SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended January 2, 1999 Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-0493110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 West Third Street, Holland, Michigan 49423-2813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 786-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes / X / No
5,869,865 shares of Class A Common Stock and 4,223,233 shares of Class B
Common Stock were outstanding as of January 31, 1999.
<PAGE>
DONNELLY CORPORATION
INDEX
Page
Numbering
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
* January 2, 1999 and June 27, 1998 3
Condensed Combined Consolidated Statements of Income
* Three and six months ended January 2, 1999 and
December 27, 1997 4
Condensed Combined Consolidated Statements of Cash Flows
* Six months ended January 2, 1999 and
December 27, 1997 5
Notes to Condensed Combined Consolidated Financial
Statements 6-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18-19
Item 4. Submission of Matters to a Vote of Security Holders 19-20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
January 2, June 27,
In thousands 1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,459 $ 5,628
Accounts receivable, less allowance
of $1,003 and $1,095 72,531 92,972
Inventories 45,548 44,146
Prepaid expenses and other current assets 26,475 24,031
Total current assets 160,013 166,777
Property, plant and equipment 317,532 295,119
Less accumulated depreciation 141,160 126,214
Net property, plant and equipment 176,372 168,905
Investments in and advances to affiliates 31,772 19,590
Other assets 24,497 22,613
Total assets $ 392,654 $ 377,885
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 95,939 $ 77,595
Other current liabilities 38,195 36,717
Total current liabilities 134,134 114,312
Long-term debt, less current maturities 112,155 123,706
Deferred income taxes and other liabilities 38,840 35,831
Total liabilities 285,129 273,849
Minority interest 900 754
Preferred stock 531 531
Common stock 1,013 1,011
Other shareholders' equity 105,081 101,740
Total shareholders' equity 106,625 103,282
Total liabilities and shareholders' equity $ 392,654 $ 377,885
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
---------------------- ---------------------
In thousands, Jan 2, Dec 27, Jan 2, Dec 27,
Except share data 1999 1997 1999 1997
<S> <C> <C> <C> <C>
Net sales $ 239,093 $ 194,800 $ 428,696 $ 359,976
Cost of sales 204,004 161,220 366,846 298,423
Gross profit 35,089 33,580 61,850 61,553
Operating expenses:
Selling, general and
Administrative 21,997 17,498 40,585 32,677
Research and development 9,782 9,704 19,067 19,408
Operating income 3,310 6,378 2,198 9,468
Non-operating (income) expenses:
Interest expense 2,172 2,290 4,182 4,694
Interest income (181) (166) (352) (277)
Royalty income (159) (170) (266) (272)
Gain on sale of equity investment (368) (4,598) (368) (4,598)
Other (income) expense, net (101) (175) (273) 12
Income (loss) before taxes
on income 1,947 9,197 (725) 9,909
Taxes on income (credit) 386 3,733 (654) 3,748
Income (loss) before minority
Interest and equity earnings 1,561 5,464 (71) 6,161
Minority interest in net (income)
loss of subsidiaries (275) (111) (42) 234
Equity in income (loss) of
affiliated companies 165 (184) (426) (240)
Net income (loss) $ 1,451 $ 5,169 $ (539) $ 6,155
Per share of common stock:
Basic net income (loss)
per share $ 0.14 $ 0.52 $ (0.06) $ 0.62
Diluted net income (loss)
per share $ 0.14 $ 0.51 $ (0.06) $ 0.61
Cash dividends declared $ 0.10 $ 0.10 $ 0.20 $ 0.20
Average common shares
Outstanding 10,086,514 9,940,564 10,082,230 9,916,545
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
----------------------
Jan 2, Dec 27,
In thousands 1999 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (539) $ 6,155
Adjustments to reconcile net income to net cash
from (for) operating activities:
Depreciation and amortization 13,125 12,034
Loss on sale of property and equipment 151 71
Gain on sale of affiliate stock (368) (4,598)
Deferred pension cost and postretirement benefits 3,266 2,709
Deferred income taxes (216) (1,015)
Minority interest loss (254) (569)
Equity in losses of affiliated companies 426 240
Changes in operating assets and liabilities:
Sale of accounts receivable 4,651 498
Accounts receivable 16,646 (3,669)
Inventories (327) (3,012)
Prepaid expenses and other current assets (2,349) (2,362)
Accounts payable and other current liabilities 16,915 (11,183)
Other 1,443 (2,555)
Net cash from (for) operating activities 52,570 (7,256)
INVESTING ACTIVITIES
Capital expenditures (26,466) (22,413)
Proceeds from sale of property and equipment 486 435
Investments in and advances to equity affiliates (3,229) (138)
Repayments on advances to equity affiliates - 248
Proceeds from sale of affiliate stock 1,069 11,067
Other (424) (322)
Net cash for investing activities (28,564) (11,123)
FINANCING ACTIVITIES
Proceeds from long-term debt - 17,711
Repayments on long-term debt (12,547) (430)
