SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended September 30, 2000 Commission File Number 1-9716
DONNELLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-0493110
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
49 West Third Street, Holland, Michigan 49423-2813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 786-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes _X_ No ___
6,081,321 shares of Class A Common Stock and 4,098,314 shares of Class B Common
Stock were outstanding as of October 31, 2000.
<PAGE>
DONNELLY CORPORATION
INDEX
Page
Numbering
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Combined Consolidated Balance Sheets
- September 30, 2000 and December 31, 1999 3
Condensed Combined Consolidated Statements of Income
- Three and nine months ended September 30, 2000 and
October 2, 1999 4
Condensed Combined Consolidated Statements of Cash Flows
- Nine months ended September 30, 2000 and
October 2, 1999 5
Notes to Condensed Combined Consolidated Financial
Statements 6-13
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
September 30, December 31,
In thousands 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,424 $ 4,153
Accounts receivable, less allowance of $1,382 and $2,449 95,538 80,605
Inventories 52,528 50,392
Prepaid expenses and other current assets 24,387 28,784
-------------- -------------
Total current assets 176,877 163,934
Property, plant and equipment 333,941 323,210
Less accumulated depreciation 131,679 124,824
-------------- -------------
Net property, plant and equipment 202,262 198,386
Investments in and advances to affiliates 38,224 28,815
Other assets 42,686 37,728
-------------- -------------
Total assets $ 460,049 $ 428,863
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 102,030 $ 92,098
Other current liabilities 47,833 46,577
-------------- -------------
Total current liabilities 149,863 138,675
Long-term debt, less current maturities 118,758 107,383
Deferred income taxes and other liabilities 62,196 58,059
-------------- -------------
Total liabilities 330,817 304,117
-------------- -------------
Minority interest (117) 951
Shareholders' equity:
Preferred stock 531 531
Common stock 1,021 1,019
Other shareholders' equity 127,797 122,245
-------------- -------------
Total shareholders' equity 129,349 123,795
-------------- -------------
Total liabilities and shareholders' equity $ 460,049 $ 428,863
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Three Months Ended Nine Months Ended
---------------------------------- --------------------------------
September 30, October 2, September 30, October 2,
In thousands except share data 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 192,684 $ 208,917 $ 657,580 $ 685,190
Cost of sales 167,356 179,445 552,178 583,252
------------- ------------- ------------- ------------
Gross profit 25,328 29,472 105,402 101,938
Operating expenses:
Selling, general and administrative 18,415 18,828 60,101 61,460
Research and development 9,300 7,820 26,891 22,974
Restructuring and other charges - - - 8,777
------------- ------------- ------------- ------------
Total operating expenses 27,715 26,648 86,992 93,211
------------- ------------- ------------- ------------
Operating income (loss) (2,387) 2,824 18,410 8,727
------------- ------------- ------------- ------------
Non-operating (income) expenses:
Interest expense 2,147 1,433 5,955 5,109
Interest income (691) (314) (1,844) (509)
Royalty income (535) (101) (1,732) (672)
Gain on sale of equity investment - (14,072) - (19,202)
Other (income) expense, net (137) 47 98 (2,248)
------------- ------------- ------------- ------------
Total non-operating (income) expenses 784 (13,007) 2,477 (17,522)
------------- ------------- ------------- ------------
Income (loss) before taxes on income (3,171) 15,831 15,933 26,249
Taxes on income (credit) (1,584) 5,900 3,581 8,087
------------- ------------- ------------- ------------
Income (loss) before minority interest and
equity earnings (1,587) 9,931 12,352 18,162
Minority interest in net losses of subsidiaries 1,304 575 1,212 3,831
Equity in earnings of affiliated companies 914 427 978 71
------------- ------------- ------------- ------------
Income before cumulative effect of
change in accounting principle 631 10,933 14,542 22,064
Cumulative effect of change in accounting principle - (1,010) - (1,010)
------------- ------------- ------------- ------------
Net income $ 631 $ 9,923 $ 14,542 $ 21,054
============= ============= ============= ============
Per share of common stock:
Basic EPS
Income before cumulative effect of
change in accounting principle $ 0.06 $ 1.08 $ 1.43 $ 2.18
Cumulative effect of change in accounting principle - (0.10) - (0.10)
------------- ------------- ------------- ------------
Net income $ 0.06 $ 0.98 $ 1.43 $ 2.08
============= ============= ============= ============
Diluted EPS
Income before cumulative effect of
change in accounting principle $ 0.06 $ 1.07 $ 1.43 $ 2.17
Cumulative effect of change in accounting principle - (0.10) - (0.10)
------------- ------------- ------------- ------------
Net income $ 0.06 $ 0.97 $ 1.43 $ 2.07
============= ============= ============= ============
Cash dividends declared $ 0.10 $ 0.10 $ 0.30 $ 0.30
Average common shares outstanding 10,173,077 10,135,059 10,163,185 10,111,292
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DONNELLY CORPORATION AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Nine Months Ended
---------------------------------------
September 30, October 2,
In thousands 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,542 $ 21,054
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 22,367 16,323
