-----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, SVX+6gIXUvNLt9LoOhhecEmoK4JZbZ2JW6mvjaUSFSH4cslQDHoWHCEEfJXavzJP Wjkfw1TNDqbSERtfCASUYA== 0000926044-97-000102.txt : 19970924 0000926044-97-000102.hdr.sgml : 19970924 ACCESSION NUMBER: 0000926044-97-000102 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970923 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DONNELLY CORP CENTRAL INDEX KEY: 0000805583 STANDARD INDUSTRIAL CLASSIFICATION: GLASS PRODUCTS, MADE OF PURCHASED GLASS [3231] IRS NUMBER: 380493110 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-09716 FILM NUMBER: 97684244 BUSINESS ADDRESS: STREET 1: 414 E FORTIETH ST CITY: HOLLAND STATE: MI ZIP: 49423 BUSINESS PHONE: 6167867000 MAIL ADDRESS: STREET 1: 424 EAST 40TH STREET CITY: HOLLAND STATE: MI ZIP: 49423 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 29, 1997 Commission File Number 1-9716 DONNELLY CORPORATION (Exact Name of Registrant as Specified in its Charter) Michigan 38-0493110 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 414 East Fortieth Street, Holland, Michigan 49423 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 786-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ 5,412,286 shares of Class A Common Stock and 4,463,243 shares of Class B Common Stock were outstanding as of April 30, 1997. DONNELLY CORPORATION INDEX Page Numbering PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Combined Consolidated Balance Sheets - March 29, 1997 and June 29, 1996 3 Condensed Combined Consolidated Statements of Income - Three months and nine months ended March 29, 1997 and March 30, 1996 4 Condensed Combined Consolidated Statements of Cash Flows - Nine months ended March 29, 1997 and March 30, 1996 5 Notes to Condensed Combined Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 10-16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17-18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS March 29 June 30 In thousands 1997 1996 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ................................................ $ 6,070 $ 1,303 Accounts receivable, less allowance of $939 and $571 ..................... 69,138 73,658 Inventories .............................................................. 45,310 24,228 Prepaid expenses and other current assets ................................ 33,715 27,506 -------- -------- Total current assets ... 154,233 126,695 Property, plant and equipment ............................................ 287,537 157,161 Less accumulated depreciation ............................................ 130,377 57,397 -------- -------- Net property, plant . 157,160 99,764 and equipment Investments in and advances to affiliates ................................ 15,426 37,932 Other assets ............................................................. 20,699 7,101 -------- -------- Total assets ........ $347,518 $271,492 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts and notes payable ............................................... $ 69,490 $ 44,349 Current maturities on long-term debt ..................................... 5,306 159 Other current liabilities ................................................ 35,446 18,705 -------- -------- Total current ....... 110,242 63,213 liabilities Long-term debt, less current maturities .................................. 117,017 101,757 Deferred income taxes and other liabilities .............................. 24,516 17,670 -------- -------- Total liabilities ... 251,775 182,640 -------- -------- Minority interest ........................................................ 279 0 Preferred stock .......................................................... 531 531 Common stock ............................................................. 991 787 Other shareholders' equity ............................................... 93,942 87,534 -------- -------- Total shareholders' . 95,464 88,852 equity -------- -------- Total liabilities and $347,518 $271,492 shareholders' equity ======== ========
The accompanying notes are an integral part of these statements. DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended March 29, March 30, March 29, March 30, In thousands except share data 1997 1996 1997 1996 Net sales ......................... $ 181,681 $ 116,445 $ 483,118 $ 313,791 Costs and expenses: Cost of sales ..................... 148,360 94,292 391,878 257,923 Selling, general and administrative 18,514 10,452 47,324 30,475 Research and development .......... 9,404 7,781 24,971 19,661 ----------- ----------- ----------- ----------- Operating income .................. 5,403 3,920 18,945 5,732 Interest expense .................. 2,663 2,394 7,654 6,131 Royalty income .................... (135) (1,763) (1,216) (4,266) Interest income ................... (135) (469) (549) (1,073) Other income, net ................. (370) (418) (1,345) (548) ----------- ----------- ----------- ----------- Income before taxes on income ..... 3,380 4,176 14,401 5,488 Taxes on income ................... 1,226 1,419 5,369 1,849 ----------- ----------- ----------- ----------- Income before minority interest and equity earnings .......... 2,154 2,757 9,032 3,639 Minority interest in net (income) loss of subsidiaries ........ 490 (16) (104) 186 Equity in earnings (losses) of affiliated companies ...... 314 (238) (331) (482) ----------- ----------- ----------- ----------- Net income ........................ $ 2,958 $ 2,503 $ 8,597 $ 3,343 =========== =========== =========== =========== Per share of common stock: Net income ........................ $ 0.30 $ 0.26 $ 0.87 $ 0.34 Cash dividends declared ........... $ 0.10 $ 0.08 $ 0.26 $ 0.24 Average common shares outstanding . 9,848,733 9,766,249 9,822,335 9,743,434
