<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1997
REGISTRATION NO. 333-26465
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DONNELLY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
MICHIGAN 38-0493110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
414 E. FORTIETH STREET
HOLLAND, MICHIGAN 49423
(616) 786-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
WILLIAM R. JELLISON
414 E. FORTIETH STREET
HOLLAND, MICHIGAN 49423
(616) 786-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
WILLIAM J. LAWRENCE III WILLIAM M. HARTNETT
VARNUM, RIDDERING, SCHMIDT & HOWLETT CAHILL GORDON & REINDEL
LLP 80 PINE STREET
333 BRIDGE STREET, N.W. NEW YORK, NEW YORK 10005
GRAND RAPIDS, MICHIGAN 49504 (212) 701-3000
(616) 336-6000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with dividend or interest
reinvestment plans, check the following box. [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES BEING TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED (1) PER UNIT (2) OFFERING PRICE (2) FEE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.10 par value........ 1,725,000 $15.25 $26,306,250 $7,972
- ---------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 225,000 Shares which may be sold by the Company to cover over-
allotments.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 15, 1997
PROSPECTUS
1,500,000 SHARES
[LOGO] DONNELLY
CLASS A COMMON STOCK
--------
All of the 1,500,000 shares of Class A Common Stock, $0.10 par value per
share (the "Class A Common Stock"), offered hereby are being issued and sold by
Donnelly Corporation (the "Company"). The Class A Common Stock is listed on the
New York Stock Exchange (the "NYSE") under the symbol "DON." On May 13, 1997,
the last reported sale price of the Class A Common Stock on the NYSE was
$15.625 per share. See "Price Range of Class A Common Stock and Dividends."
The Company's authorized capital stock includes the Class A Common Stock and
shares of Class B Common Stock, $0.10 par value per share (the "Class B Common
Stock"). The economic rights of the Class A Common Stock and the Class B Common
Stock (collectively, the "Common Stock") are identical in all material
respects, except that each share of Class A Common Stock entitles the holder
thereof to one vote with respect to matters submitted for the vote of holders
of Common Stock, whereas each share of Class B Common Stock entitles the holder
thereof to ten votes on such matters. The holders of Class A Common Stock are
entitled to elect one-quarter of the Company's directors and the holders of
Class B Common Stock are entitled to elect the remaining directors.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF CLASS A COMMON STOCK OFFERED HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $ $ $
- ----------------------------------------------------------------------------------------
Total (3)...................... $ $ $
- ----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting".
(2) Before deducting expenses estimated at $ , payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up
to 225,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. See "Underwriting". If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be , $ and
$ , respectively.
--------
The shares of Class A Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if received and
accepted by them and subject to certain conditions. It is expected that
certificates for shares of Class A Common Stock will be available for delivery
on or about 1997, at the offices of Smith Barney Inc., 333 W. 34th
Street, New York, New York 10001.
--------
SMITH BARNEY INC. SALOMON BROTHERS INC
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVERALLOTMENT, ENTERING INTO STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can
be inspected and copied at the Public Reference Section of the Commission,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New
York, New York 10048, and 500 West Madison Street, Chicago, Illinois 60601.
Copies of such materials can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site (which can be found
at http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. The Company's Class A Common Stock is listed on the NYSE, and
reports, proxy statements and other information concerning the Company can
also be inspected at the NYSE.
The Company has filed with the Commission a Registration Statement on Form
S-2 (herein, together with all amendments and exhibits thereto and documents
incorporated by reference, referred to as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby
made to the Registration Statement. The statements contained in this
Prospectus concerning the contents of any contract or other document referred
to are not necessarily complete. Where such contract or other document is an
exhibit to the Registration Statement, each statement is qualified in all
respects by the provisions of such exhibit, to which reference is hereby made
for a full statement of the provisions thereof.
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's annual report on Form 10-K for the year ended June 29, 1996,
as amended by its Form 10-K/A filed with the Commission on April 16, 1997, its
quarterly reports on Form 10-Q for the quarters ended September 28, 1996,
December 28, 1996 (as amended by its Form 10-Q/A filed with the Commission on
April 16, 1997), and March 29, 1997, and its current report on Form 8-K dated
October 28, 1996, as amended by its Form 8-K/A filed with the Commission on
November 27, 1996, have been filed by the Company with the Commission pursuant
to the Securities Exchange Act of 1934 and are incorporated herein by
reference.
Any statement contained in a document incorporated herein by reference shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Upon request, the Company will provide, without charge, copies of any
documents incorporated by reference herein (other than certain exhibits) to
any person to whom a Prospectus is delivered. Requests for such copies should
be directed to Maryam Komejan, Senior Vice President and Corporate Secretary,
Donnelly Corporation, 414 East Fortieth Street, Holland, Michigan 49423,
telephone (616) 786-7000.
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning
certain aspects of the business of the Company. When used in this Prospectus,
words such as "believe", "anticipate", "intend", "goal", "expects", and
similar expressions may identify forward-looking statements. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements, including, without limitation, changes in demand for automobiles
and light trucks, relationships with significant customers, price pressures,
the timing and structure of future acquisitions or dispositions, the impact of
environmental regulations, continued availability of adequate funding sources,
currency and other risks inherent in international sales, and general economic
and business conditions. See "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Prospective
investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Prospectus. The Company
undertakes no obligation to release publicly any revisions to these
forwarding-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and combined consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus or incorporated by reference herein.
Unless otherwise indicated, all references to years refer to the Company's
fiscal year, which is the 52 or 53 week period ending on the Saturday nearest
June 30. Unless otherwise indicated, all share and per share data, including
market prices, in this Prospectus have been adjusted to reflect a five for four
split of the Class A Common Stock and Class B Common Stock on January 30, 1997,
effected as a stock dividend. Unless otherwise indicated, all information in
this Prospectus assumes that the Underwriters' over-allotment option is not
exercised.
THE COMPANY
Donnelly Corporation produces a complete line of automotive rearview mirror
systems and believes it is the world's largest supplier of such systems. In
1996, the Company sold approximately 17.5 million interior rearview mirrors
worldwide, more than any other company in the world. The Company is also a
leading supplier of modular window systems and an emerging supplier of
innovative automotive lighting and trim products. The Company serves automotive
customers throughout the world from manufacturing locations in North America
and Europe and through joint ventures in Asia. The Company's primary customers
in North America include Chrysler, Ford and General Motors, and the North
American operations of Honda, Toyota, Isuzu and Mazda. The Company's primary
customers in Europe include BMW, Volkswagen, Volvo, SEAT, Renault and Audi.
From 1992 through 1996, the Company's net sales grew from $271.4 million to
$439.6 million, representing a compound annual growth rate of approximately
13%. The Company's net sales for 1996 were $664.4 million on a pro forma basis
to reflect the consolidation of Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe"),
a leading European supplier of automotive rearview mirror systems.
The Company's products include rearview mirror systems, modular windows,
interior lighting and trim components. The Company produces a full line of
automotive rearview mirror systems, including interior prismatic base mirrors,
mirrors with added features such as integrated compasses and lights, and
exterior rearview mirrors. The Company also produces advanced-technology
interior and exterior electrochromic mirrors that automatically dim when
headlights approach from the rear. The Company believes that electrochromic
mirrors represent a significant growth opportunity, and that the settlement of
patent litigation concerning this technology will allow the Company to compete
more vigorously in the market for electrochromic mirrors.
The Company pioneered and is a leading supplier of modular window systems,
which are produced by molding glass, weather stripping and other materials into
a single unit designed for ease of assembly by automakers. The Company uses its
expertise in glass fabrication, plastics and optics technology to develop,
manufacture and sell advanced interior lighting and trim products. The Company
also seeks to develop synergistic products and businesses, including coated
glass products for computer applications, advanced plastic diffractive optical
systems and, through its 25.6% ownership of London Stock Exchange-listed Vision
Group plc, microchip-based electronic vision systems.
The Company expects to invest approximately 5.0% of its net sales each year
in research and development. The Company's core technologies include glass
fabrication and encapsulation, electrochromics, optics and lighting, electronic
applications, painting and precision coatings, precision plastic injection
molding, and the design, assembly and system integration of complex components.
The Company continually seeks to use its technological capabilities to create
innovative value-added features for its existing products, such as automatic
electrochromic dimming and the integration of lights and compasses into
automotive mirrors. Since January 1, 1996, the Company has been awarded over 20
new patents, including patents relating to electrochromic mirrors, flush
surface windows, automotive vision systems and advanced diffractive optics. The
Company believes that its manufacturing know-how, design of its own
manufacturing equipment and development of manufacturing processes provide a
strong foundation for its success.
1
<PAGE>
The Company's strategy for continued growth and for capitalizing on trends in
the automotive industry includes the following elements:
. Grow Through Modular Systems and Value-Added Products. The Company is
using its design, manufacturing and marketing capabilities to produce
modular systems and value-added products designed to result in sales and
earnings growth. The Company's dollar content per vehicle produced in
North America has increased from $6.24 in 1986 to $25.05 in 1996.
. Improve Productivity. The Company has implemented strategic business
systems as part of an integrated philosophy designed to develop, design,
manufacture and deliver the Company's products to satisfy the
engineering, cost, quality and delivery standards of the Company's
customers. The Company's net sales per employee have increased at a
compound annual growth rate of approximately 9% from 1992 through 1996.
. Expand Technology and Product Development Capabilities. The Company
strives to be the technological leader in its markets by continually
enhancing the Company's core technologies. The Company expects to spend
approximately 5.0% of its net sales each year on research and
development.
. Expand Global Presence. The Company has developed a significant global
presence in North America, Europe and Asia, directly and through joint
ventures, and intends to continue to expand its global presence and
customer base. Approximately 2,200 of the Company's 4,700 employees are
located outside of the United States.
. Create Additional Product and Market Opportunities. The Company seeks to
use its technology and manufacturing capabilities, both directly and
through joint ventures, to develop product improvements and new products
for both automotive and non-automotive applications.
During the past two years, the Company has significantly expanded its
presence in Europe by opening a modular window manufacturing facility in
Langres, France in 1996, and through the acquisition of a controlling interest
in Donnelly Hohe, headquartered in Collenberg, Germany. The Company believes
that the expansion of its European operations will play a crucial role in
maintaining the Company's position as a global leader in the market for
automotive rearview mirrors and will also offer significant opportunities for
the Company to market its modular windows, interior lighting, trim components
and other products in Europe and elsewhere. In Europe, the Company has begun
implementing its plan to realign its manufacturing capacity, reduce the number
of non-production employees and achieve additional cost reductions in
operations.
The Company believes that its growth has resulted from its commitment to
research and development, close working relationships with customers, a strong
international presence, a skilled and dedicated workforce and a participative
management approach. As a result of its capabilities and business strategy, the
Company believes it is well-positioned in its existing markets to compete
effectively and to pursue additional growth and product opportunities.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered by the Company............... 1,500,000 shares
Shares to be Outstanding after the Offering (1):
Class A Common Stock (2)................................ 6,912,286 shares
Class B Common Stock.................................... 4,463,243 shares
-----------------
Total Common Stock.................................... 11,375,529 shares
Use of Proceeds........................................... To repay indebtedness
New York Stock Exchange Symbol............................ DON
</TABLE>
- --------
(1) The Class B Common Stock is limited in its transferability and is not
publicly traded, but each share of Class B Common Stock is convertible at
the option of the holder at any time into one share of Class A Common
Stock. See "Description of Capital Stock."
(2) Excludes 4,463,243 shares of Class A Common Stock issuable upon future
conversions of Class B Common Stock and 1,300,120 shares of Class A Common
Stock reserved for issuance under the Company's stock option, director
stock option and stock purchase plans. At May 13, 1997, options to acquire
525,844 shares were outstanding under the Company's stock option plan and
director stock option plan.
2
<PAGE>
SUMMARY COMBINED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
-------------------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 29, MARCH 30, MARCH 29, MARCH 29,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- ----------- --------- --------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $271,399 $300,927 $337,262 $383,340 $439,571 $664,376 $313,791 $483,118 $531,580
Gross profit............ 60,752 68,910 73,632 82,568 81,741 115,330 55,868 91,240 97,564
Operating income........ 12,892 12,458 13,121 17,033 13,491 21,546 5,732 18,945 19,190
Income before taxes on
income................. 10,805 10,936 11,008 16,823 12,349 15,793 5,488 14,401 13,434
Income before
extraordinary gain and
cumulative effect of
change in accounting
principle.............. 6,893 7,257 6,745 11,009 8,454 8,454 3,343 8,597 8,597
Net income.............. $ 7,082 $ 7,852 $ 7,258 $ 11,009 $ 8,454 $ 8,454 $ 3,343 $ 8,597 $ 8,597
Net income per share of
common stock........... $ 0.80 $ 0.82 $ 0.75 $ 1.14 $ 0.86 $ 0.86 $ 0.34 $ 0.87 $ 0.87
Dividends per share of
common stock........... $ 0.19 $ 0.22 $ 0.26 $ 0.26 $ 0.32 $ 0.32 $ 0.24 $ 0.26 $ 0.26
Weighted average common
shares outstanding..... 8,837 9,608 9,646 9,680 9,754 9,754 9,743 9,822 9,822
BALANCE SHEET DATA:
Working capital......... $ 28,085 $ 33,832 $ 36,406 $ 40,502 $ 63,482 $ 68,026 $ 57,814 $ 43,991
Total assets............ 131,229 139,840 183,801 233,788 271,492 366,476 278,277 347,518
Long-term debt,
including current
maturities............. 24,882 33,765 53,485 66,802 101,916 151,985 105,865 122,323
Shareholders' equity.... 61,158 65,546 70,826 82,900 88,852 88,852 82,322 95,464
</TABLE>
- -------
(1) The pro forma income statement data for the year ended June 29, 1996 and
for the nine month period ended March 29, 1997 give effect to the
consolidation of Donnelly Hohe as if it occurred at the beginning of the
period. The pro forma balance sheet data at June 29, 1996, gives effect to
the consolidation of Donnelly Hohe as if it occurred on that date. The
unaudited pro forma information presented is based on the historical
financial statements of the Company and Donnelly Hohe for the periods
indicated. The pro forma data do not purport to represent what the
Company's results of operations and financial position would actually have
been if such transactions had in fact occurred as of the dates indicated or
to project results for any future date or period. See "Pro Forma Condensed
Combined Consolidated Financial Statements" included elsewhere in this
Prospectus.
3
<PAGE>
RISK FACTORS
Prospective purchasers should carefully consider, together with the other
information included and incorporated by reference in this Prospectus, the
following factors:
The Automotive Supplier Industry. The Company competes in the worldwide
automotive supplier industry. The automotive supplier industry is highly
cyclical and, in large part, dependent upon the overall strength of consumer
demand for passenger cars and trucks, which is subject to substantial
variation based on general economic conditions. There can be no assurance that
the automotive industry for which the Company supplies components and systems
will not experience downturns in the future. A decrease in overall consumer
demand for passenger cars and trucks could have a material adverse effect on
the Company's financial condition and results of operations.
The automotive industry is characterized by a limited number of automakers
that are able to exert considerable pressure on components and systems
suppliers to reduce costs, improve quality and provide additional design and
engineering capabilities. In the past, automakers have generally demanded and
received price reductions and measurable increases in quality by implementing
competitive selection processes, rating programs and various other
arrangements. The Company has existing orders requiring annual price
reductions. Also, through increased partnering on platform work, automakers
have generally required components and system suppliers to provide more design
engineering input at earlier stages of the product development process, the
costs of which have, in some cases, been absorbed by the suppliers. There can
be no assurance that future price reductions, increased quality standards or
additional engineering capabilities required by automakers will not have a
material adverse effect on the financial condition and results of operations
of the Company.
Dependence on Principal Customers. Sales to the Company's four largest North
American customers, Chrysler, Ford, Honda and General Motors accounted for
approximately 81% of the Company's net sales for fiscal 1996. The Company has
reduced the dependence on these principal customers due to the recent
consolidation of Donnelly Hohe. The primary customers of Donnelly Hohe include
BMW, Volkswagen, Volvo, SEAT, Renault and Audi. Although the Company has on-
going supply relationships with all of these companies, there can be no
assurance that sales to any of these customers will continue at the same
levels; further, continuation of the relationships is dependent upon customer
satisfaction with the quality, delivery and price of the Company's products.
If any of these customers were to substantially reduce or discontinue its
purchases for any reason, the Company's financial condition and results of
operations could be adversely affected.
Competition. The Company operates in the highly competitive automotive
supplier industry. Accordingly, there can be no assurance that the Company's
products will continue to compete successfully with the products of other
companies, including the automakers themselves and other automotive suppliers,
many of whom are significantly larger and have greater financial and other
resources available to them. The Company is under constant pressure from its
major customers to reduce product costs and improve quality. In addition, many
of the products offered by the Company are expected to require continual
technological improvements and face competition from products using similar or
alternative technologies. For example, the Company believes that
electrochromic interior and exterior mirrors, which currently represent a
small portion of the interior rearview mirrors purchased by automakers will
represent a growing share of the automotive rearview mirror market. The
Company's principal competitor in the market for electrochromic rearview
mirrors currently has a significantly larger share of the market for
electrochromic mirrors than the Company. While the Company believes that it
will be able to compete effectively in the market for electrochromic mirrors
and increase its market share, no assurances can be given. See "Business--
Competition," "Business--Products and Markets" and "Business--Litigation."
Integration of Donnelly Hohe; Increased Foreign Operations. During the past
two years, the Company has significantly expanded its presence in Europe
through the acquisition of a controlling interest in Donnelly Hohe. Management
is in the process of integrating into the Company's business Donnelly Hohe's
European manufacturing operations. The Company has announced its intention to
restructure the Company's European operations, including Donnelly Hohe, to
realign the Company's manufacturing capacity and to reduce future operating
costs, primarily by reducing the number of non-production employees in the
Company's European
4
<PAGE>
operations. 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 will reduce the Company's net income by
approximately $3.5 to $4.5 million in the fourth quarter of 1997. See
"Business--Expansion of European Operations." The Company's implementation
strategies are subject to numerous contingencies, some of which are beyond
management's control. These contingencies include general and regional
economic conditions, competition and changes in regulation and interest rates.
In addition, the complete implementation of the reduction in European
personnel is subject to the approval of the Works Council in Germany. Even if
management is able to successfully restructure its European operations, the
Company will be dependent to a significant extent on international operations,
specifically those in Europe, and therefore subject to various political,
economic and other uncertainties. Among others, the Company's foreign
operations are subject to the risks of taxation policies, foreign exchange
restrictions, changing political conditions and governmental regulations.
Accordingly, no assurance can be given that any of the Company's strategies
will prove to be effective or that management's goals will be achieved. In
addition, the Company receives a substantial portion of its revenues in
currencies other than U.S. Dollars. Fluctuations in the exchange rates of
these currencies with respect to the U.S. Dollar could have an adverse effect
on the Company's financial condition and results of operations. From time to
time the Company engages in hedging programs intended to reduce the Company's
exposure to currency fluctuations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Control by Present Shareholders. Holders of each share of Class A Common
Stock are entitled to one vote per share, and holders of each share of Class B
Common Stock are entitled to ten votes per share. Upon completion of the
offering of the Class A Common Stock, the holders of the Class B Common Stock
will also hold approximately 24% of the outstanding Class A Common Stock and
will control approximately 90% of the vote on matters to be voted upon by all
holders of common stock voting as a single class. Five of the Company's ten
directors are descendants of, or are married to descendants of, the Company's
founder, and each represents one of five family groups of each such
descendants (the "Donnelly Family"). Four family groups have the ability to
elect at least one director if they act together and accumulate the votes of
the Class B Common Stock. Members of the Donnelly Family own approximately 99%
of the Class B Common Stock and after the offering of the Class A Common Stock
will own approximately 24% of the Class A Common Stock of the Company. As
such, the Donnelly Family will control approximately 89% of the vote on
matters to be voted upon by all holders of Common Stock voting as a single
class. Given the voting control of the Donnelly Family, the Donnelly Family
could, if all or part of the family took a united position in response to
attempts to acquire control of the Company through tender offers or proxy
contests, effectively block any such attempts. There is no assurance that any
united action would or would not be taken. See "Description of Capital Stock."
Raw Materials and Suppliers. The Company's primary raw materials are glass
supplied by third party glass manufacturers and by glass manufacturers
affiliated with automakers, as well as resins and adhesives provided by third
party chemical companies. Inability to obtain raw materials on a timely basis
or problems with the quality of raw materials supplied to the Company could
have a material adverse effect on the Company's ability to meet its customer's
requirements and could jeopardize the Company's relationship with one or more
customers. An adhesive for one of the Company's principal products is supplied
solely by Dow Chemical and the Company believes that an alternative source of
supply is not currently available. See "Business--Business Systems and
Manufacturing--Raw Materials."
Warranty Exposure and Recalls. The Company warrants the quality of its
products to its automotive customers and that the products meet certain
specifications designated by the automakers. The automakers in turn offer
product warranties to their retail customers. In some instances of common
complaint, the automobile manufacturer may institute a voluntary recall or may
be required by a governmental agency to conduct a recall. Although warranty
and recall expense has not historically been material for the Company, there
can be no assurance that the Company will not incur substantial warranty or
recall expense in the future. Such complaints and the related expenses may
have a material adverse effect on the Company's relationship with its
automotive customers, its financial condition and results of operations.