Common stock issuance 297 800
Dividends paid (2,036) (2,006)
Other - (218)
Net cash from (for) financing activities (14,286) 15,857
Effect of foreign exchange rate changes on cash 111 (263)
Increase (decrease) in cash and cash equivalents 9,831 (2,785)
Cash and cash equivalents, beginning of period 5,628 8,568
Cash and cash equivalents, end of period $ 15,459 $ 5,783
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
January 2, 1999
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited Condensed Combined Consolidated Financial
Statements have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended January 2, 1999, should not be considered indicative of
the results that may be expected for the year ended July 3, 1999. The
Combined Consolidated Balance Sheet at June 27, 1998, has been taken from
the audited Combined Consolidated Financial Statements and Condensed. The
accompanying Condensed Combined Consolidated Financial Statements and
footnotes thereto should be read in conjunction with the Company's annual
report on Form 10-K for the year ended June 27, 1998. Certain
reclassifications have been made to prior year data to conform to the
current presentation and had no effect on net income reported for any
period.
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. Fiscal 1998 included 52 weeks and fiscal 1999 will
include 53 weeks. Accordingly, the three- and six-month periods ended
January 2, 1999 and December 27, 1997, included 14 and 27 weeks and 13 and
26 weeks, respectively. All year and quarter references relate to the
Company's fiscal year and fiscal quarters, unless otherwise stated.
NOTE B --- INVENTORIES
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<CAPTION>
Inventories consist of:
(In thousands) January 2, June 27,
1999 1998
<S> <C> <C>
Finished products and work in process $ 18,509 $ 16,987
Raw materials 27,039 27,159
$ 45,548 $ 44,146
</TABLE>
NOTE C---EARNINGS PER SHARE
Effective December 27, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which
replaces the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options
and convertible securities. Diluted earnings per share is computed
similarly to fully diluted earnings per share.
<PAGE>
The following table sets forth the computation of basic and diluted earnings
per share for each period reported:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ---------------------
In thousands, Jan 2, Dec 27, Jan 2, Dec 27,
except share data 1999 1997 1999 1997
<S> <C> <C> <C> <C>
Net income (loss) $ 1,451 $ 5,169 $ (539) $ 6,155
Less: Preferred stock
Dividends (10) (10) (20) (20)
Income (loss) available
to common stockholders $ 1,441 $ 5,159 $ (559) $ 6,135
Weighted-average shares 10,087 9,941 10,082 9,917
Plus: Effect of dilutive
stock options 34 154 147
Adjusted weighted-average
shares 10,121 10,095 10,082 10,064
Basic earnings (loss) per
share $ .14 $ 0.52 $ (.06) $ 0.62
Diluted earnings (loss) per
share $ .14 $ 0.51 $ (.06) $ 0.61
</TABLE>
NOTE D---COMPREHENSIVE INCOME
Effective for the quarter ended September 27, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This Statement requires that all
components of comprehensive income and total comprehensive income be
reported in one of the following: a statement of income and comprehensive
income, a statement of comprehensive income, or a statement of shareholders'
equity. Comprehensive income is comprised of net income, and all changes to
shareholders' equity, except those due to investments by owners and
distributions to owners.
Comprehensive income consists of the following (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ---------------------
In thousands, Jan 2, Dec 27, Jan 2, Dec 27,
except share data 1999 1997 1999 1997
<S> <C> <C> <C> <C>
Net income (loss) $ 1,451 $ 5,169 $ (539) $ 6,155
Other comprehensive income (loss):
Foreign currency translation
and transaction adjustments 671 167 2,405 (1,168)
Unrealized gain on securities
available for sale 3,216 0 3,216 0
Comprehensive income $ 5,338 $ 5,336 $ 5,082 $ 4,987
</TABLE>
<PAGE>
Translation and transaction adjustments were recorded directly in a
component of shareholders' equity in the accompanying Condensed Combined
Consolidated Balance Sheets. These resulted from foreign currency
denominated assets and liabilities of the Company's foreign subsidiaries, as
well as foreign currency denominated long-term advances to affiliates and
related fluctuation in exchange rates. The Company's investment in Vision
Group plc ("Vision Group") is accounted for in accordance with the
provisions of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," and reported at fair value, with unrealized gains and
losses reported directly in a component of shareholders' equity in the
accompanying Condensed Combined Consolidated Balance Sheet (see also Note
F). Total accumulated other comprehensive income totaled ($2.5) million and
($8.1) million at January 2, 1999 and June 27, 1998, respectively.
