10-Q/A 1 donnely10qa.txt SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q/A QUARTERLY REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended March 31, 2001 Commission File Number 1-9716 DONNELLY CORPORATION (Exact Name of Registrant as Specified in its Charter) Michigan 38-0493110 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 49 West Third Street, Holland, Michigan 49423-2813 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 786-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No 6,271,094 shares of Class A Common Stock and 4,098,314 shares of Class B Common Stock were outstanding as of April 30, 2001. 1 DONNELLY CORPORATION INDEX On August 20, 2001, the Registrant announced that it would restate its financial statements for all periods beginning with fiscal 1998 to reflect a change in its accounting for its investments in Donnelly Electronics, Inc. and Donnelly Hohe GmbH & Co. K.G. See Note 1 to the accompanying Condensed Combined Consolidated Financial Statements. The results of prior periods as reflected in this Form 10-Q/A differ adversely from previously filed financial information. All items impacted by the accounting change have been restated. Quarterly segment information has also been restated to reflect a more accurate allocation of corporate expenses to the business segments. Page Numbering PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Combined Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 (as restated) 3 Condensed Combined Consolidated Statements of Operations - Three months ended March 31, 2001 and April 1, 2000 (as restated) 4 Condensed Combined Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and April 1, 2000 (as restated) 5 Notes to Condensed Combined Consolidated Financial Statements (as restated) 6-11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16-17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Exhibits and Reports on Form 8-K 17-18 Signatures 19

2 PART I ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS (UNAUDITED AND AS RESTATED) March 31, December 31, In thousands 2001 2000 -------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,974 $ 4,599 Accounts receivable, less allowance of $1,775 and $1,837 84,679 82,802 Inventories 62,046 55,933 Prepaid expenses and other current assets 32,017 28,990 ------------- ------------- Total current assets 183,716 172,324 ------------- ------------- Property, plant and equipment 354,261 345,700 Less accumulated depreciation 137,248 133,566 ------------- ------------- Net property, plant and equipment 217,013 212,134 Investments in and advances to affiliates 12,704 24,483 Other assets 20,549 15,055 ------------- ------------- Total assets $ 433,982 $ 423,996 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 95,774 $ 89,163 Other current liabilities 42,080 39,817 ------------- ------------- Total current liabilities 137,854 128,980 ------------- ------------- Long-term debt, less current maturities 130,616 132,608 Deferred income taxes and other liabilities 50,346 46,430 ------------- ------------- Total liabilities 318,816 308,018 ------------- ------------- Minority interest 2,740 1,353 Shareholders' equity: Preferred stock 531 531 Common stock 1,040 1,024 Other shareholders' equity 110,855 113,070 ------------- ------------- Total shareholders' equity 112,426 114,625 ------------- ------------- Total liabilities and shareholders' equity $ 433,982 $ 423,996 ============= =============

The accompanying notes are an integral part of these statements. 3 DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND AS RESTATED) Three Months Ended -------------------------------- March 31, April 1, In thousands, except share data 2001 2000 ------------------------------------------------------------- -------------- -------------- Net sales $ 220,001 $ 237,404 Cost of sales 187,154 196,124 -------------- -------------- Gross profit 32,847 41,280 Operating expenses: Selling, general and administrative 20,960 20,881 Research and development 9,444 9,762 -------------- -------------- Total operating expenses 30,404 30,643 -------------- -------------- Operating income 2,443 10,637 -------------- -------------- Non-operating (income) expenses: Interest expense 2,104 1,783 Interest income (118) (192) Royalty income (726) (247) Other (income) expense, net 479 152 -------------- -------------- Total non-operating expenses 1,739 1,496 -------------- -------------- Income before taxes on income 704 9,141 Taxes on income (benefit) (185) 2,562 -------------- -------------- Income before minority interest and equity earnings 889 6,579 Minority interest in (income) losses of subsidiaries, net 14 (73) Equity in earnings (losses) of affiliated companies, net (973) (939) -------------- -------------- Net income (loss) $ (70) $ 5,567 ============== ============== Per share of common stock: Basic net earnings (loss) per share $ (0.01) $ 0.55 Diluted net earnings (loss) per share $ (0.01) $ 0.55 Cash dividends declared $ 0.10 $ 0.10 Average common shares outstanding 10,255,270 10,153,601

