 Construction in progress 8,073 16,544 -------- -------- 157,161 150,578 Less accumulated depreciation 57,397 56,642 -------- -------- Net property, plant and equipment 99,764 93,936 Investments in and advances to affiliates 37,932 25,246 Other assets 7,101 4,800 -------- -------- Total assets $271,492 $223,788 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 44,349 $ 42,248 Current maturities of long-term debt 159 428 Accruals: Compensation 7,264 6,671 Taxes 4,705 1,974 Other 6,736 7,983 -------- -------- Total current liabilities 63,213 59,304 -------- -------- Long-term debt, less current maturities 101,757 66,374 Postretirement plans 12,026 7,645 Deferred income taxes and other 5,644 5,281 -------- -------- Total liabilities 182,640 138,604 -------- -------- Minority interest -- 2,284 Shareholders' equity: Preferred stock, 7 1/2% cumulative, $10 par: shares authorized 250,000, issued 53,112 531 531 Common stocks: Class A, $.10 par; shares authorized 30,000,000, issued 4,248,814 and 4,183,287 425 418 Class B, $.10 par; shares authorized 15,000,000, issued 3,582,198 and 3,582,915 358 358 Donnelly Export Corporation, $.01 par; shares authorized 600,000, issued 409,397 and 409,561 4 4 Additional paid-in capital 25,158 23,522 Cumulative foreign currency translation adjustment (771) 154 Retained earnings 63,147 57,913 -------- -------- Total shareholders' equity 88,852 82,900 -------- -------- Total liabilities and shareholders'equity $271,492 $223,788 -------- -------- -------- --------
The accompanying notes are an integral part of these statements. 25 COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands June 29, July 1, July 2, Year ended 1996 1995 1994 - ---------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 8,454 $ 11,009 $ 7,258 Adjustments to reconcile net income to net cash from (for) operating activities: Depreciation and amortization 12,984 11,184 9,771 Deferred pension cost and postretirement benefits 4,934 2,742 3,941 Deferred income taxes (2,386) (2,108) (1,432) Minority interest income (loss) (186) 371 825 Equity in (earnings) losses of affiliated companies 1,160 (453) 28 Cumulative effect of change in accounting principle -- -- (513) Restructuring charges (gain) 2,399 (2,265) 1,184 Changes in operating assets and liabilities, net of effects of sale of businesses: Accounts receivable (22,792) (3,736) (9,228) Inventories (2,186) (2,841) (6,074) Prepaid expenses and other current assets (6,117) (3,304) (3,352) Accounts payable and other current liabilities 3,134 6,320 13,629 Other 189 131 375 -------- -------- -------- Net cash from (for) operating activities (413) 17,050 16,412 -------- -------- -------- -------- -------- -------- INVESTING ACTIVITIES Capital expenditures (20,585) (29,154) (35,329) Investments in and advances to equity affiliates (13,966) (18,824) -- Purchase of minority interest (2,100) -- -- Proceeds from sale of businesses -- 14,200 -- Proceeds from sale-lease back -- 10,513 -- Change in unexpended bond proceeds 316 (1,015) 1,093 Other (854) (601) 847 -------- -------- -------- Net cash for investing activities (37,189) (24,881) (33,389) -------- -------- -------- -------- -------- -------- FINANCING ACTIVITIES Proceeds from long-term debt 36,195 15,000 21,362 Repayments on long-term debt -- (1,764) (2,018) Resources provided by minority interest -- 491 -- Common stock issuance 706 478 304 Dividends paid (3,220) (2,524) (2,511) -------- -------- -------- Net cash from financing activities 33,681 11,681 17,137 -------- -------- -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents (3,921) 3,850 160 Cash and cash equivalents, beginning of year 5,224 1,374 1,214 -------- -------- -------- Cash and cash equivalents, end of year $ 1,303 $ 5,224 $ 1,374 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these statements. 26 COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative Common Common Common foreign In Preferred Class Class Donnelly Additional currency Retained thousands, Stock A B Export paid-in translation Earnings except Corp. Capital adjustment share data Balance, July 4, 1993 $531 $413 $358 $4 $20,428 $(869) $44,681 Net Income 7,258 Foreign currency translation adjustment 229 Cash dividends declared: Preferred stock-$.75 per share (40) Common stock: Class A- $.32 per share (1,323) Class B- $.32 per share (1,148) Common stock issued under employee benefit plans 2 302 ---- ---- ---- ---- ------- ---- ------- Balance, July 2, 1994 531 415 358 4 20,730 (640) 49,428 Net Income 11,009 Foreign currency translation adjustment 794 Cash dividends declared: Preferred stock-$.75 per share (40) Common stock: Class A- $.32 per share (1,337) Class B- $.32 per share (1,147) Common stock issued under employee benefit plans 3 475 Change in investment in Vision Group, PLC 2,317 ---- ---- ---- ---- ------- ---- ------- Balance, July 1, 1995 531 418 358 4 23,522 154 57,913 Net Income 8,454 Foreign currency translation adjustment (925) Cash dividends declared: Preferred stock-$.75 per share (40) Common stock: Class A- $.40 per share (1,690) Class B- $.40 per share (1,490) Common stock issued under employee benefit plans 7 699 Change in investment in Vision Group, PLC 937 ---- ---- ---- ---- ------- ---- ------- Balance, June 29, 1996 $531 $425 $358 $4 $25,158 $(771) $63,147 ---- ---- ---- ---- ------- ----- ------- ---- ---- ---- ---- ------- ----- -------
The accompanying notes are an integral part of these statements. 27 NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION AND CONSOLIDATION The combined consolidated financial statements include the accounts of Donnelly Corporation, Donnelly Export Corporation and all majority owned, controlled subsidiaries (the Company) after all significant intercompany balances, transactions and shareholdings have been eliminated. Investments in 20% to 50% owned companies are accounted for using the equity method of accounting. Investments in affiliates representing less than 20% ownership are accounted for under the cost method. Cost in excess of net assets of acquired companies is being amortized on a straight-line basis over a 15 year period. Voting control of Donnelly Corporation and Donnelly Export Corporation is vested in the same shareholders and the corporations are under common management. Because of these relationships, the accounts of the two corporations are included in the financial statements as if they were a single entity. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION Except for the Company's subsidiary in Mexico whose functional currency is the United States dollar, financial statements of international companies are translated into United States dollar equivalents at exchange rates as follows: (1) balance sheet accounts at year-end rates; and (2) income statement accounts at weighted average monthly exchange rates prevailing during the year. Translation gains and losses are reported as a separate component of shareholders' equity. For the Company's subsidiary in Mexico, 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. Foreign currency transaction gains and losses included in other income are not material. CASH AND CASH EQUIVALENTS Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method, except for inventories of the consolidated subsidiaries which are valued using the first-in, first-out (FIFO) method. 28 CUSTOMER TOOLING TO BE BILLED Customer tooling to be billed consists of program tooling costs relating to agreements with customers for reimbursement. Customer tooling is billed at the time of tool completion and approval, or reimbursed in the program's piece price over the program's life not to exceed a period of three years. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided primarily by the straight-line method. Depreciation is computed over the estimated useful lives of the assets as follows: Years Buildings 10 to 40 Machinery and equipment 3 to 12 For tax purposes, useful lives and accelerated methods are used as permitted by the taxing authorities. INCOME TAXES Deferred taxes reflect the tax effects of temporary differences between the financial statement and tax basis of assets and liabilities, and operating loss carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred income taxes are not provided on cumulative undistributed earnings of the foreign subsidiaries and affiliates because they are intended to be permanently reinvested. INCOME PER SHARE OF COMMON STOCK Income per share is computed by dividing net income, adjusted for preferred stock dividends, by the weighted average number of shares of Donnelly Corporation common stock outstanding, as adjusted for stock splits (7,802,846 in 1996, 7,744,042 in 1995 and 7,716,923 in 1994). The potential dilutive effect from the exercise of stock options is not material. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimates the fair value of all financial instruments where the carrying value differs from the fair value, primary long- term fixed rate debt, interest rate swaps and foreign exchange currency contracts, based upon quoted amounts or the current rates available for similar financial instruments. FISCAL YEAR The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest June 30. Fiscal years 1996, 1995 and 1994 ended on June 29, July 1 and July 2, respectively, each included 52 weeks. IMPAIRMENT OF ASSETS In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires long-lived assets, including the excess of cost over the fair value of assets of businesses acquired, to be reviewed for impairment losses whenever events or changes in circumstances indicate the carrying amount may not be 29 recoverable through future net cash flows generated by the assets. The Company, consistent with existing generally accepted accounting principles, currently states the majority of its fixed assets at the lower of cost or net realizable value. The Company will adopt SFAS No. 121 in 1997 and believes the effect of adoption will not be material. RECLASSIFICATIONS Certain reclassifications have been made to prior year data to conform to the current year presentation and had no effect on net income reported for any period. 2. NATURE OF OPERATIONS The Company is an international supplier of high quality automotive parts and component systems from manufacturing operations in North America and Europe. The Company supplies automotive customers around the world with interior and exterior mirror systems, window systems and interior lighting and trim systems. The Company also provides products to several non-automotive markets. Export revenues are foreign revenues produced by identifiable assets located in the United States. Foreign revenues are generated by identifiable assets at the Company's subsidiaries located in Ireland, France and Mexico. A summary of the Company's operations by geographic area follows:
In thousands Year ended 1996 1995 1994 - ------------------------------------------------------------------- REVENUES: United States.................... $331,469 $317,710 $296,226 Foreign.......................... 55,998 36,832 18,367 EXPORT: Americas......................... 49,655 25,016 21,557 Asia............................. 532 981 310 Europe........................... 1,917 2,786 785 Other............................ -- 15 17 -------- -------- -------- $439,571 $383,340 $337,262 -------- -------- -------- -------- -------- -------- OPERATING INCOME (LOSS): United States.................... $ 15,641 $ 19,857 $ 16,397 Foreign.......................... (2,150) (2,824) (3,276) -------- -------- -------- $ 13,491 $ 17,033 $ 13,121 -------- -------- -------- -------- -------- -------- IDENTIFIABLE ASSETS: United States.................... $226,861 $186,743 $165,172 Foreign.......................... 44,631 37,045 18,629 -------- -------- -------- $271,492 $223,788 $183,801 -------- -------- -------- -------- -------- --------
30 Sales to major automobile manufacturers as a percent of the Company's net sales follows:
Year ended 1996 1995 1994 - ----------------------------------------------------------------- Chrysler Corporation.............. 33% 18% 18% Ford Motor Company................ 22 22 24 Honda............................. 16 14 12 General Motors Corporation........ 10 17 21 ---- ---- ---- 81% 71% 75%
3. INVENTORIES Inventories consist of:
In thousands 1996 1995 ---------------------------------------------- LIFO cost: Finished products and work in process......... $ 6,998 $ 6,743 Raw materials........... 6,981 6,622 ------- ------- 13,979 13,365 FIFO cost: Finished products and work in process......... 3,202 3,397 Raw materials........... 7,047 5,280 ------- ------- 10,249 8,677 ------- ------- $24,228 $22,042 ------- ------- ------- -------
If only the first-in, first-out method of inventory valuation had been used, inventories would have been $0.4 million and $0.5 million higher than reported at June 29, 1996 and July 1, 1995, respectively, and would have approximated replacement cost. 4. INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES The Company's equity affiliates include the following: Donnelly Hohe, a German limited partnership that produces exterior mirrors, interior mirrors, door handles, automotive tooling and electronic components related to mirror systems; Vision Group PLC (VISION), the sole shareholder of VLSI Vision Limited that produces an advanced video microchip; newly formed Shanghai Donnelly Fu Hua Window Systems Company Ltd. (Shanghai Donnelly Fu Hua) that will manufacture encapsulated and framed glass products for the Asian automotive industry; and Applied Films Corporation, a 50% owned joint venture that manufactures thin-film glass coatings used in the production of liquid crystal displays. In the fourth quarter of 1996, the Company formed Shanghai Donnelly Fu Hua, a 50-50 joint venture with Shanghai Fu Hua Glass Company, Ltd. Shanghai Fu Hua Glass Company is itself a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint venture will have its equipment and processes in place by September 1996, and the venture will begin manufacturing encapsulated and framed glass products by the end of the year. During 1996 and 1995, VISION sold common shares in a private placement and through public offerings reducing the Company's ownership interest from 40% to 30.4%. The Company's equity in the net proceeds of 31 these sales is reflected as an increase in additional paid-in capital in the accompanying financial statements. The aggregate market value of the Company's investment in VISION, based on the quoted market price for VISION's common shares, which are listed on the London Stock Exchange, was approximately $44 million at June 29, 1996. The Company's investment in the net assets of VISION was approximately $4 million at June 29, 1996. Effective April 1, 1995, the Company acquired an interest in Hohe GmbH & Co. KG, since renamed Donnelly Hohe GmbH & Co. KG (Donnelly Hohe), a German limited partnership with operations in Germany and Spain. Donnelly Hohe, based in Collenberg, Germany, serves many of the main auto producers in Europe. The Company acquired 48% of the general partnership interest and 66 2/3% of the limited partnership interest for $3.6 million. Additionally, the Company has advanced $28 million to Donnelly Hohe under a subordinated loan agreement, $14.3 million in 1995 and $13.7 million in 1996. Amounts advanced to Donnelly Hohe under the subordinated loan agreement provide for 10% interest per annum with no principal payments due until its maturity on April 1, 1998. In connection with the Company's acquisition of the Donnelly Hohe interest, refinancing and additional loans of approximately $70 million were provided to Donnelly Hohe by several banks. The terms of the transaction allow Donnelly to purchase the remaining ownership interest in Donnelly Hohe through various options ranging from $3 million to $10 million. The remaining owners have an option to require the Company to buy their interests at any time based upon a formula which results in a price range of up to $10 million. Summarized balance sheet and income statement information for the Company's non-consolidated affiliates accounted for using the equity method are as follows. Income statement information includes Donnelly Hohe twelve months ended May 31, 1996, and two months ended May 31, 1995. All significant others presented include twelve months ending in the month of June for each year presented.
In thousands 1996 1995 - ----------------------------------------------------------- Summarized Balance Sheet Information Current assets.................... $ 90,927 $ 80,443 Non-curent assets................. 82,052 80,986 Current liabilities............... 69,931 57,857 Non-current liabilities........... 87,905 89,860 -------- -------- Net equity........................ $ 15,143 $ 13,712 -------- -------- -------- -------- Summarized Income Statement Information Net sales......................... $250,904 $ 77,756 Costs and expenses................ 254,403 77,547 -------- -------- Net income (loss)................. $ (3,500) $ 209 -------- -------- -------- --------
32 5. DEBT AND OTHER FINANCING ARRANGEMENTS Debt consists of:
In thousands 1996 1995 - --------------------------------------------------------------- Borrowings under revolving credit agreements at 4.15% and 7.50%............. $ 35,418 $ 15,700 Senior Notes, due 2004, principal payable in installments beginning in 1999, interest at 6.67%................ 15,000 15,000 Senior Notes, due 2005, principal payable in installments beginning in 2000, interest at 7.22%................... 15,000 15,000 Senior Notes, due 2006,principal payable in installments beginning in 2001, interest at 6.70%................ 20,000 -- Industrial revenue bonds: $9,500 at adjustable rates (3.80% at June 29, 1996), due in 2008- 2010; $5,000 at a fixed rate of 8.13%, due in 2012........................ 14,500 14,500 Other..................................... 1,998 6,602 -------- -------- Total..................................... 101,916 66,802 Less current maturities................... 159 428 -------- -------- $101,757 $ 66,374 -------- -------- -------- --------
The Company has an unsecured $80 million Revolving Credit Loan Agreement which expires November 20, 2002. Interest is at prime unless one of three alternative elections are made by the Company. The $9.5 million industrial revenue bonds are secured by letters of credit which must be renewed annually. All industrial revenue bonds are collateralized by the purchased land, building and equipment. The senior notes are unsecured. The various borrowings subject the Company to certain restrictions relating to, among other things, minimum net worth, payment of dividends and maintenance of certain financial ratios. At June 29, 1996, the Company was in compliance with all related convenants. Retained earnings available for dividends at June 29, 1996, are $19.6 million. Annual principal maturities consist of:
In thousands Year ending Amount - ------------------------------------------ 1997............................. $ 159 1998............................. 117 1999............................. 3,525 2000............................. 7,000 2001............................. 20,357 2002 and thereafter.............. 70,758 -------- $101,916 -------- --------
33 The Company provides guarantees for $7.3 million in municipal funding for the construction of a manufacturing facility and up to $5.0 million of Applied Films Corporation borrowings. Interest payments of $7.8 million, $5.0 million and $3.7 million were made in 1996, 1995 and 1994, respectively. 6. FINANCIAL INSTRUMENTS The Company utilizies interest rate swaps and foreign exchange contracts 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. At June 29, 1996 and July 1, 1995, the Company had interest rate swaps with an aggregate notional amount of $60 million, $30 million and $40 million of which were offsetting at June 29, 1996 and July 1, 1995, respectively. These effectively converted $30 million and $20 million of the Company's variable interest rate debt to fixed rates at June 29, 1996 and July 1, 1995, respectively. The Company is currently paying a weighted average fixed rate of 7.17%, calculated on the notional amounts. These swap agreements have varied expirations through 2003. The notional amounts of interest rate swaps do not represent amounts exchanged by the parties, and thus are not a measure of the exposure to the Company through its use of these instruments. Net receipts or payments under the agreements are recognized as an adjustment to interest expense. The Company's Irish subsidiaries enter into foreign exchange contracts to hedge against changes in foreign currency exchange rates. The Company had foreign exchange contracts outstanding of $7.8 million and $13.3 million at June 29, 1996 and July 1, 1995, respectively. The foreign exchange contracts require the Company to exchange foreign currencies for Irish pounds and generally mature within 12 months. In accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," the Company has provided the following fair value estimates at June 29, 1996:
In thousands Carrying Value Fair Value - ---------------------------------------------------------- Liabilities Long-term fixed rate debt $55,000 $53,630 Derivatives Interest rate swaps -- (423) Foreign exchange contracts -- 274
7. BENEFIT PLANS A. PENSION BENEFITS The Company sponsors defined benefit pension plans covering substantially all employees. Pension costs for the plans are funded in amounts which equal or exceed regulatory requirements. Benefits under these plans are based primarily on years of service and compensation. 34 Assumptions and net periodic pension cost are as follows:
In thousands Year ended 1996 1995 1994 - ------------------------------------------------------------------- Discount rate....................... 8.00% 8.25% 8.25% Compensation increase............... 5.00% 5.00% 5.00% Expected return on plan assets...... 9.50% 9.50% 9.50% Service cost........................ $ 3,545 $ 3,544 $ 3,178 Interest cost....................... 5,060 4,560 3,912 Actual gain on plan assets.......... (8,528) (6,389) (854) Net amortization and deferral....... 4,550 2,563 (2,292) ------- ------- ------- Net periodic pension cost........... $ 4,627 $ 4,278 $ 3,944 ------- ------- ------- ------- ------- -------
The funded status of the defined benefit pension plans is summarized below
In thousands 1996 1995 - --------------------------------------------------------------- Accumulated benefit obligation, including vested benefits of $43,101 and $38,997.......... $(43,945) $(40,328) Effect of projected compensation increases................................ (23,826) (23,462) -------- -------- Projected benefit obligation for service rendered to date................. (67,771) (63,790) Plan assets at fair value, primarily corporate equity and debt securities............................... 55,784 47,180 -------- -------- Projected benefit obligation in excess of plan assets.................... (11,987) (16,610) Unrecognized net transition obligation............................... 408 492 Unrecognized prior service cost.......... 530 120 Unrecognized net loss.................... 1,926 10,165 -------- -------- Net pension liability.................... $ (9,123) $ (5,833) -------- -------- -------- --------
B. POSTRETIREMENT HEALTH CARE BENEFITS The Company provides certain health care and life insurance benefits for eligible active and retired employees. The plan contains cost saving features such as deductibles, coinsurance and a lifetime maximum and is unfunded. Effective July 4, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement requires the accrual, during the employee's years of service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. The net transition obligation represents the difference between the accrued postretirement benefit costs prior to the adoption of SFAS No. 106 and the Plan's unfunded accumulated postretirement benefit obligation as of July 4, 1993. The net transition obligation of $7.9 million at July 4, 1993 is being amortized over 22 years. 35 The components of the net periodic postretirement benefit cost are as follows:
In thousands Year ended 1996 1995 1994 - ---------------------------------------------------------------- Service cost..................... $ 450 $ 402 $ 388 Interest cost.................... 830 779 661 Amortization of net transition obligation over 22 years......... 360 360 360 Unrecognized net loss............ 20 13 -- ------ ------ ------ Net periodic postretirement benefit cost..................... $1,660 $1,554 $1,409 ------ ------ ------ ------ ------ ------
The postretirement health care liability recognized in the balance sheet is as follows:
In thousands 1996 1995 - -------------------------------------------------------------- Retirees................................. $(5,946) $(5,973) Fully eligible active participants....... (66) (14) Other active participants................ (5,467) (4,961) ------- ------- Accumulated postretirement benefit obligation............................... (11,479) (10,948) Unrecognized transition obligation....... 6,841 7,201 Unrecognized net loss.................... 1,486 1,519 ------- ------- Postretirement health care liability..... $(3,152) $(2,228) ------- ------- ------- -------
The assumed health care inflation rate used in measuring the postretirement health care liability is 9.0% for 1997, declining uniformly to 6% in 2000 and remaining level thereafter. The health care cost trend rate has an effect on the amounts reported. Increasing the assumed health care inflation rate by 1% would increase the postretirement health care liability by $0.6 million, and the net periodic postretirement benefit cost for the year by $40,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% and 7.75% in 1996 and 1995, respectively. 8. TAXES ON INCOME Effective July 4, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect of this accounting change of $0.5 million is reported separately in the 1994 combined consolidated statement of income. Deferred income taxes under SFAS No. 109 reflect the tax effects of temporary differences between the amounts of assets and liabilities for financial reporting purposes and those amounts as measured by income tax laws. The tax effects of temporary differences which give rise to a significant portion of deferred tax assets (liabilities) are as follows:
In thousands 1996 1995 - ------------------------------------------------------------- Fixed assets............................. $(5,581) $(4,237) Retirement plans......................... 3,106 1,641 Postretirement benefits.................. 1,103 780 Loss carryforwards....................... 2,095 636 Accrued expenses and other............... (280) (271) ------- ------- Net deferred tax asset (liability)....... $ 443 $(1,451) ------- ------- ------- -------
36 At June 29, 1996, the Company has $2.1 million of net operating loss carryforwards, the majority of which expire in 2010 or are indefinite.