NOTE E---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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<CAPTION>
Six Months Ended
(In thousands) January 2, December 27,
1999 1997
<S> <C> <C>
Cash paid during the period for:
Interest $ 4,806 $ 5,244
Income taxes 1,202 480
Non-Cash financing and investing activities:
Transfer of non-cash net assets to $ 2,617 $ 7,942
affiliates (See Note F)
Transfer of interest bearing note from $ 5,000 $ --
affiliate (See Note F)
</TABLE>
NOTE F---INVESTMENTS IN AND ADVANCES TO AFFILIATES
Effective January 4, 1999, the Company merged its wholly-owned subsidiary,
Donnelly Optics Corporation ("Optics") into Optics Acquisition, Inc.
("Acquisition"), a wholly-owned subsidiary of Applied Image Group, Inc.
("AIG"), a New York Corporation. The surviving corporation in this merger
was Optics and its name was changed to Applied Optics, Inc. ("AOI"). Optics
designed and manufactured injection molded optical lenses for the
automotive, computer and medical industries. Applied Image Group develops
and manufactures opto-imaging products for the lighting, automotive, optical
and photonics industries. As a result of this transaction, the assets and
liabilities of Optics have been removed from the Company's financial
statements as of December 1, 1998. The financial results of Optics are no
longer included in the Company's financial statements after December 1,
1998. The Company transferred the net assets of Optics for a 13% equity
interest in AIG and a $5 million convertible note.
In the second quarter of 1999, the Company sold 5.7% of its holding in
Vision Group resulting in an insignificant gain. The Company now owns 19.9%
of the common stock of Vision Group, and accounts for its investment in
accordance with SFAS 115. Under this method, the Company was required to
write up this investment to its market value, which resulted in an
unrealized gain on securities available for sale of $4.9 million during the
three-month period ended January 2, 1999. Fair value and carrying value of
the Company's investment in Vision Group approximated $7.4 million and $2.4
million, respectively, at January 2, 1999. During December of 1998,
Donnelly committed its remaining shares in the
<PAGE>
outstanding stock of Vision Group to the tender offer made by
STMicroelectronics to acquire all of the outstanding stock of Vision Group.
This sales transaction is expected to be consummated in the third quarter of
1999.
On November 3, 1997, the Company formed Lear Donnelly Overhead Systems,
L.L.C. ("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 of the Company
from period to period. 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 by the
Company under the equity method based on one-half the profitability of Lear
Donnelly. This agreement results in the dilution of gross profit and
operating margins as a percentage of sales for the periods presented.
<PAGE>
ITEM 2. DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER REPORT
FOR THE SIX MONTHS ENDED JANUARY 2, 1999
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 electrochromic mirrors, (v) whether the Company
successfully implements its 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. Fiscal 1998 included 52 weeks and fiscal 1999 will
include 53 weeks. Accordingly, the three- and six-month period ended
January 2, 1999 and December 27, 1997, included 14 and 27 weeks and 13 and
26 weeks, respectively. All year and quarter references relate to the
Company's fiscal year and fiscal quarters, unless otherwise stated.
Donnelly Hohe's fiscal year ends on May 31, and its fiscal quarters end on
August 31, November 30, February 28 and May 31. Accordingly, the Company's
Combined Consolidated Financial Statements as of or for a period ended on a
particular date include Donnelly Hohe's financial statements as of or for a
period ended approximately one month before that date. Accordingly, the
Company's financial statements for the period ended January 2, 1999,
consolidate Donnelly Hohe's financial statements for the period ended
November 30, 1998. All year and quarter references relate to the Company's
fiscal year and fiscal quarters, unless otherwise stated.
The Company's net sales and net income are subject to significant quarterly
fluctuations attributable primarily to production schedules of the Company's
major automotive customers. These same factors cause quarterly results to
fluctuate from year to year. The comparability of the Company's results on
a period to period basis may also be affected by the Company's formation of
new joint ventures, alliances, acquisitions, dispositions and substantial
investment in new product lines.
