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 including forced price reductions, (iv) market development of specific products of the Company, including electrochromic mirrors, (v) whether the Company successfully restructures its European operations, (vi) fluctuations in foreign currencies 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"), incorporated in Michigan in 1936, is a technology-driven, customer-focused, growth- oriented, global supplier to the automotive and information display industries 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 vision systems, modular window systems and handle products, which incorporate increasing electronic capabilities. The Company has experienced approximately a 14% compounded annual growth rate in net sales since fiscal 1989 due to its strong positions in the Company's traditional product markets and the acquisition in fiscal 1995 of Donnelly Hohe GmbH & Co. KG ("Donnelly Hohe"). Management believes that based on information available, the Company is one of the largest exterior rearview mirror manufacturers in the world and has the largest market share in the U.S. for interior rearview prismatic mirrors and modular window systems. During 2001, the Company will be transitioning to a global product based management structure split into two main operating groups: Electronic Systems and Exterior Systems. The Company believes that this organizational evolution will help position itself to achieve even stronger performance with its products in the global marketplace.
The Company has been following a strategic plan designed to improve shareholder value by focusing on the following key areas:
1.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 increasing volume through penetration into new and emerging markets; 2.Improving the overall operating performance of the Company's European Operations; 3.Extending the Company's capabilities in value-added electronics technologies.
1. Developing Core Automotive Products:
The Company's core automotive product offerings have experienced approximately a 14% compounded annual growth rate in net sales since fiscal 1989. Adjusted for foreign currency exchange rates and the impact of the reduction in net sales associated with Lear Donnelly, the Company experienced a growth in
sales of approximately 7% for the year ended 2000. 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 ("EC") mirrors, bonded hardware modular window systems and door handle products; and through acquisitions, primarily of Donnelly Hohe in Europe. The Company also benefits from content on strong selling vehicles such as the DaimlerChrysler minivan, the Ford Expedition, the Ford Taurus, and the General Motors' compact sport utility vehicles ("SUVs") in North America as well as the Volkswagen Passat and Volkswagen Polo in Europe. The continued penetration of the Company's products in existing and new markets and its offerings of value-added innovative technologies are an important strategy to the Company's overall financial performance.
The continued introduction of new advanced technologies is part of the Company's strategy. Over the past five years, the Company has introduced many new mirror technologies including various lighting, electronic and mechanical features that improve the overall safety and functionality of the vehicle's mirror system. The Company received a major order for business integrating advanced electronic features into interior rearview mirrors (both base prismatic and EC mirrors) to support General Motors' OnStar® system. The first commercial versions of this telematics system were launched during the second half of 2000. Management believes that the Company is the only company to integrate electronics into both prismatic and EC mirrors. Both kinds of mirrors may also include additional electronic features such as compass and temperature displays and precision interior map lighting. In November 1999, the Company introduced the Solid Polymer Matrix ("SPM™") technology to produce EC automatic-dimming rearview mirrors that the Company believes are more durable than competing products available on the market. A recent product offering is the Company's SmartRelease™ trunk release system, which uses advanced electronic sensors to detect heat and motion and automatically opens the trunk if it senses a person trapped inside. The Company has received an order from General Motors for the Company's SmartRelease™ system, which will debut on the 2002 Chevrolet Impala and Monte Carlo. General Motors has announced that automatic emergency trunk release systems will be included on all of their vehicles with trunks by 2003. The Company believes that the SmartRelease™system will be added to other customers' vehicle lines during 2002 and 2003. In modular windows, the Company has most recently developed flush surface window systems involving various bonding and encapsulation systems that allow for greater design flexibility and reduced cost to the automotive vehicle manufacturers. In addition, the Company recently commercialized technology for an integrated sliding window system popular in the light truck market segment. 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.
The global market position of the Company's automotive products has been enhanced through various operations in the emerging markets of Asia and South America. In Asia, the Company operates four joint ventures for the manufacture and sale of the Company's automotive products into the Asian and Australian markets; Varitronix EC (Malaysia) Sdn. Bhd. ("Varitronix EC") for EC mirror cells; Shanghai Donnelly Fu Hua Window Systems Company Ltd. ("Shanghai Donnelly Fu Hua") for window systems; Shunde Donnelly Zhen Hua Automotive Systems Co. Ltd. ("Shunde Donnelly Zhen Hua"); and Shanghai Donnelly Ganxiang Automotive Systems Co. Ltd. ("Shanghai Donnelly Ganxiang") for exterior mirror products. In South America, the Company operates Donnelly do Brasil LTDA. ("Donnelly do Brasil") for the manufacture and sale of interior, exterior and EC mirror products into this market. These operations provide the Company with key entries into emerging automotive markets, which are expected to have a combined overall rate of increase in industry automotive production greater than the markets in North America and Europe. See Item 1 (c) "Narrative Description of Business-Joint Ventures" for additional information concerning the Company's joint ventures.
As part of the Company's commitment to focus on its core businesses in recent years, the Company has executed actions to reposition its non-core businesses. Through these actions, the Company was able to generate positive cash flow and net gains to the Company, resulting in a strong return to shareholders for the investments made to develop these businesses. See Item 1(c) "Narrative Description of Business-Repositioning Non-Core Businesses" for a more detailed discussion of these actions. The Company continually assesses its strengths and weaknesses in relation to the direction of the respective industries represented by the Company's various investments.
2. Improving Operating Performance of European Operations:
During the past six 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 through market penetration of the Company's EC mirrors and modular window systems. Donnelly Hohe, based in Germany, serves many of the main auto producers in Europe. These include BMW, Renault, Volkswagen, Audi, Volvo, Opel and Ford in exterior mirrors. Donnelly Hohe also offers interior mirrors and certain non-automotive products through three operating facilities in Germany and one in Spain. The Company also offers its mirror and electronic products through operating facilities in Ireland and its modular window systems through its facility in France.
In February 1999, the Company announced a European restructuring plan ("the 1999 plan") based on a strategy 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 more customer focused structure, 2) consolidating two of the German manufacturing facilities; 3) implementing throughout Europe the Donnelly Production System, the Company's approach to lean manufacturing processes, and 4) re-aligning sales and engineering functions throughout Europe. An $8.8 million pre-tax restructuring charge, or $3.5 million at net income, was recorded for the 1999 plan, including $1.4 million for the impairment of assets and $7.4 million for anticipated incremental cash expenditures for the severance and voluntary retirement programs for approximately 200 production, production support, sales and engineering employees. In May 1997, the Company had recorded a $10.0 million pre-tax restructuring charge, or $4.0 million at net income, for the elimination of redundant operations, as well as, outsourcing of inefficient operations in Europe ("the 1997 plan"). A reduction of $1.1 million was recorded to the restructuring reserve in 1998 associated with changes to the 1997 plan. The Company included the remaining actions of the 1997 plan in the 1999 plan. As of December 31, 2000, the Company had terminated 197 employees under the combined plans. In addition, the Company has experienced a net reduction of approximately 76 employees through normal attrition.
As required by the generally accepted accounting principles for restructuring charges, the Company reduced its restructuring reserve by $3.8 million pre-tax, or $1.6 million at net income, in the fourth quarter of 2000. The reduction is attributable to (i) savings associated with higher than anticipated voluntary employee attrition and (ii) continuing developments within the market and operations, which have made uncertain the likely outcome of some aspects of the combined plans. The ending reserve balance of $3.2 million represents the costs associated with the remaining planned actions expected to be substantially completed during 2001. While the Company believes that further restructuring actions may be appropriate in Europe and it continues to evaluate these operations for improvements, the assessment of possible actions has not yet been completed.
Additionally, the Company anticipates a favorable impact from the change to a product based management structure. As part of this transition, expanded initiatives on supplier price-downs, increased value-added engineering and further reductions in operational overhead are being targeted in Europe. These continuing actions have proven successful in both North America and Europe in the past, and will be a crucial part of improving the performance in Europe.
3. Extending the Company's Electronics Capabilities:
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 package value-added features into new areas of the car. In response to this continued market development, in 1996, the Company invested in a new venture, Donnelly Electronics, Inc. ("Donnelly Electronics"), located in Holly, Michigan, which specializes in the design and manufacture of circuit board assemblies for a variety of electronics products and sub-assemblies. In February 2001, the Company acquired all of the outstanding equity of Donnelly Electronics, not then owned by the Company. In addition, in the first quarter of 2000, the Company purchased assets in Ireland, which will be operated by Donnelly Electronics, for the manufacture of electronic components in Europe. See Item 1 (c) "Narrative Description of Business-Joint Ventures" for a more detailed discussion of this venture. The Company believes that electronics represent a significant growth area for the Company.
