SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the Fiscal Year ended June 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to _____________
Commission File Number: 1-9716
DONNELLY CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-0493110
(State of other jurisdiction
of incorporation or organization) (IRS Employer Identification No.)
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
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. _X_
The aggregate market value of voting stock held by non-affiliates of the
registrant was $115,184,916 as of August 31, 1998.
Number of shares outstanding of each of the registrant's classes of common
stock, as of August 31, 1998.
5,788,343 shares of Class A Common Stock par value, $.10 per share
4,292,657 shares of Class B Common Stock par value, $.10 per share
<PAGE>
2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended June 27, 1998, are incorporated by reference into Part II of this report.
Portions of the registrant's proxy statement for its annual meeting of
shareholders to be held October 16, 1998, are incorporated by reference into
Part III of this report.
PART I.
ITEM 1. BUSINESS
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 form 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.
ITEM 1 (a) GENERAL DEVELOPMENT OF BUSINESS
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. All year and quarter references are relating to the Company's fiscal
years and quarters, unless otherwise noted.
The Company is primarily engaged, either solely or through several joint
ventures, in the design, manufacture, marketing and sale of products for the
automotive industry including one or more of the following technologies; glass
products, prisms, plastic molding, electronics, electrochromic products, optics
and metal diecasting. The Company also supplies glass coatings for the
transportation, electronics and computer industries.
The Company is committed to improving shareholder value through focused
development of core automotive businesses, primarily by increasing dollar
content per vehicle through introduction of new technologies, increasing volume
through penetration into new and emerging markets and improving the efficiency
of operations. Consistent with its strategy, in 1998, the Company has continued
to build volume growth for its existing products, introduced new products,
expanded its equipment and facilities and has implemented several joint ventures
to enhance global market penetration.
On November 3, 1997, the Company formed Lear Donnelly Overhead Systems, LLC
("Lear Donnelly"), a 50% owned joint venture with Lear Corporation ("Lear").
Lear Donnelly is engaged in the design, development and production of overhead
systems for the global automotive market. Prior to the joint venture, the
Company manufactured and sold components of overhead interior automotive trim.
The Company believes that this joint venture enhances the Company's competitive
market position in the global market by creating a broader market for components
and being able to offer complete interior automotive overhead systems.
As part of the Company's strategy, in 1998, the Company entered into two
additional joint ventures in emerging automotive markets. In 1998, the Company
formed a joint venture in Sao Paulo, Brazil, Donnelly/Arteb LTDA
("Donnelly/Arteb"), to manufacture interior and exterior automotive mirrors. The
Company also formed
<PAGE>
3
Varitronix EC (Malaysia) Sdn. Bhd. ("Varitronix EC"), which produces
electrochromic ("EC") mirror cells in the city of Penang, Malaysia. See Item 1
(c) "Narrative Description of Business--Joint Ventures" for additional
information concerning these joint ventures.
In October 1997, the Company signed a joint venture agreement to form a new
company, Donnex, which will be a 50/50 joint venture between the Company and
Essex specialty Products, Inc., the world's leading produced of automotive
adhesives and sealants. Donnex intends to produce and deliver complete,
ready-to-install windows and window systems to automotive customers on a
just-in-time basis and in sequence. It is expected that Donnex will base its
initial operations in the Detroit, Michigan metropolitan area.
The Company is committed to its core automotive businesses and during the last
half of 1997, the Company structured its non-automotive businesses to be
operated independently. In the third quarter of 1997, the Company created
Donnelly Optics Corporation ("DOC"), a subsidiary based in Tucson, Arizona, to
sell and manufacture high-quality, injection molded, diffractive and hybrid
optical lenses and systems. DOC has been incurring significant operation losses.
In addition, in the fourth quarter of 1998, DOC recognized a $3.5 million charge
against operating income, $0.23 per share after tax, due to the cancellation of
orders for injection-molded lenses. The customer orders were cancelled due to
changing market dynamics in the digital imaging sector of the computer industry.
The Company is exploring alternatives to protect its investment in DOC and
remain positioned for the expected growth in the digital imaging markets.
Also, effective June 29, 1997, the Company created Information Products, Inc.,
which the Company believes is the world's largest producer of specialty coated
and shaped glass for the computer touch screen industry. Information Products,
Inc. is a subsidiary based in Holland, Michigan that had previously operated as
the Company's Information Products Division. See Item 1 (c) "Narrative
Description of Business--Non-Automotive Businesses" for a more detailed
discussion of these non-automotive businesses.
During the past three years, the Company has significantly expanded its presence
in Europe primarily through the acquisition of a controlling interest in
Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe"). The Company believes that the
expansion of its European operations will play an important 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 the fourth quarter of 1997, the Company announced a
restructuring plan in Europe to realign its manufacturing capacity, improve
operating efficiencies and to reduce future operating costs, primarily by
reducing the number of nonproduction employees. Due to changes in management at
the Company's European operations, implementation of the restructuring plan was
delayed until the fourth quarter of 1998. In addition, late in the fiscal year,
Donnelly's Senior Management Team made the commitment to dedicate additional
management resources from North America to assist in the European restructuring.
Early in fiscal 1999, the Company assigned four Senior North American executives
to long-term assignments in Europe and removed the European COO, Hans Huber, who
has left the Company.
The Company was incorporated in Michigan in 1936. The Company's corporate
offices are located at 49 West Third Street, Holland, Michigan, 49423-2813, and
its telephone number is (616) 786-7000. Unless otherwise noted or indicated by
the context, the term "Company" includes Donnelly Corporation, its wholly owned
subsidiaries and Donnelly Export Corporation, a shareholder Domestic
International Sales Corporation under the Internal Revenue Code owned entirely
by the holders of the Company's Class B Common Stock.
ITEM 1 (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is an international supplier of high quality automotive parts and
component systems from manufacturing operations in North America, Europe and
Asia. The Company supplies automotive customers around the world with interior
and exterior mirror systems, window systems and interior lighting and trim
systems.
<PAGE>
4
In addition, the Company, provides products to several non-automotive markets,
none of which are reportable segments.
ITEM 1 (c) NARRATIVE DESCRIPTION OF BUSINESS
PRODUCTS, SERVICES, MARKETS AND METHODS OF DISTRIBUTION
Automotive 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.
Electrochromic Products. The Company has made significant investments in the
development of solid-state, thin-film electrochromic technology that has been
commercialized for mirror applications and has potential use for various window
applications. Electrochromic coatings allow the user to darken glass to the
desired degree through the application of an electrical current to the coating.
The Company continues to market electrochromic day/night automotive mirror
systems that will automatically dim when headlights approach from the rear.
Electrochromic mirror systems are electrically dimmable to reduce the glare from
the headlights of other vehicles approaching from the rear. This system had been
the subject of litigation between the Company and Gentex Corporation until the
fourth quarter of 1996, when the Company reached a patent and licensing
settlement with Gentex Corporation. The Company has continued to actively
develop newer and more advanced electrochromic technologies for the automotive
marketplace. The Company has developed or licensed a number of promising
technologies and several are already available for commercial use.
The Company's GLAREFREEtm electrochromic mirror technology offers several
advantages over competing technology. The Company's GLAREFREEtm electrochromic
mirrors have been purchased by Ford, Jaguar, Range Rover, Audi, PSA,
Mercedes-Benz, Volvo, Renault and Honda. These purchase agreements represent a
significant step forward in the Company's positioning as a strong player in a
global market for electrochromic mirrors that industry sources expect to grow to
$1 billion. With strong technologies to offer and having favorably settled the
patent issues that have hampered its ability to compete in recent years, the
Company has set ambitious goals for increasing its electrochromic mirror market
share in the years ahead.
Interior Rearview Mirrors. The Company has a predominant share of the U.S.
market for interior rearview prismatic mirrors and in 1998 sold approximately
18.7 million units worldwide. 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, electronic compasses, temperature and other displays.
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 15% and
7% of all interior rearview mirrors sold by all suppliers to original equipment
manufacturers in the North American and European markets, respectively, for the
1998 model year. The market for electrochromic mirrors continues to grow and in
1998, electrochromic mirrors were offered on approximately 46 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.
<PAGE>
5
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.
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
expansion of the Company's European operations, particularly the acquisition of
Donnelly Hohe, 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.
The Company also supplies exterior rearview mirror systems to automakers
throughout southern China through one of it's Chinese joint ventures. In 1998,
General Motors awarded the largest exterior rearview mirror order in the
Company's history with business on twelve General Motors vehicles.
Exterior rearview mirrors are combined with automatic or manual adjusting
mechanisms, wire harnesses and other hardware within 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 also manufactures and markets dimmable electrochromic exterior
rearview mirrors. The Company believes that electrochromic rearview mirrors
currently represent only 4% of all exterior rearview mirrors in the North
American market for the 1998 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.
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) was 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 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 more 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, rear windows and windshields. The Company produces modular windows for
Chrysler, Ford, General Motors, Honda, Isuzu and Toyota in North America and
Chrysler in Europe. The Company's modular windows are used on many popular
vehicles such as the Chrysler
<PAGE>
6
Caravan/Voyager minivan, the Jeep Grand Cherokee, the Ford Expedition and the
Ford Taurus/Sable. In 1998, the Company launched 24 window programs including
important launches on the Ford heavy truck series and Dodge Ram.
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. In addition, the Company offers various other modular window
technologies including molded-in body color panels, flush bonded hardware as
well as flush, single-sided encapsulation.
The Company has signed an agreement to form a new company, Donnex, which will be
a 50-50 joint venture between the Company and Essex Specialty Products, Inc.,
the world's leading producer of automotive adhesives and sealants. Donnex will
produce and deliver complete, ready-to-install windows and window systems to
automotive customers on a just-in-time basis and in sequence. It is expected
that Donnex will base its initial operations in the Detroit, Michigan,
metropolitan area.
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.
Interior Lighting and Trim
In September 1997, the Company entered into an agreement with Lear Corporation
to form Lear Donnelly, a joint venture for the design, development, marketing
and production of interior trim overhead systems and components for the global
market. The Company believes the formation of this joint venture strengthens the
Company's position as a supplier in the global automotive overhead systems
market. See Item 1 (c) "Narrative Description of Business--Joint Ventures" for
additional information concerning this joint venture.
Through the Lear Donnelly joint venture, the Company manufactures various
interior trim products including dome lights, interior door lights, map lights,
courtesy lamps, lighted and non-lighted grab handles, visors 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 or large subsystems.
Door Handles
The Company produces a wide variety of interior and exterior door handles for
Ford, Honda, Mazda, Nissan and Volvo. This product line was established based on
the Company's capabilities in color-matched painting and plastic injection
molding. The Company supplies various door handle designs including plastic,
diecast and chrome-plated door handles as well as products with value-added
electronic features.
<PAGE>
7
Non Automotive Businesses
The Company is committed to its core automotive businesses. However, the Company
has developed a number of non-automotive businesses and relationships over the
years, which arose from existing or developed 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.
In the second quarter of 1998, the Company sold its 50% interest in Applied
Films Corporation ("AFC") located in Boulder, Colorado in AFC's initial public
offering. As a result of this sale, the Company received $7.9 million in net
proceeds, after taxes and related out of pocket fees, and recognized a one-time
pretax gain of approximately $4.6 million, or $0.22 per share after tax. AFC is
primarily a manufacturer of thin-film glass coatings and related production
equipment used in the production of liquid crystal displays. The Company sold
all of its shares in AFC during an initial public offering that was completed in
November, 1997.
In the third quarter of 1997, the Company created Donnelly Optics Corporation,
based in Tucson, Arizona, to sell and manufacture high-quality, injection
molded, diffractive and hybrid optical lenses and systems. Diffractive optics
have a wide variety of uses in such industries as computers, telecommunications,
aerospace, medical instruments and the auto industry. The Company has booked
business with customers in the digital imaging market, has developed a
proprietary lense system for digital cameras and has orders to produce highly
specialized exterior lighting lenses for a North American auto manufacturer. DOC
has been incurring significant operation losses. In addition, in the fourth
quarter of 1998, DOC recognized a $3.5 million charge against operating income,
or $0.23 per share after tax, due to the cancellation of orders for
injection-molded lenses. The customer orders were canceled due to changing
market dynamics in the digital imaging sector of the computer industry. The
Company is exploring alternatives to protect its investment in DOC and remain
well positioned to profit from the potential rewards of the technologies of DOC.
Effective June 29, 1997, the Company created Information Products, Inc., a
Holland based subsidiary that had previously operated as the Company's
Information Products Division. The Company believes that Information Products,
Inc. is the world's largest producer of specialty coated and shaped glass for
the computer touch screen industry. The glass is used in a wide variety of touch
screen applications such as information kiosks, cash registers, industrial
controls, personalized greeting card kiosks and others.
Joint Ventures
Lear Donnelly Overhead Systems, LLC ("Lear Donnelly"). On November 3, 1997, the
Company formed Lear Donnelly, a 50% owned joint venture with Lear Corporation
("Lear"). Lear Donnelly is engaged in the design, development and production of
overhead systems and components for the global market, including complete
overhead systems, headliners, consoles and lighting components, vehicle
electrification interfaces, electronic components, visors and assist handles.
The Company and Lear each contributed certain technologies, assets and
liabilities for the creation of the joint venture.
Donnelly/Arteb LTDA, ("Donnelly/Arteb"). In 1998, the Company formed a 50% owned
joint venture with Industrias Arteb S.A. to produce interior and exterior
mirrors for the South American automotive industry. Donnelly/Arteb is located in
Sao Paulo, Brazil. Donnelly/Arteb focused on winning new orders and establishing
its operations early in 1999 and began launching several mirror programs for
General Motors and is slated to start electrochromic mirror assembly for the GM
Vectra model by mid-year. Donnelly/Arteb LTDA provides the Company with a
presence in a rapidly growing region.
Varitronix EC (Malaysia) Sdn. Bhd. ("Varitronix EC"). In the fourth quarter of
1998, the Company formed Varitronix EC, a 50% owned, controlled joint venture
with Varitronix (Malaysia) Sdn. Bhd. Varitronix EC is located in Penang,
Malaysia, within a world-class manufacturing facility that began producing
electrochromic cells in the first quarter of 1999. With the production startup,
the Company is the only automotive supplier in the world
<PAGE>
8
with EC manufacturing or assembling capabilities in North America, Europe and
Asia. Due to the Company having board control of this joint venture, the
financial statements of Varitronix EC will be consolidated with those of the
Company.
Donnex, LLC ("Donnex"). The Company previously signed a joint venture agreement
to form a new company, Donnex, which will be a 50-50 joint venture between the
Company and Essex Specialty Products, Inc., the world's leading producer of
automotive adhesives and sealants. Donnex intends to produce and deliver
complete, ready-to-install windows and window systems to automotive customers on
a just-in-time basis and in sequence. It is expected that Donnex will base its
initial operations in the Detroit, Michigan, metropolitan area.
Shunde Donnelly Zhen Hua Automotive Systems Co. Ltd. ("Shunde Donnelly Zhen
Hua"). In the first quarter of 1997, the Company formed Shunde Donnelly Zhen
Hua, a joint venture with Shunde Zhen Hua Automotive Parts Co. Ltd. The Company
has a 30% interest in the Zhen Hua joint venture and has an option to purchase
an additional 30% interest. The Shunde Donnelly Zhen Hua joint venture, based in
the Chinese city of Shunde, in Guangdong Province, manufactures interior and
exterior mirror systems for automakers throughout southern China, including the
Chinese operations of Volkswagen, Chrysler, and Isuzu.
Donnelly Electronics, LLC ("Donnelly Electronics"). In the first quarter of
1997, the Company created a new affiliate, Donnelly Electronics, that
specializes in the design and manufacture of electronic components and
sub-assemblies. The new company is a joint venture between the Company and an
individual with expertise in automotive electronics technology. The Company owns
19% of Donnelly Electronics with the option to acquire up to 100% of Donnelly
Electronics over time. Based in Flint, Michigan, Donnelly Electronics produces
the electronic components that Donnelly uses for products such as electrochromic
rearview mirrors and electronic compass systems. The firm will also provide
electronics development for future Donnelly products that may include
rear-vision camera systems, lighting systems and others. In addition to
supporting the automotive electronic needs of the Company, Donnelly Electronics
pursues business with other automotive suppliers that are not competitors of the
Company as well as other business opportunities.
Shanghai Donnelly Fu Hua Window Systems Company Ltd. ("Shanghai Donnelly Fu
Hua"). 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., which
produces window systems for automotive customers in Asia and Australia. Shanghai
Fu Hua Glass Company is itself a joint venture between Ford Motor Company and
Shanghai Yao Hua Glass Works. The joint venture began manufacturing encapsulated
and framed glass products in the third quarter of 1998.
VISION Group plc ("VISION"). The Company is working with VISION to produce
electronic vision systems for the world automotive industry using an innovative
video microchip developed by VISION. The Company and VISION have been
collaborating to produce "smart" chips that can perform a variety of functions
in a vehicle including control of advanced mirror systems, video displays,
lighting control and security devices. The Company owns 25.6% of VISION, which
is located in Edinburgh, Scotland.
KAM Truck Components, Inc. ("KAM"). The Company owns 19% of KAM which supplies
GLARESTOPPERtm solid state electrochromic mirrors for large trucks. The mirror
permits truck drivers to manually adjust the glare of their mirrors by a range
of up to ten times.
Donnelly Yantai Electronics Corporation Limited. This 50% owned venture produces
coated glass for use in the Chinese LCD market. This operation is located in the
Yantai Peninsula of the People's Republic of China.
<PAGE>
9
MARKETING STAFF
In North America and Europe, the Company markets its automotive products by
combining the engineering product expertise of members of the Company's
engineering staff with a customer focused sales force, who work together with
the Company's customers' design teams early in the design process. The Company's
wholly owned European subsidiaries employ a sales force located in Europe and
Japan, and also sell through a trading company in Japan. Nearly all sales are
made directly to automakers with the exception of some interior and exterior
mirror glass components.
The Company markets its non-automotive products through a sales force who also
work in conjunction with the Company's engineers. The Company works with
potential customers on the development of new applications for electronic
information display products.
NEW PRODUCT OR INDUSTRY SEGMENT INFORMATION
New applications in electronics continue to play an increasing role in the
Company's future. As vehicles become more electronically sophisticated, auto
manufacturers are looking for opportunities to pack value-added features into
new areas of the car. The Company is a leader in developing "plug and play"
modules that are flexible and allow vehicle manufacturers to offer different
configurations of features through the same module. At the end of April 1997,
the Company announced a new business order with a European customer that leads
in that trend. Included in the order are highly sophisticated overhead trim
components that are integrated with advanced optical lighting, all designed by
the Company, which are to be produced at a Lear Donnelly operation located in
Ireland, just outside Dublin. The overhead consoles have four optically precise
lights integrated into the units that provide directed light with little or no
spillover glare. Also included in the order are interior electrochromic mirrors
that function as a communications node for a vehicle's electronics system,
representing a significant first in the automotive industry. In essence, the
electronics that control a number of different passenger comfort and safety
functions have been integrated into the rearview mirror.
As discussed in Item 1 (c) "Narrative Description of Business--Joint Ventures,"
on November 3, 1997, the Company formed Lear Donnelly, a 50-50 joint venture
with Lear Corporation for the design, development and production of overhead
systems for the global market, including headliners, consoles and lighting
components, vehicle electrification interfaces, electronic components, visors
and assist handles.
Also as part of the Company's strategy, the Company has implemented various
joint ventures in emerging automotive markets. The Company has established the
Asian and the South American markets as the top two emerging market priorities.
As discussed in Item 1 (c) "Narrative Description of Business--Joint Ventures,"
in the fourth quarter of 1996, the Company formed Shanghai Donnelly Fu Hua, a
joint venture, which began manufacturing encapsulated and framed glass products
in the third quarter of 1998. In addition, in the first quarter of 1997, the
Company formed an automotive mirror joint venture in China, Shunde Donnelly Zhen
Hua, which produces automotive mirror systems in the Chinese city of Shunde. In
1998, the Company formed Donnelly/Arteb, an automotive mirror joint venture in
Sao Paulo, Brazil, which began producing mirrors for the South American market
during the first quarter of 1999. Also, in the fourth quarter of 1998, the
Company formed Varitronix EC (Malaysia) Sdn. Bhd. ("Varitronix EC"), which
produces electrochromic mirror cells in the city of Penang, Malaysia.
The Company has developed a number of 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. As discussed in Item 1 (c) "Narrative Description of
Business--Non Automotive Businesses," in the third quarter of 1997, the Company
created Donnelly Optics Corporation, a subsidiary based in Tucson, Arizona, to
sell and manufacture high-quality, injection molded, diffractive and hybrid
optical lenses and systems. Also, effective June 29, 1997, the Company formed
Information Products, Inc., which the Company believes is the world's largest
<PAGE>
10
producer of specialty coated and shaped glass for the computer touch screen
industry, a subsidiary based in Holland, Michigan that had previously operated
as the Company's Information Products Division. In the second quarter of 1998,
the Company sold its 50% interest in Applied Films Corporation in Boulder,
Colorado, in an initial public offering completed in November, 1997.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's primary raw materials are glass, paints, resins and adhesives.
Glass is supplied by third party glass manufacturers and by glass manufacturers
affiliated with automakers. Paints, resins and adhesives are other important raw
materials. Paints used by the Company are supplied primarily by four suppliers.
Most of the resins the Company uses are supplied by four primary suppliers. The
Company believes that alternative suppliers are available for paints and resins.
Generally, the Company has multiple sources of supply for the important
materials and components used in its products. Certain adhesives for the
Company's flush window systems are supplied solely by Essex Chemical and the
Company believes that an alternative source of supply is not readily available.
Because of the commodity nature of common materials such as glass and plastics,
the Company is somewhat vulnerable to price fluctuations in many of its material
purchases.
PATENTS, LICENSES, ETC.
While the Company owns approximately 239 patents and considers them important,
the Company as a whole is not dependent to any material extent upon any single
patent or group of patents. The Company believes its manufacturing know-how,
design of its own manufacturing equipment and development of manufacturing
processes are more important than its patents.
The Company has licensed certain of its own patents and technology and has
licenses under certain third party patents and technology.
SEASONAL NATURE OF BUSINESS
The Company's net sales and net income are subject to significant quarterly
fluctuations. These fluctuations are attributable primarily to the production
schedules of the Company's major automotive customers. The Company generally
reports lower net sales and net income in the first half of its fiscal year than
in the second half because domestic automotive production is generally lower
during the first two quarters of the Company's fiscal year.
WORKING CAPITAL
In September 1997, the Company entered into an unsecured $160 million
multi-currency global revolving credit agreement which replaces the Company's
previous unsecured $80 million domestic credit agreement and its 75 million
Deutsche Mark revolving Eurocredit loan agreement. Borrowings under this new
agreement bear interest, at the election of the Company, at a floating rate
under one of three alternative elections. This new revolving credit agreement
terminates in September 2004, with an opportunity for the Company to extend for
one year periods with the consent of all the revolver banks.
In November 1996, the Company entered into a three-year agreement to sell, on a
revolving basis, an interest in a defined pool of trade accounts receivable of
up to $50 million. At June 27, 1998 and June 28, 1997, a $40.3 million and $40.0
million interest, respectively, had been sold under this agreement with proceeds
used to reduce revolving lines of credit. The sale is reflected as a reduction
of accounts receivable and as operating cash flows. As collections reduce
previously sold interests, new accounts receivable are customarily sold. The
proceeds of sales are less than the face amount of accounts receivable sold by
an amount that approximates the purchaser's financing cost of issuing its own
commercial paper backed by these accounts receivable. The discount fees were
$2.1 million in 1998 and $1.1 million in 1997, and are included in selling,
general and administrative expense.
<PAGE>
11
The Company, as agent for the purchaser, retains collection and administrative
responsibilities for the participating interests of the defined pool.
Other than the items summarized above, the Company does not believe that it, or
industries which it serves in general, have any special practices or special
conditions affecting working capital items that are significant for an
understanding of the Company's business.
IMPORTANCE OF LIMITED NUMBER OF CUSTOMERS
In 1998, approximately 73% of the Company's net sales were to the following
major automobile manufacturers:
<TABLE>
<S> <C>
Ford Motor Company 27%
Chrysler Corporation 20%
Honda of America Mfg., Inc. 8%
BMW 7%
VW 6%
General Motors Corporation 5%
----
Total 73%
====
</TABLE>
The loss of any one of these customers would have a material adverse effect on
the Company.
BACKLOG OF ORDERS
As of June 27, 1998, and June 28, 1997, the Company's backlog of orders was
approximately $149 million and $150 million, respectively. The Company believes
that all of its existing backlog will be delivered during the current fiscal
year. The Company generally sells to automakers on the basis of long-term
purchase contracts or one-year purchase orders, which generally provide for
releases for approximately 30 to 90 days of production. Unshipped products under
these releases and short-term purchase orders constitute the Company's backlog.
GOVERNMENT CONTRACTS
The Company does not believe that any portion of its business is subject to
renegotiation of profits or termination of contracts or sub-contracts at the
election of the government.
COMPETITION
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.
Interior Rearview Mirrors. While the Company has a predominant share of the U.S.
interior rearview prismatic mirror market, the Company is aware of many
competitors in this market. The Company knows of one principal competitor in the
U.S. electrochromic market and one in the U.S. lighted mirror market. The
Company has several worldwide competitors for interior mirror glass sales in
Japan and Europe, although the Company believes each interior mirror glass
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 currently 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
<PAGE>
12
previously had an adverse impact on the Company's ability to market interior
electrochromic mirrors in the United States and Europe. During the fourth
quarter of 1996, the Company reached a patent and licensing settlement with
Gentex Corporation, and management believes that this settlement facilitates its
efforts to market electrochromic mirrors.
Exterior Rearview Mirrors. The Company has many competitors in the worldwide
exterior rearview mirror market. With the Company's recent acquisition of a
controlling interest in Donnelly Hohe, the Company is 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 the interior
lighting and trim products produced by Lear Donnelly, which include Magna
International and Johnson Controls, Inc. 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. The Company has numerous competitors in the optical digital imaging
markets. Competition in all of these product areas is based on price, service
and quality.
RESEARCH AND DEVELOPMENT
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.
In 1998, 1997 and 1996, research and development expenditures were $36.4
million, $32.5 million and $27.7 million, respectively, or 4.8%, 4.8% and 6.3%
of the Company's net sales for those years. The Company expects to spend
approximately 4.5% to 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 several
Ph.D's, located at research facilities in Holland, Michigan, and at a separate
applied research center in Tucson, Arizona. The Company owns numerous U.S. and
foreign 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 other important competitive
advantages.
HUMAN RESOURCES
The Company believes its human resources are one of its fundamental strengths.
The Company has operated for over 45 years under a team-based, participative
management system. The Company believes that this approach has increased
productivity by emphasizing employee opportunity and participation aimed at
continuous improvement. The Company believes this emphasis has resulted in
enhanced long-term productivity, cost control and product quality and has helped
the Company attract and retain capable employees. The Company was rated one of
the 100 best companies to work for in America in the most recent edition (1998)
of the Fortune Magazine list of the "100 Best Companies to Work for in America."
The Company currently has approximately 5,500 employees worldwide and
approximately 3,100 work in the Company's North American operations in the U.S.
and Mexico. The Company's non-North American employees
<PAGE>
13
are primarily located in Germany, Ireland, France and Spain. 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
Ireland, Mexico and France are unionized, as are the workforces of most
companies in these countries. The Company's workforce in Germany is represented
by a works council which has employee representation. The workforces of most
companies in Germany are required to be represented by works councils. The
Company's workforce in Spain is non-union. 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 Item 7, "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
assurances 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.
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 authorities, may give rise to
additional expenditures or liabilities that could be material.
ITEM 1 (d) INFORMATION ABOUT FOREIGN OPERATIONS
During 1998, approximately 34% of combined consolidated net sales were derived
from the operations of the Company's consolidated European subsidiaries.
Approximately 11% of combined consolidated net sales were derived from export
shipments from the Company's United States operations to customers in foreign
countries. The Company has licensed major automotive glass companies in Europe
and Japan to manufacture modular windows for sale in foreign markets using the
Company's technology.
In the second quarter of 1997, the Company began consolidating the financial
statements of Donnelly Hohe, a subsidiary based in Collenberg, Germany. The
Company's financial statements for the years ended June 27, 1998, and June 28,
1997, are consolidated using Donnelly Hohe's financial statements as of and for
the twelve month
<PAGE>
14
period ended May 31, 1998, and the nine month period ended May 31, 1997,
respectively. See Notes l and 3 to the combined consolidated financial
statements in Item 8 for a more thorough discussion.
North American revenues are revenues produced by assets located in the United
States and Mexico. Export revenues are foreign revenues produced by identifiable
assets located in the United States. European revenues are generated by
identifiable assets at the Company's subsidiaries located in Germany, Ireland,
Spain and France. The Company operates two subsidiaries in Germany, Donnelly
Hohe GmbH & Co. KG and Donnelly Hohe Schleiz GmbH & Co. KG; two subsidiaries in
Ireland, Donnelly Mirrors Limited and Donnelly Visions Systems Europe Limited;
one in Spain, Donnelly Hohe Espana S.A.; one in France, Donnelly EuroGlas
Systems SARL; and one in Mexico, Donnelly de Mexico, S.A. de C.V. A summary of
the Company's operations by geographic area follows:
<TABLE>
In thousands Year ended 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
North American:
United States.................. $420,544 $390,852 $338,355
Export:
Americas................... 76,433 54,302 49,655
Asia....................... 3,313 2,825 532
Europe..................... 2,002 1,829 1,917
Other...................... 350 76 ----
-------------------------------------
502,642 449,884 390,873
European............................ 260,669 221,413 49,112
-------------------------------------
$763,311 $671,297 $439,571
=====================================
In thousands Year ended 1998 1997 1996
- ------------------------------------------------------------------------------
Operating Income (Loss):
North American...................... $ 19,654 $ 25,528 $ 17,208
European............................ 720 (7,847) (3,717)
-------------------------------------
$ 20,374 $ 17,681 $ 13,491
=====================================
Identifiable Assets:
North American...................... $228,511 $200,100 $232,370
European............................ 149,374 158,193 39,122
-------------------------------------
$377,885 $358,293 $271,492
=====================================
</TABLE>
Fluctuating exchange rates and other factors beyond the control of the Company,
such as tariff and foreign economic policies, may affect future results of the
Company's foreign operations.
