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 July 3, 1999
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 (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
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 $99,942,880 as of August 31, 1999.
Number of shares outstanding of each of the registrant's classes of common
stock, as of August 31, 1999.
5,976,279 shares of Class A Common Stock par value, $.10 per share
4,158,502 shares of Class B Common Stock par value, $.10 per share
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended July 3, 1999, 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 November 5, 1999, 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 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, (vi)
effects of the year 2000 on the Company's business and (vii) other risks and
uncertainties. The Company does not intend to update these forward-looking
statements.
ITEM 1 (a) GENERAL DEVELOPMENT OF BUSINESS
Donnelly Corporation ("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.
The Company is an international supplier of automotive parts and component
systems through manufacturing operations and various joint ventures in North and
South America, Europe and Asia. The Company primarily supplies automotive
customers around the world with rear view mirror systems, modular window systems
and handle products. The Company's non-automotive products represent less than
4% of total net sales for each of the last three years.
The Company's fiscal year is the 52- or 53- week period ending the Saturday
nearest June 30. Fiscal years ended July 3, 1999, June 27, 1998, and June 28,
1997, included 53, 52 and 52 weeks, respectively. The fiscal years of the
Company's German and Spanish subsidiaries end on May 31. Effective July 4, 1999,
the Company will change the date for the end of its fiscal year from the
Saturday nearest June 30 to December 31. For the transition period from July 4,
1999, to December 31, 1999, the Company's fiscal quarter will end on October 2.
All year and quarter references relate to the Company's fiscal years and fiscal
quarters, unless otherwise stated.
The Company's net sales and net income may be subject to significant
fluctuations attributable primarily to production schedules of the Company's
major automotive customers. In addition, the Company has benefited from strong
product content on light trucks, including sport utility vehicles, as compared
to automobiles. These
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factors cause results to fluctuate from period to period and year to year. The
comparability of the Company's results on a period to period basis is also
affected by the Company's formation and disposition of subsidiaries, joint
ventures and alliances, and acquisitions and investments in new product lines.
The Company is committed to improving shareholder value through focused
development of core automotive businesses, primarily by increasing dollar
content per vehicle through the expansion of market share, introduction of new
technologies, increasing volume through penetration into new and emerging
markets and improving the efficiency of operations. Consistent with this
strategy, in 1999, the Company continued to build volume growth for its existing
products, introduced new products, expanded its equipment and facilities, began
implementing a turnaround plan in Europe, sold or merged its investments in
non-automotive businesses that have not met the Company's operating and
financial objectives and continued the ongoing development of its joint ventures
in emerging markets.
The Company has experienced more than 16% compounded growth rate in net sales
since 1989. The increase in net sales has been due to growth in the Company's
established products of complete outside mirrors, modular encapsulated windows
and value added features on interior mirrors; introduction of new products and
technologies such as electrochromic mirrors, bonded hardware modular window
systems and door handle products; and through the acquisition of Donnelly Hohe
GmbH & Co. KG ("Donnelly Hohe") in Europe. In addition, the Company has
benefited from content on strong selling vehicles such as the DaimlerChrysler
Minivan, the Ford Expedition and Ford Taurus in North American and the
Volkswagen Passat and Volkswagen Polo in Europe. The continued growth of the
Company's products in existing and new markets and its offerings of value-added
innovative technologies is an important strategy to the Company's overall
financial performance.
During the past five years, the Company has significantly expanded its presence
in Europe. The Company's strategy to penetrate European markets has been
primarily through acquisitions, the most significant of which was Donnelly Hohe
in March 1995 and market penetration of the Company's electrochromic mirrors and
modular window systems. Donnelly Hohe, based in Germany, serves many of the main
auto producers in Europe in exterior mirrors, interior mirrors, door handles and
certain non-automotive products through four operating facilities in Germany and
one in Spain. In May 1997, the Company announced a European restructuring plan
to realign manufacturing capacity, improve operating efficiencies and to reduce
future operating costs. The restructuring plan was primarily based on the
decision to re-organize product lines and production processes within operations
of Donnelly Hohe at Dorfprozelten, Germany and other European locations in
Schleiz, Germany, Spain and Ireland. In addition, the plan included costs
associated with the restructuring of management at Donnelly Hohe and within the
overall European management structure. The strategic intent of the plan was
primarily to consolidate redundant manufacturing processes, move certain
assembly operations to lower cost areas of production and centralize European
management responsibility.
In September 1998, the Company's Senior Management Team made the commitment to
dedicate additional management resources from North America to assist in the
improvement in the Company's European operations by assigning four senior
executives to long-term assignments in Europe. The Company's European automotive
segment recorded unfavorable operating results over the last three years,
despite strong automotive car build and overall sales increases in the Company's
European operations. In addition, certain key operating units in Europe
continued to perform at an operating loss. In February 1999, the Company
announced a European turnaround plan. The objective of the restructuring plan is
to improve the overall operating efficiency and customer service of the European
organization by 1) re-organizing certain manufacturing and customer service
functions into a customer focused structure, 2) consolidating two German
manufacturing facilities, 3) implementing throughout Europe the Donnelly
Production System, th Company's approach to lean manufacturing processes, 4)
re-negotiating an existing labor contract and 5) re-aligning sales and
engineering functions throughout Europe. The remaining actions associated with
the 1997 Restructuring, which were delayed due to the changes in the Company's
European management, will be carried out with the 1999 plan and are expected to
be completed in conjunction with the most recent European restructuring
initiatives.
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As part of the Company's commitment to focus on its core automotive businesses,
the Company has continued actions to re-position its non-automotive businesses.
In 1997, the Company structured its non-automotive businesses to be operated
independently, creating Donnelly Optics Corporation ("Optics"), a subsidiary
based in Tucson, Arizona, for the manufacture and sale of high-quality,
injection molded, diffractive and hybrid optical lenses and systems and
Information Products, Inc., a subsidiary based in Holland, Michigan for the
manufacture and sale of shaped, coated glass for the computer touch screen
industry. In addition, the Company has historically operated various
non-automotive joint ventures. Over the last two years, the Company has executed
the following actions associated with these businesses and joint ventures:
In the second quarter of 1998, the Company sold its 50% interest in Applied
Films Corporation ("AFC") as part of 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 costs and recognized a one-time
pretax gain of approximately $4.6 million.
In the second and third quarters of 1999, the Company sold its entire
interest in Vision Group plc ("Vision Group"). As a result of these sales,
the Company received $8.6 million in proceeds and recognized a combined
pretax gain of approximately $5.5 million.
During 1999, the Company merged Optics into a wholly owned subsidiary of
Applied Image Group, Inc. ("AIG"), a New York Corporation, of which the
Company retains a 13% interest and a $5 million convertible note.
As a result of these transactions, the operating results of AFC, VISION Group
and Optics are no longer included in the Company's combined consolidated
financial statements. See Item 1 (c) "Narrative Description of
Business--Non-Automotive Businesses" for a more detailed discussion of these
non-automotive businesses.
On July 1, 1999, the Company signed a letter of intent to sell its investment in
Lear Donnelly Overhead Systems, LLC ("Lear Donnelly"), to Lear Corporation
("Lear") for an undisclosed amount. The transaction was closed September 14,
1999 and is expected to have a one-time, material favorable impact on the net
income and cash flow of the Company. In addition, due to the transfer of the
Company's interior lighting and trim sales contracts included in the joint
venture to Lear, future annual net sales will be reduced by approximately $65 to
$70 million per year. Due to the joint venture operating at approximately
break-even since its formation, the sale of the Company's share of the joint
venture is not expected to have a material impact on the Company's future
results of operations or financial position. However, gross profit and operating
margins as a percent of sales for future periods will be favorably impacted once
the sale is completed. The carrying value of the Company's investment in Lear
Donnelly was $8.6 million at July 3, 1999.
In the fourth quarter of 1999, the Company formed Schott Donnelly LLC Smart
Glass Solutions ("Schott Donnelly"), a 50-50 joint venture with Schott North
America Manufacturing, Inc., a wholly owned subsidiary of Schott Corporation
("Schott"). Schott is a wholly owned subsidiary of Schott Glas, which is based
in Germany and is one of the world's leading producers of specialty glass
products. The joint venture will design and manufacture electrochromic glass for
automotive and architectural applications.
As part of the Company's strategy to enhance global market penetration through
the development of joint ventures in emerging markets, the Company operates
joint ventures in Asia and South America. In Asia, the Company operates three
joint ventures for manufacture and sale of the Company's automotive products
into the Asian and Australian markets; Varitronix EC (Malaysia) Sdn. Bhd.
("Varitronix EC") for electrochromic mirror cells; Shanghai Donnelly Fu Hua
Window Systems Company Ltd. ("Shanghai Donnelly Fu Hua") for window systems; and
Shunde Donnelly Zhen Hua Automotive Systems Co. Ltd. ("Shunde Donnelly Zhen
Hua") for exterior mirror products. In South America, the Company operates
Donnelly/Arteb, LTDA ("Donnelly/Arteb") for the manufacture and sale of
interior, exterior and electrochromic mirror products into this market. These
joint ventures provide the Company with key entries into emerging automotive
markets which are expected to have a combined overall increase in industry
automotive
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production greater than the markets in North America and Europe. See Item 1 (c)
"Narrative Description Of Business--Joint Ventures" for additional information
concerning these joint ventures.
ITEM 1 (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is primarily managed based on geographic segments and the product
markets they serve. The Company has two reportable segments: North American
Automotive Operations ("NAAO") and European Automotive Operations ("EAO"). The
operating segments are managed separately as they each represent a strategic
operational component that offers the Company's product lines to customers in
different geographical markets. Although each segment offers all of the
Company's automotive product lines, the majority of the Company's net sales from
modular windows and handle products originate from NAAO. Operating financial
information is available that is evaluated regularly by the Company's chief
executive officer, or corporate management team, in deciding how to allocate
resources and in assessing the segments' performance. The corporate management
team, which establishes each overall strategy and policy standards for the
Company, includes the chief executive officer, chief operating officers and
senior executives in administration, finance, operations and technology. The
chief operating officer of each segment, each of whom is a member of the
corporate management team, is responsible for the management of profitability
and cash flow for each respective segments' operations. In addition, the Company
provides products to certain non-automotive markets, none of which are
reportable segments. The financial information by segment is incorporated by
reference from Note 3 to the financial statements on page 27 of the Annual
Report.
ITEM 1 (c) NARRATIVE DESCRIPTION OF BUSINESS
PRODUCTS, SERVICES, MARKETS AND METHODS OF DISTRIBUTION
Automotive Rear View Mirror Systems
The Company began producing prismatic day/night mirror glass in 1939, and today
manufactures a wide range of interior and exterior rear view mirror products and
believes it is the world's largest producer of automotive rear view 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.
In the fourth quarter of 1999, the Company formed Schott Donnelly, a 50-50 joint
venture, with Schott Corporation, one of the world's leading producers of
specialty glass products. The joint venture will be engaged in the design and
manufacture of electrochromic glass for automotive and architectural
applications.
The Company continues to market electrochromic day/night automotive mirror
systems which are electrically dimmable to reduce the glare from the headlights
of other vehicles approaching from the rear. The Company has continued to
actively develop newer and more advanced electrochromic technologies for the
automotive marketplace and has developed or licensed a number of technologies,
of which several are already available for commercial use.
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The Company produces GLAREFREE" electrochromic mirrors for Ford, Volkswagen,
Audi, BMW, PSA, DaimlerChrysler, GM, Volvo, Renault, Honda, Subaru, Mitsubishi,
Porsche, Jaguar and Daewoo. These purchase agreements illustrate the Company's
position as a strong player in a global market for electrochromic mirrors that
industry sources expect to grow to $1 billion. The Company believes it is the
only exterior mirror manufacturer that is verticially integrated with
electrochromic cell manufacturing capability. 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 Rear View Mirrors. The Company has a predominant share of the U.S.
market for interior rear view prismatic mirrors and in 1999 sold approximately
18.9 million units worldwide. The interior rear view 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 rear
view mirror assemblies. The Company continues to design and market innovative
value-added features integrated into the rear view mirror such as lights,
electronic compasses, temperature and other displays.
The Company manufactures and markets automotive interior rear view mirrors using
patented electrochromic technology that automatically dims the mirror when
headlights approach from the rear. Electrochromic rear view 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 rear view mirrors currently represent approximately 20% and
8% of all interior rear view mirrors sold by all suppliers to original equipment
manufacturers in the North American and European markets, respectively, for the
1999 model year. The market for electrochromic mirrors continues to grow and in
1999, electrochromic mirrors were offered on approximately 51 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
rear view mirror market, both in terms of number of units and dollar volume, and
represent a significant growth area for the Company.
The Company is in the process of developing electronic vision systems for
vehicles that make use of advanced sensors and video microchip technology to
replace 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 rear view vision
systems. The Company has been engaged in a research program with a key customer
for the development and commercialization of this technology.
Exterior Rear View Mirrors. The Company believes it is the largest exterior rear
view mirror manufacturer in the world and considers itself a technology and
manufacturing leader with manufacturing facilities in the United States,
Germany, Spain, Ireland, Brazil and China. Through these manufacturing
locations, the Company has a strong presence in each major automotive market in
the world. The Company has booked significant new orders in recent years that
will make this product line the fastest growing business for the Company. In
calendar year 2000, the Company will launch new business with annual sales of
$39 million, including orders for twelve General Motors vehicles, the largest
single exterior rear view mirror order in the Company's history.
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, substantially
increased the Company's production capacity and sales of exterior rear view
mirrors, especially 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 rear view mirrors in North America and other markets. The
Company supplies exterior rear view mirror assemblies primarily to Honda, Ford
and Mazda in the United States and to major European automakers including BMW,
Volkswagen, Renault, Audi and Ford in Europe. The Company also supplies exterior
rear view mirror systems to automakers throughout southern China through one of
it's Chinese joint ventures and South America through its joint venture i
Brazil.
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Exterior rear view 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 rear view mirrors.
The per vehicle sales price of exterior mirrors substantially exceeds that of
interior rear view mirrors due to the greater complexity of exterior rear view
mirrors and the fact that most new vehicles are equipped with two exterior rear
view mirrors.
The Company also manufactures and markets dimmable electrochromic exterior rear
view mirrors. The Company believes that electrochromic rear view mirrors
currently represent only 9% of all exterior rear view mirrors in the North
American market for the 1999 model year. The Company believes that
electrochromic exterior rear view mirrors will represent an increasing share of
the rear view 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 and was recognized as one of
the "1996 100 Best of What's New Products" by Popular Science magazine. The
Illuminator(TM)was initially offered as an option on the Lincoln Mark VIII. The
Company is aggressively marketing th is product 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. In addition, a
significantly growing product offering for the Company is innovative 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
DaimlerChrysler, Ford, General Motors, Honda, Isuzu and Toyota in North America
and DaimlerChrysler and Isuzu in Europe. The Company's modular windows are used
on many popular vehicles such as the DaimlerChrysler Caravan/Voyager minivan,
the Jeep Grand Cherokee, the Ford Expedition and the Ford Taurus/Sable. In 1999,
the Company continued to launch many new important modular programs.
The Company believes that its materials technology and manufacturing
capabilities provide a significant competitive advantage in the market for
modular windows. The Company offers a variety of modular window technologies
including molded-in body color panels, flush bonded hardware as well as single
and double sided encapsulation. Modular windows can be molded using polyvinyl
chloride ("PVC") or a urethane reaction injection molding process. The PVC
process is less expensive primarily because the material is less costly and does
not require painting. PVC, however, is more difficult to mold, particularly for
large windows. The Company believes that its ability to design and mold windows
in either process and its expertise in PVC molding are significant competitive
advantages.
The Company has signed an agreement to form a new company, Donnex, which will be
a 50-50 joint venture with Essex Specialty Products, Inc., the world's leading
producer of automotive adhesives and sealants. Donnex was established for the
marketing, manufacture and delivery of complete, ready-to-install windows and
window systems to automotive customers on a just-in-time basis and in sequence.
This Company is in the marketing phase of this innovative technology.
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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, particularly in the North American market. The Company expects
continued growth in the 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 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. 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 has manufactured 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.
On July 1, 1999, the Company signed a letter of intent to sell its investment in
Lear Donnelly to Lear for an undisclosed amount. The transaction was closed
September 14, 1999 and is expected to have a one-time, material favorable impact
on the net income and cash flow of the Company. In addition, due to the transfer
of the Company's interior lighting and trim sales contracts included in the
joint venture to Lear, future annual net sales will be reduced by approximately
$65 to $70 million per year.
Handle Products
The Company produces a wide variety of interior and exterior handle products 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 handle products designs including plastic,
diecast and chrome-plated door handles as well as products with value-added
electronic features. These products are synergistic to the Company's complete
exterior rear view mirror product line and are marketed by combining the
Company's capabilities in design, painting and added features, such as
electronics for both product lines.
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, none of which are reportable
segments. The Company's non-automotive products represent less than 4% of total
net sales for each of the last three years.
In the third quarter of 1997, the Company created Donnelly Optics Corporation, a
wholly owned subsidiary, 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 had booked business with customers in the digital imaging
market, developed a proprietary lense system for digital cameras and had orders
to produce highly specialized exterior lighting lenses for a North American auto
manufacturer. Optics had been incurring significant operating losses. In
addition, in the fourth quarter of 1998, Optics recognized a $3.5 million charge
against operating income, or $2.3 million after tax, due to the cancellation of
a customer order for injection-molded lenses. The customer order was canceled
due to market dynamics in the digital imaging sector of the computer industry.
In the second quarter of 1999, the Company merged Optics into a wholly owned
subsidiary of AIG, a New York Corporation. In the merger, the Company received a
13% interest in AIG and a $5 million convertible note. AIG develops and
manufactures opto-imaging products for the lighting, automotive, optical and
photonics industries. As a result of this transaction, the financial results of
Optics are no longer included in the Company's financial statements after
December 1, 1998. The Company's operating results were not impacted by this
transaction.
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The Company believes Information Products, Inc., a wholly owned subsidiary based
in Holland, Michigan, 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.
In the second and third quarters of 1999, the Company sold its entire interest
in VISION Group. As a result of these sales, the Company received $8.6 million
in proceeds and recognized a combined pretax gain of approximately $5.5 million,
or $0.35 per share after tax. In the second quarter of quarter of 1997, the
Company had also sold a portion of its investment in VISION Group in conjunction
with a public offering of VISION Group shares, resulting in a $0.9 million
pretax gain. The Company's equity in the financial results of VISION Group is no
longer included in the Company's financial statements after November, 1999.
In the second quarter of 1998, the Company sold its 50% interest in AFC as part
of 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 pretax gain of approximately $4.6 million, or $0.22 per share after
tax.
Joint Ventures
Schott Donnelly. In the fourth quarter of 1999, the Company formed Schott
Donnelly, a 50-50 joint venture with Schott North America Manufacturing, Inc., a
wholly owned subsidiary of Schott Corporation ("Schott"). Schott is a wholly
owned subsidiary of Schott Glas, which is based in Germany and is one of the
world's leading producers of specialty glass products. The joint venture will
design and manufacture electrochromic glass for automotive and architectural
applications. The Company received $2 million and contributed certain assets and
liabilities for the creation of the joint venture. In accordance with the LLC
operating agreement, losses generated by the joint venture will be allocated to
Schott until Schott has contributed $9.5 million.
Lear Donnelly. On November 3, 1997, the Company formed Lear Donnelly, a 50%
owned joint venture with Lear Corporation. 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.
On July 1, 1999, the Company signed a letter of intent to sell its investment in
Lear Donnelly to Lear for an undisclosed amount. The transaction was closed
September 14, 1999 and is expected to have a one-time, material favorable impact
on the net income and cash flow of the Company. In addition, due to the transfer
of the Company's interior lighting and trim sales contracts included in the
joint venture to Lear, future annual net sales will be reduced by approximately
$65 to $70 million per year.
Donnelly/Arteb. In 1998, the Company formed a 50-50 joint venture with
Industrias Arteb S.A. to produce interior and exterior mirrors for the South
American automotive industry. Donnelly/Arteb is located near Sao Paulo, Brazil.
In 1999, Donnelly/Arteb began producing replacement parts for distribution
within the South American market and is in the process of launching new programs
for the Brazilian production of several General Motors' vehicles. Donnelly/Arteb
is continuing to focus on strategically growing its presence in the South
American market.
Varitronix. In 1998, the Company formed Varitronix EC, a 50% owned, controlled
joint venture with the Malaysian subsidiary of Varitronix International Ltd.
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 this production startup, the Company is the only automotive supplier in the
world with EC manufacturing or assembling capabilities in North America, Europe
and Asia. Due to the Compan having board control of this joint venture, the
financial statements of Varitronix EC are consolidated with those of the
Company.
<PAGE>
10
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. Donnex expects
to have commercially validated product available for sale by early calendar year
2000.
Shunde Donnelly Zhen Hua. In the first quarter of 1997, the Company formed
Shunde Donnelly Zhen Hua, based in the Chinese city of Shunde, in Guangdong
Province, a joint venture with Shunde Zhen Hua Automotive Parts Co. Ltd ("Shunde
Zhen Hua"). The Company has a 30% interest in the Shunde Donnelly Zhen Hua joint
venture which manufactures interior and exterior mirror systems for automakers
throughout southern China, including the Chinese operations of Volkswagen,
DaimlerChrysler and Isuzu. Disputes have arisen between the Company and its
joint venture partner. The parties have entered into an agreement to resolve the
disputes and reorganize the joint venture company. The agreement will be
effective upon approval of municipal authorities in China, approval of which is
expected by the parties. 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.
Donnelly Electronics, LLC ("Donnelly Electronics"). In the first quarter of
1997, the Company created an affiliate, Donnelly Electronics; a joint venture
between the Company and an individual with expertise in automotive electronics
technology. The Company owns 18.9% of Donnelly Electronics with the option to
acquire up to 100% of Donnelly Electronics over time. The joint venture based in
Holly, Michigan, specializes in the design and manufacture of electronic
components and sub-assemblies and produces the electrical components that
Donnelly uses for products such as electrochromic rear view mirrors and
electronic compass systems. The firm will also provide electronics development
for future Donnelly products that may include rear-vision camera 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. 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 1998.
KAM Truck Components, Inc. ("KAM"). The Company owns 17.1% of KAM which supplies
mirrors for large trucks, including GLARESTOPPER(R)solid state electrochromic
mirrors, which permit 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.
MARKETING STAFF
In North America, Europe, Japan and Asia, 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 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.
<PAGE>
11
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. An example of these modules is an interior
electrochromic mirror offered to a luxury vehicle manufacturer in Europe. The
mirror functions as a communications node for the 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 rear view mirror.
The Company has developed independently or acquired technology for a number of
critical electronic product modules for use in the Company's mirror systems or
for independent sale. These products include memory devices for actuators, power
fold modules, ground illumination features, electronic remote entry systems and
other products.
A recent product offering is the Company's SmartRelease(TM)trunk release system
which uses advanced electronic sensors to detect heat and motion and
automatically open the trunk if it senses a person trapped inside. The
SmartRelease(TM)will debut on the mid-year 2000 Chevrolet Impala. This
technology marks an evolution in the auto industry's efforts to make vehicles a
safer environment. The SmartRelease(TM)system is more sophisticated than the
manual emergency trunk release handles that the Company deve loped and currently
supplies to automakers. The electronic sensors require very little movement on
the part of a person trapped in a trunk to activate. The Company expects that
electronic modules and systems will continue to develop into an important
feature in the industry.
In response to this continued market development, the Company founded the
Donnelly Electronics joint venture which specializes in the design and
manufacture of electronic components and sub-assemblies. See Item 1 (c)
"Narrative Description Of Business--Joint Ventures" for a more detail discussion
of this joint venture.
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 ha 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 267 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
<PAGE>
12
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 from July to December than from January
to June because domestic automotive production is generally lower during the
first two quarters of the Company's fiscal year.
WORKING CAPITAL
Working capital was $7.3 million on July 3, 1999, compared to $58.3 million on
June 27, 1998. Current assets decreased as compared to June 1998, despite the
increase in overall sales volumes. The most significant factor causing the
decrease in working capital was the timing of customer payments relative to the
ending balance sheet dates of July 3, 1999 and June 27, 1998, respectively. 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,
resulting in higher accounts receivable balance on this date. The receipt of
customer payments, combined with more active working capital management,
provided funds which were used to reduce revolving lines of credit as of July 3,
1999. Working capital was also impacted by the restructuring charge taken in the
third quarter of 1999 and improved inventory turnover. Inventory turnover
improved du to improved operational performance at EAO and inventory write-offs
associated with the 1999 European turnaround plan. The total restructuring
reserve at July 3, 1999 was $10.1 million, of which $7.7 million was classified
as short-term.
The Company has an agreement to sell, on a revolving basis, an interest in a
defined pool of trade accounts receivable of up to $50 million. The agreement
expires in December 1999, however is renewable for one-year periods at the
option of the Company. The Company expects to extend the current agreement or
replace it on comparable terms. At July 3, 1999, and June 27, 1998, a $40.4
million and $40.3 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. Discount fees of $2.1 million in 1999 and 1998 and $1.1 million in
1997, 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.
The Company has an unsecured $160 million multi-currency global revolving credit
agreement which bears interest, at the election of the Company, at a floating
rate under one of three alternative elections. A variable facility fee,
currently at 0.225%, is paid on the credit line. This revolving credit agreement
terminates in September 2002, at which time the Company may extend for one-year
periods with the consent of all the participating banks.
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.
<PAGE>
13
IMPORTANCE OF LIMITED NUMBER OF CUSTOMERS
In 1999, approximately 69% of the Company's net sales were to the following
major automobile manufacturers:
<TABLE>
<S> <C>
Ford Motor Company 25%
DaimlerChrysler 20%
Honda 7%
BMW 6%
VW 6%
General Motors Corporation 5%
---
Total 69%
===
</TABLE>
The loss of any one of these customers would have a material adverse effect on
the Company.
BACKLOG OF ORDERS
As of July 3, 1999, and June 27, 1998, the Company's backlog of orders was
approximately $181 million and $149 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 order 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 Rear View Mirrors. While the Company has a predominant share of the
U.S. interior rear view 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 rear view mirror
assemblies.
The Company's principal competitor for automatic electrochromic rear view
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 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.
<PAGE>
14
Exterior Rear View Mirrors. The Company has many competitors in the worldwide
exterior rear view mirror market. Through the Company's operations in North
American and Europe, the Company is a leading producer of automotive exterior
rear view 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.
Handle Products. The Company has many competitors in the worldwide door handle
market. Certain competitors already supply (or are well positioned to supply in
the future) broader interior trim or exterior ornamentation sets, often working
in concert with door systems integrators. The Company will continue to use door
handles to leverage capacity and to strategically support exterior mirrors
through the sale of coordinated "door sets" of exterior mirrors and door
handles.
Other Products. 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 also
supplies a number of small-volume non-automotive products in Europe; however,
the Company is not a predominant market leader for any of these products.
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 it to provide
sophisticated integrated modules and systems and to perform the increased
responsibilities automotive suppliers are expected to manage.
In 1999, 1998 and 1997, research and development expenditures were $34.2, $36.4
million and $32.5 million, respectively, or 3.8%, 4.8% and 4.8% of the Company's
net sales for those years. These expenses were lower for 1999 primarily due to
the Lear Donnelly joint venture, the formation of the Schott Donnelly joint
venture, the Optics merger and Donnelly Electronics. Operating expenses for the
respective businesses and technologies contributed by the Company to these
ventures were transferred to the newl formed company's which are accounted for
under the equity or cost method of accounting. The Company expects to spend
approximately 3.5% to 4.0% of its net sales each year on research and
development. Over 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. 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 50 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.
<PAGE>
15
The Company is nationally recognized as a leader in the application of
participative management principles and systems. The Company currently has
approximately 5,600 employees worldwide and approximately 3,200 work in the
Company's North American operations in the U.S. and Mexico. The Company's
non-North American employees are primarily located in Germany, Ireland, France,
Spain and Malaysia. 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, wher 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
recently completed re-negotiation of its labor contract in Germany allowing for
greater work flexibility rules, broader productivity guidelines and a delay in
certain wage increases until certain income profitability targets are
accomplished. 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 plans. 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 of policies by regulatory authorities, may give rise to
additional expenditures or liabilities that could be material.
ITEM 1 (d) INFORMATION ABOUT FOREIGN OPERATIONS
During 1999, approximately 32% of combined consolidated net sales were derived
from the Company's foreign operations. Approximately 14% 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 also
licensed major automotive glass companies in Europe and Japan to manufacture
modular windows for sale in foreign markets using the Company's technology.
<PAGE>
16
North American revenues are revenues resulting from sales originating from the
United States. U.S. and export sales are classified based on where the sales are
made. Foreign revenues are generated from sales originating from the Company's
various foreign locations. The Company has various foreign subsidiaries located
in Germany, Ireland, Spain, France, Mexico and Malaysia. 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 Vision Systems Europe Limited; one in Spain, Donnelly Hohe Espana S.A.;
one in France, Donnelly EuroGlas Systems SARL; one in Mexico, Donnelly de
Mexico, S.A. de C.V. and one in Malaysia, Varitronix EC.
The Company has various non-controlled, 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", the Company has two joint ventures
located in China, Shanghai Donnelly Fu Hua and Shunde Donnelly Zhen Hua and one
in Brazil, Donnelly/Arteb.
A summary of the Company's operations by geographic area follows and does not
include sales of joint ventures in which the Company holds a 50% or less
non-controlled ownership interest:
<TABLE>
In thousands Year ended 1999 1998 1997
- ------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
North American:
United States.................. $ 482,062 $420,544 $390,852
Export:
Americas................... 122,513 76,433 54,302
Asia....................... 6,847 3,313 2,825
Europe..................... 1,355 2,002 1,829
Other...................... 386 350 76
-------------------------------------------
$ 613,163 $502,642 $449,884
Germany............................. 177,196 173,857 138,215
Ireland............................. 61,682 43,245 43,076
Other Foreign....................... 52,928 43,567 40,122
------------------------------------------
$ 904,969 $763,311 $671,297
==========================================
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------------------
Long-Lived Assets:
United States....................... $ 116,409 $ 99,518 $ 93,699
Germany............................. 46,944 47,923 50,342
Ireland............................. 8,203 8,522 8,894
Other Foreign....................... 18,076 13,962 13,289
-------------------------------------------
$ 189,632 $ 169,925 $ 166,224
===========================================
</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.
<PAGE>
17
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, 1999, were as follows:
<TABLE>
Combined
Location of Facility Square Footage Use
<S> <C> <C>
North American Automotive Operations:
Holland, Michigan (10)* 899,000 Manufacturing, Warehouse and Office
Grand Haven, Michigan 156,000 Manufacturing, Warehouse and Office
Newaygo, Michigan* 177,000 Manufacturing, Warehouse and Office
Norton Shores, Michigan* 24,000 Manufacturing and Office
Detroit, Michigan* 4,000 Sales and Marketing Office
Mt. Sterling, Kentucky 45,000 Manufacturing, Warehouse and Office
Monterrey, Mexico 64,000 Manufacturing, Warehouse and Office
Tokyo, Japan * 200 Sales and Marketing Office
European Automotive Operations:
Naas, Ireland 88,000 Manufacturing, Warehouse and Office
Manorhamilton, Ireland 25,000 Manufacturing, Warehouse and Office
Langres, France* 40,000 Manufacturing, Warehouse and Office
Paris, France 2,000 Sales and Marketing Office
Collenberg, Germany (2)* 228,000 Manufacturing, Warehouse and Office
Dorfprozelten, Germany* 319,000 Manufacturing, Warehouse and Office
Schleiz, Germany (2)* 95,000 Manufacturing, Warehouse and Office
Barcelona, Spain 60,000 Manufacturing, Warehouse and Office
Palmela, Portugal 17,000 Warehouse and Office
Goteborg, Sweden * 3,000 Sales, Marketing and Design Office
Other Segments:
Holland, Michigan ** 65,000 Manufacturing and Office
Marlette, Michigan** 200,000 Manufacturing and Office
Tucson, Arizona (2)** 49,000 Manufacturing, Warehouse and Office
Dublin, Ireland** 30,000 Manufacturing, Warehouse and Office
Prestice, Czech Republic ** 90,000 Manufacturing and Office
Shunde City, China ** 68,000 Manufacturing, Warehouse and Office
Shanghai, China ** 12,000 Manufacturing, Warehouse and Office
Penang, Malaysia ** 23,000 Manufacturing and Office
Sao Bernardo do Compo, Brazil ** 25,000 Manufacturing and Office
</TABLE>
* Leased facilities. Four of the ten Holland, Michigan facilities are leased.
Approximately 165,000 square feet of the Dorfprozelten, Germany facility is
leased. One of the two Collenberg, Germany, as well as, one of the two
Schliez, 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.
<PAGE>
18
As of July 3, 1999, the Company had capital expenditures purchase commitments
outstanding of approximately $11.9 million.
The Company provides a guarantee for $7.2 million in municipal funding for the
construction of a manufacturing facility.
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
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. The
claim by Midwest was resolved late in September, 1999 without a material effect
on the Company's financial condition, results of operations or liquidity.
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
non-infringement 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,
results of operation or 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 rear view 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. This
lawsuit has recently been 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 incidental to its business, including those arising out of alleged
defects, breach of contracts, product warranties, employment-related matters and
environmental matters. An estimated loss from a legal action or claim is accrued
when events exist that make the loss probable and the loss can be reasonably
estimated. Although the Company maintains accruals for such claims when
warranted, there can be no assurance that such accruals will continue to be
adequate. The Company believes that accruals related to such litigation and
claims are sufficient and that these items 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 July 3, 1999.
<PAGE>
19
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. 59 Director, Chairman 1978
CEO, President
John F. Donnelly, Jr. 47 COO of Europe 1986
Maryam Komejan 48 Senior Vice President, 1993
Corporate Secretary
Niall R. Lynam, Ph.D. 45 Senior Vice President, CTO 1992
Scott E. Reed 42 Senior Vice President, CFO 1998
Russell B. Scaffede 50 Senior Vice President, Global 1998
Manufacturing
Donn J. Viola 54 COO of North America 1996
Ronald L. Winowiecki 32 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. 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 Senior Vice President
and 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
for Chrysler Corporation. 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>
20
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". Market quotations regarding the range of high and low sales prices
of the Company's common stock were as follows:
<TABLE>
Fiscal 1999 Dividends
Quarter High Low Declared
-----------------------------------------------------------------
<S> <C> <C> <C>
First $18.88 $14.13 $.10
Second 16.00 12.50 .10
Third 15.25 12.13 .10
Fourth 17.50 12.88 .10
Fiscal 1998 Dividends
Quarter High Low Declared
-----------------------------------------------------------------
First $23.75 $16.75 $.10
Second 22.44 17.50 .10
Third 19.31 16.25 .10
Fourth 22.38 18.00 .10
-----------------------------------------------------------------
</TABLE>
As of August 31, 1999, 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 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 904,969 $ 763,311 $ 671,297 $ 439,571 $ 383,340
Income before taxes on
income 9,693 19,179 12,005 12,349 16,823
Net Income 10,592 13,009 10,020 8,454 11,009
Net income per common
share - Basic 1.05 1.30 1.01 0.86 1.14
Net income per common
share - Diluted 1.04 1.29 1.00 0.85 1.12
Dividends declared per
common share 0.40 0.40 0.36 0.32 0.26
Total assets 395,101 377,885 358,293 271,492 223,788
Debt including current
maturities 92,215 123,761 122,901 101,916 66,802
Preferred stock 531 531 531 531 531
Shareholders' equity
(total) 108,331 103,282 93,827 88,852 82,900
Restructuring and other
charges (gain) 8,777 3,468 9,965 2,399 (2,265)
</TABLE>
<PAGE>
21
The selected financial data for the Company for each of the five years has been
derived from the combined consolidated financial statements of the Company,
which have been audited by the Company's independent auditors, BDO Seidman, LLP.
The data should be read in conjunction with the combined consolidated financial
statements and related notes thereto, "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and "Financial Statements and
Supplementary Data" presented in Items 7 and 8 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Incorporated by reference from the 1999 Annual Report, see "Management
Discussion and Analysis of Results of Operations and Financial Condition" at
pages 10-19, 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 ris 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, which is filed as
Exhibit 13 to this Form 10-K report. Additional information relating to
financial instruments and debt is included in Note 8 - Financial Instruments and
Note 6 - Debt and Other Financing Arrangements at pages 30-31. Quantitative
disclosures relating to financial instruments and debt are included in the
tables below.
International operations are primarily based in Europe and, 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 $281 million and $139 million, respectively, as of and for the year
ended July 3, 1999. A predominent portion of these international revenues and
identifiable assets are based in German 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 transaction
adjustments on these long-term advances to affiliates and the foreign currency
translation adjustment of the Company's net investment in these affiliates,
which impact consolidated equity of the Company. International operations result
in a large volume of foreign currency commitment and transaction exposures and
significant foreign currency net asset exposures. Since the Company manufactures
its products in a number of locations around the world, it has a cost base that
is diversified over a number of different currencies, as well as the U.S.
dollar, which serves to counterbalance partially its foreign currency
transaction risk. Selective foreign currency commitments and transaction
exposures are partially hedged. The Company does not hedge its exposure to
translation gains and losses relating to foreign currency net asset exposures;
however, when possible, it borrows in local currencies to reduce such exposure.
The Company is also exposed to fluctuation in other currencies including:
British pounds, French francs, Irish punts, Japanese yen, Mexican pesos, Spanish
pesetas, Malaysian ringit and Brazilian reals. 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
<PAGE>
22
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.
Slightly over 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.
As of 7/3/99:
Interest Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
Fair value
Year ending In Thousands 1999* 2000 2001 2002 2003 2004 Thereafter Total 7/3/99
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed Rate $ 0 $9,333 $12,106 $12,668 $ 8,728 $ 5,000 $ 3,665 $ 51,500 $ 52,329
Avg. Interest Rate 6.98%
Variable Rate $ 25 $3,064 $ 40 $ 553 $ 13,067 $ 13,669 $ 10,297 $ 40,715 $ 40,715
Avg. Interest Rate 3.58%
Interest Rate Derivative Financial Instruments Related to Debt:
Interest Rate Swaps
Pay Variable/Receive Fixed $ 0 $ 0 $ 0 $ 5,000 $ 25,000 $ 0 $ 0 $ 30,000 $ (739)
Avg. Pay Rate 7.40%
Avg. Receive Rate 5.85%
*Refers to transition period ending December 31, 1999.
</TABLE>
Exchange Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
<TABLE>
Fair value
Year ending In Thousands 1999* 2000 2001 2002 2003 2004 Thereafter Total 7/3/99
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt
Fixed Rate -US Dollar $ 0 $9,333 $12,106 $12,668 $ 8,728 $ 5,000 $ 3,665 $ 51,500 $ 52,329
Variable Rate - US Dollar $ 0 $ 93 $ 40 $ 49 $ 65 $ 6 $ 9,522 $ 9,829 $ 9,829
Variable Rate - Euro $ 25 $2,971 $ 0 $ 504 $13,002 $10,237 $ 4,147 $ 30,886 $ 30,886
*Refers to transition period ending December 31, 1999.
</TABLE>
<PAGE>
23
As of 6/27/98:
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> <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>
<TABLE>
Exchange Rate Sensitivity:
Principal (Notional) Amount by Expected Maturity
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 -
German 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following combined consolidated financial statements which appear in the
1999 Annual Report are incorporated by reference:
Combined Consolidated Statements of Income - Page 20.
Combined Consolidated Balance Sheets - Page 21.
Combined Consolidated Statements of Cash Flows - Page 22.
Combined Consolidated Statements of Shareholders' Equity - Page 23.
Notes to the Combined Consolidated Financial Statements - Pages 24-37.
Management's Responsibility for Financial Reporting - Page 38.
Report of Independent Certified Public Accountants - Page 39.
<PAGE>
23
Quarterly unaudited financial data relating to the results of operations for the
years ended July 3, 1999, and June 27, 1998, appears in the 1999 Annual Report
in Note 16 of the Notes to the Combined Consolidated Financial Statements at
Page 37 and is incorporated herein by reference. The aforementioned 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 November 5, 1999,
and to be 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 November 5, 1999, 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 November 5, 1999, and the information within those sections are
incorporated by reference.
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 November 5, 1999,
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 July 3, 1999, together with the Report of
Independent Certified Public Accountants appear in the 1999 Annual Report on
pages 20-39 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.
<PAGE>
25
2. Financial Statement Schedules. The following are included in Part IV of this
report for each of the years ended July 3, 1999, June 27, 1998 and June 28,
1997, as applicable:
Page
Report of Independent Certified Public Accountants on Financial
Statement Schedule 26
Schedule II, Valuation and Qualifying Accounts 27
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 Registiant filed a Form 8-K/A, dated January 4, 1999. 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.
The Registrant also filed a Form 8-K, dated April 30, 1999. The filing included
a description of the Company's plan, effective July 4, 1999, to change its
fiscal year from the Saturday closest to June 30 to December 31.
(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>
26
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 24, 1999
Donnelly Corporation
Annual Report - Form 10-K
<PAGE>
27
Report of Independent Certified Public Accountants on Financial Statement
Schedule
Donnelly Corporation
Holland, Michigan
The audits referred to in our report dated August 12, 1999, 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 12, 1999
<PAGE>
28
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>
RESERVE FOR UNCOLLECTIBLE ACCOUNTS AND <C> <C> <C> <C>
SALES RETURNS AND ALLOWANCES:
YEAR ENDED JUNE 28, 1997 $ 571 $473 (2) -- (1) $1,064
YEAR ENDED JUNE 27, 1998 $1,064 -- (1) -- (1) $1,095
YEAR ENDED JULY 3, 1999 $1,095 662(4) 100(3) $1,665
</TABLE>
(1) INFORMATION IN THIS COLUMN IS NOT SIGNIFICANT
(2) INCREASE DUE TO CONSOLIDATION OF SUBSIDIARY
(3) DECREASE DUE TO MERGER OF SUBSIDIARY INTO NON-CONSOLIDATED JOINT VENTURE
(4) INCREASE DUE TO POTENTIALLY UNCOLLECTIBLE RECEIVABLES
<PAGE>
29
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 has been subsequently amended and
filed as part of a Registration Statement on Amendment No. 1 to Form
S-8 on March 2, 1999 as Exhibit 4 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.