The accompanying notes are an integral part of these statements. 4 DONNELLY CORPORATION AND SUBSIDIARIES CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND AS RESTATED) Three Months Ended ----------------------------- March 31, April 1, In thousands 2001 2000 ----------------------------------------------------------------- ------------- ------------- Cash Flows From Operating Activities Net income (loss) $ (70) $ 5,567 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 7,980 7,664 Gain on sale of property and equipment (18) (20) Deferred pension cost and postretirement benefits 1,648 1,485 Change in deferred income taxes (14) (61) Minority interest in income (losses) of subsidiaries, net (14) 73 Equity in losses of affiliated companies, net 973 939 Changes in operating assets and liabilities: (Refund) sales of accounts receivable (1,944) 2,901 Accounts receivable 3,449 (20,953) Inventories (4,328) 2,095 Prepaid expenses and other current assets 3,834 (44) Accounts payable and other current liabilities 9,903 29,567 Other 1,229 (144) ------------- ------------- Net cash from operating activities 22,628 29,069 ------------- ------------- Cash Flows From Investing Activities Capital expenditures (10,814) (12,288) Proceeds from sale of property and equipment 72 44 Investments in and advances to affiliates (9,430) (1,301) Cash increase due to consolidation of subsidiary (347) - Other (1,120) (197) ------------- ------------- Net cash for investing activities (21,639) (13,742) ------------- ------------- Cash Flows From Financing Activities Net proceeds from long-term debt 512 1,002 Investment and advances from minority interest - (16,781) Redemption of minority interest in subsidiary - (946) Common stock issuance 189 87 Dividends paid (1,046) (1,025) Financing (174) - ------------- ------------- Net cash for financing activities (519) (17,663) ------------- ------------- Effect of foreign exchange rate changes on cash (95) (104) Increase (decrease) in cash and cash equivalents 375 (2,440) Cash and cash equivalents, beginning of period 4,599 4,153 ------------- ------------- Cash and cash equivalents, end of period $ 4,974 $ 1,713 ============= ============= Supplemental disclosures of cash flow information Interest paid $ 1,558 $ 695 Income taxes paid 224 1,230 Significant non-cash transactions: Issuance of class A common stock to acquire business 2,250 -

The accompanying notes are an integral part of these statements. 5 NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001, should not be considered indicative of the results that may be expected for the year ending December 31, 2001. The combined consolidated balance sheet at December 31, 2000, has been taken from the audited combined consolidated financial statements and condensed. The accompanying condensed combined consolidated financial statements and footnotes thereto should be read in conjunction with the Company's report on Form 10-K/A for the twelve months ended December 31, 2000. On August 20, 2001, the Company announced that it would restate its historical financial statements to revise the accounting treatment of certain investments in and advances to affiliates. During a detailed review of the accounting treatment of its less than wholly owned affiliates, the Company determined that certain revisions to the accounting treatment of its investments in Donnelly Electronics, Inc. ("Donnelly Electronics") and Donnelly Hohe Gmbh & Co. KG ("Hohe") were necessary. The investment in Donnelly Electronics had been accounted for under the cost method since initial investment in the first quarter of fiscal 1997, and was subsequently consolidated upon the Company's acquisition of the remaining outstanding common stock on February 28, 2001. Prior to consolidation, Donnelly Electronics incurred operating losses, which were not reflected in the operating results of the Company under the cost method of accounting. Upon further review, it was determined that this investment should have been accounted for in accordance with the equity method prior to February 28, 2001. Under the equity method, substantially all of the operating losses incurred by Donnelly Electronics prior to consolidation have been included in the Company's restated net income, due to depletion of the Donnelly Electronics' equity and substantial funding provided by the Company. The investment in Hohe had initially been accounted for under the equity method since its acquisition in April 1995 and was subsequently consolidated beginning in October 1996. Hohe incurred operating losses through fiscal 2000, of which the Company absorbed 66 2/3% based upon its ownership percentage. Upon further review of the accounting treatment of this investment, it was determined that the Company should have included 100% of the losses in its net income during this period as the minority partner's equity basis had been exhausted at the initial investment date, and subsequent funding has been provided by the Company. The accompanying financial statements and notes reflect the restated amounts. See Note 10 for the impact of the restatement on the financial statements. 