Environmental Laws. Like similar companies, the Company's operations and
properties are subject to a wide variety of increasingly complex and stringent
federal, state, local and international laws and regulations,
5
<PAGE>
including those governing the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials, substances and
wastes, the remediation of contaminated soil and groundwater, and the health
and safety of employees (collectively, "Environmental Laws"). As such, the
nature of the Company's operations exposes it to the risk of claims with
respect to such matters and there can be no assurance that material costs or
liabilities will not be incurred in connection with such claims. Based upon
its experience to date, the Company believes that the future cost of
compliance with existing Environmental Laws and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement policies of regulatory agencies, may give rise to
additional expenditures or liabilities that could be material. See "Business--
Environmental Matters."
Shares Eligible for Future Sale. Sales of substantial amounts of Class A
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the Class A Common Stock.
Upon completion of the Offering, the Company will have approximately 6,912,286
(7,137,286 if the Underwriters' over-allotment option is exercised in full)
shares of Class A Common Stock outstanding, excluding 4,463,243 shares of
Class A Common Stock issuable upon future conversions of Class B Common Stock,
525,844 shares of Class A Common Stock subject to stock options outstanding as
of May 2, 1997, and any stock options or warrants granted by the Company after
May 13, 1997. Of these shares, the Class A Common Stock sold in the offering
of the Class A Common Stock will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the "Act").
Approximately 3,366,754 additional shares are currently freely tradeable,
except to the extent such shares were purchased by affiliates of the Company,
in which case they are subject to Rule 144 under the Act ("Rule 144"). In
addition, all shares that may be issued pursuant to the Company's Employees'
Stock Purchase Plan and upon exercise of options granted under the Company's
1987 Stock Option Plan and the Company's Director Stock Option Plan will be
freely tradeable without restriction, except that any such shares issued to
affiliates of the Company will be subject to Rule 144. The remaining 2,041,208
shares of outstanding Class A Common Stock and any shares of Class A Common
Stock issuable upon future conversions of Class B Common Stock (the
"Restricted Shares") were sold by the Company in reliance on exemptions from
the registration requirements of the Act and are "restricted securities" as
defined in Rule 144 and may not be sold in the absence of registration under
the Act unless an exemption is available, including an exemption afforded by
Rule 144.
Anti-takeover Effect of Certain Provisions. Certain provisions of the
Michigan Business Corporation Act and the Company's Articles of Incorporation
may have the effect of discouraging transactions involving an actual or
potential change in control of the Company. See "Description of Capital
Stock--Certain Special Article and Statutory Provisions."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,500,000 shares of Class A
Common Stock are estimated to be approximately $21,839,844 ($25,153,320 if the
Underwriters' over-allotment option is exercised in full) assuming a public
offering price of $15.625 per share and after deducting underwriting discounts
and commissions. The Company intends to use the net proceeds to repay
indebtedness, including amounts incurred under its revolving credit
agreements. At April 28, 1997, $17.8 million was outstanding under the
Company's $80.0 million U.S. revolving credit agreement at an average interest
rate of 5.63%. At April 11, 1997, $26.9 million was outstanding under Donnelly
Hohe's 75.0 million German Mark (approximately $45.0 million) revolving credit
agreements with several banks at an average interest rate of 3.96%. The
Company's revolving credit agreement terminates November 20, 2002, and the
Donnelly Hohe revolving credit agreements terminate in stages beginning June
30, 1999, and ending December 31, 1999. Repayment of amounts outstanding under
the revolving credit agreements will not reduce the total amount available for
borrowing under the revolving credit agreements. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources" and Note 5 of the Notes to Combined Consolidated Financial
Statements.
6
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March 29,
1997, and as adjusted to reflect the sale by the Company of 1,500,000 shares of
Class A Common Stock (assuming a public offering price of $15.625 per share)
and the application of the estimated net proceeds of such sale as described in
"Use of Proceeds." All share data have been adjusted to reflect a five for four
split of the Class A Common Stock and Class B Common Stock on January 30, 1997,
effected as a stock dividend.
<TABLE>
<CAPTION>
MARCH 29, 1997 (1)
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current maturities of long-
term debt).............................................. $ 5,306 $ 5,306
Long-term debt, less current maturities (2).............. 117,017 95,177
Shareholders' equity:
Series Preferred Stock, no par value, 1,000,000 shares
authorized, none issued and outstanding............... -- --
7 1/2% Cumulative Preferred Stock, $10.00 par value per
share, 250,000 shares authorized, 53,112 issued and
outstanding (3)....................................... 531 531
Class A Common Stock, $.10 par value per share,
30,000,000 shares authorized, 5,407,962 issued and
outstanding and 6,907,962 issued and outstanding as
adjusted (3)(4)....................................... 541 691
Class B Common Stock, $.10 par value per share,
15,000,000 shares authorized, 4,463,243 issued and
outstanding (3)....................................... 446 446
Donnelly Export Corporation Common Stock, $.01 par
value per share, 600,000 shares authorized, 408,074
issued and outstanding (3)............................ 4 4
Additional paid-in capital............................. 28,703 50,393
Foreign currency translation adjustment................ (3,912) (3,912)
Retained earnings...................................... 69,151 69,151
--------- ---------
Total shareholders' equity........................... 95,464 117,304
--------- ---------
Total capitalization............................... $217,787 $217,787
========= =========
</TABLE>
- --------
(1) The Company's Combined Consolidated Balance Sheet as of March 29, 1997,
includes the consolidated balance sheet of Donnelly Hohe as of February 28,
1997. See "Management's Discussion and Analysis of Results of Operation and
Financial Condition--General."
(2) See Note 5 of Notes to Combined Consolidated Financial Statements.
(3) See Note 9 of Notes to Combined Consolidated Financial Statements.
(4) As of March 29, 1997, excludes 324,656, 408,995, and 36,250 shares of Class
A Common Stock reserved for issuance under the 1987 Stock Option Plan, the
1987 Employees' Stock Purchase Plan and the Director Stock Option Plan,
respectively, and 4,469,183 shares of Class A Common Stock reserved for
issuance upon conversion of Class B Common Stock. See Note 10 of Notes to
Combined Consolidated Financial Statements and "Description of Capital
Stock."
7
<PAGE>
PRICE RANGE OF COMMON STOCK
AND DIVIDENDS
The Company's Class A Common Stock is listed on the NYSE under the symbol
"DON." Prior to March 10, 1997, the Company's Class A Common Stock was listed
on the American Stock Exchange ("AMEX") under the symbol "DON." On May 13,
1997, the Class A Common Stock was held by approximately 900 shareholders of
record, and the Class B Common Stock was held by approximately 150
shareholders of record. The following table sets forth, for the quarters
indicated, the high and low sale prices as reported on the AMEX and the NYSE
of the Class A Common Stock, and the per share cash dividends declared in such
quarters, as adjusted retroactively to reflect the five for four stock split,
effective January 30, 1997.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW PER SHARE(1)
------ ------ ------------
<S> <C> <C> <C>
YEAR ENDED JULY 1, 1995
First quarter ............................... $14.00 $12.10 $.06
Second quarter............................... 14.10 10.60 .06
Third quarter................................ 14.40 12.10 .06
Fourth quarter............................... 14.10 11.90 .06
YEAR ENDED JUNE 29, 1996
First quarter ............................... $13.40 $11.60 $.08
Second quarter............................... 12.50 11.00 .08
Third quarter................................ 11.90 10.40 .08
Fourth quarter............................... 12.90 11.00 .08
YEAR ENDED JUNE 28, 1997
First quarter................................ $14.70 $12.70 $.08
Second quarter............................... 17.90 14.10 .08
Third quarter................................ 20.00 16.00 .10
Fourth quarter (through May 13, 1997)........ 16.13 14.38 .10
</TABLE>
- --------
(1) Per share dividends for Class A Common Stock and the Class B Common Stock
were the same for the periods indicated. For holders of Class B Common
Stock, includes dividends paid by Donnelly Export Corporation. See
"Description of Capital Stock."
Prior to the adjustment for the Company's five for four stock split, the
Company's per share dividend was $.10. The Company's Board of Directors
presently intends to continue to pay dividends at a rate of $.10 per share per
quarter after the five for four stock split (effectively a 25% increase in the
dividend per share). The payment and rate of future dividends are subject to
the discretion of the Board of Directors and depend upon the Company's
earnings, financial condition, capital requirements, restrictions in loan or
other debt agreements, and other factors. As limited by the terms of certain
of the Company's debt agreements, retained earnings available for dividends at
March 1, 1997 were $24.0 million. On May 13, 1997, the last reported sale
price of Class A Common Stock on the NYSE was $15.625 per share.
8
<PAGE>
SELECTED COMBINED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical selected combined consolidated financial data set forth
below, insofar as they relate to the five fiscal years ended June 29, 1996,
are derived from the audited combined consolidated financial statements of the
Company. The data for the nine month periods ended March 30, 1996, and March
29, 1997, have been derived from unaudited interim financial statements;
however, in the opinion of the Company, such unaudited interim statements
include all adjustments (consisting of normal recurring accruals) necessary to
fairly present the data for such periods. The results of operations for the
nine month period ended March 29, 1997, are not necessarily indicative of
results to be achieved for the full fiscal year. Such data are qualified by
reference to the Combined Consolidated Financial Statements included elsewhere
or incorporated by reference in this Prospectus and should be read in
conjunction with such financial statements and related notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition." The per share data has been adjusted for the five for four stock
split, effective January 30, 1997.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 29, MARCH 30, MARCH 29, MARCH 29,
1992(1) 1993(2) 1994(3) 1995(4) 1996(5) 1996(5)(6) 1996 1997(7) 1997(6)(7)
-------- -------- -------- -------- -------- ----------- --------- --------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $271,399 $300,927 $337,262 $383,340 $439,571 $664,376 $313,791 $483,118 $531,580
Cost of sales........... 210,647 232,017 263,630 300,772 357,830 549,046 257,923 391,878 434,016
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 60,752 68,910 73,632 82,568 81,741 115,330 55,868 91,240 97,564
Selling, general and
administrative expense. 32,775 40,563 37,965 45,067 38,123 57,841 30,475 47,324 52,267
Research and development
expense................ 14,175 15,889 21,362 22,733 27,728 32,235 19,661 24,971 26,107
Restructuring charges
(gain)................. 910 -- 1,184 (2,265) 2,399 3,708 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income........ 12,892 12,458 13,121 17,033 13,491 21,546 5,732 18,945 19,190
Interest expense........ 3,506 3,216 3,528 5,010 8,102 12,608 6,131 7,654 8,553
Royalty income.......... (1,238) (1,681) (1,370) (3,774) (5,239) (5,274) (4,266) (1,216) (1,217)
Interest income......... -- -- (153) (514) (1,017) (396) (1,073) (549) (287)
Other (income) expense,
net.................... (181) (13) 108 (512) (704) (1,185) (548) (1,345) (1,293)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before taxes on
income................. 10,805 10,936 11,008 16,823 12,349 15,793 5,488 14,401 13,434
Taxes on income......... 3,889 3,571 3,334 5,795 4,191 5,291 1,849 5,369 4,993
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before minority
interest and equity
earnings............... 6,916 7,365 7,674 11,028 8,158 10,502 3,639 9,032 8,441
Minority interest in net
(income) loss of
subsidiaries........... (26) (741) (825) (371) 186 (492) 186 (104) 239
Equity in earnings
(losses) of affiliated
companies.............. 3 633 (104) 352 110 (1,556) (482) (331) (83)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before
extraordinary gain and
cumulative effect of
change in accounting
principle.............. 6,893 7,257 6,745 11,009 8,454 8,454 3,343 8,597 8,597
Tax benefit from
utilization of loss
carry forward.......... 189 585 -- -- -- -- -- -- --
Cumulative effect of
adopting SFAS No. 109.. -- -- 513 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income.............. $ 7,082 $ 7,852 $ 7,258 $ 11,009 $ 8,454 $ 8,454 $ 3,343 $ 8,597 $ 8,597
======== ======== ======== ======== ======== ======== ======== ======== ========
Income per share of
common stock........... $ 0.80 $ 0.82 $ 0.75 $ 1.14 $ 0.86 $ 0.86 $ 0.34 $ 0.87 $ 0.87
Dividends per share of
common stock........... $ 0.19 $ 0.22 $ 0.26 $ 0.26 $ 0.32 $ 0.32 $ 0.24 $ 0.26 $ 0.26
Weighted average common
shares outstanding..... 8,837 9,608 9,646 9,680 9,754 9,754 9,743 9,822 9,822
BALANCE SHEET DATA:
Working capital......... $ 28,085 $ 33,832 $ 36,406 $ 40,502 $ 63,482 $ 68,026 $ 57,814 $ 43,991
Total assets............ 131,229 139,840 183,801 223,788 271,492 366,476 278,277 347,518
Long-term debt,
including current
maturities............. 24,882 33,765 53,485 66,802 101,916 151,985 105,865 122,323
Shareholders' equity.... 61,158 65,546 70,826 82,900 88,852 88,852 82,322 95,464
</TABLE>
Footnotes appear on the following page.
9
<PAGE>
- --------
(1) 1992 included costs of $0.9 million for a severance program and other
expenses associated with the formation of the Applied Films Corporation
joint venture.
(2) Selling, general and administrative expenses in 1993 included a $3.6
million charge relating to the settlement of patent litigation.
(3) 1994 included costs of $1.2 million for a severance program and other
expenses associated with the restructuring of Donnelly Mirrors Limited and
a charge of $1.1 million relating to the adoption of FASB Statement 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
(4) 1995 included the restructuring of non-automotive businesses resulting in
a $4.7 million pretax gain, and the restructuring of certain automotive
operations resulting in a charge of $2.4 million.
(5) Selling, general and administrative expenses in 1996 included a gain of
$2.3 million associated with a patent and license settlement. 1996 also
included restructuring charges 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.
(6) The pro forma income statement data for the year ended June 29, 1996 and
for the nine month period ended March 29, 1997 give effect to the
consolidation of Donnelly Hohe as if it had occurred at the beginning of
each period. The pro forma balance sheet data at June 29, 1996, gives
effect to the consolidation of Donnelly Hohe as if it occurred on that
date. The unaudited pro forma information presented is based on the
historical financial statements of the Company and Donnelly Hohe for the
periods indicated. The pro forma data do not purport to represent what the
Company's results of operations and financial position would actually have
been if such transactions had in fact occurred as of the dates indicated
or to project results for any future date or period.
(7) The Company's Combined Consolidated Balance Sheet as of March 29, 1997,
includes the consolidated balance sheet of Donnelly Hohe as of February
28, 1997. See "Management's Discussion and Analysis of Results of
Operation and Financial Condition--General."
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Prospectus, including the disclosures below, contains certain forward-
looking statements that involve substantial risks and uncertainties. When used
herein, the terms "believe," "anticipate," "intend," "goal," "expects," and
similar expressions may identify forward-looking statements. The Company's
actual results, performance or achievements may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those disclosed in
the "Risk Factors" section of this Prospectus, which prospective purchasers of
the Class A Common Stock offered hereby should consider carefully.
GENERAL
The following is a discussion of the financial condition and results of
operations of the Company for the nine months ended March 30, 1996 and March
29, 1997, and the years ended July 2, 1994, July 1, 1995, and June 29, 1996.
The following discussion should be read in conjunction with the Combined
Consolidated Financial Statements of the Company and the related notes thereto
and other financial information included elsewhere and incorporated by
reference in this Prospectus.
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 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
nine months ended March 29, 1997, consolidate Donnelly Hohe's financial
statements for the six month 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. See
"Business--Expansion of European Operations."
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.
11
<PAGE>
NINE MONTHS ENDED MARCH 29, 1997 COMPARED TO NINE MONTHS ENDED MARCH 30, 1996.
Net sales were $483.1 million for the first nine months of 1997 compared to
$313.8 million for the same period in 1996. The consolidation of Donnelly Hohe
contributed approximately $111.6 million of net sales for the first nine
months of 1997. Donnelly Hohe's financial statements were consolidated with
those of the Company beginning at the beginning of the second quarter of 1997.
Excluding Donnelly Hohe, consolidated net sales for the first nine months of
1997 were $371.5 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 increased
approximately 3%. 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 first nine months of 1997 was 18.9% compared to
17.8% for the first nine months of 1996.
The Company's North American gross profit margins were stronger for the nine
month period due to higher volumes and significantly lower start-up expenses
compared to 1996. In the first nine months of 1996, the Company's North
American gross profit margins were 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
technical difficulties on a new business program.
The Company's European gross profit margins were lower than the previous
year, as a percent of net sales, for the nine month period ended March 29,
1997, due to the consolidation of Donnelly Hohe and lower gross 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. 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 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 were 5.2% of net sales in the first nine
months of 1997 compared to 6.3% for the first nine months of 1996. Excluding
the consolidation of Donnelly Hohe, research and development expenses as a
percentage of net sales for the first nine months of 1997 were comparable to
those in the same period in 1996. Management expects that these expenses will
be approximately 5.0% of net sales in future periods.
Interest expense was $7.7 million in the first nine months of 1997 compared
to $6.1 million for the first nine months of 1996. The higher interest expense
was due to the consolidation of Donnelly Hohe. Interest expense incurred for
the first nine months of 1997, excluding the consolidation of Donnelly Hohe,
was approximately at the same level as the first nine months of 1996. Interest
expense was favorably impacted in the first nine months of 1997 due to the
asset securitization of accounts receivable. The discount expense associated
with this transaction is included in selling, general and administrative
expenses. See "--Liquidity and Capital Resources."
12
<PAGE>
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 $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. The Company now owns 25.6% of Vision Group.
Minority interest in net (income) loss of subsidiaries was ($0.1) million in
the first nine months of 1997 due to the consolidation of Donnelly Hohe,
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 net (income) 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 ending
March 29, 1997, compared to 33.7% for the nine month period ending March 30,
1996. The increase in the effective tax rate is due to increased pre-tax
income of the Company and lower tax credits as a percentage of pre-tax income.
Net income for the nine month period was $8.6 million in 1997 compared to
$3.3 million in 1996. 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 for first nine
months of 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.
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's operations in North
America increased by approximately 12% 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 net sales in 1995) and
price pressures from the Company's major automotive customers. Price
decreases, however, did not have a material impact on the Company's increase
in net sales for 1996. The Company's net sales remained strong due to higher
sales of modular window systems (particularly for the new Chrysler
Caravan/Voyager minivans), lighting and trim products, complete exterior
mirror products and door handles. Net sales for the Company's European
operations increased by over 40% from the previous year due to the
introduction of modular window programs in Langres, France for the Chrysler
Caravan/Voyager minivan and Jeep Cherokee and stronger sales for the Company's
electrochromic mirror product line. The Company's Irish operations experienced
significant pricing pressures during the year from competition in Eastern
Europe and Asia slightly offsetting the higher sales volumes. Net sales
remained relatively strong throughout the year, but were exceptionally strong
during the fourth quarter with an increase of 24% over the fourth quarter of
1995.
Gross profit margin decreased to 18.6% of net sales in 1996, from 21.5% of
net sales in 1995. The gross profit margins were adversely impacted in the
first half of the year by the start-up of various modular window programs,
particularly for the Chrysler Caravan/Voyager minivan, and the implementation
of a new paint line in the Company's Newaygo facility. North American 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 gross margins
by $2.2 million. Although this problem was largely due to factors not directly
under the Company's control, the issue was resolved in a timely and
13
<PAGE>
cooperative way that provided an uninterrupted source of supply to the
customer. Finally, the Company's European operations experienced lower gross
profit margins in 1996 compared to 1995 due to pricing pressures and operating
expenses at the Company's Irish operations.
Selling, general and administrative expenses were 8.7% of net sales in 1996,
down from 11.8% of net sales in 1995. These costs were significantly reduced
primarily as a result of the restructuring plan implemented in 1995 and
continued commitment to achieve higher sales levels without a proportionate
increase in these expenses. In addition, a patent settlement recognized in
1996 resulted in a reduction of these expenses by 1.3% of net sales. See
"Business--Litigation."
Research and development expenses for 1996 were 6.3% of net sales, compared
to 5.9% of net sales in 1995. The increase in research and development costs
was 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.
A restructuring charge of $2.4 million was recorded in the fourth quarter of
1996 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 during 1995 and the inability to attract significant
new business for the plant. These costs included accruals for severance and
related employee support programs and write-down of certain assets removed
from service. The majority of these liabilities were paid or settled during
the first six months of 1997.
Interest expense increased to $8.1 million in 1996, from $5.0 million in
1995. The increase over 1995 resulted from higher borrowing levels to support
the Company's investment in and advances to Donnelly Hohe, which was then an
equity affiliate of the Company, and to support the Company's 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 was 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.
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. Royalty payments associated with the sale of the
Appliance Business in 1995 concluded in the fourth quarter of 1996.
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. The combined impact on net income from the Company's non-
automotive joint ventures was a loss of $1.5 million in 1996, compared to
income of $0.1 million in 1995. AFC's results were adversely affected by a
downturn in the market for coated glass used in the production of liquid
crystal displays. The Company is currently exploring opportunities to exit
this business. Vision Group continued to experience start-up losses during
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 restructuring of certain non-automotive businesses.