Effective January 4, 1999, the Company merged its wholly-owned subsidiary,
Donnelly Optics Corporation ("Optics") into Optics Acquisition, Inc.
("Acquisition"), a wholly-owned subsidiary of Applied Image Group, Inc.
("AIG"), a New York Corporation. The surviving corporation in this merger
was Optics and its name was changed to Applied Optics, Inc. ("AOI"). Optics
designed and
<PAGE>
manufactured injection molded optical lenses for the automotive, computer
and medical industries. Applied Image Group develops and manufactures opto-
imaging products for the lighting, automotive, optical and photonics
industries. As a result of this transaction, the assets and liabilities of
Optics have been removed from the Company's financial statements as of
December 1, 1998. The financial results of Optics are no longer included in
the Company's financial statements after December 1, 1998. The Company
transferred the net assets of Optics for a 13% equity interest in AIG and a
$5 million convertible note.
RESULTS OF OPERATIONS
Net sales in the second quarter of 1999 increased by 22.7% to $239.1
million, compared to $194.8 million for the second quarter of 1998. For the
six-month period, net sales were $428.7 million and $360.0 million for 1999
and 1998 respectively, an increase of 19.1%.
Net sales for the Company's North American operations increased by
approximately 11.3% and 22.2% in the second quarter and first half of 1999
compared to 1998, respectively. The increase was primarily due to programs
launched in 1998 running at full production volumes and new product
introductions in the modular window and interior trim product lines. North
American car and light truck build increased approximately 3% in the second
quarter of 1999 and was flat for the first half of 1999 compared to the same
periods last year. Net sales for the Company's European operations were
approximately 16.6% and 13.5% higher in the second quarter and six-month
period of 1999 compared to 1998 respectively. This was primarily due to the
launch of new electrochromic business and continued strong industry car
build.
The Company's gross profit margin for the second quarter of 1999 was 14.7%,
compared to 17.2% for the second quarter of 1998. For the six-month period
of 1999 and 1998, gross profit margins were 14.4% and 17.1%, respectively.
The Company's North American gross profit margins for the three- and six-
month periods were lower, compared to the same period in 1998, primarily due
to the formation of the Lear-Donnelly joint venture, which is 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, which
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. The Company's gross profit margins
in the first and second quarters of 1999 were unfavorably affected by
ongoing start-up losses at Donnelly Optics, the Company's wholly-owned
digital imaging operation in Tucson, Arizona, due to slower than anticipated
consumer acceptance of computer digital imaging products. This business was
merged into a new company in the second quarter of 1999, of which the
Company owns a 13% interest. Also, a favorable arbitration award in the
first quarter of 1998 offset excess costs related to visor programs and
improved margins slightly for the three- and six-month periods of 1998.
The Company's European gross profit margin improved in the second quarter
and first six months of 1999, as compared to 1998, primarily due to
improvements in Germany. Gross profit margins at the Company's operations
in Spain and France continue to remain strong, while gross profit margins in
Ireland were flat in the second quarter and first six months of 1999, as
compared to 1998.
<PAGE>
Selling, general and administrative expenses increased to 9.2% of net sales
in the second quarter of 1999, from 9.0% of net sales in the second quarter
of 1998, primarily due to higher expenses on resources to support the
introduction of new information systems and technology. Selling, general
and administrative expenses were 9.5% of net sales for the first six months
of 1999, compared to 9.1% for the same period last year.
Research and development expenses for the second quarter of 1999 were 4.1%
of net sales, compared to 5.0% of net sales for the second quarter of 1998
and were 4.4% and 5.4% of net sales for the first six months of 1999 and
1998, respectively. The Company expects future research and development
expenses to be lower than in the past, primarily due to the transfer of
direct expenses to support the interior trim and lighting business to the
Lear Donnelly joint venture, which is being accounted for under the equity
method.
The Company had operating income of $3.3 million and $6.4 million in the
second quarter of 1999 and 1998, respectively. For the first six months of
1999, the Company had an operating income of $2.2 million, a decrease of
$7.3 million, from an operating income of $9.5 million in 1998. The
Company's North American operating income was lower as a percent of sales
for the three- and six-month period, primarily due to losses associated with
the start-up of Donnelly Optics. Also contributing to the lower operating
income as a percent of sales was an unfavorable product mix and increased
administrative costs to support new information systems. A favorable
arbitration award offset excess costs on certain visor programs in the first
and second quarters of 1998 and improved margins slightly in the prior year.