2. INVESTMENTS IN AND ADVANCES TO AFFILIATES In April 2001, the Company announced that it had signed a non-binding letter of intent with Eaton Corporation, a diversified industrial manufacturer, to sell certain assets of the Donnelly subsidiary, Donnelly Vision Systems Europe Ltd., located in Manorhamilton, Ireland, a manufacturer of mirrors and mirror actuators. Under the terms of the agreement, Eaton will assume control and responsibility for manufacturing the Company's actuator currently used on certain vehicles in Europe. The agreement should be finalized by the third quarter of 2001. On February 28, 2001, the Company acquired all of the outstanding common stock of Donnelly Electronics, not then owned by the Company for $4.5 million, paid equally in cash and through the issuance of shares of the Company's Class A Common Stock. The acquisition has been accounted for under the purchase method of accounting, and the goodwill and intangibles in the amount of $4.9 million recorded on a preliminary basis as a result of the acquisition are being amortized over 20 years. Due to the acquisition of the remaining interest, the Company began consolidating Donnelly Electronics' financial statements beginning in March 2001. Prior to the acquisition of the remaining interest, the Company owned 18.2% of the common stock of Donnelly Electronics and had advanced funds for its operations. Donnelly Electronics 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 also produces products for other automotive suppliers and non-automotive customers. 6 The pro-forma impact of the acquisition and summarized financial information of Donnelly Electronics have not been provided since the impact on revenues is not material and substantially all of the losses of Donnelly Electronics have been reflected in the Company's financial statements as described in Note 1. 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 Brasil, LTDA ("Donnelly do Brasil"). 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. 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 Brasil is in the process of launching new programs for the Brazilian market. In July 2000, the Company purchased the remaining minority interest in Donnelly Hohe Espana, S.A., for $1.9 million. After this purchase the Company owns 29.8 % of the Spanish entity directly and owns the remainder through its German affiliate, Donnelly Hohe GmbH & Co. KG. 3. 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. The Company has two reportable segments: North American Operations ("NAO") and European Operations ("EO"). The operating segments have been managed separately as they each represented regional operational components, which offer 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 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 is 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 the operating groups is represented by a group president who is a member of the corporate management team. The Company will be reevaluating its segment definitions over the course of 2001 as it transitions to this new corporate organizational structure. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies in Note 1 of the Company's Form 10-K/A report for the twelve months ended December 31, 2000. Revenues are attributed to segments based on the location from which 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 business segments is as follows: 7 Other Intersegment Total In thousands NAO EO Segments* Eliminations Segments -------------------------------------------- -------------- -------------- --------------- ----------------- --------------- Three months ended March 31, 2001: Revenues................................ $ 141,943 $ 78,798 $ 2,936 $ (3,676) $ 220,001 Segment profit (loss)................... 8,567 5,624 (17) -- 14,174 Three months ended April 1, 2000: Revenues $ 155,842 $ 75,954 $ 7,974 $ (2,366) $ 237,404 Segment profit (loss)................... 17,732 4,305 (92) -- 21,945 * Other segments category includes the Company's majority owned Asian & South American operations, and automotive joint ventures.

Reconciliation of the totals reported for the operating segments' profit to consolidated income before income taxes in the combined consolidated financial statements is shown below: Three Months Ended ---------------------------------------- March 31, April 1, (In thousands) 2001 2000 -------------------------------------------- ------------------- ------------------ Segment profit from reportable segments............ $ 14,191 $ 22,037 Segment profit from other segments................. (17) (92) Interest, net...................................... (1,986) (1,591) Depreciation and amortization...................... (7,980) (7,664) Corporate and other expenses*...................... (3,504) (3,549) ------------------- ------------------ Income before taxes on income $ 704 $ 9,141 =================== ================== * Corporate and other expenses category includes centralized corporate functions including those for advanced research, corporate administration including information technology, human resources and finance and other costs associated with corporate development and financing initiatives.