ITEM 2. PROPERTIES
The Company, solely or through several joint ventures, owns or leases facilities
which are located throughout North America, Europe, Asia and South America. The
location, square footage and use of the most significant facilities at August
31, 1998, were as follows:
<PAGE>
15
LOCATION
<TABLE>
Location of Facility Square Footage Use
- -------------------- -------------- ---
<S> <C> <C>
Holland, Michigan (9)* 846,000 Manufacturing, Warehouse and Office
Holland, Michigan ** 68,000 Manuafacturing and Office
Grand Haven, Michigan (2)* 145,000 Manufacturing, Warehouse and Office
Newaygo, Michigan* 177,000 Manufacturing, Warehouse and Office
Detroit, Michigan* 4,000 Sales and Marketing Office
Marlette, Michigan** 200,000 Manufacturing and Office
Mt. Sterling, Kentucky 45,000 Manufacturing, Warehouse and Office
Tucson, Arizona (2)* 49,000 Manufacturing, Warehouse and Office
Naas, Ireland 88,000 Manufacturing, Warehouse and Office
Manorhamilton, Ireland 25,000 Manufacturing, Warehouse and Office
Dublin, Ireland** 30,000 Manufacturing, Warehouse and Office
Langres, France* 35,000 Manufacturing, Warehouse and Office
Collenberg, Germany (2)* 228,000 Manufacturing, Warehouse and Office
Dorfprozelten, Germany (2)* 319,000 Manufacturing, Warehouse and Office
Schleiz, Germany (2)* 95,000 Manufacturing, Warehouse and Office
Monterrey, Mexico 40,000 Manufacturing, Warehouse and Office
Barcelona, Spain 60,000 Manufacturing, Warehouse and Office
Palmela, Portugal 17,000 Warehouse and Office
Prestice, Czech Republic ** 90,000 Manufacturing and Office
Shunde City, China (2)** 100,000 Manufacturing, Warehouse and Office
Shanghai, China ** 11,000 Manufacturing and Office
Penang, Malaysia ** 20,000 Manufacturing and Office
Sao Bernardo do Compo, Brazil ** 25,000 Manufacturing and Office
Goteborg, Sweden * 4,000 Sales, Marketing and Design Office
Tokyo, Japan * 2,000 Sales and Marketing Office
</TABLE>
*Leased facilities. Three of the nine Holland, Michigan facilities are
leased. One of the two Grand Haven, Michigan facilities is leased. One of
the two Tucson, Arizona facilities is leased. Approximately 142,000 square
feet of the Dorfprozelten, Germany facility is leased. One of the two
Schleiz, as well as, one of the two Collenberg, Germany facilities are
leased.
**Owned or leased by a joint venture.
The Company believes its facilities are modern, well-maintained and adequately
insured and are primarily utilized. Because of its rapid growth in sales, the
Company is continually evaluating the need for additional office, manufacturing
and warehouse space.
As of June 27, 1998, the Company had capital expenditures purchase commitments
outstanding of approximately $13.2 million.
ITEM 3. 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
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 filed its lawsuit in an attempt to compel the Company to proceed
with the sale or to pay Midwest damages. On February 5, 1998, the court granted
the Company's motion for summary judgment on the remaining two counts. Midwest
has appealed the court's decision to the U.S.
<PAGE>
16
Seventh Circuit Court of Appeals. 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 3, 1998, the Company reached a final settlement with Happich
Fahrzeug-InnausstaHung GmbH concerning a joint venture that had been the subject
of arbitration. As a result of the settlement, the Company was awarded 100%
ownership of the former joint venture, which was subsequently transferred into
the Lear Donnelly joint venture, received payment for damages and costs incurred
and entered into other agreements with respect to certain technology and the
supply of parts.
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 rear view 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 27, 1998.
<PAGE>
17
ADDITIONAL ITEM - EXECUTIVE OFFICERS OF THE REGISTRANT
Senior Corporate and Executive Officers of Registrant. The Senior Corporate and
Executive Officers of the Company are as follows:
<TABLE>
Positions and Year First Elected
Name Age Offices Held Executive Officer
<S> <C> <C> <C>
J. Dwane Baumgardner, Ph.D. 58 Chairman, Director, 1978
CEO, President
John F. Donnelly, Jr. 46 COO of Europe 1986
Donn J. Viola 53 COO of North America 1996
Maryam Komejan 47 Senior Vice President, 1993
Corporate Secretary
Niall R. Lynam, Ph.D. 44 Senior Vice President 1992
Scott E. Reed 41 Senior Vice President, CFO 1998
Russell B. Scaffede 49 Senior Vice President, Global 1998
Manufacturing
Ronald L. Winowiecki 31 Chief Accounting Officer, Corporate 1998
Controller
</TABLE>
John F. Donnelly, Jr., is a descendant of Bernard P. Donnelly, Sr., the
Company's founder, and is the brother of Joan E. Donnelly, a director of the
Company. B. Patrick Donnelly, III, Joan E. Donnelly, Thomas E. Leonard, Gerald
T. McNeive, Jr. and Rudolph B. Pruden, all Directors of the Company, are
descendants of, or are married to descendants of Bernard P. Donnelly. There are
no other family relationships between or among the above-named executive
officers. There are no arrangements or understandings between any of the
above-named officers pursuant to which any of them was named an officer.
Dwane Baumgardner has been Chief Executive Officer and a director since 1982,
Chairman of the Board since 1986 and President since 1994. John F. Donnelly, Jr.
was elected Chief Operating Officer of the Company's European operations in
September 1998. Prior to that time he was Senior Vice President from 1993
through 1998. Donn Viola joined the Company as Chief Operating Officer of the
Company's North America operations in August 1996. Prior to joining the Company,
he was 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. Maryam Komejan has been Senior Vice President since 1995, Vice President
since 1993 and Corporate Secretary since 1989. Niall Lynam was elected Senior
Vice President and Chief Technical Officer in 1996. Prior to that time he was
Vice President from 1992 through 1996. Scott Reed joined the Company as Chief
Financial Officer in September of 1998. Prior to joining the Company, he served
as Director of International Finance for Chrysler Corporation from 1995 to 1998
and was Manager of Finance, Production Platform from 1993 to 1995. Russ Scaffede
has been Senior Vice President since April 1998 and Vice President since October
1995. Prior to joining the Company, he was employed from 1993 to 1995, by RWD
Technologies, Inc., a consulting firm engaged in the development and
implementation of lean manufacturing systems. Ron Winowiecki was elected
Corporate Controller in August 1998. Prior to that time he was Controller of
North American Operations since December 1996 and Assistant Controller since
1993.
Officers are elected annually.
<PAGE>
18
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol "DON". Prior to March 10, 1997, the Company's stock was listed on the
American Stock Exchange under the symbol "DON". Market quotations regarding the
range of high and low sales prices of the Company's common stock were as
follows:
<TABLE>
Fiscal 1998 Dividends
Quarter High Low Declared
----------------------------------------------------------
<S> <C> <C> <C>
First $23.75 $16.75 $ .10
Second 22.44 17.50 .10
Third 19.31 16.25 .10
Fourth 22.38 18.00 .10
---------------------------------------------------------
Fiscal 1997 Dividends
Quarter High Low Declared
----------------------------------------------------------
First $14.70 $11.80 $ .08
Second 17.90 14.10 .08
Third 20.00 16.00 .10
Fourth 17.38 14.38 .10
---------------------------------------------------------
</TABLE>
As of August 31, 1998, the Company had approximately 1,000 holders of record of
shares of Class A Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
In thousands, except
per share data 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $763,311 $671,297 $439,571 $383,340 $337,262
Gross profit $130,632 $126,668 $ 81,741 $ 82,568 $ 73,632
Nonrecurring charges
(gain) $ 3,468 $ 9,965 $ 2,399 $ (2,265) $ 1,184
Operating income $ 20,374 $ 17,681 $ 13,491 $ 17,033 $ 13,121
Income before taxes on
income $ 19,179 $ 12,005 $ 12,349 $ 16,823 $ 11,008
Income from continuing
operations $ 13,009 $ 10,020 $ 8,454 $ 11,009 $ 7,258
</TABLE>
<PAGE>
19
<TABLE>
In thousands, except
per share data 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing
operations per common
share - Basic $ 1.30 $ 1.01 $ 0.86 $ 1.14 $ 0.75
Income from continuing
operations per common
share - Diluted $ 1.29 $ 1.00 $ 0.85 $ 1.12 $ .73
Dividends declared per
common share $ 0.40 $ 0.36 $ 0.32 $ 0.26 $ 0.26
Total assets $ 377,885 $358,293 $ 271,492 $223,788 $ 183,801
Debt including current
maturities $ 123,761 $122,901 $ 101,916 $ 66,802 $ 53,485
Preferred stock $ 531 $ 531 $ 531 $ 531 $ 531
Shareholders' equity
(total) $ 103,282 $ 93,827 $ 88,852 $ 82,900 $ 70,826
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Incorporated by reference from the 1998 Annual Report, see "Management
Discussion and Analysis of Results of Operations and Financial Condition" at
pages 25-31, which is filed as Exhibit 13 to this Form 10-K report.
ITEM 7(a) 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 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. Quantitative
disclosures relating to financial instruments and debt are included in the
tables below.
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
<PAGE>
20
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 as outlined below.
Interest Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
Fair value
Year ending In Thousands 1999 2000 2001 2002 2003 Thereafter Total 6/27/98
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed Rate $ 0 $ 7,000 $ 11,667 $ 10,604 $ 11,517 $ 15,937 $ 56,725 $ 58,540
Avg. Interest Rate 6.93%
Variable Rate $ 2,067 $ 1,894 $ 1,866 $ 250 $ 18,372 $ 42,532 $ 66,981 $ 66,981
Avg. Interest Rate 4.44%
Interest Rate Derivative Financial Instruments Related to Debt:
Interest Rate Swaps
Pay Variable/Receive Fixed $ 0 $ 0 $ 0 $ 5,000 $ 25,000 $ 0 $ 30,000 $ (1,140)
Avg. Pay Rate 7.17%
Avg. Receive Rate 6.14%
</TABLE>
Exchange Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
Fair value
Year ending In Thousands 1999 2000 2001 2002 2003 Thereafter Total 6/27/98
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed Rate - US Dollar $ 0 $ 7,000 $ 11,667 $ 10,604 $ 11,517 $ 15,937 $ 56,725 $ 58,540
Variable Rate - US Dollar $ 133 $ 119 $ 117 $ 54 $ 3,869 $ 15,911 $ 20,203 $ 20,203
Variable Rate -
Deutsche mark $1,934 $ 1,775 $ 1,749 $ 196 $ 12,658 $ 23,547 $ 41,859 $ 41,859
Variable Rate-Other $ 0 $ 0 $ 0 $ 0 $ 1,845 $ 3,074 $ 4,919 $ 4,919
</TABLE>
<PAGE>
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following combined consolidated financial statements which appear in the
1998 Annual Report are incorporated by reference:
Combined Consolidated Statements of Income - Page 32.
Combined Consolidated Balance Sheets - Page 33.
Combined Consolidated Statements of Cash Flows - Page 34.
Combined Consolidated Statements of Shareholders' Equity - Page 35.
Notes to the Combined Consolidated Financial Statements - Pages 36-46.
Management's Responsibility for Financial Reporting - Page 47.
Report of Independent Certified Public Accountants - Page 48.
Quarterly financial data relating to the results of operations for the years
ended June 27, 1998, and June 28, 1997, appears in the 1998 Annual Report in
Note 17 of the Notes to the Combined Consolidated Financial Statements at Page
46 and is incorporated herein by reference. The foregoing is filed as Exhibit 13
to this Form 10-K report.
ITEM 9 CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of Registrant. Information relating to the directors and director
nominees of the Registrant contained in the Registrant's definitive Proxy
Statement for its Annual Meeting of Shareholders to be held October 16, 1998,
and filed pursuant to Regulation 14A, is incorporated by reference.
Executive Officers of the Registrant. Information relating to the executive
officers of the Company is included in Item 4 of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained under the caption
"Executive Compensation" in the Company's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held October 16, 1998 and the information
within those sections is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Voting Securities and Principal Holders Thereof",
"Nominees for Election as Directors" and "Securities Ownership of Management" in
the definitive Proxy Statement for the Company's Annual Meeting of Shareholders
to be held October 16, 1998, and the information within those sections are
incorporated by reference.
<PAGE>
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" in the definitive Proxy Statement
for the Company's Annual Meeting of Shareholders to be held October 16, 1998,
and the information within that section is incorporated by reference.
PART IV.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements. The Registrant's combined consolidated financial
statements, for the year ended June 27, 1998, together with the Report of
Independent Certified Public Accountants appear in the 1998 Annual Report on
pages 32-48 and are incorporated by reference and are filed as Exhibit 13 to
this Form 10-K report. The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial statements
included in this report.
2. Financial Statement Schedules. The following are included in Part IV of this
report for each of the years ended June 27, 1998, June 28, 1997 and June 29,
1996, as applicable:
Page
Report of Independent Certified Public Accountants
on Financial Statement Schedule 24
Schedule II, Valuation and Qualifying Accounts 25
All other schedules are not submitted because they are not applicable or because
the required information is included in the combined consolidated financial
statements or notes thereto.
3. Exhibits. Reference is made to the Exhibit Index which is found on the last
two pages of the body of this Form 10-K Annual Report preceding the exhibits.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the year ended June 27,
1998.
(c) EXHIBITS
The response to this portion of Item 14 is submitted as a separate section of
this report.
(d) FINANCIAL STATEMENT SCHEDULES
The response to this section of Item 14 is submitted as a separate section of
this report.
<PAGE>
23
SIGNATURES
Pursuant to the requirements of Section 13 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DONNELLY CORPORATION
/s/J. Dwane Baumgardner
Chairman, Chief Executive
Officer, and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the date indicated. The persons named below each hereby
appoint J. Dwane Baumgardner and Scott E. Reed, and each of them severally, as
his or her attorney in fact, to sign in his or her name and on his or her
behalf, as a director or officer of the Registrant, and to file with the
Commission any and all amendments to this report on Form 10-K.
/s/J. Dwane Baumgardner /s/Scott E. Reed
Chairman, Director, Senior Vice President,
Chief Executive Officer Chief Financial Officer
and President
/s/Ronald L. Winowiecki
Chief Accounting Officer,
Corporate Controller
/s/John A. Borden /s/Arnold F. Brookstone
Director Director
/s/B. Patrick Donnelly III /s/Joan E. Donnelly
Director Director
/s/R. Eugene Goodson /s/Thomas E. Leonard
Director Director
/s/Gerald T. McNeive, Jr. /s/Rudolph B. Pruden
Director Director
/s/Donald R. Uhlmann
Director
DATE: September 11, 1998
Donnelly Corporation
Annual Report - Form 10-K
<PAGE>
24
Report of Independent Certified Public Accountants on Financial Statement
Schedule
Donnelly Corporation
Holland, Michigan
The audits referred to in our report dated August 6, 1998, relating to the
combined consolidated financial statements of Donnelly Corporation and
subsidiaries, which are incorporated by reference in Item 8 of this Form 10-K,
included the audit of the financial statement schedule listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/BDO SEIDMAN, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
August 6, 1998
<PAGE>
25
DONNELLY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE AT
BEGINNING END
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
<S> <C> <C> <C> <C>
RESERVE FOR UNCOLLECTIBLE
ACCOUNTS AND SALES
RETURNS AND ALLOWANCES:
YEAR ENDED JUNE 29, 1996 $575 -- (1) -- (1) $571
YEAR ENDED JUNE 28, 1997 $571 $473 (2) -- (1) $1,064
YEAR ENDED JUNE 27, 1998 $1,064 -- (1) -- (1) $1,095
(1) INFORMATION IN THIS COLUMN IS NOT SIGNIFICANT
(2) INCREASE DUE TO CONSOLIDATION OF SUBSIDIARY
</TABLE>
<PAGE>
Annual Report - Form 10-K
Exhibit Index
3. Articles of Incorporation and Bylaws are incorporated by reference to
Exhibit 3.1 and 3.2 of Registrant's Registration Statement on Form S-1,
as amended, dated March 9, 1988, (Registration No. 33-17167) ("S-1
Registration Statement").
4. A specimen stock certificate of the Class A Common Stock was filed as
part of Form 10-K for the fiscal year ended June 28, 1997, as Exhibit 4
and is hereby incorporated herein by reference.
10.1 Multi Currency Revolving Credit Loan Agreement was filed as part of
Form 10-QA for the quarter ended September 27, 1997, 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 ended 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,
Donnelly 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,
and is hereby incorporated herein by reference. An English language
translation of an Amendment to the Acquisition Agreement was filed as
Exhibit 10.1 to Form 10-Q for the quarter ended March 28, 1998, 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 ended 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 ended July 3, 1993, as Exhibit 10.2 and is hereby
incorporated herein by reference.
10.6 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.
10.7 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.
10.8 The Donnelly Corporation 1987 Employees' Stock Purchase Plan, including
amendments was originally filed as part of a Registration Statement on
Form S-8 (Registration No. 33-34746) as Exhibit 28.1, and has been
subsequently amended and filed as part of Form 10-Q for the quarter
ended September 27, 1997, as Exhibit 10.2 and both such exhibits are
hereby incorporated herein by reference.
10.9 The Donnelly Corporation Non Employee Director's Stock Option Plan was
filed as part of a Registration Statement on Form S-8 (Registration No.
33-55499) as Exhibit 99, and the same is hereby incorporated herein by
reference.
10.10 The Donnelly Corporation Executive Compensation Plan was filed as part
of Form 10-K/A for the fiscal year ending June 29, 1996, as Exhibit
10.11 and is hereby incorporated by reference.
10.11 The Donnelly Corporation Unfunded Deferred Director Fee Plan was filed
as part of Form 10-K/A for the fiscal year ending June 29, 1996, as
Exhibit 10.12 and is hereby incorporated by reference.
<PAGE>
10.12 The Donnelly Corporation Pension Plan for Outside Directors was filed
as part of Form 10-K/A for the fiscal year ending June 29, 1996, as
Exhibit 10.13 and is hereby incorporated by reference.
10.13 The Donnelly Corporation Supplemental Retirement Plan was filed as part
of Form 10-K/A for the fiscal year ending June 29, 1996, as Exhibit
10.14 and is hereby incorporated by reference.
10.14 The Donnelly Corporation Deferred Compensation Plan was filed as part
of Form 10-K/A for the fiscal year ending June 29, 1996, as Exhibit
10.15 and is hereby incorporated by reference.
10.15 Letter from Donnelly Corporation to Mr. Donn Viola dated July 12, 1996,
as modified on July 22, 1996 was filed as part of Form 10-K/A for the
fiscal year ending June 29, 1996, as Exhibit 10.17 and is hereby
incorporated by reference.
10.16 Letter from Donnelly Corporation to Mr. Russell Scaffede dated
September 15, 1995 was filed as part of Form 10-K/A for the fiscal year
ending June 29, 1996, as Exhibit 10.18 and is hereby incorporated by
reference.
10.17 An English language summary of the Security Pooling Agreement written
in German between the Registrant and Donnelly Hohe GmbH & Co. KG dated
September 15, 1995 was filed as part of Form 10-K/A for the fiscal year
ending June 29, 1996, as Exhibit 10.19 and is hereby incorporated by
reference.
10.18 Receivables Purchase Agreement among Donnelly Receivables Corporation,
Falcon Asset Securitization Corporation and the First National Bank of
Chicago dated as of November 14, 1996 was filed as part of Form 10-K/A
for the fiscal year ending June 29, 1996, as Exhibit 10.20 and is
hereby incorporated by reference.
10.19 Lear Donnelly Overhead Systems, L.L.C. Operating Agreement dated
November 1, 1997 was filed as part of the Form 10-QA for the quarter
ended December 27, 1997, as Exhibit 10.1 and is hereby incorporated by
reference.
10.20 The Donnelly Corporation 1997 Employee Stock Option Plan was filed as
part of a Registration Statement on Form S-8 on November 25, 1997,
(Registration No. 333-40987) as Exhibit 4, and the same is hereby
incorporated herein by reference.
10.21 Amended and Restated Operating Agreement for Donnelly Electronics,
L.L.C., dated January 1, 1998.
10.22 An Agreement by and between Donnelly Electronics, L.L.C. and Donnelly
Corporation, dated January 1, 1998.
10.23 Letter from Donnelly Corporation to Mr. Scott Reed dated August 17,
1998.
13 Certain portions of the Donnelly Corporation 1998 Annual Report to
Shareholders. This information was delivered to the Company's
Shareholders in compliance with Rule 14(a)-3 of the Securities Exchange
Act of 1934, as amended.
21 Schedule of Affiliates.
23 Consent of BDO Seidman, LLP, independent public accountants.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 13
DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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) the completion of 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 and for a period ended on a
particular date include Donnelly Hohe's financial statements as of and for a
period ended approximately one month before that date. The Company's combined
consolidated financial statements as of and for the years ended June 27, 1998,
and June 28, 1997, consolidate Donnelly Hohe's financial statements as of and
for the twelve month period ended May 31, 1998, and for the nine month period
ended May 31, 1997, respectively. Fiscal years ended June 27, 1998, June 28,
1997, and June 29, 1996, each included 52 weeks. All year and quarter references
relate to the Company's fiscal year and fiscal quarters, unless otherwise
stated.
On November 3, 1997, the Company formed Lear Donnelly Overhead Systems, LLC
("Lear Donnelly"), a 50% owned joint venture with Lear Corporation ("Lear").
Lear Donnelly is engaged in the design, development and production of overhead
systems for the global automotive market, including complete overhead systems,
headliners, consoles and lighting components, vehicle electrification
interfaces, electronic components, visors and assist handles ("products"). The
Company and Lear each contributed certain technologies, assets and liabilities
for the creation of the joint venture. The Company transferred net assets of
$7.9 million associated with its interior trim and lighting businesses,
including $10 million of debt, to the joint venture for its 50% interest.
Lear Donnelly manufactures products for sale to both the Company and Lear, who
are each responsible for their customer sales efforts to the original equipment
manufacturers. Because existing and certain future contracted sales have been
retained by the Company, the existence of the joint venture does not
significantly impact the comparability of net sales or net income of the Company
from period to period. Net income recognized by the Company will be based on
one-half the profitability of Lear Donnelly. Due to the supply agreement between
Lear Donnelly and the parent companies, the sales are reported by the parents.
However, the related net earnings of the joint venture are being accounted for
under the equity method. Accordingly, the Company's gross profit and operating
margins are unfavorably impacted.
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. Donnelly Hohe, based in Collenberg, Germany, supplies many of the
leading European automakers with interior and exterior rear view mirrors,
through manufacturing facilities in Germany and Spain. Donnelly Hohe consists of
a general partnership and a limited partnership. The general partnership
controls Donnelly Hohe's assets and manages its operations while the limited
partnership is the recipient of all income or losses generated by Donnelly
Hohe's operations.
The Company's original investment consisted of a 48% interest in the general
partner and a 66 2/3% interest in the limited partner. In the second quarter of
1997, the Company acquired an additional controlling interest in the general
partner. As a result, Donnelly Hohe's financial statements were consolidated
with those of the Company, beginning with the second quarter of 1997. From the
initial date of acquisition, April 1, 1995, through the first quarter of 1997,
the Company's investment in
2
<PAGE>
Donnelly Hohe was accounted for using the equity method of accounting. The
Company's limited partnership interest has remained unchanged, therefore, the
consolidation of Donnelly Hohe has no impact on net income for each period
reported.
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 is also affected by the Company's implementation of new
joint ventures, alliances, acquisitions and investments in new product lines.
RESULTS OF OPERATIONS
Comparison of 1998 to 1997
Net sales were $763.3 million in 1998 compared to $671.3 million in 1997, an
increase of approximately 14%, which is primarily attributed to the
consolidation of Donnelly Hohe for the entire twelve month period and stronger
sales in the Company's North American operations. Pro forma net sales for 1997
were approximately $720 million including Donnelly Hohe's net sales for the
first quarter. Net sales were $209.7 million in the fourth quarter of 1998
compared to $188.2 million in the fourth quarter of 1997, an increase of
approximately 11%, due to stronger North American sales. The Company continues
to experience significant price pressures from its customers. While these price
pressures continue to impact the Company's gross profit and operating margins,
they did not have a material impact on the Company's net sales for 1998 or 1997.
Net sales for the Company's North American operations increased by approximately
12% in 1998 compared to 1997 and 17% for the comparable fourth quarter periods.
The increase was primarily due to programs launched in 1997 running at full
production volumes in 1998 and new product introductions in the modular window,
door handle and interior trim product lines. The increase in North American net
sales occurred despite the fact that automotive industry production increased
less than 3%. Net sales for the Company's European operations, as reported in
the local currencies for these operations, increased moderately for the year
ended 1998 compared to 1997, including Donnelly Hohe for the entire twelve month
period for both years. However, due to the increased strength of the dollar
relative to the Deutsche mark, Irish punt and French franc for the year ended
1998 as compared to 1997, the reported consolidated net sales in dollars for the
Company's European operations were down slightly compared to 1997, including
Donnelly Hohe for the entire twelve month period for both years.
Gross profit margin for 1998 was 17.1% compared to 18.9% in 1997 and 17.3% in
the fourth quarter of 1998 compared to 18.8% in the same period of 1997. The
Company's North American gross profit margins for 1998 were lower compared to
1997 primarily due to the profits of 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 associated with
Donnelly Happich Technology, Inc. improved gross profit margins, as a percent of
sales, slightly for 1998 (see Note 14). Gross profit for the Company's European
operations was slightly higher due to operational improvements in Ireland and
continued strong operational performance for the year in Spain and France.
Selling, general and administrative expenses decreased to 9.2% of net sales in
1998 from 9.9% of net sales in 1997, primarily due to the formation of the Lear
Donnelly joint venture. These costs are lower as a percent to sales due to
certain general and administrative functions to support the interior trim and
lighting business transferring to the joint venture, which is accounted for
under the equity method. In the fourth quarter of 1998, these expenses were 9.7%
of sales compared to 10.2% in the same period of 1997.
Research and development expenses were $36.4 million in 1998 compared to $32.5
million in 1997. These expenses were flat as a percent of sales in 1998 compared
to 1997.
In the fourth quarter of 1998, Donnelly Optics Corporation ("Donnelly Optics"),
a wholly owned subsidiary in Tucson, Arizona, recognized a $3.5 million pretax
charge against operating income, or $0.23 per share after tax, due to the
cancellation of orders, related to changing market dynamics in the digital
imaging sector of the computer industry. The charge primarily consists of a
write-off of tooling and other current assets and severance of approximately 25
manufacturing and administrative personnel. The severance cash payments will be
completed by the end of 1999. The Company is currently evaluating options for
responding to the changing market conditions.
In the fourth quarter of 1997, the Company recognized a $10 million
restructuring charge in the Company's European operations to realign
manufacturing capacity, improve operating efficiencies and to reduce future
operating costs, primarily by reducing the
3
<PAGE>
number of non-production employees. The restructuring also involves reorganizing
product lines and production to realize efficiencies in the production process.
The costs consist primarily of a severance program and voluntary separation
incentives in addition to other expenses associated with the plan. The severance
and separation incentive program includes approximately 230 personnel, primarily
personnel in manufacturing and administrative support functions. Due to changes
in management at the Company's European operations, implementation of the
restructuring plan was delayed until the fourth quarter of 1998. Through June
27, 1998, the Company had terminated 127 employees under the plan and has made
cumulative cash payments of $5.1 million, primarily severance and separation
incentives. All remaining employee separation benefits and related cash flows
are expected to be completed by the end of 1999.
The Company's operating income increased from $17.7 million in 1997 to $20.4
million in 1998. The Company's North American Automotive Operations and
Information Products subsidiary contributed strong profitability in both 1998
and 1997. However, the Company's North American operating income was lower in
1998 as a percent of sales, primarily due to losses associated with the start-up
of Donnelly Optics and an unfavorable product mix. In addition to these factors,
the Company's North American operations experienced lower operating income as a
percent of sales due to the $3.5 million pretax charge at Donnelly Optics. The
formation of the Lear Donnelly joint venture did not have a significant impact
on the Company's North American operating margins. Operating income for the
Company's European operations increased for the year and fourth quarter of 1998
compared to 1997 primarily due to the impact of the restructuring charge in 1997
and improvements in the Company's Irish operations.
Interest expense was $8.3 and $9.5 million in 1998 and 1997, respectively.
Interest expense was lower primarily due to lower average debt during 1998
compared to 1997. In the second quarter of 1997, the Company entered into an
agreement to sell an interest in a defined pool of trade accounts receivable. As
of the Company's combined consolidated balance sheets, dated June 27, 1998 and
June 28, 1997, a $40.3 million and $40.0 million interest in accounts receivable
was sold under this agreement, respectively, with proceeds used to reduce
revolving lines of credit. The discount expense associated with this transaction
is included in selling, general and administrative expenses.
Royalty income was $0.1 million and $1.5 million in 1998 and 1997, respectively.
Royalty income is lower due to the completion of various licensing agreements
with companies in Asia.
Other income was $1.9 million and $0.8 million in 1998 and 1997, respectively.
Other income was higher in 1998 primarily due to grant income and favorable
translation gains recognized at some of the Company's European operations.
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 pretax gain. In the
second quarter of 1998, the Company sold its 50% interest in Applied Films
Corporation ("AFC") during an initial public offering. As a result of this sale,
the Company received $7.9 million in net proceeds, after taxes and related out
of pocket fees, and recognized a one-time pretax gain of approximately $4.6
million, or $0.22 per share after tax.
The Company's effective tax rate was 26.3% in 1998, compared to 23.2% in 1997.
The lower tax rate in 1997 was due to operating losses in Germany at higher tax
rates. The Company recognized lower taxes than expected in the fourth quarter of
1998 due to higher tax credits than expected and tax exempt income on higher
export sales, combined with a reduced pretax result from the charge at Donnelly
Optics. The Company has recorded $7.1 million of deferred tax assets on
nonexpiring net operating loss carryforwards at June 27, 1998. The majority of
the loss carryforwards resulted from the European restructuring charge
recognized in 1997.
