<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended September 26, 1998 Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-0493110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 West Third Street, Holland, Michigan 49423-2813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 786-7000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes / X / No / /
5,802,382 shares of Class A Common Stock and 4,284,097 shares of Class
B Common Stock were outstanding as of October 30, 1998.
<PAGE> 2
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
- September 26, 1998 and June 27, 1998 3
Condensed Combined Consolidated Statements of Income
- Three months ended September 26, 1998 and
September 27, 1997 4
Condensed Combined Consolidated Statements of
Cash Flows
- Three months ended September 26, 1998
and September 27, 1997 5
Notes to Condensed Combined Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceeding 16-17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, June 27,
In thousands 1998 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,194 $ 5,628
Accounts receivable, less allowance
of $1,170 and $1,095 98,530 92,972
Inventories 47,182 44,146
Prepaid expenses and other current assets 26,367 24,031
-------- --------
Total current assets 176,273 166,777
Property, plant and equipment 311,185 295,119
Less accumulated depreciation 133,891 126,214
-------- --------
Net property, plant and equipment 177,294 168,905
Investments in and advances to affiliates 20,804 19,590
Other assets 24,346 22,613
-------- --------
Total assets $ 398,717 $ 377,885
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,551 $ 77,595
Other current liabilities 35,768 36,717
-------- --------
Total current liabilities 122,319 114,312
Long-term debt, less current maturities 135,694 123,706
Deferred income taxes and other liabilities 37,740 35,831
-------- --------
Total liabilities 295,753 273,849
-------- --------
Minority interest 803 754
Preferred stock 531 531
Common stock 1,013 1,011
Other shareholders' equity 100,617 101,740
-------- --------
Total shareholders' equity 102,161 103,282
-------- --------
Total liabilities and shareholders' equity $ 398,717 $ 377,885
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
September 26, September 27,
In thousands, except share data 1998 1997
-------- --------
<S> <C> <C>
Net sales $ 189,603 $ 165,176
Cost of sales 162,842 137,203
-------- --------
Gross profit 26,761 27,973
Operating expenses:
Selling, general and administrative 18,588 15,179
Research and development 9,285 9,704
-------- --------
Operating income (loss) (1,112) 3,090
-------- --------
Non-operating (income) expenses:
Interest expense 2,010 2,404
Interest income (171) (111)
Royalty income (107) (102)
Other (income) expense, net (172) 187
-------- --------
Income (loss) before taxes on income (2,672) 712
Taxes on income (credit) (1,040) 15
-------- --------
Income (loss) before minority interest
and equity earnings (1,632) 697
Minority interest in net loss of subsidiaries 233 345
Equity in losses of affiliated companies (591) (56)
-------- --------
Net income (loss) $ (1,990) $ 986
-------- --------
-------- --------
Per share of common stock:
Basic net income (loss) per share $ (0.20) $ 0.10
Diluted net income (loss) per share $ (0.20) $ 0.10
Cash dividends declared $ 0.10 $ 0.10
Average common shares outstanding 10,078,032 9,892,525
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
September 26, September 27,
In thousands 1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,990) $ 986
Adjustments to reconcile net income to net
cash from (for) operating activities:
Depreciation and amortization 6,321 5,913
Loss on sale of property and equipment (3) (3)
Deferred pension cost and postretirement benefits 1,481 173
Deferred income taxes (278) 207
Minority interest loss (469) (621)
Equity in losses of affiliated companies 591 56
Changes in operating assets and liabilities:
Repayment of accounts receivable (194) (3,775)
Accounts receivable (3,990) 12,590
Inventories (2,276) (3,772)
Prepaid expenses and other current assets (2,550) (3,376)
Accounts payable and other current liabilities 6,108 (15,580)
Other 461 (2,858)
-------- --------
Net cash from (for) operating activities 3,212 (10,060)
-------- --------
-------- --------
INVESTING ACTIVITIES
Capital expenditures (12,903) (10,261)
Proceeds from sale of property and equipment 369 298
Investments in and advances to equity affiliates (1,824) (6)
Other (253) (284)
-------- --------
Net cash for investing activities (14,611) (10,253)
-------- --------
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt 10,761 22,747
Repayments on long-term debt - (405)
Common stock issuance 153 297
Dividends paid (1,018) (993)
-------- --------
Net cash from financing activities 9,896 21,646
-------- --------
-------- --------
Effect of foreign exchange rate changes on cash 69 (439)
-------- --------
Increase (decrease) in cash and cash equivalents (1,434) 894
Cash and cash equivalents, beginning of period 5,628 8,568
-------- --------
Cash and cash equivalents, end of period $ 4,194 $ 9,462
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 1998
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited condensed combined consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended September
26, 1998, should not be considered indicative of the results that may
be expected for the year ended June 26, 1999. The combined
consolidated balance sheet at June 27, 1998, 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 27, 1998. Certain
reclassifications have been made to prior year, previously released,
data to conform to the current presentation and had no effect on net
income reported for any period.