Additional disclosures regarding the Company's products and services, geographic areas, major customers and total assets are included in Note 4 - Nature of Operations, in the Company's Form 10-K/A report for the twelve months ended December 31, 2000. 4. RESTRUCTURING CHARGES On July 9, 2001, the Company announced a European restructuring initiative ("the 2001 plan") to further enhance the efficiency and profitability of its European operations through a combination of margin improvements and overhead reductions. Objectives of the 2001 plan will be achieved through outsourcing of "non-core" operations including work currently performed in the Company's Tool Shop and Zinc Diecasting operations. Personnel cutbacks will also be made in the Paint Shop and in Manufacturing Overhead. The total cost of the plan is estimated at $2.1 million pre-tax, or $1.4 million at net income, related to termination benefits for approximately 125 production, engineering and support personnel. Costs will be recognized as specific actions are defined and approved beginning in the third quarter of 2001. The plan is anticipated to be completed in 2002. While the Company believes that further restructuring actions may be appropriate in Europe and continues to evaluate these operations for improvements, the assessment of possible actions has not yet been completed. 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 the Donnelly Production System, the Company's approach to lean manufacturing processes, throughout Europe and 4) re-aligning sales and engineering functions throughout Europe. An $8.8 million pre-tax restructuring charge, or $4.7 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 $5.3 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 March 31, 2001, the Company had terminated 221 employees under the combined plans. In addition, the Company has not experienced further reductions of 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. 8 As required by generally accepted accounting principles for restructuring charges, the Company reduced its restructuring reserve by $3.8 million pre-tax, or $2.4 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 the outcome uncertain for some aspects of the combined plans. The ending reserve balance of $2.6 million represents the costs associated with the remaining planned actions expected to be substantially completed during 2001. Details of the European restructuring reserves are as follows: Severance and Asset Restructuring (In thousands) Benefits Impairment Total ------------------------------------------------------------ ------------------- ------------------- ------------------ 1997 plan.............................................. $ 9,965 $ -- $ 9,965 1999 plan.............................................. 7,426 1,351 8,777 1998 reserve reduction............................ (1,117) -- (1,117) 2000 reserve reduction............................ (3,448) (348) (3,796) Amounts utilized.................................. (8,601) (530) (9,131) Impact of foreign currency changes................ (1,954) (144) (2,098) ------------------- ------------------- ------------------ Accrued Restructuring Costs at March 31, 2001 $ 2,271 $ 329 $ 2,600 =================== =================== ==================

5. INVENTORIES Inventories consist of: March 31, December 31, (In thousands) 2001 2000 ------------------------------------------------ ------------------ ----------------- Finished products and work in process........ $ 19,544 $ 18,124 Raw materials................................ 42,502 37,809 ------------------ ----------------- $ 62,046 $ 55,933 ================== =================

6. FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives in the balance sheet at fair value. It also requires that unrealized gains and losses resulting from changes in fair value be included in income or comprehensive income, depending on whether the instrument qualifies as a hedge transaction, and if so, the type of hedge transaction. The Company has examined and updated its current derivative use policy, and identified hedge arrangements, along with their anticipated treatment on an ongoing basis under the provisions of SFAS No. 133. The implementation of this new standard as of January 1, 2001, did not have a material impact on the Company's results of operations or financial position. 9 7. EARNINGS (LOSS) PER SHARE (as restated) The following table sets forth the computation of basic and diluted earnings per share for each period reported: Three Months Ended ------------------------------ March 31, April 1, (In thousands, except per share data) 2001 2000 --------------------------------------------- ------------------------------ Net income (loss)................................ $ (70) $ 5,567 Less: Preferred stock dividends................. (10) (10) ------------------------------ Income (loss) available to common shareholders... $ (80) $ 5,557 ============================== Weighted-average shares.......................... 10,255 10,154 Plus: Effect of dilutive stock options.......... - 9 ------------------------------ Adjusted weighted-average shares................. 10,255 10,163 ============================== Basic earnings (loss) per share.................. $ (0.01) $ 0.55 ============================== Diluted earnings (loss) per share................ $ (0.01) $ 0.55 ==============================

Options to purchase 733,000 shares of common stock at various prices per share were outstanding during the current quarter but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and the Company incurred a net loss for the quarter, therefore, the effect would be antidilutive. 8. COMPREHENSIVE INCOME (LOSS) (as restated) Comprehensive income includes net income and all changes to shareholders' equity, except those due to investments by owners and distributions to owners. Comprehensive income consists of the following: Three Months Ended ----------------------------------- March 31, April 1, (In thousands) 2001 2000 ---------------------------------------------- ----------------------------------- Net income (loss)........................... $ (70) $ 5,567 Other comprehensive income (loss): Foreign currency translation and transaction adjustments............. (3,203) 2,043 Unrealized loss on interest rate swaps and foreign exchange contracts.......... (220) -- ----------------------------------- Comprehensive income (loss)................. $ (3,493) $ 7,610 ===================================