(Gain) loss on sale of property and equipment 74 (12)
Gain on sale of equity investment - (19,202)
Deferred pension cost and postretirement benefits 4,542 4,709
Change in deferred income taxes (2,144) 571
Minority interest loss (2,093) (5,568)
Equity in earnings of affiliated companies (977) (71)
Restructuring and other charges - 8,777
Cumulative effect of change in accounting principle - 1,010
Changes in operating assets and liabilities:
Refund of accounts receivable (8,865) (12,771)
Accounts receivable (12,354) (10,084)
Inventories (4,789) (4,588)
Prepaid expenses and other current assets 4,151 (9,679)
Accounts payable and other current liabilities 20,507 20,436
Other (1,591) 686
------------ ------------
Net cash from operating activities 33,370 11,591
============ ============
INVESTING ACTIVITIES
Capital expenditures (34,872) (41,817)
Proceeds from sale of property and equipment 742 263
Investments in and advances to affiliates (9,370) (7,359)
Proceeds from sale of affiliate stock - 31,794
Other (1,169) (508)
------------ ------------
Net cash for investing activities (44,669) (17,627)
============ ============
FINANCING ACTIVITIES
Net proceeds (repayments) from long-term debt 15,731 (4,750)
Investment and advances from minority interest - 4,482
Redemption of minority interest in subsidiary (946) -
Common stock issuance 210 604
Dividends paid (3,079) (3,063)
------------ ------------
Net cash from (for) financing activities 11,916 (2,727)
============ ============
Effect of foreign exchange rate changes on cash (346) (128)
------------ ------------
Increase (decrease) in cash and cash equivalents 271 (8,891)
Cash and cash equivalents, beginning of period 4,153 15,459
------------ ------------
Cash and cash equivalents, end of period $ 4,424 $ 6,568
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DONNELLY CORPORATION
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
NOTE A---BASIS OF PRESENTATION
The accompanying unaudited condensed combined consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2000,
should not be considered indicative of the results that may be expected for the
year ending December 31, 2000. The combined consolidated balance sheet at
December 31, 1999, has been taken from the audited combined consolidated
financial statements and condensed. The accompanying condensed combined
consolidated financial statements and footnotes thereto should be read in
conjunction with the Company's report on Form 10-K for the six months ended
December 31, 1999.
Effective July 4, 1999, the Company changed the date for the end of its fiscal
year from the Saturday nearest June 30 to December 31. The Company's fiscal
quarters end on the Saturdays nearest March 31, June 30 and September 30. All
year and quarter references relate to the Company's fiscal year and fiscal
quarters, unless otherwise stated.
Also in 1999, the Company changed the fiscal year ends of its German and Spanish
subsidiaries from May 31 to December 31. Prior to this change, these
subsidiaries reported their results of operations on a one-month lag. The
results of operations for the three- and nine-month periods ended October 2,
1999, include the results for these subsidiaries for the three and nine months
ended August 31, 1999, while the current year includes the results for the three
and nine months ended September 30, 2000.
NOTE B --- INVENTORIES
Inventories consist of:
<TABLE>
September 30, December 31,
(In thousands) 2000 1999
-------------- ------------------ --------------------
<S> <C> <C>
Finished products and work in process $ 17,616 $ 18,529
Raw materials 34,912 31,863
------------------ --------------------
$ 52,528 $ 50,392
================== ====================
</TABLE>
6
<PAGE>
NOTE C --- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for each period reported:
<TABLE>
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------
September 30, October 2, September 30, October 2,
In thousands, except per share data 2000 1999 2000 1999
----------------------------------------- ------------------ ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Income before cumulative effect of
change in accounting principle $ 631 $ 10,933 $ 14,542 $ 22,064
Less: Preferred stock dividends (10) (10) (30) (30)
------------------ ----------------- ------------------ ----------------
Income from continuing operations
available to common shareholders $ 621 $ 10,923 $ 14,512 $ 22,034
================== ================= ================== ================
Weighted-average shares 10,173 10,135 10,163 10,111
Plus: Effect of dilutive stock
Options 17 43 17 34
------------------ ----------------- ------------------ ----------------
Adjusted weighted-average
Shares 10,190 10,178 10,180 10,145
================== ================= ================== ================
Basic EPS
Income before cumulative
effect of change in
accounting principle $ 0.06 $ 1.08 $ 1.43 $ 2.18
Cumulative effect of change in
accounting principle -- (0.10) -- (0.10)
------------------ ----------------- ------------------ ----------------
Net income $ 0.06 $ 0.98 $ 1.43 $ 2.08
================== ================= ================== ================
Diluted EPS
Income before cumulative
effect of change in
accounting principle $ 0.06 $ 1.07 $ 1.43 $ 2.17
Cumulative effect of change in
accounting principle -- (0.10) -- (0.10)
-------------------------------------------------------------------------
Net income $ 0.06 $ 0.97 $ 1.43 $ 2.07
================== ================= ================== ================
</TABLE>
7
<PAGE>
NOTE D---COMPREHENSIVE INCOME
Comprehensive income includes net income and all changes to shareholders'
equity, except those due to investments by owners and distributions to owners.