<PAGE>
30
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.
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 by reference.
10.21 Amended and Restated Operating Agreement for Donnelly Electronics,
L.L.C., dated January 1, 1998, was filed as part of Form 10-K for the
fiscal year ended June 27, 1998, as Exhibit 10.21 and is hereby
incorporated by reference.
10.22 Agreement by and between Donnelly Electronics, L.L.C. and Donnelly
Corporation, dated January 1, 1998, was filed as part of Form 10-K for
the fiscal year ended June 27, 1998, as Exhibit 10.22 and is hereby
incorporated by reference.
10.23 Letter from Donnelly Corporation to Mr. Scott Reed dated August 17,
1998, was filed as part of Form 10-K for the fiscal year ended June
27, 1998, as Exhibit 10.21 and is hereby incorporated by reference.
10.24 The Donnelly Corporation 401(k) Retirement Savings Plan (January 1,
1999, Restatement) was filed as part of Form 10-Q for the quarter
ended April 3, 1999, as Exhibit 10.2 and is hereby incorporated by
reference.
<PAGE>
31
10.25 Agreement and Plan of Merger among Applied Image Group, Inc., Optics
Acquisition, Inc., Donnelly Optics Corporation and Bruno Glavich was
filed as an Exhibit to Form 8-K/A dated January 4, 1999, and is
incorporated herein by reference.
10.26 The Donnelly Corporation 1998 Employee Stock Option Plan was filed as
Exhibit A to the Proxy Statement for the October 16, 1998 Annual
Meeting of Shareholders and is hereby incorporated by reference.
10.27 The Donnelly Corporation 1998 Employees' Stock Purchase Plan was filed
as Exhibit B to the Proxy Statement for the October 16, 1998 Annual
Meeting of Shareholders and is hereby incorporated by reference.
10.28 Joint Venture Agreement by and among Schott Corporation, Schott North
America Manufacturing, Inc., Schott Glas and Donnelly Corporation
dated as of April 5, 1999.
10.29 Limited Liability Company Agreement of Schott-Donnelly LLC Smart Glass
Solutions by and between Schott North America Manufacturing, Inc. and
Donnelly Corporation dated as of April 5, 1999
10.30 Schott Technology License Agreement by and among Schott Glass, Schott
Corporation, Schott North American Manufacturing, Inc., Donnelly
Corporation and Schott-Donnelly LLC Smart Glass Solutions dated as of
April 5, 1999.
10.31 Donnelly Technology License Agreement by and among Schott Glas, Schott
Corporation, Schott North American Manufacturing, Inc., Donnelly
Corporation and Schott-Donnelly LLC Smart Glass Solutions dated as of
April 5, 1999.
13 Certain portions of the Donnelly Corporation 1999 Annual Report to
Shareholders. This information was delivered to the Company's
Shareholders in compliance with Rule 14a-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 10.28
------------------------------------------------------------
JOINT VENTURE AGREEMENT
by and among
SCHOTT CORPORATION
SCHOTT NORTH AMERICA MANUFACTURING, INC.
SCHOTT GLAS
and
DONNELLY CORPORATION
------------------------------------------------------------
Dated as of April 5, 1999
<PAGE>
ARTICLE I DEFINITIONS .................................................. 1
Section 1.01 "Affiliate" ............................................. 1
Section 1.02 "Agreement" ............................................. 1
Section 1.03 "Annual Business Plan" .................................. 1
Section 1.04 "Architectural Glazing" ................................. 1
Section 1.05 "Assumed ATC Obligations" ............................... 1
Section 1.06 "ATC Operation" ......................................... 2
Section 1.07 "ATC Assets" ............................................ 2
Section 1.08 "Automobile" ............................................ 2
Section 1.09 "Automotive Glazing" .................................... 2
Section 1.10 "Automotive Glazing Business Offer" ..................... 2
Section 1.11 "Background Technology" ................................. 2
Section 1.12 "Closing" ............................................... 2
Section 1.13 "Closing Date" .......................................... 2
Section 1.14 "Company" ............................................... 2
Section 1.15 "Daimler Chrysler" ...................................... 2
Section 1.16 "Definitive Agreements" ................................. 2
Section 1.17 "DC Project" ............................................ 2
Section 1.18 "Donnelly Background Technology" ........................ 2
Section 1.19 "Donnelly Licensed Knowhow" ............................. 2
Section 1.20 "Donnelly Licensed Patents" ............................. 3
Section 1.21 "EC" .................................................... 3
Section 1.22 "EC Product" ............................................ 3
Section 1.23 "Electrochromic Material" ............................... 3
Section 1.24 "Execution Date" ........................................ 3
Section 1.25 "Initial Business Plan" ................................. 3
Section 1.26 "Joint Venture" ......................................... 3
Section 1.27 "Joint Venture Fields" .................................. 3
Section 1.28 "Knowhow" ............................................... 3
Section 1.29 "LLC Agreement" ......................................... 3
Section 1.30 "Member" ................................................ 3
i
<PAGE>
TABLE OF CONTENTS
(continued)
Page
Section 1.31 "New Product" ........................................... 3
Section 1.32 "Party" ................................................. 4
Section 1.33 "Person" ................................................ 4
Section 1.34 "Proprietary Information" ............................... 4
Section 1.35 "Ramp-Up Period" ........................................ 4
Section 1.36 "Schott" ................................................ 4
Section 1.37 "Schott Background Technology" .......................... 4
Section 1.38 "Schott Licensed Knowhow" ............................... 4
Section 1.39 "Schott Licensed Patents" ............................... 4
Section 1.40 "Skylights" ............................................. 4
Section 1.41 "Solid Polymer Matrix" .................................. 4
Section 1.42 "Sun Roofs" ............................................. 4
ARTICLE II FORMATION OF LLC ............................................. 5
Section 2.01 Formation of LLC ........................................ 5
Section 2.02 LLC Interests; Distributions ............................ 5
Section 2.03 Name .................................................... 5
Section 2.04 Offices ................................................. 5
Section 2.05 Initial Capital Contributions ........................... 5
ARTICLE III CLOSING; DEFINITIVE AGREEMENTS; OTHER MATTERS ................ 6
Section 3.01 Closing; Definitive Agreements .......................... 6
Section 3.02 Other Licensing Matters ................................. 6
Section 3.03 Government and Customer Funding ......................... 6
Section 3.04 Additional Financing .................................... 6
Section 3.05 Party Services .......................................... 7
ARTICLE IV BUSINESS OF THE COMPANY ...................................... 7
Section 4.01 Purposes ................................................ 7
Section 4.02 Employees ............................................... 7
Section 4.03 Customers ............................................... 7
Section 4.04 Skylight and Sun Roof Businesses ........................ 7
Section 4.05 DC Project; Automotive Glazing Business ................. 8
Section 4.06 Requested Automotive Glazing Business Offer ............. 8
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TABLE OF CONTENTS
(continued)
Page
Section 4.07 Partner in Automotive Glazing Business .................. 9
Section 4.08 Automotive Mirrors ...................................... 10
Section 4.09 Capitalization of Other Businesses ...................... 10
Section 4.10 Product Distribution .................................... 11
Section 4.11 Non-Competition ......................................... 11
Section 4.12 Patent Applications ..................................... 12
ARTICLE V REPRESENTATIONS AND WARRANTIES ............................... 12
Section 5.01 Representations by Schott ............................... 12
Section 5.02 Representations by Donnelly ............................. 13
Section 5.03 Survival of Representations and Warranties .............. 16
ARTICLE VI CONDITIONS TO CLOSING ........................................ 16
Section 6.01 Schott .................................................. 16
Section 6.02 Donnelly ................................................ 17
ARTICLE VII MANAGEMENT ................................................... 18
ARTICLE VIII WITHDRAWAL; DISSOLUTION AND TERMINATION ...................... 18
ARTICLE IX PROPRIETARY INFORMATION ...................................... 18
Section 9.01 Exchange ................................................ 18
Section 9.02 Usage ................................................... 18
Section 9.03 Permitted Disclosure .................................... 18
Section 9.04 Nondisclosure and Nonuse ................................ 18
Section 9.05 Exceptions .............................................. 18
Section 9.06 No License Obligation ................................... 19
Section 9.07 Specific Performance .................................... 19
ARTICLE X INDEMNIFICATION .............................................. 19
Section 10.01 Indemnification by Schott ............................... 19
Section 10.02 Indemnification by Donnelly ............................. 19
Section 10.03 Notices ................................................. 20
Section 10.04 Defense of Claims ....................................... 20
Section 10.05 Sole Remedy ............................................. 20
ARTICLE XI TERM AND TERMINATION ......................................... 21
Section 11.01 Termination ............................................. 21
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TABLE OF CONTENTS
(continued)
Page
Section 11.02 Term .................................................... 21
Section 11.03 Effect of Termination ................................... 21
ARTICLE XII MISCELLANEOUS ................................................ 21
Section 12.01 Public Announcements .................................... 21
Section 12.02 Dispute Resolution ...................................... 21
Section 12.03 Construction ............................................ 22
Section 12.04 Severability ............................................ 22
Section 12.05 Further Assurances ...................................... 22
Section 12.06 Representations, Warranties, Covenants and Obligations .. 22
Section 12.07 Expenses ................................................ 22
Section 12.08 Benefit ................................................. 22
Section 12.09 Entire Agreement and Amendment .......................... 22
Section 12.10 Delays or Omissions ..................................... 22
Section 12.11 Successors and Assigns .................................. 22
Section 12.12 Headings ................................................ 23
Section 12.13 Governing Law ........................................... 23
Section 12.14 Notices ................................................. 23
Section 12.15 Counterparts ............................................ 24
Section 12.16 Amendment ............................................... 24
Exhibit A. DONNELLY LICENSED PATENTS......................................... 26
Exhibit B. DONNELLY LICENSED KNOWHOW......................................... 27
Exhibit C. ATC ASSETS; ATC OBLIGATIONS....................................... 28
Exhibit E. SCHOTT LICENSED PATENTS AND KNOWHOW............................... 32
Exhibit F. FORM OF LLC AGREEMENT............................................. 33
Exhibit G. FORM OF DONNELLY LICENSE AGREEMENT................................ 34
Exhibit H. FORM OF SCHOTT LICENSE AGREEMENT.................................. 35
Exhibit I. FORM OF SERVICES AGREEMENT........................................ 36
Exhibit J. FORM OF VRS&H OPINION............................................. 38
Exhibit K. FORM OF R&W OPINION............................................... 40
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JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT, dated as of April 5, 1999, by and among
Schott Corporation, a Maryland corporation, Schott North America
Manufacturing, Inc., a Maryland corporation ("Schott North America"),
Schott Glas, a German entity under the German civil code (Schott
Corporation, Schott North America and Schott Glas are collectively referred
to herein as "Schott" or the "Schott Parties") and Donnelly Corporation, a
Michigan corporation ("Donnelly"),
W I T N E S S E T H :
WHEREAS, the Parties have agreed to enter into the Joint Venture for the
purposes herein described, which Joint Venture shall be operated principally
through a limited liability company to be formed in the State of Delaware, as
provided herein,
WHEREAS, except as otherwise provided herein, the Parties intend that the Joint
Venture shall be the exclusive vehicle for either Party to develop
electrochromic products;
NOW THEREFORE, in consideration of the premises, mutual covenants, terms,
conditions, representations and warranties herein set forth, the Parties hereby
agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the following meanings for purposes of this
Agreement:
Section 1.01 "Affiliate" shall mean, with respect to any Person, any Person
directly or indirectly controlling, controlled by, or under control with, such
other Person. The word "Affiliated," when capitalized, shall mean related to a
Person as an "Affiliate". For the purposes of this definition, "control" shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Section 1.02 "Agreement" shall mean this Joint Venture Agreement and the
Exhibits and Schedules appended hereto.
Section 1.03 "Annual Business Plan" shall have the meaning ascribed to such
term in the LLC Agreement.
Section 1.04 "Architectural Glazing" shall mean panels of electrochromic
glass or other transparent or translucent materials that are used in interior or
exterior applications in office, commercial, industrial, residential or other
buildings or structures but specifically excluding Skylights.
Section 1.05 "Assumed ATC Obligations" shall mean the debts, liabilities,
payables and obligations of the ATC Operation, whether accrued, absolute,
contingent, unasserted or otherwise, of Donnelly relating to the ATC Assets, as
and to the extent existing at April 5, 1999, and as specified in Exhibit C, and
reflected in the Statement of Net Assets attached thereto.
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Section 1.06 "ATC Operation" shall mean Donnelly's Advanced Technology
Center business and operations in Tucson, Arizona.
Section 1.07 "ATC Assets" shall mean the assets, properties and business of
every kind, wherever located, of the ATC Operation, whether tangible or
intangible, real, personal or mixed, as described on Exhibit C, including but
not limited to the Statement of Net Assets attached thereto.
Section 1.08 "Automobile" shall mean passenger vehicles and light trucks
(including vans, mini-vans and sport utility vehicles), as those terms are
commonly used in the automotive industry.
Section 1.09 "Automotive Glazing" shall mean all EC automotive glazing of
windows except Sun Roofs.
Section 1.10 "Automotive Glazing Business Offer" shall have the meaning
ascribed to such term in Section 4.05(a).
Section 1.11 "Background Technology" shall mean either Donnelly Background
Technology or Schott Background Technology, as the case may be.
Section 1.12 "Closing" shall mean the closing of the transactions
contemplated by this Agreement, which shall take place at a location mutually
agreed by the Parties.
Section 1.13 "Closing Date" shall mean a date within five (5) business days
of the satisfaction or waiver of all of the conditions set forth in Article VI
hereof, or such later business day as shall be agreed by the Parties.
Section 1.14 "Company" means the limited liability company to be formed in
the State of Delaware, as provided herein.
Section 1.15 "Daimler Chrysler" shall mean DaimlerChrysler AG and/or its
Affiliates.
Section 1.16 "Definitive Agreements" shall have the meaning ascribed to
such term in Section 3.01(b) hereof
Section 1.17 "DC Project" shall mean the existing Automotive Glazing
project of Schott with Daimler Chrysler.
Section 1.18 "Donnelly Background Technology"shall mean any EC technology
conceived by Donnelly prior to April 5, 1999, and evidenced as follows: (a) all
concepts documented in "ideas books" maintained by Donnelly, including those at
Donnelly's Advanced Technology Center, Tucson, Arizona (including but not
limited to the Ideas Book maintained from October 18, 1989 to October 17, 1994,
and the Ideas Book maintained from January 3, 1995 to April 1, 1998), (b) all
concepts recorded in laboratory notebooks prior to April 5, 1999 at Donnelly's
Advanced Technology Center, Tucson, Arizona, and (c) the patent application
under preparation as of the date of this Agreement at the law firm of
Fitzpatrick, Cella, Harper & Scinto under the title "Infrared Light Modulating
Device" Ref: 690.30 and the application under preparation under the title
"Improved Electrochromic Devices" Ref: 690.31.
Section 1.19 "Donnelly Licensed Knowhow" shall mean the non-patented
knowhow of Donnelly relating to electrochromic glazing, as more fully described
in Exhibit B hereto and
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subsequent non-patented knowhow arising from Donnelly's Improvements (as such
term is defined in the Donnelly License Agreement).
Section 1.20 "Donnelly Licensed Patents" shall mean the patents and patent
applications of Donnelly, as more fully described in Exhibit A hereto, and
subsequent patents and patent applications arising from Donnelly's Improvements
(as such term is defined in the Donnelly License Agreement).
Section 1.21 "EC" shall mean electrochromic.
Section 1.22 "EC Product" shall mean any product or component of a product
utilizing Electrochromic Material to vary its transmission or reflection of
radiation, specifically excluding automotive mirrors, other automotive
rear-vision devices and the components unique to automotive rear-vision devices.
Section 1.23 "Electrochromic Material" shall mean any material that changes
its radiation transmission by applying an electrical current inducing a redox
reaction, including but not limited to Solid Polymer Matrix.
Section 1.24 "Execution Date" shall mean the date when this Agreement has
been duly executed and delivered by the authorized representatives of each of
the Parties.
Section 1.25 "Initial Business Plan" shall mean the business plan set forth
in Exhibit D hereto.
Section 1.26 "Joint Venture" shall mean the joint venture created by the
Parties pursuant to this Agreement.
Section 1.27 "Joint Venture Fields" shall mean Skylights, Sun Roofs,
Automotive Glazing, Architectural Glazing and all other EC Product areas, at any
given time, in which the Company is then manufacturing or actively developing
other than EC Products that Schott, independent and apart from the Joint
Venture, is actively developing or commercializing, as provided in Section 4.05,
Section 4.06 or Section 4.07 hereof, or that Schott or Donnelly independent and
apart from the Joint Venture, is actively developing or commercializing, as
provided in Section 4.09 hereof.
Section 1.28 "Knowhow" shall mean all of that technical knowledge and
experience necessary to practice industrial technologies or to market and sell
the commercial products resulting from the practice of such technologies and may
include formulae, processes, and technical expertise, as well as a knowledge of
marketing strategies, customer information, and laws and customs related to
products marketing and distribution.
Section 1.29 "LLC Agreement" shall mean the Limited Liability Company
Agreement, effective as of the Closing Date, to be entered into by the Members,
as provided in Section 2.01, substantially in the form set forth as Exhibit F.
Section 1.30 "Member" shall have the meaning ascribed to such term in
Section 2.01(b) hereof.
Section 1.31 "New Product" shall have the meaning ascribed to such term in
Section 4.09(a) hereof.
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Section 1.32 "Party" shall mean Schott Corporation, Schott North America,
Schott Glass or Donnelly and "Parties" shall mean Schott Corporation, Schott
North America, Schott Glass and Donnelly collectively.
Section 1.33 "Person" shall mean any individual, corporation, limited
liability company, membership, association, trust, or other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
Section 1.34 "Proprietary Information" shall mean all written data,
knowhow, methods, processes, specifications, instructions, formulae, protocols,
trade secrets, customer lists, sales and pricing data, financial information and
all similar information, written or oral, which is non-public, confidential, or
proprietary to a Party hereto. All information delivered by any Party hereto
under any previous written confidentiality agreement or undertaking shall be
deemed Proprietary Information hereunder to the same extent as if delivered
after the Execution Date.
Section 1.35 "Ramp-Up Period" shall mean the time period between the
Closing Date and the date on which Schott, subject to the terms and conditions
of the LLC Agreement, completes the initial $9,500,000 in contributions to the
Company described in Section 3.04(a) of the LLC Agreement.
Section 1.36 "Schott" and the "Schott Parties" means, collectively, Schott
Corporation, Schott North America and Schott Glas.
Section 1.37 "Schott Background Technology"shall mean any EC technology
conceived by Schott prior to April 5, 1999.
Section 1.38 "Schott Licensed Knowhow" shall mean the non-patented knowhow
of Schott relating to electrochromic glazing, as more fully described in Exhibit
E hereto and subsequent non-patented knowhow arising from Schott's Improvements
(as such term is defined in the Schott License Agreement).
Section 1.39 "Schott Licensed Patents" shall mean the patents and patent
applications of Schott, if any, as more fully described in Exhibit E hereto, and
subsequent patents and patent applications arising from Schott's Improvements
(as such term is defined in the Schott License Agreement).
Section 1.40 "Skylights" shall mean electrochromic windows smaller than ten
(10) square feet made of glass or other transparent, semi-transparent or
translucent material located in the roof or ceiling of a building, or between
the roof and ceiling of a building through which natural light passes from
outside the building to inside the building, including but not limited to light
pipe skylights, sky tunnels and sun pipes.
Section 1.41 "Solid Polymer Matrix" shall mean a polymeric material wherein
the polymer chain molecules are covalently cross-linked.
Section 1.42 "Sun Roofs" shall mean EC windows made of glass or other
transparent, semi-transparent or translucent material located in the roof of an
Automobile, whether fixed or movable.
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ARTICLE II
FORMATION OF LLC
Section 2.01 Formation of LLC.
(a) The Parties hereby agree to create as of the Closing Date the
Joint Venture for the purposes herein described. The business of the Joint
Venture shall be conducted principally through a limited liability company.
(b) Schott North America and Donnelly (each, a "Member" of the Company
and, collectively, the "Members" of the Company) shall cause the Company to
be organized as a limited liability company, effective as of the Closing
Date, pursuant to the Limited Liability Company Act of the State of
Delaware (the "Delaware Act"). On the Closing Date, the Members shall enter
into the LLC Agreement, the effective date of which shall be April 5, 1999.
Section 2.02 LLC Interests; Distributions.
(a) As of the Closing Date, each Member shall have a fifty percent
(50%) interest in the Company and its properties, assets, and capital.
(b) The Parties acknowledge and agree that generally all earnings of
the Company not required to fund operations and capital shall be
distributed to the Members in the manner provided in the LLC Agreement.
(c) Profits and losses for any fiscal year, and each item of income,
gain, loss, or deduction comprising such profits and losses, shall be
allocated between the Members in the manner provided in the LLC Agreement.
Section 2.03 Name. The name of the Company shall be "Schott-Donnelly LLC
Smart Glass Solutions." The Parties shall take such steps as are necessary to
obtain registration of the Company's name and trademark(s) and to qualify the
Company to do business in every relevant national, state, provincial and local
jurisdiction.
Section 2.04 Offices.
(a) During the initial phases of the Joint Venture, the Company shall
operate at Donnelly's ATC facility in Tucson. The Company shall enter into
a new lease of the ATC facility pursuant to a separate agreement between
the Company and the landlord. The Parties intend that a location for the
initial production of Skylights and Sun Roofs shall be agreed upon in the
future by the Parties based upon the best interests of the Company and its
customers.
(b) The name of the Company's registered agent for service of process
shall be Corporation Service Company, and the address of the Company's
registered agent and the address of the Company's registered office in the
State of Delaware shall be 1013 Centre Road, Wilmington, New Castle County,
Delaware 19805-1297. The registered agent and the registered office of the
Company may be changed from time to time by the Management Committee, as
provided in the LLC Agreement.
Section 2.05 Initial Capital Contributions. The Members shall make initial
capital contributions to the Company in the manner set forth herein and in the
LLC Agreement.
5
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ARTICLE III
CLOSING; DEFINITIVE AGREEMENTS; OTHER MATTERS
Section 3.01 Closing; Definitive Agreements.
(a) On the Closing Date, Schott North America and Donnelly shall enter
into the LLC Agreement and make the initial capital contributions to the
Company as described therein.
(b) On the Closing Date, the Schott Parties, Donnelly and the Company,
as the case may be, shall enter into each of the following agreements
(collectively with this Agreement and the LLC Agreement, the "Definitive
Agreements"):
(i) The Donnelly Technology License Agreement (the "Donnelly
License Agreement") by and among Donnelly, the Schott Parties and the
Company, dated the Closing Date, substantially in the form set forth
in Exhibit G hereof;
(ii) The Schott Technology License Agreement (the "Schott License
Agreement") by and among the Schott Parties, Donnelly and the Company,
dated the Closing Date, substantially in the form set forth in Exhibit
H hereof;
(iii) A services agreement (the "Services Agreement") by and
among Donnelly, Schott and the Company, dated the Closing Date,
substantially in the form set forth in Exhibit I hereof.
(c) Each Party shall, upon request, furnish, execute, and deliver such
documents, instruments, certificates, notices, or other further assurances
as any other Party may reasonably require as necessary or appropriate to
effect the purposes of this Section 3.01 or to confirm the rights created
or arising hereunder.
Section 3.02 Other Licensing Matters. As of the date hereof, the Parties
believe that the Company will not manufacture Architectural Glazing except in
small sizes. The Parties hereby acknowledge and agree that after the Closing
Date the Company may license its technology for Architectural Glazing to a float
glass manufacturer or manufacturers. Any such licensing of technology by the
Company shall require the unanimous approval of both Members, considering the
best interests of the Company. A Member may withhold its approval based solely
on its own interests, but its approval shall not be unreasonably withheld.
Section 3.03 Government and Customer Funding. After the Closing, the
Parties shall cooperate to obtain appropriate government and customer funding
for research and development and other activities of the Company. Any funding
obtained by either party shall be deemed to be funding obtained by the Company,
and shall not be deemed to be a capital contribution to the Company by a Party.
Section 3.04 Additional Financing. After the Ramp-Up Period, the Members
shall make or extend additional capital contributions or financial
accommodations to the Company, whether for operations or capital expenditures,
in the manner provided in the LLC Agreement.
6
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Section 3.05 Party Services.
(a) The Parties acknowledge and agree that after the Closing Date each
Party and its Affiliates may provide services to the Company, subject to
the approval of the Management Committee.
(b) At its sole option, the Company may solicit services from outside
vendors.
ARTICLE IV
BUSINESS OF THE COMPANY
Section 4.01 Purposes. The purpose of the Company shall be to develop and
manufacture or license EC Products. Except as otherwise provided herein, the
Company shall be the exclusive vehicle for any Party of this Agreement to
develop or sell EC Products; provided, however, that Donnelly shall be permitted
to develop products comprising Solid Polymer Matrix as the Electrochromic
Material but will not sell or license such products in any Joint Venture Fields
except Architectural Glazing. Initially, the Parties anticipate that the
principal business of the Company will be Skylights and Sun Roofs.
Section 4.02 Employees. As soon as reasonably practical, but not later than
December 31, 1999, Donnelly's existing employees at the ATC Operation shall
become employees of the Company.
Section 4.03 Customers. The Parties acknowledge and agree that the Company
shall market EC Products to customers independently from the Parties although,
at the discretion of the Company, the Parties' connections and relationships may
be utilized.
Section 4.04 Skylight and Sun Roof Businesses.
(a) The Parties hereby agree to use their reasonable best efforts to
pursue, to the extent feasible, the commercialization of the Skylight and
Sun Roof businesses through the Company in accordance with the Initial
Business Plan and Annual Business Plans adopted by the Management
Committee.
(b) During the term of this Agreement, the Company shall be the
exclusive means by which any Party shall develop Skylights and Sun Roofs.
Neither the Schott Parties nor Donnelly nor any of their respective
Affiliates shall use or license any EC technology for Skylights or Sun
Roofs outside the Company.
(c) As of the date hereof, the Parties acknowledge and agree that the
Initial Business Plan represents a reasonable projection with respect to
pursuing such goal. However, the Parties also recognize that there are a
number of unknowns and that additional or different actions may be required
in order to achieve the desired results. The Parties hereby agree that
their senior management personnel shall use their reasonable best efforts
to be actively involved on a continuing basis to monitor the progress of
the Initial Business Plan.
(d) If the Parties believe that the commercialization of these
businesses is not being accomplished under the Initial Business Plan, the
Parties shall use their reasonable best efforts to work together to attempt
to determine what action, if any, is required to commercialize those
businesses, to agree on modifications to the Initial Business Plan
necessary to accommodate such action, and to provide the funding required
for the Initial Business Plan, in each case, as mutually agreed by th
Parties. The modification of the Initial Business Plan shall require the
agreement of all Parties.
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Section 4.05 DC Project; Automotive Glazing Business.
(a) Prior to September 1, 1999, subject to all required approvals of
Daimler Chrysler, Schott shall offer to assign the DC Project and its
Automotive Glazing business to the Company. Any such offer at any given
time of the DC Project (if then still in existence and active) and such
Automotive Glazing business, if any, is referred to herein as an
"Automotive Glazing Business Offer."
(b) If the Company accepts such Automotive Glazing Business Offer and
agrees to assume all obligations of Schott thereunder, each Party hereby
agrees, in addition to any funding required by either party pursuant to the
LLC Agreement, to provide fifty percent (50%) of the required funding of a
mutually agreed business plan, subject to the achievement of targeted
milestones to be set forth therein.
Section 4.06 Requested Automotive Glazing Business Offer.
(a) Subject to Schott's not having withdrawn from the DC Project or
terminated its Automotive Glazing business, and subject to Section 4.07
hereof, if at any time subsequent to September 1, 1999 but prior to
December 31, 2004, Donnelly so requests, Schott shall once again make an
Automotive Glazing Business Offer to the Company.
(b) If (1) Schott makes the Automotive Glazing Business Offer, as
provided in Section 4.06(a), and (2) the Management Committee, with the
assent of Donnelly's representatives on the Management Committee, accepts
the Automotive Glazing Business Offer and assumes Schott's obligations
thereunder, then Schott shall assign the DC Project and its Automotive
Glazing Business (including all assets associated with it) to the Company
if all of the following conditions are fulfilled:
(i) the Company develops a business plan for Automotive Glazing
acceptable to both Members;
(ii) Donnelly agrees to assume 50% of the future capital
requirement of such business plan;
(iii) Donnelly contributes to the Company, and the Members in
turn cause the Company to pay to Schott:
(a) fifty percent (50%) of Schott's unreimbursed net after-tax
expenditures with respect to the DC Project and its Automotive
Glazing business after the date of this Agreement (exclusive of
royalties paid to Donnelly pursuant to the Donnelly License
Agreement).
(b) a rate of return on such investment commensurate with the
risk, which rate shall be thirty-five percent (35%) per annum for
all expenditures prior to 2002, thirty percent (30%) per annum
for all expenditures in 2002 and 2003, and a rate thereafter to
be agreed upon by the Parties based on market interest rates and
the relative risk of the venture over the applicable period; and
(iv) Donnelly repays the aggregate amount of all royalties paid
by Schott to Donnelly with respect to Automotive Glazing products
pursuant to the Donnelly License Agreement, plus interest at 6% per
annum.
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Section 4.07 Partner in Automotive Glazing Business. Notwithstanding
Section 4.06, if Schott determines, at any time on or after July 1, 2002, that
it is necessary to obtain a partner to invest cash, technology or other assets
in the DC Project and/or Schott's Automotive Glazing business, then Schott may
make an Automotive Glazing Business Offer, in which case Donnelly shall have no
more than ninety (90) days to decide whether Donnelly will assent to the
Company's acceptance of thh Automotive Glazing Business Offer.
(a) If (1) Schott makes the Automotive Glazing Business Offer, as
provided above in the first paragraph of this Section 4.07, and (2) the
Management Committee, with the assent of Donnelly's representatives on the
Management Committee, accepts such Automotive Glazing Business Offer and
the Company assumes Schott's obligations thereunder, then Schott shall
assign the DC Project and its Automotive Glazing Business to the Company if
all of the following conditions are fulfilled:
(i) the Company develops a business plan for Automotive Glazing
acceptable to both Members;
(ii) Donnelly agrees to assume 50% of the future capital
requirement of such business plan;
(iii) Donnelly contributes to the Company, and the Members in
turn cause the Company to pay to Schott:
(a) fifty percent (50%) of Schott's unreimbursed net after-tax
expenditures with respect to the DC Project and its Automotive
Glazing business after the date of this Agreement (exclusive of
royalties paid to Donnelly pursuant to the Donnelly License
Agreement).
(b) a rate of return on such investment commensurate with the
risk, which rate shall be thirty-five percent (35%) per annum for
all expenditures prior to 2002, thirty percent (30%) per annum
for all expenditures in 2002 and 2003, and a rate thereafter to
be agreed upon by the Parties based on market interest rates and
the relative risk of the venture over the applicable period; and
(iv) Donnelly repays the aggregate amount of all royalties paid
by Schott to Donnelly with respect to Automotive Glazing products
pursuant to the Donnelly License Agreement, plus interest at 6% per
annum.
(b) If Schott makes the Automotive Glazing Business Offer, as provided
above in the first paragraph of this Section 4.07, but the Company declines
to accept the Automotive Glazing Business Offer because Donnelly's
representatives on the Management Committee decline to approve same, then
Schott may negotiate with third parties to find a bona fide partner to
invest in the DC Project and Schott's Automotive Glazing Business;
provided, however, that Schott shall use its reasonable best efforts to
include Donnelly as a partner in such enterprise. If Schott is unable to
obtain a bona fide partner to invest in the DC Project and/or such
Automotive Glazing Business, Donnelly's right to request that Schott make
an Automotive Glazing Business Offer pursuant to Section 4.06 shall be
revived and remain in effect to its original term expiring December 31,
2004.
(c) If the Company declines to accept such Automotive Glazing Business
Offer because Donnelly's representatives on the Management Committee
decline to approve same, then the licensing arrangements described herein
shall not be affected; provided, however, that if Schott does not make an
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Automotive Glazing Business Offer because Daimler Chrysler does not approve
the assignment of the DC Project to the Company, then the royalties payable
to Donnelly with respect to Automotive Glazing products shall be modified,
as provided in the Donnelly License Agreement.
(d) Notwithstanding the foregoing, (i) if Schott does not make such
Automotive Glazing Business Offer because Daimler Chrysler does not approve
the assignment of the DC Project to the Company or (ii) Schott enters into
an arrangement with a third party in the Automotive Glazing business
without the participation of Donnelly, then the royalties payable to
Donnelly with respect to Automotive Glazing products shall be modified, as
provided in the Donnelly License Agreement.
Section 4.08 Automotive Mirrors. Because Schott will have access to
Donnelly's confidential knowhow and that knowhow may be useful in the
development of EC devices, Schott shall not use or license EC technology for
automotive mirrors except as permitted herein. Schott shall be permitted to
develop, manufacture, have manufactured, advertise for sale and sell automotive
mirrors using its existing EC technologies, and Improvements (as such term is
defined in the Donnelly License Agreement and Schott License Agreement) thereof,
that do not incorporate or utilize technologies of Donnelly or the Company.
Section 4.09 Capitalization of Other Businesses.
(a) If at any time either Member or an Affiliate of a Member proposes
that the Company develop, manufacture or sell any EC Product not included
in the Initial Business Plan or Annual Business Plans adopted by the
Management Committee (each such EC Product, a "New Product"), that Member
(or an Affiliate of a Member) (a "Proposing Member") shall propose a
business plan for such New Product to the Management Committee.
(b) The other Member (a "Consulting Member") shall have the right
through its representatives on the Management Committee, at its sole
option, to accept or reject any New Product proposed by a Proposing Member.
If both Parties agree that the Company shall adopt the business plan for
such New Product, the Proposing Member and the Consulting Member shall each
commit to fund fifty percent (50%) of the cash flow required by the
business plan.
(c) With respect to any New Product, if Schott North America (or its
Affiliate) is the Proposing Member and Donnelly declines, through its
representatives on the Management Committee, to accept a business plan
proposed by Schott North America (or its Affiliate), then Schott may
proceed with the development and sale of such New Product independent of
the Company but shall pay to Donnelly a royalty, as provided in the
Donnelly License Agreement.
(d) With respect to any proposed New Product, if a Consulting Member
declines, through its representatives on the Management Committee, to
accept a business plan proposed by a Proposing Member, then such Proposing
Member may proceed with the development and sale of such New Product
independent of the Company; provided, however, that at any time prior to
the fifth anniversary of a Proposing Member's proposal of a New Product, at
the request of the Consulting Member, such Proposing Member shall again
offer such New Product to the Company by proposing a new business plan with
respect to such product. If the Consulting Member, through its
representatives on the Management Committee, agrees that the Company shall
accept such new business plan, the Proposing Member shall transfer to the
Company the business and assets associated with the New Product, and the
Company shall proceed with the development and sale of such New Product if:
(i) the Consulting Member commits to fund fifty percent (50%) of
the cash flow required by such new business plan; and
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(ii) the Consulting Member contributes to the Company, and the
Parties cause the Company to pay to the Proposing Member:
(a) fifty percent 50% of the Proposing Member's unreimbursed
net after-tax expenditures incurred to date with respect to
such New Product (excluding royalties paid to Donnelly by
Schott pursuant to the Donnelly License Agreement); and
(b) a rate of return on such investment commensurate with
the risk, which rate shall be agreed upon by the Parties,
based on the status of product development and the
associated risk; and
(iii) if Schott North America (or its Affiliate) is the Proposing
Member, Donnelly repays to Schott the amount of the royalties paid to
Donnelly by Schott pursuant to the Donnelly License Agreement, plus
interest at 6% per annum.
Notwithstanding the foregoing provisions of this Section 4.09(d), if a
Proposing Member ceases to be a Member of the Company prior to the fifth
anniversary of a Proposing Member's proposal of a New Product, at the request of
the Company, such Proposing Member shall license to the Company, subject to the
payment of a commercially reasonable royalty pursuant to a separate agreement
negotiated in good faith, all Background Technology and other intellectual
property required for the Company to commercialize such New Product.
Section 4.10 Product Distribution. The Company shall distribute EC Products
manufactured by it or for which it has acquired distribution rights in the
manner determined by the Management Committee.
Section 4.11 Non-Competition.
(a) Subject to any applicable law, regulation, decree or order, from
the Closing Date until Schott North America and its Affiliates cease to
have any direct or indirect ownership interest in the Company, and for a
period of five calendar years thereafter, neither Schott nor any of its
Affiliates shall:
(i) manufacture or sell, or license to manufacture or sell, any
EC Product other than (1) New Products developed or sold by Schott
independently of the Company pursuant to Section 4.09(c) or Section
4.09(d) or (2) Automotive Glazing products developed or sold by Schott
or its Affiliates independently of the Company pursuant to Section
4.05, Section 4.06 or Section 4.07; or
(ii) manufacture or sell, or license to manufacture or sell in
competition with Donnelly or its Affiliates any New Product developed
or sold by Donnelly independently of the Company pursuant to Section
4.09(d).
(b) Subject to any applicable law, regulation, decree or order, from
the Closing Date until Donnelly and its Affiliates cease to have any direct
or indirect ownership interest in the Company, and for a period of five
calendar years thereafter, neither Donnelly nor any of its Affiliates
shall:
(i) manufacture or sell, or license to manufacture or sell any EC
Product other than New Products developed or sold by Donnelly
independently of the Company pursuant to Section 4.09(d); or
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(ii) manufacture or sell, or license to manufacture or sell in
competition with Schott or any of its Affiliates (1) any New Product
that Schott or any of its Affiliates is manufacturing or selling as a
New Product pursuant to Section 4.09(c) or Section 4.09(d) or (2) any
Automotive Glazing Product that Schott or any of its Affiliates is
manufacturing or selling pursuant to Section 4.05, Section 4.06 or
Section 4.07.
(c) The Parties shall cooperate with one another to make all filings
required to be made by them from time to time, if any, and provide such
information as may be requested under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder, in order to consummate the transactions
contemplated by this Agreement and to make all other required regulatory
filings, whether domestic or foreign, which may be applicable to the
transactions contemplated hereby.
Section 4.12 Patent Applications.
(a) Donnelly shall have the right to file patent applications with
respect to the Donnelly Background Technology at any time prior to April 5,
2000. Donnelly hereby agrees promptly to notify Schott of any patent
applications that it files on or after April 5, 1999 with respect to
Donnelly Background Technology.
(b) Schott shall have the right to file patent applications with
respect to the Schott Background Technology at any time prior to April 5,
2000. Schott hereby agrees promptly to notify Donnelly of any patent
applications that it files on or after April 5, 1999 with respect to Schott
Background Technology.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.01 Representations by Schott. Schott hereby represents and
warrants to Donnelly as follows, with effect as of the Execution Date:
(a) Organization and Standing. Each of the Schott Parties is a legal
entity duly organized, validly existing, and in good standing under the
laws of the jurisdiction in which it was organized.
(b) Corporate Power and Authority. Each of the Schott Parties has all
requisite corporate power and authority to carry on its business as it is
now being conducted; to own and operate the properties which it now owns
and operates; and to execute, deliver, and perform this Agreement, the LLC
Agreement and the other Definitive Agreements to which it is a party.
(c) Authorization, Execution, and Delivery. The execution of this
Agreement, the LLC Agreement and the other Definitive Agreements to which
each Schott Party is a party, the delivery thereof by such Schott Party and
the consummation of the transactions contemplated hereby and thereby, will
have been duly and validly authorized by all necessary corporate or other
legal action as of the Closing Date. This Agreement, the LLC Agreement and
the other Definitive Agreements to which each Schott Party is a party have
been duly executed and delivered by each Schott Party, and each constitutes
a valid and legally binding obligation of each Schott Party enforceable
against such Schott Party in accordance with its terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws of general application relating to or affecting enforcement of
creditors' rights, and by general equitable principles.
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(d) Effect of this Agreement. Neither the execution and delivery of
this Agreement the LLC Agreement, or the other Definitive Agreements to
which each Schott Party is a party, nor the consummation of the
transactions contemplated hereby or thereby, nor compliance by each Schott
Party with any of the provisions hereof or thereof will: (i) conflict with
or result in a breach of any provision of any Schott Party's articles of
incorporation or bylaws or other constitutive documents; (ii) violate,
breach, or, with the giving of notice or passage of time, constitute an
event of default (or give rise to any right of termination, cancellation,
or acceleration) under any of the terms, conditions, or provisions of any
note, bond, mortgage, indenture, license, agreement, or other instrument or
obligation to which such Schott Party is a party, or by which such Schott
Party or any material portion of its properties or assets may be bound,
except for such violations, breaches, or defaults (or right of termination,
cancellation, or acceleration): (A) as to which requisite waivers or
consents shall have been obtained by the Execution Date, or (B) which taken
as a whole are not material to the business or financial condition of such
Schott Party or any of its properties or assets.
(e) Schott Licensed Patents and Knowhow.
(i) Schott has the right, power, and authority to license to the
Company and to Donnelly, pursuant to this Agreement, the LLC Agreement
and the Schott License Agreement, its rights in and to the Schott
Licensed Patents and Schott Licensed Knowhow and improvements thereto.