Translation and transaction adjustments are recorded directly in a component of shareholders' equity in the accompanying Condensed Combined Consolidated Balance Sheets. These result from changes in the foreign currency translation adjustments of the Company's net investments in its foreign subsidiaries, as well as foreign currency denominated long-term advances to affiliates caused by fluctuations in exchange rates. The Company had total accumulated other comprehensive losses of $18.1 million and $14.7 million at March 31, 2001, and December 31, 2000, respectively. 9. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are involved in certain 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. Reserves established for these potential liabilities are reviewed quarterly. 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 10 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. Adjustments are made to established reserves when changes in management's estimates and industry conditions occur. 10. RESTATEMENT OF FINANCIAL STATEMENTS As described in Note 1, the Company's financial statements for the relevant periods have been restated to properly reflect financial position and net income (loss). The following tables detail the effects of the restatement (in thousands, except per share data): Three Months Ended Three Months Ended Income Statement Data March 31, 2001 April 1, 2000 -------------------------------------------------------------------------------------- ----------------------------------- As Previously As Restated As Previously As Restated Reported Reported ------------------------------------ ----------------------------------- Net sales $220,001 $220,001 $237,404 $237,404 Gross profit 32,847 32,847 41,280 41,280 Net income (loss) 1,244 (70) 6,774 5,567 Basic and diluted net income (loss) per share $ 0.12 $ (0.01) $ 0.67 $ 0.55

Balance Sheet Data As of December 31, 2000 As of March 31, 2001 ------------------------------------------------------------------------------------------------------------------ As Previously As Previously Reported As Restated Reported As Restated ----------------------------------------------------------------------- Current assets $172,741 $172,324 $180,728 $ 183,716 Total assets 464,020 423,996 473,787 433,982 Current liabilities 128,980 128,980 137,854 137,854 Total liabilities and minority interest 329,239 309,371 339,891 321,556 Shareholders' equity 134,781 114,625 133,896 112,426

11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2001 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. In this Item 2, references to the results of operations and cash flows for all periods presented and to balances as of the dates presented relate to restated amounts for certain investments in and advances to affiliates. See Note 1 of the Notes to the accompanying Condensed Combined Consolidated Financial 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. The Company has two reportable segments: North American Operations ("NAO") and European Operations ("EO"). These have been managed separately as they each represent regional operational components, which offer the Company's product lines in different geographical markets. During 2001, the Company is 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 it to achieve even stronger performance with its products in the global marketplace. 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 sport utility vehicles, as compared to automobiles. These factors cause results to fluctuate from period to period and year to year. Investment 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. Acquisitions, Mergers, Joint Ventures and Sale of Investments In April 2001, the Company announced that it has signed a non-binding letter of intent with Eaton Corporation, a diversified industrial manufacturer, to sell certain assets of the Donnelly subsidiary, Donnelly Vision Systems Europe Ltd., located in Manorhamilton, Ireland, a manufacturer of mirrors and mirror actuators. Under the terms of the agreement, Eaton will assume control and responsibility for manufacturing the Company's actuator currently used on certain vehicles in Europe. The agreement should be finalized during the third quarter of 2001. 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. The acquisition has been accounted for under the purchase method of accounting. The goodwill and intangibles in the amount of $4.9 million recorded on a preliminary basis as a result of the acquisition are being amortized over 20 years. Due to the acquisition of the remaining interest, the Company began consolidating Donnelly Electronics' financial statements beginning in March 2001. As of February 28, 2001, 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 in the amount of $22.6 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 produces products for 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 12 Brasil, LTDA ("Donnelly do Brasil"). 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. 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 Brasil is in the process of launching new programs for the Brazilian market. In July 2000, the Company purchased the remaining minority interest in Donnelly Hohe Espana, S.A., for $1.9 million. RESULTS OF OPERATIONS Comparison of the three-month periods ended March 31, 2001, and April 1, 2000 North American Operations ("NAO") For the three-month period ended March 31, 2001, NAO net sales decreased 8.9%, or $13.9 million, compared to the same period in calendar 2000. North American car and light truck build for the three-month period decreased approximately 17% compared to the same period in 2000. NAO gross profit margins were down for the three-month period ended March 31, 2001, compared to the same period in the previous calendar year. The decrease in gross profit margin is due primarily to a general deterioration in the automotive industry; irregular and reduced Original Equipment Manufacturer ("OEM") production schedules, higher launch costs associated with products and costs associated with the integration of Donnelly Electronics. The success of the Company in maintaining gross profit margins is dependent upon its ability to successfully launch newly booked business and to offset continued customer pricing pressures. In addition, the Company may experience changes in gross profit margins based on its mix of lower-margin and higher-margin products. The Company's North American operating margins were below previous year levels for the three-month period ended March 31, 2001, compared to the same period in the previous