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, powerfold modules, ground illumination features, electronic remote entry systems and other products. 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 EC 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 rearview mirror.
In November 1999, the Company announced a major new order for business in which the Company will package and integrate advanced electronic features into interior rearview mirrors to support General Motors' new OnStar® system. The Company began shipping product on this order in mid-2000 with the electronic content included in a mix of base prismatic and EC mirrors. Both kinds of mirrors also include additional electronic features such as compass and temperature displays and precision interior map lighting.
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 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-vision systems. This sophisticated camera system made its debut on the General Motors' Precept concept vehicle and represents the most technologically advanced rear-vision product that the Company has ever produced. The Company has been engaged in a research program with certain key customers for the development and commercialization of this technology. The Company has also begun displaying its VideoMirror™ line of electronic vision systems for vehicles that utilize advanced image processing and display technology to give drivers better views of their vehicles' interiors and exteriors.
A recent product offering is the Company's SmartRelease™ trunk release system, which uses electronic sensors to detect heat and motion and automatically open the trunk if it senses a person trapped inside. The SmartRelease™ will debut on the 2002 Chevrolet Impala and Monte Carlo. This technology marks an evolution in the auto industry's efforts to help make vehicles a safer environment. General Motors has announced that an automatic emergency trunk release system will be included on all of their vehicles with trunks by 2003. The SmartRelease™ system is more sophisticated than the manual emergency trunk release handles that the Company developed and currently supplies to auto-makers. The electronic sensors require very little movement on the part of a person trapped in a trunk to activate. The Company believes that it will secure additional orders of other key customers during 2001 and 2002 to also utilize the SmartRelease™ trunk release system.
The Company's net sales are subject to fluctuations in industry car and light truck build, primarily for North America and Europe. North American industry build has been particularly strong in calendar years 1998, 1999 and 2000. Adjusted for car and light truck build at standard industry volumes and the impact of the acquisition of Donnelly Hohe, the Company believes that new booked orders will be consistent with historical growth levels. In addition, the Company expects door handle product sales to increase due to the withdrawal of one of its major competitors from the market. Future booked sales for outside mirrors and inside mirror products with strong value-added content, handle products and products with innovative electronic capabilities, are expected to provide the main growth for the Company in the foreseeable future. Many of these new programs, such as Onstar®, have begun to be launched during late calendar 2000 and many more will be launching over the next 18 months. See Item 1 (b) "Financial Information About Industry Segments" and Item 1 (c) "Narrative Description of Business" for a more thorough discussion about the Company's product and market segmentation.
The Company is committed to improving shareholder value with a strategic plan focused on the following key areas: 1) developing core automotive products, primarily by increasing dollar content per vehicle through the expansion of market share of existing products; 2) improving the overall operating performance of the Company's European Operations; and 3) extending the Company's capabilities in value-added electronics technologies. 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 net income from operations for the twelve-month period ending December 31, 2000, was $18.9 million, a record for the Company for any fiscal year. The Company believes the combination of the strong commercial developments for new orders booked (initially launching in late calendar 2000) and the continued introduction of advanced technologies should support the Company's ability to continue growing 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.
ITEM 1(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has been managed primarily on a geographical basis. For 2000, the Company had two reportable segments: North American Operations ("NAO") and European Operations ("EO"). During 2001, the Company will be transitioning to a new corporate organization structure that will focus its worldwide business into two main operating groups: Electronic Systems and Exterior Systems. The Company believes that this organizational evolution will help position itself to achieve even stronger performance with its products in the global marketplace. See Note 4 to the Combined Consolidated Financial Statements under Item 8 of this Form 10-K for additional information regarding the Company's operating segments.
ITEM 1(c) NARRATIVE DESCRIPTION OF BUSINESS
FISCAL YEAR AND SEASONAL NATURE OF BUSINESS
Effective July 4, 1999, the Company changed the date of its fiscal year end from the Saturday nearest June 30 to December 31. The years ended December 31, 2000, July 3, 1999, and June 27, 1998, each consisted of 52, 53 and 52 weeks, respectively. The six-month periods ended December 31, 1999, and January 2, 1999, consisted of 26 and 27 weeks, respectively. The six-month period ended December 31, 1999, is referred to as the transition period. All year and quarter references relate to the Company's fiscal years and fiscal quarters, unless otherwise stated.
During the transition period, the Company also 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 Company's results of operations for the transition period ended December 31, 1999, include the results of these subsidiaries for the six months ended November 30, 1999.
The results of operations for the period of December 1 to December 31, 1999, for these subsidiaries were charged to retained earnings in order to report only six months of operating results. Cash flow activity for this same period is reflected as a single line item in the Combined Consolidated Statement of Cash Flows.
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 minivans and SUVs, as compared to automobiles. These factors cause results to fluctuate from period to period and year to year.
PRODUCTS, SERVICES, MARKETS AND METHODS OF DISTRIBUTION
Automotive Rear-Vision Systems
The Company began producing prismatic day/night mirror glass in 1939, and today manufactures a wide range of interior and exterior rearview mirror products and believes it is one of the world's largest producer of automotive rearview mirror systems.
Electrochromic Products. The Company has made significant investments in the development of solid-state, thin-film EC technology that has been commercialized for mirror applications and has potential use for various window applications. EC coatings allow the user to darken glass to the desired degree through the application of an electrical current to the coating.
The Company manufactures, distributes, markets, and sells EC 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 EC technologies for the automotive marketplace and has developed or licensed a number of technologies, of which several are already available for commercial use.
The Company produces GLAREFREE™ EC mirrors for Ford, Volkswagen, Audi, BMW, PSA, DaimlerChrysler, General Motors, 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 EC mirrors that industry sources expect to grow to $1 billion or greater. The Company believes it is the only exterior mirror manufacturer that is vertically integrated with full exterior EC cell manufacturing capability. With strong technologies to offer and having favorably settled the patent issues that had hampered its ability to compete prior to 1996, the Company has set, and is achieving ambitious goals for increasing its EC mirror market share in the years ahead. During the last twelve months the Company has significantly increased its production of EC mirrors, and is on track to approximately double EC volumes within the next twenty-four months.
In late 1999, the Company introduced the SPM™ technology to produce EC automatic-dimming rearview mirrors that the Company believes are more durable than competing products available on the market. Over time, the Company expects that most or all of its EC mirror products will be based on SPM™ technology. EC mirrors using the SPM™ technology began appearing on production vehicles in North America and Europe in 2000.
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"), one of the world's leading producers of specialty glass products. The joint venture is seeking to develop EC glass for automotive and architectural applications.
Interior Rearview Mirrors. The Company has a predominant share of the U.S. market for interior rearview prismatic mirrors and in calendar 2000 sold approximately 27 million complete units and prism mirror elements worldwide. The interior rearview mirror product line ranges from the basic day/night flip mirror to rear-vision systems that incorporate a variety of sophisticated electronic features into complex modular interior rearview mirror assemblies. The Company continues to design and market innovative
value-added features integrated into the rearview mirror such as lights, electronic compasses, temperature and other display technologies.
In November 1999, the Company announced a major new order for business in which the Company will package and integrate advanced electronic features into interior rearview mirrors as part of General Motors' new OnStar® system. The Company began shipping product on this order in mid-2000 with the electronic content included in a mix of base prismatic and EC mirrors. Both kinds of mirrors may also include additional electronic features such as compass and temperature displays and precision interior map lighting. Management believes that the Company is the only company with the manufacturing orders to incorporate all the electronics required into both prismatic and EC mirrors.
The Company manufactures and markets automotive interior rearview mirrors using EC technology that automatically dims the mirror when headlights approach from the rear. EC rearview mirrors are a value-added substitute for traditional prismatic base mirrors and are sold for a higher dollar price per unit than prismatic base mirrors. The Company believes that EC rearview mirrors represented approximately 24% and 11% of all interior rearview mirrors sold by all suppliers to original equipment manufacturers in the North American and European markets, respectively, for the 2000 model year. The market for EC mirrors continues to grow and in 2000, EC mirrors were offered on approximately 61 car models in North America, compared to only approximately 19 models in 1991. The Company believes that EC mirrors will represent an increasing share of the rearview mirror market, both in terms of number of units and dollar volume, and represent a significant growth area for the Company.
Exterior Rearview Mirrors. The Company believes it is one of the largest exterior rearview mirror manufacturers 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 joint ventures). 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 2000, the Company launched new business with annual sales of approximately $40 million, including orders for twelve General Motors' vehicles, the largest single exterior rearview mirror order in the Company's history. Additionally, in 2000, the Company was awarded the contract for exterior rearview mirrors for a North American light truck program, which will be introduced in 2004.
