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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the fiscal year ended June 30, 1996
Commission File Number 0-27202
ADVANCED LIGHTING TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Ohio 34-1803229
(State of Incorporation) (IRS Employer Identification Number)
2307 East Aurora Road, Suite One,
Twinsburg, Ohio 44087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216)963-6680
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 27, 1996 was $148,673,500.
There were 13,296,709 shares of the Registrant's Common Stock outstanding as of
September 30, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use at the Annual Meeting of
Shareholders on November 13, 1996 are incorporated by reference in Part III of
this Form 10-K to the extent stated herein.
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TABLE OF CONTENTS
PART I
Page
----
Item 1. Business...............................................................
Item 2. Properties.............................................................
Item 3. Legal Proceedings......................................................
Item 4. Submission of Matters to a Vote of Security Holders....................
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters..
Item 6. Selected Financial Data................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................
Item 8. Financial Statements and Supplementary Data............................
Item 9. Changes 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 Schedule and Reports on Form 8-K.........
Signatures ........................................................
Exhibit Index ........................................................
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENTS OF BUSINESS SINCE FISCAL YEAR BEGINNING
Advanced Lighting Technologies, Inc. (the "Company") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, including lamps (light bulbs), lamp components and lamp production
equipment. Metal halide lamps combine superior energy efficient illumination
with longer life, excellent color rendition by providing a full color spectrum
and compact size as compared with incandescent and fluorescent lamps. The
Company believes it is the only company in the world focused primarily on metal
halide lighting and, as a result, it has developed substantial expertise in all
aspects of this industry. The Company believes that this focus enhances its
responsiveness to customer demand and has contributed to its technologically
advanced product development and manufacturing capabilities. The Company
currently markets over 240 specialty and 40 commodity-type metal halide lamps,
giving it the most diverse product line of any metal halide lamp manufacturer.
Invented approximately 35 years ago, metal halide is the newest of all
major lighting technologies and can produce the closest simulation to sunlight
of all available lighting technologies. Metal halide lighting is currently used
in commercial and industrial applications such as factories and warehouses,
outdoor site and landscape lighting, sports facilities and large retail spaces
such as superstores. In addition, due to metal halide's superior lighting
characteristics, the Company believes many opportunities exist to expand the
uses of metal halide into applications currently dominated by incandescent and
fluorescent technologies. For example, a 100 watt metal halide lamp, which is
approximately the same size as a household incandescent lamp, produces as much
light as five 100 watt incandescent lamps and as much as three 34 watt, four
foot long fluorescent lamps. While domestic sales of incandescent and
fluorescent lamps grew at a compound annual rate of approximately 4% over the
last three years, domestic metal halide lamp sales have grown at a compound
annual rate of approximately 15% over the same period, making metal halide the
fastest growing segment of the approximately $2.6 billion domestic lamp market.
In 1995, metal halide accounted for approximately 6% of domestic lamp sales. The
Company believes that new lighting technologies typically increase overall lamp
sales rather than render existing technologies obsolete. Metal halide lighting
has recently been introduced in automotive headlamp, projection television and
fiber optic applications. The Company believes that applications for metal
halide lamps will continue to increase as metal halide systems become more
widely known.
The Company's objective is to be the leading innovator, designer,
manufacturer and marketer of specialty metal halide lamps, lamp components and
lamp production equipment. The Company pursues the following operating
strategies:
o Focus on Metal Halide Technology. The Company's focus on metal halide
products has enabled it to develop unique design, manufacturing and
marketing expertise in all metal halide product lines. By supplying
lamp components and lamp production equipment to the metal halide lamp
industry, the Company also benefits from the overall expansion of
metal halide lamp sales.
o Develop Innovative Products. The Company has introduced over 75% of
the new metal halide lamp types produced domestically since 1985. The
Company's new product strategy and emphasis on innovation
differentiates it from its competitors that focus primarily on high
volume, commodity-type lamps. Most of the Company's new products were
developed in response to customer demand and the Company remains the
sole supplier for many of these products.