The accompanying notes are an integral part of these statements. DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended --------------------------- March 29, March 30 In thousands 1997 1996 - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income .......................................................... $ 8,597 $ 3,343 Adjustments to reconcile net income to net cash from (for) operating activities: Depreciation and amortization ....................................... 15,291 9,355 Gain on sale of property and equipment .............................. (596) 0 Gain on sale of affiliate stock ..................................... (872) 0 Deferred pension cost and postretirement benefits ................... 3,916 1,469 Deferred income taxes ............................................... (1,587) (23) Minority interest income (loss) ..................................... 312 (202) Equity in losses of affiliated companies ............................ 786 1,057 Changes in operating assets and liabilities: Sale of accounts receivable ......................................... 38,777 0 Accounts receivable ................................................. (12,738) (23,373) Inventories ......................................................... (4,289) (2,896) Prepaid expenses and other current assets ........................... (2,457) (10,424) Accounts payable and other current liabilities ...................... 9,008 16,854 Other ............................................................... (2,366) 304 -------- -------- Net cash from ...... 51,782 (4,536) (for) operating activities ======== ======== INVESTING ACTIVITIES Capital expenditures ................................................ (20,194) (18,811) Investments in and advances to equity affiliates .................... (4,589) (15,368) Proceeds from sale property and equipment ........................... 3,248 0 Proceeds from sale of affiliate stock ............................... 974 0 Purchase of minority interest ....................................... 0 (2,100) Change in unexpended bond proceeds .................................. 142 392 Cash increase due to consolidation of subsidiary .................... 9,963 0 Other ............................................................... (781) 0 -------- -------- Net cash for ....... (11,237) (35,887) investing activities ======== ======== FINANCING ACTIVITIES Proceeds from long-term debt ........................................ 0 39,463 Repayments on long-term debt ........................................ (33,369) 0 Common stock issuance ............................................... 863 586 Dividends paid ...................................................... (2,592) (2,378) -------- -------- Net cash from ...... (35,098) 37,671 (for) financing activities ======== ======== Effect of foreign exchange rate changes in cash ..................... (680) 0 Increase (decrease) in cash and cash equivalents .................... 5,447 (2,752) Cash and cash equivalents, beginning of period ...................... 1,303 5,224 -------- -------- Cash and cash equivalents, end of period ............................ $ 6,070 $ 2,472 ======== ========
The accompanying notes are an integral part of these statements. DONNELLY CORPORATION NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS March 29, 1997 NOTE A---BASIS OF PRESENTATION The accompanying unaudited condensed combined consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 29, 1997, should not be considered indicative of the results that may be expected for the year ended June 28, 1997. The combined consolidated balance sheet at June 29, 1996, has been taken from the audited combined consolidated financial statements and condensed. The accompanying condensed combined consolidated financial statements and footnotes thereto should be read in conjunction with the Company's annual report on Form 10-K for the year ended June 29, 1996. The Company's fiscal year is the 52 or 53 week period ending the Saturday closest to June 30. Accordingly, each quarter ends on the Saturday closest to quarter end. Both the quarters ended March 29, 1997 and March 30, 1996, included 13 weeks. NOTE B---INVENTORIES At the beginning of fiscal 1997, the Company changed to the FIFO (first-in, first-out) method for determining the cost of all inventories. Until fiscal 1997, the Company used the LIFO (last-in, first-out) method for determining inventory cost, except for the inventories of consolidated subsidiaries which used the FIFO method. The change in accounting principle was made to provide a better matching of revenue and expenses. This accounting change is not expected to be material for the year and was not material to the financial statements for any previously reported periods. Accordingly, no retroactive restatement of the prior year's financial statements was made. Inventories consist of: (In thousands) March 29, June 29, 1997 1996 LIFO cost: Finished products and work in process ............ $ -- $ 6,743 Raw materials .................................... -- 6,622 ------- ------- -- 13,365 ------- ------- FIFO costs: Finished products and work in process ............ 19,605 3,397 Raw materials .................................... 25,705 7,466 ------- ------- 45,310 10,863 ------- ------- $45,310 $24,228 ======= =======