Comprehensive income consists of the following (in thousands):
<TABLE>
Three Months Ended Nine Months Ended
--------------------------------------- -------------------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------------- ------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net income $ 631 $ 9,923 $ 14,542 $ 21,054
Other comprehensive income (loss):
Foreign currency translation
and transaction adjustments (2,940) 1,203 (3,203) (3,276)
Reclassification adjustment
for net gain on securities
available for sale included
in net income -- -- -- (3,216)
------------------- ------------------- ------------------ -----------------
Comprehensive income (loss) $ (2,309) $ 11,126 $ 11,339 $ 14,562
=================== =================== ================== =================
</TABLE>
Translation and transaction adjustments are recorded directly in a component of
shareholders' equity in the accompanying Condensed Combined Consolidated Balance
Sheets. These result from changes in the foreign currency translation
adjustments of the Company's net investments in its foreign subsidiaries, as
well as foreign currency denominated long-term advances to affiliates caused by
fluctuations in exchange rates. Prior to the first quarter of calendar 1999, the
Company's investment in VISION Group plc ("VISION Group") was accounted for at
fair value in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt
and Equity Securities," with unrealized gains and losses reported directly in a
component of shareholders' equity. In the first quarter of calendar 1999, the
Company sold its interest in VISION Group which caused the previously unrealized
gain to be realized (see also Note G). The Company had total accumulated other
comprehensive losses of $(16.4) million and $(11.2) million at September 30,
2000 and December 31, 1999, respectively.
8
<PAGE>
NOTE E---SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
Nine Months Ended
-------------------------------------------
(In thousands) September 30, October 2,
2000 1999
------------------- --------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 4,328 $ 3,861
Income taxes 6,868 2,595
Non-cash financing and investing activities:
Non-cash assets received, net of
liabilities assumed, as part of the sale
of the 50% interest in Lear Donnelly
Overhead Systems, LLC (See Note G) $ -- $ 4,133
</TABLE>
NOTE F---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 two 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 accounting polices of the reportable
operating segments are the same as those described in the summary of significant
accounting policies described in Note 1 - Summary of Significant Accounting
Policies, in the Company's 1999 Annual Report. 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
headquarters 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.
9
<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>
Three months ended September 30, 2000:
Revenues................................ $ 128,595 $ 54,214 $ 10,811 $ (936) $ 192,684
Segment profit (loss)................... 9,606 (996) 2,101 -- 10,711
Nine months ended September 30, 2000:
Revenues................................ $ 421,747 $ 200,929 $ 41,822 $ (6,918) $ 657,580
Segment profit.......................... 42,809 8,782 8,180 -- 59,771
Three months ended October 2, 1999:
Revenues................................ $ 120,413 $ 62,599 $ 27,132 $ (1,227) $ 208,917
Segment profit.......................... 10,874 1,505 1,896 -- 14,275
Nine months ended October 2, 1999:
Revenues................................ $ 397,914 $ 203,335 $ 87,858 $ (3,917) $ 685,190
Segment profit.......................... 41,700 3,771 4,157 -- 49,628
</TABLE>
* Other segments category includes the Company's automotive joint ventures and
North American non-automotive businesses.
10
<PAGE>
Reconciliation's of the totals reported for the operating segments' profit to
consolidated income (loss) before income taxes in the combined consolidated
financial statements is shown below:
<TABLE>
Three Months Ended Nine Months Ended
------------------------------------- ----------------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------------ ----------------- ------------------- --------------
<S> <C> <C> <C> <C>
Segment profit from reportable segments............ $ 8,610 $ 12,379 $ 51,591 $45,471
Segment profit from other segments................. 2,101 1,896 8,180 4,157
Interest, net...................................... (1,456) (1,119) (4,111) (4,600)
Restructuring and other charges.................... -- -- -- (8,777)
Depreciation and amortization...................... (6,894) (6,601) (22,367) (16,323)
Gain on sale of equity investments................. -- 14,072 -- 19,202
Corporate and other expenses*...................... (5,532) (4,796) (17,360) (12,881)
------------------ ----------------- ------------------- --------------
Income (loss) before taxes on income (3,171) 15,831 15,933 26,249
================== ================= =================== ==============
</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.
Additional disclosures regarding the Company's products and services, geographic
areas, major customers and total assets are included in Note 4 - Nature of
Operations, in the Company's Form 10-K for the six months ended December 31,
1999.
NOTE G---INVESTMENTS IN AND ADVANCES TO AFFILIATES
On July 14, 2000, the Company purchased the remaining minority interest in
Donnelly Hohe Espana, S.A., for approximately $1.9 million. After this purchase
the Company owns approximately 29.8% of the Spanish entity directly and the
remainder through its German affiliate in Donnelly Hohe GmbH & Co. KG.
On September 14, 1999, the Company sold its 50% interest in Lear Donnelly
Overhead Systems, LLC ("Lear Donnelly") to Lear Corporation ("Lear"), its
partner in the joint venture, resulting in a one-time pretax gain of $14.1
million, or $0.82 per share after tax. As a result of the transaction, the
financial results of Lear Donnelly are no longer included in the Company's
financial statements after September 1999.
Lear Donnelly operated by selling its products to Lear and the Company, which in
turn sold them to the final customers. Due to the transfer to Lear of the
Company's interior lighting and trim sales contracts included in the joint
venture, net sales for the three- and nine-month periods ended September 30,
2000, declined approximately $20 million and $53 million, respectively, as
compared to the comparable periods in the prior year. Since the joint venture
operated at approximately break-even since its formation, the sale has not had
and is not expected to have a material impact on the Company's future results of
operations or financial position. However, current year gross profit and
operating margins as a percent of sales are favorably impacted by the sale.
11
<PAGE>
In April 1999, the Company formed Schott-Donnelly LLC Smart Glass Solutions
("Schott Donnelly"), a 50-50 joint venture with Schott North America
Manufacturing, Inc. ("Schott"), 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 is developing electrochromic glass for
automotive and architectural applications. The Company contributed certain
assets and liabilities upon the formation of the joint venture and received $2
million in cash, 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 first quarter of calendar 1999, the Company sold its remaining interest
in VISION Group for $7.6 million in proceeds and recognized a pretax gain of
approximately $5.1 million, or $0.33 per share after tax (see Note D).