calendar year. Lower gross profit margins combined with relatively constant operating expenses during the period, including increased research and development expenses due to the inclusion of the results of Donnelly Electronics in March 2001 and the continued support of new programs which will launch during the second half of calendar 2001 were primarily responsible for the declines. Selling, general and administrative expenses remained relatively flat due largely to the benefits of the continued focus on cost reduction in North America. The Company anticipates that its acquisition of Donnelly Electronics will result in higher research and development expense both in absolute terms and as a percent of sales. However, the Company anticipates a favorable impact to both its operating and gross profit margins from this acquisition. European Operations ("EO") EO net sales increased 3.7% or $2.8 million for the three-month period ended March 31, 2001, compared to the same period in calendar 2000. The continued strengthening of the dollar compared to the euro reduced the reported sales level for Europe. Stated in local currencies, EO net sales increased approximately 10% for the three-month period ended March 31, 2001, compared to the same period in calendar 2000, respectively. The increase in net sales is primarily due to product launches begun in calendar 2000 running at full production volumes and delivering in 2001. Western European car production decreased by approximately 3% in the first three months of 2001 compared to the same period last year. EO gross profit margins increased slightly during the three-month period ended March 31, 2001, compared to the same period in calendar 2000. This was due to the growth in manufacturing of electronic components in Europe and a change in the Company's estimated warranty reserves based on positive warranty experience. EO operating income improved for the period ended March 31, 2001, compared to the same period in the previous year. The Company's ability to leverage costs against stronger sales and increased gross profit margins contributed to the improved operating margins during the three-month period. Company Net sales were $220.0 million for the three-month period ended March 31, 2001, compared to $237.4 million in the same period last year, representing a decrease of 7.3%. This decrease is due primarily to a general decline in the automotive industry. North American industry production declined 17% while average production among the three OEM's was down more than 20%. European sales increased due to relatively stronger production volumes in Europe, despite a vehicle 13 production decrease in Europe of only 3% as compared to the same period in the prior year, as well as growth from new business. Unfavorable foreign exchange rates partially offset the increased sales in Europe. Gross profit margin for the three-month period ended March 31, 2001, was 14.9% compared to 17.4% in the comparable period of last year. Reduced gross profit margins are primarily the result of increased costs associated with new product launches, irregular and reduced OEM production schedules and costs associated with the integration of Donnelly Electronics. Margin reductions were offset slightly by a change in the Company's estimated warranty reserves based on favorable warranty experience. Selling, general and administrative expenses were $21.0 million, or 9.5% of net sales, for the three-month period ended March 31, 2001, compared to $20.9 million, or 8.8% of net sales for the three-month period ended April 1, 2000. These expenses remained relatively consistent with previous year levels due to management's focus on cost reduction both in North America and Europe. Research and development expenses remained consistent with prior year levels, at $9.4 million, or 4.3% of net sales, for the three-month period ended March 31, 2001, compared to $9.8 million, or 4.1% of net sales in the comparable period of last year. The decrease in current year expenses is primarily due to continued focus on cost reductions throughout North America, despite the increased costs related to the acquisition of Donnelly Electronics. Additionally, the lower research and development expenses for the three months ended March 31, 2001, were due to timing of engineering related expenses. Operating income was $2.4 million for the three-month period ended March 31, 2001, compared to $10.6 million for the same period last year. Operating income represented 1.1% of net sales for the three months ended March 31, 2001, compared to 4.5% for the comparable period in the prior year. This decrease is due to reduced sales and gross profit margins combined with consistent levels of operating expenses. Interest expense was $2.1 million for the three-month period ended March 31, 2001, compared to $1.8 million for the same period last year. Interest expense increased slightly due to higher average debt levels partially offset by lower interest rates. Other (income) expense, net was $0.5 million and $0.2 million for the three month periods ended March 31, 2001 and April 1, 2000, respectively, primarily due to an increase in foreign transaction losses. The Company's effective tax rate was approximately (26.3)% for the three-month period compared to 28.0% in the same respective period of 2000. The recorded tax benefit reflects a low effective tax rate combined with the realization of certain tax credits and export sale tax benefits. The Company has recorded $16.3 million and $17.2 million of deferred tax assets primarily related to foreign non-expiring net operating loss carry-forwards at March 31, 2001, and December 31, 2000, respectively, and are substantially offset by related deferred tax liabilities. A significant portion of the loss carry-forwards resulted from the European restructuring charges. These tax assets are expected to be realized based on improvements from the restructuring initiative, and continuous improvement in overall operational earnings from the implementation of the Company's production system throughout Europe. Equity in losses of affiliated companies, was $1.0 compared to $0.9 in the first quarter of 2000. The Consolidation of the Company's Brazilian joint venture, which is still operating at a loss, as of October 2000 (See Note 2) and continued profitability at the Company's joint ventures in China, were offset by operating losses at Donnelly Electronics. The Company is committed to improving shareholder value with a strategic plan focused on the following key areas: developing core automotive products, primarily by increasing dollar content per vehicle through the expansion of market share of existing products; introduction of new technologies and products and increasing volume through penetration into new and emerging markets; improving the overall operating performance of the Company's European Operations; extending the Company's capabilities in value-added electronics technologies; and repositioning non-core businesses, as appropriate, through merger or divestiture. LIQUIDITY AND CAPITAL RESOURCES The Company's current ratio was 1.3 on March 31, 2001 and December 31, 2000. Working capital was $45.9 million on March 31, 2001, compared to $43.3 million at December 31, 2000. Net working capital increases associated with the Donnelly Electronics acquisition were offset by reductions in customer and other receivables. 