(ii) Schott owns the Schott Licensed Patents and Schott Licensed
Knowhow and such rights are not subject to any lien, encumbrance or
claim of ownership of any kind by any third party.
(iii) The Schott Licensed Patents have been issued or applied for
as indicated in Exhibit E hereof.
(iv) To the knowledge of Schott, Schott has not engaged in any
conduct, or omitted to perform any necessary act, the result of which
could invalidate any of the Schott Licensed Patents or adversely
affect the enforceability of any of the Schott Licensed Patents.
(v) To the knowledge of Schott, no trade secrets, inventions,
licenses, copyrights, patents, or patent applications embodied in the
Schott Licensed Patents or Schott Licensed Knowhow (1) are being
contested or infringed upon or (2) would in the conduct of the
business of the Company infringe upon or violate the United States or
foreign patents, trade secrets, or copyrights of any other Person, and
neither Schott nor any of its Affiliates has, within the last three
years, received any notice of any such contest or infringement.
(f) Disclosure. No representation or warranty by any Schott Party in
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements made therein, in
light of the circumstances under which they are made, not misleading.
Section 5.02 Representations by Donnelly. Donnelly hereby represents and
warrants to Schott as follows, with effect as of Effective Date:
(a) Organization and Standing. Donnelly is a corporation, duly
organized, validly existing, and in good standing under the laws of the
State of Michigan.
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(b) Corporate Power and Authority. Donnelly has all requisite
corporate power and authority to carry on its business as it is now being
conducted; to own and operate the properties and assets which it now owns
and operates; and to execute, deliver, and perform the provisions of this
Agreement, the LLC Agreement and each of the other Definitive Agreements to
which Donnelly is a party.
(c) Authorization, Execution, and Delivery. The execution of this
Agreement, the LLC Agreement, and each of the other Definitive Agreements
to which Donnelly or any of its Affiliates is a party, the delivery thereof
by Donnelly, and the consummation of the transactions contemplated hereby
and thereby have been duly and validly authorized by all necessary
corporate action. This Agreement, the LLC Agreement, and each of the other
Definitive Agreements to which Donnelly is a party have been duly executed
and delivered by Donnelly and constitute the valid and legally binding
obligations of Donnelly, enforceable against Donnelly in accordance with
their respective terms except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws of general
application relating to or affecting enforcement of creditors' rights, and
by general equitable principles.
(d) Effect of this Agreement. Neither the execution and delivery of
this Agreement, the LLC Agreement or any other Definitive Agreement to
which Donnelly is a party, nor the consummation of the transactions
contemplated hereby and thereby nor compliance by Donnelly with any of the
provisions hereof and thereof, will (i) conflict with or result in a breach
of any provision of Donnelly's certificate of incorporation or bylaws; or
(ii) violate, breach, or, with the giving of notice or passage of time,
constitute an event of default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms, condition, or
provisions of any note, bond, mortgage, indenture, license, agreement, or
other instrument or obligation to which Donnelly is a party, or by which
Donnelly or any material portion of its properties or assets may be bound,
except for such violations, breaches, or defaults (or rights of
termination, cancellation, or acceleration): (A) as to which requisite
waivers or consents shall have been obtained by the Execution Date, or (B)
which taken as a whole are not material to the business or financial
condition of Donnelly or any of its properties or assets.
(e) Donnelly Licensed Patents and Knowhow.
(i) Donnelly has the right, power, and authority to license to
the Company and to Schott, pursuant to this Agreement, the LLC
Agreement and the Donnelly License Agreement, its rights in and to the
Donnelly Licensed Patents and Donnelly Licensed Knowhow and
improvements thereto.
(ii) Donnelly owns the Donnelly Licensed Patents and Donnelly
Licensed Knowhow and such rights are not subject to any lien,
encumbrance or claim of ownership of any kind by any third party.
(iii) The Donnelly Licensed Patents have been issued or applied
for as indicated in Exhibit A hereof.
(iv) To the knowledge of Donnelly, Donnelly has not engaged in
any conduct, or omitted to perform any necessary act, the result of
which could invalidate any of the Donnelly Licensed Patents or
adversely affect the enforceability of any of the Donnelly Licensed
Patents.
(v) To the knowledge of Donnelly, no trade secrets, inventions,
licenses, copyrights, patents, or patent applications embodied in the
Donnelly Licensed Patents or Donnelly Licensed Knowhow (1) are being
contested or infringed upon or (2) would in the conduct of the
business of the Company infringe upon or violate the United States or
foreign patents, trade secrets, or copyrights
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of any other Person, and neither Donnelly nor any of its Affiliates
has, within the last three years, received any notice of any such
contest or infringement.
(f) ATC Assets and ATC Operation.
(i) Donnelly has good and marketable title to all of the ATC
Assets, free and clear of all liens, pledges, charges, restrictions
and encumbrances, whether legal or equitable, except as noted in
Schedule C. The ATC Assets and the ATC facility in Tucson, Arizona are
in normal operating condition and repair, normal wear and tear and
down-time excepted, permit the operations of the ATC Operation to be
conducted as they are presently conducted, and have been adequately
maintained. The tangible ATC Assets will, in all material respects, be
transferred as of the Closing Date to the Company, in an operable
condition, normal wear and tear and down-time excepted.
(ii) Upon the consummation of this Agreement and the other
Definitive Agreements, as of the Closing Date the Company will hold
substantially all of the assets relating or pertaining in any way to
the operations of the ATC Operation in Tucson and the research and
development of EC Products by Donnelly, and no other assets relating
or pertaining in any way to the ATC Operation or the research and
development of EC Products by Donnelly will be held by any other
person whatsoever, including but not limited to Donnelly and any of
its Affiliates.
(iii) The ATC Assets and the ATC Operation in Tucson are fully in
compliance with any applicable federal, state, local or foreign law
(including common law), statute, rule, ordinance, rule regulation or
other requirement, including any judicial or administrative order,
consent decree or judgment relating to the environment, natural
resources, or public or employee health and safety.
(iv) All applicable foreign, U.S. federal, state, and local tax
returns and reports with respect to income, sales, use, property,
value-added, excise and all other taxes and assessments of every kind
have been filed with respect to the ATC Assets and the ATC Operation
with the appropriate governmental agencies in each and every
applicable jurisdiction.
(v) With respect to the ATC Assets and the ATC Operations, there
exist no liabilities or claims relating or pertaining to the sale or
sales of goods shipped, any failure or alleged failure of such goods
to conform to customer or product specifications or warranties
applicable to such goods by contract or under law or any failure to
provide adequate warnings or instructions for such goods.
(vi) On or prior to the Closing Date, Donnelly will deliver to
Schott a net asset statement as at April 5, 1999, and related notes,
for the ATC Operation (together with such notes, the "Statement of Net
Assets"), a copy of which is annexed to Schedule C. As of the Closing
Date, the Statement of Net Assets will be complete, accurate and
current in all material respects. All of the ATC Assets and all of the
Assumed ATC Obligations will be completely, accurately and currently
described in the Statement of Net Assets.
(g) Disclosure. No representation or warranty by Donnelly in this
Agreement contains any untrue statement of a material fact, or omits to
state a material fact necessary to make the statements made therein, in
light of the circumstances under which they were made, not misleading.)
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Section 5.03 Survival of Representations and Warranties. The
representations and warranties set forth in this Article V shall survive until
the fourth (4th) anniversary of the Closing Date.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.01 Schott. The obligations of Schott to proceed to the Closing
shall be subject to the following conditions:
(a) LLC Agreement. Donnelly shall have executed and delivered the LLC
Agreement, and the Company shall have been organized and shall be validly
existing under the laws of the State of Delaware.
(b) Definitive Agreements. Donnelly and the Company, respectively,
shall have executed and delivered each of the Definitive Agreements to
which either of them is a party.
(c) ATC Assets and ATC Operation.
(i) Donnelly shall have transferred all of the ATC Assets to the
Company.
(ii) Since the execution date of this Agreement, the ATC
Operation shall have been conducted in the ordinary course as
conducted by Donnelly and there shall not have been (A) any materially
adverse change in the condition (financial or otherwise), assets,
liabilities, business, operations or prospects of the ATC Operation
and no fact or condition shall exist, or be contemplated or
threatened, which would result in any such materially adverse change;
(B) any material damage o destruction of any ATC Assets by fire or
other casualty (whether or not covered by insurance), or the taking of
any material part of the ATC Assets by condemnation or eminent domain;
(C) any mortgage, pledge, lien, charge or other encumbrance, other
than workmen's, materialmen's or similar liens arising in the ordinary
course of the conduct of the ATC Operation, placed upon or attaching
to any ATC Assets (except as disclosed in Schedule C) unless Donnelly
shall have provided for the satisfaction or discharge of the same on
or prior to the Closing Date; or (D) any bonus, stock option, profit
sharing, pension, retirement or other similar arrangement or plan, or
employment contract for any employee, affiliate or agent of the ATC
Operation instituted or entered into or amended by Donnelly, or, any
increase in the compensation payable to any such employee, affiliate
or agent other than in the ordinary course of business conducted in
accordance with past practice.
(iii) Since the execution date of this Agreement, no key
employees shall have left the ATC Operation.
(d) Consents, Waivers, and Authorizations. Schott shall have obtained
any and all consents, waivers, and authorizations (including any
governmental, judicial or administrative consents, waivers, or
authorizations) necessary for consummation of the transactions contemplated
by this Agreement, the LLC Agreement and the other Definitive Agreements.
(e) Authorization of Transaction. All actions necessary to authorize
the execution, delivery, and performance of this Agreement, the LLC
Agreement and each of the other Definitive Agreements, and the consummation
of the transactions contemplated hereby and thereby, shall have been duly
and validly taken, respectively, by Donnelly and by the Company.
(f) Absence of Challenge. Schott shall have determined that no action
or proceeding has been instituted before any court or other governmental
body, the result of which is substantially likely to
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prevent or make illegal the consummation of the transactions contemplated
by this Agreement, the LLC Agreement or any of the other Definitive
Agreements.
(g) Opinion of Counsel. Schott shall have received an opinion,
addressed to Schott and dated as of the Closing Date, from Varnum,
Riddering, Schmidt & Howlett LLP, Donnelly's outside counsel, in form and
substance reasonably satisfactory to Schott, substantially in the form set
forth in Exhibit J hereof.
(h) Review of Agreements. Donnelly shall have completed the thorough
and complete review of all agreements relating or pertaining to EC Products
or Electrochromic Material to which Donnelly or any of its Affiliates is a
party and delivered the required written notice to Schott, as provided in
Section 4.2(b) of the Donnelly License Agreement.
(i) Representations and Warranties. Each of Donnelly's representations
and warranties set forth in Article V shall be true and correct as if made
as of the Closing Date.
Section 6.02 Donnelly. The obligation of Donnelly to proceed to the
Closing shall be subject to the following conditions:
(a) LLC Agreement. Schott North America shall have executed and
delivered the LLC Agreement, and the Company shall have been organized and
shall be validly existing under the laws of the State of Delaware.
(b) Definitive Agreements. The Schott Parties and the Company,
respectively, shall have executed and delivered each of the Definitive
Agreements to which either of them is a party.
(c) Company's Assumption of Assumed ATC Obligations. The Company shall
have assumed, effective as of the Closing Date, all of the Assumed ATC
Obligations, as provided in the LLC Agreement.
(d) Consents, Waivers, and Authorizations. Donnelly shall have
obtained any and all consents, waivers, and authorizations (including any
governmental, judicial or administrative consents, waivers, or
authorizations) necessary for consummation of the transactions contemplated
by this Agreement, the LLC Agreement and the other Definitive Agreements.
(e) Authorization of Transaction. All actions necessary to authorize
the execution, delivery, and performance of this Agreement, the LLC
Agreement and each of the other Definitive Agreements, and the consummation
of the transactions contemplated hereby and thereby, shall have been duly
and validly taken, respectively, by Schott and by the Company.
(f) Absence of Challenge. Donnelly shall have determined that no
action or proceeding has been instituted before any court or other
governmental body, the result of which is substantially likely to prevent
or make illegal the consummation of the transactions contemplated by this
Agreement, the LLC Agreement or any of the other Definitive Agreements.
(g) Opinion of Counsel. Donnelly shall have received an opinion,
addressed to Donnelly and dated as of the Closing Date, from Rogers & Wells
LLP, Schott's outside counsel, in form and substance reasonably
satisfactory to Donnelly, substantially in the form set forth in Exhibit K
hereof.
(h) Representations and Warranties. Each of Schott's representations
and warranties set forth in Article V shall be true and correct as if made
as of the Closing Date.
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(i) Schott Payment on Closing Date. Schott North America shall have
made the $2,000,000 payment on the Closing Date, as provided in Section
3.01(a).
ARTICLE VII
MANAGEMENT
The Company shall be governed and managed as provided in the LLC Agreement.
ARTICLE VIII
WITHDRAWAL; DISSOLUTION AND TERMINATION
All matters relating or pertaining to a Member's withdrawal or deemed withdrawal
from the Company, the dissolution or liquidation of the Company, and the
transfer of its interest in the Company to third parties shall be governed by
the LLC Agreement.
ARTICLE IX
PROPRIETARY INFORMATION
Section 9.01 Exchange. It is contemplated that the Parties prior to the
Closing Date, and the Members and the Company, during the term of this
Agreement, will exchange Proprietary Information among themselves as necessary
to effectuate the purposes of this Agreement.
Section 9.02 Usage. Except to the extent otherwise agreed upon, each Party
and the Company may use Proprietary Information received from the other Party or
its Affiliates or from the Company solely for the purpose of LLC business, and
for no other purpose.
Section 9.03 Permitted Disclosure. The Parties and the Company may disclose
Proprietary Information received from the other Party, an Affiliate of the other
Party, or the Company only to their Affiliates and to the Company, and to the
counsel, consultants, and contractors of the Company, provided that such
disclosure and use by the recipient is in furtherance of the Company business,
and as permitted under the Donnelly License Agreement and Schott License
Agreement. The Parties hereby agree for themselves and on behalf of the Company
and any Affiliate to be bound by all of the confidentiality obligations with
respect to Proprietary Information set forth herein, and to cause any
consultant, or contractor receiving Proprietary Information to agree in writing
to be similarly bound.
Section 9.04 Nondisclosure and Nonuse. Other than as set forth in Sections
9.02 and 9.03 hereof, (i) Donnelly shall not use, divulge, or disclose
Proprietary Information received from the Schott Parties or any of their
Affiliates, or from the Company and (ii) Schott shall not use, divulge, or
disclose Proprietary Information received from Donnelly or any of its
Affiliates, or from the Company; provided, however, that disclosure of
Proprietary Information shall be permitted to the extent compelled by the valid
legal process of a court or governmental agency having jurisdiction, so long as
the Party receiving such legal process gives prompt notice to the Party
originally providing such Proprietary Information so that the providing Party
may seek an appropriate protective order or other relief, or waive compliance
with this requirement. The obligations set forth in this Article IX shall
survive the termination of this Agreement.
Section 9.05 Exceptions. The obligations set forth in this Article IX with
respect to the treatment of Proprietary Information are not applicable to:
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(a) Information which becomes known or available to the receiving
Party on a non-confidential basis from a source other than the disclosing
Party without breach of this Agreement or any other agreement by the
recipient or the person disclosing such information to the recipient;
(b) Information which is known by the receiving Party on a
non-confidential basis at the time of disclosure as documented in writing
antedating the disclosure by a Party hereunder;
(c) Information which is approved for release by written authorization
of a representative of the disclosing Party;
(d) Information which is or becomes publicly available without breach
of this Agreement by the receiving Party.
Section 9.06 No License Obligation. Except as expressly set forth herein or
in any other Definitive Agreement, nothing in this Agreement shall grant, imply,
or constitute a license, or obligation to license, to the Company or any Party
any intellectual or industrial property owned by a Party or any of its
Affiliates.
Section 9.07 Specific Performance. The Parties hereby declare that the
respective rights of the Parties under this Article IX are of a unique nature,
the loss of which may cause irreparable harm, and that it may be impossible to
measure in money the damages which shall accrue to a Party hereto by reason of
the loss of such rights or a failure to perform any of the obligations under
this Article IX. Accordingly, in the event of a breach or threatened breach of
this Article IX, notwithstanding any other provision of this Agreement, the
Party whose rights are jeopardized shall be entitled, as a matter of right, to a
final order from a court of competent jurisdiction of injunctive and other
equitable relief; and if any Party hereto shall institute any action or
proceeding to enforce by specific performance or other equitable relief the
provisions hereof, any person against whom such action or proceeding is brought
hereby waives the claim or defense in such action that an adequate remedy at law
is available, and such person shall not urge in any such action or proceeding
the claim or defense that such remedy at law exists.
ARTICLE X
INDEMNIFICATION
Section 10.01 Indemnification by Schott. Schott shall indemnify and hold
Donnelly and Donnelly's Affiliates and their respective directors, officers,
managers, employees and agents (collectively, the "Donnelly Indemnitees")
harmless from any and all liabilities, fines, penalties, obligations, claims,
contingencies, damages, costs and expenses, including all court costs and
reasonable attorneys' fees and disbursements (collectively, "Losses"), that any
Donnelly Indemnitee may suffer incur as a result of or relating to the
inaccuracy in or breach of any representation or warranty, or the breach of any
covenant or agreement, of Schott made pursuant to this Agreement.
Section 10.02 Indemnification by Donnelly.
(a) Donnelly shall indemnify and hold each of the Schott Parties and
their Affiliates and their respective directors, officers, managers,
employees and agents (collectively, the "Schott Indemnitees") harmless from
any and all Losses, that any Schott Indemnitee may suffer or incur as a
result of or relating to the inaccuracy in or breach of any representation
or warranty, or the breach of any covenant or agreement, of Donnelly made
pursuant to this Agreement.
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(b) Donnelly shall indemnify and hold each of the Schott Indemnitees
and the Company, and its managers, officers, employees and agents
(collectively, the "Company Indemnitees") harmless from any and all Losses,
that any Schott Indemnitee or Company Indemnitee, as the case may be, may
suffer or incur as a result of or relating to any liability, obligation,
contract or commitment (whether known or unknown, contingent or fixed),
arising out of the ownership or operation of the ATC Assets or the ATC
Operation on or prior to the Closing Date, except for the Assumed ATC
Obligations.
Section 10.03 Notices. Any Party entitled to receive indemnification under
this Article X (the "Indemnified Party") agrees to give prompt written notice (a
"Claim Notice") to the party or parties required to provide such indemnification
(the "Indemnifying Parties") upon the occurrence of any indemnifiable Loss or
the assertion of any claim or the commencement of any action or proceeding in
respect of which such a Loss may reasonably be expected to occur (such a claim,
action or proceeding being referred to as a "Claim"), but the Indemnified
Party's failure to give such notice shall not affect the obligations of the
Indemnifying Party under this Article X except to the extent that the
Indemnifying Party is prejudiced thereby. Such written notice shall include a
description of the event or events forming the basis of such Loss or Claim and
the amount involved, unless such amount is uncertain or contingent, in which
event the Indemnified Party shall give an additional written notice when the
amount becomes fixed or reasonably determinable.
Section 10.04 Defense of Claims. The Indemnifying Party may elect to assume
and control the defense of any Claim, including the employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of expenses
related thereto, if (i) the Indemnifying Party acknowledges its obligation to
indemnify the Indemnified Party for any Losses resulting from such Claim and
provides reasonable evidence to the Indemnified Party of its financial ability
to satisfy such obligation, and (ii) the Claim does not seek to impose any
material liability or obligation on the Indemnified Party other than for money
damages. If such conditions are satisfied and the Indemnifying Party elects to
assume and control the defense of a Claim, then (x) the Indemnified Party shall
not be liable for any settlement of such Claim effected without its consent,
which consent shall not be unreasonably withheld; (y) the Indemnifying Party may
not settle such Claim without the consent of the Indemnified Party (not to be
unreasonably withheld) unless such settlement includes a full and unconditional
release of the Indemnified Party; and (z) the Indemnified Party may employ
separate counsel and participate in the defense thereof, but the Indemnified
Party shall be responsible for the reasonable fees and expenses of such counsel
unless (1) the Indemnifying Party has failed to assume the defense of such Claim
or to employ counsel with respect thereto or (2) a conflict of interest exists
between the interests of the Indemnified Party and the Indemnifying Party that
requires representation by separate counsel, in which case the reasonable fees
and expenses of such separate counsel shall be paid by the Indemnifying Party.
If such conditions are not satisfied, the Indemnified Party may assume and
control the defense of the Claim at the expense of the Indemnifying Party;
provided that the Indemnified Party may not settle any such Claim without the
consent of the Indemnifying Party (not to be unreasonably withheld) unless such
settlement includes a full and unconditional release of the Indemnifying Party;
and further provided that the Indemnifying Party is given a reasonable
opportunity to participate in such defense (at the Indemnifying Party's
expense).
Section 10.05 Sole Remedy. The indemnification provisions set forth in this
Article X constitute the Schott Indemnitees' and the Donnelly Indemnitees' sole
and exclusive remedy in respect of the breach of any representation, warranty,
covenant or agreement made in this Agreement or pursuant hereto or any
allegation by a third party that, if true, would constitute such a breach. The
indemnification provisions set forth in this Article X shall survive the
termination of this Agreement.
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ARTICLE XI
TERM AND TERMINATION
Section 11.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual written consent of the Parties; or
(b) by any Party if the Closing shall not have occurred on or before
July 1, 1999; provided, however, that that the right to terminate this
Agreement under this paragraph (b) shall not be available to any Party
whose gross negligence or willful misconduct has resulted in such Party's
failure to fulfill any obligation under this Agreement which has been the
cause of, or resulted in, the failure of the Closing to occur on or before
such date.
Section 11.02 Term. Unless terminated earlier by the mutual consent of the
Parties, this Agreement shall remain in effect until the withdrawal of either
Member from the Company.
Section 11.03 Effect of Termination. If this Agreement is terminated for
any reason, Section 4.08, Section 4.11, Article IX, Article X, Section 12.01,
Section 12.02, Section 12.07, Section 12.13 and Section 12.14 shall survive such
termination; provided, however, that Section 4.11 shall survive such termination
only if the Company has been organized pursuant to the LLC Agreement and the LLC
shall not have been terminated prior to June 30, 1999; provided, further, that
nothing set forth in this Section 11.03 shall relieve any Party from liability
for any material breach hereof.
ARTICLE XII
MISCELLANEOUS
Section 12.01 Public Announcements. Subject to any applicable requirements
of any federal, state, provincial or local laws or regulations of the United
States and of the Federal Republic of Germany (including without limitation, all
applicable securities and antitrust laws or regulations and any listing
agreement with, or rules and regulations of, any stock exchange), neither Party
shall make or cause to be made or take any action that would require the
issuance of, any press release, public announcement, or statement with respect
to the transactions contemplated by this Agreement or any of the provisions
hereof without the prior written consent of the other Party as to the form,
content, and timing of such announcement or disclosure. If a disclosure is, in
the reasonable judgment of any Party, required by the laws applicable to such
Party, the proposed disclosure shall be submitted to the other Party for its
review and approval, and the submitting Party shall exercise good faith in
making changes to the disclosure reasonably requested by the other Party. Any
proposed changes from the receiving Party shall be provided within forty-eight
(48) hours of such Party's receipt of the proposed disclosure.
Section 12.02 Dispute Resolution. Subject to Section 9.07 hereof, all
disputes ("Disputes") arising out of, or in any way connected to the Joint
Venture, this Agreement or the performance of the Parties hereunder, shall be
resolved by arbitration under the Rules of Arbitration of the American
Arbitration Association by three arbitrators appointed in accordance with said
Rules. The Parties relinquish their right to seek court relief for any Dispute,
except as may be required to enforce an arbitration award. The seat of the
arbitration shall be New York, New York, and the arbitration shall be conducted
in the English language. The Parties shall be entitled to call witnesses, cross
examine the other Party's witnesses, and to file legal briefs. The arbitrators
shall be bound by the express intentions of the Parties as set forth herein and
shall render their decision in writing based on this Agreement and the facts as
proven at the arbitration hearing. Construction.
21
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Section 12.03 Construction
(a) Words. All references in this Agreement to the singular shall
include the plural where applicable, and all references to gender shall
include both genders and the neuter.
(b) No Presumption. In interpreting and applying the terms and
provisions of this Agreement, no presumption shall be made against the
Party that drafted such terms and provisions.
Section 12.04 Severability. If any part of this Agreement for any reason
shall be declared invalid, such invalidity shall not affect the validity of any
remaining portion, which shall remain in full force and effect.
Section 12.05 Further Assurances. Each Party shall, upon request, furnish,
execute, and deliver such documents, instruments, certificates, notices, or
other further assurances as any other Party may reasonably require as necessary
or appropriate to effect the purposes of this Agreement or to confirm the rights
created or arising hereunder.
Section 12.06 Representations, Warranties, Covenants and Obligations. The
representations and warranties, and all covenants, agreements, and obligations
of the Parties contained in this Agreement, as well as in any certificate or
other instrument delivered by or on behalf of any Party, shall be true and
correct in all material respects and have effect as of the Execution Date and as
of the Closing Date.
Section 12.07 Expenses. Each Party shall pay its own expenses incident to
this Agreement and the transactions contemplated hereby.
Section 12.08 Benefit. No person who is not a party to this Agreement shall
have any rights or derive any benefit hereunder.
Section 12.09 Entire Agreement and Amendment. This Agreement and the other
Definitive Agreements constitute the entire agreement among the Parties other
than the Confidentiality Agreement and supersedes all prior oral or written
agreements or understandings of the Parties with regard to the subject matter
hereof, including, without limitation, the Letter of Intent dated February 15,
1999. No modification, waiver, termination, or cancellation of any right or
claim under this Agreement shall be effective unless in writing and signed by
the Party against which it is sought to be enforced.
Section 12.10 Delays or Omissions. Except as expressly provided in this
Agreement, no delay or omission to exercise any right, power, or remedy accruing
to a Party hereunder upon any breach or default of any Party under this
Agreement shall impair any such right, power, or remedy, neither shall it be
construed to be a waiver of any such breach or default, nor an acquiescence
therein or a waiver of or acquiescence in any similar breach or default
thereafter occurring; neither shall any waiver of any single breach or default
be deemed a waiver of any other breach or default theretofore or thereafter
occurring.
Section 12.11 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions of this Agreement shall inure to the benefit of,
and be binding upon, the successors and assigns of the Parties; provided,
however, that no Party may assign or transfer its interest hereunder or any of
its rights or obligations hereunder, except in accordance with the terms hereof.
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Section 12.12 Headings. Article, Section, and subsection headings of this
Agreement are for convenience only and are not to be construed as part of this
Agreement or as defining or limiting in any way the scope or intent of the
provisions hereof.
Section 12.13 Governing Law. The terms and conditions of this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
New York and of the United States of America, without giving effect to the
doctrine of conflict or laws.
Section 12.14 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:
(a) If to Schott:
Schott Corporation
Schott North America Manufacturing, Inc.
3 Odell Plaza
Yonkers, New York 10701
Attention: Manfred Jaeckel, Esq.
Facsimile: (914) 986-8585
and
Schott Glas
Legal Department
Hattenbergstrabe 10
P.O. Box 2480
D-55014 Mainz
Federal Republic of Germany
Attention: Dr. Wilhelm Niemeier
Facsimile: 011-49-61-31-66-2098
and a required copy to:
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
Attention: Richard T. McDermott, Esq.
Facsimile: (212) 878-8375.
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(b) If to Donnelly:
Donnelly Corporation
49 West Third Street
Holland, Michigan 49423
Attention: Niall Lynam
Facsimile: (616) 786-5185
With a copy to:
Varnum, Riddering, Howlett & Schmidt LLP
Bridgewater Place
333 Bridge Street, N.W., P.O. Box 352
Grand Rapids, Michigan 49504
Attention: Daniel Molhoek, Esq.
Facsimile: (616) 336-7000.
Section 12.15 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original document.
Section 12.16 Amendment. This Agreement may not be modified or amended
without the written consent of each of the Parties.
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IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement,
intending for it to have legal and binding effect, as of the date and year first
above written.
SCHOTT CORPORATION
By: /s/ Guy Pierre De Conincx
Name: Guy Pierre De Conincx
Title: Vice Chairman, Pres & CEO
SCHOTT NORTH AMERICA MANUFACTURING, INC.
By: /s/ Guy Pierre De Conincx
Name: Guy Pierre De Conincx
Title: Pres.
SCHOTT GLAS
By: /s/ Dr. Ungeheuer /s/ R. Langfeld
Name: Dr. Ungeheuer Dr. Roland Langfeld
Title: Member of the Vice President R&D
Board of
Management
DONNELLY CORPORATION
By: /s/ Scott E. Reed
Name: Scott E. Reed
Title: Sr VP & CFO
<PAGE>
EXHIBIT 10.29
LIMITED LIABILITY COMPANY AGREEMENT
of
SCHOTT-DONNELLY LLC SMART GLASS SOLUTIONS
by and between
SCHOTT NORTH AMERICA MANUFACTURING, INC.
And
DONNELLY CORPORATION
Dated as of April 5, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS .................................................. 1
Section 1.01 Definitions ............................................. 1
Section 1.02 Definitions Generally ................................... 3
ARTICLE II GENERAL PROVISIONS ........................................... 4
Section 2.01 Formation ............................................... 4
Section 2.02 Name .................................................... 4
Section 2.03 Term .................................................... 4
Section 2.04 Purpose ................................................. 4
Section 2.05 Registered Office/Agent ................................. 4
Section 2.06 Principal Office ........................................ 4
ARTICLE III CAPITAL CONTRIBUTIONS; ISSUANCE OF SHARES .................... 4
Section 3.01 Initial Capital Contributions ........................... 4
Section 3.02 Consents of Third Parties ............................... 5
Section 3.03 Issuance of Additional Shares ........................... 5
Section 3.04 Additional Capital Contributions ........................ 5
Section 3.05 Company's Assumption of Assumed ATC Obligations ......... 6
Section 3.06 Withdrawals, Interest and Capital Accounts .............. 6
Section 3.07 Value of Contributions .................................. 6
ARTICLE IV DISTRIBUTIONS ................................................ 7
Section 4.01 Distributions ........................................... 7
Section 4.02 Distributions in Kind ................................... 7
Section 4.03 Tax Withholding ......................................... 7
ARTICLE V ALLOCATIONS AND OTHER TAX MATTERS ............................ 7
Section 5.01 Capital Accounts ........................................ 7
Section 5.02 Allocation of Net Profits and Net Losses ................ 8
Section 5.03 Definition of Net Profits and Net Losses ................ 8
Section 5.04 Federal Income Tax Allocations .......................... 9
Section 5.05 Elections ............................................... 9
Section 5.06 Fiscal Year ............................................. 9
Section 5.07 Substantial Economic Effect ............................. 9
Section 5.08 Other Tax Matters ....................................... 9
ARTICLE VI MANAGEMENT ................................................... 10
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<PAGE>
TABLE OF CONTENTS
(continued)
Page
Section 6.01 Delegation of Authority ................................. 10
Section 6.02 Management Committee .................................... 10
(a) Voting and Members ...................................... 10
(b) Meetings and Notices .................................... 11
(c) Power of Members ........................................ 11
(d) Enforcement of Company's Rights ......................... 11
(e) Deadlock ................................................ 12
Section 6.03 Employees; Officers ..................................... 12
Section 6.04 Annual Business Plan and Budget ......................... 12
Section 6.05 Members' Consents or Approvals .......................... 13
Section 6.06 Major Actions ........................................... 13
ARTICLE VII BOOKS AND RECORDS ............................................ 13
Section 7.01 Books and Records ....................................... 13
Section 7.02 Reports to Members ...................................... 14
ARTICLE VIII WITHDRAWAL OF INITIAL MEMBERS; TRANSFERS;
PARTICIPATION RIGHTS ......................................... 14
Section 8.01 Withdrawal in First Five Years .......................... 14
Section 8.02 Withdrawal After Five Years ............................. 16
Section 8.03 Admission of Substitute or Additional Members ........... 17
Section 8.04 Restrictions on Transfer ................................ 18
Section 8.05 Right of First Refusal; Right of First Offer ............ 18
ARTICLE IX EXCULPATION AND INDEMNIFICATION .............................. 19
Section 9.01 Exculpation and Indemnification ......................... 19
Section 9.02 Indemnification by Initial Members ...................... 19
Section 9.03 Liability of the Members ................................ 20
ARTICLE X DISSOLUTION, LIQUIDATION AND TRANSFER ........................ 21
Section 10.01 Dissolution ............................................. 21
Section 10.02 Liquidation ............................................. 21
Section 10.03 Claims of Members ....................................... 22
Section 10.04 Intellectual Property ................................... 22
ARTICLE XI MISCELLANEOUS ................................................ 23
Section 11.01 Amendments .............................................. 23
Section 11.02 Notices ................................................. 23
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<PAGE>
TABLE OF CONTENTS
(continued)
Section 11.03 Counterparts ............................................ 24
Section 11.04 No Third-Party Beneficiaries ............................ 24
Section 11.05 Governing Law ........................................... 24
Section 11.06 Publicity ............................................... 24
Section 11.07 Dispute Resolution ...................................... 24
Section 11.08 Headings ................................................ 25
Section 11.09 Survival ................................................ 25
Section 11.10 No Waiver ............................................... 25
Section 11.11 Entire Agreement ........................................ 25
Section 11.12 Further Assurances ...................................... 25
EXHIBIT A - INITIAL CAPITAL CONTRIBUTIONS OF INITIAL MEMBERS ................ 27
EXHIBIT B - INITIAL MANAGEMENT COMMITTEE, PRESIDENT AND CHAIRMAN ............ 28
-iii-
<PAGE>
This LIMITED LIABILITY COMPANY AGREEMENT dated as of April 5, 1999, by and
between SCHOTT NORTH AMERICA MANUFACTURING, INC., a Maryland corporation
("Schott"), and DONNELLY CORPORATION, a Michigan corporation ("Donnelly"),
W I T N E S S E T H :
WHEREAS, having formed a limited liability company with the name
Schott-Donnelly LLC Smart Glass Solutions (the "Company") under the Delaware
Limited Liability Company Act, as in effect from time to time, or any successor
statute thereto (the "Act") by the filing of a Certificate of Formation with the
Secretary of State of the State of Delaware on the date hereof, the parties
hereto now desire to enter into this Agreement to govern their rights and
obligations as members of the Company;
WHEREAS, Schott and Donnelly have entered into that certain Joint Venture
Agreement, dated as of April 5, 1999 (the "Joint Venture Agreement");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto, intending to be legally
bound by the terms hereof applicable to each of them, hereby agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. When used herein, the following terms have the
meanings set forth below. Capitalized terms used but not defined in this
Agreement shall have the meanings ascribed to such terms in the Joint Venture
Agreement.
"Agreed Fair Market Value" shall mean the fair market value of an asset, as
agreed upon from time to time by the Members. If the Members cannot agree on a
value of such asset, they shall attempt to agree upon an independent qualified
party to value the same. If the Members cannot agree upon such a party, each of
the Members shall specify a qualified independent person or entity to evaluate
such asset, and the two persons or entities so appointed shall appoint a third
person or entity to appraise the value thereof. The "Agreed Fair Market Value"
shall then be the value of such asset as agreed upon by any two of such
appraisers. If the asset is a Member's Interest in the Company, the "Agreed Fair
Market Value" thereof shall be the Agreed Fair Market Value of the Company
multiplied by that Member's Membership Percentage.
"Agreement" means this Limited Liability Company Agreement as it may be
amended, supplemented or otherwise modified from time to time.
"Annual Business Plan" has the meaning ascribed to that term in Section
6.04.
"Business" means the businesses conducted by the Company, as contemplated
under the Joint Venture Agreement, as such businesses may be expanded or
otherwise changed from time to time by the Management Committee pursuant to the
terms hereof.
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"Business Day" means a day that is not a Saturday, Sunday or other day on
which banking institutions in the State of New York are authorized or required
by law, regulation or executive order to be closed.
"Capital Account" has the meaning ascribed to that term in Section 5.01.
"Certificate of Formation" means the Certificate of Formation of the
Company as filed with the Secretary of State of the State of Delaware, effective
as of the date hereof, as the same may be amended, modified or otherwise
supplemented from time to time in accordance with the terms hereof.
"Claim" has the meaning ascribed to that term in Section 9.02(c).
"Claim Notice" has the meaning ascribed to that term in Section 9.02(c).
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Company" has the meaning ascribed to that term in the preamble.
"Definitive Documents" means this Agreement, the Joint Venture Agreement
and all other agreements and documents contemplated by any of the foregoing, as
the same may be amended, supplemented or otherwise modified in accordance with
the terms hereof or thereof, as applicable.
"Donnelly Indemnitees" has the meaning ascribed to that term in Section
9.02(a).
"Exit Milestone" has the meaning ascribed to that term in Section 8.01(d).
"Expiration Date" shall mean, with respect to the representations and
warranties set forth herein, the fourth (4th) anniversary of this Agreement.
"Indemnified Party" has the meaning ascribed to that term in Section
9.02(c).
"Indemnifying Parties" has the meaning ascribed to that term in Section
9.02(c).
"Initial Capital Contributions" has the meaning ascribed to that term in
Section 3.01.
"Initial Members" means Schott and Donnelly.
"Interest" means the interest of a Member in the Company at any particular
time, including the right of such Member to any and all benefits to which such
Member may be entitled as provided in this Agreement, together with the
obligations of such Member to comply with all the terms and provisions of this
Agreement.
"Losses" means any losses, liabilities, fines, penalties, obligations,
claims, contingencies, damages, costs or expenses, including all court costs and
attorneys' fees and disbursements.
"Management Committee" has the meaning ascribed to that term in Section
6.01.
"Member Nonrecourse Debt" means any Company liability (or portion thereof)
that is a "partner nonrecourse debt" within the meaning of Treasury Regulation
Section 1.704-2(b)(4).
"Members" means the Initial Members and any Persons admitted as additional
or substitute Members of the Company pursuant to Section 8.03.
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<PAGE>
"Membership Percentage" means, with respect to each Member, the number of
such Member's Shares in the Company divided by the total number of outstanding
Shares of the Company, expressed as a percentage.
"Net Losses" has the meaning ascribed to that term in Section 5.03.
"Net Profits" has the meaning ascribed to that term in Section 5.03.
"Remaining Member" has the meaning ascribed to that term in Section
8.02(a).
"Schott Indemnitees" has the meaning ascribed to that term in Section
9.02(b).
"Section 704(c) Property" means any property that is contributed to the
Company at a time when its adjusted tax basis differs from its fair market value
and any Company property that is the subject of a revaluation pursuant to
Treasury Regulation Section 1.704-1(b)(2)(iv)(f) at a time when its adjusted tax
basis differs from its fair market value.
"Shares" means a fractional, undivided share of the Interests of all
Members. The number of Shares outstanding and the holders thereof are set forth
on Exhibit A hereof, as such Exhibit may be amended from time to time pursuant
to Article III. If determined by the Management Committee, the ownership of
Shares shall be evidenced by a certificate in a form approved by the Management
Committee.
"Transfer" means, with respect to any item of property, any direct or
indirect sale, assignment, disposition of or other transfer, pledge or
encumbrance of such item, and "Transferred" has a meaning correlative to the
foregoing.
"Withdrawing Member" has the meaning ascribed to that term in Section
8.02(d) hereof.
SECTION 1.02. Definitions Generally.
(a) Definitions in this Agreement apply equally to both the singular and
plural forms of the defined terms, and shall apply to capitalized terms in the
exhibits and schedules attached hereto, unless otherwise defined in such
exhibits and schedules. The words "include" and "including" shall be deemed to
be followed by the phrase "without limitation" when such phrase does not
otherwise appear. The terms "herein", "hereof" and "hereunder" and other words
of similar import n refer to this Agreement (of which the attached exhibits and
schedules shall be considered a part) as a whole and not to any particular
section, paragraph or subdivision. The article and section titles appear as a
matter of convenience only and shall not affect the interpretation of this
Agreement. All article, section, paragraph, clause, exhibit or schedule
references not attributed to a particular document shall be references to such
parts of this Agreement.
(b) Capitalized terms used but not defined herein shall have the meaning
ascribed to such terms in the Joint Venture Agreement.
3
<PAGE>
ARTICLE II
General Provisions
SECTION 2.01. Formation. The Company has been formed as a limited liability
company pursuant to the provisions of the Act by the filing of the Certificate
of Formation with the Secretary of State of the State of Delaware. Each Member
hereby adopts, confirms and ratifies the Certificate of Formation and all acts
taken in connection therewith.
SECTION 2.02. Name. The name of the Company is "Schott-Donnelly LLC Smart
Glass Solutions." The Management Committee may change the name of the Company or
adopt such trade or fictitious names as it may determine with the unanimous
approval of the Members.
SECTION 2.03. Term. The term of the Company began on the date hereof and
shall continue in perpetuity or until terminated in accordance with the terms
hereof.
SECTION 2.04. Purpose. The purpose of the Company shall be to carry out the
Business contemplated in the Joint Venture Agreement and to carry on any other
lawful business, purpose or activity for a limited liability company under the
Act.
SECTION 2.05. Registered Office/Agent. The name of the Company's registered
agent for service of process shall be Corporation Service Company, and the
address of the Company's registered agent and the address of the Company's
registered office in the State of Delaware shall be 1013 Centre Road,
Wilmington, New Castle County, Delaware 19805-1297. The registered agent and the
registered office of the Company may be changed from time to time by the
Management Committee.
SECTION 2.06. Principal Office. The Company's principal place of business
shall be at Donnelly's Advanced Technology Center at 4545 East Fort Lowell,
Suite 30, Tucson, Arizona 85712, or such other address as the Management
Committee shall specify from time to time by written notice to the Members.