In thousands Year ended 1996 1995 1994 - ---------------------------------------------------------------- Income before taxes on income consists of: Domestic......................... $15,647 $18,692 $14,453 Foreign.......................... (3,298) (1,869) (3,445) ------- ------- ------- $12,349 $16,823 $11,008 ------- ------- ------- ------- ------- ------- Tax expense (benefit) consists of: Current: Domestic......................... $ 6,909 $ 7,920 $ 4,782 Foreign.......................... 8 (17) (16) ------- ------- ------- 6,917 7,903 4,766 ------- ------- ------- Deferred: Domestic......................... (2,156) (1,761) (1,101) Foreign.......................... (570) (347) (331) ------- ------- ------- (2,726) (2,108) (1,432) ------- ------- ------- $ 4,191 $ 5,795 $ 3,334 ------- ------- ------- ------- ------- -------
The difference from the amount that would be computed by applying the federal statutory income tax rate to income before taxes on income is reconciled as follows:
In thousands Year ended 1996 1995 1994 - ----------------------------------------------------------------- Income taxes at federal statutory rate................... 35% 35% 34% Impact of: Available tax credits............ -- (2) (11) Foreign subsidiary earnings...... 5 2 7 DISC earnings.................... (6) (2) (3) Other............................ -- 1 3 ------- ------- ------- Effective tax rate............... 34% 34% 30% ------- ------- ------- Income taxes paid................ $ 3,731 $10,332 $ 3,149 ------- ------- ------- ------- ------- -------
9. PREFERRED STOCK AND COMMON STOCK Each share of 7 1/2% cumulative preferred stock is entitled to one vote for the election of the members of the Board of Directors not elected by the holders of Class A Common Stock, and all other matters at all shareholders' meetings whenever dividend payments are in arrears for four cumulative quarters. No arrearage existed at June 29, 1996. The preferred stock is redeemable in whole or in part, if called by the Company, at $10.50 per share. Additionally, there are 1,000,000 authorized shares of series preferred stock, no par value. At June 29, 1996 and July 1, 1995, no series preferred stock was outstanding. Each share of Class A Common Stock and Class B Common Stock is entitled to one vote and ten votes, respectively, at all shareholders' meetings. The holders of Class A Common Stock are entitled to elect one- 37 quarter of the members of the Board of Directors. The remaining directors are elected by the holders of Class B Common Stock and any preferred stock entitled to vote. 10. STOCK PURCHASE AND OPTION PLANS The Company's Employees' Stock Purchase Plan permits the purchase in an aggregate amount of up to 437,800 shares of Class A Common Stock. Eligible employees may purchase stock at market value, or 90% of market value if the price is $8 per share or higher, up to a maximum of $5,000 per employee in any calendar year. The Company issued 17,460 shares in 1996 and 22,771 shares in 1995 under this plan. The Company's Stock Option Plans permit the granting of either nonqualified or incentive stock options to certain key employees and directors to purchase an aggregate amount of up to 862,500 shares of the Company's Class A Common Stock. The options, which become exercisable twelve months after date of grant, expire ten years after date of grant. Although the plan administrator may establish the nonqualified option price at below market value at date of grant, incentive stock options may be granted only at prices not less than the market value. Options have been granted to purchase common stock at prices ranging from $9.20 to $20.125 per share. A summary of option transactions follows:
In thousands Year ended 1996 1995 1994 - ----------------------------------------------------------------- Options outstanding, beginning of year................ 412 361 283 Options granted.................. 80 76 79 Options exercised................ (47) (13) (1) Options expired.................. (36) (12) -- ---- ---- ---- Options outstanding, end of year............................. 409 412 361 ---- ---- ---- ---- ---- ---- Exercisable, end of year......... 337 343 282 ---- ---- ---- ---- ---- ----
The Company has reserved 364,975 shares for future grants at June 29, 1996. In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to continue to account for their stock-based compensation plans in accordance with APB Opinion No. 25, but encourages the adoption of a new accounting method to record compensation expense based on the estimated fair value of employee stock-based compensation. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had adopted the new method. The Statement is required to be adopted by the Company's fiscal year ending in 1997. Management intends to continue to account for its stock-based compensation plans in accordance with APB Opinion No. 25 and provide the supplemental disclosures as required by SFAS No. 123, beginning in 1997. 38 11. COMMITMENTS AND CONTINGENCIES A. PATENT LITIGATION Certain electrochromic mirror technology of the Company has been the subject of patent litigation between the Company and Gentex Corporation ("Gentex"). Following the settlement of prior litigation, Gentex filed a lawsuit against the Company on June 7, 1993, alleging that the Company's solid polymer film electrochromic mirror infringed a patent owned by Gentex. On March 21, 1994, the Company's motion for summary judgment of non-infringement was granted and the lawsuit was dismissed. Gentex filed an appeal of this ruling. On November 3, 1995, the Court of Appeals for the Federal Circuit affirmed the summary judgment decision and dismissed Gentex's appeal. On December 18, 1995, the Court of Appeals for the Federal Circuit denied Gentex's request for a rehearing. The Company was also a party to three subsequent lawsuits involving 10 patents owned by the Company. In one of these suits, the Court granted Gentex's motion for summary judgment that two of the Company's patents relating to lighted mirrors are invalid. The Company believes that its lighted mirror patents are not invalid and has filed on appeal on this issue. The appeal is currently pending. On April 1, 1996, the Company entered into a settlement agreement with Gentex which resolved all aspects of these three lawsuits except for the pending appeal referred to above. Under the agreement, Gentex paid the Company $6.0 million in settlement fees and will pay an additional $0.2 million if the Company prevails in its appeal. In addition, the settlement includes cross-licensing of certain patents which each party may practice within its own core technology area, and an agreement that the parties will not pursue litigation against each other on certain other patents for a period of four years. This settlement was recognized net of related patent litigation costs previously capitalized. B. OTHER LITIGATION 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 (based on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company's financial position. C. OTHER As of June 29, 1996, the Company had capital expenditure purchase commitments outstanding of approximately $9 million. 12. LEASES The Company leases various facilities and equipment. Rental expense charged to operations amounted to approximately $3.8 million for 1996, $2.5 million for 1995 and $2.5 million for 1994. 39 Future minimum lease payments, excluding renewal options, consist of:
Year ending in thousands Amount - ---------------------------------------- 1997............................. $3,688 1998............................. 1,196 1999............................. 514 2000............................. 578 2001............................. 221 2002 and thereafter.............. 485 ------ $6,682 ------ ------
13. RESTRUCTURING OF OPERATIONS In the fourth quarter of 1996, the Company recorded a restructuring charge of $2.4 million related to the write-down of certain assets and the closure of the Company's manufacturing facility in Mt. Pleasant, Tennessee. The decision to close the Tennessee facility was based on a number of factors that included a major loss of business one year ago and the inability to attract significant new business for the plant. These costs include accruals for severence and related employee support programs and write-off of certain assets removed from service. The majority of these liabilities will be paid or settled during the first six months of 1997. In the second quarter of 1995, the Company entered into a plan to restructure and sell certain nonautomotive businesses resulting in a pretax gain of $4.7 million. The restructuring plan was implemented in an effort to move the Company toward a closer focus on its automotive business. The gain includes the sale of the appliance business, the liquidation of the Company's investment in OSD Envizion Company and the sale of 81% of the Company's heavy truck mirror business. The sale of the appliance business included a royalty agreement which continued through May, 1996. These non- automotive businesses represented an insignificant portion of the Company's operations. Restructuring costs were also recognized to cover a severance program and other expenses associated with the restructuring plan. The spending for these costs was essentially completed by the end of 1995. The Company also restructured certain automotive operations in the second quarter of 1995, resulting in a charge of $2.4 million primarily for the write-down of operating assets due to the loss of Saturn's business at D&A Technology, Inc. (D&A), the Company's former joint venture with Asahi Glass Company. In the first quarter of 1996, the Company dissolved the joint venture and acquired Asahi's 40% interest in D&A for approximately $2.1 million. D&A represented 5% and 8%, respectively, of the Company's combined consolidated net sales and net income in 1995. In the fourth quarter of 1994, the Company recognized restructuring costs of $1.2 million to cover a severance program and other expenses associated with the restructuring of Donnelly Mirrors Limited. 40 14. COMMON STOCK PRICE PER SHARE - UNAUDITED The Company's common stock is traded on the American Stock Exchange under the Symbol "DON." Market quotations regarding the range of high and low sales prices of the Company's common stock were as follows:
Fiscal 1996 1995 - ----------------------------------------------------------- Quarter High Low High Low - ----------------------------------------------------------- First $16 3/4 $14 1/2 $17 1/2 $15 1/8 Second 15 5/8 13 3/4 17 5/8 13 1/4 Third 14 7/8 13 18 15 1/8 Fourth 16 1/8 13 3/4 17 5/8 14 7/8
15. QUARTERLY FINANCIAL DATA - UNAUDITED
In thousands, First Second Third Fourth Total except per share data Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------- 1996 Net sales..................... $ 90,523 $106,823 $116,445 $125,780 $439,571 Gross profit.................. 13,685 20,030 22,153 25,873 81,741 Operating income (loss)....... (2,087) 3,899 3,920 7,759 13,491 Net Income (loss): Income (loss).............. (1,789) 2,629 2,503 5,111 8,454 Per common share........... (.23) .34 .32 .65 1.08 Dividends declared per share of common stock.............. .10 .10 .10 .10 .40 1995 Net sales..................... $ 86,741 $ 98,460 $ 96,708 $101,431 $383,340 Gross profit.................. 18,101 22,312 21,019 21,136 82,568 Operating income.............. 811 7,274 4,828 4,120 17,033 Net Income (loss): Income (loss).............. (85) 4,699 3,076 3,319 11,009 Per common share........... (.01) .61 .40 .42 1.42 Dividends declared per share of common stock.............. .08 .08 .08 .08 .32
The impact of certain transactions on the 1996 and 1995 quarterly results of operations is discussed in Notes 11 and 13. 41 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Donnelly Corporation is responsible for the preparation and integrity of the combined consolidated financial statements and all other information contained in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles and include amounts that are based on management's informed estimates and judgments. In fulfilling its responsibility for the integrity of financial information, management has established a system of internal accounting control which provides reasonable assurance that assets are properly safeguarded and accounted for and that transactions are executed in accordance with management's authorization and recorded and reported properly. The financial statements have been audited by our independent public accountants, BDO Seidman, LLP, whose unqualified report is presented on the next page. The independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the internal control structure and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The Audit Committee of the Board of Directors, consisting solely of outside Directors, meets with the independent public accountants and management to review and discuss the major audit findings, the adequacy of the internal control structure and quality of financial reporting. The independent accountants also have free access to the Audit Committee to discuss auditing and financial reporting matters with or without management present. /S/ J. Dwane Baumgardner, Ph.D. Chairman, Chief Executive Officer and President /S/ William R. Jellison Vice President, Corporate Controller and Treasurer 42 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS DONNELLY CORPORATION HOLLAND, MICHIGAN We have audited the combined consolidated balance sheets of Donnelly Corporation and subsidiaries as of June 29, 1996 and July 1, 1995, and the related combined consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 that our audits provide a reasonable basis for our opinion. In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of Donnelly Corporation and subsidiaries as of June 29, 1996 and July 1, 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 1996, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan August 2, 1996 43 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF REGISTRANT. Information relating to the directors and director nominees of the registrant contained in the registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held October 18, 1996, and filed pursuant to Regulation 14A, is incorporated by reference. EXECUTIVE OFFICERS OF THE REGISTRANT. Information relating to the executive officers of the Company is included in Part I of this form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is contained under the caption "Executive Compensation" in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held October 18, 1996 and the information within those sections is incorporated herein be reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The sections entitled "Voting Securities and Principal Holders Thereof", "Nominees for Election as Directors" and "Securities Ownership of Management" in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held October 18, 1996, and the information within those sections are incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions" in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held October 18, 1996, and the information within that section is incorporated by reference. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. Financial Statements. The Registrant's financial statements, for the year ended June 29, 1996, together with the Report of Independent Accountants are set forth on pages 22-41 of this report, Item 8. The supplemental financial information listed and appearing hereafter should be read in conjunction with the financial statements included in this report. Separate financial statements of affiliates accounted for by the equity method have been omitted because they would not constitute a significant subsidiary. 44 2. Financial Statement Schedules. The following are included in Part IV of this report for each of the years ended June 29, 1996, July 1, 1995 and July 2, 1994 as applicable: Page Report of Independent Certified Public Accountants on Schedules 46 Schedule II Valuation and Qualifying Accounts 47 All other schedules are not submitted because they are not applicable or because the required information is included in the financial statements or notes thereto. 3. EXHIBITS. Reference is made to the Exhibit Index which is found on the last two pages of the body of this Form 10-K Annual Report preceding the exhibits. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the year ended June 29, 1996. (c) EXHIBITS The response to this portion of Item 14 is submitted as a separate section of this report. (d) FINANCIAL STATEMENT SCHEDULES The response to this section of Item 14 is submitted as a separate section of this report. 45 SIGNATURES Pursuant to the requirements of Section 13 (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. DONNELLY CORPORATION /s/J. Dwane Baumgardner Chairman, Chief Executive Officer, and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant in the capacity indicated. The person named below hereby appoints J. Dwane Baumgardner and William R. Jellison, and each of them severally, as his or her attorney in fact, to sign in his or her name and on his or her behalf, as a director or officer of the Registrant, and to file with the Commission any and all amendments to this report on Form 10-K. /s/J. Dwane Baumgardner /s/William R. Jellison Chairman, Chief Executive Vice President, Corporate Officer, and Director and Controller and President Treasurer /s/Arnold F. Brookstone /s/B. Patrick Donnelly III Director Director /s/Joan E. Donnelly /s/R. Eugene Goodson Director Director /s/Thomas E. Leonard /s/Gerald T. McNeive Director Director /s/Rudolph B. Pruden /s/Donald R. Uhlmann Director Director /s/Glenn M. Walters Director DATE: September 24, 1996 Donnelly Corporation Annual Report - Form 10-K 46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Donnelly Corporation Holland, Michigan The audits referred to in our report dated August 2, 1996, relating to the combined consolidated financial statements of Donnelly Corporation and subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/BDO SEIDMAN, LLP BDO Seidman, LLP Grand Rapids, Michigan August 2, 1996 47
DONNELLY CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------- ----------- --------- ---------- ---------- BALANCE AT BALANCE AT BEGINNING END DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD - ------------------------- ----------- --------- ---------- --------- RESERVE FOR UNCOLLECTIBLE ACCOUNTS AND SALES RETURNS AND ALLOWANCES: YEAR ENDED JULY 2, 1994 $562 --(1) --(1) $676 YEAR ENDED JULY 1, 1995 $676 --(1) --(1) $575 YEAR ENDED JUNE 29, 1996 $575 --(1) --(1) $571 (1) INFORMATION IN THIS COLUMN IS NOT SIGNIFICANT
48 Annual Report - Form 10-K Exhibit Index 3. Articles of Incorporation and Bylaws are incorporated by reference to Exhibit 3.1 and 3.2 of Registrant's Registration Statement on Form S-1, as amended, dated March 9, 1988, (Registration No. 33-17167) ("S-1 Registration Statement"). 4. A specimen stock certificate of the Class A Common Stock was filed as part of a Registration Statement on Form S-1 (Registration No. 33-17167) as Exhibit 4.1, and the same is hereby incorporated herein by reference. 10.1 Amended and Restated First Chicago Revolving Credit Loan Agreement 10.2 Nationwide Life Insurance Company Debt Agreement was filed as part of Form 10-K for the fiscal year ending July 1, 1995 as Exhibit 10.1 and is hereby incorporated herein by reference. 10.3 An English language summary of an Acquisition Agreement and related documents written in German between the Registrant, Donnelly GmbH, Hohe GmbH & Co. KG ("Hohe") and other related parties, dated May 25, 1995, consolidated financial statements of Hohe as of March 31, 1995 and 1994 (audited) and pro forma financial information of the Registrant were filed as part of Form 8-K on June 9, 1995, which has been subsequently amended and are hereby incorporated herein by reference. 10.4 Nationwide Life Insurance Company Debt Agreement was filed as part of Form 10-K for the fiscal year ending July 2, 1994 as Exhibit 10.1 and is hereby incorporated herein by reference. 10.5 The Principal Mutual Debt Agreement was filed as part of Form 10-K for the fiscal year ending July 3, 1993 as Exhibit 10.2 and is hereby incorporated herein by reference. 10.6 A Merger Agreement for the Merger of Donnelly Coated Corporation ("DCC") into Applied Coated Corporation, among Registrant, DCC, Applied Films Lab, Inc. and Cecil Vanalsburg, John Chapin, and Richard Condon, dated February 24, 1992, was filed as part of a Registration Statement on Form S-2 (Registration No. 33-47036) and Exhibit 10.7, and the same is hereby incorporated herein by reference. 10.7 The form of Indemnity Agreement between Registrant and each of its directors was filed as a part of a Registration Statement on Form S-1 (Registration No. 33-17167) as Exhibit 10.8, and the same is hereby incorporated herein by reference. 10.8 The Donnelly Corporation Stock Option Plan was filed as part of a Registration Statement on Form S-1 (Registration No. 33-17167) as Exhibit 10.9, and the same is hereby incorporated herein by reference. 10.9 The Donnelly Corporation 1987 Employees' Stock Purchase Plan, including amendments was filed as part of a Registration Statement on Form S-8 (Registration No. 33-34746) as Exhibit 28.1, and the same is hereby incorporated herein by reference. 10.10 The Donnelly Corporation Non Employee Director's Stock Option Plan was filed as part of a Registration Statement on Form S-8 (Registration No. 33-55499) as Exhibit 99, and the same is hereby incorporated herein by reference. 49 22 Schedule of Affiliates. 24 Consent of BDO Seidman, LLP, independent public accountants. 27 Financial Data Schedules. EX-1 2 1 DONNELLY CORPORATION $80,000,000 AMENDED AND RESTATED REVOLVING CREDIT LOAN AGREEMENT dated as of May 20, 1996 SOCIETE GENERALE NATIONSBANK OF TENNESSEE, N.A. and THE FIRST NATIONAL BANK OF CHICAGO, as Agent 2 ARTICLE I DEFINITIONS................................................. 1 1.1.Certain Definitions..................................... 1 1.2.Other Definitions; Rules of Construction................ 12 ARTICLE II THE COMMITMENT.............................................. 12 2.1.Commitment of the Banks................................. 12 2.2.Termination and Reduction of Commitment................. 12 2.3.Fees.................................................... 13 2.4.Disbursement of Advances................................ 14 2.5.Conditions for First Disbursement....................... 17 2.6.Further Conditions for Disbursement..................... 17 2.7.Subsequent Elections as to Loans........................ 18 2.8.Limitation of Requests and Elections.................... 18 2.9.Minimum Amounts......................................... 19 ARTICLE III PAYMENTS AND PREPAYMENTS OF LOANS.......................... 19 3.1.Principal Payments...................................... 19 3.2.Interest Payments....................................... 20 3.3.Letter of Credit Reimbursement Payments................. 21 3.4.Payment Method.......................................... 22 3.5.No Setoff or Deduction.................................. 23 3.6.Payment on Non-Business Day; Payment Computations....... 24 3.7.Additional Costs........................................ 24 3.8.Illegality and Impossibility............................ 25 3.9.Indemnification......................................... 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES.............................. 26 4.1.Corporate Existence and Power........................... 26 4.2.Corporate Authority..................................... 26 4.3.Binding Effect.......................................... 27 4.4.Subsidiaries............................................ 27 4.5.Litigation.............................................. 27 4.6.Financial Condition..................................... 27 4.7.Use of Loans............................................ 28 4.8.Consents, Etc........................................... 28 4.9.Taxes................................................... 28 4.10.ERISA.................................................. 28 4.11.Disclosure............................................. 28 ARTICLE V COVENANTS................................................... 29 5.1.Affirmative Covenants................................... 29 5.2.Negative Covenants...................................... 31 3 ARTICLE VI DEFAULT..................................................... 33 6.1.Events of Default....................................... 33 6.2.Remedies................................................ 35 ARTICLE VII THE AGENT AND THE BANKS.................................... 36 7.1.Appointment and Authorization........................... 36 7.2.Agent and Affiliates.................................... 36 7.3.Scope of Agent's Duties................................. 