The Company's fiscal year is the 52 or 53 week period ending the
Saturday closest to June 30. Accordingly, each quarter ends on the
Saturday closest to the calendar quarter end. Both the quarters ended
September 26, 1998, and September 27, 1997, included 13 weeks.
NOTE B --- INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of:
(In thousands) September 26, June 27,
1998 1998
-------- --------
<S> <C> <C>
Finished products and work in process $ 17,608 $ 16,987
Raw materials 29,574 27,159
-------- --------
$ 47,182 $ 44,146
-------- --------
-------- --------
</TABLE>
NOTE C---EARNINGS PER SHARE
Effective December 27, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, 'Earnings per
Share,' which replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options and convertible securities. Diluted
earnings per share is computed similarly to fully diluted earnings per
share. All earnings per share amounts for all periods presented have
been restated to conform to the requirements of Statement No. 128.
<PAGE> 7
The following table sets forth the computation of basic and diluted
earnings per share for each period reported:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 26, September 27,
1998 1997
-------- --------
<S> <C> <C>
Net income (loss) $ (1,990) $ 986
Less: Preferred stock dividends (10) (10)
Income (loss) available to common
Shareholders $ (2,000) $ 976
-------- --------
-------- --------
Weighted-average shares 10,078 9,982
Plus: Effect of dilutive stock Options 61 186
-------- --------
Adjusted weighted-average Shares 10,139 10,078
-------- --------
-------- --------
Basic earnings (loss) per share $ (0.20) $ 0.10
-------- --------
-------- --------
Diluted earnings (loss) per share $ (0.20) $ 0.10
-------- --------
-------- --------
</TABLE>
NOTE D---COMPREHENSIVE INCOME
Effective for the quarter ended September 27, 1998, the Company
adopted the provisions of Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. This Statement requires that
all components of comprehensive income and total comprehensive income
be reported in one of the following: a statement of income and
comprehensive income, a statement of comprehensive income or a
statement of shareholders' equity. Comprehensive income is comprised
of net income and all changes to shareholders' equity, except those
due to investments by owners and distributions to owners.
Comprehensive income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 26, September 27,
1998 1997
-------- --------
<S> <C> <C>
Net income (loss) $ (1,990) $ 986
Other comprehensive income:
Foreign currency translation and
transaction adjustments 1,734 (1,335)
-------- --------
Comprehensive income (loss) $ (256) $ (349)
-------- --------
-------- --------
</TABLE>
<PAGE> 8
During the three-month periods ended September 26, 1998 and September
27, 1997, translation and transaction adjustments of $1.7 million and
$(1.3) million, respectively, were recorded directly in a component of
shareholder's equity in the accompanying condensed combined
consolidated balance sheets. These resulted from foreign currency
denominated assets and liabilities of the Company's foreign
subsidiaries, as well as foreign currency denominated long-term
advances to affiliates and related fluctuation in exchange rates.
Total accumulated other comprehensive income totaled $(6.3) million
and $ (8.1) million at September 26, 1998 and June 27, 1998,
respectively.