Minority interest in net loss of subsidiaries was $0.4 million in 1998 compared
to $1.1 million in 1997. Equity in losses of affiliated companies was ($1.5)
million in 1998 compared to $(0.3) million for the same period in 1997. Equity
earnings of affiliated companies were significantly lower in 1998 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. The Lear Donnelly joint venture did not have a significant impact on
the Company's equity earnings in 1998.
Net income was $13.0 million in 1998 compared to $10.0 million in 1997. Net
income for 1998 included a $2.2 million net gain after taxes associated with the
sale of AFC, offset by a $2.3 million after-tax charge at Donnelly Optics. The
consolidation of Donnelly Hohe did not impact the comparability of net income
from 1997 to 1998.
The Company is committed to improving shareholder value through focused
development of the core automotive businesses, primarily by increasing the
Company's dollar content per vehicle through introduction of new technologies,
increasing volume through penetration into new and emerging markets and
improving the efficiency of operations.
4
<PAGE>
The Company believes that future results of operations will be influenced by the
completion of the European restructuring; the implementation of a response to
the changing conditions in the computer digital imaging market; the costs to
implement new software for manufacturing, distribution and administration
applications; and general economic and industry conditions. In addition, early
in the first quarter of 1999, the Company's production schedules were disrupted
due to a strike at one of the Company's significant customers. The customer,
which represents approximately 5% of the Company's net sales, resolved the
strike in late July 1998. The loss in production for the first five weeks of the
quarter will place additional pressure on the ability of the Company to achieve
its net income goal for the quarter.
Comparison of 1997 to 1996
Net sales were $671.3 million in 1997 compared to $439.6 million in 1996. The
consolidation of Donnelly Hohe contributed approximately $164.0 million of net
sales in 1997. Excluding Donnelly Hohe, consolidated net sales for 1997 were
$507.3 million, an increase of 15% over 1996.
Net sales for the Company's North American operations increased by approximately
15% in 1997 compared to 1996. The increase in North American net sales occurred
despite the fact that automotive industry production increased less than 5%. The
increase was primarily due to programs launched in 1996 running at full
production volumes in 1997 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/Voyager and the Ford Expedition.
The Company's consolidated European sales increased by approximately $172
million in 1997 from 1996 primarily due to the consolidation of Donnelly Hohe.
Excluding the consolidation of Donnelly Hohe, net sales for the Company's
European operations were approximately 17% higher due to increased sales of
interior and electrochromic mirrors and modular windows.
Gross profit margin for 1997 was 18.9% compared to 18.6% in 1996. The Company's
North American gross profit margins were stronger for the year due to higher
volumes, significantly lower start-up expenses compared to 1996, non-recurring
costs incurred in 1996, stronger performance at the Company's subsidiary in
Mexico and stronger sales and operational performance for the Company's
Information Products business. In 1996, the Company's North American gross
profit margin was negatively impacted due to the simultaneous start-up of three
major new business programs which resulted 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
with one of the Company's suppliers on a new business program.
The Company's European gross profit margins were stronger than the previous year
primarily due to the consolidation of Donnelly Hohe and the Company's subsidiary
in France operating at normal production volumes during the period. Donnelly
Hohe's gross profit margins, particularly Donnelly Hohe's operation in Spain,
are equal to or slightly higher than those of the Company's other foreign
affiliates. Partially offsetting these improvements were lower gross profit
margins at the Company's Irish operations due to a number of factors, including
a paint supplier performance problem and price decreases resulting from currency
fluctuations associated with the strong Irish punt. These have impacted gross
profit in 1997 by approximately $4.0 million. The paint supplier performance
problem is primarily due to process related scrap expenses and the supplier's
difficulty in meeting customer schedules. This has resulted in excessive scrap,
rework and freight costs to the Company. The Company has transferred these
products to Donnelly Hohe.
Selling, general and administrative expenses were 9.9% of net sales in 1997
compared to 8.7% in 1996. These expenses increased from $38.1 million in 1996 to
$66.5 million in 1997. The increase resulted from the consolidation of Donnelly
Hohe, support necessary for higher sales from new business programs, support for
the ramp-up of the Donnelly Optics business and from discount fees associated
with the securitization of accounts receivable. In addition, a patent settlement
gain, net of litigation expenses, was recognized in 1996 resulting in a
reduction of these expenses by 0.5% of net sales.
Research and development expenses were $32.5 million in 1997 compared to $27.7
million in 1996. These expenses decreased from 6.3% of net sales in 1996 to 4.8%
of net sales in 1997 due to the consolidation of Donnelly Hohe. Excluding the
consolidation of Donnelly Hohe, research and development expenses were 5.8% of
net sales in 1997.
The fourth quarter of 1997 included a $10 million restructuring charge in the
Company's European operations to realign manufacturing capacity, improve
operating efficiencies and to reduce future operating costs, primarily by
reducing the number of nonproduction employees. 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, including accruals for severance and
related employee support programs and write-off of certain assets removed from
service. The majority of these liabilities were paid or settled during the first
six months of 1997.
5
<PAGE>
The Company's operating income increased from $13.5 million in 1996 to $17.7
million in 1997, despite the restructuring charge of $10 million in the fourth
quarter of 1997. Excluding the restructuring charges and patent gain, the
Company's operating margins increased from 3.1% of net sales in 1996 to 4.1% of
net sales in 1997.
The Company's North American operating income increased from 4.4% of net sales
in 1996 to 5.7% of net sales in 1997. Operating margins were higher during 1997
due to higher volumes, significantly lower start-up expenses compared to 1996,
nonrecurring costs incurred in the third quarter of 1996 and stronger
performance at the Company's subsidiary in Mexico and within the Information
Products business. Improvements made in North American gross profit margins were
slightly offset by higher selling, general and administrative expenses and
research and development expenses as a percent to sales including start-up
losses experienced at the Company's Donnelly Optics operation.
European operating income decreased from an operating loss of $3.7 million in
1996 to an operating loss of $7.8 million primarily due to the restructuring
charge recognized in the fourth quarter of 1997. Excluding the restructuring
charge, European operating income increased to $1.5 million in 1997 primarily
due to the consolidation of Donnelly Hohe and higher sales and stronger
operating performance at the Company's subsidiary in France.
Interest expense was $9.5 million and $8.1 million in 1997 and 1996,
respectively. The higher interest expense was due to the consolidation of
Donnelly Hohe. Interest expense was positively impacted in 1997 due to the
securitization of accounts receivable in November 1996, the proceeds of which
were used to reduce the borrowing under the Company's revolving credit
agreement. The discount fees of $1.1 million associated with this transaction
are included in administrative and general expenses.
Royalty income was $1.5 million and $5.2 million in 1997 and 1996, respectively.
Royalty payments associated with the sale of the refrigerator glass shelving
business in 1995 concluded in the fourth quarter of 1996.
In the second quarter of 1997, the Company sold 2.5% of its investment in VISION
Group shares, resulting in a $0.9 million pretax gain.
Minority interest in net loss of subsidiaries was $1.1 million in 1997 compared
to $0.2 million in 1996. Beginning in the second quarter of 1997, the Company
began accounting for its investment in Donnelly Hohe on a consolidated basis,
thereby requiring the recognition of minority interest in the net (income) or
loss 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 earnings (losses) of affiliated companies was ($0.3)
million in 1997 compared to $0.1 million in 1996. The equity losses recognized
in 1997 were primarily due to start-up losses incurred at VISION Group and at
the Company's Chinese joint ventures. Slightly offsetting these losses was
stronger performance at AFC. The Company sold all of its shares in AFC during an
initial public offering that was completed in November 1997.
The Company's effective tax rate was 23.2% for 1997, compared to 33.8% in 1996.
The decrease in the effective tax rate was due to reinstatement of the research
and development tax credit in the United States, operating losses in Germany at
higher tax rates and benefits from adopting the new United States tax
regulations for most of the Company's foreign operations. The Company recorded a
tax benefit of $2.6 million in the fourth quarter on a pretax loss of $2.4
million, primarily due to the European restructuring charge recognized in the
fourth quarter. The Company's effective tax rate for 1997 would have been
approximately 32% without the restructuring charge. The Company has recorded
$6.7 million of deferred tax assets on net operating loss carryforwards at June
28, 1997. The majority of the loss carryforwards resulted from the European
restructuring charge recognized in the fourth quarter of 1997.
Net income was $10.0 million in 1997 compared to $8.5 million in 1996. Net
income increased compared to 1996 due to higher sales, significantly lower
start-up costs and improved operational performance in North America. North
American net income was significantly impacted in the third quarter of 1996 by
technical difficulties with one of the Company's suppliers on a new business
program that resulted in significant additional costs. Offsetting these
improvements were the restructuring charge taken in the fourth quarter of 1997,
losses experienced at the Company's Irish operations and lower royalty income.
The restructuring charge impacted net income by $4.0 million, or $0.40 earnings
per share. The Company's net income also included start-up losses for Donnelly
Optics of approximately $1.5 million and $0.4 million for 1997 and 1996,
respectively. The consolidation of Donnelly Hohe did not impact the
comparability of net income from 1996 to 1997.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company entered into a new unsecured $160 million
multi-currency global revolving credit agreement to meet the financing needs of
Donnelly Corporation and its majority owned, controlled subsidiaries. This
multi-currency revolving credit agreement replaces the Company's previous
unsecured $80 million domestic credit agreement and its 75 million Deutsche Mark
revolving Eurocredit loan agreement. Borrowings under this new agreement bear
interest, at the election of the Company, at a floating rate under one of three
alternative elections. This new revolving credit agreement terminates in
September 2004, with an opportunity for the Company to extend for one year
periods with the consent of all the revolver banks.
The Company's $160 million multi-currency global revolving credit agreement had
borrowings against it of $47.5 million in the Company's combined consolidated
balance sheet dated June 27, 1998, compared to no borrowings against the
Company's $80 million bank revolving credit agreement and borrowings of $33.4
million against the Company's 75 million Deutsche Mark (approximately $41 to $44
million) credit agreement in the Company's combined consolidated balance sheet
dated June 28, 1997. The Company's total long-term borrowings at June 27, 1998,
were at the same level as the previous year. Proceeds associated with the sale
of the Company's investment in AFC and the transfer of debt to the Lear Donnelly
joint venture, were offset by borrowings to support capital expenditures.
The Company's current ratio was 1.5 and 1.3 at June 27, 1998 and June 28, 1997,
respectively. Working capital was $52.5 million at June 27, 1998, compared to
$37.0 million at June 28, 1997. The increase in working capital at June 27,
1998, was primarily due to an increase in accounts receivable, which is the
result of higher sales for the period compared to the previous year and timing
of customer payments, offset slightly by a decrease in prepaid tooling. The
Company's North American customers provide payment to the Company on
pre-established payment dates ranging from the 28th to the 30th of each month.
Therefore, a number of customer payments were not received by June 27, 1998.
Capital expenditures in 1998, 1997 and 1996 were $46.2 million, $35.2 million
and $20.6 million, respectively. Capital spending in 1998 was higher compared to
the previous year due to the consolidation of Donnelly Hohe for the entire
twelve month period, expenditures in diffractive optics and electrochromic
mirrors and implementation of new manufacturing, distribution and administrative
information technology systems in North America and Europe. Capital expenditures
are expected to continue between 6.0%-7.0% of sales over the next year due to
the launch of new business programs in North America and the implementation of
new information technology systems in the Company.
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 functional 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-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 deemed material.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for 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.
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
7
<PAGE>
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. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers.
SFAS Nos. 130 and 131 are effective for the Company in 1999. The results of
operations and financial position will be unaffected by implementation of these
new standards.
SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits," an amendment of FASB Statements 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. This Statement is effective for the Company in 1999, and requires
comparative information for earlier periods to be restated. Results of
operations and financial position of the Company will be unaffected by
implementation of this new standard.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. This
statement is effective for the Company in 2000. Management has not yet fully
evaluated the financial statement impact of implementing this statement.
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. The Company's current accounting policy complies
with this Statement. The comparability of the results of operations and
financial position of the Company are unaffected by this new SOP.
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 is effective for the Company in 2000. Results of operations and
financial position of the Company are not expected to be materially affected by
implementation of this new standard
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 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
operations. With respect to the Company's European operations, the assessment
process has been completed for computer software and hardware information
technology systems used internally by the Company. The process, which has not
been completed for internally used manufacturing and administrative equipment in
Europe, is expected to be completed in the fall of 1998. 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, 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
8
<PAGE>
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. The Company is in the
process of developing a contingency plan for its European operations.
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.
9
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
June 27, June 28, June 29,
In thousands, except share data Year ended 1998 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $763,311 $671,297 $439,571
Cost of sales 632,679 544,629 357,830
-----------------------------------------
Gross profit 130,632 126,668 81,741
Operating expenses:
Selling, general and administrative 70,372 66,530 38,123
Research and development 36,418 32,492 27,728
Nonrecurring charges 3,468 9,965 2,399
-----------------------------------------
Total operating expenses 110,258 108,987 68,250
-----------------------------------------
Operating income 20,374 17,681 13,491
-----------------------------------------
Non-operating (income) expenses:
Interest expense 8,347 9,530 8,102
Interest income (560) (648) (1,017)
Royalty income (122) (1,486) (5,239)
Gain on sale of equity investments (4,598) (872) 0
Other income, net (1,872) (848) (704)
-----------------------------------------
Non-operating expenses 1,195 5,676 1,142
-----------------------------------------
Income before taxes on income 19,179 12,005 12,349
Taxes on income 5,053 2,786 4,191
-----------------------------------------
Income before minority interest and
equity earnings 14,126 9,219 8,158
Minority interest in net losses of subsidiaries 381 1,141 186
Equity in earnings (losses) of affiliated companies (1,498) (340) 110
-----------------------------------------
Net income $13,009 $10,020 $8,454
=========================================
Per share of common stock:
Basic net income per share 1.30 1.01 0.86
Diluted net income per share 1.29 1.00 0.85
The accompanying notes are an integral part of these statements.
</TABLE>
10
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
June 27, June 28,
1998 1997
In thousands, except share data
- ----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $5,628 $8,568
Accounts receivable, less allowance of $ 1,095 and $1,064 92,972 67,850
Inventories 44,146 42,484
Customer tooling to be billed 19,211 25,235
Prepaid expenses 3,460 5,203
Deferred income taxes 1,360 3,300
-------- ---------
Total current assets 166,777 152,640
-------- ---------
Property, plant and equipment:
Land 9,457 9,400
Buildings 79,721 77,795
Machinery and equipment 184,473 177,700
Construction in progress 21,468 21,556
-------- ---------
295,119 286,451
Less accumulated depreciation 126,214 121,327
-------- ---------
Net property, plant and equipment 168,905 165,124
Investments in and advances to affiliates 19,590 15,487
Other assets 22,613 25,042
-------- ---------
Total assets $377,885 $358,293
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $77,595 $76,392
Current maturities of long-term debt 55 103
Accruals:
Compensation 16,147 13,765
Taxes 7,278 8,162
Other 13,237 17,227
-------- ---------
Total current liabilities 114,312 115,649
-------- ---------
Long-term debt, less current maturities 123,706 122,798
Postretirement plans 23,011 17,341
Deferred income taxes and other 12,820 8,333
-------- ---------
Total liabilities 273,849 264,121
-------- ---------
Minority interest 754 345
Shareholders' equity:
Series preferred stock: 1,000,000 shares authorized and unissued - -
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 5,715,388 and 5,412,286 572 541
Class B, $.10 par; shares authorized 15,000,000,
issued 4,353,349 and 4,463,243 435 446
Donnelly Export Corporation, $.01 par; shares
authorized 600,000, issued 398,028 and 408,474 4 4
Additional paid-in capital 31,268 28,765
Cumulative foreign currency translation adjustment (8,083) (6,038)
Retained earnings 78,555 69,578
-------- ---------
Total shareholders' equity 103,282 93,827
-------- ---------
Total liabilities and shareholders' equity $377,885 $358,293
======== =========
The accompanying notes are an integral part of these statements.
</TABLE>
11
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
June 27, June 28, June 29,
In thousands Year ended 1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $13,009 $10,020 $ 8,454
Adjustments to reconcile net income to net cash from
(for) operating activities:
Depreciation and amortization 22,600 21,460 12,984
Gain (loss) on sale of property and equipment 181 (605) -
Gain on sale of equity investments (4,598) (872) -
Deferred pension cost and postretirement benefits 5,670 5,315 4,934
Deferred income taxes 3,416 (4,723) (2,386)
Minority interest loss (841) (1,646) (186)
Equity in losses of affiliated companies 1,498 765 1,160
Nonrecurring charges 3,468 9,965 2,399
Changes in operating assets and liabilities:
Sale (repayment) of accounts receivable (2,695) 44,604 -
Accounts receivable (24,643) (17,661) (22,792)
Inventories (4,366) (2,101) (2,186)
Prepaid expenses and other current assets 3,868 (2,074) (6,117)
Accounts payable and other current liabilities 2,200 9,416 3,134
Other (3,822) (4,149) 189
---------------------------------------------------
Net cash from (for) operating activities 14,945 67,714 (413)
---------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (46,164) (35,151) (20,585)
Investments in and advances to affiliates (1,045) (4,537) (13,966)
Purchase of minority interest - - (2,100)
Proceeds from sale of property and equipment 677 3,078 -
Proceeds from sale of equity investments 11,067 974 -
Proceeds from sale-lease back 7,521 - -
Change in unexpended bond proceeds - 1,344 316
Cash increase due to consolidation of subsidiary - 9,963 -
Other (856) (884) (854)
---------------------------------------------------
Net cash for investing activities (28,800) (25,213) (37,189)
---------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt 13,798 8,433 36,195
Repayments on long-term debt (429) (39,887) -
Common stock issuance 2,128 925 706
Dividends paid (4,031) (3,039) (3,220)
Other financing (218) (415) -
---------------------------------------------------
Net cash from (for) financing activities 11,248 (33,983) 33,681
---------------------------------------------------
Effect of foreign exchange rate changes on cash (333) (1,253) -
Increase (decrease) in cash and cash equivalents (2,607) 8,518 (3,921)
Cash and cash equivalents, beginning of year 8,568 1,303 5,224
---------------------------------------------------
Cash and cash equivalents, end of year $ 5,628 $ 8,568 $ 1,303
===================================================
The accompanying notes are an integral part of these statements.
</TABLE>
12
<PAGE>
<TABLE>
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Cumulative
foreign
Donnelly Additional currency
Preferred Export paid-in translation Retained
In thousands, except share data stock Class A Class B Corporation capital adjustment earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 (1,435)
Common stock issued under employee benefit plans 7 699
Change in investment in VISION Group plc 937
Other (55)
----------------------------------------------------------------------------------
Balance, June 29, 1996 531 425 358 4 25,158 (771) 63,147
Net income 10,020
Foreign currency translation adjustment 564
Foreign currency transaction adjustments on
long-term advances to affiliates (5,831)
Cash dividends declared:
Preferred stock - $.75 per share (40)
Common stock:
Class A - $.36 per share (1,941)
Class B - $.36 per share (1,608)
Issuance of common stock in a five-for-
four stock split 108 88 (204)
Common stock issued under employee benefit plans 8 925
Change in investment in VISION Group plc 2,886
----------------------------------------------------------------------------------
Balance, June 28, 1997 531 541 446 4 28,765 (6,038) 69,578
Net income 13,009
Foreign currency translation adjustment 261
Foreign currency transaction adjustments on
long-term advances to affiliates (2,306)
Cash dividends declared:
Preferred stock - $.75 per share (40)
Common stock:
Class A - $.40 per share (2,229)
Class B - $.40 per share (1,763)
Conversion of Class B to Class A Shares 11 (11)
Common stock issued under employee benefit plans 20 2,107
Change in investment in affiliates 41
Income tax benefit arising from employee
stock option plans 355
----------------------------------------------------------------------------------
Balance, June 27, 1998 $531 $572 $435 $ 4 $31,268 $(8,083) $78,555
==================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
13
<PAGE>
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 no more than a 15-year period.
In the second quarter of 1997, the Company acquired majority control of Donnelly
Hohe GmbH & Co. KG (" Donnelly Hohe"). As a result, Donnelly Hohe's financial
statements were consolidated with those of the Company beginning in the second
quarter of 1997. Prior to acquiring control, the Company owned 48% of Donnelly
Hohe and accounted for its investment using the equity method of accounting. The
Company consolidates the Donnelly Hohe financial statements from the one month
prior to the Company's period end. The combined consolidated financial
statements as of and for the years ended June 27, 1998, and June 28, 1997,
consolidate Donnelly Hohe's financial statements as of and for the twelve month
period ended May 31, 1998, and for the nine month period ended May 31, 1997,
respectively. Accordingly, all comparative data presented in the combined
consolidated financial statements and accompanying footnotes for 1996 does not
include consolidated Donnelly Hohe information. A more detailed discussion of
the acquisition of Donnelly Hohe and pro forma results of operations for 1997
and 1996 are included in Note 3.
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
combined in the financial statements as if they were a single entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year is the 52 or 53 week period ending the Saturday
nearest June 30. Fiscal years ended June 27, 1998, June 28, 1997, and June 29,
1996, each included 52 weeks. All year and quarter references relate to the
Company's fiscal year and fiscal quarters, unless otherwise stated.
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.
Although management's estimates currently are not expected to change in the
foreseeable future, the costs the Company will ultimately incur could differ
from the amounts that are assumed to be incurred based on the assumptions made.
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. The
Company's primary foreign investments are in Germany, Ireland, Spain and France.
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.
14
<PAGE>
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
first-in, first-out (FIFO) method for domestic inventories and on the FIFO or
average cost basis for international inventories.
CUSTOMER TOOLING TO BE BILLED
Customer tooling to be billed represents costs incurred on behalf of the
Company's customers. These costs are recoverable at the time of tool completion
and approval or are recovered in the program's piece price over a period of
three years or over the program's useful life.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation, which includes
amortization of assets under capital leases, is provided primarily by the
straight-line method. Depreciation is computed over the estimated useful lives
of the assets as follows:
<TABLE>
Years
<S> <C>
Buildings.................... 10 to 50
Machinery and equipment...... 3 to 15
</TABLE>
For tax purposes, useful lives and accelerated methods are used as permitted by
the taxing authorities.
The Company capitalizes certain costs associated with software developed for its
own use and amortizes such costs over the expected useful lives of the software.
INCOME TAXES
Deferred income 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.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings 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, retroactively adjusted for stock dividends
and stock splits. Diluted earnings per share is computed including the effect of
dilutive stock options.
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, the current rates available for similar financial instruments or based
on calculations discounting expected cash flows at the rates currently offered
to the Company for debt of the same remaining maturities. The carrying value of
the Company's variable rate debt and all other financial instruments
approximates their fair value.
LONG-LIVED ASSETS
The Company reviews long-lived assets, including goodwill and other intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be fully recoverable. If it is
determined that an impairment loss has occurred based on expected future cash
flows, a current charge to income is recognized.
15
<PAGE>
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.
3. INVESTMENTS IN AND ADVANCES TO AFFILIATES
On November 3, 1997, the Company formed Lear Donnelly Overhead Systems, LLC
("Lear Donnelly"), a 50% owned joint venture with Lear Corporation ("Lear").
Lear Donnelly is engaged in the design, development and production of overhead
systems for the global automotive market, including complete overhead systems,
headliners, consoles and lighting components, vehicle electrification
interfaces, electronic components, visors and assist handles ("products"). The
Company and Lear each contributed certain technologies, assets and liabilities
for the creation of the joint venture. In a noncash transaction, the Company
transferred net assets of $7.9 million associated with its interior trim and
lighting businesses, including $10 million of debt, to the joint venture for its
50% interest. These assets were transferred at their net book values.
Lear Donnelly manufactures products for sale to both the Company and Lear, who
are each responsible for their customer sales efforts to the original equipment
manufacturers. Because existing and certain future contracted sales have been
retained by the Company, the existence of the joint venture does not
significantly impact the comparability of net sales or net income of the Company
from period to period. However, due to the supply agreement between Lear
Donnelly and the parent companies and the related net earnings of the joint
venture being accounted for under the equity method, the Company's gross profit
and operating margins are expected to be unfavorably impacted.
In the second quarter of 1998, the Company sold its 50% interest in Applied
Films Corporation during an initial public offering. As a result of this sale,
the Company received $7.9 million in net proceeds, after taxes and related out
of pocket fees, and recognized a one-time pretax gain of approximately $4.6
million, or $0.22 per share after tax.
In 1998, Donnelly formed a joint venture with Industrias Arteb S.A. to produce
interior and exterior mirrors for the South American automotive industry. The
new company, Donnelly/Arteb, LTDA ("Donnelly/Arteb"), is located in Sao Paulo,
Brazil. Donnelly/Arteb focused on winning new orders and establishing its
operations early in 1999. Donnelly/Arteb began launching several mirror programs
for General Motors and is slated to start electrochromic mirror assembly for the
GM Vectra model by mid-year.
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. Donnelly Hohe, based in Collenberg, Germany, supplies many of the
leading European automakers with interior and exterior rear view mirrors,
through manufacturing facilities in Germany and Spain. Donnelly Hohe consists of
a general partnership and a limited partnership. The general partnership
controls Donnelly Hohe's assets and manages its operations while the limited
partnership is the recipient of all income or losses generated by Donnelly
Hohe's operations.
The Company's original investment consisted of a 48% interest in the general
partner and a 66 2/3% interest in the limited partner. In the second quarter of
1997, the Company acquired an additional 13% interest in the general partner,
resulting in the Company owning a controlling interest in the general partner of
Donnelly Hohe. As a result, Donnelly Hohe's financial statements were
consolidated with those of the Company, beginning with the second quarter of
1997. From the initial date of acquisition, April 1, 1995, through the first
quarter of 1997, the Company's investment in Donnelly Hohe was accounted for
using the equity method of accounting. An additional 13% interest in the general
partner was acquired in the third quarter of 1997, increasing the Company's
interest in the general partnership to 74%. The Company's limited partnership
interest has remained unchanged, therefore, the consolidation of Donnelly Hohe
has no impact on net income for each period reported. The unaudited pro forma
combined consolidated net sales, in thousands, $719,548 and $664,376 for 1997
and 1996, respectively, are calculated as if the acquisition of a controlling
interest in Donnelly Hohe had occurred at the beginning of 1996, but may not be
indicative of the results that actually would have been achieved.
The Company has advanced 60 million Deutsche marks to Donnelly Hohe, valued at
$33.2 million at June 27, 1998, under subordinated loan agreements, 20 million
in 1995, 20 million in 1996, and 20 million in 1998. Amounts advanced to
Donnelly Hohe under the subordinated loan agreements provide for 5% to 10%
interest per annum with no principal payments due until maturity between October
1, 1999, and October 1, 2000. These advances are now eliminated as intercompany
transactions in the consolidation of Donnelly Hohe with the Company's financial
statements. The terms of the acquisition transaction allow Donnelly to purchase
the remaining ownership interest in Donnelly Hohe through various options. The
minority owners also
16
<PAGE>
have an option to require the Company to buy their interests at any time based
upon a predetermined formula which is currently less than $2 million.
During 1997, 1996 and 1995, VISION Group plc ("VISION Group") sold common shares
in a private placement and through public offerings. In conjunction with a
public offering of VISION Group shares in the Company's second quarter of 1997,
the Company also sold 2.5% of its investment, resulting in a $0.9 million pretax
gain. The effect of all of these transactions resulted in reducing the Company's
ownership interest from 40.4% at the date of the Company's original investment
to 25.6% at June 27, 1998. The Company's equity in the net proceeds of VISION
Group's sale of new shares is reflected as an increase in the Company's
investment in the net assets of VISION Group, which was approximately $6 million
at June 27, 1998, and additional paid-in capital, net of deferred taxes, 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
$9 million at June 27, 1998. The aggregate market value of the Company's
investment in VISION Group may vary based on business, industry and market
conditions.
In the first quarter of 1997, the Company formed Shunde Donnelly Zhen Hua
Automotive Systems Co., Ltd. ("Zhen Hua"), a joint venture with Shunde Zhen Hua
Automobile Parts Co., Ltd. The Company acquired a 30% interest in the joint
venture which manufactures exterior mirrors for car makers throughout southern
China, including Volkswagen, Isuzu and Chrysler. The Company also has an option
to acquire an additional 30% interest in the joint venture. Zhen Hua operates
out of three existing buildings in Shunde, China, which are owned by the joint
venture. Certain manufacturing equipment was in place at the time the joint
venture was formed and 200 Zhen Hua employees currently are employed at the
facilities. In the first quarter of 1999, Shunde Zhen Hua intends to sell their
portion of the joint venture to a new partner: Ganxiang Automobile Mirror
Company, the largest automotive mirror supplier in China.
In the fourth quarter of 1996, the Company formed Shanghai Donnelly Fu Hua
Window Systems Company Ltd. ("Shanghai Donnelly Fu Hua"), a 50-50 joint venture
with Shanghai Fu Hua Glass Company, Ltd. Shanghai Fu Hua Glass Company is a
joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. The
joint venture has its equipment and processes in place and began manufacturing
encapsulated and framed glass products in the third quarter of 1998.
The Company's current equity affiliates include the following: Lear Donnelly, a
50% owned joint venture that engages in the design, development and production
of overhead systems for the global automotive market; VISION Group, the sole
shareholder of VLSI Vision Limited that produces an advanced video microchip;
Shanghai Donnelly Fu Hua, a 50% owned joint venture that manufactures
encapsulated and framed glass products for the Asian automotive industry; Zhen
Hua, a 30% owned joint venture that manufactures exterior mirrors for car makers
throughout southern China; and Donnelly/Arteb, a 50% owned joint venture that
produces interior and exterior mirrors for the South American automotive
industry.
Summarized 1998 balance sheet and income statement information for the Company's
non-consolidated affiliates accounted for using the equity method is shown
below. This information includes Lear Donnelly's eight months, beginning
November 1997 and ending in June 1998. All others presented include twelve
months ending in June 1998.