The formation of the Lear Donnelly joint venture, which is accounted for
under the equity method, did not have a material impact on the Company's
operating margins for the period.
The Company's European operating income was up slightly in the second
quarter and down slightly for the comparable six-month period. Operating
variances in Germany and Ireland caused by manufacturing process
inefficiencies and new program start-up costs were offset by strong sales in
Europe and continued strong operational performance in Spain and France.
In September 1998, four members from the Company's senior management team
began extended assignments in Europe to bring greater speed and
effectiveness to the restructuring and turnaround particularly at operations
in Germany and Ireland.
Interest expense was $2.2 million in the second quarter of 1999, compared to
$2.3 million the previous year and $4.2 million and $4.7 million for the six
months of 1999 and 1998, respectively. Interest expense was lower primarily
due to favorable interest rates, compared to the same period last year.
In the second quarter of 1999, the Company sold 5.7% of its holding in
Vision Group, resulting in an insignificant gain. The Company now owns
19.9% of the common stock of Vision Group and accounts for its investment in
accordance with SFAS 115. Under this method, the Company was required to
write up this investment to its market value, which resulted in an
unrealized gain on securities available for sale of $4.9 million during the
three-month period ended January 2, 1999. Fair value and carrying value of
the Company's investment in Vision Group approximated $7.4 million and $2.4
million, respectively, at January 2, 1999. During December of 1998,
Donnelly committed its remaining shares in the outstanding stock of Vision
Group to the tender offer made by STMicroelectronics to acquire all of the
outstanding stock of Vision Group. This sales transaction is expected to be
consummated in the third quarter of 1999.
<PAGE>
The Company's effective tax rate for the three- and six-month periods in
1999 was 19.8% and 90.2%, respectively. The projected tax rate for fiscal
1999 is estimated to be between 30% to 32%. The higher rate is due to trade
tax benefits recognized on the operating losses at Donnelly Hohe.
Minority interest in net (income) loss of subsidiaries was ($0.3) million in
the second quarter of 1999, compared to ($0.1) million in the second quarter
of 1998 and ($0.0) million and $0.2 million in the first half of 1999 and
1998, respectively. Equity in earnings (losses) of affiliated companies was
$0.2 million in the second quarter of 1999 compared to ($0.2) million for
the same period in 1998 and ($0.4) million and ($0.2) million in the first
half of 1999 and 1998, respectively. The improvement in equity earnings
(losses) in the second quarter of 1999 is primarily related to the sale of
5.7% of the Company's shares in Vision Group and operational improvements at
the Company's joint venture in China.
During 1999, the Company continues to focus on implementing plans to improve
financial performance; however, the delays in implementing improvements in
Europe and the investments required for Donnelly Optics have placed pressure
on the financial performance of the Company. In September 1998, four
members from the Company's senior management team began extended assignments
in Europe to bring greater speed and effectiveness to the restructuring and
turnaround needed in Europe. This action combined with the merger of
Donnelly Optics into a new company, are expected to strongly support the
financial improvement initiative of the Company. In North America, the
Company's management has implemented an effort to re-focus functional groups
on best-in-class performance in terms of operational effectiveness and cost
efficiency. This initiative has led to setting productivity improvement
goals in North American administrative functions. The combination of these
efforts is focused on implementing the Company's financial performance
improvement initiative.
LIQUIDITY AND CAPITAL RESOURCES
The Company's $160 million multi-currency global revolving credit agreement
had borrowings against it of $41.8 million and $47.5 million in the
Company's Combined Consolidated Balance Sheets dated January 2, 1999, and
June 27, 1998, respectively. The Company's long-term borrowing decreased by
approximately $12 million from June 27, 1998 to January 2, 1999. The
Company's current ratio was 1.2 and 1.5 at January 2, 1999 and June 27,
1998, respectively. Working capital was $25.9 million at January 2, 1999,
compared to $52.5 million at June 27, 1998. These effects are primarily
attributable to the period end dates in accordance with the 53-week fiscal
year. Consequently, payments were received within this period from many of
the Company's customers who pay the Company on pre-established payment dates
ranging from the 25th to the 30th of each month.
Capital expenditures for the first six months of 1999 and 1998 were $26.5
and $22.4 million, respectively. Capital spending in 1999 is expected to be
higher compared to the previous year to support new business in
electrochromic mirrors, complete outside mirrors and modular windows and the
implementation of new manufacturing, distribution and administrative
information systems in North America.
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.