37 7.4.Reliance by Agent....................................... 37 7.5.Default................................................. 37 7.6.Liability of Agent...................................... 37 7.7.Nonreliance on Agent and Other Banks.................... 38 7.8.Indemnification......................................... 38 7.9.Resignation of Agent.................................... 38 7.10.Sharing of Payments.................................... 39 ARTICLE VIII MISCELLANEOUS............................................. 40 8.1.Amendments, Etc......................................... 40 8.2.Notices................................................. 40 8.3.No Waiver By Conduct; Remedies Cumulative............... 41 8.4.Reliance on and Survival of Various Provisions.......... 41 8.5.Expenses; Indemnification............................... 41 8.6.Successors and Assigns.................................. 43 8.7.Counterparts............................................ 43 8.8.Governing Law........................................... 43 8.9.Headings................................................ 43 8.10.Construction of Certain Provisions..................... 43 8.11.Integration and Severability........................... 44 8.12.Independence of Covenants.............................. 44 8.13.Interest Rate Limitation............................... 44 8.14.Effect of Amendment and Restatement.................... 44 8.15.Waiver of Jury Trial................................... 45 EXHIBIT A-1 REVOLVING CREDIT NOTE...................................... 47 EXHIBIT A-2 TERM NOTE.................................................. 49 EXHIBIT B REQUEST FOR ADVANCE........................................ 51 EXHIBIT C REQUEST FOR CONTINUATION OR CONVERSION OF LOAN............. 53 EXHIBIT D OPINION OF COUNSEL OF DONNELLY CORPORATION................. 54 4 SCHEDULE 1.1 Member Countries of the Organization for Economic Cooperation and Development as of the Effective Date...... 56 SCHEDULE 4.4 SCHEDULE 4.5 SCHEDULE 5.2(g) 5 Exhibit 10.2 AMENDED AND RESTATED REVOLVING CREDIT LOAN AGREEMENT THIS AMENDED AND RESTATED REVOLVING CREDIT LOAN AGREEMENT, dated as of May 20, 1996 (as it may be amended, supplemented, or modified from time to time, this "Agreement"), is among DONNELLY CORPORATION, a Michigan corporation (the "Company"), the Banks (other than NBD Bank) set forth on the signature pages hereof (collectively, the "Banks" and, individually, a "Bank"), and The First National Bank of Chicago, as agent for the Banks (in such capacity, the "Agent"). INTRODUCTION The Company is party to an Amended and Restated Revolving Credit Loan Agreement dated as of November 20, 1995 (the "1995 Agreement"), pursuant to which certain of the Banks have provided certain credit facilities to the Company in the aggregate principal amount of $80,000,000. The Company desires to amend and restate the 1995 Agreement to add a transaction loan facility, to change the Agent from NBD Bank to The First National Bank of Chicago, to increase the commitment of The First National Bank of Chicago, to eliminate the commitment of NBD Bank and to allow for the sale of receivables. The Banks are willing to establish such a credit facility in favor of the Company on the terms herein set forth. In consideration of the premises and the mutual promises herein contained, the Company, the Banks, and the Agent hereby agree to amend and restate the 1995 Agreement in it entirety as follows: ARTICLE I DEFINITIONS 1.1. Certain Definitions. As used herein the following terms shall have the following respective meanings: "Advance" means any Revolving Credit Loan, any Letter of Credit Advance, and the Term Loan. "Affiliate" when used with respect to any person shall mean any other person which, directly or indirectly, controls or is controlled by or is under common control with such person. For purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), with respect to any person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of Federal Funds Effective Rate for such day plus 1/2% per annum. 6 "Applicable Lending Office" means, with respect to any Advance made by any Bank or with respect to a Bank's Commitment, the office of that Bank or of any Affiliate of that Bank located at the address set forth next to the name of that Bank in the signature pages hereof, as may be changed by that Bank by notice to the Company and the Agent. Unless the Agent shall notify the Company otherwise, the Applicable Lending Office of the Agent shall be: (a) with respect to all Advances denominated in Dollars, the principal office of the Agent in Chicago, Illinois; and (b) with respect to all other Advances, the branch of the Agent in London, England. "Applicable Margin" means on any day, with respect to each type of Revolving Credit Loan other than Transaction Loans, the per annum rate set forth below in the corresponding column for the period during which the Interest Coverage Ratio is within the corresponding range. The Applicable Margin shall change on the fifth day following receipt of the notice delivered by the Company under Section 5.1(e)(ii), to correspond with the Interest Coverage Ratio as of the end of the period reported in that notice.
Interest Federal Coverage Floating Eurocurrency Funds Ratio Rate Rate Rate - ------------------- -------- ------------ ------- Greater than 7.75 to 1 0% .20% .40% Less than or equal to 7.75 to 1 and greater than 5.75 to 1 0% .25% .45% Less than or equal to 5.75 to 1 and greater than 3.75 to 1 0% .30% .50% Less than or equal to 3.75 to 1 and greater than 3.00 to 1 0% .45% .75% Less than or equal to 3.00 to 1 0% .75% 1.00%
"Applied Films" means Applied Films Corporation, a Colorado corporation, 50% of the equity interests of which are currently owned by the Company. "Business Day" means a day other than a Saturday, Sunday or other day on which (a) the Agent is not open to the public for carrying on substantially all of its banking functions 2 7 or (b) if such reference relates to the date for payment or purchase of any amount denominated in any currency other than Dollars, banks are not generally open to the public for carrying on substantially all of their banking functions in the principal financial center of the country issuing such currency. "Capital Lease" of any person means any lease which, in accordance with generally accepted accounting principles, is capitalized on the books of such person. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations thereunder. "Commitment" means the commitment of each Bank to make Revolving Credit Loans pursuant to Sections 2.1(a) and 3.3 and the Term Loan pursuant to Section 2.1(b), and to participate in Letter of Credit Advances through the Agent pursuant to Section 2.1(a), in an amount not exceeding the respective commitment amount for each Bank set forth on the signature pages below, as such amount may be reduced from time to time pursuant to Section 2.2. "Consolidated" or "consolidated" means, when used with reference to any financial term in this Agreement, the aggregate for two or more persons of the amounts signified by such term for all such persons determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated EBIT" means, for any period, the sum of (a) income or loss before taxes on income for the Company and its consolidated Subsidiaries (excluding Hohe), plus (b) Consolidated Interest Expense, all as determined in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means, for any period, all interest paid or payable by the Company and its consolidated Subsidiaries (excluding Hohe) during such period. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by First Chicago from time to time, changing when and as said corporate base rate changes. "Default" means any of the events or conditions described in Section 6.1 which might become an Event of Default with notice or lapse of time or both. "Dollar Equivalent" means, with respect to each Eurocurrency Rate Loan, the sum in Dollars resulting from converting the amount of the Loan from the Permitted Currency in which it is denominated into Dollars at the most favorable spot exchange rate determined by the Agent to be available to it for purchasing the Permitted Currency with Dollars at approximately 11:00 a.m. local time of the Applicable Lending Office on the date the Eurocurrency Rate Loan is disbursed or continued, or on such other date as the determination is made, which rate shall be substantially representative of the market rate. 3 8 "Dollars" and "$" means the lawful money of the United States of America. "Effective Date" means the effective date specified in the final paragraph of this Agreement. "Environmental Laws" means all provisions of law, statute, ordinances, rules, regulations, judgments, writs, injunctions, decrees, orders, awards and standards promulgated by the government of the United States of America or any foreign government or by any state, province, municipality or other political subdivision thereof or therein or by any court, agency or instrumentality, regulatory authority or commission of any of the foregoing concerning the protection of, or regulating the discharge of substances into, the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations thereunder. "ERISA Affiliate" means, with respect to any person, any trade or business (whether or not incorporated) which, together with such person or any Subsidiary of such person, would be treated as a single employer under Section 414 of the Code. "Eurocurrency Business Day" means, with respect to any Eurocurrency Rate Loan, a day which is both a Business Day and a day on which dealings in Dollar deposits are carried out in the interbank market selected by the Agent with respect to such Eurocurrency Rate Loan. "Eurocurrency Interest Period" means, with respect to any Eurocurrency Rate Loan, the period commencing on the day such Eurocurrency Rate Loan is made or converted to a Eurocurrency Rate Loan and ending on the date one, two, three or six months thereafter, as the Company may elect under Section 2.4 or 2.7, and each subsequent period commencing on the last day of the immediately preceding Eurocurrency Interest Period and ending on the date one, two, three or six months thereafter, as the Company may elect under Section 2.7, provided, however, that (a) any Eurocurrency Interest Period which commences on the last Eurocurrency Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Eurocurrency Business Day of the appropriate subsequent calendar month, (b) each Eurocurrency Interest Period which would otherwise end on a day which is not a Eurocurrency Business Day shall end on the next succeeding Eurocurrency Business Day or, if such next succeeding Eurocurrency Business Day falls in the next succeeding calendar month, on the next preceding Eurocurrency Business Day (c) no Eurocurrency Interest Period which would end after the Termination Date or, with respect to the Term Loan, the Maturity Date, shall be permitted, and (d) the Eurocurrency Interest Period for any loan made under the 1995 Agreement which becomes a Loan under this Agreement pursuant to Section 8.14 hereof shall be the period commencing on the Effective Date and ending on the last day of the interest period for such loan under the 1995 Agreement. 4 9 "Eurocurrency Rate" means, with respect to any Eurocurrency Rate Loan and the related Eurocurrency Interest Period, the per annum rate that is equal to the sum of: 1 the Applicable Margin, plus 2 (a) the rate per annum obtained by dividing (i) the per annum rate of interest at which deposits in the Permitted Currency in which the Eurocurrency Rate Loan is to be denominated for such Eurocurrency Interest Period and in an aggregate amount comparable to the amount of such Eurocurrency Rate Loan are offered by the Agent to other prime banks in the applicable interbank market, selected in the Agent's discretion, at approximately 11:00 a.m. local time of the Applicable Lending Office on the second Eurocurrency Business Day prior to the first day of such Eurocurrency Interest Period by (ii) an amount equal to one minus the stated maximum rate (expressed as a decimal) of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that is specified on the first day of such Eurocurrency Interest Period by the Board of Governors of the Federal Reserve System (or any successor agency thereto) for determining the maximum reserve requirement with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of such Board) maintained by a member bank of such System; all as conclusively determined by the Agent, such sum to be rounded up, if necessary, to the nearest whole multiple of one one-hundredth of one percent (1/100 of 1%). "Eurocurrency Rate Loan" means any Revolving Credit Loan denominated in a Permitted Currency or any portion of the Term Loan denominated in Dollars which bears interest at the Eurocurrency Rate for a specified Interest Period. "Event of Default" means any of the events or conditions described in Section 6.1. "Federal Funds Interest Period" means, with respect to any Federal Funds Rate Loan, the period commencing on the day such Federal Funds Rate Loan is made or converted to a Federal Funds Rate Loan and ending on the next Business Day thereafter, as the Company may elect under Section 2.4 or 2.7, and each subsequent period commencing on the last day of the immediately preceding Federal Funds Interest Period and ending on the next Business Day thereafter, as the Company may elect under Section 2.7. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. 5 10 "Federal Funds Rate Loan" means any Revolving Credit Loan or any portion of the Term Loan denominated in Dollars which bears interest at the Federal Funds Effective Rate. "First Chicago" means The First National Bank of Chicago in its individual capacity, and its successors. "Fixed Rate Loan" means a Eurocurrency Rate Loan or a Transaction Loan. "Floating Rate" means the per annum rate equal to the sum of the Applicable Margin plus the Alternate Base Rate, which Floating Rate shall change simultaneously with any change in the Alternate Base Rate. "Floating Rate Loan" means any Revolving Credit Loan or any portion of the Term Loan denominated in Dollars which bears interest at the Floating Rate. "Funded Debt" of any person means all Indebtedness that would, in accordance with generally accepted accounting principles, constitute long term debt, including (a) any Indebtedness with a maturity of longer than one year after the creation of such Indebtedness, (b) any Indebtedness outstanding under a revolving credit or similar agreement (and any renewal or extension thereof) providing for borrowings which constitute long term debt, provided, however, that all Indebtedness outstanding under this Agreement shall be deemed "Funded Debt" at all times regardless of the proper classification under generally accepted accounting principles, (c) any Capital Lease, and (d) any guarantee with respect to Funded Debt of another person to the extent the indebtedness or obligations guaranteed are not included in the liabilities of the Company and its Subsidiaries determined on a consolidated basis as of the date of the last balance sheet required to be furnished to the Banks pursuant to Section 5.1(e)(ii) of this Agreement. "generally accepted accounting principles" means generally accepted accounting principles applied on a basis consistent with that reflected in the financial statements referred to in Section 4.6. "Guaranty" means the Guaranty and Subordination Agreement dated May 4, 1992, executed by the Company in favor of NBD in connection with the term loan issued by NBD in favor of Applied Films, as the Guaranty may be amended or modified from time to time. "Hohe" means Donnelly Hohe GmbH & Co. KG, a limited partnership with a limited liability company as the general partner, each organized under the law of the Federal Republic of Germany, and an Affiliate of the Company. "Indebtedness" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services, except for trade accounts payable arising in the ordinary course of business that are not more than 90 days past due or as are reasonably being 6 11 contested, (iv) obligations as lessee under leases which have been in accordance with generally accepted accounting principles, recorded as Capital Leases, (v) obligations to purchase property or services if payment is required regardless of whether such property is delivered or services are performed (generally called "take or pay" contracts), but such obligations shall only be included in an amount equal to the difference between the amount of the required payment and the value to the Company or a Subsidiary of the Company of the goods or services required to be delivered in connection with such required payment, (vi) obligations in respect of currency or interest rate swaps or comparable transactions valued at the maximum termination payment payable by the obligor, other than any such contracts entered into as hedges against Indebtedness of the kinds referred to in clauses (i) and (ii) above, (vii) any obligation of any Person other than the Company or its Subsidiaries, if such obligation is secured by any lien on the property of the Company or any of its Subsidiaries, provided that, the amount of any such Indebtedness shall be limited to the greater of the then book value or fair market value of the property securing any such lien, (viii) obligations of others similar in character to those described in clauses (i) through (vii) above for which the Company or any of its Subsidiaries is contingently liable, including without limitation all reimbursement obligations in respect of letters of credit, surety bonds, or similar obligations, to the extent such obligations are not included in the liabilities of the Company and its Subsidiaries determined on a consolidated basis as of the date of the last balance sheet required to be furnished to the Banks pursuant to Section 5.1(e)(ii) of this Agreement, and (ix) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Interest Coverage Ratio" means, as of any date, (a) for purposes of calculating the ratio under Section 5.2(b), the ratio of (i) Consolidated EBIT, as calculated for the Company's eight most recently ended fiscal quarters, to (ii) Consolidated Interest Expense, as calculated for the Company's eight most recently ended fiscal quarters, and (b) for purposes of calculating the ratio under the definition of "Applicable Margin" and Section 2.3, the ratio of (i) Consolidated EBIT, as calculated for the Company's four most recently ended fiscal quarters, to (ii) Consolidated Interest Expense, as calculated for the Company's four most recently ended fiscal quarters. "Interest Payment Date" means (a) with respect to any Floating Rate Loan, the first day of each January, April, July, and October occurring after the date hereof, commencing with the first such day occurring after the date of this Agreement, and (b) with respect to any Federal Funds Rate Loan, Eurocurrency Rate Loan or Transaction Loan, the last day of the related Interest Period and, in the case of any Interest Period exceeding three months, those days that occur during such Interest Period at intervals of three months after the first day of the Interest Period (unless the Company and the Bank making a Transaction Loan specifically agree not to require the payment of interest prior to the last day of the Interest Period for such Transaction Loan.) "Interest Period" means any Eurocurrency Interest Period or Federal Funds Interest Period or Transaction Loan Interest Period. 7 12 "Letter of Credit" means a standby letter of credit denominated in Dollars, having a stated expiry date not later than the earlier of one year from its issuance date and the then-scheduled Termination Date, issued by the Agent for the Company's account under an application and related documentation acceptable to the Agent requiring, among other things, immediate reimbursement by the Company to the Agent in respect of all drafts or other demand for payment honored thereunder and all expenses paid or incurred by the Agent relating thereto. "Letter of Credit Advance" means the issuance of a Letter of Credit under Section 2.4 made pursuant to Section 2.1(a) in which each Bank acquires a pro rata risk participation pursuant to Section 2.4. "Letter of Credit Documents" shall have the meaning ascribed thereto in Section 3.3(b). "Lien" means any pledge, assignment, deed of trust, hypothecation, mortgage, security interest, conditional sale or title retaining contract, financing statement filing, or any other type of lien, charge, encumbrance or other similar claim or right. "Loan" means any Revolving Credit Loan or Term Loan, as the context may require. "Loan Documents" means this Agreement, the Notes, the Letter of Credit Documents, and any other agreement, instrument or document executed at any time in connection with this Agreement. "Maturity Date" means the maturity date of the Term Loans issued under Section 2.1(b), which will be the earlier of (a) the second anniversary of the Termination Date and (b) the date on which the Notes are declared due and payable pursuant to Section 6.2. "Multiemployer Plan" means any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA or Section 414(f) of the Code. "NBD" means NBD Bank, a Michigan banking corporation. "Net Income" means, for any period, the consolidated net income (or loss) of the Company and its Subsidiaries after deductions for income taxes, determined in accordance with generally accepted accounting principles. "Notes" means the Revolving Credit Notes and the Term Notes, and "Note" means any Revolving Credit Note or any Term Note. "Overdue Rate" means (a) in respect of principal of Floating Rate Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, (b) in respect of principal of Federal Funds Rate Loans, Eurocurrency Rate Loans and Transaction 8 13 Loans, a rate per annum that is equal to the sum of three percent (3%) per annum plus the per annum rate in effect thereon until the end of the then-current Interest Period for such Loan and, thereafter, a rate per annum that is equal to the sum of three percent (3%) per annum plus the Floating Rate, and (c) in respect of other amounts payable by the Company hereunder (other than interest), a per annum rate that is equal to the sum of three percent (3%) per annum plus the Floating Rate. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Permitted Currency" means Dollars and any currency which is freely transferable and convertible into Dollars, is readily available to the Banks in the relevant interbank market, and is issued by a country which is a member of the Organization for Economic Cooperation and Development ("OECD") (as such designation shall change from time to time) or any other currency approved by the Agent and the Banks. A list of all OECD countries as of the Effective Date is set forth in Schedule 1.1. "Permitted Liens" means Liens permitted by Section 5.2(g). "Person" or "person" shall include an individual, a corporation, an association, a partnership, a trust or estate, a joint stock company, an unincorporated organization, a joint venture, a trade or business (whether or not incorporated), a government (foreign or domestic) and any agency or political subdivision thereof, or any other entity. "Plan" means, with respect to any person, any pension plan (other than a Multiemployer Plan) subject to Title IV of ERISA or to the minimum funding standards of Section 412 of the Code which has been established or maintained by such person, any Subsidiary of such person or any ERISA Affiliate, or by any other person if such person, any Subsidiary of such person or any ERISA Affiliate could have liability with respect to such pension plan. "Prohibited Transaction" means any transaction involving any Plan which is proscribed by Section 406 of ERISA or Section 4975 of the Code. "Receivables" means and includes "accounts" and "general intangibles" (each as defined in Section 9-106 of the Uniform Commercial Code) and notes receivable, and in each case includes the right to payment of any interest or finance charges and other obligations of any obligor with respect thereto. "Reportable Event" means a reportable event as described in Section 4043(b) of ERISA including those events as to which the thirty (30) day notice period is waived under Part 2615 of the regulations promulgated by the PBGC under ERISA. 