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 Company believes that its strong presence in the automotive markets of North America and Europe are augmented by the manufacturing locations in the emerging markets of South America and Asia. In addition, the Company believes that a global presence in product development, sales, marketing, manufacturing and distribution in the markets provides a strong competitive advantage. The Company supplies exterior rearview mirror assemblies primarily to Honda, Ford, General Motors and Mazda in the United States and to major European auto-makers including BMW, Volkswagen, Renault, Audi and Ford in Europe. The Company also supplies exterior rearview mirror systems to automakers throughout China through its Chinese joint ventures, which are the two largest producers of exterior rearview mirrors in China, and in South America through its subsidiary in Brazil.
Exterior rearview mirrors are combined with automatic or manual adjusting mechanisms, wire harnesses and other hardware within an injection-molded, color-matched housing and are more complex than base interior rearview mirrors. The per vehicle sales price of exterior mirrors substantially exceeds that of interior rearview mirrors due to the greater complexity of exterior rearview mirrors and the fact that most new vehicles are equipped with two exterior rearview mirrors.
The Company also manufactures and markets dimmable EC exterior rearview mirrors. The Company believes that EC rearview mirrors currently represent only 5% of all exterior rearview mirrors in the North American market for the 2000 model year. The Company believes that EC exterior rearview mirrors will
represent an increasing share of the rearview mirror market, both in terms of number of units and dollar volume, and that the EC mirror market presents a significant growth opportunity for the Company.
Camera Vision. 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 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-vision systems. This sophisticated camera system made its debut on the General Motors' Precept concept vehicle and represents the most technology advanced rear-vision product that the Company has ever produced. The Company has been engaged in a research program with certain key customers for the development and commercialization of this technology. The Company has also begun displaying its VideoMirror™ line of electronic vision systems for vehicles that utilize advanced image processing and display technology to give drivers better views of their vehicles' interiors and exteriors. The two principal products being marketed within the VideoMirror™ line are BabyVue™ and ReversAid™. BabyVue™ is an in-cabin camera vision system, which allows the driver a view of reverse-facing infants. ReversAid™ is an exterior camera vision system, which uses a discreet camera mounted on the rear of the vehicle to provide an enhanced view of what is behind the vehicle when it is in reverse. The ReversAid™ system can also be modified to become TowChek™ to assist drivers backing up to hitch without the assistance of a second person. The VideoMirror™ system was selected as one of the thirty "Best of CES," which recognizes the best new products on display at the Consumer Electronics Show held in January 2001 in Las Vegas. Both of the systems have begun to be marketed online at www.donnelly.com. This technology is part of the Company's strategy to be a technology leader in the market for automotive rear-vision systems.
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. Other innovative product offerings by the Company are 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, sunroofs 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, the Ford Taurus/Sable, and the new generation of compact SUVs just launched by General Motors.
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 both process and its expertise in PVC molding are significant competitive advantages.
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 for light trucks and SUVs.
Handle Products
The Company produces a wide variety of interior and exterior door and liftgate handle products for Ford, Honda, Mazda, Nissan and Porsche. This product line was established based on the Company's capabilities in color-matched painting and plastic injection molding. The Company supplies various types of handle products including plastic, diecast and chrome-plated door handles as well as products with value-added electronic features. The Company expects to benefit from the recent withdrawal of a major competitor from the North American marketplace. Concurrently, acknowledgement by our customers as a leading designer and manufacturer of body colored hardware has lead to new business with General Motors, Honda and Mazda. Handle products are synergistic to the Company's complete exterior rearview 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. The Company also began to supply a "passive entry" door handle for a future luxury vehicle, which involves a sophisticated system to detect and identify the owner of a vehicle as he/she approaches and automatically opens the door. These products, when combined with the SmartRelease™ trunk release product, indicate a growing sophistication in the door closure market and represents increased growth opportunities. The Company believes that the market for all types of electronic door closure mechanisms will increase over the next decade.
Interior Lighting and Trim
In September 1997, the Company entered into an agreement with Lear Corporation ("Lear") to form Lear Donnelly Overhead Systems, LLC ("Lear Donnelly"), a joint venture for the design, development, marketing and production of interior trim overhead systems and components for the global market. Through the Lear Donnelly joint venture, the Company 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. In September 1999, the Company sold its interest in this joint venture to Lear. As a result of this transaction, the operating results of Lear Donnelly are no longer included in the Company's combined consolidated financial statements. With the exception of one existing order with a European customer, the Company has exited this product area. Sales relating to this order are classified with the Company's mirror systems and components related sales. See Item 1 (c) "Narrative Description of Business-Joint Ventures" for a more complete discussion on the sale of the Company's interest in Lear Donnelly.
Non-Automotive Businesses
The Company believes Information Products, Inc. ("Information Products"), its 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. Sales of Information Products have represented less than 5% of the Company's total net sales for each of the last three years.
Joint Ventures
Donnelly Electronics. Donnelly Electronics was formed in the first quarter of 1997, with a partner offering expertise in automotive electronics technology. In February 2001, the Company acquired all of the outstanding equity of Donnelly Electronics, not then owned by the Company for $4.5 million, paid equally in cash and through the issuance of the Company's Class A Common Stock. Due to the acquisition of the remaining interest, the Company will begin consolidating Donnelly Electronics' financial statements beginning in March 2001. As of December 31, 2000, the Company owned 18.2% of the common stock of
Donnelly Electronics. Donnelly Electronics, based in Holly, Michigan, designs and manufactures circuit board assemblies for a variety of electronic products and sub-assemblies. It produces many of the electronic components that the Company uses for products such as EC rearview mirrors and electronic compass systems. Donnelly Electronics pursues business with other automotive suppliers that are not competitors of the Company as well as other non-automotive customers. In addition, Donnelly Electronics will operate assets purchased by the Company in the first quarter of 2000, for the manufacture of electronic components in Europe.
Donnelly/Arteb LTDA ("Donnelly/Arteb"). In fiscal 1998, the Company formed Donnelly/Arteb, which is located near São Paulo, Brazil, a 50-50 joint venture with Indústrias Arteb S.A., to produce interior and exterior mirrors for the South American automotive industry. Donnelly/Arteb began producing replacement parts for distribution within the South American market in 1999. In October 2000, the Company acquired its partner's 50% interest in Donnelly/Arteb for $1.6 million, subsequently changing its name to Donnelly do Brasil LTDA and began consolidating the financial statements of this now wholly-owned subsidiary. Donnelly do Brasil is in the process of launching new programs for the Brazilian market. Equity in the results of the Company's Brazilian joint venture are no longer included in equity in earnings (losses) of affiliated companies after September 2000 due to the Company's acquisition of the remaining interest in this venture and subsequent consolidation of the financial statements of this subsidiary.
Shunde Donnelly Zhen Hua. In the first quarter of 1997, the Company formed, Shunde Donnelly Zhen Hua, a joint venture with Shunde Zhen Hua Automotive Parts Co. Ltd. ("Shunde Zhen Hua"), to manufacture interior and exterior mirror systems for automakers in China. In 1999, Shunde Zhen Hua agreed to sell its portion of the joint venture to Ganxiang Automobile Mirror Company ("Ganxiang"), the largest automotive mirror supplier in China. The Company formed an additional joint venture with Ganxiang; Shanghai Donnelly Ganxiang, see below.
Shanghai Donnelly Ganxiang. In the fourth quarter of calendar 1999, the Company formed Shanghai Donnelly Ganxiang for the manufacture, sale and distribution of outside mirrors primarily for the Chinese automotive market. The Company's investment in Shanghai Donnelly Ganxiang consisted of technology and a transfer to Ganxiang of a 5% interest of its Shunde Donnelly Zhen Hua joint venture. This transaction was finalized and approved by the Chinese authorities in 2000. As a result of this transaction, the Company now holds a 25% interest in both Shunde Donnelly Zhen Hua and Shanghai Donnelly Ganxiang.
Schott-Donnelly LLC Smart Glass Solutions ("Schott Donnelly"). In April 1999, the Company formed Schott Donnelly, a 50-50 joint venture with Schott, which is based in Germany and is one of the world's leading producers of specialty glass products. The joint venture is seeking to develop EC glass for automotive and architectural window 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 pre-tax gain. In accordance with the LLC operating agreement, Schott will provide contributions for operations and be allocated 100% of the net operating losses up to $9.5 million.