The Company has advanced $22.1 million at September 30, 2000, and $14.6 million
at December 31, 1999, to its venture, Donnelly Electronics, Inc. ("Donnelly
Electronics"), under a promissory note that bears interest at market rates which
are reviewed periodically. The Company owns approximately 18.2% of Donnelly
Electronics and accounts for it on the cost method. Accordingly, the financial
results of Donnelly Electronics are not included in the Company's financial
statements.
NOTE H---RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of 1997, the Company recorded a $10.0 million pretax
restructuring charge, or $4.0 million at net income, for its European
restructuring plan. A reduction of $1.1 million was recorded to the
restructuring reserve in 1998 associated with changes to the restructuring plan.
In the third quarter of fiscal 1999, an $8.8 million pretax restructuring
charge, or $3.5 million at net income, was recorded for the 1999 European
turnaround plan. The Company has combined the remaining actions of the 1997
restructuring, which primarily consisted of the elimination and outsourcing of
redundant operations in Germany, with the new European turnaround initiative.
The Company is also funding approximately $3.3 million for the construction of
shipping and warehousing facilities, relocation of employees and new material
handling and storage equipment associated with the turnaround plan. These costs
do not qualify as restructuring under EITF 94-3 and therefore are included in
the Company's capital expenditures and operating expenses. As of September 30,
2000, approximately 90% of the cash flows required to complete these facilities
were funded, with the remaining expenditures expected to be substantively
completed by the end of the year, the majority of which will be capitalized.
Cumulative restructuring activity is as follows:
<TABLE>
Accrued
Restructuring
Costs at
In thousands Original Fiscal 1999 Amounts September 30,
Accrual Accrual Utilized (1) 2000
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Employee severance and termination benefits............ $ 9,965 $ 7,426 $ 10,992 $ 6,399
Write down of long-lived assets........................ -- 1,351 858 493
-------------------------------------------------------------------
Restructuring Total............................... $ 9,965 $ 8,777 $ 11,850 $ 6,892
===================================================================
</TABLE>
12
<PAGE>
(1) The Company has terminated 182 employees under the plan. In addition, the
Company has experienced a net reduction of approximately 71 employees in
Germany through natural attrition. Amounts utilized include an adjustment
of $1.1 million to the restructuring reserve in 1998 associated with
changes to the restructuring plan and the impact of foreign currency
changes.
While the Company's EAO segment achieved improved nine-month performance
year-over-year, operational results in Germany remain at a net operating loss.
Management is focussing on actions to enhance improvements with the German
operations and a revised plan will be completed by the end of 2000.
NOTE I---COMMITMENTS AND CONTINGENCIES
The Company's vehicle manufacturing customers (VMs) offer warranties to new
vehicle purchasers which cover the repair and replacement of defective parts on
their vehicles for a specified period of time. Traditionally, the majority of
the Company's VMs have borne the cost associated with such warranty programs,
including costs related to the repair and replacement of parts supplied to the
vehicle manufacturer by the supplier. VMs are increasingly requiring their
outside suppliers to guarantee or warrant their products. The Company's warranty
responsibility is currently governed by the terms and conditions with each
customer, which vary from customer to customer, although most require that the
Company make certain that its products are in conformity to specifications and
free from defect. Depending on these terms, a VM might seek to hold the Company
responsible for some or all of the repair or replacement costs of such products
when the product did not perform as represented. The Company accrues for such
claims when events exist that make the loss probable and the loss can be
reasonably estimated. Because this has been a recent trend in the industry, the
Company cannot assure that adjustments will not be required based on actual
experience or change in industry expectations. In addition, adjustments to
established reserves between segments may be necessary due to changes in
management's estimates and industry conditions. Adjustments to the reserves
would impact the results of the Company's operating segments, however, should
not negatively impact the combined consolidated results of the Company.
During the three-month period ended September 30, 2000, an adjustment of
established warranty reserves occurred in which $2.3 million, pretax, was
transferred from NAAO to the Company's European operations.
13
<PAGE>
ITEM 2. DONNELLY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION SECOND QUARTER REPORT FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
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 operate; (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)
fluctuations in foreign currencies; (vii) material changes with respect to
management's estimates that affect the reported assets, liabilities and
contingencies of the Company and (viii) other risks and uncertainties. The
Company does not intend to update these forward-looking statements.
OVERVIEW
Effective July 4, 1999, the Company changed the date of its fiscal year end from
the Saturday nearest June 30 to December 31. Accordingly, comparisons of
operating results are analyzed utilizing the comparable calendar period. The
Company's fiscal quarters end on the Saturdays nearest March 31, June 30 and
September 30. The three- and nine-month periods ended September 30, 2000 and
October 2, 1999, each included 13 and 39 weeks, respectively. All year and
quarter references relate to the Company's fiscal years and fiscal quarters,
unless otherwise stated.
Also in 1999, the Company changed the fiscal year ends of its German and Spanish
subsidiaries from May 31 to December 31. Prior to this change, these
subsidiaries reported their results of operations on a one-month lag. The
results of operations for the three- and nine-month periods ended October 2,
1999, include the results for these subsidiaries for the three and nine months
ended August 31, 1999, while the current year includes the results for the three
and nine months ended September 30, 2000.