14 At March 31, 2001, and December 31, 2000, $36.4 million and $38.5 million, respectively, had been sold under the Company's accounts receivable securitization agreement. Proceeds received under this agreement are used to reduce revolving lines of credit. The sales are reflected as a reduction of accounts receivable and an increase to operating cash flows. The agreement expires in December 2001, however it is renewable for one-year periods. The Company expects to extend the current agreement or replace it on comparable terms. Capital expenditures for the three months ended March 31, 2001, and April 1, 2000, were $10.8 million and $12.3 million, respectively, excluding funds expended for the acquisition of Donnelly Electronics. Capital spending was primarily to support new business orders, the ramp up of new electrochromic and electronic mirror products, information technology, the European turnaround plan and continuous improvement activities of the Company. Capital spending for the next twelve to eighteen months is expected to remain near current spending levels to support these programs, in addition to the implementation of new manufacturing, distribution and administrative information systems globally. The Company announced significant restructuring plans in fiscal 1997 and 1999 to improve the overall profitability of EO (see Note 4). The remaining reserve balance for these plans was $2.6 million at March 31, 2001. The ending reserve balance of $2.6 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 continues to evaluate these operations for improvements, the assessment of possible actions has not yet been completed. The Company believes that its long-term liquidity and capital resource needs will continue to be provided principally by funds from operating activities, supplemented by borrowings under existing credit facilities. The Company also considers equity offerings to properly manage the Company's total capitalization position. The Company considers, from time to time, new joint ventures, alliances, divestitures and acquisitions, the implementation of which could impact the liquidity and capital resource requirements of the Company. For the three-month period ended March 31, 2001, the Company made $9.4 million of investments in and advances to affiliates. The Company's $160 million multi-currency global revolving credit agreement had borrowings against it of $73.8 million and $77.1 million as of March 31, 2001, and December 31, 2000, respectively. The Company's primary foreign investments are in Germany, Ireland, Spain, France, Mexico, China, Brazil and Malaysia. Except for the Company's subsidiary in Mexico, whose functional currency is the United States dollar, financial statements of international companies are translated into United States dollar equivalents at exchange rates as follows: (1) balance sheet accounts at period-end rates and (2) income statement accounts at weighted average monthly exchange rates prevailing during the year. Translation gains and losses are reported as a separate component of shareholders' equity and are included in accumulated other comprehensive income. For the subsidiary in Mexico, transaction and translation gains or losses are reflected in net income for all accounts other than intercompany balances of a long-term investment nature for which the translation gains or losses are reported as a separate component of shareholders' equity. Foreign currency transaction gains and losses included in other income are not material. The Company utilizes interest rate swaps and foreign exchange contracts, from time to time, to manage exposure to fluctuations in interest and foreign currency exchange rates. The risk of loss in the event of nonperformance by any party under these agreements is not material. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria, and that upon adoption of SFAS 142, the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life 15 should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test within six months of the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of March 31, 2001, the net carrying amount of goodwill and other intangible assets is $12.9 million. Amortization expense during the three-month period ended March 31, 2001 was $200,000. Currently, the Company is assessing but has not yet determined how adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. The Company implemented SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as described in Note 6. Euro Conversion Effective January 1, 1999, eleven of fifteen member countries of the European Union established permanent rates of exchange between the members' national currency and a new common currency, the "euro." In this first phase, the euro is available for non-cash transactions in the monetary, capital, foreign exchange and inter-bank markets. National currencies will continue to exist as legal tender and may continue to be used in commercial transactions until the euro currency is issued in January 2002 and the participating members' national currency is withdrawn by July 2002. The Company's significant European operations are all located in member countries participating in this monetary union. The Company created an internal, pan-European, cross-functional team, as well as internal teams at each operation affected by the change, to address operational implementation issues and investigate strategic opportunities due to the introduction of the euro. The Company has established action plans that are currently being implemented to address the euro's impact on information systems, currency exchange risk, taxation, contracts, competition and pricing. The