NOTE E---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 26, September 27,
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,247 $ 1,617
Income taxes 21 181
</TABLE>
<PAGE> 9
ITEM 2. DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1998
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The terms
'believe,' 'anticipate,' 'intend,' 'goal,' 'expect,' and
similar expressions may identify forward-looking statements.
Investors are cautioned that any forward-looking statements, including
statements regarding the intent, belief, or current expectations of
the Company or its management, are not guarantees of future
performance and involve risks and uncertainties, and that actual
results may differ materially from those in forward-looking statements
as a result of various factors including, but not limited to (i)
general economic conditions in the markets in which the Company
operates, (ii) fluctuation in worldwide or regional automobile and
light truck production, (iii) changes in practices and/or policies of
the Company's significant customers, (iv) market development of
specific products of the Company, including digital optics and
electrochromic mirrors, (v) whether the Company successfully
implements the European restructuring and (vi) other risks and
uncertainties. The Company does not intend to update these forward-
looking statements.
OVERVIEW
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.
Accordingly, the Company's financial statements for the period ended
September 26, 1998, consolidate Donnelly Hohe's financial statements
for the period ended August 31, 1998. All year and quarter references
relate to the Company's fiscal year and fiscal quarters, unless
otherwise stated.
The Company's net sales and net income are subject to significant
quarterly fluctuations attributable primarily to production schedules
of the Company's major automotive customers. These same factors cause
quarterly results to fluctuate from year to year. The comparability of
the Company's results on a period to period basis may also be affected
by the Company's formation of new joint ventures, alliances,
acquisitions and substantial investment in new product lines.
RESULTS OF OPERATIONS
Net sales were $189.6 million in the first quarter of 1999 compared to
$165.2 million for the first quarter of 1998. Net sales for the
Company's North American operations increased by approximately 18% in
1999 compared to 1998. The increase was primarily due to programs
launched in 1998 running at full production volumes and new product
introductions in the modular window and interior trim product lines.
North American car and light truck build was flat in the first quarter
of 1999 compared to the
<PAGE> 10
same period last year. Net sales for the Company's European
operations were approximately 9.6% higher in the first quarter of 1999
compared to 1998 primarily due to stronger industry car build.
The Company's gross profit margin for the first quarter of 1999 was
14.1% compared to 16.9% for the first quarter of 1998. The Company's
North American gross profit margins for the three-month period were
lower compared to the same period in 1998, primarily due to the Lear-
Donnelly joint venture being accounted for under the equity method and
relatively greater revenue growth of products with lower profit
margins. The Company's North American operations have experienced a
more rapid rate of revenue growth in modular window net sales,
relative to the net sales growth of other products, such as mirrors,
that have higher profit margins. The Company may experience a change
in gross profit margin from period to period based on the sales growth
or change in mix of higher or lower margin products. A favorable
arbitration award in the first quarter of 1998 offset excess costs
related to visor programs and improved margins slightly for the three-
month period of 1998. The Company's gross profit margins in the first
quarter of 1999 were unfavorably impacted by ongoing start-up losses
at Donnelly Optics, the Company's digital imaging operation in Tucson,
Arizona, due to slower than anticipated consumer acceptance of
computer digital imaging products. The Company's European gross
profit income was flat as compared to 1998 despite the higher volumes
due to continued operational issues at the Company's facilities in
Germany and Ireland.
Selling, general and administrative expenses increased to 9.8% of net
sales in the first quarter of 1999 from 9.2% of net sales in the first
quarter of 1998, primarily due to higher expenses on resources to
support the introduction of new information systems and technology.
Research and development expenses for the first quarter of 1999 were
4.9% of net sales compared to 5.9% of net sales for the first quarter
of 1998. The Company expects future research and development expenses
to be lower than in the past, primarily due to the transfer of direct
expenses to support the interior trim and lighting business to the
Lear-Donnelly joint venture, which is being accounted for under the
equity method.