<TABLE>
In thousands 1998
- -------------------------------------------------------------------------------
<S> <C>
Summarized Balance Sheet Information
Current assets ........................................ $ 63,526
Noncurrent assets ..................................... 49,895
Current liabilities ................................... 30,822
Noncurrent liabilities ................................ 30,379
---------
Net equity ............................................ $ 52,220
=========
Summarized Income Statement Information
Net sales ............................................. $ 96,752
Costs and expenses .................................... 103,818
---------
Net loss .............................................. $ (7,066)
=========
</TABLE>
Summarized 1996 income statement information for the Company's nonconsolidated
affiliates accounted for using the equity method is as follows, in thousands:
combined net sales were $250,904, less costs and expenses of $254,404, for a
combined net loss of $3,500. Income statement information includes Donnelly
Hohe's twelve months ended May 31, 1996. All significant
17
<PAGE>
others presented include twelve months ending in June of 1996. This information
is not presented for 1997 due to the consolidation of Donnelly Hohe in 1997.
4. NATURE OF OPERATIONS
The Company is an international supplier of high-quality automotive parts and
component systems through manufacturing operations and various joint ventures in
North and South America, Europe and Asia. The Company supplies automotive
customers around the world with rear view mirror systems, modular window systems
and interior lighting and trim systems. The Company also provides products to
several nonautomotive markets.
In the second quarter of 1997, the Company began consolidating the financial
statements of Donnelly Hohe, a subsidiary based in Collenberg, Germany. The
Company's financial statements for the years ended June 27, 1998, and June 28,
1997, are consolidated using Donnelly Hohe's financial statements as of and for
the twelve month period ended May 31, 1998, and for the nine month period ended
May 31, 1997, respectively. See Notes l and 3 for a more thorough discussion.
North American revenues are revenues produced by assets located in the United
States and Mexico. Export revenues are foreign revenues produced by identifiable
assets located in the United States. European revenues are generated by
identifiable assets at the Company's subsidiaries located in Germany, Spain,
Ireland and France. A summary of the Company's operations by geographic area
follows:
<PAGE>
<TABLE>
In thousands Year ended 1998 1997 1996
- -------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
North American:
United States .............. $ 420,544 $ 390,852 $ 338,355
Export:
Americas ............... 76,433 54,302 49,655
Asia ................... 3,313 2,825 532
Europe ................. 2,002 1,829 1,917
Other .................. 350 76 --
----------------------------------------
502,642 449,884 390,459
European ........................ 260,669 221,413 49,112
----------------------------------------
$ 763,311 $ 671,297 $ 439,571
========================================
Operating Income (Loss):
North American .................. $ 19,654 $ 25,528 $ 17,208
European ........................ 720 (7,847) (3,717)
----------------------------------------
$ 20,374 $ 17,681 $ 13,491
========================================
Identifiable Assets:
North American .................. $ 228,511 $ 200,100
European ........................ 149,374 158,193
------------------------
$ 377,885 $ 358,293
========================
</TABLE>
Sales to major automobile manufacturers as a percentage of the Company's net
sales follows:
<TABLE>
Year ended 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Ford Motor Company ......................... 27% 25% 22%
Chrysler Corporation ....................... 20 20 33
Honda ...................................... 8 11 16
BMW ........................................ 7 7 --
VW ......................................... 6 6 --
General Motors Corporation ................. 5 5 10
------------------------------
73% 74% 81%
==============================
</TABLE>
18
<PAGE>
5. NONRECURRING CHARGES
In the fourth quarter of 1998, Donnelly Optics Corporation, a wholly owned
subsidiary in Tucson, Arizona, recognized a $3.5 million pretax charge against
operating income due to the cancellation of orders, relating to changing market
dynamics in the digital imaging sector of the computer industry. The charge
primarily consists of a write-off of tooling and other current assets and
severance of approximately 25 manufacturing and administrative personnel. The
severance cash payments will be completed by the end of 1999.
In the fourth quarter of 1997, the Company recognized a $10 million
restructuring charge in the Company's European operations to realign
manufacturing capacity, improve operating efficiencies and to reduce future
operating costs, primarily by reducing the number of nonproduction employees.
The restructuring also involves reorganizing product lines and production to
realize efficiencies in the production process. The costs consist primarily of a
severance program and voluntary separation incentives, in addition to other
expenses associated with the plan. The severance and separation incentive
program includes approximately 230 personnel, primarily personnel in
manufacturing and administrative support functions. Due to changes in management
at the Company's European operations, implementation of the restructuring plan
was delayed until the fourth quarter of 1998. Through June 27, 1998, the Company
had terminated a cumulative total of 127 employees under the plan and recognized
cumulative cash payments of $5.1 million, primarily severance and separation
incentives. Additionally, in 1998, the Company recorded a reduction to the
restructuring reserve of $1.1 million pretax. All remaining employee separation
benefits and related cash flows are expected to be completed by the end of 1999.
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, including accruals
for severance and related employee support programs and write-off of certain
assets removed from service. The majority of these liabilities were paid or
settled during the first six months of 1997.
6. INVENTORIES
Inventories consist of:
<TABLE>
In thousands 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Finished products and work in process ......... $16,987 16,675
Raw materials ................................. 27,159 25,809
---------------------
$44,146 $42,484
=====================
</TABLE>
7. DEBT AND OTHER FINANCING ARRANGEMENTS
Debt consists of:
<TABLE>
In thousands 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrowings under revolving credit agreements at 4.61% and 4.81% ...................... $ 48,882 $ 41,532
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 20,000
Industrial revenue bonds:
$9,500 at adjustable rates (3.78% at June 27, 1998 and 4.14% at June 28, 1997),
due in 2008-2010; $5,000 at a fixed rate of 8.13%, due in 2012;
$1,725 at a fixed rate of 5.75%, due in 2003 ......................................... 16,225 16,225
Bank Note, principal payable in installments through 2003,
interest at 6.48%..................................................................... 1,976 3,077
Capitalized lease obligations......................................................... 3,072 5,110
Other................................................................................. 3,606 6,957
------------------
Total ................................................................................ 123,761 122,901
Less current maturities .............................................................. 55 103
------------------
$123,706 $122,798
==================
</TABLE>
19
<PAGE>
In September 1997, the Company entered into an unsecured $160 million
multi-currency global revolving credit agreement which replaces the Company's
previous unsecured $80 million domestic credit agreement and its 75 million
Deutsche mark revolving Eurocredit loan agreement. Borrowings under this new
agreement bear interest, at the election of the Company, at a floating rate
under one of three alternative elections. A variable facility fee, currently at
.15%, is paid on the credit line. This new revolving credit agreement terminates
in September 2004, with an opportunity for the Company to extend for one year
periods with the consent of all the revolver banks.
The $9.5 million industrial revenue bonds are secured by letters of credit which
expire in 2000. 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 27, 1998, the Company was in compliance with
all related covenants. Retained earnings available for dividends at June 27,
1998, are $24.0 million.
The Company classifies certain maturities as long term due to the intent to
refinance these under the Company's revolving credit agreement. Annual principal
maturities (excluding capitalized lease obligations) consist of:
<TABLE>
Year ending In thousands Amount
- -------------------------------------------------------------
<S> <C>
1999.................................... $ 55
2000.................................... 7,835
2001.................................... 13,534
2002.................................... 10,854
2003.................................... 29,889
2004 and thereafter..................... 58,522
----------
$120,689
===========
</TABLE>
Interest payments of $8.6 million, $10.4 million and $7.8 million were made in
1998, 1997 and 1996, respectively.
8. ACCOUNTS RECEIVABLE SECURITIZATION
In November 1996, the Company entered into a three-year agreement to sell, on a
revolving basis, an interest in a defined pool of trade accounts receivable of
up to $50 million. At June 27, 1998 and June 28, 1997, a $40.3 million and $40.0
million interest, respectively, had been sold under this agreement with proceeds
used to reduce revolving lines of credit. The sale is reflected as a reduction
of accounts receivable and as operating cash flows. As collections reduce
previously sold interests, new accounts receivable are customarily sold. The
proceeds of sales are less than the face amount of accounts receivable sold by
an amount that approximates the purchaser's financing cost of issuing its own
commercial paper backed by these accounts receivable. The discount fees were
$2.1 million in 1998 and $1.1 million in 1997, and are included in selling,
general and administrative expense. The Company, as agent for the purchaser,
retains collection and administrative responsibilities for the participating
interests of the defined pool.
9. FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps and foreign exchange contracts to
manage exposure to fluctuations in interest and foreign currency exchange rates
and accordingly accounts for them on a hedging rather than trading basis. The
risk of loss to the Company in the event of nonperformance by any party under
these agreements is not material. At June 27, 1998 and June 28, 1997, the
Company had interest rate swaps with an aggregate notional amount of $40 million
and $50 million, respectively, $10 million and $20 million of which were
offsetting at June 27, 1998 and June 28, 1997, respectively. These effectively
converted $30 million of the Company's variable interest rate debt to fixed
rates at June 27, 1998 and June 28, 1997. 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 $1.1 million and $2.0 million at June 27, 1998
and June 28, 1997, respectively. The foreign exchange contracts require the
Company to exchange foreign currencies for Irish punts and
20
<PAGE>
generally mature within 12 months. Deferred gains and losses are included on a
net basis in the statement of financial position as either other assets or other
liabilities and are recognized in income as part of a sale transaction when it
is recognized.
The carrying value and estimated fair value of all financial instruments in
which the fair value differs from carrying value at June 27, 1998 and June 28,
1997, are as follows:
<TABLE>
In thousands 1998 1997
- --------------------------------------------------------------------------------------------------------
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
Liabilities
Long-term fixed rate debt $56,725 $58,540 $56,725 $56,544
Derivatives
Interest rate swaps --- (1,140) --- (361)
Foreign exchange contracts --- 100 --- 5
</TABLE>
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. This statement is effective for the Company
in 2000. Management has not yet fully evaluated the financial statement impact
of implementing this statement.
10. BENEFIT PLANS
A. Pension Benefits
The Company sponsors defined benefit pension plans covering substantially all
domestic employees and employees at the Company's Donnelly Mirrors Limited
facility in Ireland. 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>
In thousands Year ended 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate........................... 7.75% 8.00% 7.75%
Compensation increase................... 5.00% 5.00% 5.00%
Expected return on plan assets.......... 9.50% 9.50% 9.50%
Service cost............................ $ 4,284 $ 3,545 $ 3,545
Interest cost........................... 5,881 5,497 5,060
Actual gain on plan assets.............. (8,678) (6,931) (8,528)
Net amortization and deferral........... 2,739 2,270 4,550
-------------------------------------------
Net periodic pension cost............... $ 4,226 $ 4,381 $ 4,627
==========================================
</TABLE>
The funded status of the defined benefit pension plans is summarized below and
reflects recent changes made to the plan to increase the normal retirement age
by three years to match that used for social security:
<TABLE>
In thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$60,711 and $51,182................................................ $ (62,195) $ (52,812)
Effect of projected compensation increases......................... (26,178) (21,602)
----------------------------
Projected benefit obligation for service rendered to date.......... (88,373) (74,414)
Plan assets at fair value, primarily corporate equity and debt
securities......................................................... 77,775 66,569
- ------
Projected benefit obligation in excess of plan assets.............. (10,598) (7,845)
Unrecognized net transition obligation............................. 349 328
Unrecognized prior service cost.................................... (4,709) 448
Unrecognized net gain.............................................. (1,990) (5,921)
----------------------------
Net pension liability.............................................. $ (16,948) $ (12,990)
============================
</TABLE>
21
<PAGE>
B. Postretirement Health Care Benefits
The Company provides certain health care and life insurance benefits for
eligible active and retired domestic employees. The plan contains cost-saving
features such as deductibles, coinsurance and a lifetime maximum and is
unfunded. The Company accrues, during the employee's years of service, the
expected cost of providing postretirement benefits to the employee and the
employee's beneficiaries and covered dependents.
The components of the net periodic postretirement benefit cost are as follows:
<TABLE>
In thousands Year ended 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost............................. $ 504 $ 445 $ 450
Interest cost............................ 977 911 830
Amortization of net transition
obligation over 22 years................. 360 360 360
Unrecognized net loss.................... 9 4 20
----------------------------------------
Net periodic postretirement benefit
cost..................................... $ 1,850 $ 1,720 $ 1,660
========================================
</TABLE>
The postretirement health care liability recognized in the balance sheet is as
follows:
<TABLE>
In thousands 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Retirees................................. $ (4,992) $ (5,478)
Other active participants................ (9,567) (6,696)
--------------------------
Accumulated postretirement benefit
obligation............................... (14,559) (12,174)
Unrecognized transition obligation. 6,121 6,481
Unrecognized net loss.................... 2,294 1,199
--------------------------
Postretirement health care liability..... $ (6,144) $ (4,494)
==========================
</TABLE>
The assumed health care inflation rate used in measuring the postretirement
health care liability is 8% for 1999, declining uniformly to 6% in 2001 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 $0.7 million, and the net
periodic postretirement benefit cost for 1998 by $77,000. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7% and 7.75% in 1998 and 1997, respectively.
11. TAXES ON INCOME
Deferred income taxes reflect the tax effects of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and those
amounts as measured by income tax laws. The Company has grouped the noncurrent
deferred tax assets with other assets and the net noncurrent deferred tax
liability with certain other liabilities on the accompanying balance sheets. The
tax effects of temporary differences which give rise to a significant portion of
deferred tax assets (liabilities) are as follows:
<TABLE>
In thousands 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Fixed assets........................... $ (9,750) $ (7,776)
Retirement plans....................... 5,904 4,462
Postretirement benefits................ 2,149 1,534
Loss carryforwards..................... 7,137 6,718
Accrued expenses and other............. (7,009) (2,480)
Valuation allowance.................... (457) (337)
---------------------------
Net deferred tax asset (liability)..... $ (2,026) $ 2,121
===========================
</TABLE>
22
<PAGE>
Deferred taxes are classified in the accompanying balance sheets as follows:
<TABLE>
In thousands 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Current income tax asset................ $ 1,360 $ 3,299
Noncurrent income tax asset............. 5,706 4,174
Noncurrent income tax liability......... (9,092) (5,352)
------------------------
Net deferred tax asset (liability)...... $ (2,026) $ 2,121
========================
</TABLE>
At June 27, 1998, the Company has $25.4 million of consolidated net operating
loss carryforwards, which do not expire.
<TABLE>
In thousands Year ended 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before taxes on income consists of:
Domestic.................................. $21,967 $ 23,833 $15,647
Foreign................................... (2,788) (11,828) (3,298)
-----------------------------------------
$19,179 $ 12,005 $12,349
=========================================
Tax expense (benefit) consists of:
Current:
Domestic.................................. $ 828 $ 6,256 $ 6,909
Foreign................................... 79 950 8
-----------------------------------------
907 7,206 6,917
-----------------------------------------
Deferred:
Domestic................................... 5,025 (23) (2,156)
Foreign.................................... (879) (4,397) (570)
-----------------------------------------
4,146 (4,420) (2,726)
-----------------------------------------
$ 5,053 $ 2,786 $ 4,191
=========================================
</TABLE>
The difference between the Company's income tax provision and 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>
In thousands Year ended 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal statutory rate..... 35% 35% 35%
Impact of:
Available tax credits................. (6) (5) ---
Foreign subsidiary earnings........... (1) (4) 5
DISC earnings......................... (4) (5) (6)
Other................................. 2 2 ---
-----------------------------------------
Effective tax rate......................... 26% 23% 34%
-----------------------------------------
Income taxes paid.......................... $ 2,164 $ 9,193 $ 3,731
=========================================
</TABLE>
12. 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 27, 1998. 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
27, 1998 and June 28, 1997, no series preferred stock was outstanding.
On December 6, 1996, the Board of Directors declared a five-for-four stock split
in the form of a 25% 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.
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.
23
<PAGE>
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) 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.
The following table sets forth the computation of basic and diluted earnings per
share for each period reported:
<TABLE>
In thousands, except per share data Year Ended 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $13,009 $10,020 $8,454
Less: Preferred stock dividends (40) (40) (40)
-------- -------- ------
Income available to common stockholders $12,969 $9,980 $8,414
======== ======= ======
Weighted-average shares 9,961 9,836 9,754
Plus: Effect of dilutive stock options 111 143 111
======== ======= ======
Adjusted weighted-average shares 10,072 9,979 9,865
======== ======= ======
Basic earnings per share $1.30 $1.01 $0.86
======== ======= ======
Diluted earnings per share $1.29 $1.00 $0.85
======== ======= ======
</TABLE>
13. 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 18,963 shares in 1998, 11,540 shares in
1997 and 21,825 in 1996 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 238,093 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. At
June 27, 1998, 201,718 options were available for grant. A summary of the
Company's stock option activity and related information follows:
<TABLE>
Shares Under Weighted--Average
In thousands Option Exercise Price
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Outstanding at July 1, 1995 515 11.41
- -----------------------------------------------------------------------------------------------
Exercisable at July 1, 1995 429 10.99
Granted in 1996 100 12.57
Exercised (59) 7.96
Canceled (45) 14.18
Outstanding at June 29, 1996 511 11.80
- -----------------------------------------------------------------------------------------------
Exercisable at June 29, 1996 421 11.64
- -----------------------------------------------------------------------------------------------
Granted in 1997 97 14.20
Exercised (79) 10.21
Canceled (6) 14.53
- -----------------------------------------------------------------------------------------------
Outstanding at June 28, 1997 523 12.45
- -----------------------------------------------------------------------------------------------
Exercisable at June 28, 1997 426 12.05
- -----------------------------------------------------------------------------------------------
Granted in 1998 164 21.94
Exercised (171) 10.64
Canceled (18) 20.42
- -----------------------------------------------------------------------------------------------
Outstanding at June 27, 1998 498 15.92
- -----------------------------------------------------------------------------------------------
Exercisable at June 27, 1998 350 13.34
- -----------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
Weighted-Average
------------------------------------------------------
Number of Options Option Price Remaining
----------------------------------- -----------------------------------
Exercise Price Range Outstanding Exercisable Outstanding Exercisable Contractual Life
- ------------------------- ----------------- ------------------ ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 8.32 - $13.60 176 176 $ 11.57 $ 11.57 4.90 years
$14.10 - $22.69 322 174 $ 18.31 $ 15.13 7.53 years
</TABLE>
The weighted-average grant-date fair value was $7.53, $4.93 and $4.37 for stock
options granted in 1998, 1997 and 1996 respectively.
The Company follows Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
stock incentive plans. Under APB Opinion No. 25, compensation expense is
recognized when the market price of the underlying stock award on the date of
grant exceeds any related exercise price. Accordingly, no compensation expense
has been recognized in the accompanying financial statements.
Pro forma information regarding net income and net income per share has been
determined as if the Company had accounted for its stock awards using the fair
value method consistent with SFAS No. 123 and had recognized compensation
expense. The fair value of these awards was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions in 1998, 1997 and 1996 respectively: risk free interest rates of
5.45%, 6.23% and 6.23%; dividend yield of 2.06%, 2.2% and 2.2%; expected market
price volatility factor of .311, .303 and .303; and an expected option life of
seven years.
The Company's pro forma information under SFAS No. 123 is as follows:
<TABLE>
Year Ended 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (In thousands):
As reported $ 13,009 $ 10,020 $ 8,454
Pro forma 11,976 9,544 8,170
Basic net income per share of common stock:
As reported $ 1.30 $ 1.01 $ .86
Pro forma 1.20 .97 .83
Diluted net income per share of common stock:
As reported $ 1.29 $ 1.00 $ .85
Pro forma 1.19 .95 .82
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
A. 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 or to pay Midwest damages. On February 5, 1998, the
court granted the Company's motion for summary judgment on the remaining two
counts. Midwest has appealed the court's decision to the U.S. Seventh Circuit
Court of Appeals. 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 3, 1998, the Company reached a final settlement with Happich
Fahrzeug-InnausstaHung GmbH concerning a joint venture that had been the subject
of arbitration. As a result of the settlement, the Company was awarded 100%
ownership of the former joint venture, which was subsequently transferred into
the Lear Donnelly joint venture, received payment for damages and costs incurred
and entered into other agreements with respect to certain technology and the
supply of parts.
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
25
<PAGE>
by Britax of rear view 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 are parallel 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 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.
B. Other
As of June 27, 1998, the Company had capital expenditure purchase commitments
outstanding of approximately $13.2 million.
The Company provides a guarantee for $7.3 million in municipal funding for the
construction of a manufacturing facility.
15. LEASES
Future minimum lease payments, excluding renewal options, consist of:
<TABLE>
Year Ending In thousands Capital Leases Operating Leases
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 2,012 $ 3,826
2000 1,143 1,754
2001 112 1,543
2002 43 1,507
2003 --- 1,203
2004 and thereafter --- 2,765
--------------------------------
Total minimum lease payments 3,310 $ 12,598
========
Less amount representing interest and other 238
----------
Present value of net minimum lease payments $ 3,072
==========
</TABLE>
Donnelly Hohe has various capital leases for manufacturing and warehouse
facilities and manufacturing, office and transportation equipment. Included in
property, plant and equipment are the following assets held under capital
leases:
<TABLE>
In thousands Year Ended 1998
- ------------------------------------------------------------------
<S> <C>
Land $ 75
Buildings 5,290
Machinery and equipment 2,644
-------
Gross property, plant and equipment under capital leases 8,009
Less accumulated depreciation (4,937)
-------
Net property, plant and equipment under capital leases $ 3,072
=======
</TABLE>
The Company has operating leases for office, warehouse and manufacturing
facilities and manufacturing equipment. Rental expense charged to operations
amounted to approximately $4.3 million for 1998, $3.8 million for 1997 and $3.8
million for 1996. In 1998, the Company entered into an agreement for the sale
and leaseback of newly installed injection molding equipment. The equipment was
sold at cost and no gain or loss was recognized on the transaction. The lease
has an effective 6.4% fixed interest rate and a 40% balloon for the Company's
option to purchase the equipment after the full seven-year term and is
classified as an operating lease.
26
<PAGE>
16. COMMON STOCK PRICE PER SHARE - UNAUDITED
The Company's common stock is traded on the New York Stock Exchange under the
Symbol "DON." Prior to March 10, 1997, the Company's stock was listed on the
American Stock Exchange under the symbol "DON." Market quotations regarding the
range of high and low sales prices of the Company's common stock were as
follows:
<TABLE>
Fiscal 1998 1997
- ---------------------------------------------------------------------------------------
Quarter High Low High Low
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $ 23.75 $ 16.75 $ 14.70 $ 11.80
Second 22.44 17.50 17.90 14.10
Third 19.31 16.25 20.00 16.00
Fourth 22.38 18.00 17.38 14.38
- --------------------------------------------------------------------------------------
</TABLE>
17. QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
First Second Third Fourth Total
In thousands, except per share data Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales......................................... $165,176 $194,800 $ 193,658 $ 209,677 $ 763,311
Gross profit...................................... 27,973 33,580 32,649 36,430 130,632
Operating income ................................. 3,090 6,378 6,674 4,232 20,374
Net Income........................................ 986 5,169 3,373 3,481 13,009
Basic net income per share..................... .10 .52 .34 .35 1.30
Diluted net income per share................... .10 .51 .33 .34 1.29
Dividends declared per share of common stock...... .10 .10 .10 .10 .40
1997
Net sales......................................... $113,400 $188,037 $ 181,681 $ 188,179 $ 671,297
Gross profit...................................... 23,148 34,771 33,321 35,428 126,668
Operating income (loss)........................... 4,942 8,600 5,403 (1,264) 17,681
Net Income........................................ 1,722 3,917 2,958 1,423 10,020
Basic net income per share..................... .18 .40 .30 .14 1.01
Diluted net income per share................... .17 .39 .29 .14 1.00
Dividends declared per share of common stock...... .08 .08 .10 .10 .36
</TABLE>
See Management's Discussion and Analysis of Results of Operations and Financial
Condition for discussion of the Company's results of operations and Notes 3, 5
and 14 for a discussion of the impact of certain transactions on the 1998 and
1997 quarterly results of operations.
27
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Donnelly Corporation is responsible for the preparation and
integrity of the combined consolidated financial statements and all other
information contained in this Annual Report. The financial statements were
prepared in accordance with generally accepted accounting principles and include
amounts that are based on management's informed estimates and judgments.
In fulfilling its responsibility for the integrity of financial information,
management has established a system of internal accounting control which
provides reasonable assurance that assets are properly safeguarded and accounted
for and that transactions are executed in accordance with management's
authorization and recorded and reported properly.
The financial statements have been audited by our independent public
accountants, BDO Seidman, LLP, whose unqualified report is presented on the next
page. The independent accountants provide an objective assessment of the degree
to which management meets its responsibility for fairness of financial
reporting. They regularly evaluate the internal control structure and perform
such tests and other procedures as they deem necessary to reach and express an
opinion on the fairness of the financial statements.
The Audit Committee of the Board of Directors, consisting solely of outside
Directors, meets with the independent public accountants and management to
review and discuss the major audit findings, the adequacy of the internal
control structure and quality of financial reporting. The independent
accountants also have free access to the Audit Committee to discuss auditing and
financial reporting matters with or without management present.
/s/ J. Dwane Baumgardner, Ph.D.
J. Dwane Baumgardner, Ph.D.
Chairman, Chief Executive Officer and President
/s/ Ronald L. Winowiecki
Ronald L. Winowiecki
Chief Accounting Officer
28
<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 27, 1998 and June 28, 1997, and the related combined
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended June 27, 1998. 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 27, 1998 and June 28, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 27, 1998, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Grand Rapids, Michigan
August 6, 1998
29
<PAGE>
EXHIBIT 10.21
Amended and Restated Operating Agreement
For
Donnelly Electronics, L.L.C.
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. THE LIMITED LIABILITY COMPANY......................................1
1.1 Formation and Name...........................................1
1.2 Character of Business........................................1
1.3 Registered Office, Resident Agent............................1
1.4 Principal Place of Business..................................1
1.5 Partnership Classification...................................1
ARTICLE 2. CAPITAL CONTRIBUTIONS AND ACCOUNTS.................................2
2.1 Initial Contributions........................................2
2.2 Capital Accounts.............................................2
2.3 Interests in Capital.........................................2
2.4 No Right to Withdraw.........................................2
2.5 Additional Contributions.....................................3
ARTICLE 3. ALLOCATIONS AND DISTRIBUTIONS......................................3
3.1 Allocations of Profits and Losses............................3
3.2 Distributions of Cash Flow...................................3
3.3 Priority and Distribution of Assets..........................3
ARTICLE 4. MANAGEMENT AND EXCULPATION.........................................3
4.1 Management of Business.......................................3
4.2 Powers of Managers...........................................4
4.3 Time Devoted to Business.....................................5
4.4 Information Relating to Company..............................5
4.5 Records at Principal Place of Business.......................5
4.6 Reimbursement of Managers....................................6
4.7 Indemnification..............................................6
4.8 Irrevocable Powers of Attorney...............................7
ARTICLE 5. TRANSFERS OF INTERESTS.............................................7
5.1 Restrictions on Transfer.....................................7
5.2 Right of First Refusal.......................................8
5.3 Other Transfers..............................................8
5.4 Lapse of Option..............................................9
5.5 Donnelly Purchase Option.....................................9
5.6 Donnelly Call Option........................................11
5.7 Member Put Option...........................................12
5.8 Default, Bankruptcy, Etc....................................13
5.9 Priority....................................................14
i
<PAGE>
5.10 Purchase Price and Terms....................................14
5.11 Loss of Membership..........................................16
5.12 Substitute or Additional Members............................16
ARTICLE 6. DISSOLUTION AND TERMINATION.......................................17
6.1 Dissolution.................................................17
6.2 Final Accounting............................................17
6.3 Liquidation.................................................17
6.4 Distributions in Kind.......................................17
6.5 Certificate of Dissolution..................................17
ARTICLE 7. AMENDMENT TO AGREEMENT............................................17
ARTICLE 8. NOTICES...........................................................18
8.1 Method for Notices..........................................18
8.2 Computation of Time.........................................18
ARTICLE 9. GENERAL PROVISIONS................................................18
9.1 Entire Agreement............................................18
9.2 Construction Principles.....................................18
9.3 Waivers.....................................................18
9.4 Validity and Severability...................................18
9.5 Counterparts................................................18
9.6 Investment Representations..................................19
ii
<PAGE>
Amended and Restated Operating Agreement
for
Donnelly Electronics, L.L.C.
Donnelly Electronics, L.L.C., a Michigan limited liability company (the
"Company"), and each person who executes this Amended and Restated Operating
Agreement or a counterpart of it (the "Agreement") or who hereafter is admitted
as a member of the Company in accordance with the procedures described in this
Agreement (individually, a "Member," and collectively, the "Members"), enter
into this Amended and Restated Operating Agreement effective as of January 1,
1998, which amends and supersedes that certain Operating Agreement of the
Company dated effective July 30, 1996 (the "Original Agreement").
ARTICLE 1. THE LIMITED LIABILITY COMPANY
1.1 Formation and Name. The Members have formed and hereby agree to operate
the Company pursuant to the provisions of this Agreement and the Michigan
Limited Liability Company Act (the "Act"). In connection with this Agreement,
the Members have caused Articles of Organization that comply with the
requirements of the Act to be properly filed with the Michigan Department of
Commerce, and shall execute such further documents (including any necessary
amendments to the Articles of Organization) and take such further action as is
appropriate to comply with the requirements of law for the formation or
operation of a limited liability company in all states and counties where the
Company conducts its business. The name of the Company shall be Donnelly
Electronics, L.L.C. The Company may conduct business under that name or such
other name or names as its Members shall determine from time to time.
1.2 Character of Business. The purposes of the Company shall be to engage
in such businesses as may be agreed upon by the Members from time to time and to
engage in activities incidental and related thereto for which limited liability
companies may be formed under the Act (including the development, sale, and
licensing of computer software and providing of professional services related to
computer software and hardware).
1.3 Registered Office, Resident Agent. The location of the registered
office of the Company initially shall be 10410 N. Holly Road, Holly, Michigan
48442, and thereafter shall be such other location as the "Managers" (as defined
in Section 4.1) may designate from time to time. The Company's resident agent at
such address initially shall be David Taylor, and thereafter such other person
as the Managers may designate from time to time.
1.4 Principal Place of Business. The location of the principal place of
business of the Company shall be its registered office, or such other place as
the Managers may designate from time to time.