The Company's net sales and net income are subject to significant fluctuations
attributable primarily to production schedules of the Company's major automotive
customers. These factors cause results to fluctuate from period-to-period and
year-to-year. The comparability of results on a period-to-period basis is also
affected by the formation and disposition of subsidiaries, joint ventures and
alliances, and acquisitions and investments in new product lines. In addition,
the Company has strong product content on light trucks, including sport utility
vehicles ("SUVs"), as compared to automobiles.
14
<PAGE>
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.
Mergers, Joint Ventures and Sale of Investments
In September 1999, the Company sold its 50% interest in Lear Donnelly Overhead
Systems, LLC ("Lear Donnelly") to Lear Corporation ("Lear"), its partner in the
joint venture. The Company's equity in the financial results of Lear Donnelly is
no longer included in the Company's financial statements after September 1999.
Lear Donnelly operated by selling its products to Lear and the Company, which in
turn sold them to their final customers. Due to the transfer to Lear of the
Company's interior lighting and trim sales contracts included in the joint
venture, net sales for the three-and nine-month period ended September 30, 2000,
declined approximately $20 million and $53 million, respectively, as compared to
the comparable periods in the prior year. Since the joint venture operated at
approximately break-even from the time of its formation, the sale has not had
and 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 the current three-and nine-month periods have been, and for future periods
should be, favorably impacted.
In April 1999, the Company formed Schott-Donnelly LLC Smart Glass Solutions
("Schott Donnelly"), a 50-50 joint venture with Schott North America
Manufacturing, Inc. ("Schott"), 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 is developing electrochromic glass for
automotive and architectural applications (see Note G).
In the second calendar quarter of 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 a 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 the Company's worldwide electrochromic mirror production.
In the first calendar quarter of 1999, the Company sold its remaining interest
in VISION Group plc ("VISION Group"). The Company received $7.6 million in
proceeds and recognized a combined pretax gain of approximately $5.1 million, or
$0.33 per share, after tax.
RESULTS OF OPERATIONS
Comparison of the three- and nine-month periods ended September 30, 2000, and
October 2, 1999
North American Automotive Operations ("NAAO")
For the three-month period ended September 30, 2000, NAAO net sales increased
6.8%, or $8.2 million, compared to the same period in calendar 1999. NAAO net
sales increased 6.0% for the nine-month period ended September 30, 2000,
compared to the same period in calendar 1999. North American car and light truck
build was flat for the three-month period and increased approximately 3.5% for
the nine-month period when compared to the same periods in 1999.
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NAAO gross profit margins were down slightly for the three- and nine-month
periods ended September 30, 2000, compared to the same periods in the previous
calendar year. The slight decrease in gross profit margin is due primarily to
higher launch costs associated with new electrochromic and electronic mirror
products and the impact of OEM scheduling, including plant shutdowns and reduced
production levels in the quarter. The success of the Company in maintaining
gross profit margins is dependent upon its ability to successfully launch new
booked business and to offset continued customer pricing pressures. In addition,
the Company may experience changes in gross profit margins based on its mix of
lower-margin and higher-margin products. It is expected that future changes in
revenue will be balanced between higher- and lower-margin products.
The Company's North American operating margins were below previous year levels
for both the three- and nine-month periods compared to the same periods in the
previous calendar year. Higher sales were offset by slightly lower gross profit
margins and higher operating expenses during the period, including increased
research and development expenses for the support of new programs launching
during the second half of calendar 2000 and 2001. Higher selling, general and
administrative expenses were caused by the previously announced increased
investments in information technology and depreciation for recently introduced
software for manufacturing, distribution and administration.
European Automotive Operations ("EAO")
EAO net sales decreased 13.4% and 1.2% for the three- and nine-month periods
ended September 30, 2000, compared to the same periods in calendar 1999,
respectively. The significant strengthening of the dollar compared to the euro
significantly reduced the reported sales level for Europe. Stated in local
currencies, EAO net sales increased approximately 2.1% and 13.8% for the three-
and nine-month periods ended September 30, 2000, compared to the same periods in
calendar 1999, respectively. The increase in net sales is primarily due to
products launched in calendar 1999 running at full production volumes and the
elimination of the one-month lag in consolidating the Company's subsidiaries in
Germany and Spain. Western European car production increased by approximately
3.3% in the first nine months of 2000 compared to the same period last year.
EAO gross profit margins decreased during both the three- and nine-month periods
ending September 30, 2000 compared to the comparable periods of calendar 1999,
primarily due to above plan product launch costs and warranty reserve adjustment
(See Note I). This decrease was partially offset by the elimination of the
one-month lag in consolidating the Company's subsidiaries in Germany and Spain.
EAO achieved positive gross profit margins for the nine-month period.
In the first calendar quarter of 1999, an $8.8 million pretax restructuring
charge, or $3.5 million at net income, was recorded for an EAO turnaround plan
(see Note H).
EAO operating income, as adjusted for the restructuring charge, was improved for
the nine-month period ended September 30, 2000, compared to the same period in
the previous year. Stronger sales and lower selling, general, and administrative
expenses contributed to the improved operating margins during the nine-month
period.