o Continue to Strengthen OEM and Lighting Agent Relationships. The
Company frequently designs lamps to meet fixture specifications of
original equipment manufacturers ("OEMs") and their lighting agent
sales force, who, in turn, market the Company's lamps to a variety of
end users. Such cooperative relationships contribute to the
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Company's innovative designs and allow it to utilize traditional
distribution channels which are dominated by the major lamp
manufacturers. The Company's innovative marketing techniques enabled
it to capture approximately 29% of all new domestic metal halide lamp
sales in 1995.
o Maintain Flexible Manufacturing Through Vertical Integration. By
controlling all aspects of the production of metal halide lamps and
components, the Company is able to cost-effectively develop and
manufacture a wide variety of specialty metal halide lamps, including
lamp types manufactured in small production runs.
The Company expects to increase its net sales by expanding the market
for metal halide products. The Company's growth strategy involves introducing
new products and creating new metal halide applications, increasing sales of
existing products, increasing its presence in international markets and
penetrating the residential market. The Company introduces new products by
working with OEMs and other customers to design and develop innovative metal
halide lighting solutions. The Company also intends to increase sales of its
existing products by implementing aggressive direct marketing of its lamps to
end users. Additionally, the Company intends to participate in growing
international markets through direct sales of lamps, lamp components and lamp
production equipment and, in countries with rapidly developing metal halide
markets, through joint ventures that will purchase the Company's lamp components
and lamp production equipment. The Company has begun its introduction of metal
halide lighting systems to the residential market, which represented 45% of all
domestic lamp sales in 1995, and believes that it is the first company to
develop such products for residential use.
The Company was formed on May 19, 1995, and acquired ownership,
primarily by merger (the "Combination"), of 17 affiliated operating corporations
that were previously under common ownership and management (the "Predecessors").
Each of the Predecessors was engaged in one or another aspect of the metal
halide lighting business. The Combination was effected on October 6 and 10,
1995.
Since the Company's initial public offering in December 1995, the
Company has continued to execute its growth strategy. The Company recently
introduced several new products, including specialty electronic metal halide
lighting controls, to complement its lamp sales and further meet the
increasingly complex specifications of OEMs and lighting agents. In May 1996,
the Company introduced its residential metal halide lighting systems at "Light
Fair," the major United States lighting trade show. The Company is currently
market testing its residential systems and expects to begin limited production
in the second quarter of fiscal 1997. Following the successful acquisition of
its distributor in the United Kingdom, the Company has continued to increase
its international marketing capabilities through the acquisition of its
Canadian and Australian distributors. In addition to two existing joint
ventures, the Company has recently entered into joint venture agreements in
Abu Dhabi and Vietnam to which it expects to sell lamp production equipment
and, when lamp production commences, certain lamp components.
MARKETING AND DISTRIBUTION
Commercial Products
The Company's innovative marketing techniques enabled it to capture
approximately 29% of all new domestic metal halide lamp sales in 1995. Because
electrical distributors typically market only commodity-type lamps, the Company
believes that its specialty products do not lend themselves to the traditional
marketing channels associated with commodity-type lamp products. As a result,
in initial distribution, the Company markets its metal halide lamps through
OEMs, who have generally been involved in the design of the lamp, and
commissioned lighting agents, who package the Company's lamps in their bids on
each construction or renovation project. Due to the fact that the Company's
lamps are produced to the specifications required to match a particular fixture
or use by an OEM, the Company's lamp will generally be included with the
fixture each time the fixture is sold.
The Company also has distributed its metal halide lamps through
lighting agents. Unlike the other principal manufacturers of metal halide
lamps, General Electric Company and its subsidiaries ("GE"), Philips
Electronics N.V. ("Philips") and Siemans A.G.'s OSRAM/Sylvania, Inc.