Applied Image Group, Inc. ("AIG"). In December 1998, the Company merged its wholly owned subsidiary, Donnelly Optics Corporation ("Optics") into a wholly owned subsidiary of Applied Image Group, Inc., 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. The Company accounts for its investment in AIG on the cost method; therefore, the financial results of Optics are no longer included in the Company's financial statements after December 1, 1998.
Varitronix EC. In 1998, the Company formed Varitronix EC, a 50% owned and 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 EC 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 Company having board control of this joint venture, the financial statements of Varitronix EC are consolidated with those of the Company. In 1999, the Company began consolidating the financial statements of Varitronix EC.
Donnex. The Company's agreement with Essex Specialty Products, Inc., the world's leading producer of automotive adhesives and sealants, to form a new company, Donnex, has expired. Donnex was intended 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 the Company will continue to market this innovative technology independent from Essex.
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. ("Shanghai Fu Hua"), which produces automotive window systems for the Chinese and Australian markets. Shanghai Fu Hua was originally, itself, a joint venture between Ford Motor Company and Shanghai Yao Hua Glass Works. In August of 2000, Ford sold its interest in Shanghai Fu Hua to Pilkington Glass Company, changing the name to Shanghai Yao Hua Pilkington Autoglass Co. Ltd. The Company's position in Shanghai Donnelly Fu Hua as a result of the sale, however, has remained unchanged.
Donnelly Yantai Electronics Corporation Limited. This 50% owned venture has produced coated glass for use in the Chinese LCD market. This operation is located on the Yantai Peninsula of the People's Republic of China.
Repositioning Non-Core Businesses
As part of the Company's commitment to focus on its core businesses, the Company has executed the following actions, associated with its non-core businesses:
In October 2000, the Company divested its interest in KAM. The Company had owned 17.1% of KAM, which supplies mirrors for large trucks. The shares sold resulted in a pre-tax gain of approximately $0.4 million, or $0.02 per share, after-tax.
In September 1999, the Company sold its 50% interest in Lear Donnelly Overhead Systems, LLC ("Lear Donnelly") to Lear Corporation, its partner in the joint venture, resulting in a pre-tax gain of $14.1 million, or $0.82 per share, after-tax, which was recognized in the third quarter of calendar 1999. In December 1999, the Company completed the final negotiation of certain issues related to the sale, resulting in an additional pre-tax gain to the Company of $4.4 million, or $0.29 per share, after-tax, which was recognized in the fourth quarter of calendar 1999. The Company's equity in the financial results of Lear Donnelly has not been included in the Company's financial statements after September 1999. For a more detailed discussion regarding the Company's sale of its investment in Lear Donnelly, see Note 3 to the Combined Consolidated Financial Statements under Item 8 of this Form 10-K.
In April 1999, the Company formed Schott Donnelly, a 50-50 joint venture with 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. See Item 1(c) "Narrative Description of Business-Joint Ventures" for a more complete discussion regarding Schott Donnelly.
In the second and third quarters of fiscal 1999, the Company sold its remaining interest in VISION Group plc ("VISION Group"). The Company received $8.6 million in proceeds and recognized a combined pre-tax gain of approximately $5.5 million, or $0.35 per share, after-tax. The Company's equity in the financial results of VISION Group has not been included in the Company's financial statements after November 1, 1998.
In December 1998, the Company merged its wholly owned subsidiary, Donnelly Optics, into a wholly owned subsidiary of Applied Image Group, Inc. ("AIG"), a New York Corporation. See Item 1(c) "Narrative Description of Business-Joint Ventures" for a more complete discussion regarding AIG. The Company accounts for its investment in AIG on the cost method; therefore, the financial results of Optics have not been included in the Company's financial statements after December 1, 1998.
In the second quarter of fiscal 1998, the Company sold its 50% interest in Applied Films Corporation ("AFC") during an initial public offering. 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.
Through repositioning these businesses, management has been able to realize the strong return to shareholders for the investments made to develop them. As a result of these transactions, the operating results of VISION Group, Optics, Lear Donnelly and AFC are no longer included in the Company's combined consolidated financial statements. The Company continually assesses its strengths and weaknesses in relation to the direction of the respective industries represented by the Company's various investments.
MARKETING STAFF
In North America, Europe, South America 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, which works together with the Company's customer 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 automotive sales are made directly to automakers with the exception of some interior and exterior mirror glass components.
The Company markets its non-automotive products through a sales force who also work in conjunction with the Company's engineers. The Company works with potential customers on the development of new applications for electronic information display products.
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 used by the Company are supplied primarily by four suppliers. Most of the resins the Company uses are supplied by four primary suppliers. The Company believes that alternative suppliers are available for paints and resins. Generally, the Company has multiple sources of supply for the important materials and components used in its products. Certain adhesives for the Company's flush window systems are supplied solely by Essex Specialty Products, Inc. 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 380 patents and considers them important, the Company as a whole is not dependent to any material extent upon any single patent or group of patents. The Company believes its manufacturing know-how, design of its own manufacturing equipment and development of manufacturing processes are more important than its patents. The Company has licensed certain of its own patents and technology and has licenses under certain third-party patents and technology.
SEASONAL NATURE OF BUSINESS
The Company's net sales and net income are subject to significant fluctuations attributable primarily to production schedules of the Company's major automotive customers. In addition, the Company has strong product content on light trucks, including minivans and SUVs, as compared to automobiles. These factors cause results to fluctuate from period to period and year to year. Investments in new product lines, acquisitions, and the formation and disposition of subsidiaries, joint ventures and alliances also affect the comparability of results on a period-to-period basis.
WORKING CAPITAL
The Company's current ratio was 1.3 on December 31, 2000, compared to 1.2 at December 31, 1999. Working capital was $43.8 million at December 31, 2000, compared to $25.3 million at December 31, 1999. The increase in working capital is due to increased accounts receivable and inventories from new product launches, and reductions in payables and restructuring accruals.
At December 31, 2000, and December 31, 1999, $38.5 million and $38.9 million, respectively, had been sold under the Company's accounts receivable securitization agreement. Proceeds received under this agreement were 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 2001; however, it is renewable for one-year periods at the option of the Company and with the consent of bank participants. The Company expects to extend the current agreement or replace it on comparable terms.
The Company's $160 million multi-currency global revolving credit agreement had borrowings against it of $77.1 million and $42.5 million as of December 31, 2000, and December 31, 1999, respectively. Total long-term borrowing increased by $25.2 million at December 31, 2000, compared to December 31, 1999, primarily to support higher working capital and capital expenditure requirements.
Other than the items summarized above, the Company does not believe that it, or industries which it serves in general, have any special practices or special conditions affecting working capital items that are significant for an understanding of the Company's business.
IMPORTANCE OF LIMITED NUMBER OF CUSTOMERS
In 2000, approximately 74% of the Company's net sales were to the following major automobile manufacturers:
The mix of the Company's product content varies by customer within each segment. The loss of any one of these customers would have a material adverse effect on the Company.
BACKLOG OF ORDERS
As of December 31, 2000, and December 31, 1999, the Company's backlog of orders was approximately $204 and $193 million, respectively. The Company believes that all of its existing backlog will be delivered during the current fiscal year. The Company generally sells to automakers on the basis of long-term purchase contracts or one-year purchase orders, which generally provide for releases for approximately 30
to 90 days of production. Unshipped products under these releases and short-term purchase orders constitute the Company's backlog.
GOVERNMENT CONTRACTS
The Company does not believe that any portion of its business is subject to re-negotiation 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, technology, design, quality, cost, delivery and customer relationship. 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 auto-makers. The level and nature of competition involving the Company's automotive products are varied.
Interior Rearview Mirrors. While the Company has a predominant share of the U.S. interior rearview prismatic mirror market, the Company is aware of many competitors in this market. The Company knows of one principal competitor in the EC 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 a number of other manufacturers of complete interior rearview mirror assemblies.
Exterior Rearview Mirrors. The Company has many competitors in the worldwide exterior rearview mirror market, although the number of these has begun to decrease in recent years due to consolidation. Through the Company's operations in North American and Europe, the Company is one of the leading producers of automotive exterior rearview 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, although recently there has been some consolidation with one competitor leaving the 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 handle products to leverage capacity and to strategically support exterior mirrors through the sale of coordinated "door sets" of exterior mirrors and handle products. Additionally, the Company will use its electronics design, development and manufacturing capability to create competitive advantage, wherever possible, in the growing electronic door closure mechanisms market, an area in which few competitors have yet emerged.