NOTE C---INCOME PER SHARE Income per share is computed by dividing net income, adjusted for preferred stock dividends of approximately $10,000 in each respective quarter, by the weighted average number of shares of Donnelly Corporation common stock outstanding, as adjusted for stock splits. On December 6, 1996, the Board of Directors declared a five for four stock split in the form of a 25 percent stock dividend distributed on January 30, 1997. All references to weighted average number of shares outstanding and per share information have been adjusted to reflect the stock split. NOTE D---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Nine Months Ended (In thousands) March 29, March 30, 1997 1996 Cash paid during the period for: Interest ......................................... $7,437 $2,227 Income taxes ..................................... $8,575 $ 249
NOTE E---ACQUISITION AND INVESTMENTS IN AFFILIATES In October 1996, the Company acquired a controlling interest in Donnelly Hohe GmbH & Co KG ("Donnelly Hohe"). Accordingly, Donnelly Hohe's financial statements were consolidated with those of the Company at the beginning of the second quarter of 1997. The Company consolidates the Donnelly Hohe financial statements from the one month prior to the Company's period end. For the Company's period ending March 29, 1997, Donnelly Hohe's financial statements are consolidated using the period ended February 28 1997. Pro-forma results of operations, as though the Company had combined at the beginning of each period presented, is as follows: Pro-forma impact: Three Months Ended Nine Months Ended March 29, March 30, March 29, March 30, In thousands, except share data 1997 1996 1997 1996 Net sales .......................... $181,681 $172,830 $531,580 $477,150 Net income ......................... 2,958 2,503 8,597 3,343 Income per share of common stock ... 0.30 0.26 0.87 0.34
NOTE F--ASSET SECURITIZATION In November 1996, the Company entered into an agreement to sell, on a revolving basis, an interest in a defined pool of trade accounts receivable. The maximum allowable amount of receivables to be sold is $50 million. The amount outstanding at any measurement date varies based upon the level of eligible receivables and management's discretion. Under this agreement, $38.8 million were sold at March 29, 1997, the proceeds of which were used to reduce borrowings under the Company's revolving credit agreements. The sale is reflected as a reduction of accounts receivable in the accompanying Condensed Combined Consolidated Balance Sheet and as operating cash flows in the accompanying Condensed Combined Consolidated Statement of Cash Flows. The sales proceeds are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs of issuing its own commercial paper backed by these accounts receivable. Discount fees of $0.8 million are included in selling, general and administrative expenses in the accompanying Condensed Combined Consolidated Statement of Income for the period ended March 29, 1997. The Company, as agent for the purchaser, retains collection and administrative responsibilities for the participating interests of the defined pool. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards for sales, securitization, and servicing of receivables and other financial assets and extinguishments of liabilities. The Company is required to adopt the Statement for all transactions occurring after December 31, 1996, including sales of receivables pursuant to securitization structures that were previously entered into by the Company. The provisions of the Statement do not have a material impact on the accounting for actual or future sales of trade accounts receivable under the securitization agreement referred to above. NOTE G--RESTRUCTURING On February 18, 1997, the Company announced its intention to restructure the Company's European operations to realign the Company's European manufacturing capacity and to reduce future operating costs, primarily by reducing the number of non-production employees in the Company's European operations. The restructuring is intended to result in reductions in operating costs through improved quality, better personnel training and management and outsourcing certain production. The restructuring also involves reorganizing product lines and production to realize efficiencies in the production process. The Company is in the process of finalizing the details of the planned restructuring with the Irish union and the workers' council in Germany specifically relating to the employees to be terminated and the benefit arrangement for each employee. Management believes that the Company will be in compliance with all the necessary conditions of EITF 94-3 to recognize the restructuring expense (primarily severance payments resulting from a reduction in the number of employees) in