Positively impacting the Company's North American operations were higher sales
volumes, higher royalty income, lower selling, general and administrative
costs as a percentage of net sales and a patent and license settlement with a
competitor. 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 which resulted in a reduction of net
earnings by $1.2 million, higher research and development costs as a percent
of net sales and restructuring charges taken in the fourth quarter. The
Company's European
14
<PAGE>
operations experienced lower net income at the Company's subsidiaries in
Ireland in addition to start-up losses at Langres, France. The Company's net
income was also lower in 1996 due to the recognition of a $1.5 million loss
for non-automotive affiliated companies.
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, Ltd. is itself a
joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The
joint venture is expected to begin manufacturing encapsulated and framed glass
products by the end of 1997.
COMPARISON OF 1995 TO 1994
Donnelly's net sales were $383.3 million in 1995, an increase of 14% over
the $337.3 million of net sales in 1994. The Company's North American net
sales increased by approximately 10% while automotive production increased 5%
in 1995 over 1994 production levels. New business in exterior mirrors, door
handles, interior systems and modular systems, along with the strong
automotive production levels, all contributed to the stronger sales level. The
Company continues to experience pricing pressures from its automotive
customers. Price decreases, however, were not material to the Company's
increase in net sales for 1995. The Company's European net sales were higher
due to twelve months of net sales included in 1995 for Donnelly Vision Systems
Europe ("DVSE"), compared to two months in 1994. The Company acquired DVSE in
April 1994.
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, general and administrative expenses were 11.8% of net sales in
1995, an increase from 11.3% of net sales 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 5.9% of net sales in 1995 compared to
6.3% of net sales in 1994.
In the second quarter of 1995, the Company implemented a restructuring plan
to focus on its automotive business. The restructuring plan included the sale
of the Company's appliance business, the sale of the heavy truck mirror
business and the liquidation of the Company's investment in OSD Envizion, a
joint venture engaged in the manufacture of welding helmet shields which
resulted in a pretax gain of $4.7 million. The Company received total proceeds
of $14.2 million associated with the restructuring of these businesses, net of
$6.5 million net book value of assets disposed and $3.0 million of
restructuring costs consisting of a severance program and other expenses
associated with the restructuring plan. The severance program included twenty-
five personnel, primarily middle and senior managers of the Company. These
non-automotive businesses represented an insignificant portion of the
Company's operations.
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. D&A represented 5% and 8%, respectively, of
the Company's net sales and net income in 1995.
Interest expense increased to $5.0 million in 1995, from $3.5 million in
1994, due to higher interest rates and to increased borrowing to support
increased capital spending.
Royalty income was $3.8 million in 1995 compared to $1.4 million in 1994.
The increase resulted primarily from royalty income associated with the sale
of the Appliance Business in 1995. 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 AFC and a
slight profit from Donnelly Hohe for the two month period ending May 31, 1995,
more than offset start-up costs at Vision Group.
15
<PAGE>
The Company had net income of $11.0 million in 1995, compared to $7.3
million in 1994. The increase in net income was the result of a restructuring
of non-automotive businesses, higher sales volumes, lower research and
development costs as a percentage of net 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital
needs, complete planned maintenance and expansion expenditures, and meet
required debt payments. The Company believes that the long-term liquidity and
capital resource needs of the Company will continue to be provided principally
by funds from operating activities supplemented, to the extent required, by
borrowing under the Company's existing and future credit facilities. The
Company currently utilizes two revolving credit agreements: an $80.0 million
United States credit facility, and a 75.0 million German Mark (approximately
$45.0 million) revolving credit agreements at the Company's Donnelly Hohe
subsidiary. Having acquired a controlling interest in Donnelly Hohe, the
Company now expects to guarantee and increase the amount of the Donnelly Hohe
revolving credit agreement by 20.0 million German Marks. These actions are
being implemented to increase availability and improve terms of the revolving
credit agreements. The Company believes the available borrowing capacity under
the revolving credit agreements, combined with funds from operations, will
provide the Company with sufficient flexibility to fund European restructuring
costs, planned capital expenditures and increased working capital requirements
for the foreseeable future. The Company considers, from time to time, new
joint ventures, alliances and acquisitions, the implementation of which could
impact liquidity and capital resource needs.
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 $50.0 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 of receivables were sold at March 29, 1997, and the proceeds 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
sale 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 have been included in selling, general and administrative expense in
the Company's Condensed Combined Consolidated Statement of Income for the nine
month 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.
Working capital was $44.0 million at March 29, 1997, compared to $63.5
million at June 29, 1996, resulting in current ratios of 1.4 and 2.0,
respectively. 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 by the
addition of Donnelly Hohe's working capital. The Company's working capital was
$40.5 million and its current ratio was 1.7 at July 1, 1995. The increase in
working capital at June 29, 1996, compared to July 1, 1995, was due to an
increase in accounts receivable resulting from higher sales and the timing of
customer payments, in addition to higher customer tooling and inventories to
support new business programs reaching full production in the first quarter of
1997. The Company's accounts receivable balance as a percent to net sales
increased from 13.3% at July 1, 1995, to 16.8% at June 29, 1996. With respect
to the timing of customer payments, the Company's North American customers pay
the Company on pre-established payment dates ranging from the 25th to the 30th
of each month. Therefore, a number of customer payments were not received by
the June 29, 1996 balance sheet date, accounting for the increase in accounts
receivable compared to July 1, 1995.
The Company's $80.0 million United States revolving credit agreement had
borrowings against it of $0.7 million at March 29, 1997, compared to $35.4
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
16
<PAGE>
against the Company's revolving credit agreement. Donnelly Hohe's 75.0 million
German Mark (approximately $45.0 million) revolving credit agreements had
borrowings against them of approximately $33 million as of February 28, 1997,
which was the end of Donnelly Hohe's third fiscal quarter.
Capital expenditures for the first nine months of 1997 and 1996 were $20.2
million and $18.8 million, respectively. 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 during the last two years to the Company's Langres, France, and
Newaygo, Michigan facilities. These additions were built 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 include costs
for equipment to support new business for complete exterior mirrors, door
handles and modular window encapsulation, bonding and hardware programs.
Excluding Donnelly Hohe, capital expenditures in 1997 are expected to be
somewhat higher than capital expenditures in 1996. An additional $4.0 to $6.0
million of capital expenditures by Donnelly Hohe will be included in the
consolidated financial statements of the Company due to the consolidation of
Donnelly Hohe. The Company does not have any material commitments for capital
expenditures other than those arising out of the normal course of business,
which were approximately $9.0 million at June 29, 1996. The Company expects
that capital 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.
Except for Mexico, the value of the Company's consolidated assets and
liabilities located outside the United States and income and expenses reported
by the Company's foreign operations may be affected by translation values of
various functional currencies. Translation gains and losses adjustments are
reported as a separate component of shareholders' equity. For the Company's
subsidiary in Mexico, whose functional currency is the United States Dollar,
transaction and translation gains or losses are reflected in net income for
all accounts other than intercompany balances of a long-term investment
nature, for which the translation gains or losses are reported as a separate
component of shareholders' equity. Foreign currency transaction gains and
losses included in other income are not material for any period reported.
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 indicate 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, securitizations, and servicing of receivables and other
financial assets, accrued borrowing and collateral transactions, and the
extinguishments of liabilities.
17
<PAGE>
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 the standards previously
found in APB Opinion No. 15, which has been superseded. It replaces the
presentation of primary 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.
18
<PAGE>
BUSINESS
GENERAL
Donnelly Corporation produces a complete line of automotive rearview mirror
systems and believes it is the world's largest supplier of such systems. In
1996, the Company sold approximately 17.5 million interior rearview mirrors
worldwide, more than any other company in the world. The Company is also a
leading supplier of modular window systems and an emerging supplier of
innovative automotive lighting and trim products. The Company serves
automotive customers throughout the world from manufacturing locations in
North America and Europe and through joint ventures in Asia. The Company's
primary customers in North America include Chrysler, Ford and General Motors,
and the North American operations of Honda, Toyota, Izuzu and Mazda. The
Company's primary customers in Europe include BMW, Volkswagen, Volvo, SEAT,
Renault and Audi. From 1992 through 1996, the Company's net sales grew from
$271.4 million to $439.6 million, representing a compound annual growth rate
of approximately 13%. The Company's net sales for 1996 were $664.4 million on
a pro forma basis to reflect the consolidation of Donnelly Hohe.
The Company's products include rearview mirror systems, modular windows,
interior lighting and trim components. The Company produces a full line of
automotive rearview mirror systems, including interior prismatic base mirrors,
mirrors with added features such as integrated compasses and lights, and
exterior rearview mirrors. The Company also produces advanced, technology
interior and exterior electrochromic mirrors that automatically dim when
headlights approach from the rear. The Company believes that electrochromic
mirrors represent a significant growth opportunity, and that the settlement of
patent litigation concerning this technology will allow the Company to compete
more vigorously in the market for electrochromic mirrors.
The Company pioneered and is a leading supplier of modular window systems,
which are produced by molding glass, weather stripping and other materials
into a single unit designed for ease of assembly by automakers. The Company
uses its expertise in glass fabrication, plastics and optics technology to
develop, manufacture and sell advanced interior lighting and trim products.
The Company also seeks to develop synergistic products and businesses,
including coated glass products for computer applications, advanced plastic
diffractive optical systems and, through its 25.6% ownership of Vision Group,
microchip-based electronic vision systems.
The Company expects to invest approximately 5.0% of its net sales each year
in research and development. The Company's core technologies include glass
fabrication and encapsulation, electrochromics, optics and lighting,
electronic applications, painting and precision coatings, precision plastic
injection molding, and the design, assembly and system integration of complex
components. The Company continually seeks to use its technological
capabilities to create innovative value-added features for its existing
products, such as automatic electrochromic dimming and the integration of
lights and compasses into automotive mirrors. Since January 1, 1996, the
Company has been awarded over 20 new patents, including patents relating to
electrochromic mirrors, flush surface windows, automotive vision systems and
advanced diffractive optics. The Company believes that its manufacturing know-
how, design of its own manufacturing equipment and development of
manufacturing processes provide a strong foundation for its success.
The Company believes that its growth has resulted from its commitment to
research and development, close working relationships with customers, a strong
international presence, a skilled and dedicated workforce and a participative
management approach. As a result of its capabilities and business strategy,
the Company believes it is well-positioned in its existing markets to compete
effectively and to pursue additional growth and product opportunities.
EXPANSION OF EUROPEAN OPERATIONS
The Company has manufactured and marketed products in Europe since
establishing its own manufacturing facility in Ireland in 1968. During the
past two years, the Company has significantly expanded its presence in Europe
by opening a modular window manufacturing facility in Langres, France in 1996,
and through the
19
<PAGE>
acquisition of a controlling interest in Donnelly Hohe, headquartered in
Collenberg, Germany. The acquisition of Donnelly Hohe provides the Company with
manufacturing facilities in Germany and Spain and positions the Company as a
leading European producer of interior and exterior automotive rearview mirrors,
automotive tooling and electronics components related to mirror systems. The
Company believes that the expansion of its European operations will play a
crucial role in maintaining the Company's position as a global leader in the
market for automotive rearview mirrors and will also offer significant
opportunities for the Company to market its modular windows, interior lighting,
trim components and other products in Europe and elsewhere.
Although the Company made its first substantial investment in Donnelly Hohe
in April 1995, the financial results of Donnelly Hohe were not consolidated
with the Company's financial results until the Company acquired a controlling
interest in October 1996. The European operations acquired as a result of the
Donnelly Hohe acquisition represented approximately 33% of the Company's assets
as of March 29, 1997, and have contributed approximately 30% of the Company's
net sales for the nine month period ended March 29, 1997, pro forma for the
consolidation of Donnelly Hohe. See "Selected Combined Consolidated Financial
Data."
The Company's strategic decision to expand its European operations provides
the Company with a number of benefits, including:
. An expanded European customer base, including major European automakers
such as BMW, Volkswagen, Volvo, SEAT, Renault and Audi.
. A significant manufacturing presence in continental Europe, which
includes five manufacturing facilities in Germany, France and Spain.
. Increased market share and production of exterior rearview mirrors. The
Company is the leading supplier of exterior rearview mirrors in Europe.
. Numerous production, purchasing and technological synergies, serving to
improve the Company's position in the global marketplace.
. Increased penetration of the Company's modular windows, electrochromic
mirrors and interior lighting and trim products in the European market
and exterior rearview mirrors in the worldwide market.
When the Company made the strategic decision to acquire Donnelly Hohe in
1995, the Company anticipated that significant changes in the management,
administration and manufacturing systems of Donnelly Hohe would be necessary to
improve the competitiveness of the European operations and achieve the
Company's objectives. The Company first focused on improving the management of
its European operations. After acquiring control of Donnelly Hohe in October
1996, the Company announced its intention to restructure its European
operations in Germany, France, Ireland and Spain. The restructuring is designed
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 implementing this
restructuring plan. Management believes that the expense of the restructuring
(primarily severance payments resulting from a reduction in the number of non-
production employees) will reduce net income by approximately $3.5 to $4.5
million in the fourth quarter of 1997.
The Company believes that the expansion of its European operations will play
a crucial role in maintaining the Company's position as a global leader in the
market for automotive rearview mirrors and will also offer significant
opportunities for the Company to market its modular windows, interior lighting,
trim components and other products in Europe and elsewhere.
20
<PAGE>
INDUSTRY OVERVIEW
A number of trends in the global automotive market have had and will
continue to have a fundamental impact on the Company's future profitability
and growth prospects, including: the purchase of integrated modules and
systems, the competitive pricing dynamics of the automotive industry, the
expansion of automotive supplier responsibilities and the globalization of the
automotive supplier base. These trends have contributed to the consolidation
of automotive suppliers, which the Company expects will continue. The Company
has carefully assessed these automotive trends in formulating its strategy for
future growth and believes it is well-positioned to respond to these current
and anticipated demands.
Purchase of Integrated Modules and Systems. Automakers are relying
increasingly on suppliers who can provide entire modular components and
systems rather than a number of separate components. Automakers can reduce
their own internal engineering efforts and the number of suppliers by
purchasing systems rather than components. Management believes the engineering
and technological challenges facing systems suppliers will continue to grow as
these systems become more complex. To strengthen the Company's position as a
major supplier of automotive mirror, window and interior lighting and trim
products, the Company has pioneered integrated modules such as modular windows
and is actively implementing its systems philosophy. This continuing shift
will create new opportunities for the Company to utilize its engineering
capabilities and low-cost, quality manufacturing.
Competitive Pricing Dynamics. In an effort to reduce costs and to ensure the
affordability and competitiveness of their products, many automakers are
sourcing automotive components by establishing a target price for the vehicle
and systematically dividing this price into system and component target
prices. In addition, automakers are often requiring annual price reductions
for the vehicle's systems and components. As a result, these competitive
pricing dynamics have generally required automotive suppliers to focus on
continually reducing product costs while improving quality standards. The
Company is using its technology and manufacturing capabilities and is
implementing strategic production and management systems to remain competitive
in the automotive market and to meet the target price objectives of its
customers.
Expansion of Automotive Supplier Responsibilities (Outsourcing). Since the
1980s, Ford, Chrysler and General Motors have been actively reducing their
respective supplier bases to include those suppliers who accept significant
responsibility for product management and meet increasingly strict standards
for product quality, on time delivery and manufacturing costs. Ford, Chrysler
and General Motors are increasing their reliance on such outside suppliers and
reducing their own design, tooling and production of component parts.
Automotive suppliers are increasingly expected to participate in and control
all aspects of the production of system components, including design,
development, component sourcing, manufacturing, quality assurance, testing and
delivery to the customer's assembly plant. The key success factors for
suppliers to automakers have changed from pure cost minimization to total
program management that encompasses state-of-the-art design, manufacture and
delivery of high quality products at competitive prices. The Company believes
that many suppliers do not have the capabilities to meet the increasingly
rigorous automotive customer requirements and that the automotive supplier
market will be divided among a smaller group of key suppliers. Management
believes that early involvement in the design and engineering of new
components affords the Company a competitive advantage in securing new
business and provides its customers with significant cost reduction
opportunities.
Globalization of the Automotive Supplier Base. The Company believes that
automakers will increasingly seek suppliers who can fulfill the automakers'
requirements worldwide and that particular vehicle models will increasingly
contain components sourced on a worldwide basis. The Company believes that the
trend towards non-U.S. automakers acquiring and building manufacturing
facilities in the U.S. also contributes to the globalization of the automotive
market and the automotive supplier base. The trend towards globalization is
further reflected in the fact that several automakers have announced certain
models designed for the world automotive market and have encouraged their
existing suppliers to establish foreign production support for these "world
car" programs. The Company believes the trend toward global sourcing will
benefit the Company due to the Company's established international presence,
its global design and manufacturing expertise, and its close relationships
with its global customers.
21
<PAGE>
BUSINESS STRATEGY
The Company intends to capitalize on trends in the automotive industry
through the development of its technology and expansion of its product line
and customer base. The key elements of the Company's strategy include:
Grow Through Modular Systems and Value-Added Products. The Company seeks to
achieve sales and earnings growth within its existing product markets through
effective use of its design, manufacturing and marketing capabilities. In
1995, the Company reorganized its marketing organization to better serve its
automotive customers. The Company's marketing efforts are organized into
strategic customer business units that work to address the needs of each
customer and provide innovative solutions early in the customer's design and
development process. The Company seeks to become the supplier of choice for
automotive rearview mirrors, modular windows and interior lighting and trim
products. The Company seeks to provide integrated solutions for customers
using the Company's capability to design, manufacture and deliver a wide range
of automotive products, including interior and exterior rearview mirrors,
modular windows and interior lighting and trim. For example, the Company
supplies interior and exterior rearview mirrors, door handles, modular window
systems for all windows (except the windshield), and various interior trim
lighting products for the Ford Expedition model. The Company also uses its
technology and product development capabilities to market innovative value-
added features, such as electrochromic dimming technology, lights and
compasses integrated into mirrors, and interior lighting using optics
technology to increase light while reducing glare. The Company is targeting
automotive lighting and interior trim as a significant growth area for the
Company. As a result of these strategies, the Company's dollar content per
vehicle produced in North America has increased from $6.24 in 1986 to $25.05
in 1996. The Company believes its design and manufacturing capabilities,
strong customer relationships and international presence will enable the
Company to achieve sales and earnings growth within its product markets.
Improve Productivity. The Company has implemented strategic business systems
as part of an integrated philosophy designed to develop, design, manufacture
and deliver the Company's products to satisfy the engineering, cost, quality
and delivery standards of the Company's customers. The Company is committed to
improving productivity by designing products for ease of manufacture. The
Company also works closely with its customers to realize efficiencies in the
design, development and manufacturing process. As a result of the ongoing
implementation of quality, production and program management systems, the
Company's net sales per employee have increased at a compound annual growth
rate of approximately 9% from 1992 through 1996. The Company has received
numerous awards in recent years, including the Ford Q1 Preferred Quality
Award, the Ford Full Service Supplier Award, the Chrysler Gold Pentastar,
General Motors Supplier of the Year, Toyota Superior VA/VE Performance Award,
the Toyota Delivery Award and the Nissan Quality Master Award. See "Business
Systems." The Company believes that it is well-positioned to respond to and
compete within the competitive pricing dynamics of the automotive supply
industry.
Expand Technology and Product Development Capabilities. The Company places a
major emphasis on research and development to help meet the needs of customers
and expand its product lines. The Company's technical capabilities have
resulted in the development of new and improved products, including techniques
for mass production of day/night prismatic mirror glass in the 1940's, and the
introduction of chrome-coated exterior mirror glass in 1958, modular windows
in 1974, convex outside mirror glass in 1975, lighted rearview mirrors in
1985, heavy truck solid state electrochromic mirrors in 1991, flush mounted
hinged window assemblies in 1996 and advanced diffractive optics in 1997. The
Company expects to spend approximately 5.0% of its net sales each year on
research and development. Over 200 of the Company's employees (including 10
PhDs) are involved in research and development, including product specific
design and development. The Company's polyvinyl chloride ("PVC") research and
computer-aided plastic molding simulations have contributed significantly to
its position as a leading supplier of modular windows. The Company strives to
be the technological leader in its markets by continually enhancing the
Company's core technologies. The Company believes that its technological and
product development capabilities will enable the Company to provide
sophisticated integrated modules and systems and to perform the increased
responsibilities automotive suppliers are expected to manage. See "--Product
Development and Technology."
22
<PAGE>
Expand Global Presence. The Company has developed a significant global
presence with operations in North America and Europe and through joint
ventures in Asia. The Company has been manufacturing in Europe since 1968 and
has operated a sales and marketing office in Japan since 1983. At present,
approximately 2,200 of the Company's approximately 4,700 employees live and
work outside of the United States. The Company intends to continue to expand
its global presence to meet the needs of its customers. The Company's recent
expansion of its European operations provides the Company with a major
increase in its European sales volumes and customer base and provides the
Company with a base of operations from which to expand in the future. The
Company's international operations also create important synergies and access
to new markets and technologies. To increase its manufacturing and sales
presence in Asia, in the fourth quarter of 1996 the Company formed the
Shanghai Fu Hua joint venture in mainland China to manufacture modular
windows. In the first quarter of 1997 the Company formed Shunde Donnelly Zhen
Hua Automotive Systems Co., Ltd., a joint venture in mainland China, to
manufacture interior and exterior mirrors. The Company believes that it is
well-positioned to adapt to and benefit from the globalization of the
automotive supplier base.