("Sylvania"), that each have extensive local distributor relationships, the
Company has entered into agency agreements with lighting agents who represent a
full line of fixture manufacturers, under which
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the agent receives a commission for selling the Company's lamps. The Company
believes it is the only major lamp manufacturer to distribute its products
through lighting agents. This relationship allows the lighting agent to package
the Company's metal halide lamps with the other products included in its bid on
a project. By bidding a more complete or unique package, the lighting agent has
a competitive advantage over less complete bids and, if selected, earns a
commission on Company lamps sold, which agents previously did not receive.
The Company intends to increase its sales of replacement lamps through
direct marketing. First, the Company places a toll-free number on each lamp
that it sells allowing an end user to call the Company, rather than an
electrical distributor, to order the replacement lamp directly from the
Company. This enables the end user to speak to a more knowledgeable
representative, thereby increasing the accuracy, efficiency and service to the
end user. Talking to the representative also allows the Company to suggest
enhanced products better suited for the end user's needs. In addition, the
Company telemarkets replacement lamps in connection with catalogue
distributions. Lamps are delivered by overnight courier to end users, thereby
providing service efficiency comparable to local electrical distributors. The
Company estimates it sold approximately 1% of all replacement metal halide
lamps in 1995. Replacement lamps are typically sold at a higher margin than
lamps sold initially through OEMs or lighting agents.
The Company markets its metal halide components to other metal halide
lamp manufacturers, primarily GE, Philips and Sylvania. The Company makes these
customers aware of its capabilities through seminars and direct marketing
materials. The Company also markets lamp components to its joint venture
partners. In addition, the Company works very closely with its customers to
manufacture components according to their specifications. Certain customer
developed components are considered proprietary to the Company's customers.
In marketing its lamp production equipment internationally, the Company
seeks out the most technically advanced lamp manufacturers in each country or
the Company is approached by foreign lamp manufacturers seeking to acquire the
technology. The Company initially sends a catalogue to these manufacturers,
then later calls on these manufacturers to determine their needs. The Company
develops a customized configuration for the equipment to meet the customers'
needs. The Company believes its ability to supply a full range of lamp
components provides it an advantage in selling lamp production equipment.
Residential Products
The Company has begun preliminary marketing of metal halide technology
to the residential market in 1996. Initially, this marketing will focus on
high-end lighting stores and designer showrooms similar to the manner in which
halogen lamps penetrated the residential market in the early 1980s. The Company
will use its existing lighting agents, who typically sell both commercial and
residential products, to reach these stores. However, unlike halogen lamps, the
Company intends to pursue a strategy of branding its products under its
MICROSUN(TM) brand name thereby differentiating it from any competitors as well
as establishing brand loyalty. In the second and third quarters of fiscal 1996,
the Company gathered many focus groups where various examples of incandescent
table lamps and table lamps containing the MICROSUN(TM) metal halide lighting
system were presented to and compared by various potential customers. The
responses received by the Company were favorable, and using information
obtained in the focus group sessions, the Company designed a line of table
lamps and produced a catalogue to market these lamps. As marketing continues,
the Company intends to promote designer and consumer awareness through targeted
advertising. The Company believes that the high price point at which this
product will be sold will support this marketing approach, unlike the
incandescent or fluorescent residential lamp market. The Company has entered
into preliminary discussions with two lighting showrooms in Cleveland, Ohio to
further test market the sale of table lamps using its MICROSUN(TM) brand name.
The Company expects to commence limited commercial production of MICROSUN(TM)
brand products in the second quarter of fiscal 1997. There can be no assurances
that the Company will successfully introduce metal halide lighting into the
residential market.