the fourth quarter of 1997 resulting in a one-time charge to net income of approximately $3.5 to $4.5 million. NOTE H---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 be place undue reliance on those forward-looking statements which speak only as of the date of this report. Item 2. DONNELLY CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER REPORT FOR THE NINE MONTHS ENDED MARCH 29, 1997 GENERAL Effective 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, supplies many of the main automakers in Europe with exterior automotive mirrors, interior mirrors, door handles, automotive tooling and electronic components related to mirror systems. The Company initially acquired for $3.6 million 48% of the controllin general partnership interest and 662/3% of the limited partnership interest in Donnelly Hohe. The Company also made a $28 million subordinated loan to Donnelly Hohe. In October 1996, the Company acquired an additional 13% interest in the general partner of Donnelly Hohe, resulting in the Company owning a controlling interest in Donnelly Hohe. Accordingly, Donnelly Hohe's financial statements are consolidated with those of the Company in the second quarter of 1997, and at March 29, 1997, Donnelly Hohe represented approximately 33% of the Company's combined consolidated total assets. The Company's fiscal year ends on the Saturday nearest June 30, and its fiscal quarters end on the Saturdays nearest September 30, December 31, March 31 and June 30. Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end on August 31, November 30, February 28 and May 31. Accordingly, the Company's Combined Consolidated Financial Statements as of or for a period ended on a particular date include Donnelly Hohe's financial statements as of or for a period ended approximately one month befor that date. The Company intends to continue this practice. The Company's financial statements for the period ended March 29, 1997, consolidate Donnelly Hohe's financial statements for the period ended February 28, 1997. On February 18, 1997, the Company announced its intention to restructure the Company's European operations to realign the Company's European manufacturing capacity and to reduce future operating costs, primarily by reducing the number of non-production employees in the Company's European operations. The restructuring is intended to result in reductions in operating costs through improved quality, better personnel training and management and outsourcing certain production. The restructuring also involves reorganizing product lines and production to realize efficiencies in the production process. The Company is in the process of finalizing the details of the planned restructuring with the Irish union and the workers' council in Germany specifically relating to the employees to be terminated and the benefit arrangement for each employee. Management expects to finalize the details of the restructuring plan and to meet all the necessary conditions of EITF 94-3 to recognize the restructuring expense (primarily severance payments resulting from a reduction in the number of employees) in the fourth quarter of 1997, resulting in a one-time charge to net income of approximately $3.5 to $4.5 million. On May 5, 1997, the Company filed a registration statement with the Securities and Exchange Commission to register 1,725,000 shares of Class A Common Stock. The net proceeds to the Company from the sale are estimated at $22.4 million assuming the sale of 1.5 million shares at a public offering price of $16.00 per share and after deducting underwriting discounts and commissions. The actual net proceeds may vary depending on the price for which the shares are sold. The Company intends to use the net proceeds to repay indebtedness, including amounts incurred under its revolving credit agreements. The Company's net sales and net income are subject to significant quarterly fluctuations attributable primarily to production schedules of the Company's major automotive customers. These same factors cause quarterly results to fluctuate from year to year. The comparability of the Company's results on a period to period basis may also be affected by the Company's implementation of new joint ventures, alliances, acquisitions, and substantial investment in new product lines. 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 be place undue reliance on those forward-looking statements which speak only as of the date of this report. RESULTS OF OPERATIONS Net sales were $181.7 million in the third quarter of 1997 compared to $116.4 million for the third quarter of 1996 and $483.1 million and $313.8 million for the first nine months of 1997 and 1996, respectively. The consolidation of Donnelly Hohe contributed approximately $51.1 million and $111.6 million of net sales for the third quarter and the first nine months of 1997, respectively. Excluding Donnelly Hohe, consolidated net sales for the first nine months of 1997 were $371.6 million, an increase of 18% over the first nine months of 1996. Net sales for the Company's operations were as follows (in thousands): Three Months Ended Nine Months Ended March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996 Domestic $114,874 $101,727 $324,898 $274,644 Foreign 66,807 14,718 158,220 39,147 Total $181,681 $116,445 $483,118 $313,791