Create Additional Product and Market Opportunities. The Company seeks to use
its technology and manufacturing capabilities both directly and through joint
ventures to develop product improvements and new products for both automotive
and non-automotive markets. The Company effectively implemented this strategy
with its investment in Vision Group, a developer of microchip-based electronic
vision systems. The Company presently owns 25.6% of Vision Group's outstanding
common stock, which is traded on the London Stock Exchange. The Company is
also seeking additional opportunities in connection with its Donnelly Optics
subsidiary which is dedicated to commercializing low cost, high quality,
advanced diffractive optics for both automotive and nonautomotive
applications. Potential applications of diffractive optics technology include
automotive lighting and fiber optic networks. In the first quarter of 1997,
the Company created a joint venture named Donnelly Electronics LLC that will
specialize in the design and manufacture of electronic components and sub-
assemblies. In addition, the Company continues to pursue and evaluate new
opportunities to create additional products and serve new markets.
PRODUCTS AND MARKETS
Automotive Rearview Mirror Systems
The Company began producing prismatic day/night mirror glass in 1939, and
today manufactures a wide range of interior and exterior rearview mirror
products and believes it is the world's largest producer of automotive
rearview mirror systems.
Interior Rearview Mirrors. The Company has a predominant share of the U.S.
market for interior rearview prismatic mirrors and in 1996 sold approximately
17.5 million units worldwide, more than any other company in the world. The
interior rearview mirror product line ranges from the basic day/night flip
mirror to rear-vision systems that incorporate a variety of sophisticated
electronic features into complex modular interior rearview mirror assemblies.
The Company continues to design and market innovative value-added features
integrated into the rearview mirror such as lights and electronic compasses.
The Company manufactures and markets automotive interior rearview mirrors
using patented electrochromic technology that automatically dims the mirror
when headlights approach from the rear. Electrochromic rearview mirrors are a
value-added substitute for traditional prismatic base mirrors and are sold for
a higher dollar price per unit than prismatic base mirrors. The Company
believes that electrochromic rearview mirrors currently represent
approximately 10% of all interior rearview mirrors in the North American
market for the 1996 model year. In 1996, electrochromic mirrors were offered
on approximately 51 new car models in North America, compared to only
approximately 19 models in 1991. The Company believes that electrochromic
mirrors will represent an increasing share of the rearview mirror market, both
in terms of number of units and dollar volume, and represent a significant
growth area for the Company.
The Company is in the process of developing electronic vision systems for
vehicles that make use of advanced sensors and video microchip technology to
control dimmable interior and exterior mirror systems. Although not yet
commercialized, the development of this technology is part of the Company's
strategy to be a technology leader in the market for automotive rearview
vision systems.
23
<PAGE>
Exterior Rearview Mirrors. The Company has used its expertise and customer
relationships in the interior mirror market to develop its product line and
increase its share of the market for complete exterior mirror systems. The
recent expansion of the Company's European operations has substantially
increased the Company's production capacity and sales of exterior rearview
mirrors, particularly in the European market. The Company believes that its
increased presence in the European market will assist the Company in
increasing its sales of exterior rearview mirrors in North America and other
markets. The Company supplies exterior rearview mirror assemblies primarily to
Honda, Ford and Mazda in the United States and to major European automakers
including BMW, Volkswagen, SEAT, Renault and Audi in Europe. Exterior rearview
mirrors are combined with automatic or manual adjusting mechanisms, wire
harnesses and other hardware into an injection-molded, color-matched housing
and are more complex than base interior rearview mirrors. The per vehicle
sales price of exterior mirrors substantially exceeds that of interior
rearview mirrors due to the greater complexity of exterior rearview mirrors
and the fact that most new vehicles are equipped with two exterior rearview
mirrors.
The Company manufactures and markets dimmable electrochromic exterior
rearview mirrors. The Company believes that electrochromic rearview mirrors
currently represent only 3% of all exterior rearview mirrors in the North
American market for the 1996 model year. The Company believes that
electrochromic exterior rearview mirrors will represent an increasing share of
the rearview mirror market, both in terms of number of units and dollar
volume, and that the electrochromic mirror market presents a significant
growth opportunity for the Company. See "--Interior Rearview Mirrors."
In 1996, the Company introduced its patented Illuminator(TM) ground
illumination mirror, the world's first commercial automotive outside mirror
that includes remote-control security lighting. The Illuminator(TM) can also
be equipped with electrochromic dimming and exterior turn indicators. The
Illuminator(TM) was recognized as one of the "1996 100 Best of What's New
Products" by Popular Science magazine. The Illuminator(TM) is initially being
offered as an option on the Lincoln Mark VIII. The Company is aggressively
marketing the Illuminator(TM) to its customers.
Modular Windows
The Company pioneered and today is a leading supplier of modular windows.
Modular windows, which have continued to increase in popularity since their
introduction, are produced by molding glass, hardware, weather stripping and
other components into a single unit assembly and can be used for all
automotive windows and sunroofs. The Company believes its modular windows
offer improved quality and aerodynamics, greater design flexibility and lower
production costs for automakers than conventional automotive windows. A recent
technological innovation by the Company is 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 modular window assemblies are used for rear and liftgate
windows, quarter windows, aperture windows, fixed vent windows, roll-up
windows, sun roofs, and rear windows. The Company produces modular windows for
Chrysler, Ford, General Motors, Honda, Isuzu and Toyota. The Company's modular
windows are used on many popular vehicles such as the Chrysler Caravan/Voyager
minivan, the Jeep Grand Cherokee, the Ford Expedition, and the Ford
Taurus/Sable. Modular window technology can also be used for windshields,
although the Company does not currently produce modular windshields.
The Company believes that its materials technology and manufacturing
capabilities provide a significant competitive advantage in the market for
modular windows. 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 advantages.
The Company believes that the increasing use of modular windows reflects
trends in the automotive industry towards increased levels of outsourcing,
demand for integrated modules and systems and reliance on suppliers for design
and manufacturing. The Company expects continued growth in the global modular
window market, as evidenced by the number of modular windows that automakers
have specified for future models.
24
<PAGE>
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 believes its automotive lighting systems have been well-received by
the marketplace largely because of the Company's expertise in developing
precision optical lenses. The Company's extensive capabilities in advanced
optics technology, precision plastic injection molding, glare management and
automotive electronics provide a competitive advantage for the Company's
automotive interior lighting and overhead trim products. These skills enable
the Company to produce interior lighting that is highly focused and directed
within the vehicle which significantly reduces unwanted spill-over glare.
The Company believes that automakers will increasingly seek 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. The Company's customers for those
products will integrate them into larger, complete interior systems that will
then be assembled into the automaker's final products. The Company currently
supplies these products for Chrysler, Ford, General Motors, Honda, Mercedes
Benz, Nissan and Toyota.
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. The Company is now producing a wide variety of exterior door
handles for Ford, Honda and Mazda.
Non-Automotive Businesses
The Company is committed to its core automotive businesses. However, the
Company has developed a number of significant non-automotive businesses and
relationships over the years, which arose 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 business.
The Company's Information Products division is the Company's principal non-
automotive business and develops, manufactures and supplies various
electrically conductive, transparent, thin-film and coated glass products.
These 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. The
Company is involved in a legal dispute concerning the Company's Information
Products division. See "--Litigation."
In January 1997 the Company formed Donnelly Optics, located in Tucson,
Arizona, to commercialize low cost, high quality, advanced diffractive optics
for both automotive and non-automotive applications. The Company has been
issued a patent and believes this new optics development significantly
improves lighting and imaging systems through the use of diffractive optics
which involves the precise bending and directing of light rays. The Company
believes that potential applications for its diffractive optics technology
include automotive lighting, fiber optic networks, and cameras.
Although not yet commercialized, the Company has announced that it has
successfully completed Phase I of an electrochromic window development program
supported by grant funding from the United States Department of Energy.
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.
Joint Ventures and Affiliates
Vision Group. The Company is working with Vision Group to produce electronic
vision systems for the world automotive industry using an innovative video
microchip developed by Vision Group. The Company and Vision Group, which is
located in Edinburgh, Scotland, have been collaborating to produce smart chips
that can
25
<PAGE>
perform a variety of functions in a vehicle including control of advanced
mirror systems, video displays, lighting control and security devices. In
March 1995, Vision Group completed an initial public offering of its common
stock, which is listed on the London Stock Exchange. The Company owns 25.6% of
the outstanding common stock of Vision Group.
Automotive Joint Ventures in China. The Company is actively pursuing
opportunities to expand its manufacturing presence and market penetration of
modular windows and rearview mirrors in Asia, particularly in China. The
Company formed Shunde Donnelly Zhen Hua Automotive Systems Co., Ltd. ("Zhen
Hua"), a joint venture with Shunde Zhen Hua Automobile Parts Co., Ltd, in the
first quarter of 1997. The Company has a 30% interest in the Zhen Hua joint
venture and has an option to purchase an additional 30% interest. The Zhen Hua
joint venture manufactures interior and exterior mirrors for automakers
throughout southern China, including the Chinese operations of Volkswagen,
Isuzu, and Chrysler. Zhen Hua operates out of three owned buildings in Shunde,
China, and approximately 200 Shunde Zhen Hua employees currently are employed
at these facilities.
In the fourth quarter of 1996, the Company formed a 50-50 joint venture
named Shanghai Donnelly Fu Hua Window Systems Company Ltd. ("Fu Hua") to
produce framed glass products for the Asian automotive industry. Shanghai Fu
Hua Glass Company is the Company's joint venture partner and is itself a joint
venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The joint
venture is expected to begin manufacturing modular windows by the end of 1997.
Donnelly Electronics. In the first quarter of 1997, the Company created a
new affiliate, Donnelly Electronics, LLC that will specialize in the design
and manufacture of automotive electronic components and sub-assemblies. The
new company is a joint venture between the Company and an individual with
expertise in automotive technology. The Company owns 19% of Donnelly
Electronics with the option to acquire up to 27% of the company. Based in
Flint, Michigan, Donnelly Electronics will initially produce the electronic
components that Donnelly uses for products such as electrochromic rearview
mirrors and electronic compass systems. In addition to supporting the
automotive electronic needs of the Company, Donnelly Electronics will pursue
business with other automotive suppliers that are not competitors of the
Company.
Coated Glass. Applied Films Corporation ("AFC") is a major manufacturer of
thin-film coated glass used in the production of liquid crystal displays
("LCD's") and of equipment used to manufacture these products. LCD's are
widely used in watches, games, calculators and instrumentation. AFC is located
in Boulder, Colorado. The Company owns 50% of the outstanding common stock of
AFC, but is currently exploring opportunities to exit this business. The
Company also owns 50% of a Chinese joint venture named Donnelly Yantai
Electronics Corporation, Ltd., which produces coated glass similar to those
produced by AFC for sale in the Chinese LCD market. The Donnelly Yantai joint
venture operates in the Yantai Peninsula of the People's Republic of China.
PRODUCT DEVELOPMENT AND TECHNOLOGY
Continued emphasis on effective research and product development is a key
part of the Company's strategy for future growth. The Company believes that
its technological and product development capabilities will enable the Company
to provide sophisticated integrated modules and systems and to perform the
increased responsibilities automotive suppliers are expected to manage.
The Company expects to spend approximately 5.0% of its net sales each year
on research and development. Approximately 80% of the Company's research and
development expenditures are product specific and conducted by the Company's
product engineers. The Company has a corporate applied research group,
including 10 Ph.Ds, located at research facilities in Holland, Michigan, and
at a separate applied research center in Tucson, Arizona. The Company owns
approximately 140 patents and has licenses for other patents and technology.
The Company also licenses certain of its own patents and technology to others.
The Company believes its manufacturing know-how, design of its own
manufacturing equipment and development of manufacturing processes are another
important competitive advantage. See "--Business Strategy."
26
<PAGE>
MARKETING AND CUSTOMERS
The Company produces and markets a complete line of automotive rearview
mirror systems and other products to automakers throughout the world. In 1995,
the Company reorganized its marketing structure to better serve its automotive
customers. The Company's marketing efforts are organized into strategic
customer-focused business units that work to address the needs of each
customer and provide innovative solutions early in the customer's design and
development process. Through such efforts, the Company seeks to become the
supplier of choice for automotive rearview mirrors, modular windows and
interior lighting and trim products. The Company markets integrated solutions
for customers using the Company's capability to design, manufacture and
deliver a wide range of automotive products. The Company also uses its
technology and product development capabilities to market innovative value-
added features, such as electrochromic dimming technology, lights and
compasses integrated into mirrors, and interior lighting using optics
technology to increase light while reducing glare.
The Company recently significantly expanded its European operations,
marketing and customer base. Net sales from European operations are expected
to constitute approximately 38% to 40% of the Company's total net sales in
1997, on a pro forma basis. The Company also operates a permanent marketing
and technical liaison office in Japan, which oversees its activities in Japan
and other Asian countries.
In 1996, approximately 81% of the Company's total net sales (excluding
Donnelly Hohe) were to Chrysler, Ford, General Motors and Honda, and
represented 54% of the Company's total net sales on a pro forma basis to
reflect the consolidation of Donnelly Hohe. The Company believes that the
recent expansion of its European operations will assist the Company in
broadening its customer base, particularly in Europe. See "Risk Factors--
Dependence on Principal Customers." The Company typically produces automotive
products under purchase orders for specific models with shipments made against
releases based upon production of that model. Although the Company typically
does not have long-term contracts with its customers, automakers typically
continue using the same supplier once the automaker has begun manufacturing a
vehicle. Purchase orders are renegotiated annually, especially as to price.
The Company has existing orders requiring annual price reductions.
Interior Rearview Mirrors. In 1996, the Company sold approximately 17.5
million interior rearview mirrors worldwide, more than any other company in
the world. The following table is a summary of various customers for which the
Company will supply interior rearview mirrors during fiscal 1997:
INTERIOR REARVIEW MIRROR CUSTOMERS
Ford Fuji Peugeot
Chrysler Hyundai Porsche
General Motors Isuzu PSA
Honda Jaguar Renault
Toyota Kenworth Truck Range Rover
AM General Land Rover Saab
Audi Leyland DAF Saturn
Aston Martin Lotus SEAT
BMW Mazda Subaru
CAMI Automotive Mercedes-Benz Suzuki
Citroen Mitsubishi Vauxhall
Delphi Interior & Lighting Nedcar Volkswagen
Diamond Star Nissan Volvo
Eurostar NUMMI Winnebago
Ferrari Opel
In fiscal 1997, the Company will supply electrochromic automotive interior
rearview mirrors to Ford, Chrysler, General Motors, Mercedes Benz, Audi,
Honda, Mitsubishi and Jaguar.
27
<PAGE>
Exterior Rearview Mirrors. The following table is a summary of customers for
which the Company will supply exterior rearview mirrors during fiscal 1997:
<TABLE>
<CAPTION>
EXTERIOR REARVIEW MIRROR CUSTOMERS PLATFORM/MODEL
---------------------------------- ------------------------------------
<S> <C>
Ford Expedition; Econoline;
Contour/Mystique; Mondeo; Scorpio;
Galaxy; Transit
Honda Accord; Acura; Civic
Mazda Probe
Audi A6; A8
BMW 3 Series; 5 Series; 7 Series; 8 Se-
ries
Mercedes Benz Vito; Evobus; V-Class
Mitsubishi Carisma
Opel Combo; Omega
Porsche Boxster; 911
Renault Express; Clio; Safrane; Megan Scenic
Saab 900; 9000
SEAT Alhambra
Volkswagen Polo; Golf; Passat; Sharan; Trans-
porter
Volvo 40 series; 70 series; 90 series
</TABLE>
In fiscal 1997, the Company will supply electrochromic automotive exterior
rearview mirrors to Ford and Jaguar.
Modular Windows. Most of the Company's sales of modular windows have been
directly to automakers, particularly in the United States where the use of
modular windows has been more widespread than in Europe or Asia. Through its
operations in Langres, France and the acquisition of Donnelly Hohe, the
Company intends to aggressively market and increase penetration of modular
windows in the European market. The Company recently formed its Fu Hua joint
venture to produce and market modular windows in the Asian market. The
following table is a summary of various customers for which the Company will
supply modular windows during fiscal 1997:
<TABLE>
<CAPTION>
MODULAR WINDOW CUSTOMERS PLATFORM/MODEL
------------------------ --------------------------------------------
<S> <C>
Ford Aerostar; F-150 truck; Expedition; Lincoln
Town Car; Ranger; Sable; Taurus; Thunderbird
Chrysler Caravan; Grand Cherokee; Neon; Voyager;
Town & Country; Viper
General Motors Achieva; Brougham; Cutlass; Grand Am; Lumi-
na; Monte Carlo; Regal; Skylark
Honda Accord; Acura; Civic
Isuzu Rodeo/Passport
Toyota Avalon; Camry; Minivan
</TABLE>
28
<PAGE>
Interior Lighting and Trim. The following table is a summary of various
customers for which the Company will supply interior lighting and trim during
fiscal 1997, either directly to the automakers or indirectly through other
automotive suppliers:
<TABLE>
<CAPTION>
INTERIOR LIGHTING AND TRIM CUSTOMERS PLATFORM/MODEL
------------------------------------ --------------------------------------------
<S> <C>
Ford Aerostar; Cougar; F-Series truck; Mustang;
Sable; Taurus; Thunderbird;
Windstar; Contour/Mystique; Expedition; Mark
VIII
Chrysler Caravan; Voyager; Grand Cherokee; Dakota;
Ram van
General Motors Blazer/Jimmy; Bravada
Honda Accord
Isuzu Rodeo/Passport
Mercedes-Benz AAV Sport Utility
Nissan Quest; Tsuru GS
Toyota Camry; Avalon; Lexus; Tacoma
</TABLE>
BUSINESS SYSTEMS AND MANUFACTURING
Business Systems
The Company has implemented various strategic business systems as part of an
integrated philosophy designed to develop, design, manufacture and deliver the
Company's products to satisfy the engineering, cost, quality and delivery
standards of the Company's customers. The Company is committed to improving
productivity by designing products for ease of manufacture. The Company also
works closely with its customers to realize efficiencies in the design,
development and manufacturing process. Specific business systems initiatives
being implemented by the Company include the following:
The Donnelly Production System is a comprehensive, integrated methodology
that includes elements of lean manufacturing, process standardization,
continuous improvement, just-in-time delivery and a cross-trained, team-
based approach to work. The Donnelly Production System has resulted in
improved productivity, cost reduction and employee involvement in the
Company's manufacturing, distribution and office support areas.
The Donnelly Quality System is based on the QS 9000 quality standards
agreed to by Chrysler, Ford and General Motors as a uniform standard of
quality measurement and compliance. The key to the Donnelly Quality System
is the development of measurable quality standards and policies, and their
consistent, across-the-board application. The Company's Naas, Ireland
facility is QS 9000 certified and substantially all of the Company's United
States manufacturing facilities are expected to achieve QS 9000
certification in the fourth quarter of 1997.
The Donnelly Program Management Process provides a single standard for new
product launches, no matter where those products will be made. From a new
product's concept through its launch and delivery, the Donnelly Program
Management Process outlines processes, testing, financial reviews and
customer interaction to be followed.
Manufacturing
The Company's automotive manufacturing operations are highly flexible with
state-of-the-art equipment, much of which was designed and built by the
Company. The Company has been recognized by its customers with many
significant supplier awards including the Ford Q1 Preferred Quality Award, the
Ford Full Service Supplier Award, the Chrysler Gold Pentastar, General Motors
Supplier of the Year, Toyota Superior VA/VE Performance Award, the Toyota
Delivery Award and the Nissan Quality Master Award. In addition, the Company's
net sales per employee have increased at a compound annual growth rate of
approximately 9% from 1992 through 1996.
29
<PAGE>
Automotive Rearview Mirrors and Trim. The manufacture of both interior and
exterior mirrors and interior lighting and trim products requires skills and
know-how involving many different processes including glass coating, grinding,
cutting and bending, and plastic injection molding. A number of other
companies perform some of these required processes, but the Company believes
that few have its broad range of skills and technology.
Modular Windows. The Company uses PVC and RIM injection molding processes in
modular window manufacturing. See "--Products." PVC is more difficult to mold,
particularly in large windows, because of slower material flow and because of
high-pressure clamping of glass, which can cause glass breakage. The breakage
problem can be acute in large, expensive windows. To solve these problems, the
Company is continually developing know-how and technology in mold design and
molding techniques, including polymer characteristic studies and computer-
aided design of material flow in the molds. The ability to offer a window in
PVC or RIM can be a significant competitive factor at the design stage because
it permits the Company to offer the technology that best satisfies the
customer's needs. Recent additions to the Company's modular window
manufacturing capabilities include hinged 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.
Other Products. The Company has developed proprietary processes and
equipment that enable it to coat glass to the high tolerances required for
electronics applications. These processes require the coatings to be performed
in highly-sophisticated vacuum chambers, most of which were designed and built
by the Company. The Company's electronic information products are manufactured
primarily by cleaning thin glass sheets, bending the glass when necessary, and
coating it with transparent, conductive layers. Some products require screen
printing after completion of the coating process.