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 fiscal 2000, 1999 and 1998, research and development expenditures were $35.2, $34.2 million and $36.4 million, respectively, or 4.1%, 3.8% and 4.8% of the Company's net sales for those years. For the six-month period ending December 31, 1999, these expenses were $16.4 million, or 3.9% to net sales. The increase in these expenses in 2000 is primarily due to increased electrochromic and electronic applications, as well as launch related engineering support. The decrease from 1998 to 1999 was primarily due to the Lear Donnelly joint venture, the formation of the Schott Donnelly joint venture, the Optics merger and Donnelly Electronics This was due to the Company's contribution of certain technologies and related operating expenses to these ventures, which are accounted for under the equity or cost method of accounting. The Company anticipates that it's acquisition of Donnelly Electronics will result in higher research and development expenses in the future both in absolute terms and as a percent of sales, however, the acquisition is expected to result in higher gross profit margins. 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.
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. Environmental Laws relating to workplace safety and worker health also govern the Company's operations. 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.
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. The Company is nationally recognized as a leader in the application of participative management principles and systems. The Company currently has approximately 6,400 employees worldwide, of whom approximately 3,600 work in the Company's North American operations in the U.S. and Mexico. During 2000, the Company had an average of approximately 6,200 employees worldwide. The Company's non-North American employees are primarily located in Germany, Ireland, France, Spain, Brazil 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 and Malaysia is non-union. The Company has no collective bargaining agreements in Ireland or Mexico, where non-economic terms of employment are governed by statute. The Company negotiates wages and benefits approximately annually with its German, Spanish and Irish workforces. In the third calendar quarter of 1999, the Company completed re-negotiation of a labor contract that is effective through 2003, covering the majority of its German workforce. This labor contract allows 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 of this Form 10-K, "Management's Discussion and Analysis of Financial Conditions and Results of Operations" for more information about the European restructuring.
ITEM 1(d) INFORMATION ABOUT FOREIGN OPERATIONS
During 2000, approximately 31% of combined consolidated net sales were derived from the Company's foreign operations. Approximately 15% 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 certain technologies to companies in Europe and Asia to manufacture and sell in foreign markets using the Company's technology.
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 to. 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, Brazil and Malaysia. The Company operates two subsidiaries in Germany, Donnelly Hohe GmbH & Co. KG and Donnelly Hohe Schleiz GmbH & Co. KG; three subsidiaries in Ireland, Donnelly Mirrors Limited, Donnelly Vision Systems Europe Limited and Donnelly Electronics Limited; one in Spain, Donnelly Hohe España S.A.; one in France, Donnelly EuroGlas Systems SARL; one in Mexico, Donnelly de Mexico, S.A. de C.V.; one in Brazil, Donnelly do Brasil; and one in Malaysia, Varitronix EC.
The Company has established the Asian and the South American markets as the top two emerging market priorities. To support this, the Company also has various non-controlled joint ventures in Asia. As discussed in Item 1 (c) "Narrative Description of Business-Joint Ventures," the Company has three joint ventures located in China: Shanghai Donnelly Fu Hua, Shunde Donnelly Zhen Hua and Shanghai Donnelly Ganxiang.
A summary of the Company's operations by geographic area is included in Note 4 to the Combined Consolidated Financial Statements under Item 8 of this Form 10-K.
ITEM 2.
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 February 28, 2001, were as follows:
*Leased facilities. Four of the ten Holland, Michigan, facilities are leased. One of the two Collenberg, Germany, as well as, one of the two Schleiz, Germany, facilities are leased.
**Owned or leased by a joint venture or non-controlled affiliate. The Company believes its facilities are modern, well maintained and adequately insured and are primarily utilized. Because of its rapid growth in sales, the Company is continually evaluating the need for additional office, manufacturing and warehouse space.
As of December 31, 2000, the Company had capital expenditure purchase commitments outstanding of approximately $11.2 million.
The Company provides a guarantee for $7.1 million in municipal funding for one of the Company's manufacturing facilities in Michigan.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The previously disclosed litigation concerning Arteb S.A. and the complaint filed by Sekurit Saint-Gobain U.S.A., Inc. against the Company in the U.S. District Court for the Eastern District of Michigan, have each been settled without material effect on the Company's financial position, results of operations and liquidity, individually and in the aggregate.
On October 5, 2000, the Company filed a complaint against Reitter & Schefenacker USA Limited Partnership and Reitter & Schefenacker GmbH Co., KG in the U.S. District Court for the Western District of Michigan. The complaint alleges that the defendants have infringed three of the Company's patents relating to interior rearview mirror assemblies incorporating lighting features. The complaint seeks unspecified damages and an injunction against further infringement. Defendant Reitter & Schefenacker USA Limited Partnership has filed an answer denying infringement and alleging that the patents at issue are invalid and/or unenforceable. Defendant Reitter & Schefenacker GmbH & Co., KG has not yet filed an answer but has stated that it intends to assert that it is not subject to the jurisdiction of the court.
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.
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 December 31, 2000.
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:
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. Maryam Komejan has been Senior Vice President since 1995, Vice President since 1993, Corporate Secretary since 1989 and resigned effective January 2, 2001. 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 1998 and in December 2000 he was elected Group President- Electronic systems, Chief Financial Officer and Chief Accounting Officer. Prior to joining the Company, he served as Director of International Finance for Chrysler Corporation from 1995 to 1998. Russ Scaffede was elected Group President- Exterior Systems in December 2000. Prior to that time he was Senior Vice President since April 1998 and Vice President since October 1995. Donn Viola joined the Company as Chief Operating Officer of the Company's North America operations in August 1996 and was elected Corporate Chief Operating Officer in December 2000. 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.
Officers are elected by the Board of Directors.
PART II.
ITEM 5.
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:
As of February 28, 2001, the Company had approximately 764 holders of record of shares of Class A Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
*For the transition period from July 4, 1999, to December 31, 1999. 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.
ITEM 7. 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 including forced price reduction, (iv) market development of specific products of the Company, including electrochromic mirrors, (v) whether the Company restructures its European operations, (vi) fluctuations in foreign currencies and (vii) other risks and uncertainties. The Company does not intend to update these forward-looking statements.
OVERVIEW
The Company is a technology-driven, customer-focused, growth-oriented, global supplier to the automotive and information display industries. The Company has been managed primarily on a geographic basis. For 2000, the Company had two reportable segments: North American Operations ("NAO") and European Operations ("EO"). These were managed separately as they each represented regional operational components, which offered the Company's product lines in different geographical markets. During 2001, the Company will be transitioning to a global, product-based management structure. Split into two main operating groups: Electronic Systems and Exterior Systems. The Company believes that this
organizational evolution will help position itself to achieve even stronger performance with its products in the global marketplace.
Effective July 4, 1999, the Company changed the date of its fiscal year end from the Saturday nearest June 30 to December 31. The years ended December 31, 2000, July 3, 1999, and June 27, 1998, consisted of 52, 53 and 52 weeks, respectively. The six-month periods ended December 31, 1999, and January 2, 1999, consisted of 26 and 27 weeks, respectively. The six-month period ended December 31, 1999, is referred to as the transition period. All year and quarter references relate to the Company's fiscal years and fiscal quarters, unless otherwise stated.
During the transition period, the Company also 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 Company's results of operations for the transition period include the results of these subsidiaries for the six months ended November 30, 1999. The results of operations for the period of December 1 to December 31, 1999, for these subsidiaries were charged to retained earnings in order to report only six months of operating results in the transition period. Cash flow activity for this same period is reflected as a single line item in the Combined Consolidated Statement of Cash Flows.
Unaudited financial information for the comparable twelve-month and six-month periods ended December 31, 1999, and January 2, 1999, respectively, is presented in Note 2 to the Combined Consolidated Financial Statements under Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data for the Company are on the following pages 38 through 67.
INDEX TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS:
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these statements.
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
The accompanying notes are an integral part of these statements.
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 inter-company 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 amortized on a straight-line basis over a period of 15 to 25 years.
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.
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 results the Company will ultimately experience could differ from the amounts that are assumed 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 inter-company 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 method for international inventories.
PRE-PRODUCTION COSTS
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 useful life. Balances recoverable over a period greater than one year are classified as long-term assets.
Design and development costs for products to be sold under long-term supply agreements are expensed as incurred unless a contractual guarantee exists. If a guarantee exists, these costs are recognized as an asset and are recoverable at the time of design or program approval or recovered in the program's piece price over a period of three years or over the program's useful life. The balance of these costs capitalized as of December 31, 2000, and December 31, 1999, is immaterial.
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:
Years
Buildings
10 to 50
Machinery, equipment and software
3 to 15
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 undiscounted future cash flows, a current charge to income is recognized.