9 14 "Required Banks" means Banks holding not less than sixty- six and two-thirds percent (66 2/3%) of the Commitments, or if the Commitments have been terminated, Banks holding not less than sixty- six and two-thirds percent (66 2/3%) of the aggregate principal amount of the Advances then outstanding. "Revolving Credit Loans" means the borrowings under Section 2.4 evidenced by the Revolving Credit Notes and made pursuant to Section 2.1(a), and "Revolving Credit Loan" means any of the Revolving Credit Loans. Any Revolving Credit Loan or portion thereof may also be denominated as a Floating Rate Loan, a Federal Funds Rate Loan, or a Eurocurrency Rate Loan or a Transaction Loan, as appropriate, and such Floating Rate Loans, Federal Funds Rate Loans, and Eurocurrency Rate Loans are referred to herein as "types" of Revolving Credit Loans. "Revolving Credit Note" means any promissory note of the Company evidencing the Revolving Credit Loans, in substantially the form annexed hereto as Exhibit A-1, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "Significant Subsidiary" means any Subsidiary of the Company which has either (i) Tangible Net Worth equal to 10% or more of the Consolidated Tangible Net Worth of the Company and its Subsidiaries or (ii) Total Assets equal to 10% or more of the Consolidated Total Assets of the Company and its Subsidiaries. "Subsidiary" of any person means any other person (whether now existing or hereafter organized or acquired) in which (other than directors qualifying shares required by law) at least a majority of the securities or other ownership interests of each class having ordinary voting power or analogous right (other than securities or other ownership interests which have such power or right only by reason of the happening of a contingency), at the time as of which any determination is being made, are owned, beneficially and of record, by such person or by one or more of the other Subsidiaries of such person or by any combination thereof. Unless otherwise specified, reference to "Subsidiary" means a Subsidiary of the Company. "Tangible Net Worth" of any person means, as of any date, (a) the amount of any capital stock, paid in capital and similar equity accounts plus (or minus in the case of a deficit) the capital surplus and retained earnings of such person and the amount of any foreign currency translation adjustment account shown as a capital account of such person, less (b) the net book value of all items of the following character which are included in the assets of such person: (i) goodwill, including without limitation, the excess of cost over book value of any asset, (ii) organization or experimental expenses, (iii) unamortized debt discount and expense, (iv) patents, trademarks, trade names and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges, (vii) franchises, licenses and permits, and (viii) other assets which are deemed intangible assets under generally accepted accounting principles, and plus (c) any Transitional Obligation reflected in such person's Total Liabilities. 10 15 "Term Loan" means the borrowings in Dollars under Section 2.4 evidenced by the Term Notes and made pursuant to Section 2.1(b), and "Term Loan" means any of the Term Loans. Any Term Loan or portion thereof may also be denominated as a Floating Rate Loan, a Federal Funds Rate Loan, or a Eurocurrency Rate Loan, as appropriate, and such Floating Rate Loans, Federal Funds Rate Loans, and Eurocurrency Rate Loans are referred to herein as "types" of Term Loans. "Term Note" means any promissory note of the Company evidencing the Term Loans, in substantially the form annexed hereto as Exhibit A-2, as amended or modified from time to time and together with any promissory note or notes issued in exchange or replacement therefor. "Termination Date" means the earlier to occur of (a) November 20, 2000 and (b) the date on which the Commitment shall be terminated pursuant to Section 2.2 or 6.2. "Total Assets" of any person means, as of any date, all property which, in accordance with generally accepted accounting principles, is or should be classified as assets on a balance sheet of such person. "Total Capitalization" of any person means the sum of Tangible Net Worth of such person and Funded Debt of such person. "Total Liabilities" of any person means, as of any date, all obligations which, in accordance with generally accepted accounting principles, are or should be classified as liabilities on a balance sheet of such person less, in the case of the Company, the amount of cash on hand which constitutes unexpended proceeds from the issuance of bonds received by the Company committed to be expended under the terms of such bonds, plus any Transitional Obligations reflected in such person's liabilities, and plus, in the case of the Company, the lesser of (a) the face amount of the Guaranty, and (b) $5,000,000. "Transaction Interest Period" means, with respect to a Transaction Loan, a period not longer than 29 days commencing on a Business Day and ending on a Business Day which is prior to the Termination Date and which is mutually agreed upon by the Company and a Bank in connection with making a particular Transaction Loan. "Transaction Loan" means any Revolving Credit Loan which bears interest at a Transaction Rate for a specified Transaction Interest Period. "Transaction Rate" means the rate per annum agreed upon by the Company and a Bank in connection with a particular Transaction Loan. "Transitional Obligations" of any person means the amount of the accumulated post-retirement benefit obligations determined to exist as of the date that Statement of Financial Accounting Standard No. 106 is initially applied to such person. 11 16 "Unfunded Benefit Liabilities" means, with respect to any Plan as of any date, the amount of the unfunded benefit liabilities determined in accordance with Section 4001(a)(18) of ERISA. 1.2. Other Definitions; Rules of Construction. As used herein, the terms "Agent", "Bank", "Banks", "Company", "1995 Agreement", and "this Agreement" shall have the respective meanings ascribed thereto in the introductory paragraphs of this Agreement. Such terms, together with the other terms defined in Section 1.1, shall include both the singular and the plural forms thereof and shall be construed accordingly. All computations required hereunder and all financial terms used herein shall be made or construed in accordance with generally accepted accounting principles unless such principles are inconsistent with the express requirements of this Agreement. Use of the terms "herein", "hereof", and "hereunder" shall be deemed references to this Agreement in its entirety and not to the Section or clause in which such term appears. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. ARTICLE II THE COMMITMENT 2.1. Commitment of the Banks. (a) Revolving Credit Loans. Each Bank agrees, for itself only, and subject to the terms of this Agreement, to make Revolving Credit Loans to the Company under Section 2.4 and Section 3.3, and to participate in Letter of Credit Advances to the Company under Section 2.4, from time to time from and including the Effective Date to but excluding the Termination Date, provided, that, on the date of each Advance, the Dollar Equivalent of all Advances made by any Bank, including the Advances to be made on that date, shall not exceed the Commitment of such Bank and the Dollar Equivalent of all Advances made by all Banks, including the Advances to be made on that date, shall not exceed the aggregate Commitments, and provided, further, that the aggregate face amount of all Letter of Credit Advances outstanding at any time shall not exceed $10,000,000. (b) Term Loan. Each Bank further agrees, for itself only, and subject to the terms of this Agreement, to make a single Term Loan in Dollars to the Company on the Termination Date in an amount not to exceed the lesser of (i) the Dollar Equivalent of the aggregate principal amount of the Revolving Credit Loans of such Bank outstanding on the Termination Date, and (ii) its respective Commitment as of the Termination Date. 2.2. Termination and Reduction of Commitment. (a) The Company shall have the right to terminate or reduce the Commitments at any time and from time to time, provided that (a) the Company shall give notice of such termination or reduction to the Agent specifying the amount and effective date thereof, (b) each partial reduction of the Commitments shall be in a minimum amount of $5,000,000 and in an integral multiple of $5,000,000, and shall reduce the 12 17 Banks' Commitments proportionately in accordance with the Banks' respective Commitment amounts, (c) no such termination or reduction shall be permitted with respect to any portion of the Commitment as to which a request for an Advance pursuant to Section 2.4 is then pending, and (d) the Commitment may not be terminated if any Advances are then outstanding and may not be reduced below the principal amount of Revolving Credit Loans and the face amount of Letters of Credit then outstanding. The Commitments or any portion thereof terminated or reduced pursuant to this Section 2.2 may not be reinstated. (b) A Letter of Credit Advance (i) shall be deemed outstanding in an amount equal to the sum of the maximum amount available to be drawn under the related Letter of Credit on or after the date of determination and on or before the stated expiry date thereof plus the amount of any draws under such Letter of Credit that have not been reimbursed as provided in Section 3.3, and (ii) shall be deemed outstanding at all times on and before such stated expiry date or such earlier date on which all amounts available to be drawn under such Letter of Credit have been fully drawn and all related reimbursement obligations have been paid pursuant to Section 3.3. As provided in Section 3.3, upon each payment made by the Agent in respect of any draft or other demand for payment under any Letter of Credit, the amount of any Letter of Credit Advance outstanding immediately prior to such payment shall be automatically reduced by the amount of each Revolving Credit Loan deemed advanced in respect of the Company's related reimbursement obligation. 2.3. Fees. (a) Facility Fee. The Company shall pay to the Agent for the account of the Banks a facility fee computed at the per annum rate set forth in the chart below of the maximum Commitment available from time to time under this Agreement for the period from and including the Effective Date to and including the Termination Date. The applicable facility fee shall change on the fifth day following receipt of the notice delivered by the Company under Section 5.1(e)(ii), based on the Interest Coverage Ratio as of the end of the period reported in that notice. Accrued facility fees shall be payable quarterly in arrears on the first Business Day of each January, April, July and October, commencing on the first such Business Day occurring after the date of this Agreement, and on the Termination Date. Interest Coverage Ratio Facility Fee - ----------------------- ------------ Greater than 7.75 to 1 .10% Less than or equal to 7.75 to 1 and greater than 5.75 to 1 .125% Less than or equal to 5.75 to 1 and greater than 3.75 to 1 .15% 13 18 Less than or equal to 3.75 to 1 and greater than 3.00 to 1 .175% Less than or equal to 3.00 to 1 .25% (b) Letter of Credit Fees. On or before the date any Letter of Credit is issued, the Company agrees to pay to the Agent for the account of the Banks a fee computed at the per annum rate set forth in the chart below of the maximum amount available to be drawn from time to time under such Letter of Credit, for the period from and including the date of issuance of such Letter of Credit to and including the stated expiry date of such Letter of Credit. The applicable letter of credit fee shall be based on the Interest Coverage Ratio as of the last day of the period reported in the notice delivered by the Company under Section 5.1(e)(ii) immediately prior to the Company delivering its request for the Letter of Credit under Section 2.4(a). Interest Coverage Ratio Letter of Credit Fee - ----------------------- -------------------- Greater than 7.75 to 1 .20% Less than or equal to 7.75 to 1 and greater than 5.75 to 1 .25% Less than or equal to 5.75 to 1 and greater than 3.75 to 1 .30% Less than or equal to 3.75 to 1 and greater than 3.00 to 1 .45% Less than or equal to 3.00 to 1 .75% Further, the Company agrees to pay an additional fee to the Agent for its own account computed at the rate of one-eighth of one percent (1/8 of 1%) per annum of such maximum amount for such period. Such fees are nonrefundable and the Company shall not be entitled to any rebate of any portion thereof if such Letter of Credit does not remain outstanding through its stated expiry date or for any other reason. (c) Agency Fee. The Company agrees to pay to the Agent an agency fee for its services as Agent under this Agreement in such amounts as may from time to time be agreed upon by the Company and the Agent. 2.4. Disbursement of Advances. (a) Requests for Advances; Proceeds of Loans. The Company shall give the Agent notice of its request for each Advance (other than an Advance to be made as a 14 19 Transaction Loan, which shall be requested in the manner set forth in Section 2.4(f)) in substantially the form of Exhibit B hereto (i) not later than 12:00 p.m. Noon Chicago time three (3) Eurocurrency Business Days prior to the date the Advance is requested to be made if the Advance is to be made as a Eurocurrency Rate Loan, (ii) not later than 1:00 p.m. Chicago time on the Business Day the Advance is requested to be made if the Advance is to be made as a Federal Funds Rate Loan or a Floating Rate Loan, and (iii) not later than 12:00 p.m. Noon Chicago time one (1) Business Day prior to the date the Advance is requested to be made in all other cases, which notice shall specify whether a Revolving Credit Loan, a Term Loan, or a Letter of Credit Advance is requested and whether a Eurocurrency Rate Loan, Federal Funds Rate Loan or Floating Rate Loan is requested. If a Letter of Credit Advance is requested, the request shall include all information which the Agent may require. If a Revolving Credit Loan in the form of a Eurocurrency Rate Loan is requested, the notice shall specify the Permitted Currency requested and the Interest Period to initially apply to the Loan. The Agent, not later than the Business Day next succeeding the day any notice is given, shall notify each Bank of the requested Advance, provided, that the Agent shall promptly notify each Bank of the Company's request for a Federal Funds Rate Loan or a Floating Rate Loan on the Business Day on which the Company makes such a request. Subject to the terms of this Agreement, the proceeds of each requested Loan (other than a Transaction Loan) denominated in Dollars shall be made available to the Company by depositing the proceeds thereof, in immediately available funds, in an account maintained and designated by the Company at the Agent, and, in the case of a Loan not denominated in Dollars shall be made available to the Company by depositing the proceeds thereof, in immediately available funds, in an account maintained and designated by the Company at a bank acceptable to the Agent in the principal financial center of the country issuing the Permitted Currency in which the Loan is denominated, or in such other place specified by the Agent, provided, however, the proceeds of the Term Loans shall be applied against the outstanding principal amount of and accrued interest on the Revolving Credit Loans. Subject to the terms of this Agreement, the Agent shall issue any requested Letter of Credit for the Company's account on the date the related Letter of Credit Advance is requested to be made. Notwithstanding anything to the contrary herein, the Agent may decline to issue any requested Letter of Credit on the basis that the beneficiary, the purpose, or the terms of drawing are unacceptable to the Agent in its reasonable discretion. (b) Funding Loans. Each Bank, on the date any Loan (other than a Transaction Loan) is requested to be made, shall make its pro rata share of the Loan, if denominated in Dollars, available in immediately available funds at the Agent's principal office for disbursement to the Company, and, in the case of a Loan not denominated in Dollars, to the Agent's account at its designated branch or correspondent bank in the country issuing the respective Permitted Currency or at such other place specified by the Agent. Unless the Agent shall have received notice from any Bank prior to the date a Loan is requested to be made under this Section 2.4(b) that the Bank will not make available to the Agent its pro rata portion of such Loan, the Agent may assume that the Bank has made such portion available to the Agent in accordance with this Section. If and to the extent any Bank shall not have so made its pro rata portion available to the Agent, the Agent may (but shall not be obligated to) make such amount available to the Company, and such Bank and the Company severally agree to pay to the Agent forthwith on 15 20 demand such amount together with interest thereon, for each day from the date such amount is made available to the Company by the Agent until the date such amount is repaid to the Agent, at a rate per annum equal to the interest rate applicable to the Loan during such period in the case of repayments by the Company or equal to the Federal Funds Effective Rate in the case of repayments by the Bank. If the Bank shall pay such amount to the Agent together with interest, such amount so paid shall constitute a Loan by the Bank as a part of the related Loan for purposes of this Agreement. The failure of any Bank to make its pro rata portion of any Loan available to the Agent shall not relieve any other Bank of its obligations to make available its pro rata portion of the Loan on the date it is requested to be made. (c) Notes. All Revolving Credit Loans shall be evidenced by the Revolving Credit Notes, and the Term Loans shall be evidenced by the Term Notes. All Loans shall be due and payable and bear interest as provided in Article III. The Banks are hereby authorized by the Company to record in their respective books and records, the date, amount and type of Loan and the duration of the related Interest Period (if applicable), the amount of each payment or prepayment of principal thereon, and any other appropriate information, which books and records shall constitute prima facie evidence of the information so recorded, provided, however, that any Bank's failure to record or any error in recording any such information shall not relieve the Company of its obligation to repay the outstanding principal amount of the Loans, all accrued interest thereon and other amounts payable with respect thereto in accordance with the terms of the Notes and this Agreement. (d) Issuing Letters of Credit. Nothing in this Agreement shall be construed to require or authorize any Bank to issue any Letter of Credit, it being recognized that the Agent has the sole obligation under this Agreement to issue Letters of Credit and the Commitment of each Bank with respect to Letter of Credit Advances is expressly conditioned upon the Agent performing these obligations. Upon such issuance by the Agent in accordance with the terms hereof, each Bank shall automatically acquire a pro rata risk participation interest in the Letter of Credit Advance based on its respective Commitment. If the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, the Agent shall provide notice thereof to each Bank on the date such draft or demand is honored unless the Company shall have satisfied its reimbursement obligation to the Agent under Section 3.3 on such date. Each Bank, on such date, shall make its pro rata share of the amount paid by the Agent available to the Agent in immediately available funds at the Agent's principal office. If and to the extent any Bank shall not have made such pro rata portion available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was paid by the Agent until such amount is so made available to the Agent, at a per annum rate equal to the interest rate applicable during such period to the related loan disbursed under Section 3.3 in respect of the Company's reimbursement obligation if paid by the Company or equal to the then-applicable Federal Funds Effective Rate if paid by the Bank. If the Bank shall pay such amount to the Agent together with such interest, such amount so paid shall constitute a Revolving Credit Loan by such Bank as part of the loan disbursed in respect of the Company's reimbursement obligation under Section 3.3. The failure of any Bank to make its pro rata portion of any such amount paid by the Agent 16 21 available to the Agent shall not relieve any other Bank of its obligation to make available its pro rata portion of such amount. (e) Prepayments and Reborrowings of Revolving Credit Loans. Subject to the terms of this Agreement, the Company may borrow Revolving Credit Loans under this Section 2.4, prepay Revolving Credit Loans pursuant to Section 3.1, and reborrow Revolving Credit Loans under this Section 2.4. (f) Transaction Loans. If the Company desires to borrow at the Transaction Rate from any Bank, it shall notify such Bank on the date the Advance is requested to be made of the amount it wishes to borrow at a Transaction Rate and the proposed Interest Period. If such Bank desires to make a Transaction Loan to the Company, such Bank will quote to the Company the Transaction Rate which would be applicable to a Transaction Loan in an amount equal to the requested Advance for the proposed Interest Period. If the Company decides to accept the Transaction Rate quoted by such Bank, the Company shall give an irrevocable notice of such acceptance within one hour after the Transaction Rate was quoted to it. The Company shall not be required to request Transaction Loans from the Banks on a pro rata basis. All Transaction Loans will be made in Dollars. The Company shall promptly notify the Agent of the amount of each Transaction Loan borrowed by the Company. 2.5. Conditions for First Disbursement. The obligation of the Agent and the Banks to make or participate in the first Advance hereunder is subject to the Banks receiving the following documents and the following matters being completed, in form and substance satisfactory to the Agent and the Banks: (a) Corporate Documents. Certified copies of such corporate documents of the Company, including those evidencing necessary corporate action with respect to this Agreement and the borrowings hereunder, as the Agent and the Banks shall reasonably request; (b) Notes. The Revolving Credit Notes, duly executed on behalf of the Company; and (c) Legal Opinions. The favorable written opinion of counsel for the Company substantially in the form attached hereto as Exhibit D. 2.6. Further Conditions for Disbursement. The obligation of the Agent and the Banks to make or participate in any Advance (including the first Advance) or any continuation or conversion under Section 2.7, is further subject to the following conditions being satisfied: (a) The representations and warranties contained in Article IV hereof shall be true and correct on and as of the date the Advance is made (both before and after the Advance is made) as if such representations and warranties were made on and as of such date; 17 22 (b) No Event of Default, and no event or condition which might become such an Event of Default with notice or lapse of time, or both, shall exist or shall have occurred and be continuing on the date the Advance is made (whether before or after the Advance is made); (c) In the case of any Term Loan, the Company shall have delivered the Term Notes for each Bank to the Agent, appropriately completed and duly executed on behalf of the Company; and (d) In the case of any Letter of Credit Advance, the Company shall have delivered to the Agent an application for the related Letter of Credit and other related documentation requested by and acceptable to the Agent, appropriately completed and duly executed on behalf of the Company. The Company shall be deemed to have made a representation and warranty to the Banks at the time of the making of, and the continuation or conversion of, each Advance to the effect set forth in clauses (a) and (b) of this Section 2.6. For purposes of this Section, the representations and warranties contained in Section 4.6 shall be deemed made with respect to the most recent financial statements delivered pursuant to Section 5.1(e)(ii). 