Raw Materials. The Company's primary raw materials are glass, resins and
adhesives. Glass is supplied by third party glass manufacturers such as PPG
Industries, Inc., and by glass manufacturers affiliated with automakers. For
modular windows, the automakers contract directly with the glass manufacturers
and the Company passes the cost of the glass through to its automotive
customers. Resins and adhesives are another important raw material. Most of
the resins and adhesives the Company uses are supplied by Condea Vista Company
and Dow Chemical, although the Company believes that alternative suppliers are
available. An adhesive for one of the Company's principal products is supplied
solely by Dow Chemical and the Company believes that an alternative source of
supply is not currently available.
COMPETITION
Competition in the markets for the Company's automotive products is based
primarily on manufacturing capabilities, design, quality, cost and delivery. 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. The level and nature of competition involving the Company's
automotive products are varied. See "Risk Factors--Competition."
Interior Rearview Mirrors. The Company knows of three principal competitors
in the U.S. market: one in the market for base interior rearview mirror
assemblies, and one in the electrochromic market and one in the lighted mirror
market. The Company has several worldwide competitors for interior mirror
glass sales in Japan and Europe, although the Company believes each competitor
has a smaller market share than the Company. In Europe, the Company competes
with several other manufacturers of complete interior rearview mirror
assemblies.
The Company's principal competitor for automatic electrochromic rearview
mirrors is Gentex Corporation, which has a dominant share of the market for
electrochromic mirrors. The Company and Gentex Corporation had been involved
in patent litigation with respect to certain aspects of electrochromic
technology. The litigation has previously had an adverse impact on the
Company's ability to market interior electrochromic mirrors in the
30
<PAGE>
United States and Europe. During the fourth quarter of 1996, the Company
reached a patent and licensing settlement with Gentex Corporation, and
management believes that this settlement will facilitate its efforts to market
electrochromic mirrors. See "Risk Factors--Competition" and "--Litigation."
Exterior Rearview Mirrors. The Company has many competitors in the worldwide
exterior rearview mirror market. With the Company's recent consolidation of
Donnelly Hohe, the Company believes that it is now a leading producer of
automotive exterior rearview mirrors. The Company has one competitor in the
U.S. market for automatic exterior electrochromic mirrors.
Modular Windows. The Company has many competitors in the worldwide modular
window market. Certain 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 a technology leader
for glass encapsulation and metal bonding of attachments to glass.
Other Products. There are many competitors in the market for interior
lighting and trim products, many of whom have greater resources and market
share than the Company. With respect to its information products business, 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 both of these segments is based on price, service and quality.
FACILITIES
The Company conducts its manufacturing, office and distribution operations
in North America, Europe and Asia at the following 31 facilities which
together comprise a total of over 2,000,000 square feet:
<TABLE>
<CAPTION>
LOCATION OF FACILITY SQUARE FOOTAGE USE
-------------------- -------------- -------------------------------
<C> <C> <S>
Manufacturing, Warehouse and
Holland, Michigan (10)* 889,000 Office
Manufacturing, Warehouse and
Grand Haven, Michigan 133,000 Office
Manufacturing, Warehouse and
Newaygo, Michigan* 177,000 Office
Detroit, Michigan* 4,000 Sales and Marketing Office
Manufacturing, Warehouse and
Mt. Sterling, Kentucky 37,000 Office
Tucson, Arizona (2)* 20,000 Research and Sales Office
Manufacturing, Warehouse and
Naas, Ireland 84,000 Office
Manufacturing, Warehouse and
Manorhamilton, Ireland 21,600 Office
Manufacturing, Warehouse and
Langres, France* 40,000 Office
Manufacturing, Warehouse and
Collenberg, Germany 207,000 Office
Manufacturing, Warehouse and
Dorfprozelten, Germany* 296,000 Office
Manufacturing, Warehouse and
Schleiz, Germany (2)* 85,000 Office
Manufacturing, Warehouse and
Monterrey, Mexico 40,000 Office
Manufacturing, Warehouse and
Barcelona, Spain 34,000 Office
Manufacturing, Warehouse and
Shunde City, China (3)** 74,000 Office
Shanghai, China** 11,000 Manufacturing and Office
Tokyo, Japan 4,000 Sales and Marketing Office
Goteborg, Sweden 4,000 Design Office
</TABLE>
- --------
*Leased facilities. Three of the ten Holland, Michigan facilities are leased.
Approximately 165,000 square feet of the Dorfprozelten, Germany facility is
leased. One of the two Schleiz, Germany facilities is leased.
**Owned or leased by a joint venture.
EMPLOYEES
The Company believes its human resources are one of its fundamental
strengths. 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
31
<PAGE>
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. The Company was rated one of the 10 best
companies to work for in America in the most recent edition (1993) of the
publication "100 Best Companies to Work for in America."
The Company currently has approximately 4,700 employees worldwide, and
approximately 2,500 work in the Company's North American operations. The
Company's non-U.S. employees are primarily located in Germany, Ireland,
France, Spain and Mexico. The Company considers its relationship with its
employees to be good.
The Company's United States workforce is non-union. The Company's workforces
in Germany, Ireland, Mexico, Spain and France are unionized, as are the
workforces 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 German, Spanish and Irish workforce. The
Company negotiates wages approximately annually and benefits approximately bi-
annually with its workforce 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 is currently reducing its European workforce as part of
its European restructuring plan. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations."
ENVIRONMENTAL MATTERS
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). As such, the nature of the Company's
operations exposes it to the risk of claims with respect to such matters and
there can be no assurance that material costs or liabilities will not be
incurred in connection with such claims.
Certain Environmental Laws regulate air emissions, water discharges,
hazardous materials and wastes and require public disclosure related to the
use of various hazardous or toxic materials. The Company's operations are also
governed by Environmental Laws relating to workplace safety and worker health.
Compliance with Environmental Laws may require the acquisition of permits or
other authorizations for certain activities and compliance with various
standards or procedural requirements.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ("CERCLA") and similar state laws provide for responses to
and liability for releases of certain hazardous substances into the
environment. These obligations are imposed on the current owner or operator of
a facility, the owner or operator of a facility at the time of the disposal of
hazardous substances at the facility, on any person who arranged for the
treatment or disposal of hazardous substances at the facility, and on any
person who accepted hazardous substances for transport to a facility selected
by such person. Generally, liability under CERCLA is strict, joint and
several. The Company, among others, has been identified as a potentially
responsible party ("PRP") based on its disposal of hazardous substances at
three third party sites that are subject to investigation and cleanup of
contamination. The Company has resolved its liability at two of these sites
pursuant to separate settlements. Based on information known at this time, the
Company does not expect its liability at the third site to be material.
Based upon its experience to date, the Company believes that the future cost
of compliance with existing Environmental Laws, and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation,
32
<PAGE>
and more vigorous enforcement policies of regulatory authorities, may give
rise to additional expenditures or liabilities that could be material.
LITIGATION
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 unspecified damages.
Management believes that the claim by Midwest will be resolved without a
material adverse effect on the Company's financial condition or results of
operations and liquidity.
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 had 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-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.
In May, 1997, Quantech, Ltd. ("Quantech") filed a lawsuit against the
Company in United States 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.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names of and certain other information
concerning the Company's directors and executive officers and other key
employees:
<TABLE>
<CAPTION>
EMPLOYED BY OR
DIRECTOR
OF THE COMPANY
NAME AGE TITLE SINCE
---- --- ----- --------------
<C> <C> <S> <C>
J. Dwane Baumgardner, Ph.D.. 56 Chairman, Chief Executive 1969
Officer, President
and Director
Robert C. Hange............. 45 Chief Operating Officer-- 1996
Europe
Donn J. Viola............... 52 Chief Operating Officer-- 1996
North America
John F. Donnelly............ 43 Senior Vice President-- 1977
Corporate Business
Development and Marketing
Maryam Komejan.............. 45 Senior Vice President and 1979
Corporate Secretary
Niall R. Lynam, Ph.D........ 43 Senior Vice President and 1980
Chief Technical Officer
William R. Jellison......... 39 Vice President, Corporate 1980
Controller and Treasurer
Russell B. Scaffede......... 47 Vice President-- 1995
Manufacturing
James A. Knister............ 59 Group Managing Director-- 1967
Ventures
John A. Borden.............. 63 Director 1996
Arnold F. Brookstone........ 66 Director 1975
B. Patrick Donnelly, III.... 52 Director 1980
Joan E. Donnelly............ 49 Director 1987
R. Eugene Goodson, Ph.D..... 61 Director 1996
Thomas E. Leonard........... 67 Director 1967
Gerald T. McNeive........... 55 Director 1980
Rudolph B. Pruden........... 67 Director 1984
Donald R. Uhlmann, Ph.D..... 60 Director 1978
</TABLE>
- --------
(1) Mr. Borden, Dr. Goodson and Dr. Uhlmann were last elected by the holders
of Class A Common Stock. The other directors were last elected by the
holders of Class B Common Stock.
Dr. Baumgardner joined the Company in 1969 and has been Chief Executive
Officer since 1983, Chairman of the Board since 1986, and President since
October 1994. Dr. Baumgardner is a director of SL Industries, Inc.
Mr. 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 Freudenberg-NOK, a major international
automotive supplier, from 1994 to 1996 and Senior Vice President and General
Manager of that division from 1992 through 1996.
Mr. Viola joined the Company as Chief Operating Officer of the Company's
North American operations in August 1996. Prior to joining the Company, Mr.
Viola was 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.
Mr. John F. Donnelly, an employee of the Company since 1977, has been a
Senior Vice President of the Company since October 1992, with responsibility
for Corporate Business Development and Marketing.
Ms. Komejan, an employee of the Company since 1979, has been a Senior Vice
President since October, 1995, with responsibility for corporate
administration, human resources, communications and investor relations.
Dr. Lynam, an employee of the Company since 1980, was elected Senior Vice
President and Chief Technical Officer in December 1995.
34
<PAGE>
Mr. Jellison has been Vice President since October 1991, Corporate
Controller since October 1992 and Treasurer since December 1988.
Mr. 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. Mr. Scaffede was Vice
President of Toyota Motor Manufacturing U.S.A., Inc. (Powertrain) from 1988 to
1993.
Mr. Knister has been Group Managing Director of Ventures since January 1997.
From 1988 until his semi-retirement in December 1996, he was Senior Vice
President of the Company. Mr. Knister joined the Company in 1967. Mr. Knister
is a director of X-Rite, Inc.
Mr. Borden has been a consultant with FTD (Florist Transworld Delivery
Incorporated), a worldwide communications and financial services organization,
since January 1996. From 1988 until his retirement in December 1995, he was
Executive Vice President and Chief Executive Officer of FTD Association.
Mr. Brookstone served as Executive Vice President, Chief Financial and
Planning Officer of Stone Container Corporation, a major international pulp
and paper manufacturer, until his retirement on January 31, 1996. Mr.
Brookstone serves on a number of Boards of Directors including MFRI, Inc.;
Stone-Consolidated Corporation; Venepal, SACA; and Florida Coast Paper
Company, LLC. He is a trustee of the Rembrandt Family of Mutual and Money
Market Funds and is also a director of several privately held companies.
Mr. B. Patrick Donnelly, III has been Plant Manager of Ran Enterprises, an
automotive parts supplier, since November 1995. From October 1993 through June
1995 he was Production Manager of Technical Auto Parts Inc., an automotive
parts supplier; from July through December 1992 he was Vice President of
Donnelly-Cooper Industries, Inc., a company engaged in production powder
coating of manufactured components; from 1989 through 1992 he was President of
that company. Donnelly-Cooper Industries, Inc., which emerged from Chapter 11
proceedings in July, 1992, is not affiliated with the Company. Mr. Donnelly is
a director of Ottawa Financial Corporation.
Ms. Joan E. Donnelly has been Executive Director of Tohono Chul Park, a non-
profit desert preserve and museum, since May 1995. From 1984 to 1995 she was a
shareholder and Vice President of Tizzard, Knuttinen, Donnelly & Wright, P.C.,
certified public accountants.
Dr. Goodson has been Chairman of the Board of Directors and Chief Executive
Officer of Oshkosh Truck Corporation, a manufacturer of specialized trucks and
transport equipment, since 1990.
Mr. Leonard has been President of Henry C. Grebe & Co., Inc. and Grebe Yacht
Sales, Inc., since 1972. These companies are currently engaged in land
development.
Mr. McNeive was appointed Senior Vice President of Finance and Chief
Financial Officer for Laclede Gas Co., a natural gas distributor, in September
1995. From 1994 through 1995 he was Vice President--Associate General Counsel,
from September 1992 through 1993 he was Assistant Vice President--Associate
General Counsel, and from 1986 through 1992 he was associate general counsel
of that company.
Mr. Pruden retired in January 1995 from the National Oceanic and Atmospheric
Administration (NOAA), an agency of the United States Department of Commerce.
His last position, which he held since 1985, was as chief of the audits and
internal control branch in the office of the controller.
Dr. Uhlmann has been a Professor of Engineering and Chairman of the
Department of Material Science and Engineering at the University of Arizona
since 1986.
Directors B. Patrick Donnelly, III, Joan E. Donnelly, Leonard, McNeive and
Pruden are all descendants of, or are or were married to descendants of,
Bernard P. Donnelly, the Company's founder, and each represents one of five
family groups of such descendants. John F. Donnelly, Jr., a Senior Vice
President of the Company, is also a descendant of Bernard P. Donnelly and is
the brother of Ms. Donnelly. See "Description of Capital Stock."
35
<PAGE>
PRINCIPAL SHAREHOLDERS
The Company was founded in 1905 by Bernard P. Donnelly. Direct familial
descendants of Bernard P. Donnelly or individuals related by marriage to
Bernard P. Donnelly or such descendants own approximately 30% (24% after the
offering of the Class A Common Stock) of the Class A Common Stock and
approximately 99% of the Class B Common Stock and control approximately 92%
(89% after the offering of the Class A Common Stock) of the voting power of
the Company.
The following table sets forth certain information as of May 15, 1997, and
as adjusted to reflect the sale of shares of Class A Common Stock offered by
the Company hereby, with respect to (a) each person who is known by the
Company to be the beneficial owner of more than five percent of the Class A
Common Stock or Class B Common Stock, (b) each director of the Company, and
(c) all officers and directors of the Company as a group. Except as otherwise
indicated below, each of the persons named in the table has sole voting and
investment power with respect to all shares of Class A Common Stock and Class
B Common Stock beneficially owned by such person as set forth opposite such
person's name. Upon completion of the offering of the Class A Common Stock,
the holders of Class B Common Stock will control approximately 90% of the vote
on matters to be voted upon by all holders of Common Stock voting as a single
class.
<TABLE>
<CAPTION>
PRIOR TO OFFERING
---------------------------------------------- PERCENTAGE OF
PERCENT OF CLASS A COMMON
NUMBER OF SHARES CLASS STOCK TO BE
----------------------- ------------------ BENEFICIALLY OWNED
CLASS A(1) CLASS B CLASS A CLASS B AFTER THE OFFERING
---------- --------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Investment Counselors of
Maryland, Inc.......... 393,750(2) -- 7.3 -- 5.5
NBD Bank, N.A........... 381,816(3) 627,885(3) 7.1 14.1 5.5
Putnam Investments,
Inc.................... 401,812(4) -- 7.4 -- 5.8
Anne H. Copps........... 47,735(5) 245,595(5) * 5.5 *
Bernard P. Donnelly..... 13,166(6) 483,046(6) .2 10.8 *
Virginia N. Donnelly.... 13,166(6) 483,046(6) .2 10.8 *
Katherine S. Donnelly... 224,911(7) 314,878(7) 4.2 7.1 3.3
Jane H. Krahmer......... 116,029(8) 363,353(8) 2.1 8.1 1.7
Gerald T. McNeive**..... 56,959(9) 328,805(9) *(14) 7.4 *(14)
Louise H. McNeive....... 56,959(9) 328,805(9) *(14) 7.4 *(14)
Marie Josephte
Martineau.............. 17,176 269,762 * 6.0 *
Fernande M. Pruden...... 222,809(10) 299,335(10) 3.8(14) 6.7 3.0(14)
Rudolph B. Pruden**..... 222,809(10) 299,335(10) 3.8(14) 6.7 3.0(14)
J. Dwane Baumgardner**.. 115,716 -- 2.0(14) -- 1.6(14)
John A. Borden**........ 625 -- *(14) -- *(14)
Arnold F. Brookstone**.. 25,625 -- *(14) -- *(14)
B. Patrick Donnelly,
III**.................. 56,305(11) 137,161(11) *(14) 3.1 *(14)
Joan E. Donnelly**...... 67,456(12) 93,625(12) 1.2(14) 2.1 *(14)
R. Eugene Goodson**..... 2,500 -- *(14) -- *(14)
Thomas E. Leonard**..... 10,625(13) 159,323(13) *(14) 3.6 *(14)
Donald R. Uhlmann**..... 15,937 -- *(14) -- *(14)
All officers and
directors as a group
(18 persons)........... 810,322 1,119,978 13.9(14) 25.1 11.5(14)
</TABLE>
- --------
*Less than one percent.
**Director.
36
<PAGE>
For purposes of the following notes, shares of Class A Common Stock are
referred to as "A Shares" and shares of Class B Common Stock are referred to
as "B Shares."
(1) Includes the following number of shares with respect to which the
Directors have the right to acquire beneficial ownership under stock
options exercisable in 60 days; Dr. Baumgardner--90,312; Dr.
Uhlmann--15,937; Dr. Goodson, Ms. Donnelly and Messrs. Brookstone,
Donnelly, Leonard, McNeive, Pruden--1,875 shares.
(2) In a Schedule 13G, dated February 14, 1997, and delivered to the Company,
Investment Counselors of Maryland, Inc. ("Investment Counselors")
disclosed on behalf of its investment advisory clients that they had
acquired beneficial ownership of 393,750 A Shares. Investment Counselors
has the sole power to dispose of all such shares, and shared power to
vote 93,750 of such shares.
(3) Includes (i) 77,733 B Shares held by NBD Bank, N.A. (the "Bank") as co-
trustee of the Robert M. Leonard Trust, 43,750 Shares as co-trustee of
the B. P. Donnelly Descendants Trust, 117,577 B Shares as co-trustee of
the John Donnelly Residual Trust, and 388,825 B Shares held in two trusts
for which the Bank serves as sole trustee, (ii) 381,816 A Shares held by
Trussal & Co., acting as nominee of the Bank as follows: 2,500 A shares
in the Robert M. Leonard Trust, 17,854 shares in the B.P. Donnelly
Descendants Trust, and 83,983 shares in the John Donnelly Residual Trust,
for all of which trusts the Bank serves as co-trustee and 275,606 shares
held in two trusts for which the Bank serves as sole trustee, and (iii)
1,873 A Shares held by the Bank as trustee, co-trustee, custodian, or
agent of other trusts.
(4) In a Schedule 13G, dated January 26, 1994, and delivered to the Company,
Putnam Investments, Inc. ("Putnam") disclosed on behalf of its investment
management subsidiaries that they had acquired beneficial ownership of
401,812 A Shares. Putnam has the sole power to dispose of all of such
shares, and shared power to vote 132,062 of such shares.
(5) Includes 47,735 A Shares and 245,595 B Shares owned by a trust of which
Anne H. Copps is trustee.
(6) Includes 13,166 A Shares and 183,046 B Shares owned by two trusts of
which Bernard P. Donnelly, Jr. and Virginia N. Donnelly (husband and
wife) are co-trustees.
(7) Includes 83,983 A Shares and 117,577 B Shares held in the John Donnelly
Residual Trust for which Katherine S. Donnelly is a co-trustee.
(8) Includes 12,218 A Shares and 16,406 B Shares owned by Mrs. Krahmer's
husband, C. Alan Krahmer, as to which she disclaims beneficial ownership.
(9) Includes (i) 33,603 A Shares and 298,730 B Shares owned by Louise H.
McNeive, (ii) 9,765 A Shares, and 13,671 B Shares owned by her husband,
Gerald T. McNeive, a director of the Company, and (iii) 11,716 A Shares
and 16,404 B Shares as to which Louise H. McNeive is custodian for her
children, and as to which Gerald T. McNeive disclaims beneficial
ownership.
(10) Includes (i) 205,192 A Shares and 282,547 B Shares owned by Fernande
Pruden and her retirement plans, and (ii) 15,742 A Shares, and 16,788 B
Shares owned by Rudolph Pruden and his retirement plans. Rudolph Pruden
is Fernande Pruden's husband and a director of the Company. Fernande
Pruden and Rudolph Pruden each disclaim beneficial ownership of the
other's shares.
(11) Includes (i) 5,250 A Shares and 2,500 B Shares owned jointly with Mr.
Donnelly's wife, Jacqueline K. Donnelly, (ii) 1,406 A Shares and 2,343 B
Shares owned by Jacqueline K. Donnelly, (iii) 4,700 A shares and 2,606 B
Shares owned by Mr. Donnelly as custodian and trustee for his children,
(iv) 6,296 A Shares and 8,815 B Shares held in trust for the benefit of a
niece, for which Mr. Donnelly is a co-trustee, and (v) 17,856 A Shares
and 43,750 B Shares held in trust for the benefit of Mr. Donnelly and his
brothers and sisters, for which Mr. Donnelly is co-trustee.
(12) Includes (i) 1,178 A Shares and 1,651 B Shares owned by Joan E.