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Company
Net sales were $192.7 million and $657.6 million for the three- and nine-month
periods ended September 30, 2000, respectively, compared to $208.9 million and
$685.2 million in the same periods last year. This represents a decrease of 7.8%
and 4.0%, respectively. Changes in foreign currency exchange rates contributed
significantly to the decrease in net sales for the three- and nine-month
periods. Adjusted for foreign exchange rate fluctuations and the impact of the
reduction in net sales associated with Lear Donnelly, the Company's net sales
increased 5.8% and 9.0% for the three- and nine-month periods, respectively.
Suppliers in the automotive industry continue to experience significant price
pressure from their customers. While this pressure continues to squeeze the
Company's gross profit and operating margins, it did not have a material impact
on net sales for the three- and nine-month periods reported. The impact of price
pressures on gross profit margins is dependant upon the ability of the Company
to offset these decreases by improvements in purchase material prices, product
design changes and overall operations productivity.
Gross profit margin for the three- and nine-month periods ended September 30,
2000, was 13.1% and 16.0% compared to 14.1% and 14.9%, respectively, in the
comparable periods from last year. The improved year-to-date gross profit margin
is primarily due to the sale of Lear Donnelly. The decline in the three-month
period percentage, however, is attributable to the negative impact of OEM
scheduling and increased costs associated with new product launches and product
mix. The Company's Information Products subsidiary also contributed favorably to
the Company's gross profit for the first nine months of 2000 compared to the
first nine months of calendar 1999.
Selling, general and administrative expenses were $18.4 million and $60.1
million, or 9.6% and 9.1% of net sales, for the three- and nine-month periods
ended September 30, 2000, compared to $18.8 million and $61.5 million, or 9.0%
and 9.0% of net sales for the three- and nine-month periods ended October 2,
1999. These expenses remained relatively flat with previous year levels due to
management's focus on cost management both in North America and Europe, despite
the continued investment in information technology. Lower exchange rates also
contributed to the decrease in the expense for the nine-month period.
Research and development expenses were $9.3 million and $26.9 million, or 4.8%
and 4.1% of net sales, respectively, for the three- and nine-month periods ended
September 30, 2000, compared to $7.8 million and $23.0 million, or 3.7% and 3.4%
of net sales, respectively, in the comparable periods from last year. The
increase in current year expenses is primarily due to increased expenditures for
value-added technologies including electrochromic, electronics and lighting.
Additionally, the lower research and development expenses for the nine months
ended October 2, 1999, were due to timing of engineering related billings.
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Operating income (loss) was $(2.4) million and $18.4 million for the three- and
nine-month periods ended September 30, 2000, compared to $2.8 million and $8.7
million for the same periods last year. Adjusted for the impact of the 1999
restructuring charge, operating income improved by $0.9 million, or from 2.6% of
net sales for the nine months ended October 2, 1999, to 2.8% of net sales for
the nine months ended September 30, 2000. The decline in operating income for
the three-month period is primarily the result of unfavorable OEM scheduling,
increased product launch costs, product mix and increased expenditures for R&D.
Nine-month operating income improved primarily due to improved gross profit
margins and positive performance of the Company's Information Products
subsidiary.
Interest expense was $2.1 million and $6.0 million for the three- and nine-month
periods ended September 30, 2000, compared to $1.4 million and $5.1 million for
the same periods last year. Interest expense increased primarily due to higher
levels of capitalized interest in the prior year, increased debt levels and
higher interest rates during calendar year 2000.
In the first calendar quarter of 1999, the Company sold its remaining interest
in VISION Group. The Company received $7.6 million in proceeds and recognized a
combined pretax gain of approximately $5.1 million, or $0.33 per share, after
tax. In the third calendar quarter of 1999, the Company recognized a one-time
pretax gain of $14.1 million associated with the sale of its investment in Lear
Donnelly, (See Note G).
Other (income) expense, net was $(0.1) million and $0.1 million for the three-
and nine-month periods ended September 30, 2000, compared to $0.05 million and
$(2.2) million, respectively, for the comparable periods last year. The decrease
for the nine-month period is primarily attributable to a $2 million pretax gain,
or $0.13 per share after tax recorded on the formation of the Schott Donnelly
joint venture in the second calendar quarter of 1999 (see Note G) and lower
exchange rates in the current year. This decrease was partially offset by
increased interest and royalty income in the current year.
The Company's effective tax rate was approximately 50% and 22.5% for the three-
and nine-month periods compared to 37.3% and 30.8% in the same respective
periods of 1999. The lower effective tax rate in the January through September
period of 2000 was primarily due to an income tax benefit from prior year North
American export sales. The Company's effective tax rate also varies based on the
level and mix in pretax earnings (losses) in countries with varying effective
tax rates, availability of tax benefits and unusual pretax gains or losses.
The Company has recorded $15.4 million and $14.6 million of deferred tax assets
on foreign non-expiring net operating loss carry-forwards at September 30, 2000
and December 31, 1999, respectively. A significant portion of the loss
carry-forwards resulted from the European restructuring charges. These tax
assets are expected to be realized based on improvements from the restructuring
initiative, which is expected to be substantially complete by the end of
calendar 2000, and continuous improvement in overall operational earnings from
the implementation of the Company's production system throughout Europe. The
enactment of reductions to German tax rates are anticipated to reduce these
assets in the fourth quarter of calendar 2000.
Minority interest in net loss of subsidiaries was $1.3 million and $1.2 million
for the three- and nine-month periods ended September 30, 2000, compared to $0.6
million and $3.8 million for the same periods last year, respectively. The
previous year minority interest in net loss of subsidiary was impacted by the
restructuring charge taken at the Company's German subsidiary in the first
quarter of
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1999 and the consolidation of the financial statements of Varitronix EC starting
in the second quarter of 1999.