1.5 Partnership Classification. The Members intend that the Company shall
be operated
1
<PAGE>
in a manner consistent with its treatment as a "partnership" for federal and
state income tax purposes. No Member shall take any action inconsistent with
such intent, and the Members agree to make any amendments hereto required (in
the opinion of counsel for the Company) to obtain or maintain partnership
classification for tax purposes from time to time. Notwithstanding the
foregoing, the Members have formed the Company as a limited liability company
under the Act and specifically intend and agree that the Company not be
construed as a partnership (including a limited partnership) or any other
venture for purposes other than tax matters. No Member shall be construed to be
a partner in the Company or a partner of any other Member or person for purposes
other than tax matters, and the Articles of Organization, this Agreement and the
relationships created thereby and arising therefrom shall not be construed to
suggest otherwise.
ARTICLE 2. CAPITAL CONTRIBUTIONS AND ACCOUNTS
2.1 Initial Contributions. Each Member initially contributed to the
Company's capital the property described opposite such Member's name on Exhibit
A attached hereto and by this reference made a part hereof. Each such
contribution was made by such Member in exchange for receipt of such Member's
interest in the Company and was made at the time of execution of the Original
Agreement unless otherwise indicated on Exhibit A. Each capital contribution
shall, unless otherwise consented to by the Company, be made free and clear of
any liens, claims, encumbrances, options or restrictions of any type whatsoever.
2.2 Capital Accounts. A separate capital account shall be maintained by the
Company for each Member. The capital account of each Member shall be credited
with each Member's capital contribution(s) (at net fair market value with
respect to any contributed property) and shall be appropriately adjusted to
reflect each Member's allocations of profits, gains, losses, deductions, the net
fair market value of distributions made to the Member, and any other adjustments
as required by section 704 of the Internal Revenue Code of 1986, as amended (the
"Code"), and its accompanying regulations. No interest shall be paid on any
capital account.
2.3 Interests in Capital. The interests of the Members in the capital
contributed to the Company shall be those percentages (referred to as "Sharing
Ratios") shown opposite their names on Exhibit A and determined by dividing the
value of each Member's capital contribution by the total value of all such
capital contributions as shown on Exhibit A.
2.4 No Right to Withdraw. A Member shall have no right to withdraw, retire
or resign as a Member of the Company, except in connection with the transfer of
its interest in the Company in accordance with the provisions of Article 5. No
Member shall have the right to withdraw its capital contribution or to demand or
receive a return of its capital contribution or any other distribution from the
Company except as provided in this Agreement. Any attempted withdrawal in
violation of this provision shall result in the withdrawing Member's forfeiture
of any distributions from the Company, and the Company shall be entitled to
receive from the withdrawing Member damages for a breach of this Agreement in
excess of the amount that would otherwise be distributable to the withdrawing
Member.
2
<PAGE>
2.5 Additional Contributions. Members shall not be obligated to make any
additional contribution to the Company's capital. Notwithstanding the foregoing,
(a) if any court of competent jurisdiction holds that distributions (or any part
thereof) received by a Member pursuant to the provisions hereof constitute a
return of capital and directs that Member to pay such amount (with or without
interest) to or for the account of the Company or any creditor thereof, such
obligation shall be the obligation of said Member and not of any other Member or
the Company, and (b) a Member shall indemnify and hold harmless the Company and
each other Member from any liability or loss incurred by virtue of the
assessment of any income tax with respect to such Member's allocable share of
the profits or gain of the Company.
ARTICLE 3. ALLOCATIONS AND DISTRIBUTIONS
3.1 Allocations of Profits and Losses. The Company's net profits or net
losses shall be determined on an annual basis and shall be allocated to the
Members in proportion to their Sharing Ratios, provided, however, that for
federal income tax purposes, income, gain, loss, and deduction with respect to
property contributed to the Company shall be allocated to take into account the
variation between the federal income tax basis of the property to the Company
and its fair market value at the time of its contribution to the Company
pursuant to Code ss. 704(c).
3.2 Distributions of Cash Flow. At such time or times as the Managers shall
determine, the Company shall distribute to the Members in proportion to their
respective Sharing Ratios the Company's available funds, which for this purpose
shall mean funds the Managers determine to be in excess of those required for
the payment of, or the reservation of funds for the payment of, the Company's
expenses, liabilities (contingent or otherwise), capital improvements and
acquisitions, and other obligations of the Company. On or before April 1 of each
year, the Company shall distribute to the Members an amount equal to the pre-tax
profits of the Company for the previous year, as determined for tax purposes,
multiplied by the highest tax rate of any member with respect to the Company's
earnings. No distribution shall be declared or made if, after giving it effect,
the Company would not be able to pay its debts as they become due in the usual
course of business or the Company's total assets would be less than the sum of
its total liabilities.
3.3 Priority and Distribution of Assets. Except as otherwise provided in
this Agreement, no Member shall have priority over any other Member either as to
the return of capital or as to profits, losses or distributions. No Member shall
have the right to demand or receive property other than cash for such Member's
capital or in payment of such Member's share of profits or cash flow. No
distributions shall be made except in proportion to the Sharing Ratios of the
Members.
ARTICLE 4. MANAGEMENT AND EXCULPATION
4.1 Management of Business. The Company's business and affairs shall be run
by its
3
<PAGE>
"Managers", who are selected from time to time by Members holding a majority of
0the Sharing Ratios, provided that Managers shall hold, in the aggregate, at
least twenty-five percent (25%) of the Sharing Ratios. The Managers shall be
elected by the Members.
Except as otherwise expressly provided by the Act or this Agreement, the
Members shall take no part whatsoever in the control, management, direction, or
operation of the Company's affairs and shall have no power to bind the Company.
The Managers may from time to time seek advice from the Members on major policy
decisions, but the Managers need not accept such advice, and at all times the
Managers shall have the exclusive right to control and manage the Company,
except as otherwise expressly provided by the Act or this Agreement. As to those
items as to which approval, decisions, or actions of the Members are required,
unless otherwise exclusively provided by law or this Agreement, the approvals,
decisions and actions of Members holding a majority of the Sharing Ratios shall
be binding on the Company.
Title to the Company's assets shall be held in the Company's name.
4.2 Powers of Managers. The approval or consent of a majority of the
Managers shall constitute action of the Managers, except that the following
items shall require the unanimous approval of all Managers:
(a) The merger of the Company or the sale of substantially all of the
Company's assets.
(b) Requirement of additional capital contributions from existing
Members or the acceptance of capital from new Members.
(c) A change in the growth or nature of the business being conducted
by the Company.
(d) The approval of any transaction between the Company and any
Member, any company owned or controlled by a Member or any relative of a
Member.
(e) The adoption of any business plan, budget or capital expenditure
which would result in an operating loss greater than shown in the Business
Plan attached as Exhibit F.
Notwithstanding the foregoing, any decision regarding the purchase by the
Company of a Company Interest (as hereinafter defined) from a Member (the
"Selling Member") shall be determined by a majority of Managers who are not the
Selling Member, any relative of the Selling Member or affiliated with any entity
which directly or indirectly controls, is controlled by or is under common
control with the Selling Member.
The Managers, acting as provided above, have the power, on the Company's
behalf, to do all things necessary or convenient to carry out the business and
affairs of the Company, including
4
<PAGE>
the power to: (a) purchase, lease or otherwise acquire any real or personal
property; (b) sell, convey, mortgage, grant a security interest in, pledge,
lease, exchange or otherwise dispose or encumber any real or personal property;
(c) open one or more depository accounts and make deposits into and checks and
withdrawals against such accounts; (d) borrow money, incur liabilities, and
other obligations; (e) enter into any and all agreements and execute any and all
contracts, documents and instruments; (f) obtain insurance covering the business
and affairs of the Company and its property and on its Members; (g) commence,
prosecute or defend any proceeding in the Company's name; and (h) participate
with others in partnerships, joint ventures and other associations and strategic
alliances. The Managers shall exercise these powers and discharge their duties
in good faith, with the care an ordinarily prudent person in a like position
would exercise under similar circumstances, and in a manner reasonably believed
to be in the best interests of the Company.
4.3 Time Devoted to Business. The Managers shall devote such time to the
business of the Company as they, in their discretion, deem necessary for the
efficient operation of the Company's business. The Managers shall not engage for
their own account in any business in which the Company is involved, except as
otherwise provided herein.
4.4 Information Relating to Company. Each Member has the right and shall
have access to and may inspect and copy all books, records and materials in the
Company's possession regarding the Company or its activities. The exercise of
the rights contained in this Article shall be at the requesting Member's
expense.
4.5 Records at Principal Place of Business. The Managers shall cause the
Company to keep at its registered office the following, together with any books
and records of the Company's business and affairs as required by the Act or by
law:
(a) a current list in alphabetical order of the full name and last
known business street address of each Member and each Manager;
(b) a copy of the stamped Articles of Organization and all
certificates of amendment to them, together with executed copies of any
powers of attorney pursuant to which any certificate of amendment has been
executed;
(c) copies of the Company's federal, state and local income tax
returns and reports, if any, for the three most recent years;
(d) copies of any financial statements of the Company, if any, for the
three most recent years;
(e) copies of this Agreement and all other operating agreements,
together with copies of any amendments thereto; and
(f) unless otherwise set forth in the Articles of Organization, a
written statement
5
<PAGE>
setting forth:
(1) the amount of cash and a description and statement of the
agreed value of the property or services contributed by each Member
and which each Member has agreed to contribute;
(2) the times at which, or the events on the happening of which,
any additional contributions agreed to be made by each Member are to
be made;
(3) any right of a Member to receive distributions which include
a return of all or any part of the Member's contributions; and
(4) any event upon the happening of which the Company is to be
dissolved and its affairs wound up.
In addition, the Managers shall maintain complete and accurate books of
account of the Company's affairs at the Company's principal place of business.
Such books shall be kept on such method of accounting as the Managers shall
select. The Company's accounting period currently ends on December 31. The
Company hereby changes its fiscal year to end on the Saturday closest to June 30
in each year, subject to approval of the Internal Revenue Service. The Managers
shall cause the Company to close its books of account promptly after the close
of each fiscal year and prepare and send to each Member a statement of such
Member's distributive share of income and expense for federal income tax
reporting purposes.
4.6 Reimbursement of Managers. The Company shall reimburse the Managers for
all substantiated direct out-of-pocket expenses they reasonably incurred and
paid (or may yet incur or pay) in organizing the Company and pursuing its
business and continuing its operations.
4.7 Indemnification. Except as otherwise provided in this Article, the
Company may indemnify any Manager, employee or agent of the Company who was or
is a party or is threatened to be made a party to a threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, and whether formal or informal, other than an action by or in
the right of the Company, by reason of the fact that such person is or was a
Manager, employee or agent of the Company, against expenses, including attorneys
fees, judgments, penalties, fees and amounts paid in settlement actually and
reasonably incurred by such person in connection with the action, suit or
proceeding, if the person acted in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner that such person reasonably believed to be in the best interests
of the Company and with respect to a criminal action or proceeding, if such
person had no reasonable cause to believe such person's conduct was unlawful. To
the extent that a Manager, an employee or agent of the Company has been
successful on the merits or otherwise in defense of an action, suit or
proceeding, such person shall be indemnified against actual and reasonable
expenses, including attorneys fees, incurred by such person in connection with
the action, suit or proceeding and any action, suit or proceeding brought
6
<PAGE>
to enforce the mandatory indemnification provided herein. Any indemnification
permitted under this Article, unless ordered by a court, shall be made by the
Company only as authorized in the specific case upon a determination that the
indemnification is proper under the circumstances because the person to be
indemnified has met the applicable standard of conduct and upon an evaluation of
the reasonableness of expenses and amounts paid in settlement. This
determination and evaluation shall be made by a majority vote of the Members who
are not parties or threatened to be made parties to the action, suit or
proceeding. Notwithstanding the foregoing, no indemnification shall be provided
to any manager, employee or agent of the Company for or in connection with the
receipt of a financial benefit to which such person is not entitled, voting for
or assenting to a distribution to Members in violation of this Operating
Agreement or the Act, or a knowing violation of law.
4.8 Irrevocable Powers of Attorney. Each Member, by its execution of this
Agreement, does irrevocably constitute and appoint David Taylor, Thomas Taylor
and/or James A. Knister (the "Agent"), with full power of substitution, as its
true and lawful attorney, in its name, place and stead, to execute and file
Articles of Organization with the appropriate depositories and authorizes the
Agent to execute, acknowledge, swear to and file (a) all amendments to this
Agreement or to the Articles of Organization required by law or authorized or
required by the provisions of this Agreement or the Articles of Organization;
(b) all certificates and other instruments necessary to qualify or continue the
Company as a limited liability company wherein the Members have limited
liability in the states where the Company may be doing business; (c) all
assignments, conveyances and other instruments necessary to effect the formation
and capitalization of the Company as contemplated by this Agreement; (d) all
notes, mortgages, security instruments, credit agreements and other documents to
reflect any borrowing that the Agent deems appropriate, including borrowing from
the Agent himself; (e) all other instruments, agreements or documents that the
Agent deems reasonably necessary to conduct the Company's regular business
activities and to carry out the intentions of this Agreement; and (f) all
conveyances and other instruments necessary to effect the Company's dissolution
and termination in accordance with this Agreement. The powers of attorney
granted herein shall be deemed to be coupled with an interest and shall be
irrevocable and survive the death, incompetency or dissolution of any Member. In
the event of any conflict between this Agreement and any instruments filed by
such attorney pursuant to the power of attorney granted in this Article, this
Agreement shall control.
ARTICLE 5. TRANSFERS OF INTERESTS
5.1 Restrictions on Transfer. No person who holds ("Holder") an interest in
the Company ("Company Interest") shall sell, exchange, assign, encumber or
otherwise transfer, voluntarily or involuntarily, with or without consideration,
all or part of any such Company Interest (or any interest therein), whether now
held or hereafter acquired except pursuant to other terms of this Agreement,
unless (a) such Holder has first given the notices and made the offers to sell
as provided herein, and no such offer has been accepted, or (b) such transfer is
expressly permitted by the terms of this Agreement. A Company Interest is
transferable only in strict compliance with the terms of this Agreement. Any
sale, exchange, assignment, encumbrance or other transfer attempted without
strict
7
<PAGE>
compliance with this Agreement shall be null and void and confer no rights on
the transferee as against the Company or any Member. A sale or transfer in
compliance with this Agreement shall confer on the transferee only the rights of
an assignee to the subsequent allocations and distributions of the Company, and
no permitted transferee shall be admitted into the Company as a substitute or
additional Member or otherwise be permitted to participate in the management and
affairs of the Company, unless the conditions set forth in Article 5.12 have
been satisfied.
8
<PAGE>
5.2 Right of First Refusal. If any Holder shall receive an offer for the
purchase of, or otherwise desires to sell, all or part of its Company Interest,
that Holder shall have the right to sell the Company Interest subject to the
following limitations:
(a) The Holder may procure a bona fide written offer, signed by the
prospective purchaser and containing all terms of the offer, or the Holder
may establish a price and terms upon which the Holder proposes to sell his
Company Interest.
(b) The Holder shall promptly notify, in writing, the Company and all
of the Members of all terms of the offer (submitting a copy thereof if one
exists) or all terms on which he proposes to sell his Company Interest, and
such notice shall be deemed to constitute an offer, made by and binding on
the person required to give such notice and his personal representative,
estate, successors and assigns, to sell to the recipient(s) of such notice
in the manner stated herein the Company Interest that is the subject of
such notice.
(c) The Company shall have the option to elect, within the longer of
sixty (60) days after receipt of the notice or twenty (20) days after an
appraisal is completed if one is requested, to purchase all but not less
than all of that portion of the Company Interest described in the notice.
The decision of the Company shall be made by the Members as provided above.
(d) If the Company does not exercise its option to purchase, the other
Members shall have, for thirty (30) days after the Company's option
expires, the option to purchase all but not less than all of the Company
Interest described in the notice. If more than one such other Member elects
to exercise this purchase option, each such electing Member shall be
entitled to purchase only that portion of the Company Interest described in
the notice that corresponds to the percentage obtained by dividing such
Member's Sharing Ratio by the total of the Sharing Ratios of all Members
electing to purchase.
(e) The options granted to the Company and to the other Members under
this Article shall be exercisable on the same terms and conditions set
forth in the notice referenced in subarticle (b).
5.3 Other Transfers. If any Holder contemplates a disposition other than by
sale, including an exchange, assignment, encumbrance, or other transfer, of a
Company Interest, or if any person seeks to obtain an interest in such Company
Interest, whether by execution, judgment or otherwise, the Holder, or the party
seeking to obtain the interest, as the case may be, shall notify the Company and
all Members of the name and address of the prospective transferee, the extent of
the Company Interest to be transferred, and all terms and conditions
contemplated by the transfer, and the Company and the other Members shall have
options to acquire the Company Interest in accordance with the terms and
conditions of the options granted in Article 5.2, except that in lieu of the
price and terms referenced in Article 5.2(e), the price and terms shall be as
specified in Article 5.10. Notwithstanding the foregoing, transfers by Members
to spouses and children, trusts or
9
<PAGE>
partnerships for the benefit of such persons or to other entities controlled by
the Member or by the same person controlling the Member shall not be covered by
this Article 5.3 provided the transferee agrees in writing to be bound by the
terms of this Agreement.
5.4 Lapse of Option. After the expiration of the options described in
Articles 5.2 and 5.3, the Holder shall be entitled to make the proposed sale,
exchange, assignment, encumbrance, or other transfer to the person named in the
notice, or offer the Company Interest for sale, but only upon the terms and
conditions described in the notice and subject to the provisions of this
Agreement. Provided, however, that if the proposed sale is being made by David
Taylor or Taylor Family Investments, Inc. or by Members whose total Company
Interest being sold is fifty percent (50%) or more of the Sharing Ratios, the
sale will be permitted only if the purchaser of those Company Interests shall
also acquire all of the Company Interests of any other Members electing to sell,
at the same time for the same price and on the same terms and conditions. If the
proposed sale is of Company Interests representing fifty percent (50%) or more
of the Sharing Ratios, and the options in Articles 5.2 and 5.3 have not been
exercised, all Members agree that they will sell all their Company Interests for
the same price and on the same terms and conditions if such sale is not to any
relative of any other Member or any person or organization which is directly or
indirectly controlled by, controlling or under common control with any other
Member, or relative of any Member and there are no employment, consulting,
non-competition or similar payments to any such person.
If such sale, exchange, assignment, encumbrance, or other transfer is not
made within ninety (90) days after the expiration of the last of the options
granted in this Article, the Company Interest shall automatically again become
subject to the restrictions on transfer stated herein. If such sale, exchange,
assignment, encumbrance or other transfer is made in compliance with this
Agreement, the interest acquired by the transferee shall be merely the interest
of an assignee, and not an interest as a Member approved in the manner provided
in Article 5.12.
5.5 Donnelly Purchase Option. The Company hereby grants to Donnelly an
irrevocable option (the "Donnelly Purchase Option") to subscribe during the
option period to purchase the interest in the Company described below ("Donnelly
Option Interest") on the following terms and conditions:
(a) Donnelly Option Interest. The Donnelly Option Interest shall be a
Sharing Ratio percentage in an amount sufficient that if Donnelly has
previously exercised its option granted as of July 30, 1996 (as amended)
and exercises the Donnelly Purchase Option and purchases the Donnelly
Option Interest, then would have a total Sharing Ratio of 60.00%.
(b) Option Period. The Donnelly Purchase Option may be exercised at
any time from July 1, 2000, until January 31, 2003.
(c) Condition to Exercise. Donnelly may exercise the Donnelly Purchase
Option only if Donnelly Corporation has previously or simultaneously
exercised the purchase option granted pursuant to the Supply and Option
Agreement dated as of July 30,
10
<PAGE>
1996, a copy of which is attached as Exhibit E to this Agreement and which
remains in full force and effect.
(d) Exercise Notice. The Donnelly Purchase Option shall be exercised
by written notice from to the Company, specifying a date, not more than
thirty (30) days after the date of the notice, on which Donnelly would pay
the Donnelly Purchase Option Price.
(e) Option Price. The Donnelly Purchase Option Price shall be equal to
One Million Eight Hundred and Forty Thousand Dollars ($1,840,000)
multiplied by an Adjustment Factor based upon the 2001 Adjusted Pre-Tax
Earnings of the Company (as hereinafter defined). The Adjustment Factor
shall be determined by the following chart:
<TABLE>
2001 Adjusted Pre-Tax Earnings ($mm) Adjustment Factor
[to be completed based on business plan]
<S> <C>
below $350,000 0.8
between $350,000 and $385,000 0.9
between $385,000 and $470,000 1.0
between $470,000 and $520,000 1.1
above $520,000 1.2
</TABLE>
"2001 Adjusted Pre-Tax Earnings" shall mean the earnings of
the Company for the twelve months ended on the Saturday
closest to June 30, 2001, prior to any interest income or
interest expense and prior to federal income tax,
(f) Payment of Purchase Price. The Donnelly Purchase Option Price
shall be payable upon issuance by the Company of the membership interest to
Donnelly. If Donnelly exercises the Donnelly Purchase Option and closes the
purchase before the accounting has been completed for the fiscal year ended
approximately June 30, 2001, the payment of the Donnelly Purchase Option
Price will be deferred until such accounting has been completed. The
Donnelly Purchase Option Price will be payable in cash or by conversion of
outstanding promissory notes representing amounts owed by the Company to
Donnelly, or a combination of both, at Donnelly's discretion. Donnelly will
be obligated to pay the Donnelly Purchase Option Price and will be charged
interest from the date of purchase to the date of payment at an interest
rate equal to the interest rate paid on the loans by the Company to
Donnelly.
(g) Conversion to a Corporation. At any time after the exercise of the
Donnelly
11
<PAGE>
Purchase Option, Donnelly shall have the right to require that the Company
convert to a corporation, in which case the non-Donnelly Members of the
Company shall have the right to appoint two out of five directors of the
Company and actions by the directors on matters referenced in Sections
4.2(a) - (e) of this Agreement shall require the approval of at least four
of the five directors of the Company. The options and obligations of the
parties under this Agreement shall be applicable with and to such
corporation and its stock in the same manner it is now applicable to
Company Interests.
5.6 Donnelly Call Option. Each of the Members other than Donnelly (the
"Selling Members") hereby grants to Donnelly an irrevocable option (the
"Donnelly Call Option") to purchase all, but not less than all, of the
outstanding Company Interests of the Selling Members (including any options to
purchase interests in the Company) on the following terms and conditions:
(a) Amount. The Donnelly Call Option may be exercised with respect to
all, but not less than all, of the outstanding Company interests of the
Selling Members other than Donnelly (including any options to purchase
interests in the Company).
(b) Option Exercise Period. The Donnelly Call Option may be exercised
at any time after July 1, 2000.
(c) Exercise Notice. The Donnelly Call Option shall be exercised by
written notice from Donnelly to the Company and each of the Members,
specifying a date, not more than sixty (60) days after the date of the
notice on which Donnelly will close the transaction and pay the Donnelly
Call Option Price to the Members.
(d) Option Price. If the Donnelly Call Option is exercised between
July 1, 2000, and December 31, 2000, the Donnelly Call Option Price for
each Selling Member's interest in the Company shall be equal to the ratio
of such Selling Member's Sharing Ratio to the Sharing Ratio of all Selling
Members (the "Selling Member's Relative Ratio" - see Exhibit A-1)
multiplied by $4,300,000.
If the Donnelly Call Option is exercised after January 1, 2001, the
Donnelly Call Option Price for each Selling Member's interest in the
Company shall be equal to such Selling Member's Relative Ratio multiplied
by the Base Value. The Base Value will depend upon the financial
performance of the Company in the fiscal year ended on or about the June 30
closest to the date of exercise of the Donnelly Call Option ("Applicable
Year"). If the Adjusted Pre-Tax Earnings for the Company (as described in
Section 5.5(e)) for the Applicable Year is less than $515,000, then the
Base Value will be $4,500,000. If the Adjusted Pre-Tax Earnings for the
Company (as described in Section 5.5(e)) for the applicable twelve month
period exceeds $515,000, then Base Value will be $4,500,000 increased by
the lesser of such excess or $500,000.
(e) Payment of Purchase Price. The closing of the transactions
contemplated by
12
<PAGE>
the Donnelly Call Option shall occur within sixty (60) days after exercise
of the option, if exercised prior to January 31, 2000; otherwise it will be
closed within sixty (60) days following completion of the Company's
financial statements for the applicable twelve month period. The price is
payable at closing in cash and/or Donnelly Class A Common Stock, as
determined by Donnelly in its sole discretion, provided that if payment is
made in Donnelly Class A Common Stock, at least 50% of the aggregate
Donnelly Call Option Price shall be payable in Donnelly Class A Common
Stock. If Donnelly Class A Common Stock is used, the number of shares
issued to each Selling Member will be equal to the portion of the Donnelly
Call Option Price payable in stock divided by the closing price of the
Donnelly Class A Common Stock as printed in the Wall Street Journal on the
fifth trading day prior to the closing date.
5.7 Member Put Option. Donnelly hereby grants to each of the Members other
than Donnelly an irrevocable option (the "Member Put Option") to require
Donnelly to purchase all, but not less than all, of the outstanding Company
Interest of the Members other than Donnelly ("Selling Members") on the following
terms and conditions:
(a) Interests Sold. The Member Put Option may be exercised with
respect to all, but not less than all, of the outstanding interests of the
Members other than Donnelly.
(b) Option Exercise Period. The Member Put Option may be exercised by
written notice to the Company and to Donnelly at any time in the months of
July through October in any year after the earlier of (i) any time after
June 30, 2001, if the sum of the Adjusted Pre-Tax Earnings (Loss) of the
Company plus $4,450,000 exceeds $500,000 in the previous fiscal year and
such sum in the Company's current year's budget exceeds $500,000, or (ii)
June 30, 2003.
(c) Condition to Exercise. The Member Put Option may be exercised if
and only if, on the date of exercise of the Member Put Option, David Taylor
(i) is the Chief Executive Officer of the Company, (ii) has been terminated
as Chief Executive Officer of the Company for any reason other than cause
as defined in the Company's employment agreement with David Taylor, (iii)
is deceased or has been disabled for a period of thirty (30) days or more.
(d) Exercise Notice; Power of Attorney. The Member Put Option shall be
exercised by written notice from David Taylor or Thomas Taylor to the
Company and Donnelly, specifying a date, not more than thirty days after
the date of the notice on which Donnelly would purchase the Selling
Members' Company Interests and pay the Member Put Option Price. Recognizing
that the Member Put Option must be exercised on behalf of all of the
Selling Members, the Selling Members hereby irrevocably appoint David
Taylor and Thomas Taylor, and either of them, with full power of
substitution as their attorneys-in-fact to exercise the Member Put Option
on their behalf.
(e) Option Price. The Member Put Option Price for each Selling
Member's
13
<PAGE>
Company Interest shall be equal to (i) such Selling Member's Relative
Ratio, multiplied by (ii) the Member Put Company Value. The Member Put
Company Value shall be (i) $4,500,000 if the Member Put Option is exercised
during calendar 2001, (ii) $4,900,000 if the Member Put Option is exercised
in calendar 2002, or (iii) $5,300,000 if the Member Put Option is exercised
after December 31, 2002.
(f) Payment of Purchase Price. Unless agreed otherwise between
Donnelly and David Taylor or Thomas Taylor, the closing of the transactions
contemplated by the Member Put Option shall occur within sixty (60) days
after exercise of the Member Put Option, if exercised prior to January 31,
2000; otherwise it will be closed at the later of sixty (60) days after
such exercise or within sixty (60) days following completion of the
Company's financial statements for the applicable twelve month period. The
price is payable at closing in cash and/or Donnelly Class A Common Stock,
as determined by Donnelly in its sole discretion, provided that if payment
is made in Donnelly Class A Common Stock, at least 50% of the aggregate
Donnelly Call Option Price shall be payable in Donnelly class A Common
Stock. If Donnelly Class A Common Stock is used, the number of shares
issued to each Selling Member will be equal to the portion of the Donnelly
call Option Price payable in stock divided by the closing price of the
Donnelly Class A Common Stock as printed in the Wall Street Journal on the
fifth trading day immediately preceding the closing date.
(g) Priority of Options. In the event the Member Put Option is
exercised within thirty (30) days after the Donnelly Call Option, the
Member Put Option shall be applicable and the Donnelly Call Option shall be
deemed not to have been exercised.
5.8 Default, Bankruptcy, Etc. Each of the following shall constitute an
event of default with respect to any Holder of a Company Interest (a "Defaulting
Holder") described below:
(a) If a Holder defaults in any of its obligations under this
Agreement, and if the default continues for thirty (30) days after service
of written notice by the Company to such Defaulting Holder.
(b) If a Holder becomes insolvent or appoints or has appointed a
receiver or custodian for all or a substantial portion of its assets.
(c) If a Holder files a voluntary petition under the provisions of the
Bankruptcy Code or has filed against him as the subject debtor an
involuntary petition under the Bankruptcy Code and fails to obtain a
dismissal of the petition within forty-five (45) days after the date of
filing.
(d) If a Holder (other than Donnelly) that is a corporation, trust,
partnership, limited liability company, or other similar entity suffers a
change of 50 percent or more of the ownership of the equity, securities, or
other beneficial interests therein, or if there is a change in 50 percent
or more of the directors, trustees, partners, or other managers or
14
<PAGE>
members of such entity, or if same is dissolved, liquidated, or otherwise
terminated or allows to occur a sale or other transfer of substantially all
of its assets, whether by merger, reorganization, or otherwise.
(e) If a Holder's Company Interest shall be levied on for execution.
If an event of default as described in subarticles (a) through (e) above
occurs, then the other Members (the "Nondefaulting Members"), acting through the
Company by majority of Sharing Ratios or acting individually shall have an
option (i) to purchase all, but not less than all, of the Defaulting Holder's
Company Interest at the price and on the terms specified in Article 5.10, or
(ii) to demand that the Company be liquidated and dissolved, in which case all
Members shall vote in such manner as to cause such liquidation and dissolution,
or (iii) to take no action with respect to the event of default. If more than
one Nondefaulting Member exercises the option to purchase under this Article,
the purchase option shall be allocated among them in accordance with Article
5.2(d) above.