<PAGE>
Except for the Company's subsidiary in Mexico, the value of the Company's
long-term consolidated assets and liabilities located outside the United
States and income and expenses reported by the Company's foreign operations
may be affected by translation values of various foreign currencies. The
Company's primary foreign investments are in Germany, Ireland, Spain and
France. Translation gain and loss adjustments are reported as a separate
component of shareholders' equity. For the Company's subsidiary in Mexico,
whose functional currency is the United States Dollar, transaction and
translation gains or losses are reflected in net income for all accounts,
other than intercompany balances of a long-term investment nature, for which
the translation gains or losses are reported as a separate component of
shareholders' equity.
The Company utilizes interest rate swaps and foreign exchange contracts,
from time to time, to manage exposure to fluctuations in interest and
foreign currency exchange rates. The risk of loss to the Company in the
event of nonperformance by any party under these agreements is not material.
Recently Issued Accounting Standards
Effective for the quarter ended September 27, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, its components and
accumulated balances in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is
defined to include all changes in equity, except those resulting from
investments by owners and distributions to owners. The quarterly
information required by this disclosure has been included in Note D---
Comprehensive Income, in the Notes to Condensed Combined Consolidated
Financial Statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public
after the initial year of adoption. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers.
SFAS No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits," an amendment of SFAS's No. 87, 88, and 106,
revises the standards for employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or the
recognition of those plans.
SFAS Nos. 131 and 132 are effective for financial statements for fiscal
years beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management has not yet fully evaluated
the impact, if any, they may have on future financial statement disclosures;
however, results of operations and financial position will be unaffected by
implementation of these new standards.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," amends SFAS Nos. 52 and 107 and supersedes SFAS Nos. 80, 105
and 119. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure
<PAGE>
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does
not expect the implementation of this new standard to have a material impact
on results of operations or financial position of the Company.
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and requires certain costs incurred to be expensed or
capitalized depending on the stage of its development and nature. This SOP
is effective for fiscal years beginning after December 15, 1998. The
Company's current accounting policy complies with this Statement. Results
of operations and financial position of the Company will be unaffected by
this new standard.
SOP 98-5, "Reporting on Costs of Start-Up Activities," requires costs of
start-up activities and organization costs to be expensed as incurred. This
Statement of Position is effective for fiscal years beginning after December
15, 1998. Management has not fully evaluated the impact of this standard on
results of operations and financial position of the Company.
No other recently issued accounting standards are expected to have a
material impact on the Company.
Year 2000 Data Conversion
The year 2000 issue is the result of computer programs having been written
using two digits, rather than four, to define the applicable year. Any of
the Company's computers, computer programs, manufacturing and administration
equipment or products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the
Company's systems or equipment that have date-sensitive software use only
two digits, system failures or miscalculations may result causing
disruptions of operations, including among other things, a temporary
inability to process transactions or send and receive electronic data with
third parties or engage in similar normal business activities.
During 1997, the Company formed an ongoing internal review team to address
the Year 2000 issue that encompasses operating and administrative areas of
the Company. A team of the Company's global professionals has been engaged
in a process to work with Company personnel to identify and resolve
significant Year 2000 issues in a timely manner. In addition, executive
management regularly monitors the status of the Company's Year 2000
remediation plans. The process includes an assessment of issues and
development of remediation plans, where necessary, as they relate to
internally-used software, computer hardware and use of computer applications
in the Company's manufacturing processes and products. In addition, the
Company is engaged in assessing the Year 2000 issue with suppliers.
The assessment process has been completed at the Company's North American
and European operations. In addition, the Company has initiated formal
communications with its suppliers and large customers in North America and
Europe to determine the extent to which the Company is vulnerable to third-
party failure to remediate their own Year 2000 issues.
The Company's operations in North America are in the process of both
replacing their existing manufacturing, distribution and administrative
applications with new software which is Year 2000 compliant, as well as
making their current legacy systems Year 2000 compliant. 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
<PAGE>
accelerated the plans to replace these systems because of the Year 2000
issue. A contingency plan has been developed which includes continuing use
of current manufacturing and distribution software, which will be Year 2000
compliant by summer.
In Europe the Company has completed the remediation process for internal
manufacturing, distribution and administration systems in Ireland and Spain,
and is expected to complete the process in France and Germany by late
summer. The cost of the remediation process is expected to be less than $3
million.
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 project costs attributable to the
purchase of new software to meet future industry requirements will be
capitalized. The total remaining Year 2000 project cost, anticipated to be
less than $3 million, will be expensed as incurred over the next nine to
twelve months.