Equity in earnings of affiliated companies in the current year improved by $0.9
million from the first nine months of calendar 1999. Earnings of $1.0 million
were recorded in the first nine months of 2000 compared to $0.1 million for the
comparable period last year. The Company's Brazilian joint venture, while still
operating at a loss, improved compared to the same period last year. The
Company's joint ventures in China continue to remain positive. Equity in losses
from the Company's Lear Donnelly joint venture impacted the first nine months of
1999. However, due to the sale of the Company's interest in this joint venture,
the Company's equity in the financial results of Lear Donnelly is no longer
included in the Company's financial statements after September 1999.
The Company accrues for claims arising from warranties offered by the Company's
vehicle manufacturing customers to new vehicle purchasers which cover the repair
and replacement of defective parts on their vehicles for a specified period of
time. The Company cannot assure that adjustments will not be required based on
actual experience or change in industry expectations, (See Note I for further
discussion).
The Company is committed to improving shareholder value with a strategic plan
focused on the following key areas: developing core automotive products,
primarily by increasing dollar content per vehicle through the expansion of
market share of existing products; introduction of new technologies and products
and increasing volume through penetration into new and emerging markets;
improving the overall operating performance of the Company's European
Operations; extending the Company's capabilities in value-added electronics
technologies; and repositioning non-core businesses, as appropriate, through
merger or divestiture.
The Company believes that these strategic initiatives have established the
foundation for the Company's ability to improve shareholder value. Excluding
unusual and non-recurring items, the unaudited net income from operations for
the nine-month period ending September 30, 2000, was $14.5 million, a record for
the Company. These financial developments combined with the strong commercial
developments for new orders booked and the continued introduction of advanced
technologies support the Company's ability to grow shareholder value. Management
remains committed to the overall strategies of continued implementation of the
Company's operational systems, introducing new and innovative technologies,
focusing on core businesses and developing and enabling highly skilled people.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 1.2 on September 30, 2000 and December 31, 1999.
Working capital was $27.0 million on September 30, 2000, compared to $25.3
million at December 31, 1999. Increases in accounts receivable were offset by
continued benefits of an active working capital management program and seasonal
accrual increases. The increase in accounts receivable was partially offset by
increased cash receipts in North America due to timing of key customer payments.
At September 30, 2000, and December 31, 1999, $30.0 million and $38.9 million,
respectively, had been sold under the Company's accounts receivable
securitization agreement. Proceeds received under this agreement are used to
reduce revolving lines of credit. The sales are reflected as a reduction of
accounts receivable and an increase to operating cash flows. The agreement
expires in December 2000, however
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it 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 for the nine months ended September 30, 2000, and October
2, 1999, were $34.9 million and $41.8 million, respectively. Capital spending
was primarily to support new business orders, the ramp up of new electrochromic
and electronic mirror products, information technology, the 1999 European
turnaround plan and continuous improvement activities of the Company. Capital
spending for the next twelve to eighteen months is expected to remain near
current spending levels to support these programs, in addition to the
implementation of new manufacturing, distribution and administrative information
systems globally.
The Company announced significant restructuring plans in fiscal 1997 and 1999 to
improve the overall profitability of EAO (see Note H). The remaining reserve
balance for these plans was $6.9 million at September 30, 2000. While the
Company's EAO Segment achieved improved nine-month performance year-over-year,
operational results in Germany remain at a net operating loss. Management is
focussing on actions to enhance improvements with the German operations and a
revised plan will be completed by the end of 2000. This revised plan will
include an assessment of overall reserve balances.
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 existing credit facilities. The Company also
considers equity offerings to properly manage the Company's total capitalization
position. The Company considers, from time to time, new joint ventures,
alliances, divestitures and acquisitions, the implementation of which could
impact the liquidity and capital resource requirements of the Company. For the
nine-month period ended September 30, 2000, the Company made $10.3 million of
investments in and advances to affiliates, including the redemption of a
minority interest in a subsidiary.
The Company's $160 million multi-currency global revolving credit agreement had
borrowings against it of $58.5 million and $42.5 million as of September 30,
2000, and December 31, 1999, respectively.
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
period-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.
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 in the event of nonperformance by any
party under these agreements is not material.
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Recently Issued Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," 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
its results of operations or financial position.
No other recently issued accounting standards are expected to have a material
impact on the Company.
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 has commenced conversion of its European operations from national
currency to the euro. The change in functional currency is proceeding as planned
and is expected to be completed in the middle of calendar 2001.
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 its
results of operations or financial position.
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, foreign currency transactions and
operating results of the Company's foreign affiliates. The Company holds
derivative instruments, including interest rate swaps and forward foreign
currency contracts. Derivative instruments used by the Company in its hedging
activities are viewed as risk management tools and are not used for trading or
speculative purposes. Analytical techniques are used to manage and monitor
foreign exchange and interest rate risk and include market valuation. The
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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 Note 1 - Summary of Significant Accounting Policies,
in the Notes to the Combined Consolidated Financial Statements, which is
included in Item 8 of the Form 10-K report for the six months ended December 31,
1999. Additional information relating to financial instruments and debt is
included in Note 9 - Financial Instruments and Note 7 - Debt and Other Financing
Arrangements, which are also included in Item 8 of the Form 10-K report for the
six months ended December 31, 1999.