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MANUFACTURING AND OPERATIONS
The Company's lamp manufacturing facility in Solon, Ohio operates five
days a week, 16 hours a day, with the Company's lamp manufacturing employees
working in two eight-hour shifts each day. The manufacturing of metal halide
lamps consists of three primary processes. First, the quartz arc tube is shaped,
electrodes for carrying the current are installed, the metal halide salt dose is
introduced and the arc tube is sealed. The entire process is performed at high
temperatures in carefully controlled conditions to ensure that the arc tube is
properly sealed and that no impurities enter the arc tube. Second, the arc tube
is mounted inside a pyrex bulb container and sealed. Finally, the lamp is
finished by adding a contact for the electrical outlet. Although light output of
metal halide lamps is not affected by ambient temperatures, an outer bulb is
used to prevent contact with the arc tube, which operates at extremely high
temperatures. Quartz and pyrex are used in the production of metal halide lamps
because of their durability and ability to retain shape and function at
extremely high temperatures. All of the finished lamps are inspected, tested and
then shipped in accordance with customer instructions.
The Company produces all of the metal halide salts it uses and sells
at its facility in Urbana, Illinois. The Urbana facility with 53 employees
working a single shift also produces precision metal pieces, precision metal
electrode leads, and high speed dose dispensers which are used by both the
Company and sold to other metal halide lamp manufacturers for the production of
metal halide lamps.
The Company manufactures equipment for metal halide lamp production at
its facility in Bellevue, Ohio. This equipment is used for the Company's lamp
production and is also sold to other lamp manufacturers world wide. The Company
internally manufactures many critical and proprietary parts for its lamp
production equipment. It purchases commercial components and has other parts
built to its specifications by a number of local suppliers. The Company
assembles and tests this equipment as well as trains customers in its use. The
Company supplies extensive product, quality, process, and training documentation
with the equipment.
RAW MATERIALS AND SUPPLIERS
The Company sources its raw materials from a variety of suppliers.
Presently, it sources all of the molds for its quartz tubing and pyrex bulbs
from GE. Although an interruption in these supplies could disrupt the Company's
operations, the Company believes that alternative sources of supply exist and
could be arranged prior to the interruption having a material adverse effect on
the Company's operations.
Most of the raw materials used in the production of metal halide salts
can be sourced from several suppliers. The Company is reliant on a single
supplier for only one raw material and expects to produce this material itself
in calendar 1996. The Company has been the dominant supplier of metal halide
salts to the metal halide lamp industry for many years. Therefore, the Company
has focused on addressing any circumstance which could jeopardize the continued
production of these vital components. Since the Company is the primary supplier
of metal halide salts to the metal halide lamp industry, any disruption in
supply would also affect each producer of the affected lamp type.
The Company purchases certain of its industrial commodity-type lamp
types from GE. This enables the Company to use its manufacturing equipment to
produce more specialty, higher margin lamp types. The Company believes that
alternative sources of these commodity-type lamp types can be arranged prior to
any material adverse effect on the Company's sales.
COMPETITION
The Company's metal halide lamps compete with other types of lighting
technology for many applications as well as with metal halide lamps produced by
other metal halide lamp manufacturers, primarily GE, Philips and Sylvania. Metal
halide technology is the newest of all lighting technologies and although the
market awareness and the uses of metal halide lamps continues to grow,
competition exists from older technologies in each metal halide application.
GE, Philips and Sylvania are the Company's principal competitors in
the production of metal halide lamps. Although GE, Philips and Sylvania have
focused their efforts on the larger incandescent and fluorescent markets, all
three companies produce metal halide lamps. These three companies have
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emphasized sales of a relatively small variety of commodity-type metal halide
lamps, such as those found in certain industrial applications, which the Company
believes represent approximately 75% of the total metal halide lamp segment.
There can be no assurance that any of the Company's competitors will not expand
their focus into specialty lamps. Although the Company believes its technical
and engineering expertise in the production of specialty metal halide lamps and
its unique marketing approach give it a competitive advantage in this market,
the Company's three primary competitors have significantly longer operating
histories, greater financial, technical, and other resources and larger
marketing and distribution organizations than the Company.
The Company does not believe that the foreign lamp manufacturers to
whom the Company sells equipment compete with the Company's specialty products.