Donnelly's husband, David K. Taylor as to which Ms. Donnelly disclaims
beneficial ownership and (ii) 1,952 A Shares and 2,732 B Shares held by
Ms. Donnelly as custodian for her children.
37
<PAGE>
(13) Includes (i) 2,500 A Shares and 77,733 B Shares held by the Robert M.
Leonard Trust, for which Mr. Leonard is a co-trustee, and (ii) 11,590 B
Shares owned by Mr. Leonard's wife, Ann N. Leonard, as to which Mr.
Leonard disclaims beneficial ownership.
(14) Calculated based on the number of shares outstanding plus 419,594 shares
with respect to which officers and directors have the right to acquire
beneficial ownership under stock options exercisable within 60 days.
Five of the Company's directors, B. Patrick Donnelly, III, Joan E. Donnelly,
Leonard, McNeive and Pruden are all descendants of, or are married to
descendants of, Bernard P. Donnelly, Sr., the Company's founder, and each
represents one of five family groups of such descendants (the "Donnelly
Family"). John F. Donnelly, Jr., a Senior Vice President of the Company, is
also a descendant of Bernard P. Donnelly and is the brother of Ms. Donnelly.
Each of four family groups has the ability to elect at least one director if
they act together and cumulate the votes of the Class B Common Stock.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Class A Common Stock, $.10 par value per share; 15,000,000 shares of Class B
Common Stock, $.10 par value per share; 1,000,000 shares of Series Preferred
Stock, no par value; and 250,000 shares of 7 1/2% Preferred Stock, $10 par
value per share.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
Upon completion of this offering, 6,912,286 shares of Class A Common Stock
(assuming no exercise of the Underwriter's over-allotment option) and
4,463,243 shares of Class B Common Stock will be outstanding. All shares of
Class A Common Stock and Class B Common Stock currently outstanding are, and
the shares of Class A Common Stock offered by the Company hereby will be,
fully paid and non-assessable, not subject to redemption and without
preemptive or other rights to subscribe for or purchase any proportionate part
of any new or additional issues of stock of any class or of securities
convertible into stock of any class.
Voting Rights. Holders of shares of Class A Common Stock are entitled to one
vote per share on all matters submitted to shareholders. Holders of shares of
Class A Common Stock, as a class, are also entitled to elect one quarter of
the Company's directors (rounded, if necessary, to the nearest whole number
and rounded up if one quarter of the directors equals a number falling exactly
between two whole numbers) to be elected at each meeting held for the election
of directors. Holders of shares of Class B Common Stock are entitled to ten
votes per share on all matters submitted to shareholders, except that they are
not entitled to vote in the election of the directors which the holders of
Class A Common Stock are entitled to elect. Holders of shares of Class B
Common Stock elect, as a class (with any Preferred Stock entitled to vote),
the directors not elected by the shares of Class A Common Stock. Holders of
shares of Class B Common Stock have cumulative voting rights in the election
of directors. Both the Class A Common Stock and the Class B Common Stock are
entitled to vote separately as a class on any amendments to the Company's
Articles of Incorporation that alter the powers, preferences or rights of the
respective class so as to affect them adversely, and with respect to such
other matters as may require class votes under the Michigan Business
Corporation Act.
Dividends and Distributions. Dividends on Class A Common Stock and Class B
Common Stock will be paid if, as and when declared out of funds legally
available therefor. If cash dividends are declared, the amount paid on each
share of Class A Common Stock must be equal to the combined cash dividends
paid to the holder of each share of Class B Common Stock (i) on that stock and
(ii) on the related Donnelly Export Corporation common stock. The shares of
common stock of Donnelly Export Corporation are held entirely by the holders
of the Company's Class B Common Stock. See "--Donnelly Export Corporation."
Otherwise, Class A Common Stock and Class B Common Stock rank equally,
including in distributions paid in partial or complete liquidation of the
Company. The Board may declare and pay a stock dividend only of Class A Common
Stock on Class A Common Stock and only of Class B Common Stock on Class B
Common Stock. If either such class receives a stock dividend, the other class
must also receive a comparable stock dividend.
38
<PAGE>
Conversion. The Class A Common Stock is not convertible into shares of any
other equity security of the Company. Holders of Class B Common Stock may
elect at any time to convert any or all of such shares into shares of the
Class A Common Stock on a share for share basis. If the number of outstanding
shares of Class B Common Stock falls below 12 1/2% of the aggregate number of
issued and outstanding shares of Class A Common Stock and Class B Common
Stock, all the shares of Class B Common Stock will automatically be converted
into shares of Class A Common Stock.
Transferability. The Class A Common Stock is freely transferable. The Class
B Common Stock may be transferred by a shareholder only to or among his or her
spouse, certain relatives (and their spouses), trusts established for such
persons' benefit, and a corporation or partnership all of the stock or units
of which are owned by such eligible holders and transferees. Accordingly, no
trading market has developed or will develop in the Class B Common Stock and
it has not been and will not be listed or traded on any exchange or any
market.
Future Issuances of Class B Common Stock, Status of Class B Common Stock
Upon Conversion. The Company may not issue any additional shares of Class B
Common Stock, except in a stock split or stock dividend upon the Class B
Common Stock, without the approval of the holders of a majority of the
outstanding shares of Class A Common Stock who do not hold Class B Common
Stock. The restrictions on future issuances of Class B Common Stock and the
existence of the DISC (see "--Donnelly Export Corporation") may limit the
ability of the Company to account for business combinations using the "pooling
of interests" method. All shares of Class B Common Stock received by the
Company upon conversion thereof to Class A Common Stock will revert to the
status of authorized but unissued shares of Class B Common Stock.
Effect on Relative Voting Power. Direct and indirect descendants of Bernard
P. Donnelly own approximately 99% of the Class B Common Stock and immediately
after the offering will own approximately 23% of the issued and outstanding
Class A Common Stock of the Company (assuming none of such shareholders
purchase stock in this offering and that the Underwriter's over-allotment
option is not exercised). Those shareholders will therefore possess 89% of the
voting power of the Company and 23% of the voting power of the Class A Common
Stock. The descendants of Bernard P. Donnelly may transfer shares of Class B
Common Stock among themselves, enabling them to retain voting control of the
Company for an extended period. Given the voting control of the Donnelly
Family, the Donnelly Family could, if all or part of the family took a united
position in response to attempts to acquire control of the company through
tender offers or proxy contests, effectively block any such attempts. There is
no assurance that any united action would be taken.
TRANSFER AGENT
The Company's transfer agent and registrar for the Class A Common Stock and
Class B Common Stock is The Bank of New York.
SERIES PREFERRED STOCK
The authorized Series Preferred Stock consists of 1,000,000 shares, no par
value. The Series Preferred Stock may be issued by resolutions of the
Company's Board of Directors from time to time without any action of the
shareholders. Such resolutions may authorize issuances in one or more classes
or series of the Series Preferred Stock, and may fix and determine dividend
and liquidation preferences, voting rights (except as provided below),
conversion privileges, redemption terms and other privileges and rights of the
shareholders of each class or series so authorized. The Series Preferred Stock
may not be given more than one vote per share or the right as a class to elect
any directors. The Company has no present plans to issue shares of Series
Preferred Stock.
7 1/2% PREFERRED STOCK
The authorized 7 1/2% Preferred Stock consists of 250,000 shares, par value
$10 per share, of which 53,112 shares are presently issued and outstanding.
These shares are held entirely by five individuals, two of whom, Bernard P.
Donnelly, Jr. (40,000 shares) and Marie Josephte Martineau (12,617 shares),
are holders of more than
39
<PAGE>
five percent of the common equity and voting power of the Company. See
"Principal Shareholders." The Company has no plans to issue additional shares
of this stock. Holders of the 7 1/2% Preferred Stock are entitled to receive
cumulative preferential dividends in cash of $.75 per share per annum when and
as declared by the Board of Directors. In the event the Company is liquidated,
dissolved or wound up, voluntarily or involuntarily, holders of the 7 1/2%
Preferred Stock are entitled to receive in cash $10 per share plus accumulated
and unpaid dividends from the assets of the Company available for distribution
to shareholders, before any payment is made to holders of any other class of
common stock or any other class of capital stock ranking junior to the 7 1/2%
Preferred Stock. The Company may, at its option, at any time on thirty days'
notice, redeem all or some of the 7 1/2% Preferred Stock by paying $10.50 per
share in cash plus all accumulated and unpaid dividends. If less than all of
the shares are redeemed, the Company may designate by lot, in such manner as
the Board of Directors determines, the shares to be redeemed, or may effect
such redemption in any other equitable manner.
The holders of the 7 1/2% Preferred Stock do not have any voting rights
except as required by applicable law and except that if at any time the
Company is in arrears in the payment of cumulative dividends to the extent of
four quarterly dividends (whether consecutive or not), holders of the 7 1/2%
Preferred Stock are entitled to one vote for each share in the election of the
directors not elected by the Class A Common Stock, and on all other matters.
The voting rights would continue until a quarterly dividend is paid reducing
the amount of arrearages to less than four quarterly dividends. The holders of
the 7 1/2% Preferred Stock have no preemptive rights.
DONNELLY EXPORT CORPORATION
Donnelly Export Corporation, a shareholder Domestic International Sales
Corporation under the Internal Revenue Code (the "DISC"), has been designed to
reduce the income tax liability of the Company. The DISC does not provide the
holders of the Class B Common Stock, who hold all of the DISC common stock,
any financial advantage over holders of the Class A Common Stock.
The holders of Class B Common Stock hold, for every 176 such shares, 16
shares of common stock of the DISC. The Company owns no shares of the DISC,
but its officers manage the DISC. The financial statements of the DISC are
combined with those of the Company. See Note 1 of Notes to Combined
Consolidated Financial Statements. The shareholders of the DISC are not
entitled to vote on issues voted upon by the Company's shareholders.
The holders of DISC common stock have received and expect to continue to
receive dividends with respect to those shares. Dividends are paid from net
income of the DISC, which is generated by commissions paid to the DISC by the
Company. The effect is to achieve dividends to the holders of Class B Common
Stock which are deductible to the Company for federal income tax purposes. The
Company's Articles of Incorporation provide that cash dividends on each share
of Class A Common Stock must equal the sum of the dividends paid per share of
Class B Common Stock and per 16/176 of a share of common stock of the DISC.
DISC shares are subject to the same restriction on transfer as the Class B
Common Stock. In addition, DISC stock and shares of Class B Common Stock may
be transferred only if 16 shares of DISC stock are transferred with every 176
shares of Class B Common Stock that are transferred. In the event of a
conversion of Class B Common Stock into Class A Common Stock, 16 shares of the
DISC common stock will be canceled for every 176 shares of Class B Common
Stock that are converted. If all Class B Common Stock is converted to Class A
Common Stock, the DISC will automatically terminate.
CERTAIN SPECIAL ARTICLE AND STATUTORY PROVISIONS
The Company's Articles of Incorporation include provisions which are
designed to or which may have the effect of deterring acquisitions of the
Company, including proposed transactions that might have the support of a
majority of the Company's voting power or a majority of the Company's common
equity. These devices could also have the effect of inhibiting certain changes
in management and temporary fluctuations in the market price
40
<PAGE>
of the Company's Class A Common Stock that could arise from actual or rumored
takeover bids. The Company's two classes of common stock may have similar
effects.
The Company's Articles of Incorporation state that any vacancy in, or newly
created, directorships will be filled only by the affirmative vote of a
majority of directors continuing in office. The Articles also provide that
nominations for the election of directors must be made as provided in the
Company's Bylaws, which set forth a procedure for shareholder nominations of
directors. Notice of any nomination must be given 30 days in advance of the
Company's annual meeting at which directors will be elected. These provisions
may restrict the ability of a shareholder to conduct a proxy contest against
management.
The Articles of Incorporation also provide that the Board of Directors shall
not approve or recommend any offer to make a tender or exchange offer for the
Company's shares, to merge or consolidate the Company or to purchase
substantially all of the assets of the Company (i) if such proposal is known
by the Board to be a possible violation of law or (ii) unless the Board of
Directors has evaluated the offer and determined that the offer is in the best
interest of the Company and its shareholders. In making its evaluation, the
Board is permitted to consider several factors, including the adequacy and
fairness of the consideration to be received and the potential social and
economic impact of the offer and its consummation on the Company, its
employees, vendors and communities.
The Company's Articles of Incorporation further state that the Company shall
not merge with another corporation, sell substantially all of its assets, or
voluntarily dissolve or liquidate its assets without the approval of two-
thirds of the voting power of the then outstanding shares of the classes of
stock entitled to vote. The Articles also require that any purchase by the
Company of shares of its voting stock from any person known by the Company to
be the beneficial owner of five percent or more of the voting power of the
Company for less than two years at a price in excess of the fair market value
at the time of purchase, be approved by a majority of the votes of the
outstanding voting stock of the Company. This provision is intended to
eliminate the payment of "greenmail" by discouraging purchasers from
accumulating significant blocks of the Company's stock and then offering that
stock for resale to the Company at a premium over market price.
As a Michigan corporation, the Company is subject to the "Fair Price" and
"Shareholder Equity" provisions of the Michigan Business Corporation Act
("MBCA"). The Fair Price provisions of the MBCA provide that, except in cases
in which certain minimum price, form of consideration and procedural
requirements are satisfied or for certain transactions that may be approved in
advance by the Board of Directors, higher than normal voting requirements are
imposed with respect to various transactions involving persons who own 10% or
more of the Company's voting stock ("Interested Shareholders"). Transactions
to which the higher voting requirements apply require an advisory statement
from the Board of Directors and must be approved by not less than 90% of the
votes of each class of stock entitled to vote and by not less than two-thirds
of the votes, other than the votes of Interested Shareholders who are (or
whose affiliates are) a party to the proposed transaction or an affiliate of
the Interested Shareholder, of each class entitled to vote. The Shareholder
Equity Provisions of the MBCA affect the voting rights of persons who acquire
more than 20%, 33 1/3% or 50% of a Michigan corporation's voting stock
("Control Shares"). The Shareholder Equity Provisions deny voting rights to
those shareholders who make purchase offers or increase their holdings above
any of the Control Share levels, unless they are granted voting rights by a
majority vote of all disinterested shareholders (shareholders excluding the
bidders or owners of Control Shares and the corporation's management). If the
shareholders do not elect to grant voting rights to Control Shares under
certain circumstances, the Control Shares may become subject to redemption by
the corporation.
41
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated , 1997, each of the underwriters named below (the
"Underwriters") has severally agreed to purchase, and the Company has agreed
to sell to each such Underwriter, the number of shares of Class A Common Stock
set forth opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Smith Barney Inc...............................................
Salomon Brothers Inc...........................................
---------
Total...................................................... 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by Cahill Gordon & Reindel, their counsel,
and to certain other conditions. The Underwriters are obligated to take and
pay for all shares of Class A Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters, for whom Smith Barney Inc. and Salomon Brothers Inc are
acting as the Representatives, initially propose to offer part of the shares
directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the shares to certain dealers at a price
which represents a concession not in excess of $ per share below the
public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares to the public, the
public offering price and such concessions may be changed by the Underwriters.
The Company granted to the Underwriters an option, exercisable for thirty
days from the date of this Prospectus, to purchase up to an aggregate of
225,000 additional shares of Class A Common Stock at the public offering price
set forth on the cover page of this Prospectus less the underwriting discounts
and commissions. The Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with the Offering
of the Class A Common Stock. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
In connection with the offering of the Class A Common Stock and in
compliance with applicable law, the Underwriters may overallot (i.e., sell
more Class A Common Stock than the total amount shown on the list of
Underwriters and participations which appears above) and may effect
transactions which stabilize, maintain or otherwise affect the market price of
the Class A Common Stock at levels above those which might otherwise prevail
in the open market. Such transactions may include placing bids for the Class A
Common Stock or effecting purchases of the Class A Common Stock for the
purpose of pegging, fixing or maintaining the price of the Class A Common
Stock or for the purpose of reducing a syndicate short position created in
connection with the offering. A syndicate short position may be covered by
exercise of the option described above rather than by
42
<PAGE>
open market purchases. In addition, the contractual arrangements among the
Underwriters include a provision whereby, if, prior to termination of price
and trading restrictions, the Representatives purchase Class A Common Stock in
the open market for the account of the underwriting syndicate and the
securities purchased can be traced to a particular Underwriter or member of
the selling group, the underwriting syndicate may require the Underwriter or
selling group member in question to purchase the Class A Common Stock in
question at a cost price to the syndicate or may recover from (or decline to
pay to) the Underwriter or selling group member in question the selling
concession applicable to the securities in question. The Underwriters are not
required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
The Company and its officers and directors have agreed that, for a period of
90 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock of the Company or any
securities convertible into, or exercisable or exchangeable for, Common Stock
of the Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Varnum, Riddering, Schmidt & Howlett LLP, Grand Rapids,
Michigan. Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York, are acting as counsel for the Underwriters.
Members of Varnum, Riddering, Schmidt & Howlett LLP own, in the aggregate,
approximately 27,688 shares of Class A Common Stock as of March 24, 1997.
EXPERTS
The financial statements and schedules included and incorporated by
reference in this Prospectus and elsewhere in the Registration Statement, have
been audited by BDO Seidman, LLP and BDO BINDER GmbH, independent certified
public accountants, to the extent and for the periods set forth in their
respective reports appearing elsewhere herein and incorporated herein by
reference. The financial statements and schedules are included and
incorporated herein in reliance upon such reports given upon the authority of
such firm as experts in auditing and accounting.
43
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants......... F-2
Combined Consolidated Statements of Income................. F-3
Combined Consolidated Balance Sheets....................... F-4
Combined Consolidated Statements of Cash Flows............. F-5
Combined Consolidated Statements of Shareholders' Equity... F-6
Notes to the Combined Consolidated Financial Statements.... F-7 through F-19
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Combined Consolidated Statements of Income....... F-20
Condensed Combined Consolidated Balance Sheets............. F-21
Condensed Combined Consolidated Statements of Cash Flows... F-22
Notes to the Condensed Combined Consolidated Financial
Statements................................................ F-23 through F-25
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF
INCOME (UNAUDITED)
Introduction............................................... F-26
Pro Forma Condensed Combined Consolidated Statements of
Income.................................................... F-27, F-28
Notes to the Pro Forma Condensed Combined Consolidated
Statements of Income...................................... F-29
</TABLE>
F-1
<PAGE>
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.
BDO Seidman, LLP
Grand Rapids, Michigan
August 2, 1996
F-2
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
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.......................... $ 0.86 $ 1.14 $ 0.70
Cumulative effect of adopting SFAS No. 109..... -- -- 0.05
-------- -------- --------
Income per share of common stock............. $ 0.86 $ 1.14 $ 0.75
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 29, JULY 1,
1996 1995
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
JUNE 29, JULY 1, JULY 2,
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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 costs and postretirement
benefits..................................... 4,934 2,742 3,941
Deferred income taxes......................... (2,386) (2,108) (1,432)
Minority interest net income (loss) of
subsidiaries................................. (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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
----------------------- FOREIGN
DONNELLY ADDITIONAL CURRENCY
PREFERRED CLASS CLASS EXPORT PAID-IN TRANSLATION RETAINED
STOCK A B CORPORATION CAPITAL ADJUSTMENT EARNINGS
--------- ----- ----- ----------- ---------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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--$.26 per
share................. (1,323)
Class B--$.26 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--$.75
per share............. (40)
Common stock:
Class A--$.26 per
share................. (1,337)
Class B--$.26 per
share................. (1,147)
Common stock issued
under employee benefit
plans................. 3 475
Change in investment in
Vision Group, plc..... 2,317
---- ---- ---- --- ------- ----- -------
Balance, July 1, 1995... 531 418 358 4 23,522 154 57,913
Net income............. 8,454
Foreign currency
translation
adjustment............ (925)
Cash dividends
declared:
Preferred stock--$.75
per share............. (40)
Common stock:
Class A--$.32 per
share................. (1,690)
Class B--$.32 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
==== ==== ==== === ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
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, transaction and
translation gains or losses are reflected in net income for all accounts other
than intercompany balances of a long-term investment nature for which the
translation gains or losses are reported as a separate component of
shareholders' equity. Foreign currency transaction gains and losses included
in other income are not material.
REVENUE RECOGNITION
The Company's primary source of revenue is generated from the sale of its
products. The Company recognizes revenue when its products are shipped.
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.
CUSTOMER TOOLING TO BE BILLED
Customer tooling to be billed represents costs incurred on behalf of the
Company's customers. Customer tooling costs are recoverable at the time of
tool completion and approval, or are recovered in the program's piece price
over the program's life, not to exceed a period of three years.
F-7
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings....................... 10 to 40
Machinery and equipment......... 3 to 12
</TABLE>
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 the stock split
effective January 30, 1997 (9,753,558 in 1996, 9,680,053 in 1995 and 9,646,154
in 1994). The potential dilutive effect from the exercise of stock options is
not material.
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, per
share information and stock plan data have been adjusted to reflect the stock
split.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of all financial instruments where the
carrying value differs from the fair value, primarily 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. The carrying value of the Company's variable rate debt and all
other financial instruments approximates their fair value.