Net sales for the Company's domestic operations increased by approximately 13% and 18% for the third quarter and first nine months of 1997, respectively, compared to the same periods in 1996. Domestic net sales increased despite the fact that automotive industry production remained stable. The increase was primarily due to programs launched in 1996 running at full production volumes and new product introductions in the modular window, door handle and interior trim product lines. Net sales also increased as a result of strong sales of vehicles containing Company products, such as the Chrysler Caravan and the Ford Expedition. The Company's foreign sales increased by over $52.1 million and $119.1 million for the third quarter and first nine months of 1997 compared to the same periods in 1996, respectively, primarily due to the consolidation of Donnelly Hohe. Excluding the consolidation of Donnelly Hohe, net sales for the Company's foreign operations for the third quarter and first nine months of 1997 were approximately 10% and 27% higher than the same period in 1996, respectively, due to higher sales of interior and electrochromi mirrors and modular windows. Gross profit margin for the third quarter of 1997 was 18.3% compared to 19.0% for the third quarter of 1996 and 18.9% and 17.8% for the first nine months of 1997 and 1996, respectively. The Company's domestic gross profit margins were stronger for the nine month period due to higher volumes, significantly lower start-up expenses compared to 1996 and non recurring-costs incurred in the third quarter of 1996 due to supplier technical difficulties on a new business program. In the first nine months of 1996, the Company's domestic gross profit margin was negatively impacted due to the simultaneous start-up of three major new business programs which will result in annual net sales exceeding $100 million in 1997. Domestic gross profit margin performance was also significantly impacted in the third quarter of 1996 by supplier technical difficulties on a new business program. The Company's foreign gross profit margins were stronger than the previous year for the third quarter and nine month period ended March 29, 1997. The improvement was primarily due to the Company's subsidiary in France operating at normal volumes during the period as well as stronger performance at the Company's subsidiary in Mexico. Partially offsetting these improvements were lower gross profit margins at the Company's Irish operations due to a number of factors, including price decreases resulting from currency fluctuations associated with the strong Irish punt and a paint supplier performance problem. Through the first nine months of 1997 the price decreases and paint supplier performance has impacted gross profit by $0.9 million and $1.9 million, respectively. The paint supplier performance problem is primarily due to process related scrap expenses and the supplier's difficulty in meeting customer schedules. The performance problem has resulted in excessive scrap, rework and freight costs to the Company. The Company is working with the supplier to resolve these issues as well as researching alternative sources of paint supply for these products. The Irish operations also experienced new business start-up costs primarily related to electrochromic mirrors. Partially offsetting the reduced gross profit margin in Europe were strong gross profit margins at the Company's operations in Spain and France. Selling, general and administrative expenses increased from $10.5 million in the third quarter of 1996 to $18.5 million for the same period of 1997 due to the consolidation of Donnelly Hohe and to support higher sales for this period. Selling, general and administrative expenses in the third quarter of fiscal 1997 were at 10.2% of net sales compared to 9.0% in the third quarter of 1996. The increase in these expenses for the quarter is due to higher legal fees in North America and consulting fees at Donnelly Hohe. These expenses are also higher in the third quarter of 1997 for the company due to $0.8 million of discount fees included from the asset securitization of accounts receivable. These expenses were 9.8% of net sales for the first nine months of 1997 compared to 9.7% for the same period in 1996. Research and development expenses for the third quarter of 1997 were $9.4 million, or 5.2% of net sales, compared to 6.7% of net sales for the third quarter of 1996 and were lower as a percentage to sales due the consolidation of Donnelly Hohe. As a percentage to net sales, these expenses compared to the previous year for the third quarter without the consolidation of Donnelly Hohe. Research and development expenses were 5.2% of net sales in the first nine months of 1997 compared to 6.3% for the first nine months of 1996, and were comparable excluding the consolidation of Donnelly Hohe. Management expects that these expenses will be approximately 5.0% of net sales in future periods. Operating income for the Company's operations was as follows (in thousands): Three Months Ended Nine Months Ended March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996 Domestic $5,331 $4,545 $16,287 $6,851 Foreign 72 (625) 2,658 (1,119) Total $5,403 $3,920 $18,945 $5,732