Company anticipates benefiting from the introduction of the euro through a reduction of foreign currency exposure and administration costs on transactions within Europe and increased efficiency in centralized European cash management. The Company has commenced conversion of its European operations from national currency to the euro. The change in functional currency is proceeding as planned and is expected to be completed in the middle of calendar 2001. The Company does not presently expect that the introduction and use of the euro will materially affect the Company's foreign exchange hedging activities or the Company's use of derivative instruments. Any costs associated with the introduction of the euro will be expensed as incurred. The Company does not believe that the introduction of the euro will have a material impact on its results of operations or financial position. ITEM 3 (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates and foreign currency exchange primarily in its cash, debt, foreign currency transactions and operating results of the Company's foreign affiliates. The Company holds derivative instruments, including interest rate swaps and forward foreign currency contracts. Derivative instruments used by the Company in its hedging activities are viewed as risk management tools and are not used for trading or speculative purposes. Analytical techniques are used to manage and monitor foreign exchange and interest rate risk and include market valuation. The Company believes it is, to a lesser degree, subject to commodity risk for price changes that relate to certain manufacturing operations that utilize raw commodities. The Company manages its exposure to changes in those prices primarily through its procurement and sales practices. This exposure is not considered material to the Company. A discussion of the Company's accounting policies for derivative financial instruments is included in Note 1 - Summary of Significant Accounting Policies, in the Notes to the Combined Consolidated Financial Statements, which are included in Item 8 of the Form 10-K/A report for the twelve months ended December 31, 2000. Additional information relating to financial instruments and debt is included in Note 9 - Financial Instruments and Note 7 - Debt and Other Financing Arrangements, which are also included in Item 8 of the Form 10-K/A report for the twelve months ended December 31, 2000. International operations are primarily based in Europe and, excluding U.S. export sales which are principally denominated in U.S. dollars, constitute a significant portion of the revenues and identifiable assets of the Company. A predominant portion of these international revenues and identifiable assets are based in German marks. The Company has significant loans to 16 foreign affiliates, which are denominated in foreign currencies. Foreign currency changes against the U.S. dollar affect the foreign currency transaction adjustments on these long-term advances to affiliates and the foreign currency translation adjustment of the Company's net investment in these affiliates, which impact consolidated equity of the Company. International operations result in a large volume of foreign currency commitment and transaction exposures and significant foreign currency net asset exposures. Since the Company manufactures its products in a number of locations around the world, it has a cost base that is diversified over a number of different currencies, as well as the U.S. dollar, which serves to counterbalance partially its foreign currency transaction risk. Selective foreign currency commitments and transaction exposures are partially hedged. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures; however, when possible, it borrows in local currencies to reduce such exposure. The Company is also exposed to fluctuations in other currencies including: Brazilian reals, British pounds, Chinese renminbi, European euros, Japanese yen, Malaysian ringgit and Mexican pesos. The Company is also exposed to potential costs associated with repatriation timing and risk from some of its foreign affiliates. The fair value of the foreign currency contracts outstanding has been immaterial each of the last two years. The Company's cash position includes amounts denominated in foreign currencies. The Company manages its worldwide cash requirements considering available funds amongst its subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of the Company's affiliates could have adverse tax consequences. However, those balances are generally available without legal restrictions to fund ordinary business operations. The Company has and will continue to transfer cash from those affiliates to the parent and to other international affiliates when it is cost effective to do so. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize interest costs. Thirty percent of the Company's long-term debt is fixed and an additional $15 million is effectively fixed through interest rate swaps. See the Company's Form 10-K/A report for the twelve months ending December 31, 2000, Item 7 (a), for quantitative and qualitative disclosures about market risk as of December 31, 2000. There have been no material changes in the nature of the market risk exposures facing the Company since December 31, 2000. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The 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, previously disclosed in the Company's Form 10-K/A report for the twelve months ended December 31, 2000, 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 2. Exhibits and Reports on Form 8-K (a) EXHIBITS Exhibit 10.1 * Letter from Donnelly Corporation to Mr. Kevin L. Brown dated March 5, 2001. 17 Exhibit 10.2 * Letter from Donnelly Corporation to Mr. Steve Crandall dated February 12, 2001. * Previously Filed (b) REPORTS ON FORM 8K The Registrant filed Form 8-K, dated February 27, 2001, in which the registrant disclosed, in Item 2, the acquisition of Donnelly Electronics, Inc., a Michigan Corporation, and subsequently an amended Form 8-K was filed on May 11, 2001 and is hereby incorporated by reference. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized. DONNELLY CORPORATION Registrant Date: September 28, 2001 /s/ J. DWANE BAUMGARDNER ------------------------ J. Dwane Baumgardner (Chairman, Chief Executive Officer and President) Date: September 28, 2001 /s/ KEVIN L. BROWN ------------------------ Kevin L. Brown (Senior Vice President, Chief Financial Officer and Chief Accounting Officer) 19

DONNELLY CORP 10-Q/A