The Company had an operating loss of $1.1 million in the first quarter
of 1999, compared to operating income of $3.1 million in the first
quarter of 1998. The Company's North American operating income was
lower as a percent of sales for the three-month period primarily due
to losses associated with the start-up of Donnelly Optics and an
unfavorable product mix. A favorable arbitration award offset excess
costs on certain visor programs in the first quarter of 1998, slightly
improving margins for the three-month period in 1998. The formation
of the Lear-Donnelly joint venture did not have a material impact on
the Company's operating margins for the period. The Company's
European operating income was unfavorably impacted for the quarter due
to continued operational variances at the Company's operations in
Germany and Ireland. These variances are primarily due to overhead
redundancies and manufacturing process inefficiencies. In Europe,
plans for restructuring the operations and addressing these issues
have been delayed due to a recent change in management. The Company
has assigned four members from the senior management team to manage
the restructuring improvements in Europe.
Interest expense was $2.0 million in the first quarter of 1999,
compared to $2.4 million for the first quarter of 1998. Interest
expense was lower primarily due to favorable interest rates compared
to the same period last year.
The Company's tax benefit for the three-month period was $1.0 million
on a pretax loss of $2.7 million for an effective tax rate of 38.9%.
The projected tax rate for fiscal 1999 is estimated to be between 30%
<PAGE> 11
to 32%. The higher first quarter rate was due to trade tax benefits
recognized on the operating losses at Donnelly Hohe.
Minority interest in net loss of subsidiaries was $0.2 million in the
first quarter of 1999 compared to $0.3 million in the first quarter of
1998. Equity in earnings (losses) of affiliated companies was ($0.6)
million in the first quarter of 1999 compared to $0.1 million for the
same period in 1998. Equity losses were higher in the first quarter
due to losses incurred at Vision Group. The losses were incurred due
to slower than anticipated consumer acceptance for Vision Group's
integrated camera microchip products.
During 1999, the Company continues to focus on implementing plans to
improve financial performance. However, the delays in implementing
improvements in Europe and the investments required for Donnelly
Optics are continuing to place pressure on the financial performance
of the Company. Donnelly Optics continues to experience major losses
due to slower-than-expected consumer acceptance of digital imaging
products. The Company is currently evaluating options to respond to
these market conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's $160 million multi-currency global revolving credit
agreement had borrowings against it of $57.7 million and $47.5 million
in the Company's Combined Consolidated Balance Sheets dated September
26, 1998, and June 27, 1998, respectively. The Company's long-term
borrowing increased by approximately $12 million from June 27, 1998 to
September 26, 1998, primarily to fund operating losses in the first
quarter and to support capital expenditures.
The Company's current ratio was 1.4 and 1.5 at September 26, 1998 and
June 27, 1998, respectively, with working capital at $54.0 million and
$52.5 million, respectively.
Capital expenditures for the first three months of 1999 and 1998 were
$12.9 and $10.3 million, respectively. Capital spending in 1999 is
expected to be higher compared to the previous year to support new
business in electrochromic mirrors, complete outside mirrors and
modular windows and the implementation of new manufacturing,
distribution and administrative information systems in North America
and Europe.
The Company believes that its long-term liquidity and capital resource
needs will continue to be provided principally by funds from operating
activities, supplemented by borrowings under the Company's existing
credit facilities. The Company also considers equity offerings to
properly manage the Company's total capitalization position. The
Company considers, from time to time, new joint ventures, alliances
and acquisitions, the implementation of which could impact the
liquidity and capital resource requirements of the Company.
Except for the Company's subsidiary in Mexico, the value of the
Company's long-term 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 foreign currencies. The Company's primary foreign investments
are in Germany, Ireland, Spain and France. Translation gain and loss
adjustments are reported as a separate component of shareholders'
equity. For the Company's subsidiary in Mexico, whose functional currency is
the United States Dollar, transaction and translation gains or losses are
reflected in net income for all accounts other than intercompany balances of a
long-
<PAGE> 12
term investment nature, for which the translation gains or losses
are reported as a separate component of shareholders' equity.
The Company utilizes interest rate swaps and foreign exchange
contracts, from time to time, to manage exposure to fluctuations in
interest and foreign currency exchange rates. The risk of loss to the
Company in the event of nonperformance by any party under these
agreements is not material.