ARTICLE III
Capital Contributions; Issuance of Shares
SECTION 3.01. Initial Capital Contributions.
(a) On the date hereof, the Initial Members shall each make the capital
contributions to the Company specified in this Section 3.01 (collectively, the
"Initial Capital Contributions").
(b) Schott's Initial Capital Contributions shall consist of:
(i) On the Closing Date, Schott shall grant to the Company, as a
capital contribution, a license to the Schott Licensed Patents and the
Schott Licensed Knowhow on the terms of the Schott License Agreement; and
(ii) A commitment to make certain contributions to the Company, in
each case as requested by the Management Committee in accordance with the
then-current Annual Business Plan, and subject to the continuing survival
and operation of the Company, in order to fund up to
4
<PAGE>
nine million five hundred thousand U.S. dollars ($9,500,000) of the initial
expenditures of the Company, as more fully described in Section 3.04(a).
(c) Donnelly's Initial Contribution shall consist of:
(i) On the Closing Date, Donnelly shall contribute to the Company the
ATC Assets, free and clear of all liens and encumbrances, whether legal or
equitable (except as otherwise provided herein or in the Joint Venture
Agreement), as a capital contribution; and
(ii) On the Closing Date, Donnelly shall grant to the Company, as a
capital contribution, certain licenses to the Donnelly Licensed Patents and
the Donnelly Licensed Knowhow, as provided in the Donnelly License
Agreement.
(d) In exchange for the Initial Capital Contributions and the contributions
to be made by Schott pursuant to Section 3.04(a), each Initial Member shall
receive 1,000 Shares, which shall be equal to 50% of the issued and outstanding
Shares as of the Closing Date.
(e) For purposes of the Initial Members' Capital Accounts, the value of the
Initial Members' Initial Capital Contributions are agreed to be as follows:
Donnelly: ATC Assets $450,000
Donnelly License Agreement $1,300,000
Schott: Schott License Agreement $450,000
SECTION 3.02. Consents of Third Parties. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any asset or any claim or right or any benefit arising under or resulting
from such asset if an attempted assignment thereof, without the consent of a
third party, would constitute a breach or other contravention of the rights of
such third party, would be ineffective with respect to any party to an agreement
concerning such asset, or would in any way adversely affect the rights of a
Member or, upon transfer, the Company with respect to such asset. If any
transfer or assignment by a Member to, or any assumption by the Company of, any
interest in, or liability, obligation or commitment with respect to, any asset
requires the consent of a third party, then such assignment or assumption shall
be made subject to such consent being obtained.
SECTION 3.03. Issuance of Additional Shares. From time to time, the
Management Committee, may cause the Company to issue additional Shares or other
Interests to existing or newly-admitted Members in exchange for the contribution
by a Member of additional contributions to the Company. Upon the issuance of
additional Shares, the Membership Percentages of all of the Members shall be
adjusted so that the Membership Percentage of each Member is equal to the
quotient (expressed as a percentage) arrived at by dividing the number of Shares
held by a Member by the total number of Shares then outstanding.
SECTION 3.04. Additional Capital Contributions.
(a) Subject to the terms and conditions of the Joint Venture Agreement and
this Agreement, Schott shall from time to time make additional contributions to
the Company, in each case as requested by the Management Committee in accordance
with the then current Annual Business Plan and subject to the continuing
survival and operation of the Company, in order to fund up to nine million five
hundred thousand U.S. dollars ($9,500,000) of the initial expenditures of the
Company, with respect to its ) research and development and manufacturing
activities, including but not limited to expenditures for the purchase
5
<PAGE>
of equipment and procurement of services provided to the Company, including but
not limited to services provided to the Company by the Parties. Schott's Capital
Account shall be adjusted from time to time, as provided herein, to reflect such
Capital Contributions as they are made by Schott.
(b) Subject to Section 3.2(b)(iv)(B) of the Donnelly License Agreement,
each Initial Member hereby agrees to contribute in any given fiscal year after
the Ramp-Up Period fifty percent (50%) of the total required contributions to
fund the then-current Annual Business Plan. If the Initial Members have not
agreed on an Annual Business Plan for the current fiscal year, each Initial
Member hereby agrees to contribute in that fiscal year 50% of the amount
required to operate the Company but not more than the respective percentage
amounts indicated below of the "Free Cash Flow" specified in the Initial
Business Plan:
<TABLE>
Fiscal Year Percentage of
"Free Cash Flow"
<S> <C>
1999 60.0%
2000 60.0%
2001 67.5%
2002 75.0%
2003 75.0%
</TABLE>
(c) In addition to the capital contributions described in subsections (a)
and (b) of this Section 3.04, upon request from the Management Committee, and
subject to the unanimous consent and approval of the Members, the Members shall
make additional capital contributions to the Company pro rata in accordance with
their respective Membership Percentages.
SECTION 3.05. Company's Assumption of Assumed ATC Obligations. Subject to
the terms and conditions of this Agreement and the Joint Venture Agreement, the
Initial Members hereby agree, effective as of the Closing, to cause the Company
to assume and agree to pay and perform and discharge the Assumed ATC Obligations
as of April 5, 1999. The Initial Members shall cause the Company to execute and
deliver all such other and additional instruments and documents and do all such
other acts and things as may be necessary to effectuate the Company's assumption
of the Assumed ATC Obligations, as contemplated herein and in the Joint Venture
Agreement.
SECTION 3.06. Withdrawals, Interest and Capital Accounts. No Member shall
have the right to withdraw any part of its capital contribution or to receive
any distribution except in accordance with the provisions of this Agreement. No
interest shall be paid on any capital contribution to the Company except as may
be set forth in this Agreement. A Member shall not have any obligation to the
Company or to any other Member to restore any negative balance in the Capital
Account of such Member.
SECTION 3.07. Value of Contributions.
(a) The Initial Members acknowledge and agree that (i) the value of
Schott's contribution of the DC Project to the Company pursuant to Section 4.06
of the Joint Venture Agreement, for purposes of Schott North America's Capital
Account, shall be equal to two times the amount described in
6
<PAGE>
Section 4.06(b)(iii) of the Joint Venture Agreement, and (ii) the value of
Schott's contribution of the DC Project to the Company pursuant to Section 4.07
of the Joint Venture Agreement, for purposes of Schott North America's Capital
Account, shall be equal to two times the amount described in Section
4.07(a)(iii) of the Joint Venture Agreement.
(b) The Initial Members acknowledge and agree that the value of Schott's
contributions to the Company pursuant to Section 4.09 of the Joint Venture
Agreement, for purposes of Schott North America's Capital Account, shall be
equal to two times the amount described in Section 4.09(d)(ii) of the Joint
Venture Agreement.
ARTICLE IV
Distributions
SECTION 4.01. Distributions. Except as provided in Section 10.02 hereto,
the Company shall make cash distributions to the Members in accordance with
their Membership Percentages at such times and in such amounts as the Management
Committee shall determine in its sole discretion.
SECTION 4.02. Distributions in Kind. The Company shall not distribute any
assets in kind unless approved by all of the Members. Such property
distributions shall be distributed based upon their Agreed Fair Market Value in
the same proportions as if cash were distributed.
If cash and property in kind are to be distributed simultaneously, the
Company shall distribute such cash and property in kind in the same proportion
to each Member, unless otherwise agreed by the Members.
SECTION 4.03. Tax Withholding. Notwithstanding any provision herein to the
contrary, the Management Committee may take any and all actions that it
determines to be necessary or appropriate to ensure that the Company satisfies
any and all withholding and tax payment obligations under Section 1441, 1445 or
1446 of the Code or any other provision of the Code or other applicable law.
Without limiting the generality of the foregoing, the Management Committee may
withhold any amount of taxes it determines is required to be withheld from
amounts otherwise distributable to any Member pursuant to this Article IV;
provided, however, that such amount shall be deemed to have been distributed to
such Member for purposes of applying the provisions of this Agreement.
ARTICLE V
Allocations and Other Tax Matters
SECTION 5.01. Capital Accounts.
(a) There shall be established for each Member on the books of the Company
an account (a "Capital Account") to be maintained pursuant to this Agreement.
The Capital Account of each Member shall be credited with (i) the amount of all
cash contributed by a Member to the Company, (ii) the fair market value of any
property contributed to the Company (net of any liabilities secured by such
property that the Company is considered to assume or take subject to under
Section 752 of the Code) and (iii) the amount of any Net Profits (or items of
income) allocated to a Member pursuant to Section 5.02, and shall be decreased
by (A) the amount of any cash distributed to a Member by the Company, (B) the
fair market value of any property distributed to a Member by the Company (net of
any liabilities secured by such
7
<PAGE>
distributed property that such Member is considered to assume or take subject to
under Section 752 of the Code), (C) the amount of any expenditure of the Company
described in Section 705(a)(2)(B) o the Code (or treated as a Section
705(a)(2)(B) expenditure for purposes of Section 704(b) of the Code) that is
allocable to a Member and (D) the amount of any Net Losses (or item of loss or
deduction) allocated to a Member pursuant to Section 5.02. The Capital Accounts
of the Members shall also be adjusted appropriately for their respective shares
of any other adjustment required under Treasury Regulation Sections 1.704-1(b)
and 1.704-2.
(b) In the event that any Interest in the Company is Transferred, the
transferee of such Interest shall succeed to the pro rata portion of the
transferor's Capital Account attributable to such Interest.
(c) Upon the occurrence of any event specified in Treasury Regulation
Section 1.704-1(b) (2) (iv) (f), the Management Committee may cause the Capital
Accounts of the Members to be adjusted to reflect the fair market value of the
Company's property at such time, as provided in such regulation.
SECTION 5.02. Allocation of Net Profits and Net Losses.
(a) Subject to Sections 5.02(b) and 5.02(c), the Net Profits and Net Losses
of the Company for each taxable year shall be allocated among the Members in
proportion to their Interests.
(b) During the Ramp-Up Period, all Net Profits, Net Losses and specific
items of income, gain, loss and deduction shall be allocated to Schott.
(c) Notwithstanding Section 5.02(a) or Section 5.02(b), special allocations
of Net Profits, Net Losses or specific items of income, gain, loss or deduction
may be required for any taxable year as follows:
(i) The Company shall allocate items of Company income and gain among
the Members at such times and in such amounts as necessary to satisfy the
minimum gain chargeback requirements of Treasury Regulation Sections
1.704-2(f) and 1.704-2(i)(4).
(ii) Any deductions attributable to Member Nonrecourse Debt shall be
allocated among the Members that bear the economic risk of loss for such
Member Nonrecourse Debt in accordance with the ratios in which such Members
share such economic risk of loss and in a manner consistent with the
requirements of Treasury Regulation Sections 1.704-2(c), 1.704-2(i)(2) and
1.704-2(j)(1).
(iii) The Company shall specially allocate Net Losses and items of
income and gain when and to the extent required to satisfy the "qualified
income offset" requirement within the meaning of Treasury Regulation
Section 1.704-1(b)(2)(ii) (d).
(iv) In the event a Member's contribution to the Company causes any
Member to recognize income for U.S. federal income tax purposes, the entire
amount of any deductions associated with such contribution shall be
allocated to the Member that recognizes income or, if more than one Member
recognizes income as a result of such contributions to the Company, shall
be allocated proportionately based upon the amount of income so recognized
by each Member.
SECTION 5.03. Definition of Net Profits and Net Losses. The "Net Profits"
or "Net Losses" of the Company, as appropriate, shall be the taxable income or
tax loss of the Company as determined for U.S. federal income tax purposes for a
given taxable year, taking into account any separately stated items, increased
by the amount of any tax exempt income of the Company during such taxable year
and
8
<PAGE>
decreased by the amount of any Code Section 705(a)(2)(B) expenditures (within
the meaning of Treasu Regulation Section 1.704-1(b)(2)(iv)(i)) of the Company
during such taxable year; provided, however, that items of income, gain, loss
and deduction attributable to Section 704(c) Property shall be determined in
accordance with the principles of Treasury Regulation Section
1.704-1(b)(2)(iv)(g). Each Member's Capital Account shall be otherwise
maintained and adjusted in accordance with Treasury Regulations Section
1.704-1(b)(iii).
SECTION 5.04. Federal Income Tax Allocations. Section 5.02 provides for the
allocation of Net Profits and Net Losses for accounting and Capital Account
maintenance purposes. The Company's ordinary income and losses and capital gains
and losses as determined for U.S. federal income tax purposes (and each item of
income, gain, loss or deduction entering into the computation thereof) shall be
allocated to the Members in the same proportions as the corresponding "book"
items are allocated pursuant to the preceding provisions of this Article V;
provided, however, that items of income, gain, loss and deduction relating to
Section 704(c) Property shall be allocated in accordance with Section
704(c)(1)(A) of the Code using the "traditional method" pursuant to Treasury
Regulation Section 1.704-3(b). Items described in this Section 5.04 shall
neither be credited nor charged to the Members' Capital Accounts.
SECTION 5.05. Elections.
(a) The Members intend that the Company shall be treated as a partnership
for U.S. federal income tax purposes. Accordingly, neither the Management
Committee nor any Member shall file any election on behalf of the Company that
is inconsistent with that intent.
(b) Except as otherwise expressly provided herein, any tax elections
required or permitted to be made by the Company under the Code or otherwise
shall be made in such manner as may be reasonably determined by the Management
Committee.
SECTION 5.06. Fiscal Year. The fiscal year of the Company shall end on the
last day of September of each year.
SECTION 5.07. Substantial Economic Effect. Notwithstanding anything in this
Agreement to the contrary, if the allocation of any item of income, gain, loss
or expense pursuant to this Article V does not have substantial economic effect
under Treasury Regulationss.1.704(b)(2) and is not in accordance with the
Interests of the Members within the meaning of Treasury
Regulationss.1.704-1(b)(3), then for purposes of United States income tax only
such item shall be reallocated in such manner as to (i) have substantial
economic effect or be in accordance with such Members' Interests in the Company
and (ii) result as nearly as possible in the respective balances of the Capital
Accounts that would have been obtained if such item had instead been allocated
under the provisions of this Article V.
SECTION 5.08. Other Tax Matters. The Members agree to treat contributions
made pursuant to this Agreement as governed by Section 721 of the Code. In the
event that any taxing authority contests such agreed treatment of the
contributions or the treatment of any other item as agreed to by the Members, a
Member receiving notice of such contest from such taxing authority shall
promptly give written notice of such contest to each other Member. Such other
Members may, at their own expense, participate in the defense of such contest.
The Members shall reasonably cooperate in defending any such contest, and no
Member shall settle or otherwise compromise such a contest without the written
consent of the other Members (which shall not be unreasonably delayed or
withheld). In the event of a Member's refusal to consent to a settlement, such
Member shall, to the extent permitted by law, assume control of the defense of
such contest, and such Member shall bear any legal fees incurred by such Member
in undertaking such defense to the extent incurred after the assumption.
9
<PAGE>
ARTICLE VI
Management
SECTION 6.01. Delegation of Authority. Except as otherwise provided herein,
each of the Members agrees that the power to direct and control the Company
shall be delegated to certain managers, elected in the manner provided herein,
who together shall constitute a management committee (the "Management
Committee"). Approval or action taken by the Management Committee in accordance
with this Agreement shall constitute approval or action by the Company and shall
be binding on each Member.
SECTION 6.02. Management Committee.
(a) Voting and Members.
(i) Initially, the Management Committee shall consist of four persons.
As long as each Initial Member's Membership Percentage equals 50%, Schott
and Donnelly shall each appoint two members of the Management Committee,
each such person to serve on the Management Committee at the pleasure of
the Initial Member appointing such person. Each member of the Management
Committee shall be an officer, director or executive employee of the Member
making such appointment or such appointing Member' Affiliate, or an
officer, director or employee of the Company. The names of the initial
members of the Management Committee are set forth in Exhibit B hereof.
After the Ramp-Up Period, each Member shall have the right to maintain
representation on the Management Committee commensurate with its Membership
Percentage.
(ii) For purposes of any approval or action taken by the Management
Committee, each member of the Management Committee shall have one vote.
Each member of the Management Committee designated by a Member shall, for
purposes of determining a quorum and taking any actions or approvals, be
entitled to represent and cast the votes of any other Management Committee
member designated by such Member who is not otherwise represented in person
or by proxy when any action or approvals are taken. Except as set forth
herein, a majority vote of all of the voting power of the members of the
Management Committee shall constitute action on that matter that is binding
upon the Company and the Members.
(iii) The quorum necessary for any meeting of the Management Committee
shall be 100% of the members of the Management Committee, represented in
person, by proxy or by representative, as provided in Section 6.02(a)(ii).
A quorum shall be deemed not to be present at any meeting for which notice
was not properly given as provided for herein, unless the member or members
as to whom such notice was not properly given attend such meeting without
protesting the lack of notice or duly execute and deliver a written waiver
of notice or a written consent to the holding of such meeting.
(iv) Any action taken by a member of the Management Committee in such
member's capacity as such shall, so far as the Members are concerned, be
deemed to have been duly authorized by the Member that appointed such
member; provided, however, that any such action shall not be deemed to be
an approval, consent or agreement of such Member for any purposes of this
Agreement for which approval, consent or agreement must be separately
obtained from such Member pursuant to the terms of this Agreement.
10
<PAGE>
(v) The initial President shall be appointed by Schott, subject to the
approval of Donnelly, which approval shall not be unreasonably withheld.
Subsequently, the President shall be elected by and report to the
Management Committee. The initial President shall be the person so
designated in Exhibit B hereof.
(vi) The initial Chairman of the Management Committee, who shall serve
for two years, shall be the person so designated in Exhibit B hereof. The
initial Chairman shall be appointed by Donnelly, subject to the approval of
Schott, which approval shall not be unreasonably withheld; upon the
expiration of such two-year term, the next Chairman shall be appointed by
Schott, subject to the approval of Donnelly, which approval shall not be
unreasonably withheld. Thereafter, the right to appoint the Chairman shall
alternate between the Members, subject to the reasonable approval of the
non-appointing Member.
(vii) The Secretary of the Company shall be elected by the Management
Committee. The Secretary may be a person who is not a member of the
Management Committee.
(b) Meetings and Notices.
(i) Meetings of the Management Committee shall be held at the
principal offices of the Company or at such other place as may be
determined by the Management Committee. A meeting of the Management
Committee may be held by conference telephone or similar communications
equipment by means of which all members participating in the meeting can be
heard by all other participants. Unless otherwise determined by the
Management Committee, regular meetings of the Management Committee shall be
held at least quarterly on such dates and at such times as shall be
determined by the Management Committee. Notice of any regular meeting shall
be given to each member of the Management Committee by the Company or any
Member at least twenty (20) Business Days prior to such meeting. Special
meetings of the Management Committee may be called by any Member on at
least twenty (20) Business Days' notice to each member and alternate member
thereof, which notice shall state the purpose or purposes for which such
meeting is being called.
(ii) The actions taken by the Management Committee at any meeting,
however called and noticed, shall be as valid as though taken at a meeting
duly held after regular call and notice if (but not until), either before,
at or after the meeting, the member or members as to whom it was improperly
held duly executes and delivers a written waiver of notice or a written
consent to the holding of such meeting. A vote of the Management Committee
may be taken either in a meeting of the members thereof or by unanimous
written consent without a meeting.
(iii) The Management Committee may establish reasonable rules and
regulations to provide for the keeping of minutes and other internal
Management Committee governance not inconsistent with the terms of this
Agreement.
(c) Power of Members. Nothing in this Section shall derogate from the power
of the Members, which is absolute, to mutually agree in writing to cause the
Company to act or refrain from acting.
(d) Enforcement of Company's Rights. Notwithstanding anything herein to the
contrary, the Company may enforce its rights under any agreement with any Member
without such Member's consent and without the approval of the members of the
Management Committee appointed by such Member.
11
<PAGE>
(e) Deadlock. In the event that a decision cannot be reached within the
Management Committee because of deadlock, the principal executive officers of
each Member, or their designees, shall use reasonable efforts to resolve the
dispute in good faith.
SECTION 6.03. Employees; Officers.
(a) General.
(i) The Management Committee shall retain and employ officers,
including a President, and such other officers as shall be deemed necessary
or advisable to operate the Company.
(ii) The President shall appoint the key personnel of the Company
other than the President, subject, in each case, to the approval by the
Management Committee. The officers of the Company shall be subject to
removal with or without cause by the Management Committee subject to the
terms of any agreements between the Company and the employee.
(iii) All officers of the Company (other than the President) shall (A)
report to the President or another officer designated by the President and
(B) attend meetings of the Management Committee as requested.
(b) The President shall be the most senior officer of the Company and shall
be responsible for the day-to-day operation of the Company, subject to the
control of the Management Committee, and he or she shall report to the
Management Committee.
(c) All employees and officers of the Company, other than the President,
shall be "at will" unless otherwise determined by the Management Committee.
SECTION 6.04. Annual Business Plan and Budget.
(a) Not later than two (2) months before the end of each fiscal year of the
Company, the President shall prepare and recommend to the Management Committee
an annual business plan and budget, which shall include, among other things,
performance milestones for such fiscal year (each, an "Annual Business Plan")
for the next succeeding fiscal year. The members of the Management Committee
shall review each proposed Annual Business Plan in a reasonable and expeditious
manner.
(b) The Initial Business Plan shall be formally ratified and adopted by the
Management Committee at its first meeting.
(c) The President shall be deemed authorized, without further approval of
the Management Committee, to conduct the operations and Business of the Company
during any fiscal year, and to pay the expenses thereof out of Company funds, in
accordance with the then current Annual Business Plan, provided, however, that
the Management Committee shall approve capital expenditures in excess of $25,000
if not included in the current Annual Business Plan and in excess of $100,000 if
included in the current Annual Business Plan.
(d) In the event the Management Committee is unable to agree on an Annual
Business Plan by September 30 of any given year, or such later date as the
Management Committee may designate, the principal executive officers of each
Member, or their designees, shall use reasonable efforts to resolve the dispute
in good faith; provided, however, that the President shall remain authorized to
conduct the Business and operations of the Company as aforesaid during the
resolution process. During such time a such dispute shall continue, the business
and operations of the Company, and the contributions required
12
<PAGE>
by Section 3.01(b)(ii) and Section 3.04(a), shall be carried out to the extent
feasible in conformity with the Initial Business Plan and prior mutually agreed
Annual Business Plans.
SECTION 6.05. Members' Consents or Approvals.
(a) Each Member shall designate one or more individuals who shall be
authorized to act on behalf of such Member in connection with consents or
approvals necessary or appropriate pursuant to the terms of this Agreement;
provided, however, that all such acts on behalf of a Member shall be in writing.
Members may change such designees by notifying the Company and each of the other
Members in writing.
(b) Each Member hereby agrees to give any consent or approval required
pursuant to the terms of this Agreement, or to indicate that such consent or
approval shall not be given, within 30 days of written request by the other
Member or Members or by the Company.
SECTION 6.06. Major Actions
(a) The Management Committee shall not, without the unanimous affirmative
vote of the Management Committee:
(i) undertake the acquisition of a controlling interest in any other
Person;
(ii) undertake any merger, consolidation, joint venture or sale of
assets with or to any other Person,
(iii) issue or transfer additional Shares to any other Person;
(iv) dissolve or liquidate the Company (other than pursuant to Section
8.01 or Section 8.02);
(v) undertake any significant change in the Company's Business
activities, including but not limited to EC Products and the license of new
products;
(vi) enter into an agreement with a Member; or
(vi) transfer or license any technology or intellectual property
rights; provided, however, that a Member may withhold its approval of such
transfer or license based solely on its own interests, but its approval
shall not be unreasonably withheld.
(b) The Company shall take any action necessary or appropriate to carry out
the purposes of this Section 6.06.
ARTICLE VII
Books and Records
SECTION 7.01. Books and Records. The Management Committee shall keep or
cause to be kept complete and accurate books of account and records with respect
to the Company's business. The books of the Company shall at all times be
maintained by the Management Committee. Each Member and its duly authorized
representatives shall have the right to examine and copy the Company's books,
records and documents during normal business hours. The Company's books of
account shall be kept in
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<PAGE>
accordance with generally accepted accounting principles, consistently applied.
The Company's independent auditors shall be an independent public accounting
firm, which shall not be the accounting firm for either Initial Member, that is
selected by the Management Committee.
SECTION 7.02. Reports to Members.
(a) Within 60 days after the end of each of the first three fiscal quarters
of each year, the Company shall prepare and mail to the Members an unaudited
report setting forth: (i) a balance sheet of the Company as of the end of such
fiscal quarter and (ii) an income statement of the Company for such fiscal
quarter, comparing actual results to the budget for such period.
(b) The Company shall use diligent efforts to prepare (or cause to be
prepared) and mail to the Members, within 60 days after the end of each fiscal
year, a report setting forth: (i) a balance sheet of the Company as of the end
of such fiscal year, (ii) an income statement of the Company for such fiscal
year, and (iii) a statement of such Member's Capital Account as of the end of
such fiscal year. After the end of the second fiscal year of the Company, at the
request of either Initial Member, such report shall be audited.
(c) The Company shall use reasonable efforts to prepare or cause the
Company's independent accountants to prepare and transmit to each Member within
90 days following each calendar year a U.S. federal income tax schedule and such
other tax information as may be reasonably necessary to enable such Member to
prepare its U.S. federal, state and local income tax returns as they relate to
the Company for such fiscal year. The Company shall provide estimates of the
Company's taxable income as may be reasonably requested by any Member in writing
from time to time.
ARTICLE VIII
Withdrawal of Initial Members; Transfers; Participation Rights
SECTION 8.01. Withdrawal in First Five Years.
(a) Neither Initial Member may voluntarily withdraw from the Company prior
to the fifth (5th) anniversary of the Closing Date, except as provided in
Section 8.01(b).
(b) If during the first five years of this Agreement:
(W) either Initial Member becomes owned or controlled by an entity which
either directly or through an Affiliate or joint venture competes with the
Company, then the Initial Member not undergoing such change of control may,
(X) either Initial Member becomes insolvent or suspends its usual business,
or enters into an agreement with its creditors to reduce its obligations to
them or to defer their fulfillment, or makes a general assignment for the
benefit of its creditors, or commences any proceeding relating to it under
any Chapter of Title 11 of the United States Code, or seeks any other form
of relief from its creditors or from a court or governmental agency
pursuant to any law, statute or procedure of any jurisdiction for the
relief of financially distressed debtors, or a debtor relief procedure
shall be commenced against such Initial Member, then the other Initial
Member may,
(Y) the Company fails to achieve any Exit Milestone, then either Initial
Member may, or
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<PAGE>
(Z) Donnelly shall be permitted to treat Schott's withdrawal from the DC
Project or termination of its Automotive Glazing Business as an Exit
Milestone pursuant to Section 3.2(b)(iv)(A) of the Donnelly License
Agreement, then Donnelly may:
(i) Give notice of its intention to withdraw from the Company, in
which case the other Initial Member may, at its option, within 60 days of
the receipt of such notice:
(a) agree to purchase the withdrawing Initial Member's Interest
for Agreed Fair Market Value, determined at the time of withdrawal,
but payable on December 31, 2005, without interest, or
(b) not agree to acquire the withdrawing Initial Member's
Interest, but provide all additional funding required by the Company
under the Initial Business Plan and/or the then-current Annual
Business Plan, in which case the Initial Member providing such
additional funding shall be entitled to an adjusted Membership
Percentage, which shall be determined by dividing the amount
contributed by the sum of the value of the Company prior to the
contribution plus the amount of the contribution, or
(c) withdraw, in which case the Company shall be liquidated, in
the manner provided herein; or
(ii) Remain as an Initial Member of the Company but provide notice to
the other Initial Member that it will not make any pro rata capital
contributions, in which case the other Initial Member may provide the
required cash flow by loan or capital contribution to the Company. If funds
are provided to the Company as a capital contribution, the contributing
Initial Member shall be entitled to an adjusted Membership Percentage,
which shall be determined by dividing the amount contributed by the sum of
the value of the Company prior to the contribution plus the amount of the
contribution.
(c) If prior to the fifth anniversary of the Closing either Initial Member
fails to make contributions required in Article III for ninety (90) days after
notice that such contributions are due, that Initial Member's Interest shall be
deemed to be forfeited unless (i) the Company's deficit cash flow exceeds the
deficit cash flow in the Initial Business Plan by the following respective
percentages for two consecutive years:
<TABLE>
Fiscal Year Percentage of
"Free Cash Flow"
<S> <C>
1999 60.0%
2000 60.0%
2001 67.5%
2002 75.0%
2003 75.0%
</TABLE>
or (ii) the Company has failed to achieve an Exit Milestone.
15
<PAGE>
(d) As used in this Agreement, "Exit Milestone" shall mean any of the
milestones described below:
(i) With respect to Skylights:
<TABLE>
Fiscal Year Ending Company's
September 30 Cumulative Total
Sales Through Fiscal
Year Less Than
<S> <C>
2000 4,000 units
2001 11,500 units
2002 23,000 units
2003 41,000 units
</TABLE>
(ii) With respect to Sun Roofs:
<TABLE>
Milestone Date Milestone Not Achieved
<S> <C>
June 1, 2001 System design developed; positive customer feedback and
acceptance.
January 1, 2002 All specifications defined with lead customer and feasibility
proven; partner/lead customer for Sunroofs defined and
contractual agreements finalized.
April 1, 2002 Evaluation samples delivered to customer.
June 1, 2003 Start of production of Sunroofs.
June 1, 2004 Cumulative 5,000 units sold since start of production.
</TABLE>
SECTION 8.02. Withdrawal After Five Years.
(a) Either Initial Member may voluntarily withdraw subsequent to the fifth
anniversary of the Closing Date, and shall be deemed voluntarily to have
withdrawn if that Initial Member (X) had a change of control under which it
becomes owned or controlled by an entity which either directly or through an
Affiliate or joint venture competes with the Company or (Y) becomes insolvent or
suspends its usual business, or enters into an agreement with its creditors to
reduce its obligations to them or to defer their fulfillment, or makes a general
assignment for the benefit of its creditors, or commences any proceeding
relating to it under any Chapter of Title 11 of the United States Code, or seeks
any other form of relief from its creditors or from a court or governmental
agency pursuant to any law, statute or procedure of any jurisdiction for the
relief of financially distressed debtors, or a debtor relief procedure shall be
commenced against such Initial Member. Before any Transfer of its Interest to
third party, a
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<PAGE>
Withdrawing Member shall first offer its Interest to the remaining Initial
Member ("Remaining Member").
(b) An Initial Member shall have been deemed to give a notice of withdrawal
in the event it remains in material default of any of its obligations under this
Agreement for sixty (60) days after notice.
(c) A withdrawing Initial Member under paragraphs 8.02(a) or (b) shall,
within sixty (60) days after such withdrawal, specify a price at which it would
be willing to sell its Interest to the Remaining Member or purchase the
Remaining Member's Interest.
(d) If an Initial Member gives notice that it wishes to withdraw from the
Company or desires to Transfer its Interest to a bona fide third-party
Transferee (a "Withdrawing Member") the Remaining Member may, at its option:
(i) cause the Company to be dissolved, as provided herein; provided,
however, that if the Company is dissolved pursuant to this subsection
(d)(i), neither Initial Member shall be permitted to purchase any business
or any material assets of the Company without the consent of the other
Initial Member; or
(ii) purchase the Withdrawing Member's Interest, at its option, at (A)
85% of the price specified by the Withdrawing Member under paragraph
8.02(c), (B) 85% of the Agreed Fair Market Value of the Withdrawing
Member's Interest, (C) 85% of the price that a bona fide third party is
willing to pay for such Interest in an arm's length transaction with the
Withdrawing Member or (D) 85% of the price stated by the Withdrawing Member
in its notice under Section 8.05(a)(ii); provided, however, that a
Withdrawing Member shall have the right to withdraw its offer to sell its
Interest at the price stated in its notice under Section 8.05(a)(ii) if the
Agreed Fair Market Value of such Interest is subsequently appraised and
determined to be lower than such stated price. If the Remaining Member
purchases a Withdrawing Member's Interest, as provided in this Section
8.02, the Remaining Member shall pay 25% of the total purchase price at the
time of the closing of such purchase from the Withdrawing Member and 25% of
the total purchase price on each of the first, second and third
anniversaries of such closing, together with interest thereon, at an annual
interest rate equal to the Withdrawing Member's then-current cost of funds
or
(iii) not purchase the Withdrawing Member's Interest, but provide all
additional funding required by the Company under the Initial Business Plan
and/or the then-current Annual Business Plan, in which case the Initial
Member providing such additional funding shall be entitled to an adjusted
Membership Percentage, which shall be determined by dividing the amount
contributed by the Agreed Fair Market Value of the Company prior to the
contribution plus the amount of the contribution.
SECTION 8.03. Admission of Substitute or Additional Members.
(a) No substitute or additional Member shall be admitted to the Company
without the prior written approval of each of the other Members. Each substitute
or additional Member shall agree to become a party to this Agreement, which
shall be appropriately amended to reflect to admission of such substitute or
additional Member.
(b) The Initial Members acknowledge and agree that if any substitute or
Members are admitted to the Company this Article VIII shall be amended to
provide for mutually acceptable withdrawal provisions binding on all Members,
effective as of the date on which additional or substitute Members are admitted.
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SECTION 8.04. Restrictions on Transfer.
(a) All Transfers of Interests shall be effected by a Transfer of the
Shares evidencing such Interests. The Transferring Member shall provide written
notice of such Transfer to the Company.
(b) No Member shall Transfer its Shares in the Company except for:
(i) Transfers in accordance with Section 8.03, Section 8.04 or Section
8.05; or
(ii) Transfers from a Member to such transferring Member's Affiliate.
Any purported Transfer of all or any part of any Interest in the Company in
violation of this Section 8.04(b) shall be null and void ab initio and of no
force or effect.
(c) The Interest of a Member in the Company may be Transferred, only in
whole and not in part (except to an Affiliate of such Member) by a sale or
exchange of such Shares representing a Member's entire Interest in the Company
following the fifth anniversary of the date hereof. A Member may Transfer its
Shares only pursuant to a sale after such Member has fully complied with the
provisions of this Section 8.04 with respect to such sale. Regardless of whether
a Transfer of Shares in the Company is permitted hereunder, such Transfer shall
not release the transferor from any liability under this Agreement, whether
arising before or after such Transfer, unless and until the transferee is
admitted as a Member of the Company in accordance with Section 8.03.
(d) In no event shall any Member transfer its Interest to Gentex
Corporation (or any of its Affiliates), without the prior written approval of
Donnelly, or to Corning Inc. (or any of its Affiliates) or to Denton Corporation
(or any of its Affiliates) without the prior written approval of Schott.
SECTION 8.05. Right of First Refusal; Right of First Offer .
(a) If a Withdrawing Member has received an unsolicited offer for the
purchase of all of its Interest from a bona fide third party and determines to
entertain such offer, or wishes to seek a third-party purchaser of its Interest,
then such Withdrawing Member shall notify the Remaining Member of either (i)
that an unsolicited offer has been received from a bona fide third party for the
purchase of the Withdrawing Member's Interest, which the Withdrawing Member is
considering accepting or (ii) tha it wishes to sell its Interest. The notice
shall state the price, terms and conditions of payment and the identity of the
bona fide third party, or if there is at that time no prospective bona fide
third party, the price at which such Withdrawing Member would be willing to sell
its Interest to a bona fide third party purchaser.
(b) Subject to Section 8.02(d), the Remaining Member shall have sixty (60)
days in which to offer to purchase from the Withdrawing Member all, but not less
than all, of its Interest at the purchase price described in Section
8.02(d)(ii). If the Remaining Member decides not to purchase the Withdrawing
Member's Interest, or if the Remaining Member fails to notify the Withdrawing
Member in writing of its intentions within sixty (60) days of the notice from
the Withdrawing Member, then, subject to the other terms and conditions of this
Agreement, the Withdrawing Member may sell all, but not less than all, of its
Interest to any bona fide third party for a price and on the terms and
conditions no less favorable than the price set forth in the notice during a
period which is one hundred eighty (180) days if no filing is required under the
Hart Scott Rodino Antitrust Act ("HSR") or similar antitrust provisions in
applicable foreign countries or the European Union or if such a filing is
required, the shorter of two hundred forty (240) days or sixty (60) days after
the expiration of early termination of the HRS pre-merger notification period
and such other similar period(s) for other applicable statutes, provided the
Withdrawing Member sends a
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<PAGE>
written notice to the Remaining Member stating the name of the purchaser and the
price and the terms of the transactions at least sixty (60) days prior to
closing and provided further that the Purchaser agrees to be bound by all of the
terms and conditions of this Agreement.
(c) The closing of any purchase by one Initial Member of another Initial
Member's Interest under this Section 8.05 shall occur within ninety (90) days
after written notice to the Withdrawing Member of the Remaining Member's
election to purchase if no filing is required under the HSR Act or other similar
applicable statutes, or if such a filing is required, the shorter of two hundred
forty (240) days or thirty (30) days after the expiration or early termination
of the HSR pre-merger notification period and similar provisions of other
applicable statutes.
(d) Notwithstanding the foregoing, in the event that a Withdrawing Party
finds a third party willing to purchase its Interest, the Remaining Party shall
have the right to demand that such third-party purchaser also offer to purchase
the Remaining Party's Interest at the same price and on the same terms so that
100% of the Interests shall be offered for sale to such third person.
ARTICLE IX
Exculpation and Indemnification
SECTION 9.01. Exculpation and Indemnification.
(a) No Member shall be liable to the Company or to any other Member for any
Losses arising from, relating to, or in connection with, this Agreement or the
business or affairs of the Company, except (i) for any Losses as are determined
by final arbitral decision to have resulted from such Member's gross negligence,
willful misconduct or from the failure by such Member to make a capital
contribution required to be made by it pursuant to Article III or (ii) pursuant
to Section 9.02.
(b) The Company shall, to the fullest extent permitted by applicable law,
indemnify and hold harmless each Member against any and all Losses to which such
Member may become subject in connection with any matter arising from, relating
to, or in connection with actions taken or services performed pursuant to this
Agreement or at the request of the Company, except (i) for any Losses as are
determined by final arbitral decision or final judgment of a court of competent
jurisdiction, as applicable, t have resulted from such Member's gross
negligence, willful misconduct or from the failure by such Member to make a
capital contribution required to be made by it pursuant to Article III or (ii)
pursuant to Section 9.02.
(c) Donnelly shall indemnify and hold Schott and the Company, and its
managers, officers, employees and agents (each, an "Indemnitee") harmless from
any and all Losses, that any Indemnitee may suffer or incur as a result of or
relating to any liability, obligation, contract or commitment (whether known or
unknown, contingent or fixed), arising out of the ownership or operation of the
ATC Assets or the ATC facility in Tucson, except as otherwise provided in the
Joint Venture Agreement, on or prio to the Closing Date.
(d) The foregoing provisions of this Section shall survive any termination
of this Agreement.
SECTION 9.02. Indemnification by Initial Members.
(a) Indemnification by Schott. Schott shall indemnify and hold Donnelly,
its Affiliates and their respective directors, officers, managers, employees and
agents (collectively, the "Donnelly Indemnitees")
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and the Company harmless from any and all Losses that any Donnelly Indemnitee or
the Company may suffer or incur as a result of or relating to Schott's breach of
any covenant or agreement made pursuant to this Agreement.
(b) Indemnification by Donnelly. Donnelly shall indemnify and hold Schott,
its Affiliates and their respective directors, officers, managers, employees and
agents (collectively, the "Schott Indemnitees") and the Company harmless from
any and all Losses, that any Schott Indemnitee may suffer or incur as a result
of or relating to Donnelly's breach of any covenant or agreement made pursuant
to this Agreement.
(c) Notice. Any party entitled to receive indemnification under this
Section 9.02 (the "Indemnified Party") agrees to give prompt written notice (a
"Claim Notice") to the party or parties required to provide such indemnification
(the "Indemnifying Parties") upon the occurrence of any indemnifiable Loss or
the assertion of any claim or the commencement of any action or proceeding in
respect of which such a Loss may reasonably be expected to occur (such a claim,
action or proceeding being referre to as a "Claim"), but the Indemnified Party's
failure to give such notice shall not affect the obligations of the Indemnifying
Party under this Section 9.02 except to the extent that the Indemnifying Party
is prejudiced thereby. Such written notice shall include a description of the
event or events forming the basis of such Loss or Claim and the amount involved,
unless such amount is uncertain or contingent, in which event the Indemnified
Party shall give a later additional written notice when the amount becomes fixed
or reasonably determinable.
(d) Defense of Claims. The Indemnifying Party may elect to assume and
control the defense of any Claim, including the employment of counsel reasonably
satisfactory to the Indemnified Party and the payment of expenses related
thereto, if (i) the Indemnifying Party acknowledges its obligation to indemnify
the Indemnified Party for any Losses resulting from such Claim and provides
reasonable evidence to the Indemnified Party of its financial ability to satisfy
such obligation, and (ii) the Claim does not seek to impose any material
liability or obligation on the Indemnified Party other than for money damages.
If such conditions are satisfied and the Indemnifying Party elects to assume and
control the defense of a Claim, then (x) the Indemnifying Party shall not be
liable for any settlement of such Claim effected without its consent, which
consent shall not be unreasonably withheld; (y) the Indemnifying Party may not
settle such Claim without the consent of the Indemnified Party (not to be
unreasonably withheld) unless such settlement includes a full and unconditional
release of the Indemnified Party; and (z) the Indemnified Party may employ
separate counsel and participate in the defense thereof, but the Indemnified
Party shall be responsible for the fees and expenses of such counsel unless (1)
the Indemnifying Party has failed to assume the defense of such Claim or to
employ counsel with respect thereto or (2) a conflict of interest exists between
the interests of the Indemnified Party an the Indemnifying Party that requires
representation by separate counsel, in which case the fees and expenses of such
separate counsel shall be paid by the Indemnifying Party. If such conditions are
not satisfied, the Indemnified Party may assume and control the defense of the
Claim at the expense of the Indemnifying Party; provided, however, that the
Indemnified Party may not settle any such Claim without the consent of the
Indemnifying Party (not to be unreasonably withheld) unless such settlement
includes a full and unconditional release of the Indemnifying Party; and,
provided further, that the Indemnifying Party is given a reasonable opportunity
to participate in such defense (at the Indemnifying Party's expense).