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.
Euro Conversion
Effective January 1, 1999, eleven of fifteen member countries of the
European Union ("EU") established permanent rates of exchange between the
members' national currency and a new common currency, the "euro." In this
first phase, the euro is available for noncash transactions in the monetary,
capital, foreign exchange and interbank markets. National currencies will
continue to exist as legal tender and may continue to be used in commercial
transactions until the euro currency is issued in January 2002 and the
participating members' national currency is withdrawn by July 2002. The
Company's significant European operations are all located in member
countries participating in this monetary union.
The Company created an internal panEuropean cross functional team, as well
as internal teams, at each operation affected by the change to address
operational implementation issues and investigate strategic opportunities
due to the introduction of the euro. The Company has established action
plans that are currently being implemented to address the euro's impact on
information systems, currency exchange risk, taxation, contracts,
competition and pricing. The Company anticipates benefiting from the
introduction of the euro through a reduction of foreign currency exposure
and administration costs on transactions within Europe and increased
efficiency in centralized European cash management. The Company does not
presently expect that the introduction and use of the euro will materially
affect the Company's foreign exchange hedging activities or the Company's
use of derivative instruments. Any costs associated with the introduction
of the euro will be expensed as incurred. The Company does not believe that
the introduction of the euro will have a material impact on the results of
operations or financial position of the Company.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign currency
exchange primarily in its cash, debt and foreign currency transactions. The
Company holds derivative instruments, including interest rate swaps and
forward foreign currency contracts. Derivative instruments used by the
Company in its hedging activities are viewed as risk management tools and
are not used for trading or speculative purposes. Analytical techniques are
used to manage and monitor foreign exchange and interest rate risk and
include market valuation. The Company believes it is, to a lesser degree,
subject to commodity risk for price changes that relate to certain
manufacturing operations that utilize raw commodities. The Company manages
its exposure to changes in those prices primarily through its procurement
and sales practices. This exposure is not considered material to the
Company.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the 1998 Annual Report, Summary of Significant
Accounting Policies in the Notes to the Combined Consolidated Financial
Statements. Additional information relating to financial instruments and
debt is included in Note 9 - Financial Instruments and Note 7 - Debt and
Other Financing Arrangements of the Company's 1998 Annual Report.
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 partially
counterbalance 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: Brazilian reals, British
pounds, French francs, Irish punts, Japanese yen, Mexican pesos and Spanish
pesetas. The fair value of the foreign currency contracts outstanding has
been immaterial each of the last two years.
The Company's cash position includes amounts denominated in foreign
currencies. The Company manages its worldwide cash requirements considering
available funds among its subsidiaries and the cost effectiveness with which
these funds can be accessed. The repatriation of cash balances from certain
of the Company's affiliates could have adverse tax consequences; however,
those balances are generally available without legal restrictions to fund
ordinary business operations. The Company has and will continue to transfer
cash from those affiliates to the parent and to other international
affiliates when it is cost effective to do so.
The Company manages its interest rate risk in order to balance its exposure
between fixed and variable rates, while attempting to minimize interest
costs. Approximately half of the Company's long-term debt is fixed and an
additional $30 million is effectively fixed through interest rate swaps.
<PAGE>
See the Company's Form 10-K for the fiscal year ending June 27, 1998, Item
3, for quantitative disclosures about market risk as of June 27, 1998.
There have been no material changes in the nature of the market risk
exposures facing the Company since June 27, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 21, 1997, Midwest Manufacturing Holdings, L.L.C. ("Midwest")
filed a lawsuit against the Company in Cook County, Illinois Circuit Court
with respect to terminated discussions regarding the possibility of
Midwest's acquisition of the Company's Information Products business. The
litigation was removed to the U.S. District Court for the Northern District
of Illinois. Midwest alleges that a verbal agreement to purchase the
Information Products business had been reached, and has filed its lawsuit in
an attempt to compel the Company to proceed with the sale or to pay Midwest
damages. On August 28, 1997, the court granted the Company's motion to
dismiss one of three counts and on February 5, 1998, the court granted the
Company's motion for summary judgment on the remaining two counts. Midwest
then appealed the court's decision to the U.S. Seventh Circuit Court of
Appeals. While the appeal was pending, on October 7, 1998, the U.S.
District Court for the Northern District of Illinois vacated its earlier
judgment and ruling on jurisdictional grounds. The case was remanded to the
Illinois Circuit Court of Cook County where the litigation is now pending.