Recently Issued Accounting Standards
Effective for the quarter ended September 27, 1998, the Company
adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, 'Reporting Comprehensive Income.' SFAS No. 130
establishes standards for the reporting and display of comprehensive
income, its components and accumulated balances in a financial
statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners
and distributions to owners. The quarterly information required by
this disclosure has been included in Note D---Comprehensive Income,
in the Notes to Condensed Combined Consolidated Financial Statements.
SFAS No. 131, 'Disclosures about Segments of an Enterprise and
Related Information,' which supersedes SFAS No. 14, 'Financial
Reporting for Segments of a Business Enterprise,' establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public after the initial year of
adoption. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.
SFAS No. 132, 'Employer's Disclosures about Pensions and Other
Postretirement Benefits,' an amendment of SFAS's No. 87, 88, and 106,
revises the standards for employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or the recognition of those plans.
SFAS Nos. 131 and 132 are effective for financial statements for
fiscal years beginning after December 15, 1997, and require
comparative information for earlier years to be restated. Management
has not yet fully evaluated the impact, if any, they may have on
future financial statement disclosures. However, results of
operations and financial position will be unaffected by implementation
of these new standards.
SFAS No. 133, 'Accounting for Derivative Instruments and Hedging
Activities,' amends SFAS Nos. 52 and 107 and supersedes SFAS Nos. 80,
105 and 119. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company
does not expect the implementation of this new standard to have a
material impact on results of operations or financial position of the
Company.
Statement of Position (SOP) 98-1, 'Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,' provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and requires certain costs incurred to be
expensed or capitalized depending on the stage of its development and
nature. This SOP is effective for fiscal years beginning
<PAGE> 13
after December 15, 1998. The Company's current accounting policy
complies with this Statement. Results of operations and financial
position of the Company will be unaffected by this new standard.
SOP 98-5, 'Reporting on Costs of Start-Up Activities,' requires
costs of start-up activities and organization costs to be expensed as
incurred. This Statement of Position is effective for fiscal years
beginning after December 15, 1998. Management has not fully evaluated
the impact of this standard on results of operations and financial
position of the Company.
No other recently issued accounting standards are expected to have a
material impact on the Company.
Year 2000 Data Conversion
The year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable
year. Any of the Company's computers, computer programs,
manufacturing and administration equipment or products that have date-
sensitive software may recognize a date using '00' as the year 1900
rather than the year 2000. If any of the Company's systems or
equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of
operations, including, among other things, a temporary inability to
process transactions or send and receive electronic data with third
parties or engage in similar normal business activities.
During 1997, the Company formed an ongoing internal review team to
address the Year 2000 issue that encompasses operating and
administrative areas of the Company. A team of the Company's global
professionals has been engaged in a process to work with Company
personnel to identify and resolve significant Year 2000 issues in a
timely manner. In addition, executive management regularly monitors
the status of the Company's Year 2000 remediation plans. The process
includes an assessment of issues and development of remediation plans,
where necessary, as they relate to internally used software, computer
hardware and use of computer applications in the Company's
manufacturing processes and products. In addition, the Company is
engaged in assessing the Year 2000 issue with significant suppliers.
The assessment process has been completed at the Company's North
American and European operations. In addition, the Company has
initiated formal communications with its significant suppliers and
large customers in North America and Europe to determine the extent to
which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Finally, related to products
sold by the Company, the Company has determined it has no exposure to
contingencies related to the Year 2000 Issue.
The Company's operations in North America and Europe are in the
process of replacing their existing manufacturing, distribution and
administrative applications. The decisions to replace these systems
were primarily based on the ongoing and expected future industry
requirements and the inability of the current applications to meet
these expectations. The Company has not accelerated the plans to
replace these systems because of the Year 2000 issue. In North
America and Europe, a contingency plan has been established to address
the Year 2000 issue if the replacement systems are not implemented in
time. If necessary, implementation of the contingency plan, which
includes making current manufacturing and distribution software Year
2000 compliant, could have a material adverse impact on the Company's
results of operations and financial condition.