WARRANTY RESERVES
The Company accrues for warranty claims when events exist that make the loss probable and the loss can be reasonably estimated. Adjustments are made to established reserves when changes in management's estimates and industry conditions occur.
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 foreign subsidiaries and affiliates because they are intended to be permanently reinvested. Deferred tax liabilities and assets are adjusted in the period of an enacted change in tax laws or rates and the effect is included in income from continuing operations.
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 for certain key employees and directors. Under APB No. 25, compensation expense is recognized when the market price of the underlying stock award on the date of grant exceeds the related exercise price. The Company's policy is to grant options at the prevailing market price and, 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 13.
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. These estimates are based upon quoted amounts, the current rates available for similar financial instruments or calculations discounting expected cash flows at rates currently offered to the Company for debt of the same maturity. The carrying value of the Company's variable rate debt and all other financial instruments approximates their fair value.
COMPREHENSIVE INCOME
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 and is reported in the accompanying combined consolidated statements of shareholders' equity.
CHANGE IN ACCOUNTING PRINCIPLE
Effective July 4, 1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities," which requires companies to expense the costs of start-up activities and organization costs as incurred. A one-time charge of $1.0 million, net of tax, was taken against net income as the cumulative effect of a change in accounting principle for the write-off of previously capitalized start-up and organization costs.
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. FISCAL YEAR END CHANGE
Effective July 4, 1999, the Company changed the date of its fiscal year end from the Saturday nearest June 30 to December 31. The years ended December 31, 2000; July 3, 1999; and June 27, 1998; consisted of 52, 53 and 52 weeks, respectively. The six-month periods ended December 31, 1999, and January 2, 1999, consisted of 26 and 27 weeks, respectively. The six-month period ended December 31, 1999, is referred to as the "transition period." All year and quarter references relate to the Company's fiscal years and fiscal quarters, unless otherwise stated.
During the transition period, 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 Company's results of operations for the transition period include the results of these subsidiaries for the six months ended November 30, 1999. The results of operations for the
period of December 1 to December 31, 1999, for these subsidiaries were charged to retained earnings in order to report only six months of operating results in the transition period. Cash flow activity for this same period is reflected as a single line item in the Combined Consolidated Statement of Cash Flows.
Unaudited financial information for the comparable twelve-month and six-month periods ended December 31, 1999, and January 2, 1999, respectively, is presented in the table below and includes any normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation.
COMBINED CONSOLIDATED STATEMENTS OF INCOME
3. INVESTMENTS IN AND ADVANCES TO AFFILIATES
In February 2001, the Company acquired all of the outstanding equity of Donnelly Electronics, Inc. ("Donnelly Electronics"), not then owned by the Company for $4.5 million, paid equally in cash and through the issuance of the Company's Class A Common Stock. Due to the acquisition of the remaining interest, the Company will begin consolidating Donnelly Electronics' financial statements beginning in March 2001. As of December 31, 2000, the Company owned 18.2% of the common stock of Donnelly Electronics, held $9 million of 7% non-voting preferred stock in Donnelly Electronics, and had a 7% promissory note of $15.2 million. The entity, formed in the first quarter of 1997, designs and manufactures circuit board assemblies for a variety of electronic products and sub-assemblies. It produces many of the electronic components that the Company uses for products such as electrochromic rearview mirrors and electronic compass systems, and pursues business with other automotive suppliers as well as other non-automotive customers.
In October 2000, the Company acquired its partner's 50% interest in its Brazilian joint venture for $1.6 million and began consolidating the financial statements of its now wholly-owned subsidiary, Donnelly do Brazil, LTDA ("Donnelly do Brazil"). The 50-50 joint venture was formed in 1998 to produce interior and exterior mirrors for the South American automotive industry and began producing replacement parts for distribution within the South American market in 1999. Donnelly do Brazil is in the process of launching new programs for the Brazilian market. Equity in the results of the Company's Brazilian joint venture are no longer included in equity in earnings (losses) of affiliated companies after October 2000 due to the Company's acquisition of the remaining interest in this venture and subsequent consolidation of the financial statements of this subsidiary.
In 2000, the Company purchased the remaining minority interest in Donnelly Hohe España, S.A., for approximately $1.9 million.
In 1999, the Company's partner in its Shunde Donnelly Zhen Hua Automotive Systems Co. Ltd. ("Shunde Donnelly Zhen Hua") joint venture, agreed to sell its portion of the joint venture to Ganxiang Automobile Mirror Company ("Ganxiang"), the largest automotive mirror supplier in China. Shunde Donnelly Zhen Hua manufactures interior and exterior mirror systems for automakers in China. Subsequently, in the fourth quarter of calendar 1999, the Company formed an additional joint venture with Ganxiang; Shanghai Donnelly Ganxiang Automotive Systems Co. Ltd. ("Shanghai Donnelly Ganxiang") for the manufacture, sale and distribution of outside mirrors primarily for the Chinese automotive market. The Company's investment in Shanghai Donnelly Ganxiang consisted of technology and a transfer to Ganxiang of a 5% interest of its Shunde Donnelly Zhen Hua joint venture. As a result of these transactions, the Company holds a 25% interest in both of these joint ventures.
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, resulting in a pre-tax gain of $14.1 million, or $0.82 per share, after-tax, which was recognized in the third quarter of calendar 1999. In consideration for its interest in Lear Donnelly, the Company received a Lear Donnelly product line and other net proceeds of $28.4 million, which consisted of $24.2 million in cash as well as certain assets, net of liabilities assumed. The Company's equity in the financial results of Lear Donnelly is no longer included in the Company's financial statements after September 1999.
At the time of the sale, the value of the product line transferred to the Company and other related issues remained in negotiation or arbitration for determination of final valuation. Management recorded an estimate at the time of the sale for the expected outcome of these negotiations based on the best information available. In December 1999, the Company completed the final negotiation of these issues, which included the purchase of another product line for cash of $2.4 million. The final negotiated settlement resulted in an additional pre-tax gain to the Company of $4.4 million, or $0.29 per share, after-tax, which was recognized in the fourth quarter of calendar 1999.
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 seeking to develop 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 pre-tax 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 the Company's worldwide electrochromic mirror production.
In the second and third quarters of 1999, the Company sold its remaining interest in VISION Group plc ("VISION Group") for $8.6 million and recognized a combined pre-tax gain of approximately $5.5 million, or $0.35 per share, after-tax. The Company's equity in the financial results of VISION Group have not been included in the Company's financial statements after November 1, 1998.
In December 1998, 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. The Company accounts for its investment in AIG on the cost method; therefore, the financial results of Optics have not been 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 ("AFC") during an initial public offering. The Company received $7.9 million, net of taxes and related out of pocket fees, and recognized a pre-tax gain of approximately $4.6 million, or $0.22 per share, after-tax. The Company's equity in the financial results of AFC is no longer included in the Company's financial statements after November 1997.
The Company has advanced 80 million German marks to Donnelly Hohe, valued at $38.5 million at December 31, 2000, under subordinated loan agreements. Amounts advanced to Donnelly Hohe under the subordinated loan agreements provide for 10% interest per annum with no principal payments due until maturity. Outstanding loan maturities range from October 1, 2001, to October 1, 2002. These advances are eliminated as inter-company transactions in the consolidation of Donnelly Hohe with the Company's financial statements. The Company has the option to purchase the remaining minority 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.
4. NATURE OF OPERATIONS
The Company is a technology-driven, customer-focused, growth-oriented, global supplier to the automotive and information display industries 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 vision systems, modular window systems and handle products, which incorporate increasing electronic capabilities.
The Company has been managed primarily on a geographical basis. For 2000, the Company had two reportable segments: North American Operations ("NAO") and European Operations ("EO"). The operating segments were managed separately as they each represented regional operational components,
which offered the Company's product lines in different geographic markets. While each reportable 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 NAO. NAO sales also include touch screen sales, which are supplied to the information display industry. Operating financial information is available and is utilized regularly by the Company's corporate management team to assess each segment's performance. The corporate management team, which establishes the overall strategy and policy standards for the Company, has included the Company's 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 was a member of the corporate management team, has been responsible for the management of profitability and cash flow for each respective segment's operations.
The NAO segment includes all of the Company's majority-owned North American operations, which includes non-automotive businesses. This represents a change to the previous segment definition that was based on a combination of geographic location and the product markets they served. This change was made in accordance with the guidance provided in SFAS No. 131 as a result of changes in the manner in which the Company has managed the business. During 2000, the Company also changed the way in which it allocated corporate expenses to the various segments. Due to these changes, data for all prior periods has been restated to conform to the current segment definitions and allocation methods.