Due to the technical and engineering expertise required to produce a new type of
metal halide lamp, these purchasers have typically only produced the
commodity-type lamps types in which they have been trained by the Company.
Although there can be no assurances these purchasers will not produce specialty
lamp types to compete with the Company, these purchasers would need to
independently develop the expertise required to produce specialty metal halide
lamps.
INTELLECTUAL PROPERTY
The Company relies on trade secret, trademark and patent laws to
protect its rights to certain aspects of its products, including proprietary
manufacturing processes and technologies, product research and concepts and
trademarks, all of which the Company believes are important to the success of
its products and its competitive position. In recent years, the Company has
successfully taken legal action to enjoin misappropriation of trade secrets by
other parties. Any increase in the level of activities involving
misappropriation of the Company's trade secrets or other intellectual property
rights could require the Company to increase significantly the resources devoted
to such efforts. In addition, an adverse determination in litigation could
subject the Company to the loss of its rights to a particular trade secret,
trademark or patent, could require the Company to grant licenses to third
parties, could prevent the Company from manufacturing, selling or using certain
aspects of its products or could subject the Company to substantial liability,
any of which could have a material adverse effect on the Company's results of
operations.
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state, local and
foreign laws and regulations governing, among other things, emissions to air,
discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of waste and other materials as well as laws relating to
occupational health and safety. The Company believes that its business,
operations, and facilities are being operated in compliance in all material
respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. However, the operations of manufacturing plants entail risks in
these areas, and there can be no assurance that the Company will not incur
material costs or liabilities. In addition, potentially significant expenditures
could be required in order to comply with evolving environmental and health and
safety laws, regulations or requirements that may be adopted or imposed in the
future.
In 1993, the Company entered into a consent decree with the City of
Solon Sewer District with respect to the discharge of mercury into the sewer
system from its Solon, Ohio plant operations. The Company instituted procedures
to comply with this consent decree, and the consent decree expired by its terms
due to the Company's operation within required discharge limits for the period
required by the decree. However, routine sampling of the effluent by Solon
revealed three discrete instances of mercury discharge in excess of the limits
imposed by Solon between June 30, 1995 and September 1, 1996. Subsequent tests
conducted by the City of Solon showed mercury discharges within required
limits. The Company has implemented a plan intended to prevent intermittently
exceeding Solon's mercury standards in the future. The Company believes the
cost of continued compliance will not have a material effect on its financial
position or results of operations.
The Company believes that the overall impact of compliance with
regulations and legislation protecting the environment including the consent
decree will not have a material effect on its future financial position or
results of operations, although no assurance can be given. Capital expenditures
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and operating expenses in fiscal 1996, fiscal 1995 and fiscal 1994 attributable
to compliance with such legislation were not material.
EMPLOYEES
As of June 30, 1996, the Company had approximately 564 full-time
employees, including 453 in lamp designing, manufacturing and marketing, 56 in
component manufacturing, 35 in equipment manufacturing, and 20 in
corporate/administrative services. The Company believes that its employee
relations historically have been good. The Company's employees are not
represented by any collective bargaining organization, and the Company has never
experienced a work stoppage.
ITEM 2. PROPERTIES
The Company owns a 30,000 square foot component manufacturing facility
in Urbana, Illinois. This property is subject to a mortgage of approximately
$819,398 as of June 30, 1996. The Company's remaining facilities, including its
facilities at Solon, Ohio, and Bellevue, Ohio, described above under "BUSINESS
- -- Manufacturing and Operations," are leased, with aggregate annual rent of
approximately $1.1 million. The aggregate square footage of such leased space is
256,000 square feet. The average number of years remaining on these leases is
approximately 4 years. The Company believes that its facilities are adequate for
its current needs and does not expect difficulty replacing such facilities or
locating additional facilities if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company does not have pending any litigation that, separately, or
in the aggregate, if adversely determined, could reasonably be expected to have
a material adverse effect on the Company. The Company and its subsidiaries may,
from time to time, be a party to litigation or administrative proceedings which
arise in the normal course of their business.