<PAGE 14>
The Company intends to use both internal and external resources to
reprogram, or replace and test, the software for Year 2000
modifications. The Company plans to substantially complete its Year
2000 assessment and remediation in the summer of 1999. The total
project cost has not yet been determined. However, based on
preliminary information, the majority of the project cost will be
attributable to the purchase of new software to meet future industry
requirements and will be capitalized. The total remaining project
cost will be expensed as incurred over the next twelve to eighteen
months. To date, the Company has not incurred any material costs
related to the assessment of, and preliminary efforts in connection
with, its Year 2000 issues.
The costs of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based on
management's estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ significantly from those
plans. Specific factors that might cause differences from
management's estimates include, but are not limited to, the
availability and cost of personnel trained in this area, the ability
to locate and correct relevant computer codes, and similar
uncertainties. Management believes that the Company is devoting the
necessary resources to identify and resolve significant Year 2000
issues in a timely manner.
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign
currency exchange primarily in its cash, debt and foreign currency
transactions. The Company holds derivative instruments, including
interest rate swaps and forward foreign currency contracts.
Derivative instruments used by the Company in its hedging activities
are viewed as risk management tools and are not used for trading or
speculative purposes. Analytical techniques are used to manage and
monitor foreign exchange and interest rate risk and include market
valuation. The Company believes it is, to a lesser degree, subject to
commodity risk for price changes that relate to certain manufacturing
operations that utilize raw commodities. The Company manages its
exposure to changes in those prices primarily through its procurement
and sales practices. This exposure is not considered material to the
Company.
A discussion of the Company's accounting policies for derivative
financial instruments is included in the 1998 Annual Report, Summary
of Significant Accounting Policies in the Notes to the Combined
Consolidated Financial Statements. Additional information relating to
financial instruments and debt is included in Note 9 - Financial
Instruments and Note 7 - Debt and Other Financing Arrangements.
International operations, excluding U.S. export sales which are
principally denominated in U.S. dollars, constitute a significant
portion of the revenues and identifiable assets of the Company and
totaled $261 million and $149 million, respectively, as of and for the
year ended June 27, 1998, most of which were denominated in Deutsche
marks. The Company has significant loans to foreign affiliates which
are denominated in foreign currencies. Foreign currency changes
against the U.S. dollar affect the foreign currency translation
adjustment of the Company's net investment in these affiliates and the
foreign currency transaction adjustments on long-term advances to
affiliates, which impact consolidated equity of the Company.
International operations result in a large volume of foreign currency
commitment and transaction exposures and significant foreign currency
net asset exposures. Since the Company manufactures its products in a
number of locations around the world, it has a cost base that is
diversified over a number of different currencies, as well as the U.S.
dollar, which serves to counterbalance partially its foreign currency
transaction risk. Selective foreign currency commitments and
transaction exposures are partially hedged. The Company does not
hedge its exposure to translation gains and losses relating to foreign
currency net asset exposures; however, when possible, it borrows in
local currencies to reduce such exposure. The Company is also exposed
to fluctuations in other currencies including: British pounds, French
francs, Irish punts, Japanese yen, Mexican pesos and Spanish pesetas.
The fair value of the foreign currency contracts outstanding has been
immaterial each of the last two years.
The Company's cash position includes amounts denominated in foreign
currencies. The Company manages its worldwide cash requirements
considering available funds among its subsidiaries and the cost
effectiveness with which these funds can be accessed. The
repatriation of cash balances from certain of the Company's affiliates
could have adverse tax consequences. However, those balances are
generally available without legal restrictions to fund ordinary
business operations. The Company has and will continue to transfer
cash from those affiliates to the parent and to other international
affiliates when it is cost effective to do so.
The Company manages its interest rate risk in order to balance its
exposure between fixed and variable rates while attempting to minimize
interest costs. Approximately half of the Company's long-term debt is
fixed and an additional $30 million is effectively fixed through
interest rate swaps.