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 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
F-8
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
rearview mirror systems, modular 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:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
Sales to major automobile manufacturers as a percent of the Company's net
sales follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Chrysler................................................... 33% 18% 18%
Ford....................................................... 22 22 24
Honda...................................................... 16 14 12
General Motors............................................. 10 17 21
--- --- ---
81% 71% 75%
=== === ===
</TABLE>
F-9
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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 Group"), 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 Group 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 Group, based on the quoted market price for Vision Group'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
Group 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, supplies many of the main automakers 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
F-10
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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's 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.
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Summarized Balance Sheet Information:
Current assets....................................... $ 90,927 $80,443
Non-current 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
======== =======
</TABLE>
5. DEBT AND OTHER FINANCING ARRANGEMENTS
Debt consists of:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======== =======
</TABLE>
F-11
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 covenants. Retained earnings available for
dividends at June 29, 1996, are $19.6 million.
Annual principal maturities consist of:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- --------------
(IN THOUSANDS)
<S> <C>
1997...................... $ 159
1998...................... 117
1999...................... 3,525
2000...................... 7,000
2001...................... 20,357
2002 and thereafter....... 70,758
--------
$101,916
========
</TABLE>
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 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. 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.
F-12
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments" (see Note 1), the Company has provided the
following fair value estimates for instruments in which the fair value differs
from carrying value at June 29, 1996:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Liabilities:
Long-term fixed rate debt..................... $55,000 $53,630
Derivatives:
Interest rate swaps........................... -- (423)
Foreign exchange contracts.................... -- 274
</TABLE>
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.
Assumptions and net periodic pension cost are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
The funded status of the defined benefit pension plans is summarized below:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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)
======== ========
</TABLE>
F-13
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The components of the net periodic postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
The postretirement health care liability recognized in the balance sheet is
as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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)
======== ========
</TABLE>
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
F-14
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts as measured by income tax laws. The Company has grouped the noncurrent
deferred tax assets with other assets and the net noncurrent deferred tax
liability with certain other liabilities on the balance sheet. The tax effects
of temporary differences which give rise to a significant portion of deferred
tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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)
======= =======
</TABLE>
Per Balance Sheet:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current income tax asset............................... $ 1,912 $ 2,197
Noncurrent income tax asset............................ 2,095 --
Noncurrent income tax liability........................ (3,564) (3,648)
------- -------
Net deferred tax asset (liability)..................... $ 443 $(1,451)
======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-15
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------
1996 1995 1994
------ ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ======= ======
</TABLE>
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-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 547,250 shares of Class A Common Stock. Eligible
employees may purchase stock at market value, or 90% of market value if the
price is $6.40 per share or higher, up to a maximum of $5,000 per employee in
any calendar year. The Company issued 21,825 shares in 1996 and 28,464 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 1,078,125 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.
F-16
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options have been granted to purchase common stock at prices ranging from
$7.36 to $16.10 per share. Options were exercised during 1995 and 1996 at
prices ranging from $7.36 to $8.48 per share. A summary of option transactions
follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding, beginning of year.................. 515 451 353
Options granted......................................... 100 95 99
Options exercised....................................... (59) (16) (1)
Options expired......................................... (45) (15) --
--- --- ---
Options outstanding, end of year........................ 511 515 451
=== === ===
Exercisable, end of year................................ 421 429 353
=== === ===
</TABLE>
The Company has reserved 456,219 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.
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
F-17
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
other on certain other patents for a period of four years. This settlement was
recognized in selling, general and administrative, net of related patent
litigation costs previously capitalized. Patent litigation costs included in
selling, general and administrative expenses were $3.7 million, $3.1 million
and $0.8 million in 1996, 1995, and 1994, respectively.
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, results of operation and liquidity, individually
and in the aggregate.
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. In 1995 the Company entered an agreement
for the sale and leaseback of newly installed modular window production
equipment. The equipment was sold at cost and no gain or loss was recognized
on the transaction. The lease, which has six one year renewal terms, an
effective 6.9% fixed interest rate, and a 40% balloon option for the Company
to purchase the equipment after the full seven year term, is classified as an
operating lease.
Future minimum lease payments, excluding renewal options, consist of:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- --------------
(IN THOUSANDS)
<S> <C>
1997...................... $3,688
1998...................... 1,196
1999...................... 514
2000...................... 578
2001...................... 221
2002 and thereafter....... 485
------
$6,682
======
</TABLE>
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 severance 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 implemented a restructuring plan
of its non-automotive businesses to focus on its automotive businesses. The
restructuring plan included the sale of the Company's appliance business, the
sale of the heavy truck mirror business and the liquidation of the Company's
investment in OSD Envizion, a joint venture engaged in the manufacture of
welding helmet shields. The Company received total proceeds of $14.2 million
associated with the restructuring of these businesses, which had a combined
net
F-18
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
book value of $6.5 million. In addition, restructuring costs of $3.0 million
were also recognized consisting of a severance program and other expenses
associated with the plan. The severance program included twenty-five
personnel, primarily middle and senior managers of the Company. The spending
for these costs was essentially completed by the end of 1995. The
restructuring of the non-automotive businesses resulted in a pretax gain of
$4.7 million. These non-automotive businesses represented an insignificant
portion of the Company's operations for each period reported.
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.
14. QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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.............. (.18) .27 .25 .52 .86
Dividends declared per share of
common stock................... .08 .08 .08 .08 .32
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) .49 .32 .34 1.14
Dividends declared per share of
common stock................... .064 .064 .064 .064 .256
</TABLE>
All per share data has been adjusted for the stock split effective January
30, 1997. The impact of certain transactions on the 1996 and 1995 quarterly
results of operations is discussed in Notes 11 and 13. See Management's
Discussion and Analysis of Results of Operations and Financial Condition for
discussion of the Company's results of operations.
F-19
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
MARCH 29, MARCH 30,
1997 1996
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales.................................. $ 483,118 $ 313,791
Costs and expenses:
Cost of sales............................ 391,878 257,923
Selling, general and administrative...... 47,324 30,475
Research and development................. 24,971 19,661
------------- -------------
Operating income........................... 18,945 5,732
Interest expense......................... 7,654 6,131
Royalty income........................... (1,216) (4,266)
Interest income.......................... (549) (1,073)
Other income, net........................ (1,345) (548)
------------- -------------
Income before taxes on income.............. 14,401 5,488
Taxes on income.......................... 5,369 1,849
------------- -------------
Income before minority interest and equity
earnings.................................. 9,032 3,639
Minority interest in net (income) loss of
subsidiaries............................ (104) 186
Equity in losses of affiliated companies. (331) (482)
------------- -------------
Net income................................. $ 8,597 $ 3,343
============= =============
Per share of common stock:
Net income............................... $ 0.87 $ 0.34
Cash dividends declared.................. $ 0.26 $ 0.24
Average common shares outstanding........ 9,822,335 9,743,434
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 29, JUNE 29,
1997 1996
--------- --------
(IN THOUSANDS)
<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.................. 14,426 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.
F-21
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
MARCH 29, MARCH 30,
1997 1996
--------- ---------
(IN THOUSANDS)
<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........................... 15,391 9,355
Gain on sale of property and equipment.................. (596) --
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 net income (loss) of subsidiaries..... 312 (202)
Equity in losses of affiliated companies................ 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................................................... (2,356) 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) (16,368)
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 and cash
equivalents.............................................. (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.
F-22
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 29, 1997
1. 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 nine month periods ended March 29, 1997, and March 30,
1996, included 26 weeks.
2. 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:
<TABLE>
<CAPTION>
MARCH 29, JUNE 29,
1997 1996
--------- --------
(IN THOUSANDS)
<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>
F-23
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. 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.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
MARCH 29, MARCH 30,
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash paid during the period for:
Interest............................................ $7,437 $2,227
Income taxes........................................ $8,575 $ 249
</TABLE>
5. 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 are consolidated with those of the Company beginning in the second
quarter of 1997. The Company consolidates Donnelly Hohe's financial statements
for the period ending one month prior to the Company's period end. For the
Company's period ended 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 companies had combined at the beginning of each period
presented is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------
MARCH 29, MARCH 30,
1997 1996
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Net sales............................................. $531,580 $477,150
Net income............................................ 8,597 3,343
Income per share of common stock ..................... $ 0.87 $ 0.34
</TABLE>
6. 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 have
been included in selling, general and administrative expense in the Company's
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.
F-24
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(UNAUDITED)
6. 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.
7. 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.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
See Management's Discussion and Analysis of Results of Operations and
Financial Condition for discussion of recently issued accounting standards.
F-25
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
INTRODUCTION
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 beginning in the second quarter of
1997. Prior to the second quarter of 1997, the Company's investment in
Donnelly Hohe was accounted for using the equity method, with the results of
Donnelly Hohe's operations included in the Company's combined consolidated
financial statements from the initial date of acquisition, April 1, 1995.
The following unaudited pro forma Condensed Combined Consolidated Statements
of Income for the year ended June 29, 1996, and the nine months ended March
29, 1997, include Donnelly Hohe's results for the twelve month period ended
May 31, 1996, and the nine month period ending February 28, 1997,
respectively, giving the effect to the consolidation of Donnelly Hohe as if it
occurred at the beginning of the periods presented. The pro forma information
presented is based on the historical financial statements of the Company and
Donnelly Hohe for the periods listed. Income related items are translated at
the average exchange rate for the period presented. See the March 29, 1997
Condensed Combined Consolidated Balance Sheet presented on page F-21 of this
report for a presentation of the Company's balance sheet including Donnelly
Hohe.
The pro forma data do not purport to represent what the Company's results of
operations would actually have been if such transactions had in fact occurred
as of the dates indicated or to project results for any future date or period.
F-26
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THE DONNELLY
YEAR ENDED JUNE 29, 1996 COMPANY HOHE ADJUSTMENTS NOTES PRO FORMA
------------------------ -------- -------- ----------- ----- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net Sales...................... $439,571 $225,085 $ (280) 3 $664,376
COST AND EXPENSES:
Cost of sales.................. 357,830 191,496 (280) 3 549,046
Selling, general and
administrative................ 38,123 19,718 -- 57,841
Research and development....... 27,728 4,507 -- 32,235
Restructuring charges.......... 2,399 1,309 -- 3,708
-------- -------- ------ --------
Operating income............. 13,491 8,055 -- 21,546
NON OPERATING EXPENSES
(INCOME):
Interest expense............... 8,102 7,057 (2,551) 3 12,608
Royalty income................. (5,239) (35) -- (5,274)
Interest income................ (1,017) (268) 889 1,3 (396)
Other income, net.............. (704) (481) -- (1,185)
-------- -------- ------ --------
Income before taxes on
income...................... 12,349 1,782 1,662 15,793
Taxes on income................ 4,191 710 294 1,2 5,291
-------- -------- ------ --------
Income before minority
interest and equity
earnings.................... 8,158 1,072 1,368 10,502
Minority interest in net
(income) loss of subsidiaries. 186 (660) (114) 4 (492)
Equity in earnings (losses) of
affiliated companies.......... 110 -- (1,666) 1 (1,556)
-------- -------- ------ --------
Net income................... $ 8,454 $ 412 $ (412) $ 8,454
======== ======== ====== ========
Income per share of common
stock $ 0.86 $ 0.86
</TABLE>
See notes to pro forma condensed combined consolidated statement of income
F-27
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THE DONNELLY
NINE MONTHS ENDED MARCH 29, 1997 COMPANY HOHE(5) ADJUSTMENTS NOTES PRO FORMA
- -------------------------------- -------- -------- ----------- ----- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales....................... $483,118 $48,848 $ (386) 3 $531,580
COST AND EXPENSES:
Cost of sales................... 391,878 42,524 (386) 3 434,016
Selling, general and
administrative................. 47,324 4,943 52,267
Research and development........ 24,971 1,136 26,107
-------- ------- ------ --------
Operating income (loss)......... 18,945 245 -- 19,190
NON OPERATING EXPENSES (INCOME):
Interest expense................ 7,654 1,657 (758) 3 8,553
Royalty income.................. (1,216) (1) (1,217)
Interest income................. (549) (29) 291 1,3 (287)
Other income, net............... (1,345) 52 (1,293)
-------- ------- ------ --------
Income (loss) before taxes on
income....................... 14,401 (1,434) 467 13,434
Taxes on income................. 5,369 325 (701) 1,2 4,993
-------- ------- ------ --------
Income (loss) before minority
interest and equity earnings. 9,032 (1,759) 1,168 8,441
Minority interest in net
(income) loss of subsidiaries.. (104) (265) 608 4 (239)
Equity in earnings (losses) of
affiliated companies........... (331) 248 1 (83)
-------- ------- ------ --------
Net income (loss)............. $ 8,597 $(2,024) $2,024 $ 8,597
======== ======= ====== ========
Income per share of common
stock.......................... $ 0.87 $ 0.87
</TABLE>
See notes to pro forma condensed combined consolidated statement of income
F-28
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NOTE A--The pro forma adjustments to the condensed consolidated statements of
income are as follows:
(1) These adjustments reflect the reversal of Donnelly Hohe's equity earnings
recorded by the Company and reversal of the Company's consolidating
adjustments to eliminate intercompany interest out of equity earnings for
fiscal 1996 and the first three months of fiscal 1997, net of tax.
(2) These adjustments reflect the taxes on the Donnelly Hohe partnership
earnings.
(3) These adjustments reflect the elimination of intercompany sales and cost
of sales and to reflect the elimination of interest on intercompany debt.
(4) These adjustments reflect the elimination of the Company's investment in
Donnelly Hohe and related minority interest.
(5) Represents Donnelly Hohe's results of operations for the three month
period ended August 31, 1996. Donnelly Hohe's results of operations for
the six month period ended February 28, 1997 are consolidated with the
Company's results of operations for the nine months ended March 29, 1997.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DE-
SCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JU-
RISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... i
Incorporation of Certain Documents by Reference........................... i
Forward-looking Statements................................................ ii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 6
Capitalization............................................................ 7
Price Range of Common Stock and Dividends................................. 8
Selected Combined Consolidated Financial Data............................. 9
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 11
Business.................................................................. 19
Management................................................................ 34
Principal Shareholders.................................................... 36
Description of Capital Stock.............................................. 38
Underwriting.............................................................. 42
Legal Matters............................................................. 43
Experts................................................................... 43
Index to Combined Consolidated Financial Statements....................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES
[LOGO]DONNELLY
CLASS A COMMON STOCK
--------
PROSPECTUS
--------
SMITH BARNEY INC.
SALOMON BROTHERS INC
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the securities
being registered are estimated as follows, all of which are to be borne by the
Company:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $7,972.00
National Association of Securities Dealers filing fee.......... 3,346.25
New York Stock Exchange Listing................................ *
Printing and Engraving Expenses................................ 75,000.00
Accounting Fees................................................ *
Transfer and Registrar's Fees.................................. *
Legal Fees and Expenses........................................ 110,000.00
Blue Sky Qualification Fees and Expenses....................... 9,000.00
Miscellaneous.................................................. *
----------
Total........................................................ $ *
==========
</TABLE>
- --------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561-571 of the Michigan Business Corporation Act, as amended (the
"Act"), grant the Registrant broad powers to indemnify any person in
connection with legal proceedings brought against him by reason of his present
or past status as an officer or director of the Registrant, provided that the
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Registrant, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The Act also gives the Registrant broad powers to indemnify any
such person against expenses and reasonable settlement payments in connection
with any action by or in the right of the Registrant, provided the person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Registrant, except that no
indemnification may be made if such person is adjudged to be liable to the
Registrant unless and only to the extent the court in which such action was
brought determines upon application that, despite such adjudication, but in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for reasonable expenses as the court deems proper. In
addition, to the extent that any such person is successful in the defense of
any such legal proceeding, the Registrant is required by the Act to indemnify
him against expenses, including attorneys' fees, that are actually and
reasonably incurred by him in connection therewith.
The Registrant's Second Amended and Restated Articles of Incorporation
contain provisions entitling directors and officers of the Registrant to
indemnification against certain liabilities and expenses. The Registrant has
entered into indemnification agreements with each of its directors providing
for indemnity by the Registrant of directors against certain liabilities and
expenses.
Under an insurance policy maintained by the Registrant, the directors and
officers of the Registrant are insured within the limits and subject to the
limitations of the policy, against certain expenses in connection with the
defense of certain claims, actions, suits or proceedings, and certain
liabilities which might be imposed as a result of such claims, actions, suits
or proceedings, which may be brought against them by reason of being or having
been such directors and officers.
The Registrant has agreed to indemnify the Underwriters, and the
Underwriters have agreed to indemnify the Registrant against certain civil
liabilities, including liabilities under the Securities Act, as amended.
Reference is made to the Underwriting Agreement filed as Exhibit 1 herewith.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Reference is made to the Exhibit Index which appears at page II-5 of the
Registration Statement.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities under the Securities Act of 1933,
as amended (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant of the foregoing provisions, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission such indemnification is against the public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective; and (2) For the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOLLAND, STATE OF MICHIGAN, ON MAY
14, 1997.
Donnelly Corporation
/s/ J. Dwane Baumgardner
By __________________________________
Chairman, Chief Executive Officer,
and President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>
/s/ J. Dwane Baumgardner May 14, 1997
___________________________________________
J. Dwane Baumgardner,
Principal Executive Officer and Director
/s/ William R. Jellison May 14, 1997
___________________________________________
William R. Jellison,
Principal Financial and Accounting Officer
/s/ John A. Borden* May 14, 1997
___________________________________________
John A. Borden, Director
/s/ Arnold F. Brookstone* May 14, 1997
___________________________________________
Arnold F. Brookstone, Director
/s/ Joan E. Donnelly* May 14, 1997
___________________________________________
Joan E. Donnelly, Director
/s/ Thomas E. Leonard* May 14, 1997
___________________________________________
Thomas E. Leonard, Director
/s/ Rudolph B. Pruden* April 30, 1997
___________________________________________
Rudolph B. Pruden, Director
/s/ B. Patrick Donnelly, III* May 14, 1997
___________________________________________
B. Patrick Donnelly, III, Director
/s/ R. Eugene Goodson* May 14, 1997
___________________________________________
R. Eugene Goodson, Director
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
/s/ Gerald T. McNeive* May 14, 1997
___________________________________________
Gerald T. McNeive, Director
/s/ Donald R. Uhlmann* May 14, 1997
___________________________________________
Donald R. Uhlmann, Director
</TABLE>
/s/ William R. Jellison
*By_____________________________ May 14, 1997
William R. Jellison, Attorney-in-
Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1 Form of Underwriting Agreement.
4* A specimen stock certificate of the Class A Common
Stock.
5** Form of Opinion of Varnum, Riddering, Schmidt &
Howlett LLP as to the validity of the issuance of the
Class A Common Stock.
10.1* Amended and Restated First Chicago Revolving Credit
Loan Agreement filed as part of Form 10-K for the
fiscal year ending June 29, 1996, as Exhibit 10.1 and
is hereby incorporated herein by reference.
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, was filed as Exhibit 2 to a Form 8-K dated
June 9, 1995, which has been subsequently amended and
is 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 28.1, and the same is hereby incorporated
herein by reference.
10.11* The Donnelly Corporation Executive Compensation Plan.
10.12* The Donnelly Corporation Unfunded Deferred Director
Fee Plan.
10.13* The Donnelly Corporation Pension Plan for Outside
Directors.
10.14* The Donnelly Corporation Supplemental Retirement
Plan.
10.15* The Donnelly Corporation Deferred Compensation Plan.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
10.16* Consolidated balance sheets of Hohe GmbH & Co. KG as
of March 31, 1996 and May 31, 1996, and the related
consolidated statements of income and cash flows for
the periods then ended which were filed as Item 7a
to the registrant's current report on Form 8-K dated
October 28, 1996, as amended by the registrant's
Form 8-K/A filed with the Commission on November 27,
1996, which is incorporated herein by reference.
10.17* Letter from Donnelly Corporation to Mr. Donn Viola
dated July 12, 1996, as modified on July 22, 1996.
10.18* Letter from Donnelly Corporation to Mr. Robert C.
Hange dated March 26, 1996.
10.19* Letter from Donnelly Corporation to Mr. Russ
Scaffede dated September 15, 1995.
10.20** An English language summary of the Pooling Agreement
written in German between the Registrant and
Donnelly Hohe GmbH & Co. KG dated .
10.21*** Receivables Purchase Agreement among Donnelly
Receivables Corporation, Falcon Asset Securitization
Corporation and the First National Bank of Chicago
dated as of November 14, 1996.
23.1 Consent of BDO Seidman, LLP, independent public
accountants.
23.2 Consent of BDO BINDER GmbH, independent public
accountants.
23.3** Consent of Varnum, Riddering, Schmidt & Howlett LLP
(to be included in their opinion filed herewith as
Exhibit 5).
24* Power of Attorney (included on the signature page).
27 Financial Data Schedules, incorporated by reference
to previously filed Form 10-K for year ended June
29, 1996 and 10-Q for quarter ended December 28,
1996.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
***Certain confidential information has been omitted pursuant to a request for
confidential treatment.
II-6
<PAGE>
EXHIBIT 1
1,500,000 Shares
DONNELLY CORPORATION
Class A Common Stock
(par value $0.10 per share)
UNDERWRITING AGREEMENT
----------------------
[ ], 1997
SMITH BARNEY INC.