If the Nondefaulting Members exercise any option granted under this Article
5.8, including the option to purchase or liquidate, they shall do so by
notifying the Defaulting Holder (or its legal successor) of this decision any
time within one (1) year after the occurrence of the event of default, even
though it may have been cured before the notice of exercise or any bankruptcy
petition may have been dismissed, or otherwise discharged, after the forty-five
(45) day period specified above. The options of the Nondefaulting Members
granted under this Article shall be in addition to and not in lieu of any other
options, rights or remedies that may be available under this Agreement or
otherwise, and any exercise of any rights granted under this Agreement shall not
relieve the Defaulting Holder from any obligations accrued before the date of
transfer of the Company Interest or any liability or damage to the Nondefaulting
Members.
5.9 Priority. If any event, condition or facts give rise to application or
possible application of simultaneous options to purchase or otherwise act under
more than one Article to any particular set of facts, the holder(s) of the
option(s) to purchase shall, acting through the Company or individually, by
majority in Sharing Ratios, have the option as to which Article is used to
effect the purchase.
5.10 Purchase Price and Terms.
(a) Except as otherwise specifically provided herein, the purchase
price for any Company Interest to be sold pursuant to options or
requirements contained in this Agreement shall be the fair market value of
the Company as determined by an independent appraiser selected and agreed
upon by the selling Member and Purchaser (the "Appraiser"), multiplied by
the Sharing Ratio of the Company Interest being sold. The Appraiser shall
be a qualified business appraiser with experience in appraising the value
of closely-held companies. The Appraiser's determination of the fair market
value of the Company Interest shall be final and binding on all parties and
if required may be entered in a court of competent jurisdiction.
If the selling Member or Members and the Purchaser are unable to
reasonably agree on the selection of an Appraiser within twenty (20) days
after a party has requested an
15
<PAGE>
appraisal, then the selling Member or Members shall select a qualified
business Appraiser with experience in appraising the value of close-held
companies and the purchaser shall select such an appraiser within thirty
(30) days after the request for appraisal. If either party fails to appoint
an appraiser within that time, the appraiser appointed by the other party
shall determine the purchase price for the Company Interests being
purchased. If the Appraisers so selected can agree upon the value of the
Company, that value shall be used to determine the purchase price for
Company Interests being purchased. If the Appraisers so selected cannot
agree on a value of the Company, they shall select and agree on a third
qualified Appraiser with experience in appraising the closely-held
companies, and the valuation of the Company agreed upon by at least two of
the three Appraisers shall be final and binding on all parties. The
Appraisers shall complete the appraisal within thirty (30) days after their
appointment.
If any part of the purchase price is funded by policies of insurance
on the life of a deceased selling Member, only the cash surrender value, if
any, and no part of the proceeds of such insurance, shall be counted as an
asset of the Company in connection with the appraisal.
The valuation of the Company pursuant to this Article shall be binding
upon all parties to this Agreement and their successors and assigns and if
required may be entered in a court of competent jurisdiction.
Each party shall pay for its own appraiser and the costs of a jointly
appointed appraiser shall be divided equally.
(b) Except as otherwise provided herein, if a Company Interest is sold
and purchased pursuant to the provisions of Articles 5.2 or 5.3 of this
Agreement, the payment terms shall be as follows: The purchase price shall
be paid by a down payment of twenty percent (20%) of the total purchase
price with the balance being paid pursuant to a promissory note in the form
of Exhibit C, requiring twenty (20) equal quarterly principal payments of
principal, plus interest at a rate equal to New York Consensus Prime Rate
as published in the Wall Street Journal on the day preceding the payment
date, with payments commencing three (3) months following the date of
closing. The promissory note may be prepaid without premium or penalty. The
note shall be secured by a collateral assignment of the Company Interest
being purchased in the form of Exhibit D (the "Collateral Assignment and
Security Agreement"), and the purchaser of said interest shall sign such
documents as the seller may reasonably request in order to perfect the
security interest contemplated by said Collateral Assignment and Security
Agreement.
(c) Except as otherwise provided herein, the closing on a purchase
pursuant to an option or obligation set forth in this Agreement shall occur
within thirty (30) days after the purchaser's written election to purchase.
The specific time and place of closing shall be specified by the purchaser.
(d) If any Member who is an individual exercises an option to purchase
or otherwise purchases a Company Interest (or any portion thereof) from any
other Member and the purchase price is not paid in full in cash at the
closing, such individual purchaser shall
16
<PAGE>
execute and deliver to the seller of such Company Interest, no later than
the time of closing on such purchase, a sworn statement in writing
specifying that there is a business purpose for the transaction and
specifying the type of business and business purpose for which the seller's
extension of credit will be used ("Business Purpose Affidavit") and such
other documentation as the seller and its counsel may reasonably deem
necessary in order to comply with any and all usury laws. If any rate of
interest called for herein for any deferred payment sale would, in the
opinion of the seller's counsel, be usurious, the seller shall have the
option to request in lieu of such rate the maximum rate of interest (not
exceeding the rate specified in subsection (c) above) as the seller's
counsel believes to be permissible under the then applicable usury laws,
and the purchaser shall comply with such request.
5.11 Loss of Membership. Any Member who sells or transfers, or makes an
ineffective transfer, the entire Company Interest of such Member, or all of the
rights to allocations and distributions represented by such Company Interest,
shall thereupon cease to be a Member, and all of his or its rights relating to
the Company shall thereupon automatically terminate.
5.12 Substitute or Additional Members.
(a) A person shall be admitted as a substitute or additional Member
under this Agreement only after compliance with the following:
(i) A transfer contemplated by Article 5.4 shall be made only by
written document, signed by the transferor and accepted in writing by
the transferee, and a duplicate original of such document shall be
delivered to the Company and be approved by the Managers and all
Members (which approval may be withheld in the sole and unrestricted
discretion of any Member).
(ii) The transferee shall execute and deliver to the Company a
written agreement, in form satisfactory to the Managers and Members,
pursuant to which such transferee agrees to be bound by this Agreement
and grants the power of attorney contained in this Agreement.
(b) If a transfer is made in accordance with the terms of this
Article, unless otherwise permitted or required by the Managers and Members
and the Code, both of the following shall apply:
(i) The effective date of such transfer shall be the date the
written documents described in Article 5.12(a)(i) and (ii) are
approved by the last of all of the Members and the Managers.
(ii) The Company, the Managers, and the Members shall be entitled
to treat the transferor as the absolute owner of the transferred
Company Interest in all respects and shall incur no liability for
distributions or allocations made pursuant to Article 3 in good faith
to such transferor until such time as the effective date of such
transfer as determined under Article 5.12(a)(i).
(c) The costs incurred by the Company associated with the admission of
a
17
<PAGE>
substitute or additional Member contemplated by this Article (including
reasonable attorneys' fees) shall be borne by the transferee, and the
Managers' and Members' approval of transfer may be conditioned upon payment
of such costs.
ARTICLE 6. DISSOLUTION AND TERMINATION
6.1 Dissolution. The Company shall be dissolved and its affairs wound up on
the first to occur of the following events:
(a) the written consent of members holding at least eighty percent
(80%) of the Sharing Ratios;
(b) the occurrence of any event or legislation making it unlawful for
the Company to carry on its business; or
(c) the time specified as the latest date for dissolution or the
happening of any event specified in the Company's Articles of Organization,
as amended, or any other event causing a dissolution of a limited liability
company under the Act.
6.2 Final Accounting. In case of the Company's dissolution, a proper
accounting shall be made from the date of the last previous accounting to the
date of dissolution.
6.3 Liquidation. Upon the Company's dissolution, the Managers shall act or
appoint someone to act, as liquidator to wind up the Company as soon as
practical. The liquidator shall have full power and authority to sell, assign
and encumber any or all of the Company's assets and to wind up and liquidate the
Company's affairs in an orderly and prudent manner. Upon the winding up of the
Company, the assets of the Company shall be distributed first to creditors to
the extent permitted by law, in satisfaction of Company debts, liabilities and
obligations; and then to Members, first in satisfaction of liabilities for
distributions, and then in accordance with the Sharing Ratios then held. Such
proceeds shall be paid to such Members within ninety (90) days after the date of
winding up.
6.4 Distributions in Kind. If the Members or a liquidator shall determine
that a portion of the Company's assets should be distributed in kind to the
Members, the liquidator shall distribute such assets to them in undivided
interests as tenants in common in proportion to their Sharing Ratios unless
otherwise agreed by all members.
6.5 Certificate of Dissolution. Upon the completion of the distribution of
Company assets, the Company shall be terminated and the Members shall execute,
or cause the Company to execute, certificates of dissolution and take such other
actions as may be necessary to terminate the Company.
ARTICLE 7. AMENDMENT TO AGREEMENT
Amendments to this Agreement and to the Articles of Organization that are
of an
18
<PAGE>
inconsequential nature (as determined by the Managers) and do not affect the
rights of the Members in any material respect, or that are contemplated by this
Agreement, may be made by the Managers through the exercise of the powers of
attorney granted in Article 4.9. Any other amendment to this Agreement or to the
Articles of Organization may be proposed to the Members by the Managers, but
shall be adopted and become effective only if approved in writing by all persons
who then are Members.
ARTICLE 8. NOTICES
8.1 Method for Notices. All notices hereunder shall be sent by first class
mail, postage prepaid, and addressed as set forth under each Member's signature
below (except that any Member may from time to time give notice changing its
address for such purpose) and shall be effective on the date of receipt or on
the fifth day after mailing, whichever is earlier.
8.2 Computation of Time. In computing any period of time under this
Agreement, the day of the act, event or default from which the designated period
of time begins to run shall not be included. The last day of the period so
computed shall be included, unless it is a Saturday, Sunday or legal holiday, in
which event the period shall run until the end of the next day which is not a
Saturday, Sunday or legal holiday.
ARTICLE 9. GENERAL PROVISIONS
9.1 Entire Agreement. This Agreement (a) contains the entire agreement
among the parties with respect to its subject matter, (b) except as provided in
Article 7, may not be amended nor may any rights hereunder be waived except by
an instrument in writing signed by every party hereto opposing any such
amendment or waiver, (c) shall be construed in accordance with, and governed by,
the laws of the State of Michigan, and (d) shall bind and inure to the benefit
of the parties and their respective representatives, successors and assigns,
except as otherwise set forth.
9.2 Construction Principles. Words in any gender shall be deemed to include
the other genders. The singular shall be deemed to include the plural and vice
versa. The headings and underlined Article titles are for guidance only and
shall have no significance in the interpretation of this Agreement.
9.3 Waivers. Failure or delay of any party in exercising any right or
remedy under this Agreement will not operate as a waiver of the terms of this
Agreement. The express waiver by any party of a breach of any provision of this
Agreement by any other party shall not operate or be construed as a waiver of
any subsequent breach by such party. No waiver will be effective unless and
until it is in written form and signed by the waiving party.
9.4 Validity and Severability. If any provision of this Agreement
contravenes any law and such contravention would invalidate this Agreement, or
if the operation of any provision of this Agreement is determined by law,
administrative regulation or otherwise to result in classification of the
Company as an association taxable as a corporation for federal income tax
purposes, or to make a Member generally liable for the obligations of the
Company, then such provision is declared to be invalid and subject to severance
from the remaining portions of this Agreement, and this Agreement shall be read
and construed as through it did not contain such provision in a manner to
19
<PAGE>
give effect to the intention of the parties to the fullest extent possible.
9.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Photocopies, facsimile
transmissions, and other reproductions of this executed original (with
reproduced signatures) shall be deemed to be original counterparts of this
Agreement.
9.6 Investment Representations. Each Member understands (a) that the
interests evidenced by this Agreement have not been registered under the
Securities Act of 1933, as amended, or any state securities laws (the
"Securities Acts") because the Company is issuing these interests in reliance
upon the exemptions from the registration requirements of the Securities Acts
providing for issuance of securities not involving a public offering, (b) that
the Company has relied upon the fact that the interests are to held by each
Member for investment purposes only, and (c) that exemption from registration
under the Securities Acts would not be available if the interests were acquired
by a Member with a view to distribution.
Accordingly, each Member hereby confirms to the Company that such Member is
acquiring its interest hereunder for such own Member for investment and not with
a view to the resale or distribution thereof. Each Member agrees not to
transfer, sell or offer for sale any portion of such interest unless there is an
effective registration or other qualification relating thereto under the
Securities Acts or unless the Member delivers to the Company an opinion of
counsel, satisfactory to the Company, that such registration or other
qualification under such Securities Acts is not required in connection with such
transfer, offer or sale. Each Member understands that the Company is under no
obligation to register the interests or to assist such Member in complying with
any exemption from registration under the Securities Acts if such Member should
at a later date wish to dispose of any interest hereunder. Furthermore, each
Member realizes that such interests are unlikely to qualify for disposition
under Rule 144 of the Securities and Exchange Commission unless such Member is
not an "affiliate" of the Company and the interest has been beneficially owned
and fully paid for by such Member for at least three (3) years.
Each Member represents and warrants that prior to investing or acquiring
any interest in the Company, such Member and its legal or other representatives
have made an independent investigation of the Company and its business and have
had made available to them all information with respect thereto requested and/or
needed to make an informed decision to acquire the interest. Each Member
represents and warrants that it is a person possessing experience and
sophistication as an investor that are adequate for the evaluation of the merits
and risks of such Member's investment in the Company.
In witness whereof, this Agreement has been executed on the dates set forth
and shall become effective when executed by all Members.
Donnelly Electronics, L.L.C.
By /s/ David Taylor
David Taylor
Its Manager
20
<PAGE>
/s/ David Taylor
David Taylor
Address: 65 Chateaux DuLac
Fenton, MI 48430
21
<PAGE>
TAYLOR FAMILY INVESTMENTS, INC.
By /s/ David Taylor
David Taylor, President
Address: 65 Chateaux DuLac
Fenton, MI 48430
DONNELLY CORPORATION
By /s/ James A. Knister
James A. Knister
Group Managing Director - Ventures
Address: 49 W. Third Street
Holland, MI 49423
SKIVINGTON INVESTMENTS, INC.
By /s/ James Skivington
James Skivington
Address: 1329 Hickory Hollow
Flint, MI 48532
THOMAS TAYLOR INVESTMENTS, INC.
By /s/ Thomas Taylor
Thomas Taylor, President
Address: 13092 Country Club Drive
Clio, MI 48420
DILLON PROPERTIES, INC.
By /s/ Gary Collins
Gary Collins, President
Address: 25505 W. Twelve Mile Rd.
Suite 1900
Southfield, MI 48034
22
<PAGE>
WILLIAM MORGAN INVESTMENTS, INC.
By /s/ William Morgan
William Morgan, President
Address: 13070 Country Club Drive
Clio, MI 48420
/s/ David Wujciak
David Wujciak
Address: 15284 Bealfred
Fenton, MI 48430
/s/ David Wight
David Wight
Address:
/s/ Susan Denty
Susan Denty
Address:
/s/ Kirk Hinkins
Kirk Hinkins
Address:
23
<PAGE>
<TABLE>
EXHIBIT A
Capital Contribution
(In Cash, Unless Sharing
Name Otherwise Specified) Ratio
<S> <C> <C>
David Taylor $375,000 27.727%
Taylor Family Investments, Inc. 375,000 27.727%
Donnelly Corporation 255,000 18.854%
Skivington Investments, Inc. 105,000 7.7643%
Thomas Taylor Investments, Inc. 105,000 7.7643%
Dillon Properties, Inc. 27,500 2.033%
William Morgan Investments, Inc. 22,500 1.664%
David Wujciak 27,500 2.033%
David Wight $40,000 2.958%
Susan Denty $10,000 .739%
Kirk Hinkins $10,000 .739%
------- ----
Totals $1,352,500 100.00%
========== ========
</TABLE>
A-1
<PAGE>
EXHIBIT A-1
Seller's Relative Ratios at January 1, 1998
<TABLE>
Capital Relative
Name Contribution Ratio
<S> <C> <C>
Dayid Taylor $375,000 34.169%
Taylor Family Investments, Inc. 375,000 34.169%
Skivington Investments, Inc. 105,000 9.567%
Thomas Taylor Investments, Inc. 105,000 9.567%
Dillon Properties, Inc. 27,500 2.506%
William Morgan Investments, Inc. 22,500 2.050%
David Wuyciak 27,500 2.506%
David Wight 40,000 3.644%
Susan Denty 10,000 .911%
Kirk Hinkins 10,000 .911%
------ -----
$1,097,500 100%
========== =======
</TABLE>
The Seller's Relative Ratios are subject to change with transfers,
redemptions or issuances of Member's interests in the Company. any Member's
Sharing Ratio shall be the quotient of that Member's Sharing Ratio divided by
the sum of the Sharing Ratios of all members other than Donnelly.
<PAGE>
EXHIBIT B
LIST OF MEMBERS FOR ARTICLE V
David Taylor
Taylor Family Investments, Inc.
Skivington Investments, Inc.
Thomas Taylor Investments, Inc.
Dillon Properties, Inc.
William Morgan Investments, Inc.
David Wujciak
B-1
<PAGE>
EXHIBIT C
PROMISSORY NOTE
$_____________________ ____________, Michigan
_____________, 19___
For value received, the undersigned, ______________________________ (the
"Maker"), of ________________________, promises to pay to the order of
____________________, at _________________, or such other place as the payee may
designate by written notice to the Maker, the principal sum of
_____________________________ Dollars ($_____________), together with interest
thereon at the rate of _________________ percent (______%) per annum on the
principal balance from time to time outstanding, but not in excess of the
highest lawful rate.
Payment shall be made in ___________________________ (_______ ) equal
quarterly installments of principal and interest of _____________________
Dollars ($ ____________ ) each, commencing three (3) months following the above
date. Each payment shall be applied first to interest and the balance to
principal.
The Maker hereby waives demand, presentment for payment, and, except as set
forth below, any and all notices of protest, default, nonpayment or dishonor of
this Note.
This Note shall be governed by and construed and interpreted in accordance
with the laws of the state of Michigan. In the event any provision hereof is in
conflict with any statute or rule of law in the state of Michigan or is
otherwise unenforceable for any reason whatsoever, then such provision shall be
deemed severable from this Note, or enforceable to the maximum extent permitted
by law, as the case may be, and the same shall not invalidate any other
provisions hereof.
This Note may be prepaid, in whole or in part, at any time and from time to
time without premium or penalty; provided, however, that all prepayments are
first applied to any accrued interest and then to the last principal payment(s)
due hereunder.
This Note is executed pursuant to an Amended and Restated Operating
Agreement for Donnelly Electronics, L.L.C., dated July 1, 1998, and is secured
by a Collateral Assignment and Security Agreement.
In the event of any default in the payment of principal and/or interest
when due hereunder or in the event of any default under the terms of said
Operating Agreement, or Collateral Assignment and Security Agreement, and the
same is not cured within thirty (30) days after written notice by the holder
hereof to the Maker, then the entire principal balance plus accrued interest
thereon shall, at the option of the holder hereof, become immediately due and
payable without any further notice. Notice shall be delivered personally or by
registered or certified mail to the Maker at the address shown above, or at such
other address as the Maker shall substitute in writing to the holder hereof, and
the notice period shall begin to run on the date of personal delivery or the
date of posting of said notice.
C-1
<PAGE>
No delay or omission on the part of the holder hereof in the exercise of
any right hereunder or under any agreement securing this Note shall operate as a
waiver of such right or any other right; a waiver on any one occasion shall not
be construed as a bar to or waiver of any such right on any future occasion.
In the event the holder hereof institutes legal proceedings to enforce this
Note or the terms of any agreement securing this Note, the holder hereof shall
be entitled to collect, in addition to the indebtedness and interest specified
therein, all reasonable costs and expenses of suit, including reasonable
attorney fees.
The Maker acknowledges that the indebtedness represented by this Note is
for the purpose of _____________ in connection with the Maker's business as a
_______________.
________________________________________
STATE OF MICHIGAN )
) ss.
COUNTY OF )
Subscribed and sworn to before me, a Notary Public in and for said County,
on _________, 199__ .
___________________________________
Notary Public: ________ County, MI
My Commission Expires: __________
C-2
<PAGE>
EXHIBIT D
COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, ________________________ ("Assignor"), of
______________________ , hereby conditionally assigns to ______________________
(the "Secured Party"), of ________________________ , as collateral for the
payment of certain obligations under a promissory note of approximate even date
(the "Note") executed by the Assignor as partial consideration for the purchase
of an interest in Donnelly Electronics, L.L.C., a Michigan limited liability
company (the "Company"), all interest in such Company being purchased by the
Assignor (the "Company Interest").
The occurrence of any of the following shall be deemed a default hereunder:
(a) a default in payments due under the Note beyond any grace period allowed
thereunder, (b) the commencement by or against the Assignor of any proceeding in
bankruptcy or insolvency (if same is not cured within forty-five (45) days after
filing) or if the Assignor shall make an assignment for the benefit of its
creditors or become insolvent, or (c) the emergence of any lien or encumbrance
or any writ of attachment, garnishment, execution, or other legal process upon
the Company Interest or any part thereof, if same is not cured within thirty
(30) days after notice from the Secured Party.
Upon occurrence of a default hereunder, the Secured Party shall have all
the rights and remedies of a secured party under the Michigan Uniform Commercial
Code, as amended, and any other applicable laws, together with all rights and
remedies provided for in this Collateral Assignment, and may sell the Company
Interest assigned hereunder at public or private sale in such manner and for
such purchase price as the Secured Party may determine. The Secured Party may
purchase the Company Interest or any part thereof at any such sale. Out of the
proceeds of any sale, the Secured Party may retain an amount equal to the amount
due and owing under the terms of the Note plus the amount of the expenses of
sale and shall pay any balance of proceeds to the Assignor. If the proceeds of
sale are insufficient to pay the obligations under the Note plus expenses of
sale, the Secured Party shall remain liable for the amount of the deficiency.
If any notification of intended disposition by the Secured Party of the
Company Interest is required by law, such notification, if mailed, shall be
deemed reasonably and properly given if mailed at least seven (7) days before
such disposition, postage prepaid, addressed to the Assignor at the address
first above written or at such other address as the Assignor may have provided
to the Secured Party. The rights, duties and obligations hereunder of the
Secured Party and the Assignor shall, unless otherwise required by law, be
governed by the provisions of the Michigan Uniform Commercial Code, as amended,
and other applicable laws of the State of Michigan. The Assignor agrees to
execute and file such financing statements and/or other documents as the Secured
Party may reasonably request in order to perfect the Secured Party's interest.
In the event of a default hereunder, the Assignor hereby assigns directly
to the Secured Party the right to collect and apply all distributions of Company
property to any and all indebtedness represented by the Note, and the Assignor
hereby appoints the Secured Party as the Assignor's attorney-in-fact, which
appointment is coupled with an interest and shall survive any disability of the
Assignor, for the specific purpose of endorsing any checks representing such
distributions and
D-1
<PAGE>
applying the proceeds thereof to the indebtedness represented by the Note and
also for the purpose of doing such acts and things as may be necessary in order
to carry out the intent of this Collateral Assignment, including seeking
distributions from the Company and executing and filing any financing statement
or continuation thereof or such other documentation as the Secured Party may
deem necessary from time to time in order to perfect its security interest in
the collateral assigned hereby. Notice of the exercise of the foregoing shall be
given by the Secured Party to the Assignor.
The Assignor represents and warrants that this Collateral Assignment is
intended to grant to the Secured Party a first security interest in the
collateral with the intention that same be perfected. Upon the Secured Party's
receipt of all amounts due under the Note, the Assignor shall be entitled to
have the Company Interest released from this Collateral Assignment, and the
Secured Party shall execute and deliver to the Assignor such documents as the
Assignor may reasonably request to evidence such release.
This Collateral Assignment shall bind and benefit the Assignor and the
Secured Party and their respective representatives, successors and assigns.
Dated: ___________________, 199___.
Witnesses: ASSIGNOR:
_______________________________
_______________________________ __________________________
STATE OF MICHIGAN )
) ss.
COUNTY OF )
The foregoing instrument was executed before me this __________ day of
____________, 199__, by _____________________.
___________________________________
Notary Public, _________ County, MI
My Commission Expires: ___________
D-2
<PAGE>
EXHIBIT E
SUPPLY AND OPTION AGREEMENT
Option Agreement made this 30th day of July, 1996, by and between Donnelly
Electronics, L.L.C., a Michigan limited liability company of 62 Chateaux DuLac,
Fenton, Michigan 48430 ("Electronics") and Donnelly Corporation of 414 E.
Forteith Street, Holland, Michigan 49423 ("Donnelly").
Donnelly is a member of Electronics, has loaned money to Electronics, and
proposes to be a purchaser of product from Electronics. Donnelly is prepared to
commit to purchase its requirements of certain products from Electronics on
terms and conditions hereinafter specified, and Electronics is prepared to grant
Donnelly an option to purchase increased interests in Electronics.
In consideration of the mutual undertakings hereinafter set forth, the
parties hereto agree as follows:
1. Requirements Contract. Donnelly hereby agrees that it will purchase from
Electronics, and Electronics agrees it will manufacture and sell to Donnelly all
the electronic components required by Donnelly for its North American
automotive business, provided that all of the following conditions are met:
(a) Electronics is currently producing or has a demonstrable ability
to manufacture such products in the quantity and in the time frame
required.
(b) The price, quality and delivery of the products manufactured by
Electronics are competitive in the market place.
(c) Donnelly's customer has not directed Donnelly to use another
source.
(d) Donnelly remains a member of Electronics.
Donnelly's exclusive purchase obligation shall not apply to: (i) products also
used by Donnelly outside of North America and sourced by Donnelly to one
supplier which supplies that product both inside and outside of North America,
(ii) products for which Donnelly has existing contracts, or (iii) products which
are proprietary to the vendor.
2. Grant of Option. Electronics hereby grants to Donnelly an irrevocable
option to subscribe during the option period to the interest in the Company
described below ("Option Interest") on the following terms and conditions:
<PAGE>
(a) The Company Interest shall be a Sharing Ratio of 11.74% (so that
if Donnelly exercised the option after the option to be granted to
management (as approved by the Members on this date) have been exercised,
Donnelly would have a total Sharing Ratio of 27.5%).
(b) The option may be exercised at any time on or before July 30,
1999.
(c) The option shall be exercised by written notice from Donnelly to
Electronics, specifying a date, not more than thirty (30) days after the
date of the notice on which Donnelly would pay its option price.
(d) The Option Price shall be equal to and paid by the contribution by
Donnelly to Electronics of the outstanding principal and interest on the
promissory note in the original principal amount of $157,500 issued to
Donnelly by Electronics on July 30, 1996, or in the event that promissory
note has been prepaid, then a cash payment of $157,500, plus an amount
equal to 6.75% per annum from the date hereof until payment of the Option
Price. In the event there has been capital contributed to Electronics after
the date hereof, the Option Price shall be adjusted upward to reflect the
additional capital contribution required in order to make Donnelly's
capital account with respect to the Option Interest to be the same amount
per percentage of Sharing Ratio as that of the other Members on that date.
The Option Price shall be payable at closing.
3. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, this Agreement has been executed this 30th day of July,
1996.
DONNELLY ELECTRONICS, L.L.C.