<PAGE> 16
See the Company's Form 10-K for the fiscal year ending June 27, 1998,
Item 3, for quantitative disclosures about market risk as of June 27,
1998. There have been no material changes in the nature of the market
risk exposures facing the Company since June 27, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 21, 1997, Midwest Manufacturing Holdings, L.L.C.
('Midwest') filed a lawsuit against the Company in Cook County,
Illinois Circuit Court with respect to terminated discussions
regarding the possibility of Midwest's acquisition of the Company's
Information Products business. The litigation was removed to the U.S.
District Court for the Northern District of Illinois. Midwest alleges
that a verbal agreement to purchase the Information Products business
had been reached, and has filed its lawsuit in an attempt to compel
the Company to proceed with the sale or to pay Midwest damages. On
August 28, 1997, the court granted the Company's motion to dismiss one
of three counts and on February 5, 1998, the court granted the
Company's motion for summary judgment on the remaining two counts.
Midwest then appealed the court's decision to the U.S. Seventh Circuit
Court of Appeals. While the appeal was pending, on October 7, 1998,
the U.S. District Court for the Northern District of Illinois vacated
its earlier judgment and ruling on jurisdictional grounds. The case
was remanded to the Illinois Circuit Court of Cook County where the
litigation is now pending. Management believes that the claim by
Midwest will be resolved without a material effect on the Company's
financial condition or results of operations and liquidity.
On February 10, 1998, the Company filed a patent infringement action,
Donnelly Corporation v. Britax Rainsfords, Inc., which is pending in
the United States District Court for the Western District of Michigan.
The lawsuit alleges that the production and sale by Britax of rearview
mirrors incorporating a security light infringes on a Company patent.
The Company seeks an injunction against Britax, as well as unspecified
damages. Britax has denied infringement and asserts that the
Company's patent is invalid and unenforceable. In a related action,
on May 18, 1998, Britax sued the Company in the High Court of England
seeking to invalidate two of the Company's English patents which
correspond to the United States patents subject to the litigation
described above. On July 3, 1998, the Company brought an action in
the High Court of England alleging patent infringement by Britax and
seeking injunctive relief and damages. Management believes that the
Britax litigation will be resolved without a material adverse effect
on the Company's financial condition or results of operations and
liquidity.
The Company and a Chinese company, Shunde-Ronqui Zhen Hua Automotive
Parts Plant, formed a joint venture company in 1996 to manufacture
automotive, truck and motorcycle rearview mirrors in the People's
Republic of China. Disputes have arisen between the Company and its
joint venture partner and the Company is in the process of commencing
arbitration proceedings to terminate the joint venture and to recover
damages. The Company believes that the outcome will not have a
material effect on the Company's financial condition or results of
operation and liquidity.
On May 12, 1998, Metagel Industria E Cornercio Ltda filed a complaint
against the Company in the U.S. District Court for the Eastern
District of Michigan. The complaint requests a declaratory judgment
of noninfringement and invalidity of certain Company patents related
to lights integrated into automotive mirrors. The Company believes
that the litigation will not have a material adverse effect on the
Company's financial condition or results of operation and liquidity.
<PAGE> 17
The Company has been put on notice by the Lemelson Medical, Education
& Research Foundation Limited Partnership ('Lemelson') that Lemelson
alleges that certain manufacturing methods and systems employed by the
Company infringe one or more patents owned by Lemelson. The patents
are said to relate to 'machine vision,' 'automatic identification'
and 'flexible manufacturing systems and methods.' Lemelson has
proposed that the Company take a royalty-bearing license under the
Lemelson patents. The Company is currently investigating these
allegations and the amount of any potential liability cannot now be
ascertained.
The Company and its subsidiaries are involved in certain other legal
actions and claims, including environmental claims, arising in the
ordinary course of business. Management believes that such litigation
and claims will be resolved without material effect on the Company's
financial position, results of operations and liquidity, individually
and in the aggregate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedules
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: November 4, 1998 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: November 4, 1998 /s/ Scott E. Reed
Scott E. Reed
(Senior Vice President, Chief
Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from September
26, 1998 Donnelly Corporation financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-END> SEP-26-1998
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0
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