During 2001, the Company will be transitioning to a new corporate organization structure that will focus its worldwide business into two main operating groups: Electronic Systems and Exterior Systems. Each of these operating groups will be represented by a group president who will be a member of the corporate management team. The Company will be re-evaluating its segment definitions over the course of 2001 as it transitions to this new corporate organization structure.
The accounting polices of the reportable operating segments are the same as those described in the summary of significant accounting policies 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 headquarters being located in the United States, certain estimates are made for allocations to NAO of centralized corporate costs incurred in support of NAO. Centralized European overhead costs are included in EO. The Company accounts for inter-segment sales and transfers at current market prices and inter-segment services at cost.
A summary of the Company's operations by its business segments follows:
* Other Segments category includes the Company's automotive joint ventures.
* Corporate and other expenses category includes centralized corporate functions such as advanced research, corporate administration including information technology, human resources and finance and other costs associated with corporate development and financing initiatives.
* 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.
The following summarizes the Company's sales by product line:
Sales to major automobile manufacturers as a percentage of the Company's net sales follows:
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 non-controlling ownership interest:
5. RESTRUCTURING AND OTHER CHARGES
In February 1999, the Company announced a European restructuring plan ("the 1999 plan") based on a strategy 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 more customer focused structure, 2) consolidating two of the German manufacturing facilities, 3) implementing throughout Europe the Donnelly Production System, the Company's approach to lean manufacturing processes and
4) re-aligning sales and engineering functions throughout Europe. An $8.8 million pre-tax restructuring charge, or $3.5 million at net income, was recorded for the 1999 plan, including $1.4 million for the impairment of assets and $7.4 million for anticipated incremental cash expenditures for the severance and voluntary retirement programs for approximately 200 production, production support, sales and engineering employees. In May 1997, the Company had recorded a $10.0 million pre-tax restructuring charge, or $4.0 million at net income, for the elimination of redundant operations, as well as, outsourcing of inefficient operations in Europe ("the 1997 plan"). A reduction of $1.1 million was recorded to the restructuring reserve in 1998 associated with changes to the 1997 plan. The Company included the remaining actions of the 1997 plan in the 1999 plan. As of December 31, 2000, the Company had terminated 197 employees under the combined plans. In addition, the Company has experienced a net reduction of approximately 76 employees through normal attrition.
The Company also funded approximately $3.1 million of capital expenditures for the construction of shipping and warehousing facilities associated with actions in support of the combined plans. These costs do not qualify as restructuring within the technical accounting guidelines and therefore were included in the Company's capital expenditures.
As required by the generally accepted accounting principles for restructuring charges, the Company reduced its restructuring reserve by $3.8 million pre-tax, or $1.6 million at net income, in the fourth quarter of 2000. The reduction is attributable to (i) savings associated with higher than anticipated voluntary employee attrition and (ii) continuing developments within the market and the operations, which have made the outcome uncertain for some aspects of the combined plans. The ending reserve balance of $3.2 million represents the costs associated with the remaining planned actions expected to be substantially completed during 2001. While the Company believes that further restructuring actions may be appropriate in Europe and it continues to evaluate these operations for improvements, the assessment of possible actions has not yet been completed.
Details of the European restructuring reserves are as follows:
Other
In the fourth quarter of 1998, the Company recognized a $3.5 million pre-tax charge against operating income, or $2.3 million, after-tax, due to the cancellation of a customer order at Optics, relating 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 3).
6. INVENTORIES
Inventories consist of:
7. DEBT AND OTHER FINANCING ARRANGEMENTS
Debt consists of:
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 0.125%, 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 2002. 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 December 31, 2000, the Company was in compliance with all related covenants. Retained earnings available for dividends at December 31, 2000, are $24 million.
Certain maturities are generally classified as long-term due to the intent to refinance these under the revolving credit agreement. Annual principal maturities consist of:
Interest payments of $7.0 million, $4.1 million, $7.8 million and $8.6 million were made in 2000, the six-month period ended December 31, 1999, and years 1999 and 1998, respectively.
8. 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 2001, however, it is renewable for one-year periods at the option of the Company and with the consent of bank participants. The Company expects to extend the current agreement or replace it on comparable terms. At December 31, 2000, and December 31, 1999, a $38.5 million and $38.9 million interest, respectively, had been sold under this agreement with proceeds used to reduce revolving lines of credit. The sale is reflected as a reduction of accounts receivable and as operating cash flows. As collections reduce previously sold interests, new accounts receivable are customarily sold. The proceeds of sales are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing cost of issuing its own commercial paper backed by these accounts receivable. The Company, as agent for the purchaser, retains collection and administrative responsibilities for the participating interests of the defined pool.
9. FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps and foreign exchange contracts to manage exposure to fluctuations in interest and foreign currency exchange rates and accordingly accounts for them on a hedging rather than trading basis. The risk of loss to the Company in the event of nonperformance by any party under these agreements is not material. At December 31, 2000, and December 31, 1999, the Company had interest rate swaps with an aggregate notional amount of $15 million and $30 million, respectively. These effectively converted $15 million and $30 million of the Company's variable interest rate debt to fixed rates at December 31, 2000, and December 31, 1999, respectively. The Company is currently paying a weighted-average fixed rate of 7.49%, 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 entered into foreign exchange contracts to hedge against changes in foreign currency exchange rates for the benefit of its Irish subsidiaries. Foreign exchange contracts outstanding were $1.4 million and $2.0 million at December 31, 2000, and December 31, 1999, respectively. The foreign exchange contracts require the Company to exchange foreign currencies for Irish punts and generally mature within twelve 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 December 31, 2000, and December 31, 1999, are as follows:
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 transaction, and if so, the type of hedge transaction. SFAS No. 133 is effective for the Company on January 1, 2001. The Company does not expect the implementation of this new standard to have a material impact on its results of operations or financial position.
10. BENEFIT PLANS
A.Pension Benefits The Company sponsors defined benefit pension plans covering substantially all domestic employees and employees at the Company's Donnelly Mirrors Limited facility in Ireland. Pension costs for the plans are funded in amounts that equal or exceed regulatory requirements. Plan assets are primarily corporate equity and debt securities.
Assumptions used in determining net periodic pension cost are as follows:
The following tables provide a reconciliation of the changes in the plans' benefit obligations, fair value of assets and funded status:
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.
Assumptions used in determining net periodic postretirement benefit cost are as follows:
(a)Gradually declining to 6.5% in 2004 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:
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:
11. TAXES ON INCOME
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:
The tax rate in Germany decreased by approximately 10 percentage points during the fourth quarter of 2000. As a result of this change, the related deferred tax assets and net income were reduced by $2.3 million.
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:
Deferred taxes are classified in the accompanying balance sheets as follows:
At December 31, 2000, the Company has $45.5 million of consolidated net operating loss carryforwards, which do not expire.
12. PREFERRED STOCK AND COMMON STOCK
Each share of 71/2% 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 December 31, 2000. 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 with none outstanding.
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.
The following table sets forth the computation of basic and diluted earnings per share for each period reported:
13. 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 31,038 shares in 2000, 16,287 shares in the six-month period ended December 31, 1999, and 14,182 shares in 1999 under this plan. The Company also issued 16,831 shares in 1999 and 18,963 shares in 1998 under a 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 975,000 shares of the Company's Class A Common Stock. The options granted under the 1987 and 1997 Employee Option Plans and Non-employee Director Stock Option Plan become exercisable twelve months after date of grant and expire ten years after the date of grant. The options granted under the 1998 Employee Stock Option Plan become exercisable in three equal annual installments, beginning twelve months after the date of grant and expire ten years after the date of grant. Although the plan administrator may establish the non-qualified option price at below market value at the date of grant, incentive stock options may be granted only at prices not less than the market value. At December 31, 2000, 579,629 options were available for grant.
A summary of the Company's stock option activity and related information follows:
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: risk-free interest rates of 5.15%, 6.52%, 6.07% and 5.45%; dividend yield of 2.9%, 2.6%, 2.5% and 2.06%; expected market price volatility factors of 0.319, 0.313, 0.316 and 0.311; and an expected option life of seven years, for 2000, the six-month period ended December 31, 1999, and the fiscal years ended July 3, 1999, and June 27, 1998, respectively.
The weighted-average, grant-date fair value of options were $3.80, $5.28, $5.76 and $7.53 for stock options granted in 2000, the six-month period ended December 31, 1999, and the fiscal years ended July 3, 1999; and June 27, 1998; respectively.