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. A
predominant 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 fluctuations in other currencies including: Brazilian reals, British pounds,
Chinese renminbi, European euros, Japanese yen, Malaysian ringgit and Mexican
pesos. The Company is also exposed to potential costs associated with
repatriation timing and risk from some of its foreign affiliates. The fair value
of the foreign currency contracts outstanding has been immaterial each of the
last two years and the transition period.
The Company's cash position includes amounts denominated in foreign currencies.
The Company manages its worldwide cash requirements considering available funds
amongst its subsidiaries and the cost effectiveness with which these funds can
be accessed. The repatriation of cash balances from certain of the Company's
affiliates could have adverse tax consequences. However, those balances are
generally available without legal restrictions to fund ordinary business
operations. The Company has and will continue to transfer cash from those
affiliates to the parent and to other international affiliates when it is cost
effective to do so.
The Company manages its interest rate risk in order to balance its exposure
between fixed and variable rates while attempting to minimize interest costs.
Nearly half of the Company's long-term debt is fixed and an additional $25
million is effectively fixed through interest rate swaps.
See the Company's Form 10-K for the six months ending December 31, 1999, Item 7
(a), for quantitative and qualitative disclosures about market risk as of
December 31, 1999. There have been no
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material changes in the nature of the market risk exposures facing the Company
since December 31, 1999.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 30, 2000, the Company filed a complaint against Industrias Arteb S.A.
("Arteb") and Tocantins Participacoes S/C LTDA ("Tocantins") in Central Civil
Court in Sao Paulo, Brazil. The complaint alleges that Arteb and Tocantins,
Donnelly's partner in the joint venture Donnelly/Arteb LTDA (the "Joint Venture
Company"), have failed to support the business as required by the Joint Venture
Agreement and that the Company has a right to purchase all of their interest in
the Joint Venture Company for an amount equal to the book value of Arteb's and
Tocantins' interest in the Joint Venture Company. No answer has yet been filed
to the complaint. The Company believes that this litigation will not have a
material adverse effect on the Company. On October 1, 2000 the Company reached a
tentative agreement to purchase Arteb's and Tocantins' interest in the Joint
Venture.
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 or liquidity,
individually and in the aggregate.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 10.1 First amendment dated October 20, 2000, to the January 1, 1997
Donnelly Corporation Deferred Compensation Plan.
Exhibit 27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.
DONNELLY CORPORATION
Registrant
Date: November 10, 2000 /s/ J. Dwane Baumgardner
J. Dwane Baumgardner
(Chairman, Chief Executive
Officer, and President)
Date: November 10, 2000 /s/ Scott E. Reed
Scott E. Reed
(Senior Vice President, Chief
Financial Officer)
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Exhibit 10.1
FIRST AMENDMENT TO THE DONNELLY CORPORATION
DEFERRED COMPENSATION PLAN
The First Amendment to the January 1, 1997 Donnelly Corporation Deferred
Compensation Plan (the "Plan") is adopted by Donnelly Corporation, a Michigan
corporation (the "Company") with respect to the following:
- The Company adopted the Plan in 1996.
- The Company wishes to amend the Plan.
NOW, THEREFORE, the Plan is amended as follows:
In order to make the Donnelly Corporation Deferred Compensation Plan
consistent with a fiscal year of January 1 through December 31, and to
accommodate this transition year, the following changes are being made to this
Plan.
1. The definition of "Plan Year" in Section 2.12 shall be the 12 consecutive
month period between January 1 and December 31st.
2. Section 4.1 is changed to read as follows:
Annual Incentive Award Deferral Election: No later than September 15th of
the Plan Year in which the annual incentive award under the Donnelly Corporation
Executive Compensation Plan is earned, each Eligible Employee may irrevocably
elect, by completing and executing a Deferred Compensation Agreement and filing
it wit the Administrator, to defer any portion up to one hundred percent (100%)
of his/her annual incentive award to be earned for that year. This election must
be made annually. FOR THE YEAR 2000 ONLY, THIS ELECTION DATE WILL BE OCTOBER
23RD OF 2000.
3. Section 4.2 is changed by adding the following sentence to the end of that
section:
FOR THE FOURTH QUARTER OF 2000 (OCTOBER THROUGH DECEMBER) THE ELECTION MUST
BE EXECUTED AND FILED WITH THE ADMINISTRATOR BY OCTOBER 23rd OF 2000. FOR THIS
QUARTER ONLY, ANY ELECTION, MODIFICATION OR REVOCATION SHALL BE EFFECTIVE AS OF
THE FIRST PAYROLL AFTER THE ELECTION.
4. Section 4.3 is changed to read as follows:
Period for Which Deferral Election is Effective: A Participant's deferral
election under Section 4.1 with respect to annual incentive award shall be
effective only for the Plan Year specified in the Deferred Compensation
Agreement. A participant must file a separate Deferred Compensation Agreement by
September 15 of each subsequent Plan Year in order to make annual incentive
award deferrals for that Plan Year. A participant's election to defer annual
base
<PAGE>
salary shall remain in effect until modified or revoked as provided in Section
4.2. FOR THE YEAR 2000 ONLY, THIS ELECTION DATE WILL BE OCTOBER 23RD OF 2000.
IN WITNESS WHEREOF, the Board of Directors has caused this Amendment to be
adopted this 20th day of October, 2000.
DONNELLY CORPORATION
By __________________________________
Its Chief Executive Officer
(Corporate Seal)
Attest:
By ___________________________
Its Secretary