2.7. Subsequent Elections as to Loans. The Company may elect (a) to continue a Loan of one type, or a portion thereof (other than a Transaction Loan), as a Loan of the then-existing type, or (b) may elect to convert a Loan of one type, or a portion thereof (other than a Transaction Loan), to a Loan of another type, in each case by giving notice thereof to the Agent in substantially the form of Exhibit C hereto not later than 12:00 p.m. Noon Chicago time three (3) Eurocurrency Business Days prior to the date any such continuation of or conversion to a Eurocurrency Rate Loan is to be effective, and not later than 1:00 p.m. Chicago time on the Business Day that such continuation or conversion is to be effective in all other cases, provided, that an outstanding Eurocurrency Rate Loan may only be converted on the last day of the then-current Interest Period with respect to such Loan, and provided, further, if a continuation of a Loan as, or a conversion of a Loan to, a Eurocurrency Rate Loan is requested, such notice shall also specify the Interest Period to be applicable thereto upon such continuation or conversion. If the Company shall not timely deliver such a notice with respect to any outstanding Eurocurrency Rate Loan, the Company shall be deemed to have elected to convert the Eurocurrency Rate Loan to a Floating Rate Loan on the last day of the then-current Interest Period applying to the Loan. 2.8. Limitation of Requests and Elections. Notwithstanding any other provision of this Agreement to the contrary, if, upon receiving a request for a Eurocurrency Rate Loan pursuant to Section 2.4, or a request to continue a Eurocurrency Rate Loan as a Eurocurrency Rate Loan, or a request to convert any other Loan to a Eurocurrency Rate Loan pursuant to Section 2.7, (a) deposits in the Permitted Currency for periods comparable to the Interest Period elected by the Company are not available to any Bank in the relevant interbank or secondary market, or (b) the Eurocurrency Rate will not adequately and fairly reflect the cost to any Bank of making, funding or maintaining the related Eurocurrency Rate Loan, or (c) by reason of 18 23 national or international financial, political or economic conditions or by reason of any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect, or the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, it is impracticable, unlawful or impossible for any Bank (i) to make or fund the relevant Eurocurrency Rate Loan or (ii) to continue such Eurocurrency Rate Loan as a Eurocurrency Rate Loan of the then-existing type or (iii) to convert a Loan to such a Eurocurrency Rate Loan, then the Company shall not be entitled, so long as such circumstances continue, to request a Eurocurrency Rate Loan of the affected type pursuant to Section 2.4 or a continuation of or conversion to a Eurocurrency Rate Loan of the affected type pursuant to Section 2.7. In the event that such circumstances no longer exist, the Banks shall again consider requests for Eurocurrency Rate Loans of the affected type pursuant to Section 2.4, and requests for continuations of and conversions to Eurocurrency Rate Loans of the affected type pursuant to Section 2.7. 2.9. Minimum Amounts. Except for (a) Revolving Credit Loans and conversions thereof or Letter of Credit Advances which exhaust the entire remaining amount of the Commitment, and (b) conversions or payments required pursuant to Section 3.1(b), Section 3.3, or Section 3.7, each Revolving Credit Loan and each continuation or conversion pursuant to Section 2.7 and each prepayment thereof shall be, with respect to a Floating Rate Loan or a Transaction Loan, in a minimum amount of $1,000,000, and with respect to a Federal Funds Rate Loan or Eurocurrency Rate Loan, in a minimum amount of $3,000,000, and in integral multiples of $100,000. ARTICLE III PAYMENTS AND PREPAYMENTS OF LOANS 3.1. Principal Payments. (a) Unless earlier payment is required under this Agreement, (i) the Company shall pay to the Banks on the Termination Date the entire outstanding principal amount of the Revolving Credit Loans, and (ii) the Company shall pay to the Banks the outstanding principal amount of each Term Loan in equal quarterly amounts payable on the first day of each January, April, July, and October, commencing on the first such day following the Termination Date, to and including the Maturity Date, when the entire outstanding principal amount of the Term Loan shall be due and payable. In addition, the outstanding principal amount of each Transaction Loan shall be paid on the last day of the then-current Interest Period with respect to such Loan. (b) The Company may at any time and from time to time prepay all or a portion of the Loans, without premium or penalty, provided that (i) the Company may not prepay any portion of any Loan as to which an election for a continuation of or a conversion to a Eurocurrency Rate Loan is pending pursuant to Section 2.7, and (ii) unless earlier payment is 19 24 required under this Agreement, any Eurocurrency Rate Loan or Transaction Loan may only be prepaid or paid on the last day of the then-current Interest Period with respect to such Loan. (c) If at any time the Dollar Equivalent of the aggregate principal amounts outstanding under the Revolving Credit Loans and Letter of Credit Advances exceed the Commitments, the Company shall immediately pay to the Agent for the account of the Banks an amount not less than the amount of such excess, to be applied first to the amounts outstanding under the Revolving Credit Loans, and the remainder, if any, to be held by the Agent on behalf of the Banks as cash collateral securing any reimbursement obligations which may arise under the outstanding Letters of Credit; the Company grants to the Agent for the benefit of the Banks a first-priority lien and security interest in this cash collateral, and all cash collateral shall be in the Agent's sole and exclusive control. (d) If at any time the face amount of the Letters of Credit exceed the lesser of $10,000,000 and the Commitments, the Company shall immediately pay to the Agent for the account of the Banks an amount not less than the amount of such excess, to be applied first to the amounts outstanding under the Revolving Credit Loans, and the remainder, if any, to be held by the Agent on behalf of the Banks as cash collateral securing any reimbursement obligations which may arise under the outstanding Letters of Credit. (e) All prepayments of the Term Loans shall be applied to principal installments of the Term Loan in the inverse order of their maturities. No partial prepayment of the Term Loans shall reduce the amount or defer the date of the scheduled installments of principal. 3.2. Interest Payments. The Company shall pay interest to the Agent for the account of the Banks on the unpaid principal amount of each Loan (other than a Transaction Loan) and shall pay interest directly to each applicable Bank on the unpaid principal amount of each Transaction Loan, for the period commencing on the date the Loan is made until the Loan is paid in full, on each Interest Payment Date and at maturity (whether at stated maturity, by acceleration or otherwise), and thereafter on demand, as follows: (a) Loans. Interest on each Loan shall be payable (i) at the Floating Rate during such periods that the Loan is a Floating Rate Loan, (ii) at the Eurocurrency Rate applicable to the Loan for each related Eurocurrency Interest Period during such periods that the Loan is a Eurocurrency Rate Loan, and (iii) at the Federal Funds Rate applicable to the Loan for each related Interest Period during such periods that the Loan is a Federal Funds Rate Loan and (iv) at the Transaction Rate applicable to the Loan for each related Interest Period during such periods that the Loan is a Transaction Loan. (b) Overdue Amounts. Notwithstanding the foregoing paragraph (a), the Company shall pay interest on demand at the Overdue Rate on the outstanding principal amount of any Loan and any other amount payable by the Company hereunder (other than 20 25 interest) which is not paid in full when due (whether at stated maturity, by acceleration or otherwise) for the period commencing on the due date thereof until the same is paid in full. 3.3. Letter of Credit Reimbursement Payments. (a) The Company agrees to pay to the Agent, on the day on which the Agent honors a draft or other demand for payment presented or made under any Letter of Credit, an amount equal to the amount paid by the Agent in respect of such draft or other demand under such Letter of Credit and all expenses paid or incurred by the Agent relative thereto. Unless the Company shall have made such payment to the Agent on such day, upon each such payment by the Agent, the Agent shall be deemed to have disbursed to the Company, and the Company shall be deemed to have elected to satisfy its reimbursement obligation by, a Revolving Credit Loan bearing interest at the Floating Rate for the account of the Banks in an amount equal to the amount so paid by the Agent in respect of such draft or other demand under the Letter of Credit. Such Revolving Credit Loan shall be disbursed notwithstanding any failure to satisfy any conditions for disbursement of any Loan set forth in Article II and, to the extent of the Revolving Credit Loan so disbursed, the reimbursement obligation of the Company under this Section 3.3 shall be deemed satisfied. (b) The reimbursement obligation of the Company under this Section 3.3 shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all obligations of the Company to the Banks hereunder shall have been satisfied, and the Company's obligations shall not be affected, modified or impaired upon the happening of any event, including without limitation any of the following, whether or not with notice to, or the consent of, the Company: (i)Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the "Letter of Credit Documents"); (ii)Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents; (iii)The existence of any claim, setoff, defense or other right which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), the Agent or any Bank or any other person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions; (iv)Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; 21 26 (v)Payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (vi)Any failure, omission, delay or lack on the part of the Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Agent, any Bank or any such party under this Agreement or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Agent, any Bank or any such party; (vii)Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise of the Company from the performance or observance of any obligation, covenant or agreement contained in this Section 3.3. No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which the Company has or may have against the beneficiary of any Letter of Credit shall be available hereunder to the Company against the Agent or any Bank. 3.4. Payment Method. (a) All payments to be made by the Company hereunder will be made in immediately available funds to the Agent, or in the case of Transaction Loans, to the applicable Bank, (i) in the case of principal and interest on any Loan, in the Permitted Currency in which such Loan is denominated and (ii) in all other cases, in the otherwise specified or relevant currency. All payments in Dollars (other than with respect to Transaction Loans) shall be made to the Agent at its address set forth in Section 8.2 not later than 1:00 p.m. Chicago time on the date on which such payment shall become due, and all payments in a Permitted Currency other than Dollars shall be made by credit to the Agent's account at its designated branch or correspondent bank in the country issuing the relevant Permitted Currency, or in such other place specified by the Agent, not later than 1:00 p.m. in the local time at the place for payment. Any payment of principal or interest on a Transaction Loan prior to the occurrence of an Event of Default shall be made directly to each applicable Bank at its address specified on the signature page hereto, by 1:00 p.m. local time on the date when due ratably among the Banks based on each Bank's share of the aggregate amount of Transaction Loans due and payable on such date. After the occurrence of a Default or an Event of Default or in the event any Bank receives payment by set-off, Section 7.1 shall govern the distribution of payments made by the Company until such Default or Event of Default is cured. Payments received after 1:00 p.m. local time shall be deemed to be payments made prior to 1:00 p.m. local time on the next succeeding Business Day. (b) At the time of making each such payment to the Agent, the Company shall, subject to the other terms of this Agreement, specify to the Agent the Loan or other obligation of the Company hereunder to which such payment is to be applied. In the event that the Company fails to so specify the relevant obligation or if an Event of Default shall have 22 27 occurred and be continuing, the Agent may apply such payments to the Company's obligations under this Agreement as it may determine in its sole discretion. (c) This Agreement arises in the context of an international transaction, and the specification of payment in a specific currency at a specific place pursuant to this Agreement is of the essence. Such specified currency shall be the currency of account and payment under this Agreement. The Company's obligations hereunder shall not be discharged by an amount paid in any other currency or at another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid, on prompt conversion into the applicable currency and transfer to the Banks under normal banking procedure, does not yield the amount of such currency due under this Agreement. In the event that any payment, whether pursuant to a judgment or otherwise, upon conversion and transfer, does not result in payment of the amount of such currency due under this Agreement, the Banks shall have an independent cause of action against the Company for the currency deficit. (d) If for purposes of obtaining judgment in any court, it becomes necessary to convert any currency due hereunder into any other currency, the Company will pay any additional amount as may be necessary to ensure that the amount paid in respect of such judgment is the amount in such other currency which, when converted at the Agent's spot rate of exchange prevailing on the date of payment, would yield the same amount of the currency due hereunder. Any amount due from the Company under this Section 3.4(d) will be due as a separate debt and shall not be affected by judgment being obtained for any other sum due under or in respect of this Agreement. 3.5. No Setoff or Deduction. (a) All payments of principal of and interest on the Loans and other amounts payable by the Company hereunder shall be made by the Company without setoff or counterclaim, and free and clear of, and without deduction or withholding for, or on account of, any present or future taxes, levies, imposts, duties, fees, assessments, or other charges of whatever nature, imposed by any governmental authority, or by any department, agency or other political subdivision or taxing authority. The Company indemnifies each Bank against any taxes or charges (other than on net overall income) which may be claimed from it in respect of the Advances or any of them or any sum payable by the Company hereunder and against any costs, charges and expenses or liabilities in respect of such claim. Such indemnity shall survive the termination of the Commitments. (b) If at any time the Company is required by law or by any directive or order of any court of competent jurisdiction to make any deduction or withholding of whatever nature from any payment due under this Agreement or any of the Loan Documents, the Company will ensure that the same does not exceed the minimum liability therefor and will (i) pay to any Bank on request such additional amount as such Bank certifies will result in the net amount received by it after all deductions being equal to the full amount which would have been receivable had there been no deduction or withholding and (ii) pay forthwith to the relevant authorities the full amount of the deduction or withholding and deliver to the Agent such an official receipt, certificate or other proof evidencing the amount paid in respect of such deduction 23 28 or withholding. Any additional amount paid under this sub-clause shall not be treated as interest but as agreed compensation. (c) If any payment by the Company is made to or for the account of any Bank after deduction for or on account of tax, and additional payments are made by the Company, then, if any Bank shall receive or be granted a credit against or remission for such tax, that Bank shall, to the extent that it can do so without prejudice to the retention of the amount of such credit or remission, reimburse to the Company such amount as that Bank shall, in its reasonable opinion, have concluded to be attributable to the relevant tax or deduction or withholding. A statement as to the amount of such reimbursement, prepared in good faith and in reasonable detail by the Bank and submitted by the Bank to the Company following the Company's written request, shall be conclusive and binding for all purposes absent manifest error in computation. Nothing herein contained shall interfere with the right of any Bank to arrange its affairs in whatever manner it thinks fit and, in particular, the Banks shall not be under any obligation to claim relief from its corporation profits or similar tax liability in respect of such tax in priority to any other claims, reliefs, credits or deductions available to it nor oblige any Bank to disclose any information relating to its tax affairs. Such reimbursement shall be made as soon as reasonably practical upon such Bank certifying that the amount of such credit or remission has been received by it. 3.6. Payment on Non-Business Day; Payment Computations. Except as otherwise provided in this Agreement to the contrary, whenever any installment of principal of, or interest on, any Loan or any other amount due hereunder becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of any installment of principal, interest shall be payable thereon at the rate per annum determined in accordance with this Agreement during such extension. Computations of interest and other amounts due under this Agreement shall be made on the basis of a year of 360 days, or 365 or 366 days, as determined by custom in the relevant market, for the actual number of days elapsed, including the first day but excluding the last day of the relevant period. 3.7. Additional Costs. (a) In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of any such authority (whether or not having the force of law), shall (i) affect the basis of taxation of payments to the Bank of any amounts payable by the Company under this Agreement (other than taxes imposed on the overall net income of the Bank, by the jurisdiction, or by any political subdivision or taxing authority of any such jurisdiction, in which the Bank has its principal office), or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Bank, or (iii) shall impose any other condition with respect to this Agreement, the Commitment, the Advances, any Letter of Credit, the Notes, or the Loans, and the result of any of the foregoing is to increase the cost to the Bank of making, 24 29 funding or maintaining any Eurocurrency Rate Loan or any Letter of Credit, or to reduce the amount of any sum receivable by the Bank thereon, then the Company shall pay to the Bank, from time to time, upon request by the Bank, additional amounts sufficient to compensate the Bank for such increased cost or reduced sum receivable to the extent, in the case of any Eurocurrency Rate Loan, the Bank is not compensated therefor in the computation of the interest rate applicable to such Eurocurrency Rate Loan. A statement as to the amount of such increased cost or reduced sum receivable, prepared in good faith and in reasonable detail by the Bank and submitted by the Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. (b) In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of any such authority (whether or not having the force of law), including any risk-based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by any Bank (or any corporation controlling the Bank) and the Bank determines that the amount of such capital is increased by or based upon the existence of the Bank's obligations hereunder and such increase has the effect of reducing the rate of return on the Bank's (or such controlling corporation's) capital as a consequence of such obligations hereunder to a level below that which the Bank (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy) by an amount deemed by the Bank to be material, then the Company shall pay to the Bank, from time to time, upon request by the Bank, additional amounts sufficient to compensate the Bank (or such controlling corporation) for any increase in the amount of capital and reduced rate of return which the Bank reasonably determines to be allocable to the existence of the Bank's obligations hereunder. A statement as to the amount of such compensation, prepared in good faith and in reasonable detail by the Bank and submitted by the Bank to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. 3.8. Illegality and Impossibility. In the event that any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank with any guideline, request or directive of such authority (whether or not having the force of law), including without limitation exchange controls, shall make it unlawful or impossible for the Bank to maintain any Eurocurrency Rate Loan or Letter of Credit under this Agreement, the Company shall, upon receiving notice thereof from the Bank, repay in full the then-outstanding principal amount of each Eurocurrency Rate Loan so affected or provide cash collateral equal to the outstanding amount of the Letter of Credit so affected, together with all accrued interest thereon to the date of payment and all amounts owing to the Bank under Section 3.9, (a) on the last day of the then-current Interest Period applicable to the affected loan if the Bank may lawfully continue to maintain the loan to such day, or (b) immediately if the Bank may not continue to maintain the Loan to such day or if being paid on account of a Letter of 25 30 Credit. If otherwise permitted to do so under this Agreement, the Company may convert the principal amount of each Eurocurrency Rate Loan so affected to a Floating Rate Loan in lieu of repaying such Eurocurrency Rate Loan hereunder. 3.9. Indemnification. If the Company makes any payment of principal with respect to any Eurocurrency Rate Loan or Transaction Loan on any other date than the last day of an Interest Period applicable thereto (whether pursuant to Section 6.2 or otherwise), or if the Company fails to borrow any Eurocurrency Rate Loan or Transaction Loan after notice has been given to the Agent or a Bank, as applicable, in accordance with Sections 2.4 or 2.7, or if the Company fails to make any payment of principal or interest in respect of a Eurocurrency Rate Loan or Transaction Loan when due, the Company shall reimburse the Banks on demand for any resulting actual loss or expense incurred by the Banks, including without limitation any actual loss incurred in obtaining, liquidating or employing deposits from third parties, whether or not the Banks shall have funded or committed to fund such Loan. A statement as to the amount of such loss or expense, prepared in good faith and in reasonable detail by the affected Bank and submitted to the Company, shall be conclusive and binding for all purposes absent manifest error in computation. Calculation of all amounts payable to a Bank under this Section 3.9 shall be made as though the Bank shall have actually funded or committed to fund the relevant Eurocurrency Rate Loan or Transaction Loan through the purchase of an underlying deposit in an amount equal to the amount of the Loan and having a maturity comparable to the related Interest Period; provided, however, that each Bank may fund any Eurocurrency Rate Loan or Transaction Loan in any manner it sees fit and the foregoing assumption shall be utilized only for the purpose of calculating amounts payable under this Section 3.9. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Company represents and warrants that: 4.1. Corporate Existence and Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan, and is duly qualified to do business, and is in good standing, in all additional jurisdictions where such qualification is necessary under applicable law. The Company has all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted, and to execute and deliver this Agreement, the Notes, and the other Loan Documents and to engage in the transactions contemplated by this Agreement. 4.2. Corporate Authority. The execution, delivery and performance by the Company of this Agreement, the Notes, and the other Loan Documents have been duly authorized by all necessary corporate action and are not in contravention of any law, rule or regulation, or any judgment, decree, writ, injunction, order or award of any arbitrator, court or governmental authority, or of the terms of the Company's articles of incorporation or by-laws, or of any 26 31 contract or undertaking to which the Company is a party or by which the Company or its property may be bound or affected or result in the imposition of any lien except for Permitted Liens. 