Management believes that the claim by Midwest will be resolved without a
material effect on the Company's financial condition or results of
operations and liquidity.
On February 10, 1998, the Company filed a patent infringement action,
Donnelly Corporation v. Britax Rainsfords, Inc., which is pending in the
United States District Court for the Western District of Michigan. The
lawsuit alleges that the production and sale by Britax of rearview mirrors
incorporating a security light infringes on a Company patent. The Company
seeks an injunction against Britax, as well as unspecified damages. Britax
has denied infringement and asserts that the Company's patent is invalid and
unenforceable. Britax has filed a motion for summary judgment seeking to
have the lawsuit dismissed without prejudice on the basis that there is no
justifiable case or controversy. This motion is currently pending. 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 Shunde-Ronqui Zhen Hua Automotive Parts Plant, a Chinese
company, 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. The
Company has commenced 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.
<PAGE>
On May 12, 1998, Metagal Industria E Cornercio Ltda (Metagal) 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.
On October 6, 1998, the Company filed a complaint against Metagal in the
U.S. District Court for the Western District of Michigan. The lawsuit
alleges that the production and sale by Metagal of certain automotive
rearview mirrors incorporating lights infringes one of the Company's
patents. The Company seeks an injunction against Metagal, as well as
unspecified damages. Metagal has denied infringement and asserts that the
Company's patent is invalid. The parties have recently agreed that this
lawsuit will be transferred to the Eastern District of Michigan, where
Metagal's declaratory judgment action described above is pending. The
Company believes that this litigation will not have a material adverse
effect on the Company's financial condition 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 VOTE OF SECURITY HOLDERS
At the Annual Shareholders Meeting held October 16, 1998, the shareholders
voted on various proposals presented in the Company's 1998 definitive proxy
statement. The results of the votes follow:
<TABLE>
<CAPTION>
I. Proposal to elect ten (10) directors, each for a term of one year:
Class A Common Stock For Withheld Broker Non-Vote
<S> <C> <C> <C>
John A. Borden 5,191,676 50,329 0
R. Eugene Goodson 5,195,609 46,396 0
Donald R. Uhlmann 5,195,700 46,305 0
Class B Common Stock
Dwane Baumgardner 34,067,140 146,220 0
Arnold F. Brookstone 34,067,140 146,220 0
B. Patrick Donnelly, III 34,067,140 146,220 0
Joan E. Donnelly 34,067,140 146,220 0
Thomas E. Leonard 34,067,140 146,220 0
Gerald T. McNeive 34,067,140 146,220 0
Rudolph B. Pruden 34,067,140 146,220 0
</TABLE>
2. A proposal to approve the Donnelly Corporation 1998 Employee Stock
Option Plan (the "Option Plan"). The proposal was carried and the Option
Plan was approved with 37,419,254 votes being cast in favor, 1,136,007 votes
being cast against and 750,812 of broker non-votes.
<PAGE>
3. A proposal to approve the Donnelly Corporation 1998 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The proposal was carried and the
Stock Purchase Plan was approved with 38,168,513 votes being cast in favor,
387,461 votes being cast against and 750,812 of broker non-votes.
4. A proposal to approve the First Amendment to the Donnelly Corporation
Non-employee Stock Option Plan (the "Amendment"). The proposal was carried
and the Amendment was approved with 38,136,687 votes being cast in favor,
408,351 votes being cast against and 750,812 of broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - 27 FINANCIAL DATA SCHEDULES
(b) REPORTS ON FORM 8-K
The Registrant filed Form 8-K, dated January 4, 1999, which has subsequently
been amended. The filings included an Agreement and Plan of Merger among
Applied Image Group, Inc., Optics Acquisition, Inc., Donnelly Optics
Corporation and Bruno Glavich and pro forma financial statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: February 16, 1999 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
Chairman, Chief Executive Officer, and
President
Date: February 16, 1999 /s/ Scott E. Reed
Scott E. Reed
Senior Vice President, Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from January 2,
1999 Donnelly Corporation financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-END> JAN-2-1999
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<RECEIVABLES> 72,531
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<INVENTORY> 45,548
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<DEPRECIATION> 141,160
<TOTAL-ASSETS> 392,654
<CURRENT-LIABILITIES> 134,134
<BONDS> 112,155
0
531
<COMMON> 1,013
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<TOTAL-LIABILITY-AND-EQUITY> 392,654
<SALES> 428,696
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<CGS> 366,846
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<INCOME-PRETAX> (725)
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</TABLE>