(e) The foregoing provisions of this Section 9.02 shall survive any
termination of this Agreement.
SECTION 9.03. Liability of the Members. Except as otherwise expressly
provided in the Act, the debts, obligations and liabilities of the Company,
whether arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the Company, and no Member shall be obligated
personally
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for any such debt, obligation or liability of the Company solely by reason of
being a Member. Except as otherwise expressly provided in the Act, the liability
of each Member for capital contributions shall be limited to the amount of
capital contributions required to be made by such Member in accordance with the
provisions of this Agreement, but only when and to the extent the same shall
become due pursuant to the provisions of this Agreement. In no event shall any
Member enter into any agreement or instrument that would create or purport to
create personal liability on the part of any other Member for any debts,
obligations or liabilities of the Company without the prior written consen of
such other Member.
ARTICLE X
Dissolution, Liquidation and Transfer
SECTION 10.01. Dissolution. The Company shall be dissolved and its affairs
shall be wound up:
(a) upon the bankruptcy or dissolution of any Member, unless within 90 days
of such event either Initial Member or a majority of the Members holding a
majority of the remaining Membership Interests determines to continue the
business of the Company;
(b) upon the vote of all the Members to dissolve the Company; or
(c) upon the liquidation of the Company pursuant to Section 8.01(b) or
Section 8.02(d).
SECTION 10.02. Liquidation.
(a) Upon a dissolution pursuant to Section 10.01, the Company's business
and assets shall be liquidated in a prompt and orderly manner. The Management
Committee shall act as the liquidator to wind up the affairs of the Company
pursuant to this Agreement. If there shall be no Management Committee, the
remaining Member or Members may approve one or more liquidators to act as the
liquidator in carrying out such liquidation. In performing its duties, the
liquidator shall be authorized to sell, distribute, exchange or otherwise
dispose of Company assets (except knowhow, patents and other intellectual
property) in accordance with the Act in any reasonable manner that the
liquidator shall determine to be in the best interest of the Members, provided
that no business of the Company or material group of assets of the Company may
be transferred to any Member without the approval of the other Members and no
Member shall purchase such business or assets without such approval. Upon a
dissolution of the Company and prior to making any distribution of property to
Members in liquidation, the Company's assets shall be deemed to have been sold
at their fair market values and the resulting deemed Net Profit or Net Loss
shall be allocated to the Members' Capital Accounts in accordance with the
provisions of Section 5.02.
(b) The proceeds of the liquidation of the Company shall be distributed in
the following order and priority:
(i) first, to creditors of the Company that are not Members (or
Affiliates of Members) in order of priority as provided by law in payment
of unpaid liabilities of the Company to the extent required by law or under
agreement with such creditors;
(ii) second, to the setting of any reserves which the liquidator
reasonably deems necessary for any anticipated, contingent or unforeseen
liabilities or obligations of the Company arising out of or in connection
with the conduct of the Company's business, provided that at the
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expiration of such period the balance thereof shall be distributed in
accordance with the balance of this Section 10.02(b);
(iii) third, to any Member (or Affiliate of a Member) for any other
loans or debts owing to such Member (or Affiliate) by the Company
(including reimbursement of costs or expenses incurred on behalf of the
Company in accordance with the terms hereof); and
(iv) fourth, the balance, if any, pro rata to each Member in
accordance with its Membership Percentage.
SECTION 10.03. Claims of Members. The Members shall look solely to the
Company's assets for the return of their capital contributions and for any
amount payable pursuant to Section 10.02, and if the assets of the Company
remaining after payment of or reasonable provision for the payment of all
liabilities of the Company are insufficient to return such capital
contributions, the Member shall have no recourse against the Company.
SECTION 10.04. Intellectual Property.
(a) To the extent permitted by applicable law, the assets sold or
distributed in any liquidation shall exclude any technology, knowhow, patents or
other intellectual property of the Company, or technology licenses granted to
the Company by either Schott or Donnelly.
(b) If Schott and Donnelly are both still Members of the Company upon the
liquidation of the Company under this Article X, to the extent permitted by
applicable law, Schott and Donnelly shall own jointly, or each of Schott and
Donnelly shall receive a non-exclusive, paid-up, royalty-free license to, all
intellectual property developed by the Company as of the date of such
liquidation. Schott shall be permitted to license or sublicense such
intellectual property to third parties but shall be required to remit half of
the royalty for any such license or licenses to Donnelly. Donnelly shall be
permitted to license or sublicense such intellectual property to third parties
but shall be required to remit half of the royalty for any such license or
licenses to Schott. Schott shall not use, and neither Initial Member shall
license or sublicense (except to their respective Affiliates) such intellectual
property for the manufacture or sale of automotive mirrors or automotive rear
vision systems or their components.
(c) Notwithstanding any other provision of this Article X, to the extent
permitted by applicable law, any Background Technology belonging to either
Schott or Donnelly shall revert to that Member upon liquidation of the Company,
and any licenses of such Background Technology to the Company shall terminate
upon liquidation. Each of Schott and Donnelly shall, effective as of the date of
such liquidation, grant the other a license (with no right to sublicense) to the
Background Technology and to Donnelly Licensed Patents and Schott Licensed
Patents that it then owns, in each case, only to the extent necessary or
convenient to permit the other Member to use the intellectual property developed
by the Company. The terms of such licenses shall be reasonable and customary for
similar licenses with respect to similar intellectual property.
(d) If the Company is liquidated prior to the completion of the Ramp-Up
Period, Donnelly shall be required to grant a license to Schott for all of
Donnelly's Background Technology and Donnelly's Licensed Patents, as provided in
Section 10.04(c), and Schott shall be entitled to any interest in the
intellectual property developed by the Company, only if Schott pays to Donnelly
one half of the difference between $9,500,000 and the aggregate amount
contributed to the Company by Schott pursuant to Section 3.04(a) as of the date
of liquidation of the Company.
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ARTICLE XI
Miscellaneous
SECTION 11.01. Amendments. This Agreement and the Certificate of Formation
may be amended, supplemented or otherwise modified only by written instrument
executed by each Member.
SECTION 11.02. 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:
(a) If to Schott:
Schott Corporation
Schott North America Manufacturing, Inc.
3 Odell Plaza
Yonkers, New York 10701
Attention: Manfred Jaeckel
Facsimile: (914) 968-8585
with a required copy to:
Schott Glas
Legal Department
Hattenbergstrabe 10
P.O. Box 2480
D-55014 Mainz
Federal Republic of Germany
Attention: Dr. Wilhelm Niemeier
Facsimile: 011-49-61-31-66-2098
and a required copy to:
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
Attention: Richard T. McDermott
Facsimile: (212) 878-8375.
(b) If to Donnelly:
Donnelly Corporation
49 West Third Street
Holland, Michigan 49423
Attention: Niall Lynam
Facsimile: (616) 786-5185,
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With a required copy to:
Varnum, Riddering, Howlett & Schmidt LLP
Bridgewater Place
333 Bridge Street, N.W., P.O. Box 352
Grand Rapids, Michigan 49504
Attention: Daniel Molhoek
Facsimile: (616) 336-7000.
SECTION 11.03. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each of the other parties.
SECTION 11.04. No Third-Party Beneficiaries. Except as provided in Article
XI this Agreement is for the sole benefit of the parties hereto and their
permitted assigns and nothing herein expressed or implied shall give or be
construed to give to any Person, other than the parties hereto and such assigns,
any legal or equitable rights hereunder.
SECTION 11.05. Governing Law. The terms and conditions of this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
New York and of the United States of America, without giving effect to the
doctrine of conflict or laws.
SECTION 11.06. Publicity. No advertisement, press release or other
publicity concerning this Agreement or the transactions contemplated by this
Agreement shall be made or disseminated without the consent of the Members.
SECTION 11.07. Dispute Resolution. Any dispute, controversy or claim
(hereinafter "Dispute") between the Members of any kind or nature whatsoever,
arising under or related 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 members of the
Management Committee) arises among the Members under or relating to 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
Member 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, except the decision
shall be rendered 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 Western District of Michigan or the Chief Judge of the United
States District Court for the Southern District of New York 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 in English on an expedited schedule, and
all proceedings shall be confidential. Any 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 Members),
between the prevailing and non-prevailing Member as the arbitrator deems fair
and reasonable. Any arbitration award shall be binding and enforceable against
the Members hereto and judgment may be entered thereon in any court of competent
jurisdiction. The arbitration will take place at New York, New York, or Grand
Rapids, Michigan, at the election of the Member not giving the Arbitration
Notice. The
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Members shall be entitled to call witnesses, cross examine the other Member's
witnesses, and to file legal briefs. The arbitrator shall be bound by the
express intentions of the Members as set forth herein and shall render his or
her decision in writing based on this Agreement and the facts as proven at the
arbitration hearing.
SECTION 11.08. Headings. The headings contained in this Agreement, in any
Exhibit or Schedule hereto and in the table of contents to this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 11.09. Survival. The covenants contained in this Agreement which,
by their terms, require their performance after the expiration or termination of
this Agreement shall be enforceable notwithstanding the expiration or other
termination of this Agreement.
SECTION 11.10. No Waiver. The failure of any Member to insist in any one or
more instances upon the strict performance of any one or more of the agreements,
terms, covenants, conditions or obligations of this Agreement, or to exercise
any right, remedy or election herein contained, shall not be construed as a
waiver or relinquishment for the future of the performance of any one or more of
said obligations of this Agreement or of the right to exercise such election,
but the same shall continue in full force and effect with respect to any
subsequent breach, act or omission, whether of a similar nature or otherwise.
SECTION 11.11. Entire Agreement. This Agreement and the Definitive
Documents, along with the Schedules and Exhibits hereto and thereto, contain the
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and supersede all prior agreements and understandings
relating to such subject matter. Neither party shall be liable or bound to any
other party in any manner by any representations, warranties or covenants
relating to such subject matter excep as specifically set forth herein.
SECTION 11.12. Further Assurances. Each party hereto shall execute and
deliver all such other and additional instruments and documents and do all such
other acts and things as may be necessary more fully to effectuate the terms of
this Agreement.
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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of
the date first above written.
SCHOTT NORTH AMERICA MANUFACTURING, INC.
by
/s/ Guy Pierre De Conincx
Name: Guy Pierre De Conincx
Title:
DONNELLY CORPORATION
by
/s/ Scott E. Reed
Name: Scott E. Reed
Title: Sr VP & CFO
<PAGE>
EXHIBIT A - INITIAL CAPITAL CONTRIBUTIONS OF INITIAL MEMBERS
<TABLE>
Member Initial Capital Contributions No. of Shares Membership Percentage
<S> <C> <C> <C>
Schott Commitment for $9.5 million expenditure, pursuant 1,000 50%
to Section 3.01(b) and Section 3.04(a).
Contribution of license or licenses pursuant to
Section 3.01(b) and Schott License Agreement
Donnelly Contribution of ATC Assets, pursuant to 1,000 50%
Section 3.01(c).
Contribution of license pursuant to Section 3.01(c)
and Donnelly License Agreement.
</TABLE>
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<PAGE>
Exhibit B
EXHIBIT B - INITIAL MANAGEMENT COMMITTEE, PRESIDENT AND CHAIRMAN
Schott Appointees to Management Committee:
1. Guy De Coninck
2. Dr. Roland Langfeld
Donnelly Appointees to Management Committee:
1. Scott Reed
2. Dr. Niall Lynam
Initial President: Stefan Hansen
Initial Chairman of the Management Committee: Niall Lynam
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<PAGE>
EXHIBIT 10.30
SCHOTT TECHNOLOGY LICENSE AGREEMENT
THIS TECHNOLOGY LICENSE AGREEMENT (this "Agreement"), dated and effective
as of as of the 5th day of April, 1999 (the "Effective Date"), by and among
DONNELLY CORPORATION, a Michigan corporation with its principal offices at 49 W.
Third Street, Holland, Michigan 49423 ("Donnelly"), SCHOTT GLAS, a German entity
organized under the German civil code ("Schott Glas"), SCHOTT CORPORATION, a
Maryland corporation with its principal offices at 3 Odell Plaza, Yonkers, New
York 10701-1405 ("Schott Corporation"), and SCHOTT NORTH AMERICA MANUFACTURING,
INC., a Maryland Corporation with its principal offices at 3 Odell Plaza,
Yonkers, New York 10701-1405 ("Schott North America") (Schott Glas, Schott
Corporation and Schott North America are sometimes referred to collectively as
"Schott"), and SCHOTT-DONNELLY LLC SMART GLASS SOLUTIONS, a Delaware limited
liability company (the "Company").
RECITALS:
WHEREAS, Donnelly, Schott Glas, Schott Corporation and Schott North America
have executed a Joint Venture Agreement, dated April 5, 1999, creating a joint
venture among the parties thereto;
WHEREAS, Schott North America and Donnelly, as the members of the Company,
have executed a Limited Liability Company Agreement, dated as of April 5, 1999
(the "LLC Agreement") on the Closing Date;
WHEREAS, Schott is the owner of certain intellectual property rights
principally covering and/or principally used in the manufacture of EC Products;
WHEREAS, the parties desire to enter into this Agreement to provide certain
rights for the Company to license certain specified intellectual property rights
from Schott; and
WHEREAS, the Company may develop Improvements to the intellectual property
rights licensed from Schott and may develop other intellectual property rights
and the parties desire to enter into this Agreement to provide certain rights
for Schott to license such Improvements from the Company;
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
DEFINITIONS
Capitalized terms used but not defined herein shall have the meaning
ascribed to them in the Joint Venture Agreement or the LLC Agreement, as the
case may be.
<PAGE>
1.1 "Improvement" shall mean (i) any development or alteration,
modification or enhancement to Technology or Intellectual Property Rights,
whether patentable or not, which improves the effectiveness, efficiency,
performance or other attribute of, or otherwise relates to, Technology or
Intellectual Property Rights, or any element thereof, or (ii) any new product or
material which performs substantially the same function as Technology or
Intellectual Property Rights, whether patentable or not, but does so through a
different method or process.
1.2 "Intellectual Property Rights" shall mean United States, international
and foreign patents and patent applications (including United States provisional
applications and all PCT patent applications), any and all patents issuing
therefrom or otherwise corresponding thereto, and all divisions, continuations,
continuations-in-part, reissues, restorations, reexamination certificates and
extensions thereof, describing and/or claiming Technology, and all mask works,
industrial design registrations and applications for such registrations, and all
other proprietary rights covering or otherwise related to Technology and/or
processes for manufacture and/or use of EC Products embodying Technology arising
prior to or during the term of this Agreement. Schott's Intellectual Property
Rights existing on the date hereof are set forth on Schedule A.
1.3 "Licensed Product" shall mean an EC Product licensed hereunder that
could not be manufactured and sold by a Licensee without infringing Schott's
Intellectual Property Rights or using Schott's Technology.
1.4 "Licensee" shall mean the Person licensed hereunder in the field of the
applicable EC Product.
1.5 "Licensor" shall mean the Company and/or Schott, as the case may be,
whichever is licensing in the field of the applicable EC Product.
1.6 "Substantial Notice" shall have the meaning ascribed to such term in
Section 7.2(c).
1.7 "Technology" shall mean technological developments principally covering
or principally used in the manufacture of EC Products, including, but not be
limited to, the technology described on Schedule B hereto, ideas, concepts,
inventions, processes, principles of operation, formulae, patterns, drawings,
prints, proposals, devices, software, compilations of related information,
records, specifications, trade secrets and the knowhow, arising before or during
the term of this Agreement.
ARTICLE 2
LICENSE GRANTS
2.1 License Grants to the Company. Schott hereby grants unto the Company a
worldwide, exclusive (except as provided in this Section 2.1 and Section 2.2)
license of Schott's Technology and Intellectual Property Rights to make, have
made, use, offer to sell and sell EC Products; provided, however, that Schott
reserves the exclusive right to utilize Schott's Technology and Intellectual
Property Rights with respect to (a) Automotive Glazing products
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unless and until Schott makes an Automotive Glazing Business Offer and the
Company accepts such offer, as provided in Section 4.05 or Section 4.06 of the
Joint Venture Agreement, (b) New Products developed by Schott independent of the
Company in compliance with Section 4.09(c) or Section 4.09(d) of the Joint
Venture Agreement, and (c) all other products that are not EC Products;
provided, however, that if Schott makes an Automotive Glazing Business Offer and
the Company accepts such offer, as provided in Section 4.05 or Section 4.06 of
the Joint Venture Agreement, the Company shall have an exclusive license to all
Automotive Glazing products. The term of this license is described in Article 9
of this Agreement.
2.2 Limitation on Company Exclusivity. The license granted in Section 2.1
shall be non-exclusive with respect to the following:
(a) Architectural Glazing;
(b) Skylights, if the Company determines to abandon the development,
manufacture and sale of Skylights;
(c) Sun Roofs, if the Company determines to abandon the development,
manufacture and sale of Sun Roofs.
2.3 Sublicenses by the Company. The Company may not sublicense Schott's
Technology or Intellectual Property Rights without Schott's prior written
consent, which consent shall not be unreasonably withheld; provided, however,
that the Company shall have the right to sublicense Schott's Technology and
Intellectual Property Rights to the Company's Affiliates. The parties
acknowledge and agree that the Company shall have the right to grant such
sublicenses as may be necessary or convenient to have Licensed Products made by
third parties for sale by the Company and its Affiliates.
ARTICLE 3
IMPROVEMENTS
3.1 Ownership and Licensing of Improvements. The Company shall own and
shall have all rights, including Intellectual Property Rights, in and to all
Improvements conceived and in the process of development by the Company's
personnel or by third party personnel working on the Company's behalf. The
Company hereby grants and shall grant to Schott a royalty-free, paid-up,
worldwide, non-exclusive license without the right to sublicense (other than to
its Affiliates) to all Technology and Intellectual Property Rights of the
Company and Improvements thereto, except in the fields of Automotive Glazing,
and New Products manufactured and/or sold by Schott, as long as:
(a) Schott (or any of its Affiliates) is a Member of the Company; or
(b) the use, manufacture, advertising or sale is of a non-EC Product;
or
(c) Schott (or any of its Affiliates) is paying a royalty to Donnelly
(or any of its Affiliates).
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If the conditions described in subsections (a), (b) or (c) above are not
fulfilled, the license granted pursuant to this Section 3.1 shall not be royalty
free, and Schott shall pay to the Company a reasonable royalty based on
prevalent market conditions (to be negotiated by the parties) for any products
manufactured and/or sold by Schott that would infringe a patent of the Company.
If the parties cannot agree upon a royalty rate after good faith negotiations, a
commercially reasonable royalty rate shall be determined by arbitration in the
manner provided in Section 10.10.
The parties acknowledge and agree that Schott shall have the right to grant such
sublicenses as may be necessary or convenient to have the products covered by
this Section 3.1 made by third parties for sale by Schott. This Section 3.1
shall be subject to Section 3.3 of this Agreement.
3.2 Improvements.
(a) Schott hereby grants and shall grant to the Company licenses to
all Improvements owned or developed by or licensed to Schott, on the same
terms and conditions of the licenses granted hereunder with respect to
Schott's Technology and Intellectual Property Rights; provided, however,
that Schott shall not be required to license any of Schott's Improvements
if it is precluded from doing so under any agreement with any Person.
Should Schott North America (or an Affiliate of Schott North America)
withdraw as a Member of the Company, all Improvements developed by Schott
after the date of such withdrawal shall remain royalty free until the third
anniversary of the date of such withdrawal, after which time the Company
shall pay Schott a reasonable royalty based on prevalent market conditions
(to be negotiated by the parties) for any products manufactured and/or sold
by the Company that would infringe a patent of Schott covering such
Improvements. If the parties cannot agree upon a royalty rate after good
faith negotiations, a commercially reasonable royalty rate shall be
determined by arbitration in the manner provided in Section 10.10.
(b) Schott hereby represents, to the best of its knowledge, that as of
the date hereof Schott is not a party to any agreement with any Person that
would preclude Schott from licensing to the Company of Schott's
Improvements to Schott's Technology or Intellectual Property Rights that
are (i) owned by Schott, (ii) developed by Schott or (iii) licensed to
Schott. Schott hereby agrees to undertake prior to the Closing Date a
thorough and complete review of all agreements relating or pertaining to EC
Products or Electrochromic Material to which Schott or any of its
Affiliates is a party and, on a confidential basis, to notify Donnelly
prior to the Closing Date in writing of any such agreements that would, or
reasonably could be expected to, preclude Schott from licensing to the
Company any of Schott's Improvements to Schott's Technology or Intellectual
Property Rights that are (i) owned by Schott, (ii) developed by Schott or
(iii) licensed to Schott, identifying the date, the parties thereto and the
EC Product or Electrochromic Material that is subject thereto; provided,
however, that Schott shall not be required to provide specific information
about such agreement if Schott is precluded from doing so under any
agreement with any party to such agreement.
(c) Schott hereby agrees that as of the date hereof it shall not enter
into any agreement with any Person that would preclude Schott from
licensing to the Company any Improvements to
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Schott's Technology or Intellectual Property Rights that (i) are owned or
at any time have been owned by Schott and (ii) are developed by Schott.
(d) Schott hereby agrees to use its reasonable commercial efforts to
obtain rights for the Company to any Improvements encompassed by any
agreement between Schott and any Person covering the subject matter of
Schott's Technology or Intellectual Property Rights.
(e) Schott further agrees that prior to entering into any other
agreement with any Person that would preclude Schott from licensing to the
Company any of Schott's Improvements to Schott's Technology or Intellectual
Property Rights, it shall, on a confidential basis, notify the Company of
such prospective agreement and identify the parties thereto; provided,
however, that Schott shall not be required to provide such notice if it is
precluded from doing so under any agreement with any Person.
3.3 License Grant.
(a) The Company hereby grants and agrees to grant to Schott a
worldwide, non-exclusive, royalty-free, paid-up license without the right
to sublicense (other that to its Affiliates) to make, have made, use, offer
to sell and sell New Products manufactured by Schott in compliance with
Section 4.09 of the Joint Venture Agreement using the non-patented
Technology of the Company and Improvements thereto.
(b) If either Schott does not make an Automotive Glazing Business
Offer to the Company, as provided in Section 4.05(a) of the Joint Venture
Agreement, prior to September 1, 1999, or Schott makes an Automotive
Glazing Business Offer, as provided in Section 4.05 or Section 4.06 of the
Joint Venture Agreement, and the Company does not accept such offer, the
Company hereby grants and agrees to grant to Schott a worldwide, exclusive,
royalty-free, paid-up license without the right to sublicense (other that
to Schott's Affiliates) to make, have made, use, offer to sell and sell
Automotive Glazing products manufactured by Schott using the non-patented
Technology of the Company and Improvements thereto; provided, however, that
should Schott North America (or its Affiliate) withdraw as a Member of the
Company, the license granted pursuant to this Section 3.3(b) shall become
non-exclusive.
(c) The Company hereby grants and agrees to grant to Schott a
worldwide, non-exclusive license without the right to sublicense (other
that to its Affiliates) to make, have made, use, offer to sell and sell New
Products manufactured by Schott in compliance with Section 4.09 of the
Joint Venture Agreement using the Intellectual Property Rights of the
Company and Improvements thereto. In exchange for such license Schott, if
it should stop paying to Donnelly a licensing fee for use of Donnelly's
Intellectual Property Rights and Improvements thereto pursuant to the
Donnelly Technology License Agreement, dated as of April 5, 1999, by and
among Donnelly, Schott Glas, Schott Corporation, Schott North America and
the Company (the "Donnelly License Agreement"), shall pay to the Company a
reasonable royalty based on prevalent market conditions (to be negotiated
by the parties) for any such New Products manufactured and/or sold by
Schott that would infringe a patent of the Company. If the parties cannot
agree upon a royalty rate after good faith negotiations, a commercially
reasonable royalty rate shall be determined by arbitration in the manner
provided in Section 10.10.
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(d) If either Schott does not make an Automotive Glazing Business
Offer to the Company, as provided in Section 4.05(a) of the Joint Venture
Agreement, prior to September 1, 1999, or Schott makes an Automotive
Glazing Business Offer, as provided in Section 4.05 or Section 4.06 of the
Joint Venture Agreement, and the Company does not accept such offer, the
Company hereby grants and agrees to grant to Schott a worldwide, exclusive
license without the right to sublicense (other that to Schott's Affiliates)
to make, have made, use, offer to sell and sell Automotive Glazing products
manufactured by Schott using the Intellectual Property Rights of the
Company and Improvements thereto. In exchange for such license Schott, if
it should stop paying to Donnelly a licensing fee for use of Donnelly's
Intellectual Property Rights and Improvements thereto pursuant to the
Donnelly License Agreement, shall pay to the Company a reasonable royalty
based on prevalent market conditions (to be negotiated by the parties) for
any such Automotive Glazing products manufactured and/or sold by Schott
that would infringe a patent of the Company; provided, however, that should
Schott North America (or its Affiliate) withdraw as a Member of the
Company, the license granted pursuant to this Section 3.3(d) shall become
non-exclusive. If the parties cannot agree upon a royalty rate after good
faith negotiations, a commercially reasonable royalty rate shall be
determined by arbitration in the manner provided in Section 10.10.
The parties acknowledge and agree that Schott shall have the right to grant such
sublicenses as may be necessary or convenient to have the products covered by
this Section 3.3 made by third parties for sale by Schott.
Notwithstanding the foregoing, the obligations to pay such royalties to the
Company pursuant to Section 3.3(c) or Section 3.3(d) shall terminate upon the
expiration of the last-to-expire Company patent that would be infringed by the
manufacture and sale of such Automotive Glazing products or New Products, as the
case may be, by Schott and its Affiliates.
ARTICLE 4
PROSECUTION AND MAINTENANCE OF
INTELLECTUAL PROPERTY RIGHTS
4.1 Knowledge of Infringement. If any party has knowledge of any
infringement of a claim of a patent under this Agreement, the party having such
knowledge shall promptly inform the other party of such infringement.
4.2 Prosecution.
(a) Schott shall retain the right to (but shall not be obligated to)
prosecute and/or maintain all of Schott's Technology and Intellectual
Property Rights licensed by Schott to the Company pursuant to Article 2 of
this Agreement.
(b) The Company shall have the right to prosecute and/or maintain at
the Company's expense any of Schott's Intellectual Property Rights licensed
hereunder in any country when the Company has been notified by Schott that
Schott no longer wishes to prosecute or maintain such Intellectual Property
Rights in such country, and Schott hereby agrees to notify the Company of
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its intent to cease prosecution or payment of maintenance fees with respect
to any of such Intellectual Property Rights in any such country, at least
ninety (90) days prior to the date of any abandonment of any right or the
date of any required payment or filing which Schott does not intend to make
or file.
ARTICLE 5.
TECHNICAL ASSISTANCE
Schott shall furnish to the Company all of the Technology and any and all
technical information, data, drawings, plans, specifications and other pertinent
information prepared by or for, used by, or in the possession of Schott that may
be useful for the development, manufacture or sale of Licensed Products. Schott
shall begin furnishing such Technology and technical information and technical
assistance promptly following the date of this Agreement.
ARTICLE 6
COOPERATION AND CONFIDENTIALITY
6.1 Exchange of Information. During the term of this Agreement, Schott, the
Company, Donnelly and their respective Affiliates shall exchange information
concerning all Technology and Intellectual Property Rights conceived or
developed by any of them relating to EC Products and processes or techniques
used in the manufacture of EC Products.
6.2 Cooperation. The Company, Schott and Donnelly agree to cooperate with
each other in the prosecution of pending applications concerning any
Intellectual Property Rights or any new applications based upon any Improvements
thereto by providing, upon request, technical information and data in an
appropriate form relating to the subject matter or any pending or issued
applications and/or Improvements.
6.3 Confidentiality. The Company, Schott and Donnelly acknowledge that the
Intellectual Property Rights, Technology and Improvements licensed pursuant to
this Agreement or developed by Schott, Donnelly and/or the Company after the
date of this Agreement relate or will relate to information which is not or will
not be publicly available ("Confidential Information"), including, without
limitation, information exchanged pursuant to Section 6.1 hereof and Schott's
Technology listed or described in Schedule B. The Company, Schott and Donnelly
hereby agree not to disclose the Confidential Information to any third parties
for a period of ten (10) years after the receipt of such Confidential
Information, except to only (a) those of their respective employees having a
legitimate business need-to-know, (b) consultants engaged by them respectively,
(c) permitted sub-licensees hereunder or (d) Daimler Chrysler, but only to the
extent that such disclosure to Daimler Chrysler is reasonably necessary for
Daimler Chrysler to determine whether it will grant its consent to the
assignment of the DC Project to the Company, as contemplated in Section 4.05,
Section 4.06 and Section 4.07 of the Joint Venture Agreement, subject to the
prior approval of Donnelly, which approval shall not be unreasonably withheld.
The Company, Schott and Donnelly agree that prior to making disclosures to any
consultant or employee, they shall obtain a confidentiality and non-use
agreement.
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6.4 Confidentiality Exceptions. Notwithstanding the provisions of this
Article 6, Confidential Information shall not include (a) information that is
known to the public or is generally known within the industry or business, (b)
information that the Company, Schott or Donnelly, as the case may be, is
required to disclose pursuant to law or order of a court having jurisdiction
(provided that the party required so to disclose such Confidential Information
shall offer the party owning such Confidential Information the opportunity to
obtain an appropriate protective order or administrative relief against
disclosure of such Confidential Information), and (c) information that was
legally acquired by the Company, Schott or Donnelly, as the case may be, from a
third party in good faith, provided that such disclosure by the third party was
not in breach of any agreement between such third party and the Company, Schott
or Donnelly, as the case may be.
6.5 Protection of Rights. The parties hereto agree that it shall be the
policy of the Company to protect the Intellectual Property Rights, Technology
and Improvements licensed hereunder and not to infringe upon the intellectual
property rights of third parties.
ARTICLE 7
WARRANTY AND INDEMNIFICATION
7.1 Warranty. Schott represents and warrants that to its knowledge, no
claim has been asserted that the products and/or processes covered by the rights
or licenses transferred or intended to be transferred or granted by Schott
pursuant to this Agreement infringe upon any third party rights. Schott
represents that it owns Schott's Technology and Intellectual Property Rights and
that such rights are not subject to any encumbrance, lien or claim of ownership
by any third party. Schott further represents that it has not engaged in any
conduct, or omitted to perform any necessary act, the result of which could
invalidate Schott's Intellectual Property Rights or adversely affect their
enforceability or publicly disclose Schott's Technology.
7.2 No Representation or Indemnification.
(a) Nothing in this Agreement is intended to state or otherwise imply
that the exercise of any right or license granted by Schott pursuant to
this Agreement to the Company will not infringe rights of third parties.
Schott does not undertake any obligation to indemnify the Company or
Donnelly against, or assume any responsibility for, any claim of
infringement by any third party relating to or arising out of any exercise
of any right or license granted in this Agreement; provided, however, if
any third party shall deliver a Substantial Notice to the Company or
Donnelly, or commence litigation against the Company or Donnelly, alleging
that the use of Schott's Technology or Intellectual Property Rights or the
manufacture or sale of Licensed Products infringes such third party's
intellectual or industrial property rights by a method or apparatus covered
by the Technology or Intellectual Property Rights, then the Company or
Donnelly, as the case may be, shall be entitled immediately to suspend
payment of royalties to Schott with respect to sales of the allegedly
infringing Licensed Products, and to pay such amounts into escrow, until
such time as any settlement with such third party is entered into or the
outcome of such litigation is finally known; provided, however, that if the
Company or Donnelly, as the case may be, suspends the payment of royalties
to Schott and pays such amounts into escrow upon the receipt of a
Substantial Notice, as provided above, if within one
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year of the receipt of such Substantial Notice, Donnelly or the Company, as
the case may be, has neither begun negotiations relating to such
Substantial Notice nor sought a declaratory judgment and no litigation has
been commenced by such third party, all such amounts paid into escrow shall
be released to Schott; provided, however, if litigation does commence
within three years of the original delivery of the Substantial Notice,
Schott shall restore any amounts that have been released to Schott pursuant
to the immediately preceding proviso and any additional amounts paid from
such release date by Donnelly and/or the Company to such escrow account. If
the Company or Donnelly, as the case may be, enters into any settlement
agreement or is found to infringe any such third party rights by the
exercise of any right or license granted by Schott pursuant to this
Agreement (as described above):
(1) any royalties with respect to (A) such infringing Licensed Product
and/or (B) such Licensed Products covered by, or manufactured using,
such infringing process licensed hereunder, paid to Schott or any of
its Affiliates on or prior to the date of the Substantial Notice of
such infringement or commencement of the litigation alleging such
infringement shall be promptly repaid by Schott to the Company and/or
Donnelly, as the case may be, to the extent of any damages or
royalties owing by the Company or Donnelly in excess of that received
in sub-paragraph (2) below;
(2) any amounts with respect to royalties held in escrow, as provided
above, shall be released to the Company or to Donnelly, as the case
may be, to the extent of any settlement and/or any damages or
royalties owing by the Company or Donnelly;
(3) any future royalties with respect to sales of such Licensed
Products and/or use of such process to manufacture or covering such
Licensed Products that was the subject of such settlement agreement or
litigation that will be payable to Schott by the Company or Donnelly,
as the case may be, after the date of determination by a court, or a
settlement of such alleged infringement, shall be reduced by the
amount of any royalties payable to a third party as a result of such
determination by a court or such settlement;
Any settlement of such alleged infringement shall be subject to Schott's
reasonable approval; provided, however, that Schott may not withhold its
approval of any license or settlement agreement unless it agrees to defend the
Company and/or Donnelly, and agrees to reimburse the Company and/or Donnelly, as
the case may be, for fifty percent (50%) of the costs of defending such claims
or bringing a declaratory judgment action relating to such claims.
Upon the determination by a court, or a settlement, of such alleged infringement
action, all amounts paid into escrow pursuant to Section 7.2(a) shall be
released to the respective parties in order equitably to reflect such
determination or settlement. If the parties cannot mutually agree as to the
equitable release of such amounts paid into escrow, notwithstanding good faith
negotiations, the issue of the release of such escrowed funds shall be resolved
by means of arbitration, as provided in Section 10.10 hereof.
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(b) Neither the Company nor Donnelly undertakes any obligation to
indemnify Schott against, or assume any responsibility for, any claim of
infringement by any third party relating to or arising out of any exercise
of any right or license granted to Schott, the Company or Donnelly, as the
case may be, under this Agreement.
(c) As used in this Agreement, "Substantial Notice" shall mean a
written notice from a third party that alleges that the use of Schott's
Technology or Intellectual Property Rights or the manufacture or sale of
Licensed Products infringes a third party's intellectual or industrial
property rights by a method or apparatus covered by the Technology or
Intellectual Property Rights and constitutes grounds for the recipient of
such written notice to seek a declaratory judgment with respect to such
allegation(s) or challenge(s).
ARTICLE 8
INFRINGEMENT OF LICENSED INTELLECTUAL PROPERTY RIGHTS
8.1 Action by a Licensee. Except as provided in Section 8.2, a Licensee
shall have the right but shall not be obligated to institute proceedings in its
own name or in the name of the Licensor against any third party infringer, in
the Licensee's field of use of Licensed Products, of any Intellectual Property
Rights licensed by the Licensor to the Licensee pursuant to this Agreement. If
the Licensor or a Licensee becomes aware of any actual, threatened, or apparent
infringement of any of the licensed Intellectual Property Rights by any Person
in the field of use of Licensed Products, such party agrees to provide the other
parties with written notice prior to suit of such actual, threatened, or
apparent infringement and agrees to furnish to the other party any available
evidence of such actual, threatened, or apparent infringement. The Licensor
agrees to cooperate in any proceedings instituted by a Licensee against third
party infringers and to provide information relating to such proceedings which
the Licensor may reasonably request. In the event that a Licensee determines
that it lacks standing to commence such a proceeding, the Licensor agrees to
execute such documents and take such actions as the Licensee may reasonably
request for the purpose of commencing such infringement proceedings. The
Licensee shall have the right to control prosecution of such proceedings
regardless of whether the proceedings are commenced in the Licensor's name or in
the name of the Licensee; provided, however, that (a) in the event of a
counterclaim against the Licensor, or a challenge to the validity or
enforceability of any Intellectual Property Rights, the litigation shall be
jointly managed by a Licensor and the Licensee so long as the Licensor pays all
costs and expenses relating to such counter claim and/or challenge to the
validity or enforceability of any Intellectual Property Rights; provided,
however, that in the event of disagreements between a Licensor and Licensee in
such jointly managed litigation, (1) the final decision of issues in
disagreement relating to alleged infringements of third-party rights shall be
made by the Licensee and (2) the final decision of issues in disagreement
related to challenges to the validity and enforceability of Intellectual
Property Rights shall be made by the Licensor; and (b) the Licensee shall not
settle any claim or counterclaim in any manner agreeing to the invalidity or
limitation of any Intellectual Property Right without the prior written consent
of the Licensor. Any recovery awarded in such proceedings shall be retained by
the Licensee; provided, however, that the respective expenses of the Licensor
and Licensee shall first be paid, pro rata, out of the proceeds of such
recovery.
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8.2 Action by the Licensor. In the event the Licensor notifies the Licensee
or receives notice from the Licensee of actual, threatened, or apparent
infringement of any licensed rights or Intellectual Property Rights by a third
party and the Licensee does not institute proceedings against such a third party
within sixty (60) days of notification, then the Licensor may institute
proceedings against such a third party, at its own expense, and in the
Licensee's name, subject to the Licensor's prompt reimbursement of Licensee's
costs and expenses with respect to such proceedings. The Licensee agrees to
cooperate fully with the Licensor in such proceedings. Any recovery awarded in
such proceedings shall be retained by the Licensor.
ARTICLE 9
TERM AND TERMINATION
9.1 Term. Unless otherwise terminated as provided herein:
(a) The licenses granted hereunder to the Company shall remain in
place and shall continue notwithstanding the withdrawal of either Initial
Member (or its Affiliate) or both Initial Members (or their respective
Affiliates) from the Company;
(b) The licenses granted hereunder from the Company to Donnelly and/or
Schott (and their Affiliates), respectively, shall continue so long as
either Schott (or an Affiliate of Schott) or Donnelly North America (or an
Affiliate of Donnelly North America) is a member of the Company, and upon
the withdrawal from the Company by either Schott (or an Affiliate of
Schott) or Donnelly North America (or an Affiliate of Donnelly North
America), as the case may be, such licenses to the withdrawing member (or
its Affiliates) shall continue under the same terms and scope existing as
of the date of such withdrawal, including but not limited to Improvements
existing as of the date of such withdrawal.
9.2 Default. If any party fails to comply with any of its obligations
hereunder, and after notice from another party such failure continues for sixty
(60) days, such action shall constitute a default hereunder; provided, however,
if a default under this Agreement cannot reasonably and with due diligence and
good faith be cured within said 60-day period, and if the defaulting party
promptly commences and proceeds to complete the cure of such default with due
diligence and in good faith, the 60-day period with respect to such default
shall be extended to include such additional period of time as may be reasonably
necessary to cure such default.
ARTICLE 10
CONSTRUCTION
10.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
applicable principles of conflicts of laws.
10.2 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)
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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 Street
Holland, Michigan 49423
Attention: Niall Lynam
Fax No. (616) 786-786-5185
With a copy to: Varnum, Riddering, Howlett & Schmidt LLP
Bridgewater Place
333 Bridge Street, N.W., P.O. Box 352
Grand Rapids, Michigan 49504
Attention: Daniel Molhoek
Fax No. (616) 336-7000
To the Company:
To: Schott Corporation
Schott North America Manufacturing, Inc.
3 Odell Plaza
Yonkers, New York 10701
Attention: Manfred Jaeckel
Fax No. (914) 968-8585; and
Schott Glas
Legal Department
Hattenbergstra(beta)e 10
P.O. Box 2480
D-55014 Mainz
Federal Republic of Germany
Attention: Dr. Wilhelm Niemeier
Facsimile: 011-49-61-31-66-2098.
With a copy to: Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
Attention: Richard T. McDermott
Facsimile: (212) 878-8375.
10.3 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.
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10.4 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.
10.5 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.
10.6 Schedules Included in Exhibits; Incorporation by Reference. Any
reference to an Exhibit or Schedule to this Agreement contained herein shall be
deemed to include any Exhibits or Schedules to such Exhibit or Schedules. Each
of the Exhibits and Schedules referred to in this Agreement, and each Exhibit or
Schedule thereto, 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.
10.7 Amendments. This Agreement may not be amended except by written
agreement executed by duly authorized officers of all of the parties hereto.
10.8 Entire Agreement; Section Headings. This Agreement, the Joint Venture
Agreement, the LLC Agreement and the agreements contemplated by the LLC
Agreement 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 not affect in any way the meaning or interpretation of this
Agreement.
10.9 Assignment. Except as otherwise specifically provided in this
Agreement, the Joint Venture Agreement, or the LLC Agreement, neither this
Agreement nor any rights or obligations hereunder shall be assignable or be
delegated directly or indirectly by any party hereto to a third party without
the prior written consent of all the parties to this Agreement.