The Company's operating margins increased from 1.8% of net sales in the first nine months of 1996 to 3.9% of net sales in the same period of 1997. The Company's operating margins decreased slightly in the third quarter from 3.4% of net sales in 1996 to 3.0% of net sales in 1997. The decrease in the third quarter was due to the consolidation of Donnelly Hohe which included planned customer shutdowns for the Christmas holiday. The Company's domestic operating income increased from 2.5% of net sales in the first nine months of 1996 to 5.0% of net sales in the same period of 1997. Operating margins were flat in the third quarter of 1997 compared to 1996. Domestic operating margins were higher in the nine month period due to higher volumes, significantly lower start-up expenses compared to 1996 and non-recurring costs incurred in the third quarter of 1996. Improvements made in domestic gross profit margins were mostly offset by higher selling, general and administrative expenses and research and development expenses as a percent to sales. Foreign operating income improved from an operating loss of 4.2% of net sales and 2.9% of net sales for the third quarter and the first nine months of 1996, respectively, to operating income of 0.1% of net sales and 1.7% of net sales in the same periods of 1997, respectively. The improvement in the third quarter was primarily due to the consolidation of Donnelly Hohe, which has stronger operating margins than that of the Company's other European operations, and lower research and development expenses a Donnelly Mirrors Limited in Ireland. The nine month period also benefited from the consolidation of Donnelly Hohe as well as higher sales and stronger operating performance at the Company's subsidiary in France. Partially offsetting these improvements in operating margin for each period were lower gross profit margins at the Company's Irish operations due to price decreases resulting from currency fluctuations and a paint supplier performance problem. Interest expense was $2.7 million in the third quarter of 1997 compared to $2.4 million for the third quarter of the previous year and $7.7 million and $6.1 million for the first nine months of 1997 and 1996, respectively. The higher interest expense was due to the consolidation of Donnelly Hohe. Interest expense, excluding the consolidation of Donnelly Hohe, was at the same level as the previous year. Interest expense was positively impacted in the third quarter due to the asset securization of accounts receivable. The discount expense associated with this transaction is included in selling, general and administrative expenses. Royalty income was $1.2 million and $4.3 million for the first nine months of 1997 and 1996, respectively. Royalty payments associated with the sale of the refrigerator glass shelving business (the "Appliance Business") in 1995 concluded in the fourth quarter of 1996. Other income was $0.4 million for both the third quarter of 1997 and 1996 and $1.3 million and $0.5 million for the first nine months of 1997 and 1996, respectively. In the second quarter of 1997, the Company sold 2.5% of its holding in Vision Group plc ("Vision Group"), resulting in a $0.9 million gain. Minority interest in net (income) loss of subsidiaries was ($0.1) million in the first nine months of 1997 compared to ($0.2) million in the first nine months of 1996. Beginning in the second quarter of 1997, the Company accounts for its investment in Donnelly Hohe under the purchase method of accounting, thereby requiring the recognition of minority interest in the net (income) or loss for 331/3% of this subsidiary. Prior to the second quarter of 1997, the Company accounted for its investment in Donnelly Hohe under the equity method of accounting. Equity in losses of affiliated companies was $0.3 million in the first nine months of 1997 compared to $0.5 million for the same period in 1996. The Company's effective tax rate was 37.2% for the nine month period ended March 29, 1997, compared to 33.7% for the nine month period ended March 29, 1997. The increase in the effective tax rate is due to a higher marginal tax rate due to improved pretax income of the Company and lower tax credits as a percentage of pretax income. Net income was $3.0 million in the third quarter of 1997 compared to $2.5 million the previous year and $8.6 million and $3.3 million for the first nine months of 1997 and 1996, respectively. Domestic net income increased compared to the first nine months of 1996 due to higher sales, significantly lower start-up costs and improved operational performance. Domestic net income was also significantly impacted in the third quarter of 1996 by supplier technical difficulties on a new business program that resulted in significant additional costs that negatively impacted net income. Net income for the Company's foreign operations was lower in the first nine months of 1997, as compared to the same period in 1996, due to losses experienced at the Company's Irish operations. The Company's net income was positively impacted in 1997 by the gain on sale of Vision Group stock. The consolidation of Donnelly Hohe did not impact the comparability of net income from 1996 to 1997 for the nine month periods. 