SALOMON BROTHERS INC
As Representatives of
the Several Underwriters
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Donnelly Corporation, a Michigan corporation (the "Company"), proposes
to issue and sell an aggregate of 1,500,000 shares (the "Firm Shares") of its
Class A Common Stock, $0.10 par value per share (the "Common Stock"), to the
several Underwriters named in Schedule I hereto. The Company also proposes to
sell to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 225,000 shares (the "Additional Shares") of Common
Stock. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares".
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. Registration Statement and Prospectus. The Company has prepared
--------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
<PAGE>
-2-
"Act"), a registration statement on Form S-2 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said post-
effective amendment. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) unde the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430a
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus. Any reference in this Agreement to the
Registration Statement, any Prepricing Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-2 under the Act. As used herein, the term
"Incorporated Documents" means the documents which are incorporated by reference
into the registration statement, the Registration Statement, any Prepricing
Prospectus, the prospectus, or any amendment or supplement thereto.
2. Agreements to Sell and Purchase. The Company hereby agrees,
--------------------------------
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $[ ] per Share (the
"purchase price per share"),
<PAGE>
-3-
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 225,000
Additional Shares. Additional Shares may be purchased only for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. Upon any exercise of the over-allotment option, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments as you may determine in order to
avoid fractional shares) which bears the same proportion to the number of
Additional Shares to be purchased by the Underwriters as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto (or
such number of Firm Shares increased as set forth in Section 10 hereof) bears to
the aggregate number of Firm Shares.
3. Terms of Public Offering. The Company has been advised by you
-------------------------
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
--------------------------------------------
Underwriters of and payment for the Firm Shares shall be made at the office of
Cahill Gordon & Reindel, 80 Pine Street, New York, N.Y. 10005, at 10:00 A.M.,
New York City time, on [ ], 1997 (the "Closing Date"). The place of closing for
the Firm Shares and the Closing Date may be varied by agreement between you and
the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Cahill Gordon & Reindel at
<PAGE>
-4-
such time on such date (the "Option Closing Date"), which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor earlier
than two nor later than ten business days after the giving of the notice
hereinafter referred to, as shall be specified in a written notice from you on
behalf of the Underwriters to the Company of the Underwriters' determination to
purchase a number, specified in such notice, of Additional Shares. The place of
closing for any Additional Shares and the Option Closing Date for such Shares
may be varied by agreement between you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
--------------------------
Underwriters as follows:
(a) If, at the time this the Registration Statement or a post-
effective amendment thereto to be declared effective before the offering of the
Shares may commence, the Company will endeavor to cause the Registration
Statement or such post-effective amendment to become effective as soon as
possible and will advise you promptly and, if requested by you, will confirm
such advice in writing, when the Registration Statement or such post-effective
amendment has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
<PAGE>
-5-
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, (i) three signed
copies of the registration statement as originally filed with the Commission and
of each amendment thereto, including financial statements and all exhibits to
the registration statement, (ii) such number of conformed copies of the
registration statement as originally filed and of each amendment thereto, but
without exhibits, as you may request, (iii) such number of copies of the
Incorporated Documents, without exhibits, as you may request, and (iv) three
copies of the exhibits to the Incorporated Documents.
(d) Prior to the end of the period of time referred to in the first
sentence of subsection (f) below, the Company will not file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall
reasonably object after being so advised.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Company.
<PAGE>
-6-
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers a reasonable number of
copies thereof. In the event that the Company and you, as Representatives of the
several Underwriters, agree that the Prospectus should be amended or
supplemented, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Shares, in any jurisdiction where it is not now so
subject.
<PAGE>
-7-
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a twelve-
month period commencing after the effective date of the Registration Statement
and ending not later than 15 months thereafter, as soon as practicable after the
end of such period, which consolidated earnings statement shall satisfy the
provisions of Section ll(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to time
such other information concerning the Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all
reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) The Company will not sell, contract to sell or otherwise dispose
of any Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant any options or warrants to purchase
Common Stock, for a period of 90 days after the date of the Prospectus, without
the prior written consent of Smith Barney Inc. except as provided in this
Agreement, pursuant to the Company's Stock Purchase Plan, Stock Options Plans or
in connection with other incentive compensation arrangements with employees of
the Company.
<PAGE>
-8-
(m) The Company has furnished or will furnished to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors.
(n) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(o) The Company will use its best efforts to have the Shares listed,
subject to notice of issuance, on the New York Stock Exchange on or before the
Closing Date.
6. Representations and Warranties of the Company. The Company
----------------------------------------------
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b) The Company meets the requirements for the use of Form S-2 under
the Act. The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective and the prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the registration statement or the prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the Company
in writing by or on behalf of any Underwriter through you expressly for use
therein.
(c) The Incorporated Documents, when they were filed (or, if any
amendment with respect to any such document was filed, when such amendment was
filed), complied in all material respects with the requirements of the Exchange
Act and the
<PAGE>
-9-
rules and regulations thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
(d) All the outstanding shares of Common Stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms to the description thereof in the registration
statement and the prospectus.
(e) The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Michigan with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of the Company and the Subsidiaries (as hereinafter defined) taken as
a whole.
Each significant subsidiary of the Company as defined in Rule 1-02 of
Regulation S-X under the Act (collectively, the "Subsidiaries") is listed
on Schedule II hereto an exhibit to the Company's Annual Report on Form
10-K which is incorporated by reference into the Registration Statement. Each
Subsidiary which is a corporation has been duly organized, validly existing and
is in good standing in the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole. Each Subsidiary which is a partnership has been
duly formed, is validly existing and is in good standing
<PAGE>
-10-
as a limited partnership under the laws of the jurisdiction of its organization,
with all requisite partnership power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus, and is duly qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure to so register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole. All of the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and to the extent represented as owned by the Company,
are owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any lien, adverse claim, security interest,
equity, or other encumbrance.
(g) Except as described in the Registration Statement and the
Prospectus, there are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties, is subject, that are required to be
described in the Registration Statement or the Prospectus, and there are no
agreements, contracts, indentures, leases or other instruments that are required
to be described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement or any Incorporated Document that
are not described or filed as required by the Act or the Exchange Act.
(h) To the best knowledge of the Company, neither the Company nor any
of the Subsidiaries is in violation of its certificate or articles of
incorporation or by-laws, or other organizational documents, or of any law,
ordinance, administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of the Subsidiaries,
or in default in any material respect in the performance of any obligation,
agreement or condition contained in any bond, debenture, note, or other evidence
of indebtedness, or in any material agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any
<PAGE>
-11-
of them or any of their respective properties may be bound, except any such
violation or default that in the aggregate would not materially adversely affect
the business, operations, affairs, property, prospects, profits or conditions
(financial or other) of the Company and the Subsidiaries taken as a whole.
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the consummation by
the Company of the transactions contemplated hereby (i) requires any consent,
approval, authorization or other order of or registration or filing with, any
court, regulatory body, administrative agency or other governmental body, agency
or official (except such as may be required for the registration of the Shares
under the Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement), or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of the property or assets of any of them is
subject.
(j) The accountants, BDO Seidman, who have certified or shall certify
the financial statements included or incorporated by reference in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and
notes, included or incorporated by reference in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and the Subsidiaries on the basis stated in the
Registration Statement
<PAGE>
-12-
at the respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and the
Subsidiaries.
(l) The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement, have been duly and validly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws .
(m) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the Subsidiaries
taken as a whole.
(n) Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as being
owned by it, free and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration Statement and the
Prospectus or in a document filed as an exhibit to the Registration Statement
and all the property described in the Prospectus as being held under lease by
each
<PAGE>
-13-
of the Company and the Subsidiaries is held by it under valid, subsisting and
enforceable leases, except as do not, singly or in the aggregate, materially
adversely affect the value of such property and do not interfere with the use of
such property.
(o) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus and except to the extent a
failure to have any such permit would not materially adversely affect the
business, operations, affairs, properties, prospects, profits or condition
(financial or other) of the Company and the Subsidiaries taken as a whole; the
Company and each of the Subsidiaries has fulfilled and performed all its
material obligations with respect to such permits and except to the extent a
failure to do so possess any such permit would not, singly or in the
aggregate, materially adversely affect the business, operations, affairs,
properties, prospects, profits or condition (financial or other) of the Company
and the Subsidiaries taken as a whole. To the best knowledge of the Company, no
event has occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material impairment of
the rights of the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus, and, except as described in
the Prospectus, none of such permits contains any restriction that is materially
burdensome to the Company or any of the Subsidiaries.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
<PAGE>
-14-
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r)
(r) The Company and each of the Subsidiaries have filed all tax
returns required to be filed, and neither the Company nor any Subsidiary is in
default in the payment of any taxes which were payable pursuant to said returns
or any assessments with respect thereto except where the failure to file such
returns or pay such taxes would not materially adversely affect the business,
operations, affairs, properties, prospects, profits or condition (financial or
other) of the Company and the Subsidiaries taken as a whole.
(s) No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the registration statement or consummation of the
transactions contemplated by this Agreement.
(t) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registration, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not aware of
any claim to the contrary or any challenge by any other person to the rights of
the Company and the Subsidiaries with respect to the foregoing.
(u) The Company is not now, and after sale of the Shares and
application of the net proceeds from such sale as described in the Prospectus
under the caption "Use of Proceeds" will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(v)
7. Indemnification and Contribution. (a) The Company agrees to
---------------------------------
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material
<PAGE>
-15-
fact contained in any Prepricing Prospectus or in the Registration Statement or
the Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Shares by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, provided that the Company
has delivered the Prospectus to the several Underwriters in requisite quantity
on a timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel, or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that
<PAGE>
-16-
representation of such indemnified party and the Company by the same counsel
would be inappropriate under applicable standards of professional conduct
(whether or not such representation by the same counsel has been proposed) due
to actual or potential differing interests between them (in which case the
Company shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the Company shall, in connection with any one such
action, suit or proceeding or separate but substantially similar or related
actions, suits or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter,
to the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by reason
of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
with respect to information relating to such Underwriter furnished in writing by
or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer, or any such
controlling person, based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect of
which indemnity may be sought against any Underwriter pursuant to this paragraph
(c), such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but
<PAGE>
-17-
may employ separate counsel therein and participate in the defense thereof, but
the fees and expenses of such counsel shall be at such Underwriter's expense),
and the Company, its directors, any such officer, and any such controlling
person shall have the rights and duties given to the Underwriters by paragraph
(b) above. The foregoing indemnity agreement shall be in addition to any
liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof, for any
reason other than pursuant to the terms thereof, in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of the
Shares, or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Underwriters were treated as one entity for
such pur-
<PAGE>
-18-
pose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective numbers of Firm Shares set forth opposite their names in Schedule I
hereto (or such numbers of Firm Shares increased as set forth in Section 10
hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers, or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person con-
<PAGE>
-19-
trolling any Underwriter, or to the Company, its directors or officers, or any
person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
7.
8. Conditions of Underwriters' Obligations. The several obligations
----------------------------------------
of the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions :
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriters and their counsel, requires the making of
any addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Shares.
<PAGE>
-20-
(c) You shall have received on the Closing Date, an opinion of Varnum,
Riddering, Schmidt & Howlett LLP, counsel for the Company, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, to
the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Michigan with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly
registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, properties,
net worth or results of operations of the Company and the Subsidiaries
taken as a whole;
(ii) Each of the domestic Subsidiaries is a corporation duly organized
and validly existing in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease,
and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto); and all the outstanding shares of capital stock of each of the
domestic Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable, and, as to wholly owned Subsidiaries, are
owned by the Company directly, or indirectly through one of the other
Subsidiaries, free and clear of any perfected security interest, or, to the
best knowledge of such counsel after reasonable inquiry, any other security
interest, lien, adverse claim, equity or other encumbrance;
(iii) The authorized and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus and the
authorized capital stock of the Company conforms in all material respects
as to legal matters to
<PAGE>
-21-
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding prior
to the issuance of the Shares have been duly authorized and validly issued,
and are fully paid and nonassessable;
(v) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and
free of any preemptive, or to the best knowledge of such counsel after
reasonable inquiry, similar rights that entitle or will entitle any person
to acquire any Shares upon the issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms to the
requirements of the Michigan Business Corporation Act;
(vii) The Registration Statement and all post-effective amendments, if
any, have become effective under the Act and, such counsel has been orally
advised by the SEC that no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
are pending before or contemplated by the Commission; and any required
filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(viii) The Company has corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and is a valid, legal and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement of rights to indemnity and
contribution hereunder may be limited by Federal or state securities laws
or principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, in-
<PAGE>
-22-
solvency, reorganization, moratorium, and other laws relating to or
affecting creditors' rights generally and by general equitable principles;
(ix) To the best knowledge of such counsel, after due inquiry, the
Company is not in violation of its articles of incorporation or in material
violation of its bylaws, or other organizational documents, or to the best
knowledge of such counsel after reasonable inquiry, is in default in the
performance of any material obligation, agreement or condition contained in
any bond, debenture, note or other evidence of indebtedness known to such
counsel to which the Company is a party, except as may be disclosed in the
Prospectus;
(x) Neither the offer, sale or delivery of the Shares, the execution,
delivery or performance of this Agreement, compliance by the Company with
the provisions hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company
or any of the domestic Subsidiaries or any agreement, indenture, lease or
other instrument to which the Company or any of the domestic Subsidiaries
is a party or by which any of them or any of their respective properties is
bound that is an exhibit to the Registration Statement or to any
Incorporated Document, or is known to such counsel after reasonable
inquiry, or will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of the
domestic Subsidiaries, nor will any such action result in any violation of
any existing law, regulation, ruling (assuming compliance with all
applicable state securities and Blue Sky laws), judgment, injunction, order
or decree known to such counsel after reasonable inquiry, applicable to the
Company, the domestic Subsidiaries or any of their respective properties,
except in the case of any such violation, breach, default, creation or
imposition, to such extent as does not materially adversely affect the
business, operations, affairs, properties, prospects, prof
<PAGE>
-23-
its or condition (financial or other) of the Company and the Subsidiaries
taken as a whole;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the
part of the Company (except as have been obtained under the Act or the
Rules and Regulations or such as may be required under state securities or
Blue Sky laws governing the purchase and distribution of the Shares) for
the valid issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and
the notes thereto and the schedules and other financial and statistical
data included therein, as to which such counsel need not express any
opinion) appears on its face to comply as to form in all material respects
with the requirements of the Act; and each of the Incorporated Documents
(except for the financial statements and the notes thereto and the
schedules and other financial and statistical data included therein, as to
which such counsel need not express any opinion) appears on its face to
comply as to form in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder;
(xiii) There are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to
be filed as an exhibit to the Registration Statement or any Incorporated
Document that are not described or filed as required, as the case may be.
(xiv) To the best knowledge of such counsel, except as described in,
or specifically contemplated by, the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and such
counsel does not know of any commitment, plan or arrangement to issue, any
shares of capital stock of the Company or any se-
<PAGE>
-24-
curity convertible into or exchangeable or exercisable for capital stock of
the Company; and
(xv)
(xv) To the best knowledge of such counsel, based solely on a review
of its litigation docket, internal inquiry, an officer certificate from a
Company officer having general responsibility for such matters, and a
review of recent attorney's letters to independent public accountants,
there are no legal or governmental actions or proceedings against the
Company or any of the Subsidiaries pending or threatened in writing before
any court, governmental agency or arbitrator, which i) seek to affect the
enforceability of this Agreement or the related transaction documents or
ii) are required to be described in the Prospectus which are not
described.
(xvi) Although counsel has not undertaken, except as otherwise
indicated in their opinion, to determine independently, and does not assume
any responsibility for, the accuracy or completeness of the statements in
the Registration Statement, such counsel has participated in the
preparation of the Registration Statement and the Prospectus, including
review and discussion of the contents thereof (including review and
discussion of the contents of all Incorporated Documents), and nothing has
come to the attention of such counsel that has caused them to believe that
the Registration Statement (including the Incorporated Documents) at the
time the Registration Statement became effective, or the Prospectus, as of
its date and as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading or that any amendment or supplement
to the Prospectus, as of its respective date, and as of the Closing Date or
the Option Closing Date, as the case may be, contained any untrue statement
of a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading (it being understood
<PAGE>
-25-
that such counsel need express no opinion with respect to the financial
statements and the notes thereto and the schedules and other financial and
statistical data included in the Registration Statement or the Prospectus
or any Incorporated Document).
(xvii)
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of Michigan, provided that (1) each such local counsel is
acceptable to the Representatives, (2) such reliance is expressly authorized by
each opinion so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of Cahill
Gordon & Reindel, counsel for the Underwriters, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, with respect
to the matters referred to in clauses (v), (vii), (viii), (xii) and (xvi) of the
foregoing paragraph (c) and such other related matters as you may request.
(e) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from BDO Seidman, independent certified public accountants,
substantially in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth in or contemplated by the
Registration Statement or the Prospectus (or any amendment or Supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement
<PAGE>
-26-
thereto), except as may otherwise be stated in the Registration Statement and
Prospectus (or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries taken as a
whole; (iv) the Company and the Subsidiaries shall not have any liabilities or
obligations, direct or contingent (whether or not in the ordinary course of
business), that are material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration Statement or the
Prospectus (or any amendment or supplement thereto); and (v) all the
representations and warranties of the Company contained in this Agreement shall
be true and correct on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company (or such other officers as are
acceptable to you), to the effect set forth in this Section 8(f) and in Section
8(g) hereof.
(g) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(h) Prior to the Closing Date the Shares shall have been listed,
subject to notice of issuance, on the New York Stock Exchange.
(i) The Company shall have furnished or caused to be furnished to you
"lock-up" letters in the form and substance satisfactory to you, signed by each
of the Company's current officers and directors. Each "lock-up" letter signed by
each of the foregoing persons shall be in full force and effect on the Closing
Date.
(j) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Un-
<PAGE>
-27-
derwriters, or to counsel for the Underwriters, shall be deemed a representation
and warranty by the Company to each Underwriter as to the statements made
therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (f) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c) and (d)
shall be revised to reflect the sale of Additional Shares.
9. Expenses. The Company agrees to pay the following costs and
---------
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all
amendments or supplements to any of them, as may be requested for use in
connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the listing of the Shares on the New York Stock Exchange or;
(vi) the registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states as provided in Section
5(g) hereof (including the reasonable fees, expenses and disbursements of
counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees and
the fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities Dealers,
Inc.; (viii) the transportation and other expenses incurred by or on behalf of
Company representatives in connection with presentations to
<PAGE>
-28-
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company.
10. Effective Date of Agreement. This Agreement shall become
----------------------------
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such post-
effective amendment has been released by the Commission. Until such time as this
Agreement shall have become effective, it may be terminated by the Company, by
notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or
refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven
<PAGE>
-29-
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any such default of any such Underwriter under this
Agreement. The term "Underwriter" as used in this Agreement includes, for all
purposes of this Agreement, any party not listed in Schedule I hereto who, with
your approval and the approval of the Company, purchases Shares which a
defaulting Underwriter is obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
-------------------------
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York or Michigan
shall have been declared by either federal or state authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities or other
international or domestic calamity, crisis or change in political, financial or
economic conditions, the effect of which on the financial markets of the United
States is such as to make it, in your judgment, impracticable or inadvisable to
commence or continue the offering of the Shares at the offering price to the
public set forth on the cover page of the Prospectus or to enforce contracts for
the resale of the Shares by the Underwriters. Notice of such termination may be
given to the Company by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
12. Information Furnished by the Underwriters. The statements set
------------------------------------------
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first and third paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 7 hereof.
The first paragraph
<PAGE>
-30-
under the caption "Underwriting" will contain the names and participations of
the underwriters; the third paragraph will contain the selling concession and
the reallowance.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and
--------------
11 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at Donnelly Corporation, 414 East Fortieth Street, Holland, Michigan
49423, Attention: William R. Jellison, Vice President and Treasurer; or (ii)
if to you, as Representatives of the several Underwriters, care of Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. THIS AGREEMENT SHALL BE GOVERNED BY
-----------------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK .
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE>
-31-
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
DONNELLY CORPORATION
By: ________________________
Name:
Title:
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
SALOMON BROTHERS INC
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By __________________________
Name:
Title:
By SALOMON BROTHERS INC
By __________________________
Name:
Title:
<PAGE>
SCHEDULE I
DONNELLY CORPORATION
Number of
Underwriter Firm Shares
- ----------- -----------
Smith Barney Inc. ..................................
Salomon Brothers Inc ...............................
___________
Total .................. 1,500,000
<PAGE>
SCHEDULE II
SIGNIFICANT SUBSIDIARIES
OF
DONNELLY CORPORATION
Name State of Incorporation
- ---- ----------------------
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Donnelly Corporation
Holland, Michigan
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 2, 1996, relating to the
combined consolidated financial statements of Donnelly Corporation, which is
contained in that Prospectus, and to the incorporation in the Prospectus by
reference to our reports dated August 2, 1996, relating to the combined
consolidated financial statements and schedules of Donnelly Corporation
appearing in the Company's Annual Report on Form 10-K for the year ended June
29, 1996.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
May 14, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Donnelly Corporation
Holland, Michigan
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated July
12, 1996, relating to the consolidated financial statements of Hohe GmbH & Co.
KG as of March 31, 1996 and May 31, 1996 and for the periods then ended
appearing in the Company's Form 8-K/A filing on November 27, 1996.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO BINDER GmbH
Frankfurt am Main
May 14, 1997