By _________________________
David Taylor, Manager
DONNELLY CORPORATION
By _________________________
James A. Knister, Senior Vice President
-2-
<PAGE>
EXHIBIT F
BUSINESS PLAN
<TABLE>
All numbers in (000) Forecast based on Model Year Estimates
Price at Model Year Unit volumes in model year
SALES 1998 1999 2000 2001 2002 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Compass $20.00 $16.00 $14.00 $ 9.50 $8.50 300 130
Mirror Display boards $18.00 $17.00 $22.00 $21.00 $20.00 80 130
Overhead consoles $18.50 $18.00 $17.50 $17.00 $17.00 0 0
mirror ICON's,DCA $ 5.00 $5.00 $ 5.00 $ 5.00 $5.00 0 0
RF Products $10.00 $10.00 $10.00 $10.00 $10.00 0 0
EC mirror boards $ 5.00 $5.00 $ 4.50 $ 4.25 $4.25 300
new products $10.00 $10.00 $10.00 $10.00 $10.00 40 350
Total Sales Dollars $7,840 $9,290
LABOR $ 8.00% Labor costs in 000 $627 $743
# people production 31 37
Material Content
Compass $14.00 12.00 10.00 7.00 6.75 4,200 1,560
Mirror Display boards $14.00 12.00 13.00 12.50 11.50 1,120 1,560
Overhead consoles $11.00 12.00 12.00 11.50 11.50 0 0
mirror ICON's,DCA $3.00 3.00 3.00 3.00 3.00 0 0
RF Products $6.00 6.00 6.00 6.00 6.00 0 0
EC mirror boards $3.00 3.00 2.50 2.50 2.50 0 0
new products $6.50 $6.50 $6.50 $6.50 $6.50 260 2,275
0 0 0
MAT'L $ $5,580 $6,295
Freight 1.00% 56 63
% Matl costs 71.89% 68.44%
COST OF GOODS SOLD, MFG $6,263 $7,101
GROSS PROFIT, MFG $1,577 $2,189
G&A Holly
Lease 138 138
Property Taxes 50 60
Utilities 40 70
Mfg Overheads pay 45 200
Other 20 20
Depreciation 300 500
Materials pay 200 240
Other 10 10
Quality pay 100
Other 0 50
Admin pay 100 200
Other 100 100
0
Finance pay 60 100
Other 10 20
Legal 100
Personnel pay 50 75
Other 0 0
Sales pay 100 33
commission 100
other 0 20
- --------- --------- ------- -------
G&A $1,223 $2,403
Operating Profit $354 ($214)
Product Eng, Holly Sales $200 $200
Matl 50 50
Pay $600 $1,000
other 20 50
Profit ($470) ($900)
Product Eng, Holland Sales 680
supplies 310
Pay 2204
bonus 56
travel 120
depreciation 157
other 28
Corporate 62.5
Rent 217.8
Profit -1070 -2475.3
Advanced Dev, Tucson Sales 0
supplies 30
Pay 316
bonus 10
travel 70
other 16
Corporate 1.5
Rent 42
Profit -486
Net Profit, BT & Interest (1,186) (4,075)
Income taxes 40.00% 0 0
Net Income after taxes before Int (1186) (4075)
Receivables 653 774
Equipment Purchases (building not included) 1500 650
Cash Required (assuming operating cash = 20% sales growth, before interest + depreciation) 2386 4682
Cum Cash Required (before current year interest) 2386 7068
Interest 7.00% 167 495
Total Cash Required (Cum, with interest) 7563
Net Income after taxes and interest (1353) (4570)
Assumptions: 1 Operating capital requirement assumed to be 20% of sales increase
2 Interest to Donnelly at 7%
3 Corporate rent at $18,150 per month fixed
4 Building expansion and/or purchase not included in projection
5 Donnelly or bank funds operating capital requirements
6 Lost compass business at Ford Truck for 99MY
7 Pick up Gulf States Toyota comp/temp for 99MY
8 Retain compass at Wixom for 99MY
9 In 2000MY go to MiniPod compass integrated into mirror
10 No cost included for CEL acquisition or overhead
11 No cost included for European engineering
12 $1,000,000 invoice received from Donnelly included in 1998
13 1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
<TABLE>
All numbers in (000) Forecast based on Model Year Estimates
Unit volumes in model year
SALES 2000 2001 2002 2003 2004 2005 2006
<S> <C> <C> <C> <C> <C> <C> <C>
Compass 300 400 600 800 1000 1000 1000
Mirror Display boards 200 400 300 500 750 750 800
Overhead consoles 75 200 300 500 750 750 750
mirror ICON's,DCA 0 200 200 200 200 200 200
RF Products 0 200 300 500 500 500 500
EC mirror boards 500 600 8800 800 1000 1000 1000
new products 500 1500 2500 3500 4000 4500 5000
Total Sales Dollars $17,163 $36,150 $48,600 $69,700 $86,500 $91,500 $97,500
LABOR $
Labor costs in 000 $1,373 $2,892 $3,888 $5,576 $6,920 $7,320 $7,800
# people production 69 145 194 279 346 366 390
Compass 3,000 2,800 4,050 5,400 6,750 6,750 6,750
Mirror Display boards 2,600 5,000 3,450 6,250 9,375 9,375 10,000
Overhead consoles 900 2,300 3,450 5,750 8,625 8,625 8,625
mirror ICON's,DCA 0 600 600 600 600 600 600
RF Products 0 1,200 1,800 3,000 3,000 3,000 3,000
EC mirror boards 1,250 1,500 2,000 2,000 2,500 2,500 2,500
new products 3,250 9,750 16,250 22,750 26,000 29,250 32,500
0 0 0 0 0 0 0 0
MAT'L $ $11,000 $23,150 $31,600 $45,750 $56,850 $60,100 $63,975
Freight 110 232 316 458 569 601 640
% Matl costs 64.73% 64.68% 65.67% 66.29% 66.38% 66.34% 66.27%
COST OF GOODS
SOLD, MFG $12,483 $26,274 $35,804 $51,784 $64,339 $68,021 $72,415
GROSS PROFIT, MFG $4,680 $9,877 $12,796 $17,917 $22,162 $23,479 $25,085
G&A Holly
Lease 138 138 138 145 145 145 145
Property Taxes 66 73 80 88 97 106 117
Utilities 80 90 90 90 90 100 100
Mfg Overheads
pay 250 300 300 300 300 300 300
other 20 20 20 20 20 20 20
Depreciation 700 900 1200 1300 1300 1500 1500
Materials
pay 240 280 280 350 350 350 350
other 10 10 10 10 10 10 10
Quality
pay 200 200 400 500 600 600 600
other 50 50 50 50 50 50 50
Admin
pay 300 500 500 750 1000 1000 1000
other 200 200 300 300 300 300 300
0 0 0 0 0 0 0
Finance pay 150 150 200 200 250 250 250
other 20 20 20 20 20 20 20
Legal 100 100 100 100 100 100 100
Personnel
pay 100 150 150 150 150 150 150
other 0 0 0 0 0 0 0
Sales
pay 300 400 400 400 500 500 500
commission 300 300 400 600 600 600 600
other 30 40 40 40 40 40 40
- --------- ------- ------ ------- ------ ------- ------- ------
G&A $3,254 $3,921 $4,678 $5,413 $5,922 $6,141 $6,152
Operating Profit $1,426 $5,956 $8,118 $12,504 $16,240 $17,338 $18,933
Product Eng, Holly
Sales $200 $200 $200 $200 $200 $200 $200
Matl 50 50 50 50 50 50 50
Pay $1,100 $1,200 $1,300 $1,400 $1,600 $1,600 $1,800
other 100 100 250 250 250 250 250
Profit ($1,050) ($1,150) ($1,400) ($1,500) ($1,700) ($1,700) ($1,900)
Product Eng, Holland
Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0
supplies 325.5 341.8 358.9 376.8 395.6 415.4 436.2
Pay 2534.6 2914.8 3352.0 3854.8 4433.0 5098.0 5862.7
bonus 64.4 74.1 85.2 97.9 112.6 129.5 149.0
travel 132.0 145.2 159.7 175.7 193.3 212.6 233.8
depreciation 172.7 190.0 209.0 229.9 252.9 278.1 305.9
other 30.8 33.9 37.3 41.0 45.1 49.6 54.6
Corporate 65.6 68.9 72.4 76.0 79.8 83.8 87.9
Rent 217.8 217.8 217.8 217.8 217.8 217.8 217.8
Profit -3543.4 -3986.4 -4492.1 -5069.9 -5730.1 -6484.8 -7347.9
Advanced Dev, Tucson
Sales
supplies 31.5 33.1 34.7 36.5 38.3 40.2 42.2
Pay 347.6 382.4 420.6 462.7 508.9 559.8 615.8
bonus 11.0 12.1 13.3 14.6 16.1 17.7 19.5
travel 77.0 84.7 93.2 102.5 112.7 124.0 136.4
other 17.6 19.4 21.3 23.4 25.8 28.3 31.2
Corporate 1.6 1.7 1.7 1.8 1.9 2.0 2.1
Rent 42.0 42.0 42.0 42.0 42.0 42.0 42.0
Profit -528 -575 -627 -683 -746 -814 -889
Net Profit,
BT & Interest (3,696) 244 1,599 5,250 8,064 8,339 8,796
Income taxes
40.00% 0 98 640 2100 3226 3336 3518
Net Income after
taxes before Int. (3696) 147 959 3150 4838 5003 5278
Receivables 1430 3013 4050 5808 7208 7625 8125
Equipment Purchases
(building not included) 100 1500 1500 1500 1200 1000 1000
Cash Required
(assuming operating
cash = 20% sales growth,
before interest +
depreciation) 5165 5107 3044 2697 37 -2885 -3161
Cum Cash Required
(before current year
interest) 12233 17341 20385 23082 23119 20234 17073
Interest 7.00% 856 1214 1427 1616 1618 1416 1195
Total Cash Required
(Cum, with interest) 13090 18555 21812 24698 24737 21651 18268
Net Income after
taxes and interest (4553) (1067) (467) 1534 3220 3587 4083
Assumptions: 1 Operating capital requirement assumed to be 20% of sales increase
2 Interest to Donnelly at 7%
3 Corporate rent at $18,150 per month fixed
4 Building expansion and/or purchase not included in projection
5 Donnelly or bank funds operating capital requirements
6 Lost compass business at Ford Truck for 99MY
7 Pick up Gulf States Toyota comp/temp for 99MY
8 Retain compass at Wixom for 99MY
9 In 2000MY go to MiniPod compass integrated into mirror
10 No cost included for CEL acquisition or overhead
11 No cost included for European engineering
12 $1,000,000 invoice received from Donnelly included in 1998
13 1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
EXHIBIT 10.22
AGREEMENT
This Agreement made as of January 1, 1998 (the "Effective Date") , by and
between DONNELLY ELECTRONICS L.L.C., a Michigan limited liability company, of
10410 N. Holly Road, Holly, Michigan 48442 ("Electronics") and DONNELLY
CORPORATION of 49 W. Third Street, Holland, Michigan 49423 ("Donnelly").
Donnelly is a member of Electronics. The parties contemplate a
restructuring of Electronics' business under which Electronics will assume
Donnelly's electronics development group. The parties recognize this is for the
long term benefit of Electronics, but that it will create a short-term negative
cash flow. Donnelly has agreed to loan funds to Electronics in order to provide
for this deficit cash flow. Donnelly, Electronics and the other members of
Electronics have agreed upon various options to purchase and sell interests in
Electronics as set forth in an Amended and Restated Operating Agreement, dated
the date hereof.
In consideration of the mutual undertakings hereinafter set forth, the
parties hereto agree as follows:
1. Assumption of Operations. Beginning on the effective date, Electronics
will assume electronic development work currently operated by Donnelly,
including personnel and facilities. The personnel, facilities and equipment are
all listed on Exhibit A attached hereto.
<PAGE>
(a) The existing employees and independent contractors of Donnelly
identified on Exhibit A ("DE Employees") shall remain employees of Donnelly
but shall be leased to Electronics on the terms set forth on the Leased
Employee Agreement attached as Exhibit D.
(b) Facilities, equipment, overhead. In addition to the direct costs
of the employees set forth in subparagraph (a), Electronics will pay
Donnelly $18,150 per month, to be renegotiated annually beginning July 1,
1999, based on then current budgets, for the right to use Donnelly's
facilities and equipment and for other overhead charges and services
identified on Exhibit B.
2. Donnelly's Electronic Development. Electronics agrees that it will
perform electronic development projects for Donnelly's own product development,
as requested from time to time by Donnelly. The current projects which
Electronics is undertaking are listed on Exhibit C attached hereto. Electronics
agrees to perform such development services at a rate equal to Electronics'
costs for such services (including overhead). Electronics will invoice Donnelly
monthly for the cost of those services, and Donnelly will pay such invoices
within thirty (30) days.
3. Financing Commitment. Donnelly agrees that it will loan Electronics the
funds shown as being required for borrowing in the business plan attached hereto
as Exhibit G, or such other business plan as is approved by Donnelly. Those
funds would be loaned to Electronics through the later of June 30, 2001 or a
closing under an option set forth
2
<PAGE>
in Section 5.6 or 5.7 of Electronics' Amended and Restated Operating Agreement,
at which time Donnelly's obligation to make additional loans shall cease. The
loans shall bear interest at the rate of seven percent (7%) per annum and be
payable interest only on a quarterly basis until the later of June 30, 2001, or
the closing under an option set forth in Section 5.6 or 5.7 of Electronics'
Amended and Restated Operating Agreement, at which time the entire unpaid
balance will be due and payable. The loans will be subordinated to bank
financing in the ordinary course, but will be secured with a security interest
in all assets of Electronics. Electronics will execute a promissory note and
security agreement in the forms attached hereto as Exhibits E and F
respectively.
4. Ownership and Use of Technology. The parties contemplate that
Electronics will develop proprietary technology, some of which will be related
to Donnelly's business. The ownership and rights to such technology will be as
follows:
(a) All technology developed by Electronics and paid for by Donnelly
will belong to Donnelly.
(b) All other technology developed by Electronics will be owned as
follows:
(i) if the technology or its application relates to automotive
rear vision, electrochromics or automotive windows, it will belong to
Donnelly. Electronics will execute such assignments to Donnelly as may
be requested by Donnelly from
3
<PAGE>
time to time, including executing patent applications and assignments
of all patent rights in these fields, and will cooperate in filing for
patents and protecting intellectual property rights.
(ii) All other technology shall belong to Electronics, provided,
however, that Donnelly shall have a worldwide, royalty free license to
make, use and sell devices incorporated into any of its products using
such technology. In addition, Electronics agrees not to sell any
products using such technology, or license any other person to
manufacture or sell products, which are or are used in connection with
automotive rear vision products (including, but not limited to,
interior and exterior automotive mirrors) or automotive windows or sun
roofs.
In the event Electronics owns technology which it does not wish to patent,
Donnelly shall have the right to apply for, prosecute and maintain patents on
such technology, and upon filing of an application for such patent, Electronics
will execute assignments creating the technology as jointly owned technology.
The same restrictions applicable to the use and sublicensing of Electronics'
technology as set forth above shall be applicable to jointly held technology.
4
<PAGE>
5. Extension of Option. Pursuant to a Supply and Option Agreement between
Electronics and Donnelly, dated July 30, 1996, Donnelly has an option to acquire
an additional sharing ratio in Electronics, and such option may be exercised at
any time on or before July 30, 1999. The exercise date in that agreement is
hereby extended until January 31, 2002. All other terms of the option contained
in the Supply and Option Agreement shall remain unchanged.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
DONNELLY ELECTRONICS L.L.C.
By /s/ David Taylor
Its Manager
DONNELLY CORPORATION
By /s/ James A. Knister
145652/6 Its Group Managing Director - Ventures
5
<PAGE>
EXHIBIT A
Personnel, Facilities, Equipment
Personnel
Eugenie Uhlmann Shahrnaz Motakef
Wayne Bracelin Brent Bos
Greg Devette Rob Dykhouse
Rich Hicks Eric Hoekstra
Mark Kramer Mark Lawson
Lisa Naber Eldon Nyhof
Sue Paas Tom Phee
Bill Schaefer Ken Schierbeek
Ken Schofield Paul Tarnow
John VanDussen Mike Veiseh
Kyle Cooper Howard Fitzgerald
Marc Smeyers Zhanbo Sun
Rob Blank
*Val Garza *Mike Kokinis
*Gordon Lanting *Dan Whisman
*Independent Contractors
Facilities
Approximately 12,700 square feet of office space in one of Donnelly's
facilities in Holland, Michigan, currently being on the second floor of
the 40th Street facility.
Equipment
Furniture (including office panels), computers, telephones, copiers,
facsimile machines currently existing in the space being occupied by
the personnel listed above.
<PAGE>
EXHIBIT B
Donnelly Facility and Overhead Services
Facilities Services - housekeeping and supervisor, utilities, snow and trash
removal, lawn care, preventative maintenance and
miscellaneous building supplies; shared facilities.
Overhead Services - benefits administration, accounting, payroll, HR
administration, general safety, systems,
telecommunications, etc.
<PAGE>
EXHIBIT C
Current Donnelly Development Projects
BMW vision system
<PAGE>
EXHIBIT D
LEASED EMPLOYEE AGREEMENT
THIS LEASED EMPLOYEE AGREEMENT (this "Agreement") is entered into as of
this 1st day of July, 1998 (the "Effective Date"), by and among DONNELLY
CORPORATION, a Michigan corporation, ("Donnelly") and DONNELLY ELECTRONICS,
L.L.C., a Michigan limited liability company (the "Company").
RECITALS:
WHEREAS, Donnelly Corporation is a member of the Company pursuant to an
Amended and Restated Operating Agreement of the Company dated July 1, 1998 (the
"Operating Agreement"); and
WHEREAS, the parties desire that the Company shall lease and may eventually
employ those Donnelly employees associated with Donnelly's electronics business
identified on Schedule A attached hereto;
NOW THEREFORE, for good and valuable consideration including the mutual
promises contained herein, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE 1
ASSIGNMENT OF LEASED EMPLOYEES
1.1 "Leased Employees" shall mean those persons identified on Schedule A
who are employed by Donnelly as of the Effective Date and who have been assigned
to the Company.
1.2 Assignment of Leased Employees. Effective as of the Effective Date,
Donnelly hereby assigns the Leased Employees identified on Schedule A who are
currently employed by Donnelly to perform the services performed by such Leased
Employees immediately prior to the Effective Date ("Services") for the term of
this Agreement. No additional Donnelly employees will be assigned to the Company
as Leased Employees under this Agreement without the agreement of both parties.
All employees hired after the Effective Date will be employees of the Company,
not Leased Employees, unless otherwise agreed.
1.3 Employee Compensation. While a Leased Employee is performing Services
under this Agreement, Donnelly will pay all wages and compensation and provide
all benefits to the Leased Employee, subject to payment by the Company for the
Services as
<PAGE>
provided by this Agreement. Leased Employees will be compensated in accordance
with Donnelly compensation practices.
1.4 Status. The Leased Employees assigned to perform Services for the
Company are solely the employees of Donnelly and nothing contained in this
Agreement shall be construed to create any other relationship between the
parties. Donnelly has recruited, interviewed, tested, selected, hired and
trained the Leased Employees. Donnelly will maintain all necessary payroll and
personnel records and compute wages and withhold applicable federal, state and
local taxes and social security payments for the Leased Employees. Donnelly and
the Company shall cooperate to discipline, review and evaluate employees. The
Company may terminate the services of any Leased Employee being provided to the
Company by notifying Donnelly, in which case Donnelly shall no longer assign
such person to perform services for the Company. Donnelly has sole
responsibility to determine compensation and terminate Leased Employees assigned
pursuant to this Agreement, but Donnelly shall consult with the Company prior to
effecting any changes of compensation or benefits.
ARTICLE 2
PAYMENTS BY THE COMPANY TO DONNELLY
2.1 Payment. The Company agrees to pay Donnelly an amount equal to
Donnelly's direct costs (wages, compensation, withholding and employment taxes,
and bonuses) of employing the Leased Employees to perform the Services and an
amount equal to Donnelly's indirect actual costs related and appropriately
allocated to the Leased Employees, including, but not limited to, employee
benefits, Employees' compensation insurance, and payments to the Michigan
Employment Security Commission. Donnelly shall submit to the Company monthly
invoices for the Services, which invoices shall be due and payable within seven
(7) days of receipt.
ARTICLE 3
WORKERS' COMPENSATION AND OTHER MATTERS
3.1 Workers' Compensation. Donnelly shall maintain, at its expense,
workers' compensation insurance for Leased Employees, covering any compensable
work-related injuries or illnesses they sustain on the premises owned or leased
by the Company during their work assignment. Donnelly shall provide a copy of
the workers' compensation insurance certificate annually on its renewal date to
the Company.
3.2 OSHA. The Company will provide Donnelly with all information required
under the Occupational Safety and Health Act, or other applicable laws,
regarding any work- related injuries or illnesses sustained by Leased Employees
while on Company premises during their work assignment.
2
<PAGE>
3.3 General Liability Insurance. Donnelly shall maintain, at its expense,
general liability insurance to cover the tortious actions or negligence of
Leased Employees while on the premises of Donnelly or the Company during their
work assignment. Donnelly shall provide a copy of the liability insurance
certificate annually on its renewal date to the Company.
3.4 Unemployment Benefits. Donnelly shall be responsible for unemployment
benefits for Leased Employees.
3.5 Drug/Alcohol Policy. Leased Employees will be subject to Donnelly's
Employee Alcohol and Drug Testing policy. Donnelly will notify the Company if a
Leased Employee is selected for a drug and alcohol test, and will coordinate
with the Company the scheduling of the test. Donnelly will pay for the cost of
the aforementioned tests, and will recommend to the Company what disciplinary
action must be taken in the event of a positive test result.
3.6 Employment Laws. Donnelly and the Company shall comply with the
Americans with Disabilities Act, the Civil Rights Act, the Age Discrimination in
Employment Act, the Fair Labor Standards Act, and other applicable state and
federal labor and employment laws.
3.7 Safety. The Company shall provide the Leased Employee with (i) a
suitable workplace which complies with all applicable safety and health
standards, statutes and ordinances, (ii) all necessary information, training and
safety equipment with respect to hazardous substances, and (iii) adequate
instructions, assistance, supervision, and time to perform the services
requested of them. The Company is responsible for all claims, losses, damages
and expenses concerning (i) hazardous substances and all other pollutants and
contaminants present at or released from the workplace which the Company
provides for the Leased Employees, or (ii) any violations of applicable safety
or health standards, statutes and ordinances.
3.8 Employee Records. Personnel files for Leased Employees will be
maintained by Donnelly. The Company shall provide performance feedback to Leased
Employees and will provide Donnelly with written documentation of such feedback.
All information contained in personnel files for Leased Employees will be
available to appropriate staff of the Company on request. For each Leased
Employee that becomes an employee of the Company, that employee's complete
personnel file with be transferred to the Company.
ARTICLE 4
INDEMNIFICATION
Donnelly shall indemnify and hold harmless the Company, its agents and
employees from and against any and all claims, losses, actions, damages,
expenses, and all other
3
<PAGE>
liabilities, including but not limited to attorney's fees, arising out of or
resulting from a Leased Employee's willful misconduct or reckless performance of
or failure to perform the work within the scope of the assignment hereunder to
the extent any such claim, loss, action, damage, expense or other liability is
attributable to bodily injury to or death of any person or damage to or
destruction of any property, whether belonging to the Company or to another
provided, however, that Donnelly shall not be liable for any injury, death,
damage or destruction to the extent caused by the negligent or willful acts or
omissions of the Company, its agents, employees or contractors. The Company
shall give notice in writing to Donnelly of any such claim, loss, action,
damage, expense or other liability within 15 days after discovery of the event
upon which the claim may be based or the learning of such claim, whichever
occurs first.
ARTICLE 5
CONSTRUCTION
5.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan without giving effect to any
applicable principles of conflicts of laws.
5.2 Notices. All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given when delivered
(i) in person, (ii) to the extent receipt is confirmed, by telecopy, facsimile
or other electronic transmission service, (iii) by a nationally recognized
overnight courier service, or (iv) by registered or certified mail (postage
prepaid return receipt requested), to the parties at the following address:
To Donnelly: Donnelly Corporation
49 W. Third St.
Holland, Michigan 49423
Attention: James Knister
Telecopy No. (616) 786-6239
With a copy to: Varnum, Riddering, Howlett & Schmidt LLP
Suite 1600, Bridgewater Place
333 Bridge Street, N.W., P.O. Box 352
Grand Rapids, Michigan 49504
Attention: Daniel Molhoek
Telecopy No. (616) 336-7000
To the Company: Donnelly Electronics LLC
10410 N. Holly Road
Holly, Michigan 48442
Attention: David C. Taylor
Telecopy No.(810) 606-0147
4
<PAGE>
5.3 Severability. If any provision of this Agreement shall be conclusively
determined by a court of competent jurisdiction to be invalid or unenforceable
to any extent, the remainder of this Agreement shall not be affected thereby.
5.4 Binding Effect. Except as otherwise provided herein, this Agreement
shall inure to the benefit of and be binding upon the parties, their respective
successors, legal representatives and permitted assigns.
5.5 No Third Party Rights. This Agreement is intended to create enforceable
rights between the parties hereto only, and creates no rights in, or obligations
to, any other Persons whatsoever.
5.6 Time is of Essence. Time is of the essence in the performance of each
and every obligation herein imposed.
5.7 Schedules; Incorporation by Reference. Any reference to a Schedule or
Exhibit to this Agreement contained herein shall be deemed to include any
Schedules to such Exhibit. Each of the Exhibits and Schedules to this Agreement,
and each Schedule to such Exhibits, is hereby incorporated by reference in this
Agreement as if such Schedules and Exhibits were set out in full in the text of
this Agreement.
5.8 Term. This Agreement shall be for an indefinite term and may be
canceled only by written agreement executed by duly authorized officers of the
parties hereto.
5.9 Amendments. This Agreement may not be amended except by written
agreement executed by duly authorized officers of all of the parties hereto.
5.10 Entire Agreement; Section Headings. This Agreement, the Operating
Agreement, the agreements contemplated thereby, and any other related written
agreement between the parties hereto constitute the entire Agreement among the
parties hereto relating to the subject matter hereof and supersede all prior
agreements, understandings, and arrangements, oral or written, among the parties
with respect to the subject matter hereof. The Section headings in this
Agreement are for reference purposes only and shall be affect in any way the
meaning or interpretation of this Agreement.
5.11 Assignment. This Agreement and each and every covenant, term and
condition hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns. Except as otherwise
specifically provided in this Agreement or the Operating Agreement (particularly
Section 9.2(a) thereof), neither this Agreement nor any rights or obligations
hereunder shall be assignable or be delegated
5
<PAGE>
directly or indirectly by any party hereto to a third party (other than an
Affiliate of the Member) without the prior written consent of all the parties to
this Agreement.
5.12 Arbitration. Any dispute, controversy or claim (hereinafter "Dispute")
between the parties of any kind or nature whatsoever, arising under or relating
to this Agreement whether arising in contract, tort or otherwise, shall be
resolved according to the following procedure. If a Dispute (excluding business
decisions to be voted on by Members or Directors) arises among the Members under
this Agreement which is not resolved by good faith negotiation, then such
Dispute, upon 30 days' prior notice from one Member to the other of its intent
to arbitrate (an "Arbitration Notice"), shall be submitted to and settled by
arbitration; provided, however, that nothing contained herein shall preclude any
party hereto from seeking or obtaining (a) injunctive relief, or (b) equitable
or other judicial relief to enforce the provisions hereof or to preserve the
status quo pending resolution of disputes hereunder. Such arbitration shall be
conducted in accordance with the commercial arbitration rules of the American
Arbitration Association existing at the time of submission by one arbitrator.
The Members shall attempt to agree upon an arbitrator. If one cannot be agreed
upon, the Member which did not give the Arbitration Notice may request the Chief
Judge of the United States District Court for the Eastern District of Michigan
or the Chief Judge of the United States District Court for the Western District
of Michigan to appoint an arbitrator. If he or she will not, the arbitrator
shall be appointed by the American Arbitration Association. If an arbitrator so
selected becomes unable to serve, his or her successor shall be similarly
selected or appointed. All arbitration hearings shall be conducted on an
expedited schedule, and all proceedings shall be confidential. Either Member may
at its expense make a stenographic record thereof. The arbitrator shall
apportion all costs and expenses of arbitration (including the arbitrator's fees
and expenses, the fees and expenses of experts, and the fees and expenses of
counsel to the parties), between the prevailing and non-prevailing Member as the
arbitrator deems fair and reasonable. Any arbitration award shall be binding and
enforceable against the parties hereto and judgment may be entered thereon in
any court of competent jurisdiction. The arbitration will take place at Flint,
Michigan or Grand Rapids, Michigan at the election of the Member not giving the
Arbitration Notice.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
DONNELLY CORPORATION
("Donnelly")
By____________________________________________
James Knister, Managing Director - Ventures
DONNELLY ELECTRONICS, LLC
By
David Taylor, President
::ODMA\PCDOCS\GRR\145652\6
<PAGE>
SCHEDULE A
List of Employees
Eugenie Uhlmann Shahrnaz Motakef
Wayne Bracelin Brent Bos
Greg Devette Rob Dykhouse
Rich Hicks Eric Hoekstra
Mark Kramer Mark Lawson
Lisa Naber Eldon Nyhof
Sue Paas Tom Phee
Bill Schaefer Ken Schierbeek
Ken Schofield Paul Tarnow
John VanDussen Mike Veiseh
Kyle Cooper Howard Fitzgerald
Marc Smeyers Zhanbo Sun
Rob Blank
*Val Garza *Mike Kokinis
*Gordon Lanting *Dan Whisman
*Independent Contractors
<PAGE>
EXHIBIT E
PROMISSORY NOTE
$10,000,000.00 Holly, Michigan
July 1, 1998
For value received, the undersigned, DONNELLY ELECTRONICS L.L.C., a
Michigan limited liability company, of 10410 N. Holly Road, Holly, Michigan
48442 (the "Borrower"), hereby promises to pay to the order of DONNELLY
CORPORATION, a Michigan corporation, at 49 W. Third Street, Holland, MI 49423,
or such other place as the holder hereof may designate by written notice to the
Borrower, in lawful money of the United States of America and in immediately
available funds, the principal sum of Ten Million Dollars ($10,000,000) to such
lesser sum as advanced from time to time and recorded on Schedule A attached
hereto or a copy thereof and initialed by Borrower, together with interest
thereon at the rate of seven percent (7%) per annum on the principal balance
from time to time outstanding.
This Note shall be paid in quarterly installments of interest only
commencing on September 30, 1998, and continuing on each December 31, March 31,
June 30 and September 30 thereafter, with the entire principal balance, plus
accrued interest thereon, being due and payable in full on the later of June 30,
2001 or the closing under the "put" or "call" options set forth in Electronics'
Amended and Restated Operating Agreement.
This Note may be prepaid, in whole or in part, at any time and from time to
time without premium or penalty; provided, however, that all prepayments are
first applied to any accrued interest and then to the last principal payment(s)
due hereunder. As provided in Section 5.5(f) of Borrower's amended and Restated
Operating Agreement, the holder hereof shall be permitted to reduce the balance
of this Note in consideration of payments due to Borrower for the purchase of an
additional Sharing ratio in Borrower.
This Note will be subordinate to loans made to the borrower from any bank
which is the Borrower's principal lending bank.
This Note is secured by a Security Agreement of even date (the "Security
Agreement").
In the event of any default in payment of principal and/or interest when
due hereunder or in the event of any default or upon the occurrence of any event
of default under the terms of the Security Agreement or any other agreement
securing this Note, and any such default is not cured within twenty (20) days
after the holder provides written notice thereof to the Borrower, then the
entire principal balance plus accrued interest thereon shall, at the option of
the holder, become immediately due and payable without any further notice.
Notice shall be delivered by registered or certified mail to the Borrower at the
address shown above, or at such other address as the Borrower shall substitute
in writing to the holder, and the notice period shall begin to run on the date
of mailing of said notice.
<PAGE>
No delay or omission on the part of the holder in the exercise of any right
hereunder or under any agreement securing this Note shall operate as a waiver of
such right or any other right; a waiver on any one occasion shall not be
construed as a bar to or waiver of any such right on any future occasion.
In the event the holder hereof institutes legal proceedings to enforce this
Note or the terms of any agreement securing this Note, the holder shall be
entitled to collect, in addition to the indebtedness and interest specified
therein, all reasonable costs and expenses of suit, including reasonable
attorney fees.
The Borrower and any guarantors and endorsers and all persons liable or to
become liable under this Note and/or any agreement securing this Note hereby
severally waive demand, presentment for payment, and any and all notices of
protest, default, nonpayment, or dishonor of this Note and hereby consent to any
and all extensions of time for the payment or renewals hereof.
This Note shall be governed by and construed and interpreted in accordance
with the laws of the State of Michigan. In the event any provision hereof is in
conflict with any statute or rule of law in the State of Michigan or is
otherwise unenforceable for any reason whatsoever, then such provision shall be
deemed severable from this Note, or enforceable to the maximum extent permitted
by law, as the case may be, and the same shall not invalidate any other
provisions of this Note.
DONNELLY ELECTRONICS L.L.C.