Pro forma information under SFAS No. 123 is as follows:
14. COMMITMENTS AND CONTINGENCIES
A. Litigation
On October 5, 2000, the Company filed a complaint against Reitter & Schefenacker USA Limited Partnership and Reitter & Schefenacker GmbH & Co., KG in the U.S. District Court for the Western District of Michigan. The complaint alleges that the defendants have infringed three of the Company's patents relating to interior rearview mirror assemblies incorporating lighting features. The complaint seeks unspecified damages and an injunction against further infringement. Defendant Reitter & Schefenacker USA Limited Partnership has filed an answer denying infringement and alleging that the patents at issue are invalid and/or unenforceable. Defendant Reitter & Schefenacker GmbH & Co., KG has not yet filed an answer but has stated that it intends to assert that it is not subject to the jurisdiction of the court.
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.
B. Other
As of December 31, 2000, the Company had capital expenditure purchase commitments outstanding of approximately $11.2 million.
The Company provides a guarantee for $7.1 million in municipal funding for one of the Company's manufacturing facilities in Michigan.
15. LEASES
Future minimum lease payments, excluding renewal options, consist of:
The company has operating leases for office, warehouse, and manufacturing facilities and manufacturing equipment. Rental expense charged to operations amounted to approximately $4.5 million, $5.2 million, and $4.3 million for 2000, 1999, and 1998, respectively, and approximately $2.4 million for the six months ended December 31, 1999. In 1998, the company entered into an agreement for the sale and leaseback of newly installed injection molding equipment. The equipment was sold at cost and no gain or loss was recognized on the transaction. The lease has an effective 6.4% fixed interest rate and a 40% balloon for the Company's option to purchase the equipment after the full seven-year term and is classified as an operating lease.
16. 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:
17. QUARTERLY FINANCIAL DATA-UNAUDITED
See Management's Discussion and Analysis of Results of Operations and Financial Condition for discussion of the Company's results of operations and Notes 3, 5 and 11 for a discussion of the impact of certain transactions on the quarterly results of operations.
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/ DWANE BAUMGARDNER
J. Dwane Baumgardner, Ph.D.
Chairman, Chief Executive Officer and President
/s/ SCOTT E. REED
Scott E. Reed
Group President-Electronic Systems,
Chief Financial Officer
and Chief Accounting Officer
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 December 31, 2000, and 1999, and the related combined consolidated statements of income, shareholders' equity and cash flows for the year ended December 31, 2000, the six-month period ended December 31, 1999, and each of the two years for the periods ended July 3, 1999, and June 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 December 31, 2000, and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, the six-month period ended December 31, 1999, and each of the two years for the periods ended July 3, 1999, and June 27, 1998, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the combined consolidated financial statements, the Company changed its method of accounting for start-up and organization costs effective July 4, 1999.
/s/ BDO SEIDMAN
BDO Seidman, LLP
Grand Rapids, Michigan
February 8, 2001, except Note 3,
which is dated February 26, 2001
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III.
ITEM 10.
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 May 11, 2001, 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 Registrant is included under Item 4 of this Form 10-K.
ITEM 11.
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 May 11, 2001, and the information within those sections is incorporated by reference.
ITEM 12.
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 May 11, 2001, and the information within those sections is incorporated by reference.
ITEM 13.
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 May 11, 2001, and the information within that section is incorporated by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)DOCUMENTS FILED AS PART OF THIS REPORT
1.Financial Statement Schedules. The following are included in Part IV of this report for the year ended December 31, 2000, six-month period ended December 31, 1999, and for the years ended July 3, 1999 and June 27, 1998, as applicable:
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.
2.Exhibits. Reference is made to the Exhibit Index, which is found on the last two pages of the body of this Form 10-K preceding the exhibits.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the year ended December 31, 2000.
(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.
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
By:
/s/ J. DWANE BAUMGARDNER 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 J. Dwane Baumgardner
Chairman, Director,
Chief Executive Officer
and President
/s/ SCOTT E. REED Scott E. Reed
Group President-Electronic Systems,
Chief Financial Officer
and Chief Accounting Officer
/s/ JOHN A. BORDEN John A. Borden
Director
/s/ ARNOLD F. BROOKSTONE Arnold F. Brookstone
Director
/s/ B. PATRICK DONNELLY III B. Patrick Donnelly III
Director
/s/ JOAN E. DONNELLY Joan E. Donnelly
Director
/s/ R. EUGENE GOODSON R. Eugene Goodson
Director
/s/ THOMAS E. LEONARD Thomas E. Leonard
Director
/s/ GERALD T. MCNEIVE JR. Gerald T. McNeive Jr.
Director
/s/ RUDOLPH B. PRUDEN Rudolph B. Pruden
Director
/s/ DONALD R. UHLMANN Donald R. Uhlmann
Director
DATE: March 26, 2001
Donnelly Corporation
Annual Report-Form 10-K
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
DONNELLY CORPORATION
HOLLAND, MICHIGAN
The audits referred to in our report dated February 8, 2001, relating to the combined consolidated financial statements of Donnelly Corporation and subsidiaries, which is included in Item 8 of this Form 10-K for the year ended December 31, 2000, 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 February 8, 2001
DONNELLY CORPORATION
SCHEDULE II
VALUATION AND QUALIYING ACCOUNTS
Changes in Reserve for uncollectible accounts and sales returns and allowances:
*Significant recoveries related to process improvements in accounts receivable management which has substantially reduced exposure for overdue receivables.
ANNUAL REPORT-FORM 10-K
Exhibit Index
DOCUMENTS INCORPORATED BY REFERENCE
PART I.
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
ITEM 1(a) GENERAL DEVELOPMENT OF BUSINESS
ITEM 1(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
ITEM 1(c) NARRATIVE DESCRIPTION OF BUSINESS
Automotive Rear-Vision Systems
Modular Windows
Handle Products
Interior Lighting and Trim
Non-Automotive Businesses
Joint Ventures
Repositioning Non-Core Businesses
ITEM 1(d) INFORMATION ABOUT FOREIGN OPERATIONS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ADDITIONAL ITEM-EXECUTIVE OFFICERS OF THE REGISTRANT
Senior Corporate and Executive Officers of Registrant.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
OVERVIEW
Mergers, Joint Ventures and Sale of Investments
Restructuring
RESULTS OF OPERATIONS
Comparison of 2000 to calendar 1999
North American Operations
European Operations
Company
Comparison of the six-month periods ended December 31, 1999, and January 2, 1999
North American Operations
European Operations
Company
Comparison of 1999 to 1998
North American Operations
European Operations
Company
LIQUIDITY AND CAPITAL RESOURCES
Recently Issued Accounting Standards
Euro Conversion
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity:
Exchange Rate Sensitivity:
Interest Rate Sensitivity:
Exchange Rate Sensitivity:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS:
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DONNELLY CORPORATION AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
USE OF ESTIMATES
FOREIGN CURRENCY TRANSLATION
REVENUE RECOGNITION
CASH EQUIVALENTS
INVENTORIES
PRE-PRODUCTION COSTS
PROPERTY, PLANT AND EQUIPMENT
LONG-LIVED ASSETS
WARRANTY RESERVES
INCOME TAXES
EARNINGS PER SHARE OF COMMON STOCK
STOCK INCENTIVE PLANS
FAIR VALUE OF FINANCIAL INSTRUMENTS
COMPREHENSIVE INCOME
CHANGE IN ACCOUNTING PRINCIPLE
RECLASSIFICATIONS
2. FISCAL YEAR END CHANGE
COMBINED CONSOLIDATED STATEMENTS OF INCOME
3. INVESTMENTS IN AND ADVANCES TO AFFILIATES
4. NATURE OF OPERATIONS
5. RESTRUCTURING AND OTHER CHARGES
6. INVENTORIES
7. DEBT AND OTHER FINANCING ARRANGEMENTS
8. ACCOUNTS RECEIVABLE SECURITIZATION
9. FINANCIAL INSTRUMENTS
10. BENEFIT PLANS
11. TAXES ON INCOME
12. PREFERRED STOCK AND COMMON STOCK
13. STOCK PURCHASE AND OPTION PLANS
14. COMMITMENTS AND CONTINGENCIES
A. Litigation
B. Other
15. LEASES
16. COMMON STOCK PRICE PER SHARE-UNAUDITED
17. QUARTERLY FINANCIAL DATA-UNAUDITED
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
DONNELLY CORPORATION SCHEDULE II VALUATION AND QUALIYING ACCOUNTS
Changes in Reserve for uncollectible accounts and sales returns and allowances:
Exhibit Index