10.10 Arbitration.
(a) Any dispute, controversy or claim (hereinafter "Dispute") between
the parties of any kind or nature whatsoever, arising under or related to
this Agreement whether arising in contract, tort or otherwise, shall be
resolved according to the following procedure. If a Dispute arises among
the parties under or relating to this Agreement which is not resolved by
good faith negotiation, then such Dispute, upon 30 days' prior notice from
one party 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, except
the decision shall be rendered by one arbitrator. The parties shall attempt
to agree upon an arbitrator. The arbitrator shall be a licensed
attorney-at-law, experienced and knowledgeable in the field of intellectual
property,
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<PAGE>
with technical knowledge sufficient to understand and render a reasoned
written opinion with respect to this Agreement, the Technology and the
Intellectual Property Rights. If an arbitrator cannot be agreed upon, the
party that did not give the Arbitration Notice may request the Chief Judge
of the United States District Court for the Western District of Michigan or
the Chief Judge of the United States District Court for the Southern
District of New York to appoint an arbitrator. If he or she cannot or does
not appoint such arbitrator, 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 in English on an
expedited schedule, and all proceedings shall be confidential.
(b) The parties shall use their reasonable best efforts to limit the
total time period of any arbitration to a maximum of six months. Discovery
shall be limited to a maximum time period of four months, unless extended
by the arbitrator, and any party's failure to deliver documents for
discovery in a timely manner shall preclude such party from relying on
other documents that support its position with respect to the issue in
question. The arbitrator shall use his or her reasonable best efforts to
decide any dispute hereunder within the six-month time period referred to
in the first sentence of this paragraph (b).
(c) Any party may at its expense make a stenographic record of any
arbitration proceeding. 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 party 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 shall take place at
New York, New York, or Grand Rapids, Michigan at the election of the party
not giving the Arbitration Notice.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
DONNELLY CORPORATION
By /s/ Scott E. Reed
Its Sr. VP & CFO
SCHOTT GLAS
By /s/ Dr. Ungeheuer /s/ R. Langfeld
Its Member of the Vice President R&D
Board of
Management
SCHOTT CORPORATION
By /s/ Guy Pierre De Conincx
Its ___________________________
SCHOTT NORTH AMERICA
MANUFACTURING, INC.
By /s/ Guy Pierre De Conincx
Its ___________________________
SCHOTT-DONNELLY LLC
SMART GLASS SOLUTIONS
By /s/ Niall Lynam
Its Chairman
<PAGE>
SCHEDULE A
Intellectual Property Rights, as defined in Section 1.2 of this Agreement.
As of the date of this Agreement, none.
<PAGE>
SCHEDULE B
Technology, as defined in Section 1.7 of this Agreement.
- - Commercialization of EC products
- - EC material selection, purification and synthesis
- - Accelerated testing/reliability assurance
- - Sealing techniques/seal integrity testing
- - Substrate preparation & cleaning
- - Diagnostic testing
- - Troubleshooting/PFMEA
- - Equipment design
- - Process design
- - Customization for automotive applications
- - Production scale-up of EC products
- - Quality systems for EC products
- - Component, material and equipment selection & procurement
- - Electrical connectors and interfaces
- - Automotive development, supply and quality systems
- - Failure analysis and countermeasure implementation
- - Competitive benchmarking
- - Manufacturing flow and production control for EC products
- - Costing & pricing for EC products
- - Supplier development & quality control for EC products
<PAGE>
EXHIBIT 10.31
DONNELLY TECHNOLOGY LICENSE AGREEMENT
THIS TECHNOLOGY LICENSE AGREEMENT (this "Agreement"), dated and effective
as of as of the 5th day of April, 1999 (the "Effective Date"), by and among
DONNELLY CORPORATION, a Michigan corporation with its principal offices at 49 W.
Third Street, Holland, Michigan 49423 ("Donnelly"), SCHOTT GLAS, a German entity
organized under the German civil code ("Schott Glas"), SCHOTT CORPORATION, a
Maryland corporation with its principal offices at 3 Odell Plaza, Yonkers, New
York 10701-1405 ("Schott Corporation"), and SCHOTT NORTH AMERICA MANUFACTURING,
INC., a Maryland Corporation with its principal offices at 3 Odell Plaza,
Yonkers, New York 10701-1405 ("Schott North America") (Schott Glas, Schott
Corporation and Schott North America are sometimes referred to collectively as
"Schott"), and SCHOTT-DONNELLY LLC SMART GLASS SOLUTIONS, a Delaware limited
liability company (the "Company").
RECITALS:
WHEREAS, Donnelly, Schott Glas, Schott Corporation and Schott North America
have executed a Joint Venture Agreement, dated April 5, 1999, creating a joint
venture among the parties thereto;
WHEREAS, Schott North America and Donnelly, as the members of the Company,
have executed a Limited Liability Company Agreement, dated as of April 5, 1999
(the "LLC Agreement") on the Closing Date;
WHEREAS, Donnelly is the owner of certain intellectual property rights
principally covering and/or principally used in the manufacture of EC Products;
WHEREAS, the parties desire to enter into this Agreement to provide certain
rights for the Company and Schott to license certain specified intellectual
property rights from Donnelly; and
WHEREAS, the Company may develop Improvements to the intellectual property
rights licensed from Donnelly and may develop other intellectual property rights
and the parties desire to enter into this Agreement to provide certain rights
for Donnelly to license such Improvements from the Company;
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
DEFINITIONS
Capitalized terms used but not defined herein shall have the meaning
ascribed to them in the Joint Venture Agreement or the LLC Agreement, as the
case may be.
<PAGE>
1.1 "Improvement" shall mean (i) any development or alteration,
modification or enhancement to Technology or Intellectual Property Rights,
whether patentable or not, which improves the effectiveness, efficiency,
performance or other attribute of, or otherwise relates to, Technology or
Intellectual Property Rights, or any element thereof, or (ii) any new product or
material which performs substantially the same function as Technology or
Intellectual Property Rights, whether patentable or not, but does so through a
different method or process.
1.2 "Intellectual Property Rights" shall mean United States, international
and foreign patents and patent applications (including United States provisional
applications and all PCT patent applications), any and all patents issuing
therefrom or otherwise corresponding thereto, and all divisions, continuations,
continuations-in-part, reissues, restorations, reexamination certificates and
extensions thereof, describing and/or claiming Technology, and all mask works,
industrial design registrations and applications for such registrations, and all
other proprietary rights covering or otherwise related to Technology and/or
processes for manufacture and/or use of EC Products embodying Technology arising
prior to or during the term of this Agreement. Donnelly's Intellectual Property
Rights existing on the date hereof are set forth on Schedule A.
1.3 "Licensed Product" shall mean an EC Product licensed hereunder that
could not be manufactured and sold by a Licensee without infringing Donnelly's
Intellectual Property Rights or using Donnelly's Technology.
1.4 "Licensee" shall mean the Person licensed hereunder in the field of the
applicable EC Product.
1.5 "Licensor" shall mean the Company and/or Donnelly, as the case may be,
whichever is licensing in the field of the applicable EC Product.
1.6 "Minimum Automotive Glazing Royalty" shall have the meaning ascribed to
such term in Section 3.2(b).
1.7 "Net Sales" shall mean the total invoiced amount relating to sales of a
given product by a Licensee and its Affiliates to any Person that is not an
Affiliate of such Licensee, less the following:
(a) customary or usual trade or quantity discounts or other charge-backs
actually taken by the customer and not already credited on an invoice;
(b) sales, use, value-added or other excise taxes, imposed and paid
directly with respect to the sale, and included within the invoice price,
and separately stated on the invoice;
(c) refunds for customer returns, not already credited on an invoice; and
(d) customs, duties, transportation charges and other similar expenses
separately invoiced.
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<PAGE>
1.8 "Schott License Grant Date" shall mean:
(a) if Schott fails to make an Automotive Glazing Business Offer to
the Company by September 1, 1999, as contemplated in Section 4.05 of the
Joint Venture Agreement, September 1, 1999;
(b) if Schott makes an Automotive Glazing Business Offer to the
Company, pursuant to Section 4.05 of the Joint Venture Agreement, the date
on which the Company delivers to Schott its written refusal of such
Automotive Glazing Business Offer.
1.9 "Substantial Notice" shall have the meaning ascribed to such term in
Section 8.2(d).
1.10 "Technology" shall mean technological developments principally
covering or principally used in the manufacture of EC Products, including, but
not be limited to, the technology described on Schedule B hereto, ideas,
concepts, inventions, processes, principles of operation, formulae, patterns,
drawings, prints, proposals, devices, software, compilations of related
information, records, specifications, trade secrets and the knowhow, arising
before or during the term of this Agreement.
ARTICLE 2
LICENSE GRANTS
2.1 License Grants to the Company. Donnelly hereby grants unto the Company
a worldwide, exclusive (except as provided in Section 2.2) license of Donnelly's
Technology and Intellectual Property Rights to make, have made, use, offer to
sell and sell EC Products. The term of this license is described in Article 10
of this Agreement.
2.2 Limitation on Company Exclusivity. The license granted in Section 2.1
shall be non-exclusive with respect to the following:
(a) Architectural Glazing, provided, however, that Donnelly shall not
license its Intellectual Property Rights or Technology for Architectural
Glazing to:
(i) Denton Corporation or any of its Affiliates or joint
ventures.
(ii) Any float glass manufacturer which commercially uses a Sol
Gel process.
(iii) Any float glass manufacturer unless the license includes
specific prohibition of and penalties for using any of Donnelly's
Technology or Intellectual Property Rights for Automotive Glazing.
(iv) Any Person to make, have made, use, offer to sell or sell
any windows smaller than ten (10) square feet unless such window is a
part of a wall;
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<PAGE>
(b) Automotive Glazing, to the extent Donnelly licenses its Technology
and/or Intellectual Property Rights to Schott as set forth below;
(c) Skylights, if the Company determines to abandon the development,
manufacture and sale of Skylights;
(d) Sun Roofs, if the Company determines to abandon the development,
manufacture and sale of Sun Roofs.
2.3 Sublicenses by the Company. The Company may not sublicense Donnelly's
Technology or Intellectual Property Rights without Donnelly's prior written
consent, which consent shall not be unreasonably withheld; provided, however,
that the Company shall have the right to sublicense Donnelly's Technology and
Intellectual Property Rights to the Company's Affiliates. The parties
acknowledge and agree that the Company shall have the right to grant such
sublicenses as may be necessary or convenient to have Licensed Products made by
third parties for sale by the Company and its Affiliates.
2.4 License Grants to Schott.
(a) Effective on the Schott License Grant Date, Donnelly hereby grants
to Schott a worldwide, exclusive (subject to Section 2.5 below) license of
Donnelly's Technology, to make, have made, use, offer to sell and sell
Automotive Glazing products. In addition, Donnelly hereby grants Schott a
worldwide, exclusive license of Donnelly's Intellectual Property Rights to
make, have made, use, offer to sell and sell Automotive Glazing products
subject to the terms of this Agreement, including the royalty payments
provided in Section 3.2 below.
(b) Donnelly hereby grants to Schott a worldwide exclusive license of
Donnelly's Technology and Intellectual Property Rights to make, have made,
offer to sell and sell New Products, effective immediately upon Schott's
proceeding with the development and sale of any New Product independent of
the Company that has been offered to and declined by the Company, as
provided in Section 4.09(c) of the Joint Venture Agreement, subject to the
terms of the Joint Venture Agreement and the royalty payments provided in
Section 3.2(d) below.
2.5 Exclusivity. For as long as Donnelly receives the Minimum Automotive
Glazing Royalty from Schott, as provided in Section 3.2, Donnelly shall not
license its Technology or Intellectual Property Rights to any party other than
Schott and the Company for Automotive Glazing.
2.6 Sublicenses by Schott. Schott may not sublicense Donnelly's Technology
or Intellectual Property Rights, except to an Affiliate of Schott, without
Donnelly's prior written consent. The parties acknowledge and agree that Schott
shall have the right to grant such sublicenses as may be necessary or convenient
to have made Automotive Glazing products or New Products (as provided in Section
4.09(c) of the Joint Venture Agreement) by third parties for sale by Schott and
its Affiliates.
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<PAGE>
ARTICLE 3
ROYALTIES
3.1 Company Royalties. In consideration of the license granted herein, the
Company agrees to pay Donnelly royalties as follows:
(a) With respect to Skylights or Sun Roofs that are Licensed Products,
five percent (5%) of Net Sales of such Skylights and Sun Roofs that are
Licensed Products manufactured and sold by the Company until the total
payments under this Section 3.1(a) are Ten Million Dollars ($10,000,000).
Thereafter, sales by the Company of all Skylights and Sun Roofs shall be
royalty free. Notwithstanding the foregoing, payments of royalties pursuant
to this paragraph (a) shall terminate upon the occurrence of the later of
(i) the expiration of the last-to-expire Donnelly Licensed Patent that
would be infringed by the Company's manufacture and sale of Skylights or
Sun Roofs that are Licensed Products or (ii) the twentieth (20th)
anniversary of the date of this Agreement.
(b) With respect to Automotive Glazing Licensed Products, two and
one-half percent (2-1/2%) of Net Sales of all Automotive Glazing Licensed
Products manufactured and sold by the Company.
(c) With respect to Architectural Glazing Licensed Products, a royalty
rate shall be negotiated in good faith by the parties based on a
commercially reasonable royalty rate with respect to Net Sales of
Architectural Glazing Licensed Products manufactured and sold by the
Company, beginning at such time as commercial production and sales of
Architectural Glazing Licensed Products by the Company commence, at a rate
not less than one and one-half percent (1-1/2%) or more than three percent
(3%) of the Net Sales of Architectural Glazing Licensed Products
manufactured and sold by the Company. If the parties cannot agree upon a
royalty rate after good faith negotiations, a commercially reasonable
royalty rate shall be determined by arbitration in the manner provided in
Section 11.10.
(d) With respect to all other Licensed Products, three and one-half
percent (3- 1/2%) of the Net Sales of such Licensed Product manufactured
and sold by the Company.
Notwithstanding the foregoing, payments of royalties pursuant to paragraphs
(b), (c) and (d) of this Section 3.1 shall terminate upon the expiration of the
last-to-expire Donnelly Licensed Patent that would be infringed by the Company's
manufacture and sale of the Licensed Products.
3.2 Schott Royalties. In consideration of the licenses granted herein and
the agreement by Donnelly not to grant any other license to any party other than
the Company in Donnelly's Intellectual Property Rights for the manufacture
and/or sale of Automotive Glazing Licensed Products, Schott agrees:
(a) To pay Donnelly Two Million Dollars ($2,000,000) on the date
hereof;
5
<PAGE>
(b) To pay Donnelly Sixty-Two Thousand Five Hundred Dollars ($62,500)
per quarter (the "Minimum Automotive Glazing Royalty"). The first such
payment is due and payable on the thirtieth (30th) day after the Schott
License Grant Date, and subsequent payments shall be due on each March 31,
June 30, September 30 and December 31 thereafter, for a minimum of twenty
(20) payments and for such time thereafter as elected by Schott in order to
preserve its exclusivity under Section 2.5 above; provided, however, that
the Minimum Automotive Glazing Royalty shall be increased to One Hundred
Twenty- five Thousand Dollars ($125,000) per quarter upon the occurrence of
the events and for the periods provided in Section 4.06(a), the proviso set
forth in Section 4.07(c), and Section 4.07(d) of the Joint Venture
Agreement; provided, further, that Schott's obligation to pay the Minimum
Automotive Glazing Royalty shall cease at such time as the Company accepts
the assignment of the DC Project, as provided in Section 4.05(b), Section
4.06(b), or Section 4.07(a) of the Joint Venture Agreement.
Notwithstanding any other provision of this Agreement, if at any time Schott
determines to withdraw from the DC Project and to terminate its Automotive
Glazing business, Schott shall deliver to Donnelly a written notice of such
withdrawal and termination ("Termination Notice"). Effective as of the date
occurring nine (9) months after Donnelly's receipt of the Termination Notice:
(i) Schott's obligation to make payments with respect to the Minimum Automotive
Glazing Royalties shall cease (a "Termination of Minimum Royalties");
(ii) All licenses with respect to Automotive Glazing granted to the Company or
to Schott by Donnelly hereunder shall terminate and Donnelly shall be free to
negotiate licenses with respect to Automotive Glazing with third parties;
(iii) Schott and its Affiliates shall not for a period of five (5) calendar
years, beginning on the Termination Date, manufacture or sell, or license to
manufacture or sell, any Automotive Glazing product; and
(iv) (A) If Schott has not made an Automotive Glazing Business Offer because
Daimler Chrysler did not approve the assignment of the DC Project to the
Company, or if the Termination Notice is received by Donnelly on or prior to
July 1, 2002, then Donnelly shall be permitted to treat such withdrawal and
termination by Schott as an Exit Milestone under Section 8.01(b) of the Limited
Liability Company Agreement; or
(B) If Schott has made an Automotive Glazing Business Offer and the Company
declined to accept the Automotive Glazing Business Offer because Donnelly's
representatives on the Management Committee declined to approve the same, and
the Termination Notice is received by Donnelly after July 1, 2002, then Section
3.04(b) of the Limited Liability Agreement shall be modified so that the
limitation of contributions for each fiscal year specified in the column
thereunder shall be that percentage of "Free Cash Flow" shown in such column
decreased by an amount equal to (X) the amount of the Minimum Automotive Glazing
Royalty that would have been payable to Donnelly in such fiscal year but for the
Termination of
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<PAGE>
Minimum Royalties, minus (Y) the amount actually paid by Schott in such fiscal
year with respect to Minimum Automotive Glazing Royalties, if any.
(c) Only if Schott proceeds with the DC Project and its Automotive
Glazing business separate and apart from the Joint Venture, but cannot
produce Automotive Glazing Products without infringing Donnelly's
Intellectual Property Rights, then Schott shall pay Donnelly a royalty
equal to two and one-half percent (2-1/2%) of the Net Sales of Automotive
Glazing Products manufactured and sold by Schott or an Affiliate of Schott.
(d) Only if Schott proceeds with the development and sale of New
Products independent of the Company, as provided in Section 4.09(c) of the
Joint Venture Agreement, Schott shall pay to Donnelly a royalty of five
percent (5%) of Net Sales of New Products manufactured and sold by Schott,
the manufacture or sale of which would but for the licenses granted
hereunder infringe Donnelly's Intellectual Property Rights.
Notwithstanding the foregoing, payments of the royalties described in paragraphs
(b), (c) and (d) of this Section 3.2 shall terminate upon the expiration of the
last-to-expire Donnelly Licensed Patent that would be infringed by Schott's
manufacture and sale of EC Products, including but not limited to New Products.
3.3 Reporting and Royalty Payments.
(a) The Company and Schott shall render to Donnelly quarterly reports
to be delivered to Donnelly on or before the 30th day after each March 31,
June 30, September 30, and December 31 of each year during the term of this
Agreement when royalty payments are due. Such report shall include a
breakdown of the Net Sales of each type of Licensed Product for each
customer. Each quarterly report shall be accompanied by payment to Donnelly
in US dollars of the royalty due for Licensed Products shipped to customers
in the previous quarter. In case of any delay in payment, interest at the
rate of one percent (1%) per month shall be payable from the due date.
(b) Donnelly and Schott shall render to the Company quarterly reports
to be delivered to the Company on or before the 30th day after each March
31, June 30, September 30, and December 31 of each year during the term of
this Agreement when royalty payments are due. Such report shall include a
breakdown of the Net Sales of each type of Licensed Product for each
customer. Each quarterly report shall be accompanied by payment to the
Company in US dollars of the royalty due for Licensed Products shipped to
customers in the previous quarter. In case of any delay in payment,
interest at the rate of one percent (1%) per month shall be payable from
the due date.
ARTICLE 4
IMPROVEMENTS
4.1 Ownership and Licensing of Improvements. The Company shall own and
shall have all rights, including Intellectual Property Rights, in and to all
Improvements conceived and
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<PAGE>
in the process of development by the Company's personnel or by third party
personnel working on the Company's behalf. The Company hereby grants and shall
grant to Donnelly a royalty-free, paid-up, worldwide, non-exclusive license
without the right to sublicense (other than to its Affiliates) to all Technology
and Intellectual Property Rights of the Company and Improvements thereto, except
in the field of New Products manufactured and/or sold by Donnelly, as long as:
(a) Donnelly (or any of its Affiliates) is a Member of the Company; or
(b) the use, manufacture, advertising or sale is of a non-EC Product;
or
(c) Donnelly ( or any of its Affiliates) is paying a royalty to Schott
(or any of its Affiliates).
If none of the conditions described in subsections (a), (b) or (c) above is
fulfilled, the license granted pursuant to this Section 4.1 shall not be royalty
free, and Donnelly shall pay to the Company a reasonable royalty based on
prevalent market conditions (to be negotiated by the parties) for any EC
Products manufactured and/or sold by Donnelly that would infringe a patent of
the Company. If the parties cannot agree upon a royalty rate after good faith
negotiations, a commercially reasonable royalty rate shall be determined by
arbitration in the manner provided in Section 11.10.
The parties acknowledge and agree that Donnelly shall have the right to grant
such sublicenses as may be necessary or convenient to have the products covered
by this Section 4.1 made by third parties for sale by Donnelly. This Section 4.1
shall be subject to Section 4.3 of this Agreement.
4.2 Improvements.
(a) Donnelly hereby grants and shall grant to the Company and to
Schott, as the case may be, licenses to all Improvements owned or developed
by or licensed to Donnelly, on the same terms and conditions of the
licenses granted hereunder with respect to Donnelly's Technology and
Intellectual Property Rights; provided, however, that Donnelly shall not be
required to license any of Donnelly's Improvements if it is precluded from
doing so under any agreement with any Person.
(b) Donnelly hereby represents, to the best of its knowledge, that as
of the date hereof Donnelly is not a party to any agreement with any Person
that would preclude Donnelly from licensing to the Company and/or Schott
any of Donnelly's Improvements to Donnelly's Technology or Intellectual
Property Rights that are (i) owned by Donnelly, (ii) developed by Donnelly
or (iii) licensed to Donnelly. Donnelly hereby agrees to undertake prior to
the Closing Date a thorough and complete review of all agreements relating
or pertaining to EC Products or Electrochromic Material to which Donnelly
or any of its Affiliates is a party and, on a confidential basis, to notify
Schott prior to the Closing Date in writing of any such agreements that
would, or reasonably could be expected to, preclude Donnelly from licensing
to the Company and/or Schott any of Donnelly's Improvements to Donnelly's
Technology or Intellectual Property Rights that are (i) owned by Donnelly,
(ii) developed by Donnelly or (iii)
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licensed to Donnelly, identifying the date, the parties thereto and the EC
Product or Electrochromic Material that is subject thereto; provided,
however, that Donnelly shall not be required to provide specific
information about such agreement if Donnelly is precluded from doing so
under any agreement with any party to such agreement.
(c) Donnelly hereby agrees that as of the date hereof it shall not
enter into any agreement with any Person that would preclude Donnelly from
licensing to the Company and/or Schott any Improvements to Donnelly's
Technology or Intellectual Property Rights that (i) are owned or at any
time have been owned by Donnelly and (ii) are developed by Donnelly.
(d) Donnelly hereby agrees to use its reasonable commercial efforts to
obtain rights for the Company and for Schott to any Improvements
encompassed by any agreement between Donnelly and any Person covering the
subject matter of Donnelly's Technology or Intellectual Property Rights.
(e) Donnelly further agrees that prior to entering into any other
agreement with any Person that would preclude Donnelly from licensing to
the Company and/or Schott any of Donnelly's Improvements to Donnelly's
Technology or Intellectual Property Rights, it shall, on a confidential
basis, notify the Company and Schott of such prospective agreement and
identify the parties thereto; provided, however, that Donnelly shall not be
required to provide such notice if it is precluded from doing so under any
agreement with any Person.
4.3 License Grant.
(a) The Company hereby grants and agrees to grant to Donnelly a
worldwide, non-exclusive, royalty-free, paid-up license without the right
to sublicense (other that to its Affiliates) to make, have made, use, offer
to sell and sell New Products manufactured by Donnelly in compliance with
Section 4.09 of the Joint Venture Agreement using the non-patented
Technology of the Company and Improvements thereto.
(b) The Company hereby grants and agrees to grant to Donnelly a
worldwide, non-exclusive license without the right to sublicense (other
that to its Affiliates) to make, have made, use, offer to sell and sell New
Products manufactured by Donnelly in compliance with Section 4.09 of the
Joint Venture Agreement using the Intellectual Property Rights of the
Company and Improvements thereto. In exchange for such license, Donnelly
shall pay to the Company a reasonable royalty based on prevalent market
conditions (to be negotiated by the parties) for any such New Products
manufactured and/or sold by Donnelly that would infringe a patent of the
Company. If the parties cannot agree upon a royalty rate after good faith
negotiations, a commercially reasonable royalty rate shall be determined by
arbitration in the manner provided in Section 11.10.
Notwithstanding the foregoing, the obligation to pay such royalty to the Company
shall terminate upon the expiration of the last-to-expire Company patent that
would be infringed by the manufacture and sale of such New Products by Donnelly
or its Affiliates.
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The parties acknowledge and agree that Donnelly shall have the right to grant
such sublicenses as may be necessary or convenient to have the products covered
by this Section 4.3 made by third parties for sale by Donnelly (and/or its
Affiliates).
ARTICLE 5
PROSECUTION AND MAINTENANCE OF
INTELLECTUAL PROPERTY RIGHTS
5.1 Knowledge of Infringement. If any party has knowledge of any
infringement of a claim of a patent under this Agreement, the party having such
knowledge shall promptly inform the other party of such infringement.
5.2 Prosecution.
(a) Donnelly shall retain the right to (but shall not be obligated to)
prosecute and/or maintain all of Donnelly's Technology and Intellectual
Property Rights licensed by Donnelly to the Company and/or Schott pursuant
to Article 2 of this Agreement.
(b) The Licensee shall have the right to prosecute and/or maintain at
the Licensee's expense any of Donnelly's Intellectual Property Rights
licensed hereunder in any country when the Licensee has been notified by
Donnelly that Donnelly no longer wishes to prosecute or maintain such
Intellectual Property Rights in such country, and Donnelly hereby agrees to
notify the Licensee of its intent to cease prosecution or payment of
maintenance fees with respect to any of such Intellectual Property Rights
in any such country, at least ninety (90) days prior to the date of any
abandonment of any right or the date of any required payment or filing
which Donnelly does not intend to make or file. Notwithstanding any other
provision of this Agreement, as of the date of such notice, all sales by
the Company or by Schott or their Affiliates, in any such country
(excluding sales for purposes of export out of such country) where Donnelly
no longer wishes to prosecute or maintain such Intellectual Property
Rights, of Licensed Products manufactured in such country shall be royalty
free.
ARTICLE 6.
TECHNICAL ASSISTANCE
6.1 Technical Information. Donnelly shall furnish to the Company, and to
Schott, if requested, all of the Technology and any and all technical
information, data, drawings, plans, specifications and other pertinent
information prepared by or for, used by, or in the possession of Donnelly that
may be useful for the development, manufacture or sale of Licensed Products.
Donnelly shall begin furnishing such Technology and technical information and
technical assistance promptly following the date of this Agreement.
6.2 Technical Personnel. Donnelly's ATC technical personnel with applicable
knowledge and information concerning the development of EC Products shall, as
soon as practical after the closing under the Joint Venture Agreement, but not
later than December 31, 1999, become employees of the Company. Donnelly shall
exert reasonable commercial efforts to provide the Company with such other
technical personnel and information as is agreed by the
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parties to be necessary or useful to develop EC Products, and the Company shall
reimburse Donnelly for its costs related thereto.
ARTICLE 7
COOPERATION AND CONFIDENTIALITY
7.1 Exchange of Information. During the term of this Agreement, Donnelly,
the Company, Schott and their respective Affiliates shall exchange information
concerning all Technology and Intellectual Property Rights conceived or
developed by any of them relating to EC Products and processes or techniques
used in the manufacture of EC Products.
7.2 Cooperation. The Company, Donnelly and Schott agree to cooperate with
each other in the prosecution of pending applications concerning any
Intellectual Property Rights or any new applications based upon any Improvements
thereto by providing, upon request, technical information and data in an
appropriate form relating to the subject matter or any pending or issued
applications and/or Improvements.
7.3 Confidentiality. The Company, Donnelly and Schott acknowledge that the
Intellectual Property Rights, Technology and Improvements licensed pursuant to
this Agreement or developed by Donnelly, Schott and/or the Company after the
date of this Agreement relate or will relate to information which is not or will
not be publicly available ("Confidential Information"), including, without
limitation, information exchanged pursuant to Section 7.1 hereof and Donnelly's
Technology listed or described in Schedule B. The Company, Donnelly and Schott
hereby agree not to disclose the Confidential Information to any third parties
for a period of ten (10) years after the receipt of such Confidential
Information, except to only (a) those of their respective employees having a
legitimate business need-to-know, (b) consultants engaged by them respectively,
(c) permitted sub-licensees hereunder, or (d) Daimler Chrysler, but only to the
extent that such disclosure to Daimler Chrysler is reasonably necessary for
Daimler Chrysler to determine whether it will grant its consent to the
assignment of the DC Project to the Company, as contemplated in Section 4.05,
Section 4.06 and Section 4.07 of the Joint Venture Agreement, subject to the
prior approval of Donnelly, which approval shall not be unreasonably withheld.
The Company, Donnelly and Schott agree that prior to making disclosures to any
consultant, employee or permitted sub- licensee, as the case may be, they shall
obtain a confidentiality and non-use agreement.
7.4 Confidentiality Exceptions. Notwithstanding the provisions of this
Article 7, Confidential Information shall not include (a) information that is
known to the public or is generally known within the industry or business, (b)
information that the Company, Donnelly or Schott, as the case may be, is
required to disclose pursuant to law or order of a court having jurisdiction
(provided that the party required so to disclose such Confidential Information
shall offer the party owning such Confidential Information the opportunity to
obtain an appropriate protective order or administrative relief against
disclosure of such Confidential Information), and (c) information that was
legally acquired by the Company, Donnelly or Schott, as the case may be, from a
third party in good faith, provided that such disclosure by the third party was
not in breach of any agreement between such third party and the Company,
Donnelly or Schott, as the case may be.
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7.5 Protection of Rights. The parties hereto agree that it shall be the
policy of the Company to protect the Intellectual Property Rights, Technology
and Improvements licensed hereunder and not to infringe upon the intellectual
property rights of third parties.
ARTICLE 8
WARRANTY AND INDEMNIFICATION
8.1 Warranty. Donnelly represents and warrants that to its knowledge, no
claim has been asserted that the products and/or processes covered by the rights
or licenses transferred or intended to be transferred or granted by Donnelly
pursuant to this Agreement infringe upon any third party rights. Donnelly
represents that it owns Donnelly's Technology and Intellectual Property Rights
and that such rights are not subject to any encumbrance, lien or claim of
ownership by any third party. Donnelly further represents that it has not
engaged in any conduct, or omitted to perform any necessary act, the result of
which could invalidate Donnelly's Intellectual Property Rights or adversely
affect their enforceability or publicly disclose Donnelly's Technology.
8.2 No Representation or Indemnification.
(a) Nothing in this Agreement is intended to state or otherwise imply
that the exercise of any right or license granted by Donnelly pursuant to
this Agreement to the Company or Schott will not infringe rights of third
parties. Donnelly does not undertake any obligation to indemnify the
Company or Schott against, or assume any responsibility for, any claim of
infringement by any third party relating to or arising out of any exercise
of any right or license granted in this Agreement; provided, however, if
any third party shall deliver a Substantial Notice to the Company or
Schott, or commence litigation against the Company or Schott, alleging that
the use of Donnelly's Technology or Intellectual Property Rights or the
manufacture or sale of Licensed Products infringes such third party's
intellectual or industrial property rights by a method or apparatus covered
by the Technology or Intellectual Property Rights, then the Company or
Schott, as the case may be, shall be entitled immediately to suspend
payment of royalties with respect to sales of the allegedly infringing
Licensed Products, and to pay such amounts into escrow, until such time as
any settlement with such third party is entered into or the outcome of such
litigation is finally known; provided, however, that if the Company or
Schott, as the case may be, suspends the payment of royalties and pays such
amounts into escrow upon the receipt of a Substantial Notice, as provided
above, if within one year of the receipt of such Substantial Notice, Schott
or the Company, as the case may be, has neither begun negotiations relating
to such Substantial Notice nor sought a declaratory judgment and no
litigation has been commenced by such third party, all such amounts paid
into escrow shall be released to Donnelly; provided, however, if litigation
does commence within three years of the original delivery of the
Substantial Notice, Donnelly shall restore any amounts that have been
released to Donnelly pursuant to the immediately preceding proviso and any
additional amounts paid from such release date by Schott and/or the Company
to such escrow account. If the Company or Schott, as the case may be,
enters into any settlement agreement or is found to infringe any such third
party rights by the exercise of any right or license granted by Donnelly
pursuant to this Agreement (as described above):
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(1) any royalties with respect to (A) such infringing Licensed
Product and/or (B) such Licensed Products covered by, or
manufactured using, such infringing process licensed hereunder,
paid to Donnelly or any of its Affiliates on or prior to the date
of the Substantial Notice of such infringement or commencement of
the litigation alleging such infringement shall be promptly
repaid by Donnelly to the Company and/or Schott, as the case may
be, to the extent of any damages or royalties owing by the
Company or Schott in excess of that received in sub-paragraph (2)
below;
(2) any amounts with respect to royalties held in escrow, as
provided above, shall be released to the Company or to Schott, as
the case may be, to the extent of any settlement and/or any
damages or royalties owing by the Company or Schott;
(3) any future royalties with respect to sales of such Licensed
Products and/or use of such process to manufacture or covering
such Licensed Products that was the subject of such settlement
agreement or litigation that will be payable by the Company or
Schott, as the case may be, after the date of determination by a
court, or a settlement of such alleged infringement, shall be
reduced by the amount of any royalties payable to a third party
as a result of such determination by a court or such settlement;
Any settlement of such alleged infringement shall be subject to Donnelly's
reasonable approval; provided, however, that Donnelly may not withhold its
approval of any license or settlement agreement unless it agrees to defend the
Company and/or Schott, and agrees to reimburse the Company and/or Schott, as the
case may be, for fifty percent (50%) of the costs of defending such claims or
bringing a declaratory judgment action relating to such claims.
Upon the determination by a court, or a settlement, of such alleged infringement
action, all amounts paid into escrow pursuant to Section 8.2(a) shall be
released to the respective parties in order equitably to reflect such
determination or settlement. If the parties cannot mutually agree as to the
equitable release of such amounts paid into escrow, notwithstanding good faith
negotiations, the issue of the release of such escrowed funds shall be resolved
by means of arbitration, as provided in Section 11.10 hereof.
(b) Section 8.2(a) shall not apply to Schott's obligation to pay the
Minimum Automotive Glazing Royalty. Notwithstanding any other provision of
this Agreement, if at any time the validity and/or enforceability of a
substantial portion of Donnelly's Intellectual Property Rights relating to
Automotive Glazing, including but not limited to U.S. Patents Nos. 5220317,
5384578, 5252354, 5457218, 5424865, 5472643, 5239406, 5680245 and 5864419
and International Publication No. WO97/3850, have been substantially
impaired as the result of a challenge to the validity or enforceability of
such Intellectual Property Rights, then, as of the earlier of the date of
the receipt of Substantial Notice by Schott or the Company, as the case may
be, from a third party, or the commencement of any litigation relating to
such challenge to the invalidity or unenforceability, Schott may suspend
the payment of the Minimum Automotive
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Glazing Royalty and pay such amounts into escrow, until such time as the
challenge to the validity and enforceability of such patents has been
settled or adjudicated, and upon such settlement or adjudication Schott
may, at its option:
(1) notify Donnelly that it will stop making payments of the
Minimum Automotive Glazing Royalty, in which case Donnelly's
obligation not to license its Technology or Intellectual Property
Rights to any party other than Schott and the Company for
Automotive Glazing, as provided in Section 2.5, shall terminate;
or
(2) offer to negotiate a lower Minimum Automotive Glazing Royalty
with Donnelly, in which case Schott and Donnelly shall promptly
enter into good faith negotiations and use their reasonable best
efforts to reach agreement as to the amount of future Automotive
Glazing Royalties that will equitably reflect the diminished
value of Donnelly's Intellectual Property Rights relating to
Automotive Glazing resulting from the invalidity and/or
unenforceability of such Intellectual Property Rights. If the
parties cannot mutually agree as to the amount payable with
respect to future Automotive Glazing Royalties, notwithstanding
such good faith negotiations, the issue of the amount of future
payments with respect to the Minimum Automotive Glazing Royalty
shall be resolved by means of arbitration, as provided in Section
11.10 hereof.
At such time as such challenge to the validity and enforceability of patents has
been settled or adjudicated, as the case may be, all amounts paid into escrow
pursuant to this Section 8.2(b) shall be released to the respective parties in
order equitably to reflect the value of Donnelly's Intellectual Property Rights
relating to Automotive Glazing as the result of, and remaining after, such
challenge. If the parties cannot mutually agree as to the amount payable with
respect to amounts of Automotive Glazing Royalties paid into escrow,
notwithstanding such good faith negotiations, the issue of the release of such
escrowed funds shall be resolved by means of arbitration, as provided in Section
11.10 hereof.
(c) Neither the Company nor Schott undertakes any obligation to
indemnify Donnelly against, or assume any responsibility for, any claim of
infringement by any third party relating to or arising out of any exercise
of any right or license granted to Donnelly, the Company or Schott, as the
case may be, under this Agreement.
(d) As used in this Agreement, "Substantial Notice" shall mean a
written notice from a third party that either (i) alleges that the use of
Donnelly's Technology or Intellectual Property Rights or the manufacture or
sale of Licensed Products infringes a third party's intellectual or
industrial property rights by a method or apparatus covered by the
Technology or Intellectual Property Rights or (ii) challenges to the
validity or enforceability of Intellectual Property Rights, and constitutes
grounds for the recipient of such written notice to seek a declaratory
judgment with respect to such allegation(s) or challenge(s).
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ARTICLE 9
INFRINGEMENT OF LICENSED INTELLECTUAL PROPERTY RIGHTS
9.1 Action by a Licensee. Except as provided in Section 9.2, a Licensee
shall have the right but shall not be obligated to institute proceedings in its
own name or in the name of the Licensor against any third party infringer, in
the Licensee's field of use of Licensed Products, of any Intellectual Property
Rights licensed by the Licensor to the Licensee pursuant to this Agreement. If
the Licensor or a Licensee becomes aware of any actual, threatened, or apparent
infringement of any of the licensed Intellectual Property Rights by any Person
in the field of use of Licensed Products, such party agrees to provide the other
parties with written notice prior to suit of such actual, threatened, or
apparent infringement and agrees to furnish to the other party any available
evidence of such actual, threatened, or apparent infringement. The Licensor
agrees to cooperate in any proceedings instituted by a Licensee against third
party infringers and to provide information relating to such proceedings which
the Licensor may reasonably request. In the event that a Licensee determines
that it lacks standing to commence such a proceeding, the Licensor agrees to
execute such documents and take such actions as the Licensee may reasonably
request for the purpose of commencing such infringement proceedings. The
Licensee shall have the right to control prosecution of such proceedings
regardless of whether the proceedings are commenced in the Licensor's name or in
the name of the Licensee; provided, however, that (a) in the event of a
counterclaim against the Licensor, or a challenge to the validity or
enforceability of any Intellectual Property Rights, the litigation shall be
jointly managed by a Licensor and the Licensee so long as the Licensor pays all
costs and expenses relating to such counter claim and/or challenge to the
validity or enforceability of any Intellectual Property Rights; provided,
however, that in the event of disagreements between a Licensor and Licensee in
such jointly managed litigation, (1) the final decision of issues in
disagreement relating to alleged infringements of third-party rights shall be
made by the Licensee and (2) the final decision of issues in disagreement
related to challenges to the validity and enforceability of Intellectual
Property Rights shall be made by the Licensor; and (b) the Licensee shall not
settle any claim or counterclaim in any manner agreeing to the invalidity or
limitation of any Intellectual Property Right without the prior written consent
of the Licensor. Any recovery awarded in such proceedings shall be retained by
the Licensee; provided, however, that the respective expenses of the Licensor
and Licensee shall first be paid, pro rata, out of the proceeds of such
recovery.
9.2 Action by the Licensor. In the event the Licensor notifies the
Licensee or receives notice from the Licensee of actual, threatened, or
apparent infringement of any licensed rights or Intellectual Property
Rights by a third party, and (a) the infringement is in the field of
automotive mirrors or automotive rear vision systems, or (b) the Licensee
does not institute proceedings against such a third party within sixty (60)
days of notification, then the Licensor may institute proceedings against
such a third party, at its own expense, and in the Licensee's name, subject
to the Licensor's prompt reimbursement of Licensee's costs and expenses
with respect to such proceedings. The Licensee agrees to cooperate fully
with the Licensor in such proceedings. Any recovery awarded in such
proceedings shall be retained by the Licensor.
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ARTICLE 10
TERM AND TERMINATION
10.1 Term. Unless otherwise terminated as provided herein:
(a) The licenses granted hereunder to the Company shall remain in
place and shall continue notwithstanding the withdrawal of either Initial
Member (or its Affiliate) or both Initial Members (or their respective
Affiliates) from the Company;
(b) The licenses granted hereunder from the Company to Schott and/or
Donnelly (and their Affiliates), respectively, shall continue so long as
either Donnelly (or an Affiliate of Donnelly) or Schott North America (or
an Affiliate of Schott North America) is a member of the Company, and upon
the withdrawal from the Company by either Donnelly (or an Affiliate of
Donnelly) or Schott North America (or an Affiliate of Schott North
America), as the case may be, such licenses to the withdrawing member (or
its Affiliates) shall continue under the same terms and scope existing as
of the date of such withdrawal, including but not limited to Improvements
existing as of the date of such withdrawal; and
(c) The licenses granted hereunder from Donnelly to Schott (and its
Affiliates) shall remain in place and shall continue notwithstanding any
withdrawal of either Donnelly (or an Affiliate of Donnelly) or Schott North
America (or an Affiliate of Schott North America) from the Company;
provided, however, that such licenses to Schott (or its Affiliate) shall be
terminated as of the date of the withdrawal by Schott if:
(i) Schott's Interest is deemed forfeited pursuant to Section
8.01(c) of the LLC Agreement, or
(ii) Schott fails to pay to Donnelly, within thirty (30) days of
such withdrawal, one-half (1/2) of the difference between $9.5 million
and the aggregate amount contributed to the Company by Schott pursuant
to Section 3.04(a) of the LLC Agreement as of the date of withdrawal.