4.3. Binding Effect. This Agreement is, and the Notes and the other Loan Documents when delivered hereunder will be, legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. 4.4. Subsidiaries. Schedule 4.4 hereto correctly sets forth the corporate or partnership name, jurisdiction of incorporation or registration of partnership, and ownership of each Subsidiary of the Company. Each such Subsidiary and each corporation becoming a Subsidiary of the Company after the date hereof is and will be a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is and will be duly qualified to do business in each additional jurisdiction where such qualification is or may be necessary under applicable law. Each Subsidiary of the Company has and will have all requisite corporate power to own or lease the properties used in its business and to carry on its business as now being conducted and as proposed to be conducted. 4.5. Litigation. Except as set forth in Schedule 4.5, there is no action, suit or proceeding pending or, to the best of the Company's knowledge, threatened against or affecting the Company or any of its Subsidiaries before or by any court, governmental authority or arbitrator, which if adversely decided might result, either individually or collectively, in any material adverse change in the business, properties, operations or condition, financial or otherwise, of the Company or any of its Subsidiaries or in any material adverse effect on the legality, validity or enforceability of this Agreement, the Notes, or the other Loan Documents, and, to the best of the Company's knowledge, there is no basis for any such action, suit or proceeding. 4.6. Financial Condition. The consolidated balance sheet of the Company and its Subsidiaries and the consolidated statements of income, retained earnings and changes in financial position of the Company and its Subsidiaries for the fiscal year ended July 1, 1995, and reported on by BDO Seidman, independent certified public accountants, and the interim consolidated balance sheet and interim consolidated statements of income, retained earnings and changes in financial position of the Company and its Subsidiaries, as of or for the three-month period ended on September 30, 1995, copies of which have been furnished to the Banks, fairly present, and the financial statements of the Company and its Subsidiaries delivered pursuant to Section 5.1 will fairly present, the consolidated financial position of the Company and its Subsidiaries as at the respective dates thereof, and the consolidated results of operations of the Company and its Subsidiaries for the respective periods indicated, all in accordance with generally accepted accounting principles consistently applied (subject, in the case of said interim statements, to year-end audit adjustments). There has been no material adverse change in the business, properties, operations or condition, financial or otherwise, of the Company or any of its Subsidiaries since July 1, 1995. There is no material contingent liability of the Company or any of its Subsidiaries that is not reflected in such financial statements or in the notes thereto. 27 32 4.7. Use of Loans. The Company will use the Advances for its general corporate purposes. Neither the Company nor any of its Subsidiaries extends or maintains, in the ordinary course of business, credit for the purpose, whether immediate, incidental, or ultimate, of buying or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Loan will be used for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any such margin stock or maintaining or extending credit to others for such purpose. After applying the proceeds of each Loan, such margin stock will not constitute more than 25% of the value of the assets (either of the Company alone or of the Company and its Subsidiaries on a consolidated basis) that are subject to any provisions of this Agreement that may cause the Advances to be deemed secured, directly or indirectly, by margin stock. 4.8. Consents, Etc. No consent, approval or authorization of or declaration, registration or filing with any governmental authority or any nongovernmental person or entity, including without limitation any creditor, lessor or stockholder of the Company or any of its Subsidiaries, is required on the part of the Company in connection with the execution, delivery and performance of this Agreement, the Notes, or the other Loan Documents, or the transactions contemplated hereby or as a condition to the legality, validity or enforceability of this Agreement, the Notes, or the other Loan Documents. 4.9. Taxes. The Company and its Subsidiaries have filed all tax returns (federal, state and local) required to be filed and have paid all taxes shown thereon to be due, including interest and penalties, or have established adequate financial reserves on their respective books and records for payment thereof. Neither the Company nor any of its Subsidiaries knows of any actual or proposed tax assessment or any basis therefor, and no extension of time for the assessment of deficiencies in any federal or state tax has been granted by the Company or any Subsidiary. 4.10. ERISA. The Company, its Subsidiaries, their ERISA Affiliates and their respective Plans are in compliance in all material respects with those provisions of ERISA and of the Code which are applicable with respect to any Plan. No Prohibited Transaction and no Reportable Event has occurred with respect to any such Plan. None of the Company, any of its Subsidiaries or any of their ERISA Affiliates is an employer with respect to any Multiemployer Plan. The Company, its Subsidiaries and their ERISA Affiliates have met the minimum funding requirements under ERISA and the Code with respect to each of their respective Plans, if any, and have not incurred any liability to the PBGC or any Plan. The execution, delivery and performance of this Agreement and the issuance and payment of the Notes do not constitute a Prohibited Transaction. There is no material unfunded benefit liability, determined in accordance with Section 4001(a)(18) of ERISA, with respect to any Plan of the Company, its Subsidiaries or their ERISA Affiliates. 4.11. Disclosure. No report or other information furnished in writing or on behalf of the Company to the Agent or the Banks in connection with negotiating or administrating this Agreement or the 1995 Agreement contains any material misstatement of fact 28 33 or omits to state any material fact or any fact necessary to make the statements contained therein not misleading. Neither this Agreement, the Notes nor any other Loan Document furnished to the Agent or the Banks by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact in order to make the statements contained herein and therein not misleading. There is no fact known to the Company which materially and adversely affects, or which in the future may (so far as the Company can now foresee) materially and adversely affect, the business, properties, operations or condition, financial or otherwise, of the Company or any Subsidiary, which has not been set forth in this Agreement or in the other documents, certificates, statements, reports and other information furnished in writing to the Agent and the Banks by or on behalf of the Company in connection with the transactions contemplated hereby. ARTICLE V COVENANTS .1.. Affirmative Covenants. The Company covenants and agrees that, until the Maturity Date and thereafter until payment in full of the principal of and accrued interest on the Notes and the performance of all other obligations of the Company under this Agreement, unless the Required Banks shall otherwise consent in writing, it will: .2. (a) Maintain Corporate Existence. Maintain, and cause each of its Significant Subsidiaries to maintain, its corporate existence in good standing and maintain or obtain, and cause each of its Significant Subsidiaries to maintain or obtain, those qualifications required by the states or countries where it is conducting business. (b) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, whether federal, state, local or foreign (including without limitation ERISA, the Code, and Environmental Laws), in effect from time to time; and pay and discharge, and cause each of its Subsidiaries to pay and discharge, promptly when due, all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon such properties or any portion thereof, except to the extent that payment of any of the foregoing is then being contested in good faith by appropriate legal proceedings and with respect to which adequate financial reserves have been established on the books and records of the Company or such Subsidiary. (c) Payment of Taxes. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, promptly when due, all property, income and other tax assessments and governmental charges of every kind and nature lawfully levied, assessed or imposed upon it or its properties, except to the extent contested in good faith. 29 34 (d) Maintenance of Properties; Insurance. Maintain and protect, and cause each Subsidiary to maintain and protect, all property that is material to the Company and each Significant Subsidiary in conducting its business and keep such property in good repair, working order, and condition, and, from time to time, make or cause to be made all needful repairs, renewals, additions, and improvements necessary in order that the business carried on in connection therewith may be properly conducted at all times in accordance with customary and prudent business practices for similar businesses; and maintain, and cause each of its Subsidiaries to maintain, with financially sound and responsible companies, insurance in such forms and in such amounts and against such risks as is customarily carried by like persons engaged in the same business and operating like properties, and deliver to the Agent evidence satisfactory to the Agent that such insurance has been procured. Self-insurance is permissible provided that customary stop-loss insurance is maintained and the Agent is promptly notified of such self-insurance being implemented. (e) Reporting Requirements. Furnish to the Agent and the Banks the following: (i)Promptly, upon the occurrence of any Event of Default as defined herein, or any event which, with notice or lapse of time or both, would constitute an Event of Default, or of any occurrence having a materially adverse effect upon the Company's financial condition or upon the ability to comply with its obligations hereunder or under any other agreement to which it is a party, notice of such occurrence. (ii)Within forty-five (45) days after the end of each of the first three quarterly periods of each fiscal year of the Company and within ninety (90) days after the close of each fiscal year of the Company, consolidated and consolidating balance sheets of the Company and its Subsidiaries as of such date and related statements of income for the fiscal year or year-to-date portion thereof then ended, all in reasonable detail, unaudited and subject to normal year-end adjustments but, in the case of fiscal year statements, audited by BDO Seidman or another certified public accountant or firm of certified public accountants acceptable to the Agent. Each financial report of the Company shall be accompanied by a certificate of a principal officer of the Company stating that it has been prepared in accordance with generally accepted accounting principles consistently applied and fairly presents the financial condition of the Company and its Subsidiaries as of the date of said balance sheet and of the results of operations for the year-to-date period then ended, and shall include a certificate of such officer demonstrating compliance with the covenants contained in Sections 5.2(a)-(d) and (i), and stating whether such officer is aware of any Event of Default or any event or condition which, with notice or lapse of time, or both, would constitute an Event of Default, and, if such an Event of Default or event or condition then exists and is continuing, a statement setting forth the nature and status thereof. (iii)The Company agrees promptly to provide the Agent and the Banks with each report or form filed by the Company with the Securities and Exchange Commission 30 35 and all documents supplied contemporaneously with such filing, and with such other information as the Agent or the Banks may reasonably request from time to time. (f) Accounting; Access to Records, Books, Etc. Maintain a system of accounting established and administered in accordance with sound business practices to permit financial statements to be prepared in accordance with generally accepted accounting principles and to comply with the requirements of this Agreement and, at any reasonable time and from time to time upon prior notice to the Company, permit the Agent or any Bank or any agents or representatives thereof to examine any of the Company's books and records. 5.2. Negative Covenants. The Company covenants and agrees that, until the Maturity Date and thereafter until payment in full of the principal of and accrued interest on the Notes and the performance of all other obligations of the Company under this Agreement and the other Loan Documents, unless the Required Banks shall otherwise consent in writing, it will not and will not permit any Subsidiary to: (a) Tangible Net Worth. Permit or suffer Consolidated Tangible Net Worth of the Company and its Subsidiaries to be less than $65,000,000, increasing by fifty percent of the Consolidated Net Income of the Company and its Subsidiaries, if positive, for each fiscal year commencing with the fiscal year ended June 29, 1996, and continuing thereafter. (b) Interest Coverage Ratio. Permit or suffer the Interest Coverage Ratio to be less than 2.0 to 1.0, calculated as of the end of each fiscal quarter. (c) Funded Debt to Total Capitalization. Permit or suffer the ratio of Consolidated Funded Debt of the Company and its Subsidiaries to Consolidated Total Capitalization of the Company and its Subsidiaries to exceed .70 to 1.0. (d) Loans. Permit outstanding loans or advances by the Company or its Subsidiaries to their respective officers, directors, shareholders and employees, or any persons related to any such persons by blood or marriage which exceed, in the aggregate, $500,000 at any time. (e) Merger. Merge or consolidate or amalgamate with any other person or take any other action having a similar effect; provided, however, that this Section shall not prohibit any merger or acquisition of or by the Company if the Company shall be the surviving or continuing corporation thereof and, immediately after such merger or acquisition, no Default or Event of Default shall exist or shall have occurred and be continuing. (f) Nature of Business. Make any material change in the manner in which the business of the Company is conducted. (g) Liens. Create, incur, assume or suffer to exist any mortgage, pledge, encumbrance, security interest, lien or charge of any kind upon any of the Company's or any 31 36 Subsidiary's properties or assets (including the right to receive income) whether now owned or hereafter acquired, other than in favor of the Agent and the Banks to secure the obligations of the Company hereunder, except (i) Liens for taxes not delinquent, or being contested in good faith and the payment of which is secured in a manner satisfactory to the Agent, (ii) Liens not delinquent created by statute in connection with worker's compensation, unemployment insurance, social security, and similar statutory obligations, (iii) Liens disclosed to the Agent and each Bank on Schedule 5.2(g), (iv) Capital Leases, (v) purchase money security interests in machinery, equipment, fixtures, or other personal property, not including inventory or supplies, purchased by the Company or any Subsidiary and given to secure the deferred purchase price, provided that no such purchase money security interest shall extend to or cover any assets of the Company or any Subsidiary other than the asset being purchased and that the security interest in the asset being purchased shall secure only the purchase price thereof, (vi) Liens on tangible operating assets to secure tax-advantaged financings not exceeding the aggregate principal amount of $20,000,000 at any one time outstanding obtained by the Company or any Subsidiary, provided that no such Lien shall extend to or cover any assets of the Company or any Subsidiary other than assets being purchased with the proceeds of the financing and that the security interest in the assets being purchased shall secure only the purchase price thereof and (vii) Liens in connection with transactions permitted by Section 5.2(j). (h) Disposition of Assets; Etc. Sell, lease, license, transfer, assign or otherwise dispose of any portion of its business, assets, rights, revenues or property, real, personal or mixed, tangible or intangible, whether in one or a series of transactions (other than inventory sold in the ordinary course of business upon customary credit terms and sales of scrap or obsolete material or equipment and sales of Receivables pursuant to Section 5.2(j)), provided, however, that this Section 5.2(h) shall not prohibit any such sale, lease, license, transfer, assignment or other disposition if the aggregate book value (disregarding any write-downs of such book value other than ordinary depreciation and amortization) of all of the business, assets, rights, revenues and property involved in the transaction or series of transactions, together with such aggregate book value of all other business, assets, rights, revenues and property sold, leased, licensed, transferred or otherwise disposed of by the Company and its Subsidiaries in the same fiscal year of the Company constitutes less than 10% of the aggregate book value of the consolidated total tangible assets of the Company and its Subsidiaries as of the end of the preceding fiscal year of the Company and, together with the aggregate book value of all other business, assets, rights, revenues and property sold, leased, licensed, transferred or otherwise disposed of by the Company and its Subsidiaries during the entire period subsequent to the Effective Date of this Agreement constitutes less than 25% of the aggregate book value of consolidated total tangible assets of the Company and its Subsidiaries as of the end of the last fiscal year of the Company preceding such sale, lease, license, transfer, assignment or disposition, and if, immediately after such transaction, no Default or Event of Default shall exist or shall have occurred and be continuing. For purposes of calculating the aggregate book value of any business, assets, rights, revenues and property sold, leased, licensed, transferred or otherwise disposed of by the Company, there shall be excluded any sale or transfer of Receivables permitted by Section 5.2(j). 32 37 (i) Investments. Make, permit or suffer to exist any investment in the stock or securities of, make loans or advances to, or make, permit or suffer to exist a liability as guarantor, surety or indemnitor with respect to any Indebtedness or other obligation of, any entity which is not consolidated with the Company for financial reporting purposes, in an amount which, together with the aggregate amount of all such investments, loans, advances and liabilities made or existing subsequent to the Effective Date of this Agreement, exceeds 20% of the Consolidated Tangible Net Worth of the Company and its Subsidiaries, provided, that in addition to the items permitted above, the Company may also invest in, advance to, or guaranty debt of (i) Applied Films in principal amount not exceeding in the aggregate $10,000,000, and (ii) Hohe in principal amount not exceeding in the aggregate $35,000,000. (j) Sale of Receivables. Sell, lease, transfer, assign or otherwise dispose of any Receivables of the Company or any of its Subsidiaries except for the sale, lease, transfer, assignment or other disposition of Receivables of the Company or any Subsidiary (whether directly or indirectly through a special purpose entity all of the equity interests in which are owned directly or indirectly by the Company or any of its Subsidiaries) to any Person pursuant to a written agreement to provide for the securitization of such Receivables; provided that (i) the investment arising as a result of such transaction, when aggregated with the remaining unpaid investment of such other Person or Persons in respect of all prior such sales shall not exceed $50,000,000; (ii) such sale is for all cash consideration (whether payable immediately or on a deferred basis) and (iii) such sale is treated as a sale of such Receivables under generally accepted accounting principles. ARTICLE VI DEFAULT 6.1. Events of Default. The occurrence of any one of the following events or conditions shall be deemed an "Event of Default" hereunder unless waived by the Required Banks pursuant to Section 8.1: (a) Nonpayment. The Company shall fail to pay on the date when due any principal of the Notes, or the Company shall fail to pay within five days after the date when due any interest on the Notes or any fees or any other amount payable hereunder; or (b) Misrepresentation. Any representation or warranty made by the Company in Article IV or any other certificate, report, financial statement or other document furnished by or on behalf of the Company in connection with this Agreement or the 1995 Agreement, shall prove to have been incorrect in any material respect when made or deemed made; or (c) Certain Covenants. The Company shall fail to perform or observe any term, covenant or agreement contained in Sections 5.2(d), (e), (h), or (i); or 33 38 (d) Other Defaults. The Company shall fail to perform or observe any other term, covenant or agreement contained in this Agreement, and, if capable of remedy, any such failure shall remain unremedied for 20 calendar days after notice thereof shall have been given to the Company by the Agent, provided, however, that, except for any such failure occurring under Sections 5.1(e), 5.2(a), (b), and (c), so long as the Company, in the Required Banks' judgment, is diligently pursuing the remedy of such failure, but in no event for a period longer than 90 calendar days, such failure shall not be deemed an Event of Default; or (e) Cross-Default. The Company or any of its Subsidiaries shall fail to pay any part of the principal of, the premium, if any, or the interest on, or any other payment of money due under any of its Indebtedness (other than Indebtedness hereunder) or the Guaranty, beyond any period of grace provided with respect thereto, which individually or together with other such Indebtedness as to which any such failure exists has an aggregate outstanding principal amount in excess of $5,000,000; or if the Company or any of its Subsidiaries fails to perform or observe any other term, covenant or agreement contained in any agreement, document or instrument evidencing or securing any such Indebtedness or the Guaranty, or under which any such Indebtedness or the Guaranty was issued or created, beyond any period of grace, if any, provided with respect thereto, which Indebtedness, individually or together with such other Indebtedness as to which any such failure exists, has an aggregate outstanding principal amount in excess of $5,000,000, if the effect of such failure is to cause, or permit the holders of such Indebtedness (or a trustee on behalf of such holders) to cause, any payment in respect of such Indebtedness to become due prior to its due date; or (f) ERISA. The occurrence of a Reportable Event that results in or could result in liability of the Company, any Subsidiary of the Company or their ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the occurrence of any Reportable Event which could constitute grounds for termination of any Plan of the Company, its Subsidiaries or their ERISA Affiliates by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and such Reportable Event is not corrected within thirty (30) days after the occurrence thereof; or the filing by the Company, any Subsidiary of the Company or any of their ERISA Affiliates of a notice of intent to terminate a Plan or the institution of other proceedings to terminate a Plan; or the Company, any Subsidiary of the Company or any of their ERISA Affiliates shall fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall have instituted proceedings to terminate, or to cause a trustee to be appointed to administer, any Plan of the Company, its Subsidiaries or their ERISA Affiliates; or any person engages in a Prohibited Transaction with respect to any Plan which results in or could result in liability of the Company, any Subsidiary of the Company, any of their ERISA Affiliates, any Plan of the Company, its Subsidiaries or their ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any Subsidiary of the Company or any of their ERISA Affiliates to make a required installment or other payment to any Plan within the meaning of Section 302(f) of ERISA or Section 412(n) of the Code that results in or could result in liability of the Company, any Subsidiary of the Company or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the Company, any of its Subsidiaries or any of their ERISA 34 39 Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(9a)(2) of ERISA; or the Company, any of its Subsidiaries or any of their ERISA Affiliates becomes an employer with respect to any Multiemployer Plan without the prior written consent of the Bank; or (g) Judgments. One or more judgments or orders for the payment of money shall be rendered against the Company or any of its Subsidiaries, or any other judgment or order (whether or not for the payment of money) shall be rendered against or shall affect the Company or any of its Subsidiaries which causes or could cause a material adverse change in the business, properties, operations or condition, financial or otherwise, of the Company or any of its Subsidiaries or which does or could have a material adverse effect on the legality, validity or enforceability of this Agreement or the Notes and either (i) such judgment or order shall have remained unsatisfied and the Company or such Subsidiary shall not have taken action necessary to stay enforcement thereof by reason of pending appeal or otherwise, prior to the expiration of the applicable period of limitations for taking such action or, if such action shall have been taken, a final order denying such stay shall have been rendered, or (ii) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (h) Insolvency, Etc. The Company or any Significant Subsidiary shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered), or shall generally not pay its debts as they become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or shall institute, or there shall be instituted against the Company or any Significant Subsidiary, any proceeding or case seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief or protection of debtors or seeking the entry of an order for relief, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its assets, rights, revenues or property, and, if such proceeding is instituted against the Company or such Significant Subsidiary and is being contested by the Company or such Significant Subsidiary, as the case may be, in good faith by appropriate proceedings, such proceeding shall remain undismissed or unstayed for a period of 60 days; or the Company or such Significant Subsidiary shall take any action (corporate or other) to authorize or further any of the actions described above in this subsection. 