<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended March 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.
<PAGE> 2
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 6-8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 29, June 29,
In thousands 1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,070 $ 1,303
Accounts receivable, less allowance
of $879 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 and equipment 157,160 99,764
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 of long-term debt 5,306 159
Other current liabilities 35,446 18,705
-------- --------
Total current liabilities 110,242 63,213
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 -
Preferred stock 531 531
Common stock 991 787
Other shareholders' equity 93,942 87,534
-------- --------
Total shareholders' equity 95,464 88,852
-------- --------
Total liabilities and shareholders' equity $ 347,518 $ 271,492
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
March 29, March 30, March 29, March 30,
In thousands except share data 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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 9,743,343
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
March 29, March 30,
In thousands 1997 1996
-------- --------
<S> <C> <C>
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
Loss (gain) on sale of property and equipment (596) -
Loss (gain) on sale of affiliate stock (872) -
Deferred pension cost and postretirement benefits 3,916 1,469
Deferred income taxes (1,587) (23)
Minority interest income (loss) 312 (202)
Equity in (earnings) losses of affiliated company 786 1,057
Changes in operating assets and liabilities:
Sale of accounts receivable 38,777 -
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 (for) operating activities 51,782 (4,536)
-------- --------
-------- --------
INVESTING ACTIVITIES
Capital expenditures (20,194) (18,811)
Investments in and advances to equity
affiliates (4,589) (15,368)
Proceeds from sale of property and equipment 3,248 -
Proceeds from sale of affiliate stock 974 -
Purchase of minority interest - (2,100)
Change in unexpended bond proceeds 142 392
Cash increase due to consolidation of subsidiary 9,963 -
Other (781) -
-------- --------
Net cash for investing activities (11,237) (35,887)
-------- --------
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt - 39,463
Repayments on long term debt (33,369) -
Common stock issuance 863 586
Dividends paid (2,592) (2,378)
-------- --------
Net cash from (for) financing activities (35,098) 37,671
-------- --------
-------- --------
Effect of foreign exchange rate changes on cash (680) -
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
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
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.
<TABLE>
<CAPTION>
Inventories consist of:
(In thousands) March 29, June 29,
1997 1996
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
<PAGE> 7
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
<TABLE>
<CAPTION>
Nine Months Ended
(In thousands) March 29, March 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash paid during the period for:
Interest $ 7,437 $ 2,227
Income taxes $ 8,575 $ 249
</TABLE>
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-form results of operations, as though the
the Company had combined at the beginning of each period presented, is
as follows:
Pro-forma impact:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
March 29, March 30, March 29, March 30,
In thousands, except share data 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 8
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.
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, and has begun its implementation.
Management believes that the expense of the restructuring (primarily
severance payments resulting from a reduction in the number of employees)
will reduce net income by a one-time charge of approximately $3.5 to $4.5
million in the fourth quarter of 1997.
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.
<PAGE> 9
Item 2.
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER REPORT
FOR THE NINE MONTHS ENDED MARCH 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 controlling general
partnership interest and 66 2/3% 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
before 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, and has begun its implementation.
Management believes that the expense of the restructuring (primarily
severance payments resulting from a reduction in the number of employees)
will reduce net income by a one-time charge of approximately $3.5 to $4.5
million in the fourth quarter of 1997.
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
<PAGE> 10
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 and acquisitions.
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 in
North America increased by approximately 17% for the first nine months of
1997 compared to the same period in 1996, despite the fact that automotive
industry production remained stable. North American net sales increased
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. Excluding the consolidation of Donnelly
Hohe, net sales for the Company's European operations for the first nine
months of 1997 were approximately 36% higher than the same period in 1996
due to higher sales of interior and electrochromic 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 North American 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 North American
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. North American 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 European gross profit margins were lower than the previous
year, as a percent to sales, for the three and nine month period ended
March 29, 1997, due to the consolidation of Donnelly Hohe and lower gross
<PAGE> 11
profit margins at the Company's Irish subsidiaries. Donnelly Hohe's gross
profit margin, as a percent of net sales, is slightly lower than that of
the Company. Accordingly, the consolidation of Donnelly Hohe unfavorably
impacted gross profit performance as a percentage of net sales for each
period reported. Donnelly Hohe's performance for the third quarter included
the month of December, which includes planned customer shutdowns for the
Christmas holiday, having further unfavorable impact on the Company's gross
profit percentage for the third quarter of 1997. The Company's Irish
operations experienced lower gross profit margins for the first nine months
of 1997 compared to the same period in 1996 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. 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.
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.
<PAGE> 12
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 33 1/3% 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. North American net income
increased compared to the first nine months of 1996 due to higher sales,
significantly lower start-up costs and improved operational performance.
North American 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 European 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 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. 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
<PAGE> 13
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 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 $0.7 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
<PAGE> 14
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, securitizations, and servicing of receivables and
other financial assets, accrued borrowing and collateral transactions, and
the entinguishments of liabilities. The Company is required to adopt the
Statement for all transactions occurring after December 31, 1996, including
transfers of assets pursuant to securitization structures that previously
were entered into. The adoption of this Statement will not be material to
the accompanying financial statements.
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.
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. 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. In mid-
January, the Company informed Midwest that it did not believe the
transaction could be completed due to a number of different reasons. The
Company believes that it has acted in good faith and in the best interests
of its employees and shareholders. Management believes that the claim by
Midwest is without merit and will be resolved without material effect on
the Company's financial position or results of operations and cash flows.
In June, 1994, the Company entered into a joint venture with Happich
Fahrzeug-InnausstaHung 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.
The Company and its subsidiaries are involved in certain other legal
actions and claims, including environmental claims, arising in the ordinary
course of business. Management believes that such litigation and claims
will be resolved without material effect on the Company's financial
position or results of operations and cash flows.
<PAGE> 16
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.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: May 13, 1997 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: May 13, 1997 /s/ William R. Jellison
William R. Jellison
(Vice President, Corporate
Controller, and Treasurer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
March 29, 1997 Donnelly Corporation financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> MAR-29-1997
<CASH> 6,070
<SECURITIES> 0
<RECEIVABLES> 69,138
<ALLOWANCES> 879
<INVENTORY> 45,310
<CURRENT-ASSETS> 154,233
<PP&E> 287,537
<DEPRECIATION> 130,377
<TOTAL-ASSETS> 347,518
<CURRENT-LIABILITIES> 110,242
<BONDS> 117,017
0
531
<COMMON> 991
<OTHER-SE> 94,221
<TOTAL-LIABILITY-AND-EQUITY> 372,666
<SALES> 483,118
<TOTAL-REVENUES> 483,118
<CGS> 391,878
<TOTAL-COSTS> 391,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,654
<INCOME-PRETAX> 14,400
<INCOME-TAX> 5,369
<INCOME-CONTINUING> 6,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,597
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.87
</TABLE>