10.2 Default. If any party fails to comply with any of its obligations
hereunder, and after notice from another party such failure continues for sixty
(60) days, such action shall constitute a default hereunder; provided, however,
if a default under this Agreement cannot reasonably and with due diligence and
good faith be cured within said 60-day period, and if the defaulting party
promptly commences and proceeds to complete the cure of such default with due
diligence and in good faith, the 60-day period with respect to such default
shall be extended to include such additional period of time as may be reasonably
necessary to cure such default.
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ARTICLE 11
CONSTRUCTION
11.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to any
applicable principles of conflicts of laws.
11.2 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 Street
Holland, Michigan 49423
Attention: Niall Lynam
Fax No. (616) 786-786-5185
With a copy to: Varnum, Riddering, Howlett & Schmidt LLP
Bridgewater Place
333 Bridge Street, N.W., P.O. Box 352
Grand Rapids, Michigan 49504
Attention: Daniel Molhoek
Fax No. (616) 336-7000
To the Company:
To: Schott Corporation
Schott North America Manufacturing, Inc.
3 Odell Plaza
Yonkers, New York 10701
Attention: Manfred Jaeckel
Fax No. (914) 968-8585; and
Schott Glas
Legal Department
Hattenbergstra(beta)e 10
P.O. Box 2480
D-55014 Mainz
Federal Republic of Germany
Attention: Dr. Wilhelm Niemeier
Facsimile: 011-49-61-31-66-2098.
With a copy to: Rogers & Wells LLP
200 Park Avenue
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New York, New York 10166
Attention: Richard T. McDermott
Facsimile: (212) 878-8375
11.3 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.
11.4 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.
11.5 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.
11.6 Schedules Included in Exhibits; Incorporation by Reference. Any
reference to an Exhibit or Schedule to this Agreement contained herein shall be
deemed to include any Exhibits or Schedules to such Exhibit or Schedules. Each
of the Exhibits and Schedules referred to in this Agreement, and each Exhibit or
Schedule thereto, 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.
11.7 Amendments. This Agreement may not be amended except by written
agreement executed by duly authorized officers of all of the parties hereto.
11.8 Entire Agreement; Section Headings. This Agreement, the Joint Venture
Agreement, the LLC Agreement and the agreements contemplated by the LLC
Agreement 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 not affect in any way the meaning or interpretation of this
Agreement.
11.9 Assignment. Except as otherwise specifically provided in this
Agreement, the Joint Venture Agreement, or the LLC Agreement, neither this
Agreement nor any rights or obligations hereunder shall be assignable or be
delegated directly or indirectly by any party hereto to a third party without
the prior written consent of all the parties to this Agreement.
11.10 Arbitration.
(a) Any dispute, controversy or claim (hereinafter "Dispute") between
the parties of any kind or nature whatsoever, arising under or related to
this Agreement whether arising in contract, tort or otherwise, shall be
resolved according to the following procedure. If a Dispute arises among
the parties under or relating to this Agreement which is not resolved by
good faith negotiation, then such Dispute, upon 30 days' prior notice from
one party to the other of its
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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, except the decision shall be rendered
by one arbitrator. The parties shall attempt to agree upon an arbitrator.
The arbitrator shall be a licensed attorney-at-law, experienced and
knowledgeable in the field of intellectual property, with technical
knowledge sufficient to understand and render a reasoned written opinion
with respect to this Agreement, the Technology and the Intellectual
Property Rights. If an arbitrator cannot be agreed upon, the party that did
not give the Arbitration Notice may request the Chief Judge of the United
States District Court for the Western District of Michigan or the Chief
Judge of the United States District Court for the Southern District of New
York to appoint an arbitrator. If he or she cannot or does not appoint such
arbitrator, 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 in English on an expedited schedule, and all
proceedings shall be confidential.
(b) The parties shall use their reasonable best efforts to limit the
total time period of any arbitration to a maximum of six months. Discovery
shall be limited to a maximum time period of four months, unless extended
by the arbitrator, and any party's failure to deliver documents for
discovery in a timely manner shall preclude such party from relying on
other documents that support its position with respect to the issue in
question. The arbitrator shall use his or her reasonable best efforts to
decide any dispute hereunder within the six-month time period referred to
in the first sentence of this paragraph (b).
(c) Any party may at its expense make a stenographic record of any
arbitration proceeding. 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 party 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 shall take place at
New York, New York, or Grand Rapids, Michigan at the election of the party
not giving the Arbitration Notice.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
DONNELLY CORPORATION
By /s/ Scott E. Reed
Scott E. Reed
Its Sr. VP and CFO
SCHOTT GLAS
By /s/ Dr. Ungeheuer /s/ R. Langfeld
Name: Dr. Ungeheuer Dr. Roland Langfeld
Its: Member of the Vice President R&D
Board of
Management
SCHOTT CORPORATION
By /s/ Guy Pierre De Conincx
Its ___________________________
SCHOTT NORTH AMERICA
MANUFACTURING, INC.
By /s/ Guy Pierre De Conincx
Its ___________________________
SCHOTT-DONNELLY LLC
SMART GLASS SOLUTIONS
By /s/ Niall Lynam
Its Chairman
<PAGE>
SCHEDULE A
All of Donnelly's Intellectual Property Rights and Improvements, and all of
Donnelly's other patents and patent applications relating to electrochromic
glazing existing on the date hereof which may be useful or necessary to the
Company in the Joint Venture Fields, including but not limited to the following:
Issued Patents
5838483 and 5604626 (which describe user controllable photochromic devices)
5,073,012
5,239,406
5,523,877
5,680,245
5,864,419
4,996,083
4,855,161
4,959,247
5,252,354
5,277,986
5,457,218
5,076,673
5,148,014
5,220,317
5,384,578
5,424,865
5,140,455
5,142,407
5,145,609
5,151,816
5,216,536
5,233,461
5,239,405
5,300,374
5,340,503
5,424,865
5,472,643
5,567,360
5,611,966
5,725,809
5,729,379
Patent Applications
- WO97/3850
- applications filed by Donnelly regarding the use of a roller coater to apply
the sol-gel coatings
- application regarding the use of additional bus bars
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- application called "Method and apparatus for filling the cavities of cells
and laminated substrates with a fluid
<PAGE>
SCHEDULE B
All of Donnelly's Technology and non-patented knowhow relating to electrochromic
glazing existing on the date hereof which may be useful or necessary to the
Company in the Joint Venture Fields and Donnelly's Improvements, including but
not limited to the following:
- Commercialization of EC products
- Material selection, purification and synthesis
- Accelerated testing/reliability assurance
- Sealing techniques/seal integrity testing
- Substrate preparation & cleaning
- Diagnostic testing
- Troubleshooting/PFMEA
- Equipment design
- Process design
- Customization for automotive applications
- Production scale-up of EC products
- Quality systems for EC products
- Component, material and equipment selection & procurement
- Electrical connectors and interfaces
- Automotive development, supply and quality systems
- Failure analysis and countermeasure implementation
- Competitive benchmarking
- Manufacturing flow and production control for EC products
- Costing & pricing for EC products
- Supplier development & quality control for EC products
<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 electrochromic mirrors, (v)
whether the Company successfully implements its European restructuring, (vi)
effects of the year 2000 on the Company's business and (vii) other risks and
uncertainties. The Company does not intend to update these forward-looking
statements.
OVERVIEW
Donnelly Corporation ("the Company") is an international supplier of automotive
parts and component systems through manufacturing operations and various joint
ventures in North and South America, Europe and Asia. The Company primarily
supplies automotive customers around the world with rear view mirror systems,
modular window systems and handle products. The Company's non-automotive
products represent less than 4% of total net sales for each of the last three
years.
The Company is primarily managed based on geographic segments and the product
markets they serve. The Company has two reportable segments: North American
Automotive Operations ("NAAO") and European Automotive Operations ("EAO"). The
operating segments are managed separately as they each represent a strategic
operational component that offers the Company's product lines to customers in
different geographical markets.
The Company's fiscal year is the 52- or 53- week period ending the Saturday
nearest June 30. Fiscal years ended July 3, 1999, June 27, 1998, and June 28,
1997, included 53, 52 and 52 weeks, respectively. The fiscal years of the
Company's German and Spanish subsidiaries end on May 31. Effective July 4, 1999,
the Company will change the date for the end of its fiscal year from the
Saturday nearest June 30 to December 31. For the transition period from July 4,
1999, to December 31, 1999, the Company's fiscal quarter will end on October 2.
All year and quarter references relate to the Company's fiscal years and fiscal
quarters, unless otherwise stated.
The Company's net sales and net income may be subject to significant
fluctuations attributable primarily to production schedules of the Company's
major automotive customers. In addition, the Company has benefited from strong
product content on light trucks, including sport utility vehicles, as compared
to automobiles. These factors cause results to fluctuate from period to period
and year to year. The comparability of the Company's results on a period to
period basis is also affected by the Company's formation and disposition of
subsidiaries, joint ventures and alliances, and acquisitions and investments in
new product lines.
In the second quarter of 1999, the Company merged its wholly owned subsidiary,
Donnelly Optics Corporation ("Optics") into a wholly owned subsidiary of Applied
Image Group, Inc. ("AIG"), a New York Corporation. In the merger, the Company
received a 13% interest in AIG and a $5 million convertible note. AIG develops
and manufactures opto-imaging products for the lighting, automotive, optical and
photonics industries. As a result of this transaction, the financial results of
Optics are no longer included in the Company's financial statements after
December 1, 1998. The transaction had no impact on the Company's operating
results.
On July 1, 1999, the Company signed a letter of intent to sell its investment in
Lear Donnelly Overhead Systems, LLC ("Lear Donnelly") to Lear Corporation
("Lear") for an undisclosed amount. The transaction is expected to be completed
in the first quarter of the next fiscal period and is expected to have a
one-time, material favorable impact on the net income and cash flow of the
Company. In addition, due to the transfer of the Company's interior lighting and
trim sales contracts included in the joint venture to Lear, future annual net
sales will be reduced by approximately $65 to $70 million per year (see Note 2).
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RESULTS OF OPERATIONS
Comparison of 1999 to 1998
North American Automotive Operations
Net sales for NAAO increased by approximately 15.4% for the year and 18.3% for
the fourth quarter of 1999, compared to the same periods of 1998, respectively.
The increase was primarily due to programs launched in 1998 running at full
production volumes in 1999, new product introductions in the modular window
product line, stronger North American car and light truck build and a 53 week
versus 52 week year. North American car and light truck build increased
approximately 6% in 1999 compared to 1998 and increased 13% for the comparable
fourth quarter periods.
NAAO gross profit was higher for the year and fourth quarter compared to the
previous year primarily due to the stronger sales levels. However, gross profit
margins have decreased as a percent of net sales due to significant customer
pricing pressures and 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 gross profit margins. Improvements in purchased material costs
partially offset pressures on gross 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. It is expected that future
revenue growth will be more balanced between higher- and lower- margin products.
A favorable arbitration award in 1998 associated with Donnelly Happich
Technology, Inc., ("Donnelly Happich"), offset costs associated with visor
programs and improved margins in 1998.
The Company's North American operating margins were flat for both the fourth
quarter and twelve month period of 1999 compared to 1998. Higher sales volumes
and lower selling, administrative and research and development costs as a
percent to net sales were offset by an unfavorable mix of lower margin products
and significant customer pricing pressures. During 1999, NAAO implemented a cost
reduction program to focus functional groups on best-in-class performance. This
program allowed NAAO to leverage these expenses with increases in sales.
European Automotive Operations
Net sales for EAO were approximately 7.3% higher in 1999 compared to 1998 and
increased 5.8% for the comparable fourth quarter periods. This was primarily due
to the launch of new electrochromic business and product content on strong
selling vehicles. European car build, while relatively flat in 1999 compared to
1998, remained strong. Exchange rates did not have a material effect on the
comparability of net sales between 1999 and 1998.
EAO gross profit margin increased slightly for the year and fourth quarter of
1999 compared to 1998. Gross profit performance at the Company's operations in
Spain and France continue to remain strong. EAO gross profit margins were
stronger despite inventory write-offs and other expenses associated with the
1999 European turnaround plan, discussed below, and an increase to warranty
reserves. Improvements in purchased material costs and a one-time supplier
rebate in the third quarter of 1999 partially offset these expenses.
In February 1999, the Company announced a European turnaround plan. The
Company's European automotive segment recorded unfavorable operating results
over the last three years with operating income (losses) of $0.7 million in
1998, $2.1 million in 1997 (excluding restructuring charges), and ($3.7) million
in 1996, despite strong automotive car build and overall sales increases in the
Company's European operations. Certain key operating units in Europe continued
to perform at an operating loss. In September 1998, the Company assigned four
senior managers from its North American operations to this segment to improve
the Company's overall operating performance in Europe. The objective of the
restructuring plan is to improve the overall operating efficiency and customer
service of the European organization by 1) re-organizing certain manufacturing
and customer service functions into a customer focused structure, 2)
consolidating two German manufacturing facilities, 3) implementing throughout
Europe the Donnelly Production System, the Company's approach to lean
manufacturing processes, 4) re-negotiating an existing labor contract and 5)
realigning sales and engineering functions throughout Europe.
In the third quarter of 1999, an $8.8 million pretax restructuring charge, or
$3.5 million charge to net income, was recorded for this plan. The restructuring
charge included $1.4 million for the impairment of assets and a reserve of $7.4
million for anticipated incremental cash expenditures for the severance and
voluntary incentive programs for approximately 200 production, production
support, sales and engineering employees. The restructuring charge was recorded
in accordance with Emerging Issues Task Force ("EITF") 94-3. The impairment of
long-lived assets includes adjustments to the carrying-value of certain
facilities and operating assets. The impairment charge was determined by
comparing management's current estimate of the fair market value of the assets
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based on existing or alternative use of those assets impacted by the turnaround
plan with the carrying-value of the related assets. The estimated underlying
fair market value for these assets is subject to change. The Company will also
fund approximately $4.3 million for the construction of shipping and warehousing
facilities, relocation of employees and new material handling and storage
equipment associated with the 1999 European turnaround plan. These costs do not
qualify as restructuring under EITF 94-3 and therefore are included in the
Company's capital and operating budget for the next six to eight months; the
majority of the costs will be capitalized.
In July 1999, the Company completed the re-negotiation of its labor contract in
Germany allowing for greater work flexibility rules, broader productivity
guidelines and a delay in certain wage increases until certain income
profitability targets are accomplished. As of July 3, 1999, cash payments of
$0.6 million had been incurred, including the termination of 10 employees
associated with the plan. It is expected that all actions associated with the
plan will be completed by the end of calendar year 2000.
EAO operating income was lower in 1999 compared to 1998 primarily due to the
restructuring charge, inventory write-offs and other expenses associated with
the 1999 European turnaround plan. EAO operating income was also impacted by
approximately $0.9 million of costs associated with the year 2000 remediation
process. EAO operating income in the fourth quarter of 1999 was higher than 1998
primarily due to stronger volumes during the period.
Company
Net sales were $905.0 million in 1999 compared to $763.3 million in 1998, an
increase of approximately 19%. Net sales for the fourth quarter of 1999 and 1998
were $243.1 million and $209.7, respectively, an increase of approximately 16%.
Suppliers in the automotive industry continue to experience significant price
demands from their customers. While these price demands continue to place
significant pressure on the Company's gross profit and operating margins, they
did not have a material impact on net sales for 1999 or 1998. Due to the
transfer to Lear of the Company's interior lighting and trim sales contracts
included in the joint venture, future annual net sales will be reduced by
approximately $65 to $70 million per year. The Company has announced its intent
to sell its investment in this joint venture (see Note 2).
Gross profit margin for 1999 was 14.8% compared to 17.1% in 1998 and 14.2% in
the fourth quarter of 1999 compared to 17.3% in the same period of 1998. The
lower gross profit margins are primarily due to the formation of the Lear
Donnelly joint venture, which is accounted for under the equity method,
relatively greater revenue growth of products with lower profit margins at NAAO,
significant global pricing pressures and inventory write-offs and other expenses
associated with the 1999 European turnaround plan. The Lear Donnelly joint
venture unfavorably impacts gross profit margins because sales related to the
joint venture are included in the net sales of the Company, but the gross profit
is recorded by Lear Donnelly, which the Company accounts for under the equity
method (see Note 2).
Selling, general and administrative expenses were flat at 9.2% of net sales in
1999 and 1998. In the fourth quarter of 1999, these expenses were 9.1% of sales
compared to 9.7% in the same period of 1998 primarily as a result of the
Company's ability to leverage these expenses on higher sales volumes. In
addition, these expenses were lower for the year and fourth quarter due to the
Optics merger.
Research and development expenses were $34.2 million in 1999, compared to $36.4
million in 1998. These expenses were lower for the year primarily due to the
Lear Donnelly joint venture, the formation of the Schott Donnelly LLC Smart
Glass Solutions ("Schott Donnelly") joint venture, Optics merger and the
formation of Donnelly Electronics LLC. Operating expenses for the respective
businesses and technologies contributed by the Company to these ventures were
transferred to the new ventures which are accounted for under the equity or cost
method of accounting.
In the fourth quarter of 1998, Optics recognized a $3.5 million pretax charge
against operating income, or $2.3 million after tax, due to the cancellation of
a customer order related to market dynamics in the digital imaging sector of the
computer industry. The charge primarily consisted of a write-off of tooling and
other current assets and severance of approximately 25 manufacturing and
administrative personnel. The severance cash payments were completed in the
second quarter of 1999. This business was merged into a new company in the
second quarter of 1999 (see Note 2).
The Company reported operating income of $8.1 million in 1999 compared to $20.4
million in 1998 or 0.9% and 2.7% of net sales, respectively. For the fourth
quarter of 1999, the Company had operating income of $6.9 million, an increase
of $2.6 million compared to the same period last year. The Company's operating
margins were lower in 1999 primarily due to the restructuring charge and costs
associated with the 1999 European turnaround plan and higher growth in sales at
NAAO of lower margin products. Operating income in 1998 benefited from the
favorable arbitration settlement related to the Company's joint venture,
Donnelly Happich, which offset costs on certain visor programs. However, 1998
was unfavorably impacted by the charge at Optics. The formation of the Lear
Donnelly joint venture did not have a material impact on the Company's operating
margins for the fourth quarter or twelve-month period.
Interest expense was $7.9 and $8.3 million in 1999 and 1998, respectively, and
slightly lower in the fourth quarter compared to 1998.
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Interest expense was lower primarily due to lower average debt during 1999
compared to 1998. Royalty income was $0.8 million and $0.1 million in 1999 and
1998, respectively.
Other income, net was $2.6 million and $1.9 million in 1999 and 1998,
respectively, and $3.0 million compared to $1.2 million in the fourth quarter of
1999 and 1998, respectively. In the fourth quarter of 1999, the Company formed
Schott Donnelly, a 50-50 joint venture with Schott North America Manufacturing,
Inc., a wholly owned subsidiary of Schott Corporation ("Schott"). Schott is a
wholly owned subsidiary of Schott Glas, which is based in Germany and is one of
the world's leading producers of specialty glass products. The joint venture
will design and manufacture electrochromic glass for automotive and
architectural applications. Upon the formation of this joint venture, the
Company received $2 million, which was recorded as a pretax gain. In accordance
with the LLC operating agreement, losses generated by the joint venture will be
allocated to Schott until Schott has contributed $9.5 million.
In the second and third quarters of 1999, the Company sold its entire interest
in VISION Group plc ("VISION Group"). As a result of these sales, the Company
received $8.6 million in proceeds and recognized a combined pretax gain of
approximately $5.5 million, or $0.35 per share after tax. The Company's equity
in the financial results of VISION Group is no longer included in the Company's
financial statements after November 1999.
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 pretax gain of approximately $4.6 million,
or $0.22 per share after tax.
The Company's effective tax rate was 15.8% in 1999, compared to 26.3% in 1998.
The lower effective tax rate is the result of tax benefits recognized on
domestic export sales and domestic U.S. research tax credits. Where these items
were equal to 1998 levels, the relative percent to the Company's lower pretax
earnings was higher. In addition, local trade tax benefits in Germany favorably
impacted the Company's effective tax rate. These benefits were partially offset
by foreign operating losses in Asia for the Company's Malaysian operation for
which no net operating loss carryforward can be utilized due to tax treatment
relating to start-up companies in Malaysia. The Company has recorded $12.4
million and $7.1 million of deferred tax assets on non-expiring net operating
loss carry-forwards at July 3, 1999, and June 27, 1998, respectively. A
significant portion of the loss carryforwards resulted from the 1997 and 1999
European restructuring charges.
Minority interest in net loss of subsidiaries increased to $3.2 million in 1999,
compared to $0.4 million in 1998, primarily due to the restructuring charge and
operating losses at the Company's German operations.
Equity in losses of affiliated companies improved to $0.8 million in 1999
compared to $1.5 million in 1998, primarily related to the sale of the Company's
interest in VISION Group, which was incurring operating losses, and operational
improvements at the Company's joint ventures in China.
Net income was $10.6 million in 1999 compared to $13.0 million in 1998.
During 1999, the Company continued to focus on implementing plans to improve
financial performance. 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. In the third
quarter of 1999, this senior management team developed a turnaround plan to
restore the European operations to long-term profitability. This action combined
with the impact of the merger of Optics into a new company, the sale of the
Company's interest in VISION Group, the formation of Schott Donnelly and
productivity improvements made in North America are expected to improve the
overall operating performance and financial condition 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.
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Comparison of 1998 to 1997
North American Automotive Operations
Net sales for NAAO increased by approximately 4.8% in 1998 compared to 1997 and
3.4% 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%.
NAAO gross profit and operating margins were lower in 1998 due to stronger sales
on products with lower margins, primarily modular windows, and continued
customer pricing pressures. In addition, a favorable arbitration award in 1998
associated with Donnelly Happich offset costs associated with visor programs and
improved margins in 1998.
European Automotive Operations
Net sales for EAO increased by approximately 17.8% in 1998 compared to 1997,
primarily due to the consolidation of the Company's German subsidiary, Donnelly
Hohe GmbH and Co. K.G. ("Donnelly Hohe"). As a result of acquiring a controlling
interest in the general partner of Donnelly Hohe, the company began
consolidating the financial statements of Donnelly Hohe, beginning in the second
quarter of 1997. EAO net sales for the fourth quarter of 1998, increased 1.4%
compared to the same period in the prior year. Net sales for EAO, 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 German 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 for the Company's European operations was higher due to the
consolidation of Donnelly Hohe in the second quarter of 1997. Gross profit
margins for the Company's European Operations were slightly lower in 1998
compared to 1997. The inclusion of Donnelly Hohe, for a full twelve months in
1998, unfavorably impacted margins due to the first quarter performance of this
operation being included in 1998. Margins for Donnelly Hohe are traditionally
lower in the first quarter due to lower sales volumes caused by industry
shutdowns. On a comparable twelve-month basis, the gross profit margins at
Donnelly Hohe were flat. Gross profit margins at the Company's Irish operations
improved in 1998 compared to 1997 due to launch issues in 1997, partially
offsetting the impact of Donnelly Hohe.
In May 1997, the Company announced a European restructuring plan to realign
manufacturing capacity, improve operating efficiencies and to reduce future
operating costs. The Company's strategy to penetrate European markets was
through acquisitions; the most significant of which was Donnelly Hohe in March
1995. Donnelly Hohe, based in Germany, serves many of the main auto producers in
Europe in exterior mirrors, interior mirrors, door handles and certain
non-automotive products through four operating facilities in Germany and one in
Spain. The restructuring plan was primarily based on the decision to re-organize
product lines and production processes within operations of Donnelly Hohe at
Dorfprozelten, Germany and other European locations in Schleiz, Germany, Spain
and Ireland. In addition, the plan included costs associated with the
restructuring of management at Donnelly Hohe and within the overall European
management structure. The strategic intent of the plan was primarily to
consolidate redundant manufacturing processes, move certain assembly operations
to lower cost areas of production and centralize European management
responsibility.
In the fourth quarter of 1997, a $10.0 million pretax restructuring charge, or
$4.0 million charge to net income, was recorded for this plan. The restructuring
charge consisted of a severance program, voluntary separation incentives and
administrative costs associated with the plan in accordance with EITF 94-3. The
severance and separation incentive program includes approximately 230 personnel,
primarily personnel in manufacturing and European management functions. Through
July 3, 1999, the Company had terminated 129 employees under the 1997 plan and
had incurred cumulative cash payments of $5.5 million. In addition, in 1998, the
Company recorded a reduction to the restructuring reserve of $1.1 million pretax
associated with changes to the plan.
Due to changes in management at the Company's European operations,
implementation of the restructuring plan was delayed. However, the remaining
actions under this plan have not changed. The remaining reserve of $2.8 million,
as adjusted for foreign currency changes, has been combined with the
restructuring charge taken in the third quarter of 1999. All remaining employee
separation benefits and related cash payments are expected to be completed in
conjunction with the most recent European restructuring initiatives.
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.
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Company
Net sales were $763.3 million in 1998 compared to $671.3 million in 1997, an
increase of approximately 13.7%, which was primarily the result of the
consolidation of Donnelly Hohe for the entire twelve month period and stronger
sales at NAAO. 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 11.4%, due to stronger North
American sales. While price pressures from the Company's customers continued 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.
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. Gross
Profit margins are lower primarily due to the formation of the Lear Donnelly
joint venture, lower gross profit margins at NAAO and the consolidation of
Donnelly Hohe.
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 being transferred 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, Optics recognized a $3.5 million pretax charge
against operating income, or $2.3 million after tax (see Note 4).
The Company's operating income increased from $17.7 million in 1997 to $20.4
million in 1998. However, the Company's 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 NAAO. In addition to these
factors, the Company experienced lower operating income as a percent of sales
due to the $3.5 million pretax charge at Optics. The formation of the Lear
Donnelly joint venture did not have a significant impact on the Company's
operating margins.
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
were 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
foreign currency transaction 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, resulting in a $0.9 million pretax gain. In the second quarter of 1998,
the Company sold its 50% interest in 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 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 Optics.
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. In the second and third
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quarters of 1999, the Company sold its entire interest in VISION Group (see Note
2). 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 charge after taxes, at Optics. The
consolidation of Donnelly Hohe did not impact the comparability of net income
from 1997 to 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 1.1 and 1.5 at July 3, 1999, and June 27, 1998,
respectively. Working capital was $7.3 million on July 3, 1999, compared to
$58.3 million on June 27, 1998. Current assets decreased as compared to June
1998, despite the increase in overall sales volumes. The most significant factor
causing the decrease in working capital was the timing of customer payments
relative to the ending balance sheet dates of July 3, 1999 and June 27, 1998,
respectively. 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, resulting in higher accounts receivable balance on this date. The
receipt of customer payments, combined with more active working capital
management, provided funds which were used to reduce revolving lines of credit
as of July 3, 1999. Working capital was also impacted by the restructuring
charge taken in the third quarter of 1999 and improved inventory turnover.
Inventory turnover improved due to improved operational performance at EAO and
inventory write-offs associated with the 1999 European turnaround plan. The
total restructuring reserve at July 3, 1999 was $10.1 million, of which $7.7
million is classified as short-term.
At July 3, 1999, and June 27, 1998, a $40.4 million and $40.3 million interest,
respectively, had been sold under the Company's accounts receivable
securitization. Proceeds sold under this agreement were used to reduce revolving
lines of credit. The sale is reflected as a reduction of accounts receivable and
as operating cash flows. The agreement expires in December 1999, however is
renewable for one-year periods at the option of the Company. The Company expects
to extend the current agreement or replace it on comparable terms.
Capital expenditures in 1999, 1998 and 1997 were $57.8, $46.2 and $35.2 million,
respectively. Capital spending was higher in the twelve month period to support
new business orders and to support the implementation of new manufacturing,
distribution and administrative information systems. Capital spending the next
twelve to eighteen months is expected to remain at current spending levels to
support the continued launch of new business orders, the implementation of new
manufacturing, distribution and administrative information systems globally and
capital expenditures related to the 1999 European turnaround plan.
The Company's $160 million multi-currency global revolving credit agreement had
borrowings against it of $22.5 million and $47.5 million in the Company's
Combined Consolidated Balance Sheets dated July 3, 1999, and June 27, 1998,
respectively. The Company's total long-term borrowing decreased by $31.5 million
at July 3, 1999 compared to June 27, 1998, primarily due to lower working
capital and net cash provided by operating activities.
The Company has announced significant restructuring plans in 1997 and 1999 to
improve the overall profitability of the Company's European operations (see Note
4). Cash payments of approximately $9.2 million are expected to be required over
the next eighteen months to support these plans primarily for the payment of
severance and voluntary termination benefits. In addition, the Company will also
require approximately $4.3 million for the construction of shipping and
warehousing facilities, relocation of employees and new material handling and
storage equipment associated with the 1999 European turnaround plan, the
majority of which will be capitalized.
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. In
addition, the Company expects the sale of its investment in Lear Donnelly to
have a material favorable impact on cash flows (see Note 2). This transaction is
expected to be completed in the first quarter of the next fiscal period. 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.
The Company's primary foreign investments are in Germany, Ireland, Spain,
France, Mexico, China, Brazil and Malaysia. Except for the Company's subsidiary
in Mexico, whose functional currency is the United States dollar, financial
statements of international companies are translated into United States dollar
equivalents at exchange rates as follows: (1) balance sheet accounts at year-end
rates and (2) income statement accounts at weighted average monthly exchange
rates prevailing during the year. Translation gains and losses are reported as a
separate component of shareholders' equity and are included in accumulated other
comprehensive income. For the subsidiary in Mexico, transaction and translation
gains or losses are reflected in net income
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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 incom are not material.
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
Statement of Financial Accounting 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 in the balance sheet at fair
value. It also requires that unrealized gains and losses resulting from changes
in fair value be included in income or comprehensive income, depending on
whether the instrument qualifies as a hedge. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. 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") 98-5, "Reporting on Costs of Start-Up Activities,"
requires costs of start-up activities and organization costs to be expensed as
incurred. This SOP is effective for fiscal years beginning after December 15,
1998. The impact of this standard on the results of operations and financial
position of the Company is estimated to be approximately $0.7 million to $0.9
million, net of tax.
No other recently issued accounting standards are expected to have a material
impact on the Company.
Year 2000
The year 2000 issue is the result of computer programs 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 has engaged in an assessment process with suppliers
regarding the year 2000 issue.
The assessment, remediation and testing process has materially been completed at
the Company's North American and European operations for all facilities,
products, embedded systems and information systems. In addition, the Company has
initiated formal communications with its joint ventures, 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. Joint ventures have been analyzed utilizing the same process employed
internally within the Company. All joint ventures are either year 2000 compliant
at the present time or have plans in place where they will finish their year
2000 remediation by the end of the third calendar quarter of 1999. Critical
suppliers have favorably performed under interview and audit procedures and in
management's assessment have their year 2000 remediation underway in a
reasonable manner.
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 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 legacy system manufacturing and distribution software, which has been
remediated and is currently year 2000 compliant. No significant issues have been
identified by management that are expected to interrupt the Company's business
9
<PAGE>
systems, product performance or supply to customers. All necessary remediation
actions are expected to be completed by the end of the third quarter. Total cost
of all North American year 2000 inventory, analysis and testing was less than
$0.5 million.
In Europe, the Company has completed the remediation process for facilities,
embedded systems and information systems. The total cost of the remediation
process was approximately $0.9 million.
The Company has utilized both internal and external resources to reprogram, or
replace and test, the software for year 2000 modifications. The Company has
substantially completed its year 2000 assessment and remediation. The project
costs attributable to software developed for internal use to meet future
industry requirements will be capitalized. Any remaining year 2000 project cost,
anticipated to be less than $1 million, will be expensed as incurred over the
next six months. Year 2000 preparations have had no material impact other than
these costs. The Company has received several audits of year 2000 compliance
from both customers and external auditors at customer requests. The current
status of all such external audits is a current condition of acceptable year
2000 readiness.
In addition to the fact that the Company has substantially completed its
assessment, remediation and testing efforts, it has also initiated a year 2000
contingency planning process to identify, reduce and manage the risk to our
business and Customers of year 2000 failures on the part of others. The
contingency planning process is intended to identify the most reasonable likely
worst case scenarios and develop contingency plans to address them. While the
individual contingency plans vary by facility, the common recurring theme for a
worst case scenario is failure of local utilities and communications for 1 to 2
days. Contingencies planned by the Company include such key items as adequate
local power generation capability to ensure continuous operation of computers
and shipping, as well as, adequate on-hand finished goods to bridge such a gap
with continuous supply to customers. The anticipated finalization and
implementation of the year 2000 contingency plan is early fall 1999.
Management believes that the Company is devoting the necessary resources to keep
remediated and tested systems year 2000 compliant.
Euro Conversion
Effective January 1, 1999, eleven of fifteen member countries of the European
Union 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 non-cash 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, pan-European, 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.
10
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
July 3, June 27, June 28,
In thousands, except share data Year ended 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 904,969 $ 763,311 $ 671,297
Cost of sales 770,653 632,679 544,629
-----------------------------------------------------
Gross profit 134,316 130,632 126,668
Operating expenses:
Selling, general and administrative 83,217 70,372 66,530
Research and development 34,221 36,418 32,492
Restructuring and other charges 8,777 3,468 9,965
-----------------------------------------------------
Total operating expenses 126,215 110,258 108,987
-----------------------------------------------------
Operating income 8,101 20,374 17,681
-----------------------------------------------------
Non-operating (income) expenses:
Interest expense 7,858 8,347 9,530
Interest income (547) (560) (648)
Royalty income (837) (122) (1,486)
Gain on sale of equity investments (5,498) (4,598) (872)
Other income, net (2,568) (1,872) (848)
-----------------------------------------------------
Non-operating (income) expenses (1,592) 1,195 5,676
-----------------------------------------------------
Income before taxes on income 9,693 19,179 12,005
Taxes on income 1,533 5,053 2,786
-----------------------------------------------------
Income before minority interest and
equity earnings 8,160 14,126 9,219
Minority interest in net losses of subsidiaries 3,214 381 1,141
Equity in losses of affiliated companies (782) (1,498) (340)
-----------------------------------------------------
Net income $ 10,592 $ 13,009 $ 10,020
=====================================================
Per share of common stock:
Basic net income per share $ 1.05 $ 1.30 $ 1.01
Diluted net income per share $ 1.04 $ 1.29 $ 1.00
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
July 3, June 27,
In thousands, except share data 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,413 $ 5,628
Accounts receivable, less allowance of $1,665 and $1,095 73,925 92,972
Inventories 42,722 44,146
Recoverable customer tooling 20,478 19,211
Prepaid expenses 4,137 3,460
Deferred income taxes 1,240 1,360
---------------------------
Total current assets 145,915 166,777
---------------------------
Property, plant and equipment:
Land 8,802 9,457
Buildings 76,506 79,721
Machinery, equipment and software 187,936 184,473
Capital projects in progress 47,749 21,468
---------------------------
320,993 295,119
Less accumulated depreciation 132,138 126,214
---------------------------
Net property, plant and equipment 188,855 168,905
Investments in and advances to affiliates 28,588 19,590
Other assets 31,743 22,613
---------------------------
Total assets $ 395,101 $ 377,885
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,372 $ 77,595
Current maturities of long-term debt 49 55
Accruals:
Compensation 16,150 16,147
Taxes 8,288 7,278
Other 16,727 7,353
---------------------------
Total current liabilities 138,586 108,428
---------------------------
Long-term debt, less current maturities 92,166 123,706
Postretirement plans 29,473 23,011
Deferred income taxes and other 25,184 18,704
---------------------------
Total liabilities 285,409 273,849
---------------------------
Minority interest 1,361 754
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 5,972,279 and 5,715,388 597 572
Class B, $.10 par; shares authorized 15,000,000,
issued 4,162,502 and 4,353,349 416 435
Donnelly Export Corporation, $.01 par; shares
authorized 600,000, issued 380,579 and 398,028 4 4
Additional paid-in capital 31,869 31,268
Accumulated other comprehensive income (10,157) (8,083)
Retained earnings 85,071 78,555
---------------------------
Total shareholders' equity 108,331 103,282
---------------------------
Total liabilities and shareholders' equity $ 395,101 $ 377,885
===========================
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
July 3, June 27, June 28,
In thousands Year ended 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,592 $ 13,009 $ 10,020
Adjustments to reconcile net income to net cash from
(for) operating activities:
Depreciation and amortization 22,847 22,600 21,460
(Gain) loss on sale of property and equipment 149 181 (605)
Gain on sale of equity investments (5,498) (4,598) (872)
Deferred pension cost and postretirement benefits 6,462 5,670 5,315
Deferred income taxes 1,603 3,416 (4,723)
Minority interest loss (4,902) (841) (1,646)
Equity in losses of affiliated companies 782 1,498 765
Restructuring and other charges 8,777 3,468 9,965
Changes in operating assets and liabilities:
Sale (repayment) of accounts receivable 2,402 (2,695) 44,604
Accounts receivable 13,479 (24,643) (17,661)
Inventories 384 (4,366) (2,101)
Prepaid expenses and other current assets (2,968) 3,868 (2,074)
Accounts payable and other current liabilities 24,564 (475) 9,416
Other 3,443 (1,147) (4,149)
-------------------------------------------------
Net cash from operating activities 82,116 14,945 67,714
-------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (57,807) (46,164) (35,151)
Investments in and advances to affiliates (6,957) (1,045) (4,537)
Proceeds from sale of property and equipment 723 677 3,078
Proceeds from sale of equity investments 8,636 11,067 974
Proceeds from sale-lease back - 7,521 -
Change in unexpended bond proceeds - - 1,344
Cash increase due to consolidation of subsidiary - - 9,963
Other (1,028) (856) (884)
-------------------------------------------------
Net cash for investing activities (56,433) (28,800) (25,213)
-------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt - 13,798 8,433
Repayments on long-term debt (28,767) (429) (39,887)
Investment and advances from minority partner 4,482 - -
Common stock issuance 533 2,128 925
Dividends paid (4,076) (4,031) (3,039)
Other financing - (218) (415)
-------------------------------------------------
Net cash from (for) financing activities (27,828) 11,248 (33,983)
-------------------------------------------------
Effect of foreign exchange rate changes on cash (70) (333) (1,253)
Increase (decrease) in cash and cash equivalents (2,215) (2,940) 7,265
Cash and cash equivalents, beginning of year 5,628 8,568 1,303
-------------------------------------------------
Cash and cash equivalents, end of year $ 3,413 $ 5,628 $ 8,568
=================================================
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
Common Stock
-----------------------------
Accumulated
Donnelly Additional other Total
Preferred Class Class Export paid-in Retained comprehensive shareholders'
In thousands, except share data stock A B Corporation capital earnings income equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 29, 1996 $ 531 $ 425 $ 358 $ 4 $ 25,158 $ 63,147 $ (771) $ 88,852
Issuance of common stock in a five-for-
four stock split 108 88 (204) (8)
Common stock issued under employee
benefit plans 8 925 933
Change in investment in VISION Group plc 2,886 2,886
Cash dividends declared:
Preferred stock - $.75 per share (40) (40)
Common stock:
Class A - $.36 per share (1,941) (1,941)
Class B - $.36 per share (1,608) (1,608)
Net income 10,020
Other comprehensive income:
Foreign currency translation adjustment 564
Foreign currency transaction adjustments
on long-term advances to affiliates (5,831)
Total comprehensive income 4,753
---------------------------------------------------------------------------------------
Balance, June 28, 1997 531 541 446 4 28,765 69,578 (6,038) 93,827
Conversion of Class B to Class A Shares 11 (11)
Common stock issued under employee
benefit plans 20 2,107 2,127
Change in investment in affiliate 41 41
Income tax benefit arising from employee
stock option plans 355 355
Cash dividends declared:
Preferred stock - $.75 per share (40) (40)
Common stock:
Class A - $.40 per share (2,229) (2,229)
Class B - $.40 per share (1,763) (1,763)
Net income 13,009
Other comprehensive income:
Foreign currency translation adjustment 261
Foreign currency transaction adjustments
on long-term advances to affiliates (2,306)
Total comprehensive income 10,964
---------------------------------------------------------------------------------------
Balance, June 27, 1998 531 572 435 4 31,268 78,555 (8,083) 103,282
Conversion of Class B to Class A Shares 19 (19)
Common stock issued under employee
benefit plans 6 527 533
Income tax benefit arising from employee
stock option plans 74 74
Cash dividends declared:
Preferred stock - $.75 per share (40) (40)
Common stock:
Class A - $.40 per share (2,344) (2,344)
Class B - $.40 per share (1,692) (1,692)
Net income 10,592
Other comprehensive income:
Foreign currency translation adjustment 943
Foreign currency transaction adjustments
on long-term advances to affiliates (3,017)
Total comprehensive income 8,518
---------------------------------------------------------------------------------------
Balance, July 3, 1999 $ 531 $ 597 $ 416 $ 4 $31,869 $85,071 $ (10,157) $ 108,331
=======================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined consolidated financial statements include the accounts of Donnelly
Corporation, Donnelly Export Corporation, and all majority owned or controlled
subsidiaries (collectively, "the Company"), after all significant intercompany
balances, transactions and shareholdings have been eliminated and adjustments
for minority interests have been made. All other investments in 20% to 50%
owned, non-controlled 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.
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.