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. The Company believes that future results of operations will be influenced by the Company's introduction of improved progra management and lean manufacturing systems, introduction of new technologies and programs to the Company, significant global pricing pressures and general economic and industry conditions. The Company is working to restructure European operations to improve financial performance to a level consistent with the Company's overall corporate financial goals. In addition, global pricing pressures are continuing to place pressure on the Company's overall gross profit margin performance as pricing agreements are implemented throughout the year. LIQUIDITY AND CAPITAL RESOURCES In November 1996, the Company entered into an agreement to sell, on a revolving basis, an interest in a defined pool of trade accounts receivable. The maximum allowable amount of receivables to be sold is $50 million. The amount outstanding at any measurement date varies based upon the level of eligible receivables and management's discretion. Under this agreement, $38.8 million were sold at March 29, 1997 the proceeds of which are used to reduce debt under the Company's revolving credit agreements. The sale is reflected as a reduction of accounts receivable in the accompanying Condensed Combined Consolidated Balance Sheet and as operating cash flows in the accompanying Condensed Combined Consolidated Statement of Cash Flows. The sales proceeds are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs of issuing its own commercial paper backed by these accounts receivable. Discount fees of $0.8 million are included in selling, general an administrative expense in the accompanying Condensed Combined Consolidated Statement of Income for the period ended March 29, 1997. The Company, as agent for the purchaser, retains collection and administrative responsibilities for the participating interests of the defined pool. The Company's current ratio was 1.4 and 2.0 at March 29, 1997 and June 29, 1996, respectively. Working capital was $44.0 million at March 29, 1997, compared to $63.5 million at June 29, 1996. The decrease in the current ratio for the period was due to the sale of $38.8 million of accounts receivable at March 29, 1997, offset slightly by the addition of Donnelly Hohe's working capital. Capital expenditures for the first nine months of 1997 and 1996 were $20.2 and $18.8 million, respectively. Capital spending in 1997 is expected to be slightly higher compared to the previous year due to the consolidation of Donnelly Hohe. The company expects that company spending will increase in 1998 by approximately 45%-55% of the 1997 spending level primarily due to new business in interior lighting and trim, diffractive optics and electrochromic mirrors. The Company's $80 million bank revolving credit agreement had borrowings against it of $1.5 million at March 29, 1997, compared to $42.2 million at June 29, 1996. The decrease is primarily due to the sale of $38.8 million of accounts receivable at March 29, 1997, the proceeds of which were used to reduce borrowings against the Company's revolving credit agreement. Donnelly Hohe has a 75 million German Mark (approximately $45-$50 million) revolving line of credit agreement, which had borrowings against it of approximately $33 million as of February 28, 1997. 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 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," 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 indicated the carrying amount may not be recoverable through future net cash flows generated by the assets. The Company adopted SFAS No. 121 in the first quarter of 1997. The effect of adoption was not material to the accompanying financial statements. SFAS No. 123, "Accounting for Stock-Based Compensation," 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 effective for 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. SFAS No. 125, " Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards for sales, securitization, and servicing of receivables and other financial assets and extinguishments of liabilities . The Company is required to adopt the Statement for all transactions occurring after December 31, 1996, including sales of receivables pursuant to securization structures that were previously entered into by the Company. The provisions of the Statement do not have a material impact on the accounting for actual or future sales of trade accounts receivable under the securitization agreement referred to above. SFAS No. 128, "Earnings Per Share," establishes standards for computing and presenting earnings per share ("EPS") and simplifies that standards previously found in APB Opinion No. 15, which has been superseded. It replaces the presentation of primarily EPS with a presentation of basic EPS, which excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. This Statement is effective for the Company in 1998, and requires restatement of all prior-period EPS data presented. It is not expected to have a material effect on the accompanying financial statements. SFAS No. 129, "Disclosure of Information about Capital Structure, " establishes standards for disclosing information about an entity's capital structure. This statement is effective for the Company in 1998 and will not have a material effect on the accompanying financial statements. No other recently issued accounting standards are expected to have a material impact on the Company. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. ("Midwest") filed a lawsuit against the Company in Cook County, Illinois Circuit Court with respect to terminated discussions regarding the possibility of Midwest's acquisition of the Company's Information Products business. The litigation has been removed to the Federal District Court for the Northern District of Illinois. Midwest alleges that a verbal agreement to purchase the Information Products business had been reached, and has filed its lawsuit in an attempt to compel the Company to proceed with the sale and to pay damages including Midwest's claimed damages of out of pocket costs and the difference between the alleged value of the Information Products business and the price that Midwest alleges was verbally agreed upon. The Company has denied liability and intends to vigorously defend its interests. In April 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 settlement, the Company and Gentex Corporation agreed to cross-license certain patents, which each company may practice within its own core technology. The Company's core electrochromic technology achieves dimming by electrochromic coloration of a solid film, and the Company manufactures and markets electrochromic mirrors using the Company's solid film electrochromic technology. In the settlement, the parties also agreed not to pursue patent litigation against each other on certain other patents for a period of four years. In addition, Gentex Corporation agreed to pay the Company a settlement of $6.0 million in patent settlement fees plus a $0.2 million contingent payment if the Company prevails in its appeal involving the Company's lighted mirror patent. The Company used the settlement proceeds primarily to offset related patent litigation costs that has previously been capitalized and recognized a gain of $2.3 million net of those costs. Management believes that the settlement with Gentex Corporation is a positive development for the Company that will allow the Company to compete more vigorously in the market for electrochromic mirrors. In June, 1994, the Company entered into a joint venture with Happich Fahrzeug-InnausstrHung GmbH of Germany ("Happich") to purchase sun visors, grab handles and other interior parts in North America. In July, 1995, when the joint venture was at an early stage of its development, Happich expressed its desire to terminate the joint venture. The parties have been engaged in arbitration over the terms of the joint venture termination since July 29, 1996. The Company has made several claims against Happich, including for damages, as has Happich against the Company. Management believes that the arbitration will be concluded without a material adverse effect on the Company's financial condition or results of operations and liquidity. In May, 1997, Quantech, Ltd. ("Quantech") filed a lawsuit against the Company in the United Sates District Court for the District of Minnesota concerning components supplied by the Company's Donnelly Optics division to Quantech, which Quantech alleges failed to meet specifications. Quantech seeks unspecified damages, including damages resulting from Quantech's alleged delay in obtaining regulatory approval of the medical instrument being developed by Quantech of which the component is a part. Management believes that the claim by Quantech will be resolved without a material adverse effect on the Company's financial condition or results of operations and liquidity. The Company and its subsidiaries are involved in certain other legal actions and claims, including environmental claims, arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without a material adverse effect on the Company's financial condition, results of operations and liquidity, individually and in the aggregate. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 18 - Preferability Letter for Change in Accounting Method The preferability letter for change in accounting method was filed as part of Form 10-Q for the quarter ended September 28, 1996, as Exhibit 18 and is hereby incorporated herein by reference. Exhibit 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K The Registrant filed a Form 8-K, dated October 28, 1996, relating to the acquisition of a controlling interest in Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe.") Therefore, Donnelly Hohe's financial statements are consolidated with those of the Registrant beginning in the second quarter. The initial filing included a description of the acquisition and additional options to increase the Registrant's ownership in the future. The Registrant also filed a Form 8-K/A, dated November 27, 1996, which was an amendment to the above Form 8-K. The originally filed Form 8-K did not include audited financial statements for Hohe (the business acquired) or pro forma financial statements which were both filed under cover of the amended Form 8-KA. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. DONNELLY CORPORATION Registrant Date: September 23, 1997 /s/ William R. Jellison William R. Jellison (Vice President, Corporate Controller, and Treasurer) -----END PRIVACY-ENHANCED MESSAGE-----