6.2. Remedies. (a) Upon the occurrence and during the continuance of any Event of Default, the Agent, with the Required Banks' consent, may or, at the Required Banks' direction, shall, by notice to the Company, (i) terminate the Commitments or (ii) declare the outstanding principal of, and accrued interest on, the Notes and all other amounts owing under this Agreement (including without limitation all obligations to provide cash collateral) to be immediately due and payable whereupon the Commitments shall terminate forthwith and all such amounts shall become immediately due and payable, provided, that in the case of any event or condition described in Section 6.1(h) with respect to the Company, the Commitments shall automatically terminate forthwith and all such amounts (including without limitation all obligations to provide cash collateral) shall automatically become immediately due and payable 35 40 without notice; in all cases without demand, presentment, protest, diligence, notice of dishonor or other formality, all of which are hereby expressly waived. (b) The Agent may, and upon being directed to do so by the Required Banks, shall, in addition to the remedies provided in Section 6.2(a), exercise and enforce any and all other available rights and remedies, whether arising under this Agreement, the Notes or under applicable law, in any manner deemed appropriate by the Agent, including suits in equity, actions at law, or other appropriate proceedings, whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the Notes or in aid of exercising any power granted in this Agreement or the Notes. (c) Upon the occurrence and during the continuance of any Event of Default, each Bank may at any time and from time to time, without notice to the Company (any requirement for such notice being expressly waived by the Company) set off and apply against any and all of the obligations of the Company now or hereafter existing under this Agreement any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Company and any property of the Company from time to time in possession of the Bank, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations may be contingent and unmatured. The Company hereby grants to the Agent and the Banks a lien on and security interest in all such deposits, indebtedness and property as collateral security for the payment and performance of the obligations of the Company under this Agreement. The rights of the Banks under this Section 6.2(c) are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Banks may have. ARTICLE VII THE AGENT AND THE BANKS 7.1. Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement, the Notes, and the other Loan Documents as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. The provisions of this Article VII are solely for the benefit of the Agent and the Banks, and the Company shall not have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Company. 7.2. Agent and Affiliates. First Chicago, in its capacity as a Bank, shall have the same rights and powers hereunder as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent. First Chicago and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with the 36 41 Company or any Subsidiary of the Company as if it were not acting as Agent hereunder, and may accept fees and other consideration therefor without having to account for the same to the Banks. 7.3. Scope of Agent's Duties. The Agent shall have no duties or responsibilities except those expressly set forth herein, and shall not, by reason of this Agreement, have a fiduciary relationship with any Bank, and no implied covenants, responsibilities, duties, obligations or liabilities shall be read into this Agreement or shall otherwise exist against the Agent. As to any matters not expressly provided for by this Agreement (including, without limitation, collection and enforcement actions under the Notes), the Agent shall not be required to exercise any discretion or take any action, but the Agent shall take such action or omit to take any action pursuant to the reasonable written instructions of the Required Banks and may request instructions from the Required Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, pursuant to the written instructions of the Banks or the Required Banks, as the case may be, which instructions and any action or omission pursuant thereto shall be binding upon all of the Banks; provided, however, that the Agent shall not be required to act or omit to act if, in the judgment of the Agent, such action or omission may expose the Agent to personal liability or is contrary to this Agreement, the Notes, or applicable law. 7.4. Reliance by Agent. The Agent shall be entitled to rely upon any certificate, notice, document or other communication (including any cable, telegram, telex, facsimile transmission or oral communication) believed by it to be genuine and correct and to have been sent or given by or on behalf of a proper person. The Agent may treat the payee of any Note as the holder thereof. The Agent may employ agents (including without limitation collateral agents) and may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts selected by it and shall not be liable to the Banks, except as to money or property received by it or its authorized agents, for the negligence or misconduct of any such agent selected by it with reasonable care or for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 7.5. Default. The Agent shall not be deemed to have knowledge of the occurrence of any Default or Event of Default, unless the Agent has received written notice from a Bank or the Company specifying such Default or Event of Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice, the Agent shall promptly give written notice thereof to the Banks or the Company, as the case may be. 7.6. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable to the Banks for any action taken or not taken by it or them in connection herewith with the consent or at the request of the Required Banks or in the absence of its or their own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any recital, statement, warranty or representation contained in this Agreement or any Note, or in any certificate, report, financial statement or other document furnished in connection with this Agreement, (ii) the performance or observance of any of the covenants or agreements of the Company, (iii) the satisfaction of any condition specified in 37 42 Article II, or (iv) the validity, effectiveness, legal enforceability, value or genuineness of this Agreement, the Notes, or any other instrument or document furnished in connection herewith. 7.7. Nonreliance on Agent and Other Banks. Each Bank acknowledges and agrees that it has, independently and without reliance on the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decision in taking or not taking action under this Agreement. The Agent shall not be required to keep itself informed as to the performance or observance by the Company of this Agreement, the Notes, or any other documents referred to or provided for herein or to inspect the properties or books of the Company. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Bank with any information concerning the affairs, financial condition or business of the Company or any of its Subsidiaries which may come into the possession of the Agent or any of its affiliates. 7.8. Indemnification. The Banks agree to indemnify the Agent (to the extent not reimbursed by the Company, but without limiting any obligation of the Company to make such reimbursement), ratably according to the respective amounts of their Commitments or if the Commitments have been terminated, ratably according to the principal amounts of the Advances then outstanding made by each of them, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or the transactions contemplated hereby or any action taken or omitted by the Agent under this Agreement, provided, however, that no Bank shall be liable for any portion of such claims, damages, losses, liabilities, costs or expenses which are paid by the Company or which result from the Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including without limitation the reasonable fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Company, but without limiting the obligation of the Company to make such reimbursement. If the indemnity furnished to the Agent under this Section shall, in the judgment of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Banks and cease, or not commence, to take any action until such additional indemnity is furnished. 7.9. Resignation of Agent. The Agent may resign as such at any time upon thirty days' prior written notice to the Company and the Banks. In the event of any such resignation, the Banks shall, by an instrument in writing delivered to the Company and the Agent, 38 43 appoint a successor, which shall be a commercial bank organized under the laws of the United States or any State thereof and having a combined capital and surplus of at least $500,000,000. If a successor is not so appointed or does not accept such appointment before the Agent's resignation becomes effective, the resigning Agent may appoint a temporary successor to act until the appointment by the Banks is made and accepted or, if no temporary successor is appointed as provided above by the resigning Agent, the Required Banks shall thereafter perform all the duties of the Agent hereunder until such appointment by the Banks is made and accepted. Any successor to the Agent shall execute and deliver to the Company and the Banks an instrument accepting such appointment. At that time, the successor Agent, without further act, deed, conveyance or transfer, shall become vested with all of the properties, rights, interests, powers, authorities and obligations of its predecessor hereunder with like effect as if originally named as Agent hereunder. Upon the successor Agent's request, the Company and the resigning Agent shall execute and deliver all instruments of conveyance, assignment and further assurance and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor Agent all such properties, rights, interests, powers, authorities and obligations. The provisions of this Article VII shall thereafter remain effective for such resigning Agent with respect to any actions taken or omitted to be taken by such Agent while acting as the Agent hereunder. 7.10. Sharing of Payments. The Banks agree among themselves that, in the event that any Bank shall obtain payment in respect of any Advance or any other obligation owing to the Banks under this Agreement through exercising a right of set-off, banker's lien, counterclaim or otherwise in excess of its ratable share of payments received by all of the Banks on account of the Advances and other obligations (or if no Advances are outstanding, ratably according to the respective amounts of the Commitments), such Bank shall promptly purchase from the other Banks participations in such Advances and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all of the Banks share such payment in accordance with such ratable shares, provided that prior to the occurrence of a Default or an Event of Default each Bank shall be entitled to retain payments received by such Bank in accordance with Section 3.4 with respect to Transaction Loans made by such Bank. The Banks further agree among themselves that if payment to a Bank obtained by such Bank through exercising a right of set-off, banker's lien, counterclaim or otherwise as aforesaid shall be rescinded or must otherwise be restored, each Bank which shall have shared the benefit of such payment shall, by repurchase of participations theretofore sold, return its share of that benefit to each Bank whose payment shall have been rescinded or otherwise restored. The Company agrees that any Bank so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including set-off, banker's lien or counterclaim, with respect to such participation as fully as if such Bank were a holder of an Advance or other obligation in the amount of such participation. The Banks further agree among themselves that, in the event that amounts received by the Banks and the Agent hereunder are insufficient to pay all such obligations or insufficient to pay all such obligations when due, the fees and other amounts owing to the Agent in such capacity shall be paid therefrom before paying obligations owing to the Banks under this Agreement. Except as otherwise expressly provided in this Agreement, if any Bank or the Agent shall fail to remit to the Agent or any other Bank an amount payable by such Bank 39 44 or the Agent pursuant to this Agreement on the date when such amount is due, such payments shall be made together with interest thereon from the date such amount is due until the date such amount is paid to the Agent or such other Bank at a rate per annum equal to the Federal Funds Effective Rate. It is further understood and agreed among the Banks and the Agent that if the Agent shall engage in any other transactions with the Company and shall have the benefit of any collateral or security therefor which does not expressly secure the obligations arising under this Agreement except by virtue of a so-called dragnet clause or comparable provision, the Agent shall be entitled to apply any proceeds of such collateral or security first in respect of the obligations arising in connection with such other transaction before application to the obligations arising under this Agreement. ARTICLE VIII MISCELLANEOUS 8.1. Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement nor any consent to any departure therefrom shall be effective unless the same shall be in writing and signed by the Required Banks and, to the extent any rights or duties of the Agent may be affected thereby, the Agent, provided, however, that no such amendment, modification, termination, waiver or consent shall, without the consent of the Agent and all of the Banks, (i) authorize or permit the extension of time for, or any reduction of the amount or rate of, any payment of the principal of, or interest on, the Notes or any Letter of Credit reimbursement obligation, or any fees or other amount payable hereunder, or (ii) amend or terminate the respective Commitments of any Bank set forth on the signature pages hereof, or (iii) modify the provisions of this Section regarding the taking of any action under this Section or the provisions of Section 7.10 or the definitions of Maturity Date, Termination Date, or Required Banks. Any such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 8.2. Notices. (a) Except as otherwise provided in Section 8.2(c) hereof, all notices and other communications hereunder shall be in writing and shall be delivered or sent to the Company at 414 East 40th Street, Holland, Michigan 49423, Attention: Treasurer, Facsimile No. (616) 786-5606, and to the Agent and the Banks at the addresses set forth on the signature pages below, or to such other address as may be designated by the Company, the Banks, or the Agent by notice to the other parties hereto. All notices and other communications shall be deemed to have been given at the time of actual delivery thereof to such address, or if sent by certified or registered mail, postage prepaid, to such address, on the third day after the date of mailing, or, if sent by federal express or other recognized overnight delivery service, prepaid, to such address, on the Business Day following the date of deposit with such delivery service prior to such service's next day delivery deadline, provided, however, that notices to the Agent or the Banks shall not be effective until received. (b) Notices by the Company to the Agent with respect to terminating or reducing the Commitment pursuant to Section 2.2, requests for Advances pursuant to Section 40 45 2.4, and requests for continuations or conversions of Loans pursuant to Section 2.7 shall be irrevocable and binding on the Company. (c) Any notice to be given by the Company pursuant to Sections 2.4 or 2.7, and any notice to be given by the Agent or the Banks hereunder, may be given by telephone, and all such notices given by the Company must be immediately confirmed in writing in the manner provided in Section 8.2(a). Any such notice given by telephone shall be deemed effective upon receipt thereof by the party to whom such notice is to be given. 8.3. No Waiver By Conduct; Remedies Cumulative. No course of dealing on the part of the Agent or any Bank, nor any delay or failure on the part of the Agent or any Bank in exercising any right, power or privilege hereunder, shall operate as a waiver of such right, power or privilege or otherwise prejudice the Agent's or any Bank's rights and remedies hereunder, nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other right, power or privilege. No right or remedy conferred upon or reserved to the Agent or any Bank under this Agreement or the Notes is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy granted thereunder or now or hereafter existing under any applicable law. Every right and remedy granted by this Agreement or the Notes or by applicable law to the Agent or any Bank may be exercised from time to time and as often as may be deemed expedient by the Agent or any Bank and, unless contrary to the express provisions of this Agreement or the Notes, irrespective of the occurrence or continuance of any Default or Event of Default. 8.4. Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of the Company made herein or in any certificate, report, financial statement or other document furnished by or on behalf of the Company in connection with this Agreement and the 1995 Agreement shall be deemed to be material and to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by or on behalf of any Bank, and those covenants and agreements of the Company set forth in Sections 3.5, 3.7, and 8.5 shall survive the repayment in full of the Loans and the termination of the Commitment. 8.5. Expenses; Indemnification. (a) The Company agrees to pay, or reimburse the Agent for the payment of, on demand, (i) the reasonable fees and expenses of counsel to the Agent, which shall include in-house counsel, in connection with the preparation, execution, delivery and administration of this Agreement, the Notes, and the other Loan Documents, and the consummation of the transactions contemplated hereby, and in connection with advising the Bank as to its rights and responsibilities with respect thereto, and in connection with any amendments, waivers or consents in connection therewith, and (ii) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing or recording of this Agreement, the Notes, or the other Loan Documents, and the consummation of the transactions contemplated hereby, and any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees, and (iii) all reasonable costs and expenses of the Agent and the Banks (including reasonable fees and expenses of counsel and 41 46 whether incurred through negotiations, legal proceedings or otherwise) in connection with any Default or Event of Default or the enforcement of, or the exercise or preservation of any rights under, this Agreement, the Notes, or the other Loan Documents, or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement. (b) The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees, and agents, harmless from and against any and all claims, damages, losses, liabilities, costs, or expenses of any kind which the Banks or the Agent or any such person may incur or which may be claimed against any of them by reason of or in connection with any Letter of Credit, and neither any Bank nor the Agent or any of their respective officers, directors, employees, or agents shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency, or genuineness of documents or of any endorsement thereon, even if such documents prove to be invalid, insufficient, fraudulent, or forged; (iii) payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption, or delay in transmission, dispatch, or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; provided, that the Company shall not be required to indemnify the Banks and the Agent and such other persons, and the Banks shall be liable to the Company to the extent, but only to the extent, of any direct, as opposed to consequential or incidental, damages suffered by the Company which were caused by the Agent's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary of a draft or other demand for payment and other documentation strictly complying with the terms of such Letter of Credit, or the Agent's payment to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit to the extent, but only to the extent, that such payment constitutes gross negligence or willful misconduct of the Agent. (c) The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including reasonable attorneys fees and disbursements incurred in connection with any investigative, administrative or judicial proceeding whether or not such person shall be designated as a party thereto) which the Banks or the Agent or any such person may incur or which may be claimed against any of them by reason of or in connection with entering into this Agreement or the transactions contemplated hereby, including without limitation those arising under Environmental Laws; provided, however, that the Company shall not be required to indemnify any such Bank and the Agent or such other person, to the extent, but only to the extent, that such claim, damage, loss, liability, cost or expense is attributable to the negligence or misconduct of such Bank or the Agent, as the case may be. 42 47 8.6. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, that the Company may not, without the prior consent of the Banks, assign its rights or obligations hereunder or under the Notes or the other Loan Documents, and the Banks shall not be obligated to make any Advance hereunder to any entity other than the Company. Any Bank may grant to any financial institution or institutions, a participation interest (undivided or divided) in Advances and its rights and benefits under this Agreement, and to the extent of that participation, such participant or participants shall have the same rights and benefits against the Company under Section 6.2(c) as it or they would have had if such participant or participants were the Bank making the Advances to the Company hereunder, provided, however, that (a) such Bank's obligations under this Agreement shall remain unmodified and fully effective and enforceable against such Bank, (b) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (c) such Bank shall remain the holder of its Note or Notes for all purposes of this Agreement, (d) the Company, the Agent, and any other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (e) such Bank shall not grant to its participant any rights to consent or withhold consent to any action taken by such Bank or the Agent under this Agreement other than action requiring the consent of all of the Banks hereunder. No Bank may assign any of its rights or obligations under this Agreement, the Notes, or the other Loan Documents without the prior written consent of the Company. The Agent from time to time in its sole discretion may appoint agents for the purpose of servicing and administering this Agreement and the transactions contemplated hereby and enforcing or exercising any rights or remedies of the Agent provided under this Agreement, the Notes or otherwise. In furtherance of such agency, the Agent may from time to time direct that the Company provide notices, reports and other documents contemplated by this Agreement (or duplicates thereof) to such agent. The Company hereby consents to the appointment of such agent and agrees to provide all such notices, reports and other documents and to otherwise deal with such agent acting on behalf of the Agent in the same manner as would be required if dealing with the Agent itself. 8.7. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 8.8. Governing Law. This Agreement is a contract made under, and shall be governed by and construed in accordance with the law of the State of Illinois applicable to contracts made and to be performed entirely within such State and without giving effect to choice of law principles of such State. 8.9. Headings. The headings of the various subdivisions hereof are for the convenience of reference only and shall in no way modify any of the terms or provisions hereof. 8.10. Construction of Certain Provisions. If any provision of this Agreement refers to any action to be taken by any person, or which such person is prohibited from taking, 43 48 such provision shall be applicable whether such action is taken directly or indirectly by such person, whether or not expressly specified in such provision. 8.11. Integration and Severability. This Agreement embodies the entire agreement and understanding among the Company, the Agent, and the Banks, and supersedes all prior agreements and understandings, relating to the subject matter hereof. In case any one or more of the obligations of the Company under this Agreement, the Notes, or any other Loan Document shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of the Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of the Company under this Agreement, the Notes, or the other Loan Documents in any other jurisdiction. 8.12. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any such covenant, the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default or any event or condition which with notice or lapse of time, or both, could become such a Default or an Event of Default if such action is taken or such condition exists. 8.13. Interest Rate Limitation. Notwithstanding any provisions of this Agreement, the Notes, or the other Loan Documents, in no event shall the amount of interest paid or agreed to be paid by the Company exceed an amount computed at the highest rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision of this Agreement, the Notes, or any other Loan Document at the time performance of such provision shall be due shall involve exceeding the interest rate limitation validly prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be fulfilled shall be reduced to an amount computed at the highest rate of interest permissible under applicable law, and if for any reason whatsoever the Banks shall ever receive as interest an amount which would be deemed unlawful under such applicable law such interest shall be automatically applied to the payment of principal of the Loans outstanding hereunder (whether or not then due and payable) and not to the payment of interest, or shall be refunded to the Company if such principal and all other obligations of the Company to the Agent and the Banks have been paid in full. 8.14. Effect of Amendment and Restatement. On and after the Effective Date (i) all loans outstanding under the 1995 Agreement shall be deemed to be Loans made under this Agreement, provided that loans made by NBD shall be deemed to be Loans made by First Chicago and (ii) NBD shall have no Commitment under this Agreement and shall not be a Bank under this Agreement. Prior to the Effective Date, each Bank and NBD shall deliver to the Agent the Notes (as defined in and delivered to it pursuant to the 1995 Agreement) and such Notes shall be delivered to the Company upon the Agent's receipt of the Revolving Credit Notes required to be delivered to the Agent under Section 2.5(b). NBD shall continue to have the 44 49 benefit of the provisions of Article VII with respect to any action taken by NBD in its capacity as Agent under the 1995 Agreement. 8.15. Waiver of Jury Trial. The Agent, the Banks, and the Company, after consulting or having had the opportunity to consult with counsel, knowingly, voluntarily and intentionally waive any right any of them may have to a trial by jury in any litigation based upon or arising out of this Agreement or any related instrument or agreement or any of the transactions contemplated by this Agreement or any course of conduct, dealing, statements (whether oral or written) or actions of any of them. Neither the Agent or the Banks nor the Company shall seek to consolidate, by counterclaim or otherwise, any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. These provisions shall not be deemed to have been modified in any respect or relinquished by any of them except by a written instrument executed by all of them. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written, which date shall constitute the Effective Date. DONNELLY CORPORATION By: _____________________________ William R. Jellison Its: Chief Financial Officer THE FIRST NATIONAL BANK OF Address for Notices: CHICAGO, individually and as Agent One First National Plaza Mail Suite 0088 By: _____________________________ Chicago, IL 60670-0088 Patricia H. Besser Attn: Patricia H. Besser Its: Vice President/Senior Facsimile No. (312) 732-5161 Corporate Banker Commitment Amount $50,000,000 Address for Notices: SOCIETE GENERALE 181 W. Madison St. Suite 3400 Chicago, IL 60602 By: _____________________________ Attn: Joseph A. Philbin Joseph A. Philbin Facsimile No. (312) 578-5099 Its: Vice President Commitment Amount $15,000,000 45 50 Address for Notices: NATIONSBANK OF TENNESSEE, N.A. Automotive Industries One NationsBank Plaza, 2nd Floor Nashville, TN 37239-1697 By: _____________________________ Attn: Yvette Floyd Yvette Floyd Facsimile No. (615) 749-4951 Its: Banking Officer Commitment Amount $15,000,000 CONSENTED TO BY: NBD BANK By:_____________________________ 46 51 EXHIBIT A-1 REVOLVING CREDIT NOTE May 20, 1996 Chicago, Illinois FOR VALUE RECEIVED, the undersigned, DONNELLY CORPORATION, a Michigan corporation (the "Company"), hereby promises to pay to the order of ______________________, (the "Bank"), the aggregate unpaid principal amount of all Revolving Credit Loans made by the Bank to the Company pursuant to the Credit Agreement referred to below together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in such Credit Agreement. The principal amount of each Transaction Loan shall be due and payable on the last day of the Interest Period applicable to such Transaction Loan. The principal amount of all other Revolving Loans shall be due and payable on the Termination Date. All payments shall be made at the places specified in the Agreement. The Bank is authorized by the Company to record on its books and records the date, amount and type of each Revolving Credit Loan, the interest rate and duration of the related Interest Period (if applicable), the amount of each payment or prepayment of principal thereon, and any other appropriate information, which books and records shall constitute prima facie evidence of the information so noted, provided, however, that any failure by the Bank to record any information shall not relieve the Company of its obligation to repay the outstanding principal amount of this Revolving Credit Note, all accrued interest hereon, and any amount payable with respect hereto in accordance with the terms of this Revolving Credit Note and the Credit Agreement. The Company and each endorser or guarantor hereof waives demand, presentment, protest, diligence, notice of dishonor and any other formality in connection with this Revolving Credit Note. Should the indebtedness evidenced by this Revolving Credit Note or any part thereof be collected in any proceeding or be placed in the hands of attorneys for collection, the Company agrees to pay, in addition to the principal and interest due and payable hereon, all costs of collecting this Revolving Credit Note, including attorneys' fees and expenses. This Revolving Credit Note evidences one or more Revolving Credit Loans made under an Amended and Restated Revolving Credit Loan Agreement of even date herewith (as amended or modified from time to time, the "Credit Agreement"), among the Company, the Banks named therein, and The First National Bank of Chicago, as Agent, to which reference is made for a statement of the circumstances under which this Revolving Credit Note is subject to prepayment and under which its due date may be accelerated. Capitalized terms used but not defined in this 47 52 Revolving Credit Note shall have the respective meanings assigned to them in the Credit Agreement. The Revolving Credit Note is made under, and shall be governed by and construed in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State, without giving effect to the choice of law principles of such State. DONNELLY CORPORATION By: ___________________________ Its: ______________________ 48 53 EXHIBIT A-2 TERM NOTE $_________________ ______________, ____ Chicago, Illinois FOR VALUE RECEIVED, DONNELLY CORPORATION, a Michigan corporation (the "Company"), hereby promises to pay to the order of _________________________ (the "Bank"), at the principal banking office of the Agent in lawful money of the United States of America and in immediately available funds, the sum of __________________ Dollars ($___________) or such lesser amount of the Term Loan as is recorded in the Bank's records, in quarterly installments in the amounts and on such dates provided in Section 3.1 of the Credit Agreement referred to below and on the Maturity Date, at which time the principal balance thereof, and all accrued interest thereon, shall be due and payable; and to pay interest on the unpaid principal balance hereof from time to time outstanding, in like money and funds, for the period from the date hereof until the Term Loan evidenced hereby shall be paid in full, at the rates per annum and on the dates provided in the Credit Agreement. The Bank is authorized by the Company to record on its records the date and the amount of the Term Loan, the applicable interest rate and type and the duration of the related Interest Period (if applicable), the amount of each payment or prepayment of principal thereon, and any other appropriate information, which records shall constitute prime facie evidence of the information so recorded, provided, however, that any failure by the Bank to record any such notation shall not relieve the Company of its obligation to repay the outstanding principal amount of this Term Loan, all accrued interest hereon, and any amount payable with respect hereto in accordance with the terms of this Term Note and the Credit Agreement. The Company and each endorser or guarantor hereof waives presentment, protest, notice of dishonor and any other formality in connection with this Term Note. Should the indebtedness evidenced by this Term Note or any part thereof be collected in any proceeding or be placed in the hands of attorneys for collection, the Company agrees to pay, in addition to the principal, interest and other sums due and payable hereon, all costs of collecting this Term Note, including attorneys' fees and expenses. This Term Note evidences a Term Loan made under an Amended and Restated Revolving Credit Loan Agreement, dated as of May 20, 1996 (as amended or modified from time to time, the 49 54 "Credit Agreement"), among the Company, the Banks (including the Bank) named therein, and The First National Bank of Chicago, as Agent for the Banks, to which reference is made for a statement of the circumstances under which this Term Note is subject to prepayment and under which its due date may be accelerated. Capitalized terms used but not defined in this Term Note shall have the respective meanings assigned to them in the Credit Agreement. This Term Note is made under, and shall be governed by and construed in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State, without giving effect to the choice of law principles of such State. DONNELLY CORPORATION By:____________________________ Its:_______________________ 50 55 EXHIBIT B REQUEST FOR ADVANCE __________, 19__ The First National Bank of Chicago One First National Plaza Chicago, Illinois 60670 Attention: _________________________ The undersigned (the "Company") hereby requests a [Revolving Credit Loan/Term Loan/Letter of Credit Advance] pursuant to Section 2.4 of the Amended and Restated Revolving Credit Loan Agreement, dated as of May 20, 1996 (as amended from time to time, the "Credit Agreement"), among the Company, the Banks named therein, and you as Agent, in the amount of [$______________/amount of other Permitted Currency], to be made on ___________, 19__, and to be evidenced by the Company's [Revolving Credit Notes/Term Notes]. Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Credit Agreement. [Such [Revolving Credit Loan/Term Loan] shall be a [insert either Floating Rate Loan, Eurocurrency Rate Loan or Federal Funds Rate Loan] and the initial Interest Period, if the requested loan is a Eurocurrency Rate Loan, shall be [insert permitted Interest Period].] [The Company delivers herewith a duly executed Term Note in favor of each Bank.] [Such Letter of Credit Advance shall be made by the Agent issuing its Letter of Credit for the Company's account in the maximum amount of $__________ to and for the benefit of ___________, with an expiry date of _____________, 19__, and containing the further terms and conditions set forth in the attached letter of credit application.] In support of this request, the Company hereby certifies that: 1. The representations and warranties contained in Article IV of the Credit Agreement are true and correct on and as of the date hereof, and will be true and correct on the date such Advance is made, as if such representations and warranties were made on and as of such dates. 51 56 2. No Event of Default, and no event or condition which might become an Event of Default with notice or with lapse of time, or both, has occurred and is continuing or will exist on the date such Advance is made. 3. Acceptance of the Advance by the Company shall be deemed to be a further representation that the representations made herein are true and correct at the time such proceeds are disbursed. DONNELLY CORPORATION By:_________________________ Its:____________________ 52 57 EXHIBIT C REQUEST FOR CONTINUATION OR CONVERSION OF LOAN ___________, 19__ The First National Bank of Chicago One First National Plaza Chicago, Illinois 60670 Attention: ________________________ The undersigned (the "Company") hereby requests that [$__________________/amount of other Permitted Currency] of the principal amount of the [Revolving Credit Loan/Term Loan] originally made on ____________, 19__, which loan is currently a [insert type of Revolving Credit Loan/Term Loan], be continued as or converted to, as the case may be, a [insert type of Revolving Credit Loan/Term Loan requested] on _______________, 19__. If the loan is requested to be continued as or converted to a Eurocurrency Rate Loan, the Company hereby elects an Interest Period of [insert permitted Interest Period]. Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Amended and Restated Revolving Credit Loan Agreement, dated as of May 20, 1996, among the Company, the Banks named therein, and you as Agent. In support of this request, the Company hereby certifies that: 1. The representations and warranties contained in Article IV of the Credit Agreement are true and correct on and as of the date hereof, and will be true and correct on the date such Advance is made, as if such representations and warranties were made on and as of such dates. 2. No Event of Default, and no event or condition which might become an Event of Default with notice or with lapse of time, or both, has occurred and is continuing or will exist on the date such Advance is made. 3. Acceptance of the Advance by the Company shall be deemed to be a further representation that the representations made herein are true and correct at the time such proceeds are disbursed. DONNELLY CORPORATION By: ___________________________ Its:_______________________ 53 58 EXHIBIT D OPINION OF COUNSEL OF DONNELLY CORPORATION May 20, 1996 The First National Bank of Chicago One First National Plaza Mail Suite 0088 Chicago, IL 60670-0088 Societe Generale NationsBank of Tennessee,N.A. 181 West Madison Street Automotive Industries Suite 3400 One NationsBank Plaza, 2nd Floor Chicago, IL 60602 Nashville, TN 37239-1697 Re: $80,000,000 Revolving Credit Loan by The First National Bank of Chicago, Societe Generale and NationsBank of Tennessee, N.A. (collectively, the "Banks") to Donnelly Corporation We have acted as counsel to Donnelly Corporation, a Michigan corporation ("Donnelly"), in connection with a revolving credit loan of even date herewith, in principal amount not to exceed $80,000,000 (the "Loan") made by the Banks to Donnelly pursuant to that certain Amended and Restated Revolving Credit Loan Agreement of even date herewith (the "Loan Agreement") among Donnelly, the Banks, and The First National Bank of Chicago as agent (the "Agent"). Except as otherwise indicated in this Opinion Letter, capitalized terms are defined as set forth in the Loan Agreement or the Accord (see below). This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). Accordingly, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage, and other limitations, all as more particularly described in the Accord. The law covered by the opinions expressed in this Opinion Letter is limited to the federal law of the United States and the law of the State of Michigan. To the extent the Loan Agreement is governed by the law of the State of Illinois, we have assumed, without investigation, that the law of the State of Illinois is identical to the law of the State of Michigan. 54 59 For purposes of this Opinion Letter, we have examined copies of the Loan Agreement and Revolving Credit Notes of even date herewith, made by Donnelly in favor of the respective Banks in the aggregate principal amount of $80,000,000 (the "Revolving Credit Notes"). The Loan Agreement and the Revolving Credit Notes are hereinafter together referred to as the "Transaction Documents". We have not examined any Loan Documents, as defined in the Loan Agreement, except for the Transaction Documents. Based upon and subject to the foregoing, we are of the opinion that: 1. Donnelly is a corporation duly organized, validly existing and in good standing under the laws of the state of Michigan, has the requisite corporate power and authority under Michigan law to conduct its business and own or lease and operate its properties as contemplated by the Transaction Documents, and to perform its obligations thereunder, and is duly qualified to transact business in all other jurisdictions wherein the failure to qualify would have a material adverse effect on the business, properties, operations or condition, financial or otherwise, of Donnelly. 2. The Transaction Documents are enforceable against Donnelly. The execution and delivery of the Loan Documents has been duly authorized by Donnelly. 3. The execution, delivery and performance by Donnelly of the Transaction Documents do not (i) violate the articles of incorporation or bylaws of Donnelly, or (ii) result in any breach of any of the obligations of, or constitute a default under, the provisions of any written agreement or other written instrument relating to the borrowing of money to which Donnelly or any of its Subsidiaries is a party, or by which Donnelly or any of its Subsidiaries may be bound, or (iii) violate applicable provisions of statutory law or regulation. 4. No consent, approval or authorization of, or any registration or filing with, any governmental body, federal or state of Michigan, is necessary for the execution, delivery and performance by Donnelly of the Loan Documents or the enforcement of the Loan Documents against Donnelly; provided, however, no opinion is expressed with respect to the effect of your compliance with any laws or regulations applicable to the transaction on account of the nature of your business, or facts relating specifically to you or as to the effect of any such noncompliance on the opinions set forth above. We hereby confirm to you that there are no actions or proceedings against Donnelly or any of its Subsidiaries pending, or overtly threatened in writing, before any court, governmental agency or arbitrator for which we have represented Donnelly or any of its Subsidiaries, which, if adversely determined, would exceed an aggregate amount of $_________ in damages or civil penalties or which could have a material adverse effect on the enforceability of the Transaction Documents. 55 60 Very truly yours, 56 61 SCHEDULE 1.1 Member Countries of the Organization for Economic Cooperation and Development as of the Effective Date Austria Belgium Canada Denmark France Germany Greece Iceland Italy Ireland Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland Turkey United Kingdom United States Japan Finland Australia New Zealand 57 EX-22 3 EXHIBIT 22 SCHEDULE OF AFFILIATES AS OF JUNE 29, 1996 PERCENTAGE OF AFFILIATE INCORPORATION OWNERSHIP - ------------------------------- ------------------------ ------------ DONNELLY MIRRORS LIMITED ORGANIZED UNDER THE 100% LAWS OF THE REPUBLIC OF IRELAND DONNELLY VISION SYSTEMS ORGANIZED UNDER THE 100% EUROPE, LTD. LAWS OF THE REPUBLIC OF IRELAND DONNELLY DE MEXICO, S.A. DE C.V. ORGANIZED UNDER THE 100% LAWS OF MEXICO DONNELLY EUROGLAS SYSTEMS, ORGANIZED UNDER THE 100% E.U.R.L. LAWS OF FRANCE DONNELLY HOLDING GmbH ORGANIZED UNDER THE 100% LAWS OF GERMANY DONNELLY INTERNATIONAL, INC. MICHIGAN 100% DONNELLY TECHNOLOGY, INC. MICHIGAN 100% DONNELLY INVESTMENTS, INC. MICHIGAN 100% DONNELLY EUROTRIM, LTD. ORGANIZED UNDER THE 100% LAWS OF THE REPUBLIC OF IRELAND DONNELLY HOHE GmbH & CO. KG ORGANIZED UNDER THE 66.7% LAWS OF GERMANY DONNELLY HOHE VERWALTUNGS GmbH ORGANIZED UNDER THE 48% LAWS OF GERMANY DONNELLY HAPPICH MICHIGAN 60% TECHNOLOGIES, INC. DONNELLY FU HUA WINDOW ORGANIZED UNDER THE 50% SYSTEMS COMPANY, LTD. LAWS OF CHINA APPLIED FILMS CORPORATION COLORADO 50% VISION GROUP, PLC ORGANIZED UNDER THE 30.4% LAWS OF SCOTLAND DONNELLY HOHE ESPANA, S.A. ORGANIZED UNDER THE 25.6% LAWS OF SPAIN EX-24 4 EXHIBIT 24 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference of our reports dated August 2, 1996, relating to the combined consolidated financial statements and schedule of Donnelly Corporation appearing in the corporation's annual report on Form 10-K for the year ended June 29, 1996, in that corporation's previously filed Form S-8 Registration Statements for that corporation's 1987 Stock Option Plan (Registration File No. 33-26555), 1987 Employee's Stock Purchase Plan (Registration File No. 33-34746) and Non Employee Director's Stock Option Plan (Registration File No. 33-55499). /s/BDO SEIDMAN, LLP - ------------------- BDO Seidman, LLP Grand Rapids, Michigan September 19, 1996 EX-27 5
5 This schedule contains summary financial information extracted from 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 1,303 0 73,658 0 24,228 126,695 157,161 57,397 271,492 63,213 101,757 0 531 787 87,534 271,492 439,571 439,571 357,830 357,830 0 0 8,102 12,349 4,191 12,349 0 0 0 8,454 1.08 1.08
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