FISCAL YEAR
The Company's fiscal year is the 52- or 53- week period ending the Saturday
nearest June 30. Fiscal years ended July 3, 1999, June 27, 1998, and June 28,
1997, included 53, 52 and 52 weeks, respectively. The fiscal years of the
Company's German and Spanish subsidiaries end on May 31. Effective July 4, 1999,
the Company will change the date for the end of its fiscal year from the
Saturday nearest June 30 to December 31. For the transition period from July 4,
1999, to December 31, 1999, the Company's fiscal quarter will end on October 2.
All year and quarter references relate to the Company's fiscal years 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 materially
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
The Company's primary foreign investments are in Germany, Ireland, Spain,
France, Mexico, China, Brazil and Malaysia. Except for the Company's subsidiary
in Mexico, whose functional currency is the United States dollar, financial
statements of international companies are translated into United States dollar
equivalents at exchange rates as follows: (1) balance sheet accounts at year-end
rates and (2) income statement accounts at weighted average monthly exchange
rates prevailing during the year. Translation gains and losses are reported as a
separate component of shareholders' equity and are included in accumulated other
comprehensive income. For the 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. Revenue is recognized when products are shipped.
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.
15
<PAGE>
RECOVERABLE CUSTOMER TOOLING
Recoverable customer tooling represents costs recoverable from customers at the
time of tool completion and approval or which are recovered in the program's
piece price over a period of three years or over the program's expected 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, equipment and software....... 3 to 15
</TABLE>
For tax purposes, useful lives and accelerated methods are used as permitted by
the taxing authorities.
Certain costs associated with software developed for internal use are
capitalized in capital projects in progress and once placed in service, are
transferred to machinery, equipment and software and amortized over the expected
useful lives of the software.
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.
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.
STOCK INCENTIVE PLANS
The Company follows the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," for its stock
incentive plans. Under APB 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. The pro forma effects had the Company
followed the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123 are included in Note 12.
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.
16
<PAGE>
COMPREHENSIVE INCOME
The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying of
comprehensive income and its components. Comprehensive income reflects the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. For the Company,
comprehensive income represents net income adjusted for foreign currency
translation adjustments. Comprehensive income is reported in the accompanying
combined consolidated statements of shareholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year data to conform to the
current year presentation and had no effect on net income reported for any
period.
2. INVESTMENTS IN AND ADVANCES TO AFFILIATES
On November 3,1997, the Company formed Lear Donnelly Overhead Systems, LLC
("Lear Donnelly), as a 50% owned joint venture with Lear Corporation ("Lear").
The Company and Lear each contributed certain technologies, assets and
liabilities for the creation of the joint venture. In a non-cash 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 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"). Lear
Donnelly manufactures these products for sale to both the Company and Lear, who
are each responsible for their customer sales efforts to the original equipment
manufacturers. 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 using the
equity method of accounting. This accounting treatment for the venture results
in the dilution of gross profit margins as a percentage of sales for the periods
presented. However, the comparability of net sales or net income of the Company
are not significantly impacted.
On July 1, 1999, the Company signed a letter of intent to sell its investment in
Lear Donnelly to Lear for an undisclosed amount. The transaction is expected to
be completed in the first quarter of the next fiscal period and is expected to
have a one-time, material favorable impact on the net income and cash flow of
the Company. In addition, due to the transfer of the Company's interior lighting
and trim sales contracts included in the joint venture to Lear, future annual
net sales will be reduced by approximately $65 to $70 million per year. Due to
the joint venture operating at approximately break-even since its formation, the
sale of the Company's share of the joint venture is not expected to have a
material impact on the Company's future results of operations. However, gross
profit and operating margins as a percent of sales for future periods will be
favorably impacted by the sale. The carrying value of the Company's investment
in Lear Donnelly is $8.6 million at July 3, 1999.
In the fourth quarter of 1999, the Company formed Schott Donnelly LLC Smart
Glass Solutions, a 50-50 joint venture with Schott North America Manufacturing,
Inc., a wholly owned subsidiary of Schott Corporation ("Schott"). Schott
Corporation is a wholly owned subsidiary of Schott Glas, which is based in
Germany and is one of the world's leading producers of specialty glass products.
The joint venture will design and manufacture electrochromic glass for
automotive and architectural applications. The Company contributed certain
assets and liabilities for the creation of the joint venture. Upon the formation
of this joint venture, the Company received $2 million, which was recorded as a
pretax gain. In accordance with the LLC operating agreement, losses generated by
the joint venture will be allocated to Schott until Schott has contributed $9.5
million.
In 1999, the Company began consolidating the financial statements of Varitronix
EC (Malaysia) sdn. bhd. ("Varitronix EC"). Varitronix EC is based in Malaysia
and is the Company's 50-50, controlled joint venture with the Malaysian
subsidiary of Varitronix International Ltd. ("Varitronix"). Varitronix, based in
Hong Kong, is a global leader in the market for liquid crystal displays and
electronic systems. Varitronix EC provides support for Donnelly's growing
worldwide electrochromic mirror sales.
In the second and third quarters of 1999, the Company sold its entire interest
in VISION Group plc ("VISION Group"). As a result of these sales, the Company
received $8.6 million in proceeds and recognized a combined pretax gain of
approximately $5.5 million, or $0.35 per share after tax. In the second quarter
of quarter of 1997, the Company had also sold a portion of its investment in
VISION Group in conjunction with a public offering of VISION Group shares,
resulting in a $0.9 million pretax gain. Th Company's equity in the financial
results of VISION Group is no longer included in the Company's financial
statements after November, 1999.
In the second quarter of 1999, the Company merged its wholly owned subsidiary,
Donnelly Optics Corporation ("Optics") into a wholly owned subsidiary of Applied
Image Group, Inc. ("AIG"), a New York Corporation. In the merger, the Company
received
17
<PAGE>
a 13% interest in AIG and a $5 million convertible note. AIG develops and
manufactures opto-imaging products for the lighting, automotive, optical and
photonics industries. As a result of this transaction, the financial results of
Optics are no longer included in the Company's financial statements after
December 1, 1998.
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 pretax gain of approximately $4.6 million, or
$0.22 per share after tax.
In 1998, Donnelly formed a 50-50 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
near Sao Paulo, Brazil. In 1999, Donnelly/Arteb began producing replacement
parts for distribution within the South American market and is in the process of
launching new programs for the Brazilian production of several General Motors'
vehicles. Donnelly/Arteb is continuing to focus on strategically growing its
presence in the South American market.
Due to the acquisition of a controlling interest in the general partner of its
German subsidiary, Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe"), the Company
began consolidating Donnelly Hohe's financial statements beginning with the
second quarter of 1997. 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. The unaudited
pro forma combined consolidated net sales for 1997 were $719.5 million, and are
calculated as if the acquisition of a controlling interest in Donnelly Hohe had
occurred at the beginning of 1997.
The Company has advanced 80 million German marks to Donnelly Hohe, valued at
$42.6 million at July 3, 1999, under subordinated loan agreements, which
included advances of 20 million German marks in 1998 and 20 million in 1999.
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.
Outstanding loan maturities range from October 1, 2000, to October 1, 2002.
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
partners also have an option to require the Company to buy their interests at
any time based upon a predetermined formula, which is currently valued at less
than $2 million.
In the first quarter of 1997, the Company created an affiliate, Donnelly
Electronics, LLC ("Donnelly Electronics"), with an individual with expertise in
automotive electronics technology. The Company owns 18.9% of Donnelly
Electronics with the option to acquire up to 100% , based upon a predetermined
formula. The joint venture, based in Flint, Michigan, specializes in the design
and manufacture of electronic components and sub-assemblies and produces the
electronic components that Donnelly uses for products such as electrochromic
rear view mirrors and electronic compass systems. Donnelly Electronics pursues
business with other automotive suppliers that are not competitors of the Company
as well as other business opportunities. At July 3, 1999, Donnelly Electronics
had borrowings from the Company of $7.2 million under a $10 million promissory
note, that bears interest at 7%. The note is payable in quarterly installments
of interest only until the entire principle is due at maturity on June 30, 2001.
Summarized 1999 and 1998 balance sheet and income statement information for the
Company's non-consolidated affiliates accounted for using the equity method is
shown below and includes the following: Lear Donnelly (formed November 3, 1997);
Donnelly/Arteb (included for 1999 only); Shunde Donnelly Zhen Hua Automotive
Systems Co. Ltd. ("Zhen Hua"), a 30% owned joint venture that manufactures
exterior mirrors for car makers in southern China; Shanghai Donnelly Fu Hua
Window Systems Company Ltd., a 50% owned joint venture that manufactures
encapsulated and framed glass products for the Asian automotive industry; and
VISION Group (included through November 1998 only).
<TABLE>
In thousands 1999 1998
- ---------------------------------------------------------------------------
<S> <C> <C>
Summarized Balance Sheet Information
Current assets......................... $ 47,938 $ 63,526
Non-current assets..................... 40,379 49,895
Current liabilities................. 34,757 30,822
Non-current liabilities................ 28,779 30,379
---------------------------
Net equity............................. $ 24,781 $ 52,220
===========================
Summarized Income Statement Information
Net sales.............................. $ 217,858 $ 96,752
Costs and expenses..................... 221,237 103,818
---------------------------
Net loss............................... $ (3,379) $ (7,066)
===========================
</TABLE>
18
<PAGE>
3. NATURE OF OPERATIONS
The Company is an international supplier of automotive parts and component
systems through manufacturing operations and various joint ventures in North and
South America, Europe and Asia. The Company primarily supplies automotive
customers around the world with rear view mirror systems, modular window systems
and handle products. The Company's non-automotive products represent less than
4% of total net sales for each of the last three years.
For the year ended July 3, 1999, the Company has adopted the provisions of SFAS
No. 131, Disclosures about Segments of a Business Enterprise and Related
Information." SFAS No. 131 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. Previously reported
information has been restated to conform to SFAS No. 131. In some instances,
prior year data has been estimated to conform to the current presentation.
The Company is primarily managed based on geographic segments and the product
markets they serve. The Company has two reportable segments: North American
Automotive Operations ("NAAO") and European Automotive Operations ("EAO"). The
operating segments are managed separately as they each represent a strategic
operational component that offers the Company's product lines to customers in
different geographical markets. Where each segment offers all of the Company's
automotive product lines, the majority o the Company's net sales from modular
windows and handle products originate from NAAO. Operating financial information
is available that is evaluated regularly by the Company's chief executive
officer, or corporate management team, in deciding how to allocate resources and
in assessing the segment's performance. The corporate management team, which
establishes the overall strategy and policy standards for the Company, includes
the Company's chief executive officer and senior executives in administration,
engineering, finance, operations and technology. The chief operating officer of
each segment, each of whom is a member of the corporate management team, is
responsible for the management of profitability and cash flow for each
respective segment's operations.
The accounting polices of the reportable operating segments are the same as
those described in the summary of significant accounting policies described in
Note 1. Revenues are attributed to segments based on the location of where the
sales originate. The Company evaluates performance based on segment profit,
which is defined as earnings before interest, taxes, depreciation and
amortization, excluding significant special gains, losses and restructuring
charges. Due to the Company's corporate headquarter being located in the United
States, certain estimates are made for allocations to NAAO of centralized
corporate costs incurred in support of NAAO. Centralized European overhead costs
are included in EAO. The Company accounts for intersegment sales and transfers
at current market prices and intersegment services at cost.
19
<PAGE>
A summary of the Company's operations by its business segments follows:
<TABLE>
Other Intersegment Total
In thousands NAAO EAO Segments* Eliminations Segments
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Revenues............................. $523,830 $280,714 $104,778 $ (4,353) $904,969
Segment profit....................... 53,443 7,394 2,026 -- 62,863
Depreciation and amortization........ 11,598 9,796 814 -- 22,208
Identifiable assets.................. 201,680 139,324 42,863 (9,612) 374,255
Investment in equity affiliates...... -- -- 11,291 -- 11,291
Capital expenditures................. 34,711 13,598 7,228 -- 55,537
1998
Revenues............................. $453,779 $261,635 $ 51,367 $ (3,470) $763,311
Segment profit....................... 51,062 12,058 2,074 -- 65,194
Depreciation and amortization........ 11,066 10,321 641 -- 22,028
Identifiable assets.................. 184,985 146,342 37,703 (5,050) 363,980
Investment in equity affiliates...... -- -- 16,730 -- 16,730
Capital expenditures................. 22,954 14,257 7,129 -- 44,340
1997
Revenues............................. $432,973 $222,089 $ 17,389 $ (1,154) $671,297
Segment profit....................... 52,200 11,220 3,957 -- 67,377
Depreciation and amortization........ 11,086 8,960 892 -- 20,938
Identifiable assets.................. 172,546 153,086 27,050 (6,067) 346,615
Investment in equity affiliates...... -- -- 13,277 -- 13,277
Capital expenditures................. 16,353 10,727 3,798 -- 30,878
</TABLE>
*Other segments category includes the Company's automotive joint ventures and
North American non-automotive businesses.
Reconciliations of the totals reported for the operating segments to the
applicable amounts in the combined consolidated financial statements is shown
below:
<TABLE>
In thousands Year ended 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Segment profit from reportable segments........... $ 60,837 $ 63,120 $ 63,420
Segment profit from other segments................ 2,026 2,074 3,957
Interest, net..................................... (7,311) (7,787) (8,882)
Depreciation and amortization..................... (22,847) (22,600) (21,460)
Restructuring and other charges................... (8,777) (3,468) (9,965)
Gain on sale of equity investments................ 5,498 4,598 872
Gain on formation of joint venture................ 2,000 -- --
Corporate and other expenses*..................... (21,733) (16,758) (15,937)
---------------------------------------------
Income before taxes on income $ 9,693 $ 19,179 $ 12,005
=============================================
</TABLE>
* Corporate and other expenses category includes centralized corporate functions
including those for advanced research, corporate administration including
information technology, human resources and finance and other costs associated
with corporate development and financing initiatives.
<TABLE>
In thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Total assets of reportable segments............... $ 341,004 $ 331,327 $ 325,632
Total assets of other segments.................... 42,863 37,703 27,050
Elimination of intersegment receivables.......... (9,612) (5,050) (6,067)
Corporate and other assets*....................... 20,846 13,905 11,678
-----------------------------------------------
Total Consolidated Assets $ 395,101 $ 377,885 $ 358,293
===============================================
</TABLE>
* Corporate and other assets category includes tax related assets, fixed assets
related to centralized corporate and advanced research functions, consisting
primarily of buildings and equipment, capitalized costs and financial assets.
20
<PAGE>
The following summarizes the Company's sales by product line:
<TABLE>
In thousands Year ended 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mirror systems and components..................... $ 414,981 $ 355,823 $ 313,860
Modular window systems............................ 335,345 286,470 264,359
Interior lighting and trim........................ 73,626 42,175 26,680
Handle products................................... 57,318 51,251 44,578
Non-automotive products........................... 23,699 27,592 21,820
-------------------------------------------------
$ 904,969 $ 763,311 $ 671,297
=================================================
</TABLE>
Sales to major automobile manufacturers as a percentage of the Company's net
sales follows:
<TABLE>
Year ended 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ford Motor Company.................. 25% 27% 25%
DaimlerChrysler..................... 20 20 20
Honda............................... 7 8 11
BMW................................. 6 7 7
VW.................................. 6 6 6
General Motors Corporation.......... 5 5 5
---------------------------------------
69% 73% 74%
=======================================
</TABLE>
Additional information regarding geographic areas follows:
<TABLE>
In thousands Year Ended 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
North American:
United States............................. $ 482,062 $ 420,544 $ 390,852
Export:
Americas............................... 122,513 76,433 54,302
Asia................................... 6,847 3,313 2,825
Europe................................. 1,355 2,002 1,829
Other.................................. 386 350 76
$ 613,163 $ 502,642 $ 449,884
Germany...................................... 177,196 173,857 138,215
Ireland...................................... 61,682 43,245 43,076
Other Foreign................................ 52,928 43,567 40,122
-----------------------------------------------
$ 904,969 $ 763,311 $ 671,297
===============================================
</TABLE>
<TABLE>
In thousands 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-Lived Assets:
United States.................................. $ 116,409 $ 99,518 $ 93,699
Germany........................................ 46,944 47,923 50,342
Ireland........................................ 8,203 8,522 8,894
Other Foreign.................................. 18,076 13,962 13,289
-----------------------------------------------
$ 189,632 $169,925 $166,224
===============================================
</TABLE>
4. RESTRUCTURING AND OTHER CHARGES
1999 Restructuring
In February 1999, the Company announced a European turnaround plan. The
Company's European automotive segment recorded unfavorable operating results
over the last three years, despite strong automotive car build and overall sales
increases in the Company's European operations. In addition, certain key
operating units in Europe continued to perform at an operating loss. In
September 1998, the Company assigned four senior managers from its North
American operations to this segment to improve the Company' overall operating
performance in Europe. The objective of the restructuring plan is to improve the
overall operating efficiency and customer service of the European organization
by 1) re-organizing certain manufacturing and customer service functions into a
customer focused structure, 2) consolidating two German manufacturing
facilities, 3) implementing throughout Europe the Donnelly Production System,
the Company's approach to lean manufacturing processes, 4) re-negotiating an
existing labor contract an 5) re-aligning sales and engineering functions
throughout Europe.
21
<PAGE>
In the third quarter of 1999, an $8.8 million pretax restructuring charge, or
$3.5 million charge to net income, was recorded for this plan. The restructuring
charge included $1.4 million for the impairment of assets and a reserve of $7.4
million for anticipated incremental cash expenditures for the severance and
voluntary incentive programs for approximately 200 production, production
support, sales and engineering employees. The restructuring charge was recorded
in accordance with Emerging Issues Task Force ("EITF") 94-3. The impairment of
long-lived assets includes adjustments to the carrying-value of certain
facilities and operating assets. The impairment charge was determined by
comparing management's current estimate of the fair market value of the assets
based on existing or alternative use of those assets impacted by the turnaround
plan with the carrying value of the related assets. The estimated underlying
fair market value for these assets is subject to change. The Company will also
require approximately $4.3 million for the construction of shipping and
warehousing facilities, relocation of employees and new material handling and
storage equipment associated with the 1999 European turnaround plan. These costs
do not qualify as restructuring under EITF 94-3 and therefore are included in
the Company's capital and operating budget for the next six to eight months; the
majority of the costs will be capitalized.
In July 1999, the Company completed the re-negotiation of its labor contract in
Germany allowing for greater work flexibility rules, broader productivity
guidelines and a delay in certain wage increases until certain income
profitability targets are accomplished. As of July 3, 1999, cash payments of
$0.6 million had been incurred, including the termination of 10 employees
associated with the plan. It is expected that all actions associated with the
plan will be completed by the end of calendar year 2000
1997 Restructuring
In May 1997, the Company announced a European restructuring plan to realign
manufacturing capacity, improve operating efficiencies and to reduce future
operating costs. The Company's strategy to penetrate European markets was
through acquisitions, the most significant of which was Donnelly Hohe in March
1995. Donnelly Hohe, based in Germany, serves many of the main auto producers in
Europe with exterior mirrors, interior mirrors, door handles and certain
non-automotive products through four operating facilities in Germany and one in
Spain. The restructuring plan was primarily based on the decision to re-organize
product lines and production processes within operations of Donnelly Hohe at
Dorfprozelten, Germany and other European locations in Schleiz, Germany, Spain
and Ireland. In addition, the plan included costs associated with the
restructuring of management at Donnelly Hohe and within the overall European
management structure. The strategic intent of the plan was primarily to
consolidate redundant manufacturing processes, move certain assembly operations
to lower cost areas of production and centralize European management
responsibility.
In the fourth quarter of 1997, a $10.0 million pretax restructuring charge, or
$4.0 million charge to net income, was recorded for this plan. The restructuring
charge consisted entirely of a severance program, voluntary separation
incentives and administrative costs associated with the plan in accordance with
EITF 94-3. The severance and separation incentive program includes approximately
230 personnel, primarily personnel in manufacturing and European management
functions. Through July 3, 1999, the Company had terminated 129 employees under
the 1997 plan and had incurred cumulative cash payments of $5.5 million. In
addition, in 1998, the Company recorded a reduction to the restructuring reserve
of $1.1 million pretax associated with changes to the plan.
Due to changes in management at the Company's European operations,
implementation of the restructuring plan was delayed. However, the remaining
actions under this plan have not changed. The remaining reserve of $2.8 million,
as adjusted for foreign currency changes, has been combined with the
restructuring charge taken in the third quarter of 1999. The combined
restructuring reserve at July 3, 1999, was $10.1 million, of which $7.7 million
is classified as short-term. All remaining employee separation benefits and
related cash flows are expected to be completed in conjunction with the most
recent European restructuring initiatives.
Other
In the fourth quarter of 1998, Optics, recognized a $3.5 million pretax charge
against operating income, or $2.3 million after tax, due to the cancellation of
a customer order, relating to 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 were completed in the
second quarter of 1999. This business was merged into a new company in the
second quarter of 1999 (see Note 2).
22
<PAGE>
5. INVENTORIES
Inventories consist of:
<TABLE>
In thousands 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Finished products and work in process....... $ 18,871 $ 16,987
Raw materials............................... 23,851 27,159
--------------------------------
$ 42,722 $ 44,146
================================
</TABLE>
6. DEBT AND OTHER FINANCING ARRANGEMENTS
Debt consists of:
<TABLE>
In thousands 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Borrowings under revolving credit agreements at 3.56% and 4.61%....................... $ 24,728 $ 48,882
Senior Notes:
$15,000 at 6.67%, due 2003, principal payable in installments beginning
in 1999*......................................................................... 11,500 15,000
$15,000 at 7.22%, due 2004, principal payable in installments beginning
in 1999*......................................................................... 15,000 15,000
$20,000 at 6.70%, due 2005, principal payable in installments beginning
in 2000.......................................................................... 20,000 20,000
Industrial revenue bonds:
$9,500 at adjustable rates (3.62% at July 3, 1999, and 3.78% at June 27, 1998),
due in 2008-2010................................................................. 9,500 9,500
$5,000 at a fixed rate of 8.13%, due in 2012.................................... 5,000 5,000
Capitalized lease obligations......................................................... 1,389 3,072
Other................................................................................. 5,098 7,307
--------------------------
Total................................................................................. 92,215 123,761
Less current maturities......................................................... ..... 49 55
--------------------------
$ 92,166 $123,706
==========================
</TABLE>
*Refers to transition period ending December 31, 1999 (see Note 1).
The Company has an unsecured $160 million multi-currency global revolving credit
agreement which bears interest, at the election of the Company, at a floating
rate under one of three alternative elections. A variable facility fee,
currently at 0.225%, is paid on the credit line. This revolving credit agreement
terminates in September 2002, at which time the Company may extend for one-year
periods with the consent of all the participating 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 July 3, 1999, the Company was in compliance with
all related covenants. Retained earnings available for dividends at July 3,
1999, are $15.8 million.
Certain maturities are classified as long term due to the intent to refinance
these under the revolving credit agreement. Annual principal maturities consist
of:
<TABLE>
Year ending In thousands Amount
- -------------------------------------------------------------
<S> <C>
1999*........................ $ 25
2000......................... 12,397
2001......................... 12,146
2002......................... 13,221
2003......................... 21,795
2004......................... 13,962
2005 and thereafter......... 18,669
------------
$ 92,215
============
</TABLE>
*Refers to transition period ending December 31, 1999 (see Note 1).
Interest payments of $7.8 million, $8.6 million and $10.4 million were made in
1999, 1998 and 1997, respectively.
23
<PAGE>
7. ACCOUNTS RECEIVABLE SECURITIZATION
The Company has an agreement to sell, on a revolving basis, an interest in a
defined pool of trade accounts receivable of up to $50 million. The agreement
expires in December 1999, however is renewable for one-year periods at the
option of the Company. The Company expects to extend the current agreement or
replace it on comparable terms. At July 3, 1999, and June 27, 1998, a $40.4
million and $40.3 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. Discount fees of $2.1 million in 1999, $2.1 million in 1998 and $1.1
million in 1997, 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.
8. 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 July 3, 1999, and June 27, 1998, the
Company had interest rate swaps with an aggregate notional amount of $30 million
and $40 million, $10 million of which were offsetting at June 27, 1998. These
effectively converted $30 million of the Company's variable interest rate debt
to fixed rates at July 3, 1999, and June 27, 1998. The Company is currently
paying a weighted-average fixed rate of 7.395%, 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. Foreign exchange contracts
outstanding were $1.4 million and $1.1 million at July 3, 1999, and June 27,
1998, respectively. The foreign exchange contracts require the Company to
exchange foreign currencies for Irish punts and generally mature within 12
months. Deferred gains and losses are included on a net basis in the Company's
combined consolidated financial statements 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 July 3, 1999, and June 27,
1998, are as follows:
<TABLE>
1999 1998
In thousands Carrying Value Fair Value Carrying Value Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities:
Long-term fixed rate debt $51,500 $52,329 $ 56,725 $ 58,540
Derivatives:
Interest rate swaps -- (739) -- (1,140)
Foreign exchange contracts -- (2) -- 100
</TABLE>
Statement of Financial Accounting 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 in the balance sheet at fair
value. It also requires that unrealized gains and losses resulting from changes
in fair value be included in income or comprehensive income, depending on
whether the instrument qualifies as a hedge. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. 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.
9. 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 that
equal or exceed regulatory requirements. Plan assets are primarily corporate
equity and debt securities.
24
<PAGE>
The Company has adopted the provisions of SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 is an amendment
of SFAS's No. 87, 88 and 106 and 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. Previously reported
information has been restated to conform to SFAS No. 132.
Assumptions and net periodic pension cost are as follows:
<TABLE>
Year ended 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate....................... 7.00% 7.75% 8.00%
Compensation increase............... 5.00% 5.00% 5.00%
Expected return on plan assets...... 9.50% 9.50% 9.50%
In thousands:
Service cost........................ $ 5,085 $ 4,284 $ 3,545
Interest cost....................... 6,459 5,881 5,497
Expected return on plan assets...... (7,087) (6,023) (6,931)
Net amortization and deferral....... (175) 84 2,270
-----------------------------------
Net periodic benefit cost........... $ 4,282 $ 4,226 $ 4,381
===================================
</TABLE>
The following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets and funded status and reflects changes
made to the plan in the prior year to increase the normal retirement age by
three years to match that used for social security:
<TABLE>
In thousands Year ended 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year....................... $ 88,373 $ 74,414
Service cost.................................................. 5,085 4,230
Interest cost................................................. 6,459 5,881
Plan participants' contributions.............................. 161 161
Amendments.................................................... (344) (5,073)
Actuarial losses (gains)...................................... (6,087) 11,053
Foreign exchange rate changes................................. (876) (841)
Benefits paid................................................. (1,457) (1,452)
-----------------------
Benefit obligation at end of year............................. $ 91,314 $ 88,373
=======================
Change in plan assets
Fair value of plan assets at beginning of year................ $ 77,775 $ 66,671
Actual return on plan assets.................................. 7,359 13,391
Foreign exchange rate changes................................. (1,070) (1,233)
Employer contribution......................................... -- 237
Plan participants' contributions.............................. 161 161
Benefits paid................................................. (1,414) (1,452)
-----------------------
Fair value of plan assets at end of year...................... $ 82,811 $ 77,775
=======================
Funded status................................................. $ (8,503) $(10,598)
Unrecognized net actuarial (gain)............................. (8,614) (1,990)
Unrecognized transition obligation............................ 166 349
Unrecognized prior service cost............................... (4,246) (4,709)
-----------------------
Prepaid (accrued) benefit cost................................ $(21,197) $(16,948)
=======================
</TABLE>
B. Postretirement Health Care Benefits
The Company provides certain health care and life insurance benefits for
eligible active and retired domestic employees hired before July 1, 1998. 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. Funding policy
for these benefits is to pay covered expenses as incurred.
25
<PAGE>
Assumptions and net periodic postretirement benefit cost are as follows:
<TABLE>
Year ended 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate....................... 7.00% 7.75% 8.00%
Health care cost trend (a).......... 8.00% 9.00% 10.00%
In thousands:
Service cost........................ $ 650 $ 504 $ 445
Interest cost....................... 938 977 911
Expected return on plan assets...... -- -- --
Amortization of transition obligation
over 22 years....................... 360 360 360
Net other amortization.............. 30 9 4
----------------------------------
Net periodic benefit cost........... $ 1,978 $ 1,850 $ 1,720
==================================
</TABLE>
(a) Gradually declining to 6% in 2001 and remaining level thereafter.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets and funded status:
<TABLE>
In thousands Year ended 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year................ $ 14,559 $ 12,174
Service cost........................................... 650 504
Interest cost.......................................... 938 977
Amendments............................................. 588 --
Actuarial (gains) losses............................... (3,178) 1,104
Benefits paid.......................................... (281) (200)
-----------------------
Benefit obligation at end of year...................... $ 13,276 $ 14,559
=======================
Fair value of plan assets at beginning and end of year. -- --
=======================
Funded status.......................................... $(13,276) $(14,559)
Unrecognized net actuarial (gain) loss................. (326) 2,294
Unrecognized transition obligation..................... 5,761 6,121
-------------------------
Prepaid (accrued) benefit cost......................... $ (7,841) $ (6,144)
=========================
</TABLE>
The assumed health care cost trend rates have a significant effect on the
amounts reported. A 1-% change in assumed health care cost trend rates would
have the following effects:
<TABLE>
In thousands: 1-% Increase 1-% Decrease
- ------------- ------------- ------------
<S> <C> <C>
Effect on service and interest cost components $103 $(123)
Effect on postretirement benefit obligation $660 $(731)
</TABLE>
10. TAXES ON INCOME
<TABLE>
In thousands Year ended 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before taxes on income consists of:
Domestic....................... $ 27,877 $ 21,967 $ 23,833
Foreign........................ (18,184) (2,788) (11,828)
-------------------------------------------
$ 9,693 $ 19,179 $ 12,005
===========================================
Tax expense (benefit) consists of:
Current:
Domestic....................... $ 1,243 $ 828 $ 6,256
Foreign........................ 1,840 79 950
-------------------------------------------
$ 3,083 $ 907 $ 7,206
-------------------------------------------
Deferred:
Domestic....................... $ 5,484 $ 5,025 $ (23)
Foreign........................ (7,034) (879) (4,397)
-------------------------------------------
(1,550) 4,146 (4,420)
-------------------------------------------
$ 1,533 $ 5,053 $ 2,786
============================================
</TABLE>
26
<PAGE>
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 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal statutory rate.. 34% 35% 35%
Impact of:
Available tax credits.............. (9) (6) (5)
Foreign subsidiary earnings........ 5 (2) 4
Export sale tax benefits........... (14) (4) (5)
Other.............................. -- 3 (6)
-------------------------------------
Effective tax rate...................... 16% 26% 23%
-------------------------------------
Income taxes paid....................... $1,506 $2,164 $9,193
=====================================
</TABLE>
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 non-current
deferred tax assets with other assets and the net non-current 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 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Fixed assets........................ $ (11,034) $ (9,750)
Retirement plans.................... 7,472 5,904
Postretirement benefits............. 2,843 2,149
Loss carryforwards.................. 12,425 7,137
Accrued expenses and other.......... (10,589) (7,009)
Valuation allowance................. (946) (457)
----------------------------
Net deferred tax asset (liability).. $ 171 $ (2,026)
============================
</TABLE>
Deferred taxes are classified in the accompanying balance sheets as follows:
<TABLE>
In thousands 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
Current income tax asset............ $ 1,240 $ 1,360
Non-current income tax asset........ 10,873 5,706
Non-current income tax liability.... (11,942) (9,092)
----------------------------
Net deferred tax asset (liability).. $ 171 $ (2,026)
============================
</TABLE>
At July 3, 1999, the Company has $39.0 million of consolidated net operating
loss carryforwards, which do not expire.
11. 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 July 3, 1999. 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 July 3,
1999, and June 27, 1998, 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.
27
<PAGE>
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 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income................................................................. $ 10,592 $13,009 $10,020
Less: Preferred stock dividends.......................................... (40) (40) (40)
--------------------------------------
Income available to common stockholders.................................... $ 10,552 $12,969 $ 9,980
======================================
Weighted-average shares.................................................... 10,091 9,961 9,836
Plus: Effect of dilutive stock options................................... 29 111 143
--------------------------------------
Adjusted weighted-average shares.......................................... 10,120 10,072 9,979
======================================
Basic earnings per share................................................... $1.05 $1.30 $1.01
======================================
Diluted earnings per share................................................. $1.04 $1.29 $1.00
======================================
</TABLE>
12. STOCK PURCHASE AND OPTION PLANS
The Company's 1998 Employees' Stock Purchase Plan permits the purchase in an
aggregate amount of up to 300,000 shares of Class A Common Stock. Eligible
employees may purchase stock at market value, or 85% of market value up to a
maximum of $25,000 per employee in any calendar year. The Company issued 14,182
shares in 1999, under this plan. The Company also issued 16,831 shares in 1999,
18,963 shares in 1998 and 11,540 shares in 1997 under the previous plan.
The Company's Stock Option Plans permit the granting of either non-qualified or
incentive stock options to certain key employees and directors to purchase an
aggregate amount of up to 1,150,593 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 non-qualified 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 July 3, 1999, 1,002,368 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 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
- ------------------------------------------------------------------------------------------------
Granted in 1999 123 16.98
Exercised (35) 9.75
Canceled (23) 19.81
- ------------------------------------------------------------------------------------------------
Outstanding at July 3, 1999 563 16.38
- ------------------------------------------------------------------------------------------------
Exercisable at July 3, 1999 441 16.21
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Weighted-Average
--------------------------------------------------------
Number of Options Option Price Remaining
------------------------------------------------------------------
Exercise Price Range Outstanding Exercisable Outstanding Exercisable Contractual Life
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.48 - $14.30 210 208 $12.79 $12.78 5.37yrs
$14.81 - $22.69 353 233 $18.52 $19.29 7.25yrs
</TABLE>
The weighted-average, grant-date fair value was $5.76, $7.53 and $4.93 for stock
options granted in 1999, 1998 and 1997 respectively.
28
<PAGE>
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 1999, 1998 and 1997, respectively: risk free interest rates of
6.07%, 5.45% and 6.23%; dividend yield of 2.5%, 2.06% and 2.2%; expected market
price volatility factor of 0.316, 0.311 and 0.303; and an expected option life
of seven years.
Pro forma information under SFAS No. 123 is as follows:
<TABLE>
In thousands Year ended 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported.............................................. $ 10,592 $ 13,009 $ 10,020
Pro forma................................................ 9,748 11,976 9,544
Basic net income per share of common stock:
As reported.............................................. $ 1.05 $ 1.30 $ 1.01
Pro forma................................................ .96 1.20 .97
Diluted net income per share of common stock:
As reported.............................................. $ 1.04 $ 1.29 $ 1.00
Pro forma................................................ .96 1.19 .95
</TABLE>
13. 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 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.
The Company believes that the claim by Midwest will be resolved without a
material effect on the Company's financial condition, results of operations or
liquidity.
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 non-infringement 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, results of
operation or 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 rear view 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. This
lawsuit has recently been 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 incidental to its business, including those arising out of alleged
defects, breach of contracts, product warranties, employment-related matters and
environmental matters. An estimated loss from a legal action or claim is accrued
when events exist that make the loss probable and the loss can be reasonably
estimated. Although the Company maintains accruals for such claims when
warranted, there can be no assurance that such accruals will continue to be
adequate. The Company believes that accruals related to such litigation and
claims are sufficient and that these items will be resolved without material
effect on the Company's financial position, results of operations and liquidity,
individually and in the aggregate.
29
<PAGE>
B. Other
As of July 3, 1999, the Company had capital expenditure purchase commitments
outstanding of approximately $11.9 million.
The Company provides a guarantee for $7.2 million in municipal funding for the
construction of a manufacturing facility.
14. LEASES
Future minimum lease payments, excluding renewal options, consist of:
<TABLE>
Year ending In thousands Capital Leases Operating Leases
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1999*............................................. $ 1,093 $ 2,282
2000.............................................. 237 3,423
2001.............................................. 116 2,171
2002.............................................. 14 1,894
2003.............................................. 2 1,665
2004.............................................. 1 1,984
2005 and thereafter............................... 0 616
--------------------------------
Total minimum lease payments...................... 1,463 $ 14,035
===========
Less amount representing interest and other....... 74
-----------
Present value of net minimum lease payments............ $ 1,389
===========
</TABLE>
*Refers to transition period ending December 31, 1999.
Donnelly Hohe and Donnelly Mirrors Limited have 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 1999
- --------------------------------------------------------------------------------
<S> <C>
Land........................................................ $ 27
Buildings................................................... 4,397
Machinery and equipment..................................... 2,919
---------
Gross property, plant and equipment under capital leases.... 7,343
Less accumulated depreciation............................... (5,912)
Net property, plant and equipment under capital leases...... $ 1,431
=========
</TABLE>
The Company has operating leases for office, warehouse and manufacturing
facilities and manufacturing equipment. Rental expense charged to operations
amounted to approximately $5.2 million for 1999, $4.3 million for 1998 and $3.8
million for 1997. 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 rat 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.
15. COMMON STOCK PRICE PER SHARE - UNAUDITED
The Company's common stock is traded on the New York 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 1999 1998
- --------------------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First........................ $ 18.88 $ 14.13 $ 23.75 $ 16.75
Second....................... 16.00 12.50 22.44 17.50
Third........................ 15.25 12.13 19.31 16.25
Fourth....................... 17.50 12.88 22.38 18.00
- --------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
16. 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>
1999
Net sales............................................ $189,603 $239,093 $233,154 $243,119 $904,969
Gross profit......................................... 26,761 35,089 37,963 34,503 134,316
Operating income..................................... (1,112) 3,310 (944) 6,847 8,101
Net income........................................... (1,990) 1,451 3,820 7,311 10,592
Basic net income per share.................... (.20) .14 .38 .72 1.05
Diluted net income per share.................. (.20) .14 .38 .72 1.04
Dividends declared per share of common stock......... .10 .10 .10 .10 .40
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
</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 2, 4
and 13 for a discussion of the impact of certain transactions on the 1999 and
1998 quarterly results of operations.
31
<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
J. Dwane Baumgardner, Ph.D.
Chairman, Chief Executive Officer and President
/s/ Scott E. Reed
Scott E. Reed
Senior Vice President
and Chief Financial Officer
32
<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 July 3, 1999 and June 27, 1998, and the related combined
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended July 3, 1999. 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 July 3, 1999 and June 27, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended July 3, 1999, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Grand Rapids, Michigan
August 12, 1999
33
<PAGE>
EXHIBIT 21
SCHEDULE OF AFFILIATES
AS OF JULY 3, 1999
<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%
INFORMATION PRODUCTS, INC. MICHIGAN 100%
DONNELLY SCANDINAVIA A.B. ORGANIZED UNDER THE 100%
LAWS OF SWEDEN
DONNELLY INVESTMENTS, INC. MICHIGAN 100%
DONNELLY HOHE VERWALTUNGS GmbH ORGANIZED UNDER THE 74%
LAWS OF GERMANY
DONNELLY HOHE ESPANA, S.A. ORGANIZED UNDER THE 68.6%*
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. ORGANIZED UNDER THE 50%
LAWS OF MALAYSIA
LEAR DONNELLY OVERHEAD SYSTEMS, L.L.C. MICHIGAN 50%**
DONNELLY/ARTEB, LTDA ORGANIZED UNDER THE 50%
LAWS OF BRAZIL
DONNELLY ELECTRONICS, L.L.C. MICHIGAN 19%
KAM TRUCK COMPONENTS, INC. MICHIGAN 17%
APPLIED IMAGE GROUP NEW YORK 13%
SHOTT-DONNELLY LLC SMART GLASS SOLUTIONS DELAWARE 50%
</TABLE>
* 21.8% owned directly by Donnelly Corporation and 70.2% owned by
Donnelly Hohe GmbH & CO. KG (66.7% of the equity of which is owned by
Donnelly Corporation)
** Donnelly Corporation sold its interest in Lear Donnelly Overhead Systems,
L.L.C. on September 14, 1999.
<PAGE>
EXHIBIT 23
Consent of Independent Certified Public Accountants
Donnelly Corporation
Holland, Michigan
We hereby consent to the incorporation by reference of our reports dated August
12, 1999, relating to the combined consolidated financial statements and
schedules of Donnelly Corporation appearing in the corporation's annual report
on Form 10-K for the year ended July 3, 1999, in that corporation's previously
filed Form S-8 Registration Statements for that corporation's 1998 Employees'
Stock Purchase Plan (Registration No. 333-67969), 1998 Employee Stock Option
Plan (Registration No. 333-67967), 1997 Employee Stock Option Plan (Registration
No. 333-40987), 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
Grand Rapids, Michigan
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
July 3, 1999 Donnelly Corporation financial statements and is
qualified in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jul-3-1999
<PERIOD-START> Jun-28-1998
<PERIOD-END> Jul-3-1999
<CASH> 3,413
<SECURITIES> 0
<RECEIVABLES> 73,925
<ALLOWANCES> 0
<INVENTORY> 42,722
<CURRENT-ASSETS> 145,915
<PP&E> 320,993
<DEPRECIATION> 132,138
<TOTAL-ASSETS> 395,101
<CURRENT-LIABILITIES> 97,372
<BONDS> 92,166
1,017
0
<COMMON> 531
<OTHER-SE> 106,783
<TOTAL-LIABILITY-AND-EQUITY> 395,101
<SALES> 904,969
<TOTAL-REVENUES> 904,969
<CGS> 770,653
<TOTAL-COSTS> 770,653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,858
<INCOME-PRETAX> 9,693
<INCOME-TAX> 1,533
<INCOME-CONTINUING> 9,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,592
<EPS-BASIC> 1.05
<EPS-DILUTED> 1.04
</TABLE>