By: ____________________________________
Its: Manager
::ODMA\PCDOCS\GRR\174199\1
<PAGE>
SCHEDULE A
Loan Extensions from
Donnelly Corporation to Donnelly Electronics LLC
Amount Total
Date Advanced Loan Debtor Initials
::ODMA\PCDOCS\GRR\174199\1
<PAGE>
EXHIBIT F
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of ___________, 1998, between DONNELLY
CORPORATION, a Michigan corporation, of 49 W. Third Street, Holland, Michigan
49423 (the "Secured Party") and DONNELLY ELECTRONICS L.L.C., a Michigan limited
liability company, of 10410 N. Holly Road, Holly, Michigan 48442 (the "Debtor").
ARTICLE 1
GRANT OF SECURITY INTEREST
To secure the payment of all indebtedness owing to Secured Party by Debtor,
including, without limitation, a promissory note in the original principal
amount of $__________ and the performance of all obligations of the Debtor under
this Agreement (collectively, the "Indebtedness"), the Debtor grants the Secured
Party a security interest in all of the following which are hereinafter referred
to collectively as the "Collateral": all assets owned by Debtor, including all
goods, inventories, equipment, accounts, chattel paper and general intangibles.
This Agreement is subordinate to any security interest of Old Kent bank or any
other bank which is the Debtor's principal commercial bank ("the Bank") in
Debtor's assets.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
The Debtor represents and warrants to the Secured Party as follows:
2.1 Ownership; No Other Liens. The Debtor is the owner of the Collateral;
except for any security interest granted to the Bank in Debtor's assets, there
is no other lien, security interest, or encumbrance on any of the Collateral;
and except for any financing statement filed with respect to any interest of the
Bank, no financing statement is now on file in any public office covering any of
the Collateral, except in favor of the Secured Party.
2.2 Location of Business and Collateral; Identification Number. The
Debtor's principal place of business is located at the address set forth above
and the tangible items of Collateral covered by this Agreement are situated, and
at all times will remain, at that location. The Debtor's Federal Employer
Identification Number is .
2.3 Continuing Security Interest. The Debtor represents that it intends and
understands that the security interest in the Collateral granted hereby shall be
a continuing security interest to secure payment of all Indebtedness, whether
now existing or which may hereafter be incurred by future advances or otherwise,
and whether or not such Indebtedness is related to any transaction described in
this Agreement, by class or kind, or whether or not contemplated by the parties
as of the date hereof. Notice of the continuing nature of this security interest
shall not be required to be stated on the face of any document representing any
such Indebtedness, nor need such Indebtedness otherwise be identified as being
secured hereby.
2.4 Subordination. The Secured Party acknowledges that the security
interest granted in the Agreement is subordinate to the security interest of the
Bank in Debtor's assets.
<PAGE>
ARTICLE 3
COVENANTS, AGREEMENTS, AND RIGHTS OF PARTIES
3.1 Restrictions upon the Disposition of Collateral. The Debtor shall not
sell, assign, or transfer any of the Collateral, except for inventories in the
ordinary course of business, or cause or permit any other lien, security
interest, or encumbrance to be placed on any of the Collateral other than the
security interest of the Bank.
3.2 Condition of the Collateral; Insurance. The Debtor shall maintain all
tangible Collateral in good condition and repair and shall cause the same to be
continuously insured in an amount equal to the full insurable value thereof for
the benefit of the Secured Party and the Debtor as their interests may appear.
Such insurance shall name the Secured Party as loss payee and shall not be
subject to cancellation or reduction in coverage without thirty (30) days prior
written notice to the Secured Party. Certificates of insurance shall be provided
to the Secured Party upon request.
3.3 Taxes; Use. The Debtor shall pay promptly when due all taxes and
assessments upon the Collateral or for its use or operation. The Debtor shall
not use the Collateral unlawfully or improperly.
3.4 Secured Party's Rights to Perform. The Secured Party may, but shall
have no obligation to: discharge taxes, liens, security interests, or other
encumbrances at any time levied or placed upon the Collateral; pay for the
maintenance and preservation of the Collateral; obtain and/or pay for insurance
on the Collateral; and cause to be performed for and in behalf of the Debtor any
obligations of the Debtor hereunder which the Debtor has failed or refused to
perform. The Debtor shall reimburse the Secured Party upon demand for all
payments made and all expenses incurred by the Secured Party pursuant to this
Paragraph 3.4, with interest, from the date paid or incurred by the Secured
Party, at the highest rate permitted by law.
ARTICLE 4
EVENTS OF DEFAULT
Upon the occurrence of any of the following events of default, any part or
all of the Indebtedness shall, at the option of the Secured Party, become
immediately due and payable without notice or demand:
4.1 Default on Indebtedness. If the Debtor shall default in the payment
when due, whether by acceleration or otherwise, of any of the Indebtedness; if
the Debtor shall default in the performance or observance of any obligation or
covenant under this Security Agreement; or if Debtor shall default in the
performance or observance of any obligation or covenant with respect to any
senior security interest of the Bank.
4.2 False Warranty or Representation. If any warranty or representation
made by the Debtor in this Agreement or in any other document given in
connection with the Indebtedness, or in any guaranty or other document given in
connection therewith, shall be false or inaccurate in any material respect when
made.
2
<PAGE>
4.3 Lien on Collateral. If any valid lien or encumbrance or any writ of
attachment, garnishment, execution, or other legal process shall at any time be
placed upon any part of the Collateral.
ARTICLE 5
REMEDIES UPON DEFAULT
5.1 Remedies Generally. Upon the occurrence of an event of default as
defined in Article 4 hereof, the Secured Party shall have all the rights and
remedies of a secured party under the Michigan Uniform Commercial Code and any
other applicable laws, together with all rights and remedies provided for in
this Security Agreement. In addition thereto, upon the occurrence of an event of
default, the Secured Party may require the Debtor to assemble the Collateral and
any proceeds thereof and deliver same to the Secured Party at a place to be
designated by the Secured Party which is reasonably convenient to both parties,
and the Debtor agrees that the Secured Party shall have the right to peacefully
retake any of the Collateral without judicial hearing prior to such retaking,
including the right to enter upon the Debtor's premises for such purpose. All
rights and remedies of the Secured Party shall be cumulative and may be
exercised from time to time.
5.2 Disposition of Collateral; Deficiency. The Secured Party may dispose of
the Collateral and proceeds in any commercially reasonable manner and the Debtor
shall be liable for any deficiency.
5.3 Payment of Expenses. The Debtor shall pay the Secured Party on demand
all expenses, including reasonable attorneys' fees and legal expenses paid or
incurred by the Secured Party in protecting and enforcing the rights of and
obligations to the Secured Party under any provision of this Agreement,
including its right to take possession of the Collateral and proceeds thereof
from the custody of the Debtor or any trustee or receiver in bankruptcy or any
other person. All such expenses shall become part of the Indebtedness and shall
bear interest from the date paid or incurred by the Secured Party at the highest
rate permitted by law.
5.4 Notice of Sale. Any notice required to be given by the Secured Party to
the Debtor with respect to the sale or other disposition of the Collateral shall
be deemed reasonable if mailed, in the manner set forth in Paragraph 6.2 below,
at least seven (7) days before the time of such sale or other disposition.
ARTICLE 6
MISCELLANEOUS
6.1 Financing Statements. At the request of the Secured Party, the Debtor
shall join with the Secured Party in executing one or more financing statements
and continuation statements, in form satisfactory to the Secured Party, and
shall pay the cost of filing the same in all public offices, wherever filing is
deemed by the Secured Party to be necessary or desirable.
6.2 Manner of Notice. All notices to the Debtor or Secured Party shall be
deemed to be effectively given when sent by first class mail, postage prepaid,
to the addresses set forth above, or to such other addresses as the parties may
designate by notice as provided in this Paragraph 6.2.
3
<PAGE>
6.3 No Waiver. No delay on the part of the Secured Party in the exercise of
any right or remedy shall operate as a waiver thereof and no single or partial
exercise by the Secured Party of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other right or remedy.
6.4 Definitions; Applicable Law. All terms used herein, unless otherwise
defined or the context otherwise requires, shall have the meanings given to them
by the Michigan Uniform Commercial Code, which, together with other applicable
laws of the state of Michigan, shall govern this Agreement and the
interpretation thereof.
6.5 Captions. The captions to the various Paragraphs hereof have been
inserted for convenience only and shall not be deemed a part of this Agreement.
6.6 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Debtor and the Secured Party and their respective successors and
assigns.
6.7 Entire Agreement; Amendment. This Agreement sets forth the entire
agreement of the parties as to the subject matter hereof and may not be amended
except in writing and executed by the parties hereto.
6.8 Severability. In the event any provision hereof is in conflict with any
statute or rule of law in the State of Michigan or is otherwise unenforceable
for any reason whatsoever, then such provision shall be deemed severable from or
enforceable to the maximum extent permitted by law, as the case may be, and the
same shall not invalidate any other provisions hereof.
IN WITNESS WHEREOF, the Debtor and the Secured Party have executed this
Security Agreement as of the day and year first above written.
SECURED PARTY:
DONNELLY CORPORATION
By:
James A. Knister
Managing Director, Ventures
DEBTOR:
DONNELLY ELECTRONICS L.L.C.
By:
Its: Manager
::ODMA\PCDOCS\GRR\174209\1
4
<PAGE>
EXHIBIT G
BUSINESS PLAN
<TABLE>
All numbers in (000) Forecast based on Model Year Estimates
Price at Model Year Unit volumes in model year
SALES 1998 1999 2000 2001 2002 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
Compass $20.00 $16.00 $14.00 $ 9.50 $8.50 300 130
Mirror Display boards $18.00 $17.00 $22.00 $21.00 $20.00 80 130
Overhead consoles $18.50 $18.00 $17.50 $17.00 $17.00 0 0
mirror ICON's,DCA $ 5.00 $5.00 $ 5.00 $ 5.00 $5.00 0 0
RF Products $10.00 $10.00 $10.00 $10.00 $10.00 0 0
EC mirror boards $ 5.00 $5.00 $ 4.50 $ 4.25 $4.25 300
new products $10.00 $10.00 $10.00 $10.00 $10.00 40 350
Total Sales Dollars $7,840 $9,290
LABOR $ 8.00% Labor costs in 000 $627 $743
# people production 31 37
Material Content
Compass $14.00 12.00 10.00 7.00 6.75 4,200 1,560
Mirror Display boards $14.00 12.00 13.00 12.50 11.50 1,120 1,560
Overhead consoles $11.00 12.00 12.00 11.50 11.50 0 0
mirror ICON's,DCA $3.00 3.00 3.00 3.00 3.00 0 0
RF Products $6.00 6.00 6.00 6.00 6.00 0 0
EC mirror boards $3.00 3.00 2.50 2.50 2.50 0 0
new products $6.50 $6.50 $6.50 $6.50 $6.50 260 2,275
0 0 0
MAT'L $ $5,580 $6,295
Freight 1.00% 56 63
% Matl costs 71.89% 68.44%
COST OF GOODS SOLD, MFG $6,263 $7,101
GROSS PROFIT, MFG $1,577 $2,189
G&A Holly
Lease 138 138
Property Taxes 50 60
Utilities 40 70
Mfg Overheads pay 45 200
Other 20 20
Depreciation 300 500
Materials pay 200 240
Other 10 10
Quality pay 100
Other 0 50
Admin pay 100 200
Other 100 100
0
Finance pay 60 100
Other 10 20
Legal 100
Personnel pay 50 75
Other 0 0
Sales pay 100 33
commission 100
other 0 20
- --------- --------- ------- -------
G&A $1,223 $2,403
Operating Profit $354 ($214)
Product Eng, Holly Sales $200 $200
Matl 50 50
Pay $600 $1,000
other 20 50
Profit ($470) ($900)
Product Eng, Holland Sales 680
supplies 310
Pay 2204
bonus 56
travel 120
depreciation 157
other 28
Corporate 62.5
Rent 217.8
Profit -1070 -2475.3
Advanced Dev, Tucson Sales 0
supplies 30
Pay 316
bonus 10
travel 70
other 16
Corporate 1.5
Rent 42
Profit -486
Net Profit, BT & Interest (1,186) (4,075)
Income taxes 40.00% 0 0
Net Income after taxes before Int (1186) (4075)
Receivables 653 774
Equipment Purchases (building not included) 1500 650
Cash Required (assuming operating cash = 20% sales growth, before interest + depreciation) 2386 4682
Cum Cash Required (before current year interest) 2386 7068
Interest 7.00% 167 495
Total Cash Required (Cum, with interest) 7563
Net Income after taxes and interest (1353) (4570)
Assumptions: 1 Operating capital requirement assumed to be 20% of sales increase
2 Interest to Donnelly at 7%
3 Corporate rent at $18,150 per month fixed
4 Building expansion and/or purchase not included in projection
5 Donnelly or bank funds operating capital requirements
6 Lost compass business at Ford Truck for 99MY
7 Pick up Gulf States Toyota comp/temp for 99MY
8 Retain compass at Wixom for 99MY
9 In 2000MY go to MiniPod compass integrated into mirror
10 No cost included for CEL acquisition or overhead
11 No cost included for European engineering
12 $1,000,000 invoice received from Donnelly included in 1998
13 1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
<TABLE>
All numbers in (000) Forecast based on Model Year Estimates
Unit volumes in model year
SALES 2000 2001 2002 2003 2004 2005 2006
<S> <C> <C> <C> <C> <C> <C> <C>
Compass 300 400 600 800 1000 1000 1000
Mirror Display boards 200 400 300 500 750 750 800
Overhead consoles 75 200 300 500 750 750 750
mirror ICON's,DCA 0 200 200 200 200 200 200
RF Products 0 200 300 500 500 500 500
EC mirror boards 500 600 8800 800 1000 1000 1000
new products 500 1500 2500 3500 4000 4500 5000
Total Sales Dollars $17,163 $36,150 $48,600 $69,700 $86,500 $91,500 $97,500
LABOR $
Labor costs in 000 $1,373 $2,892 $3,888 $5,576 $6,920 $7,320 $7,800
# people production 69 145 194 279 346 366 390
Compass 3,000 2,800 4,050 5,400 6,750 6,750 6,750
Mirror Display boards 2,600 5,000 3,450 6,250 9,375 9,375 10,000
Overhead consoles 900 2,300 3,450 5,750 8,625 8,625 8,625
mirror ICON's,DCA 0 600 600 600 600 600 600
RF Products 0 1,200 1,800 3,000 3,000 3,000 3,000
EC mirror boards 1,250 1,500 2,000 2,000 2,500 2,500 2,500
new products 3,250 9,750 16,250 22,750 26,000 29,250 32,500
0 0 0 0 0 0 0 0
MAT'L $ $11,000 $23,150 $31,600 $45,750 $56,850 $60,100 $63,975
Freight 110 232 316 458 569 601 640
% Matl costs 64.73% 64.68% 65.67% 66.29% 66.38% 66.34% 66.27%
COST OF GOODS
SOLD, MFG $12,483 $26,274 $35,804 $51,784 $64,339 $68,021 $72,415
GROSS PROFIT, MFG $4,680 $9,877 $12,796 $17,917 $22,162 $23,479 $25,085
G&A Holly
Lease 138 138 138 145 145 145 145
Property Taxes 66 73 80 88 97 106 117
Utilities 80 90 90 90 90 100 100
Mfg Overheads
pay 250 300 300 300 300 300 300
other 20 20 20 20 20 20 20
Depreciation 700 900 1200 1300 1300 1500 1500
Materials
pay 240 280 280 350 350 350 350
other 10 10 10 10 10 10 10
Quality
pay 200 200 400 500 600 600 600
other 50 50 50 50 50 50 50
Admin
pay 300 500 500 750 1000 1000 1000
other 200 200 300 300 300 300 300
0 0 0 0 0 0 0
Finance pay 150 150 200 200 250 250 250
other 20 20 20 20 20 20 20
Legal 100 100 100 100 100 100 100
Personnel
pay 100 150 150 150 150 150 150
other 0 0 0 0 0 0 0
Sales
pay 300 400 400 400 500 500 500
commission 300 300 400 600 600 600 600
other 30 40 40 40 40 40 40
- --------- ------- ------ ------- ------ ------- ------- ------
G&A $3,254 $3,921 $4,678 $5,413 $5,922 $6,141 $6,152
Operating Profit $1,426 $5,956 $8,118 $12,504 $16,240 $17,338 $18,933
Product Eng, Holly
Sales $200 $200 $200 $200 $200 $200 $200
Matl 50 50 50 50 50 50 50
Pay $1,100 $1,200 $1,300 $1,400 $1,600 $1,600 $1,800
other 100 100 250 250 250 250 250
Profit ($1,050) ($1,150) ($1,400) ($1,500) ($1,700) ($1,700) ($1,900)
Product Eng, Holland
Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0
supplies 325.5 341.8 358.9 376.8 395.6 415.4 436.2
Pay 2534.6 2914.8 3352.0 3854.8 4433.0 5098.0 5862.7
bonus 64.4 74.1 85.2 97.9 112.6 129.5 149.0
travel 132.0 145.2 159.7 175.7 193.3 212.6 233.8
depreciation 172.7 190.0 209.0 229.9 252.9 278.1 305.9
other 30.8 33.9 37.3 41.0 45.1 49.6 54.6
Corporate 65.6 68.9 72.4 76.0 79.8 83.8 87.9
Rent 217.8 217.8 217.8 217.8 217.8 217.8 217.8
Profit -3543.4 -3986.4 -4492.1 -5069.9 -5730.1 -6484.8 -7347.9
Advanced Dev, Tucson
Sales
supplies 31.5 33.1 34.7 36.5 38.3 40.2 42.2
Pay 347.6 382.4 420.6 462.7 508.9 559.8 615.8
bonus 11.0 12.1 13.3 14.6 16.1 17.7 19.5
travel 77.0 84.7 93.2 102.5 112.7 124.0 136.4
other 17.6 19.4 21.3 23.4 25.8 28.3 31.2
Corporate 1.6 1.7 1.7 1.8 1.9 2.0 2.1
Rent 42.0 42.0 42.0 42.0 42.0 42.0 42.0
Profit -528 -575 -627 -683 -746 -814 -889
Net Profit,
BT & Interest (3,696) 244 1,599 5,250 8,064 8,339 8,796
Income taxes
40.00% 0 98 640 2100 3226 3336 3518
Net Income after
taxes before Int. (3696) 147 959 3150 4838 5003 5278
Receivables 1430 3013 4050 5808 7208 7625 8125
Equipment Purchases
(building not included) 100 1500 1500 1500 1200 1000 1000
Cash Required
(assuming operating
cash = 20% sales growth,
before interest +
depreciation) 5165 5107 3044 2697 37 -2885 -3161
Cum Cash Required
(before current year
interest) 12233 17341 20385 23082 23119 20234 17073
Interest 7.00% 856 1214 1427 1616 1618 1416 1195
Total Cash Required
(Cum, with interest) 13090 18555 21812 24698 24737 21651 18268
Net Income after
taxes and interest (4553) (1067) (467) 1534 3220 3587 4083
Assumptions: 1 Operating capital requirement assumed to be 20% of sales increase
2 Interest to Donnelly at 7%
3 Corporate rent at $18,150 per month fixed
4 Building expansion and/or purchase not included in projection
5 Donnelly or bank funds operating capital requirements
6 Lost compass business at Ford Truck for 99MY
7 Pick up Gulf States Toyota comp/temp for 99MY
8 Retain compass at Wixom for 99MY
9 In 2000MY go to MiniPod compass integrated into mirror
10 No cost included for CEL acquisition or overhead
11 No cost included for European engineering
12 $1,000,000 invoice received from Donnelly included in 1998
13 1998 does not reflect the short fiscal year as DE adopts the Donnelly fiscal year
</TABLE>
<PAGE>
EXHIBIT 10.23
August 17, 1998
Mr. Scott Reed
2962 Eagle Dr.
Rochester Hills, Mi. 48309
Dear Scott,
I am very pleased that you have agreed to accept the position of Senior Vice
President, Chief Financial Officer for Donnelly Corporation (Donnelly)
consistent with the terms we verbally agreed to, as summarized below, and
contingent upon Board support on August 21, 1998. We believe you bring
outstanding skills to our company and that you will find Donnelly an excellent
environment in which to invest your career. We look forward to working with you.
You will report to the CEO of Donnelly and will be an officer of the company.
You will work from our home office located in Holland, Michigan a minimum of 4
days per week, with 1 day a week in East Michigan. The details of your offer are
as follows:
A base salary of $22,916.66 per month. This equates to an annual salary of
$275,000. This base compensation was determined by evaluating the base
salary of the top financial executives in $1billion organizations and as
such represents our strong interest for you to join Donnelly. Our policy is
to review salaries for all officers annually after the close of our fiscal
year. You will be eligible for review in August 1999. The Board takes
action regarding officers salaries in August of each year.
An annual bonus incentive will be provided which is linked to the
achievement of specific business and individual goals. Achieving plan
performance would result in a bonus of approximately 40% of base salary.
Exceptional performance over plan goals can earn a bonus of up to 50% of
base salary. I will meet with you shortly after you start to establish
goals for the fiscal year 98/99 to allow you to earn up to the maximum
bonus potential for this fiscal year. Since you were not part of the
planning process for fiscal year 98/99, and you will not have the full year
to influence performance, you will be paid a one time, guaranteed, minimum
incentive bonus of $ 75,000 paid in August 1999.
<PAGE>
Scott Reed
August 17, 1998
Page 2
To demonstrate our interest in you joining Donnelly, you will be given a
lump sum gross signing bonus of $125,000 payable within 30 days of your
start of employment at Donnelly.
It is customary for Donnelly to consider stock options for executives
annually, based on competitive market comparisons and on individual
contributions made to the business. The initial stock option grants will be
priced at the date of the start of your employment. Subsequent grants will
be priced as of the date granted. Stock options are to be exercised after
one year of receiving them and no later than ten years of receiving them.
A special one time consideration is being offered to you to recognize the
adjustments that will be required in making a transition to Donnelly. This
one-time consideration will include an initial stock offering of 15,000
shares upon your start at Donnelly. These shares are subject to approval by
the Donnelly Stock Option Committee and will be governed by the terms of
the Donnelly plans for these programs.
You will receive a company car valued at approximately $40,000. Car
expenses will be covered for insurance, maintenance, and business fuel
expenses. You will be responsible for the tax consequences of the personal
use portion of the car.
Donnelly offers a very comprehensive package of group health insurance,
group life insurance, 401K, employee stock purchase, and retirement plans.
Vacation is six weeks. You will be provided with descriptions of all plans
and I believe you will find our flexible benefit options very strong in
protecting you and your dependents.
If you decide to relocate to West Michigan our relocation package will
include:
Temporary living expenses to cover the cost of an apartment or
equivalent temporary condo/townhouse for up to six months in West
Michigan. You will be eligible for this benefit at the start of your
employment. These costs will be "grossed-up" for taxes.
Closing costs on a new home in West Michigan . These costs will be
"grossed up" for tax purposes.
<PAGE>
Scott Reed
August 17, 1998
Page 3
Moving of your household goods to West Michigan. Donnelly has
contracts with two national carriers and can select the carrier for
you. These reimbursements are not reported as taxable income to the
IRS
Full buyout option via a third-party relocation company for the sale
of your home in East Michigan. The buyout price is based on the
average value of two independent appraisals. Once you receive the
buyout price you will have 60 days to get a bonafide offer exceeding
the buyout price or accept the buyout price. The tax consequences of
selling the home are covered in the buyout option.
In the event you are separated from Donnelly for any reason other than
cause, we will provide a severance plan that provides 12 months of base
salary and benefits subject to a non-compete agreement in our specific area
of business and closure on a separation agreement.
In the event that you choose to leave Donnelly, you will receive all
benefits for which you are vested per plan descriptions. Also, if you
choose to leave Donnelly within the first two years of your start date, you
agree to reimburse Donnelly, on a prorated basis, the signing bonus of
$125,000, and any relocation costs paid to you or on your behalf by
Donnelly (i.e. if you elect to leave Donnelly employment after one year you
would reimburse Donnelly one half of these costs).
In the event that there is a change in control regarding ownership of the
company, all stock options will be vested consistent with the plan
description.
It is important that you meet the Board of Directors on August 21, 1998
before everything is finalized. I do not anticipate any issues and expect
that both you and the Board will feel positive about moving forward.
<PAGE>
Scott Reed
August 17, 1998
Page 4
As the company continues to grow and develop, part of our corporate mission is
to double in shareholder value every five years, and our current five-year
outlook is consistent with achieving this level of performance. Donnelly has
grown at a compounded annual rate in excess of 15% during the past 15 years and
we believe the company is positioned for strong growth in the future. With your
proven skills to shape strong financial performance and improved earnings, the
prospects for the growth of your estat through stock options should be strong.
Our program for deferred compensation should also prove to be an attractive tool
for enhancing your long-term financial position.
All matters not specified here will be handled in accordance with company
policy. We will provide you with all appropriate policies and plan descriptions
forthrightly. I believe that you will find all of them very competitive and
supportive.
Please review this letter and let me know as quickly as possible if it reflects
what we discussed. If you are in agreement to the terms, please sign and return
this letter by August 20, 1998, to complete the formal hiring process. As
discussed this offer is contingent upon the approval of the Donnelly Board of
Directors and upon you successfully passing a pre-employment physical and drug
screen. Your start date will be September 1, 1998.
On behalf of myself, the Board of Directors, the senior management team, and
others at Donnelly you met, we look forward to having you join our company. I am
convinced that you will help us make this an even stronger company and I am
personally looking forward to working with you.
Sincerely,
DONNELLY CORPORATION
Dwane Baumgardner
Chairman of the Board
Scott Reed Date
<PAGE>
EXHIBIT 21
SCHEDULE OF AFFILIATES
AS OF JUNE 27, 1998
<TABLE>
PERCENTAGE OF
AFFILIATE INCORPORATION OWNERSHIP
<S> <C> <C>
DONNELLY MIRRORS LIMITED ORGANIZED UNDER THE 100%
LAWS OF THE REPUBLIC
OF IRELAND
DONNELLY VISION SYSTEMS ORGANIZED UNDER THE 100%
EUROPE LIMITED LAWS OF THE REPUBLIC
OF IRELAND
DONNELLY DE MEXICO, S.A. DE C.V. ORGANIZED UNDER THE 100%
LAWS OF MEXICO
DONNELLY EUROGLAS SYSTEMS, ORGANIZED UNDER THE 100%
S.A.R.L. LAWS OF FRANCE
DONNELLY HOLDING GmbH ORGANIZED UNDER THE 100%
LAWS OF GERMANY
DONNELLY INTERNATIONAL, INC. MICHIGAN 100%
DONNELLY TECHNOLOGY, INC. MICHIGAN 100%
DONN-TECH INC. MICHIGAN 100%
DONNELLY RECEIVABLES CORPORATION MICHIGAN 100%
DONNELLY OPTICS CORPORATION MICHIGAN 100%
INFORMATION PRODUCTS, INC. MICHIGAN 100%
DONNELLY SCANDINAVIA A.B. ORGANIZED UNDER THE 100%
LAWS OF SWEDEN
VARITRONIX EC MIRRORS, LTD. MICHIGAN 100%
DONNELLY HOHE VERWALTUUNGS GmbH ORGANIZED UNDER THE 74%
LAWS OF GERMANY
DONNELLY HOHE ESPANA, S.A. ORGANIZED UNDER THE 68.59%*
LAWS OF SPAIN
DONNELLY HOHE GmbH & CO. KG ORGANIZED UNDER THE 66.7%
LAWS OF GERMANY
SHANGHAI DONNELLY FU HUA WINDOW ORGANIZED UNDER THE 50%
SYSTEMS COMPANY, LTD. LAWS OF CHINA
SHUNDE DONNELLY ZHEN HUA ORGANIZED UNDER THE 50%
AUTOMOTIVE SYSTEMS CO. LTD. LAWS OF CHINA
DONNELLY YANTAI ELECTRONICS CO. LTD. ORGANIZED UNDER THE 50%
LAWS OF THE PEOPLES
REPUBLIC OF CHINA
VARITRONIX EC (MALAYSIA) SDN. BHD. MICHIGAN 50%
LEAR DONNELLY OVERHEAD SYSTEMS, L.L.C. MICHIGAN 50%
DONNELLY/ARTEB, LTDA ORGANIZED UNDER THE 50%
LAWS OF BRAZIL
VISION GROUP, PLC ORGANIZED UNDER THE 25.6%
LAWS OF SCOTLAND
DONNELLY ELECTRONICS, L.L.C. MICHIGAN 19%
KAM TRUCK COMPONENTS, INC. MICHIGAN 19%
</TABLE>
* 21.8% OWNED DIRECTLY BY DONNELLY AND 70.2% OWNED BY DONNELLY HOHE GmbH & CO.
KG (66.7% OF THE EQUITY OF WHICH IS OWNED BY DONNELLY)
<PAGE>
Exhibit 23
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference of our reports dated August
6, 1998, relating to the combined consolidated financial statements and schedule
of Donnelly Corporation appearing in the corporation's annual report on Form
10-K for the year ended June 27, 1998, in that corporation's previously filed
Form S-8 Registration Statements for that corporation's 1987 Stock Option Plan
(Registration No. 33-26555), 1987 Employees' Stock Purchase Plan (Registration
No. 33-34746) and Non- Employee Directors' Stock Option Plan (Registration No.
33-55499).
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
September 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from June 29,
1996 Donnelly Corporation financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 5,628
<SECURITIES> 0
<RECEIVABLES> 92,972
<ALLOWANCES> 0
<INVENTORY> 44,146
<CURRENT-ASSETS> 166,777
<PP&E> 295,119
<DEPRECIATION> 126,214
<TOTAL-ASSETS> 377,885
<CURRENT-LIABILITIES> 114,312
<BONDS> 123,706
1,011
0
<COMMON> 531
<OTHER-SE> 101,740
<TOTAL-LIABILITY-AND-EQUITY> 377,885
<SALES> 763,311
<TOTAL-REVENUES> 763,311
<CGS> 632,679
<TOTAL-COSTS> 632,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,347
<INCOME-PRETAX> 19,179
<INCOME-TAX> 5,503
<INCOME-CONTINUING> 19,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,009
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
</TABLE>