On March 1, 1996, Edmund E. Heartstedt asserted a claim in the United
States District Court for the Northern District of Ohio against Wayne R.
Hellman, Chief Executive Officer and a director of the Company, and Louis S.
Fisi, Chief Financial Officer and a director of the Company, alleging certain
misrepresentations and/or omissions were made to him in connection with: (i) the
cash-out of his interest effected by a merger of a Predecessor into the Company,
as to which Mr. Heartstedt did not exercise his statutory appraisal rights; and
(ii) the purchase by Mr. Hellman of Mr. Heartstedt's beneficial interest in a
trust controlled by Mr. Hellman. On July 2, 1996, the Complaint in this action
was amended to add the Company as an additional defendant (the Amended Complaint
is referred to as the "Heartstedt Claim"). Mr. Heartstedt alleges that the
misrepresentations and/or omissions made by Mr. Fisi and others on behalf of
Messrs. Hellman and Fisi and the Company caused him direct damages which he
believes exceed $900,000. The suit also claims punitive damages in an
undetermined amount believed by the Plaintiff to exceed $2.7 million. Messrs.
Hellman and Fisi and the Company have denied the allegations and are vigorously
defending the claim. On August 23, 1996, John Hazen filed a claim (the "Hazen
Claim") in the United States District Court for the Northern District of Ohio
against the Company and Messrs. Hellman and Fisi, alleging that Mr. Hazen was or
is a partner of Mr. Heartstedt and asserting claims identical to the Heartstedt
Claim regarding the cash-out of Mr. Hazen's interest effected by the same merger
involved in the Heartstedt claim, as to which Mr. Hazen did not exercise
statutory appraisal rights. Mr. Hazen alleges that the alleged
misrepresentations by Mr. Fisi and others on behalf of the Company caused him
direct damages which he believes exceed $400,000. The suit also claims punitive
damages in an undetermined amount believed to exceed $1,200,000. Messrs. Hellman
and Fisi and the Company have denied the allegations and are vigorously
defending the claim. The Company does not believe the litigation relating to the
Heartstedt Claim and the Hazen Claim could reasonably be expected to have a
material adverse effect on the financial position, results of operations or
liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since December 12, 1995, the Common Stock has been trading on the
Nasdaq National Market tier of the Nasdaq Stock Market under the symbol "ADLT."
The following table sets forth the range of high and low sales prices per share
of Common Stock for the periods indicated, as reported by the Nasdaq National
Market:
FISCAL 1996 HIGH LOW
- ----------- ---- ---
Second Quarter (beginning December 12, 1995) $10.250 $10.000
Third Quarter 14.875 7.625
Fourth Quarter 18.250 12.625
On September 27, 1996, the last reported sales price of the Common
Stock on the Nasdaq National Market was $19.75 per share and, as of September
26, 1996, the number of holders of record of the Common Stock was 196.
The Company has paid no dividends in its last two fiscal years. The
Company's revolving credit facility prohibits payment of dividends on the Common
Stock without the prior consent of the lender, which consent may not be withheld
unreasonably. The Company does not intend to declare or pay dividends for the
foreseeable future and intends to retain earnings, if any, for the future
operation and expansion of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is
qualified by the more detailed Consolidated Financial Statements and Notes
thereto of the Company. The selected financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Items 7 and 8 below.
FISCAL YEAR ENDED JUNE 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited)
INCOME STATEMENT DATA:
Net sales $54,636 $40,767 $30,938 $25,455 $26,416
Costs and expenses:
Cost of sales 29,254 21,899 17,253 17,033 16,240
Selling, general and administrative 14,907 11,833 8,400 5,500 6,677
Research and development 3,000 1,673 1,006 1,166 1,203
Noncash settlement of claim 2,732(1) -- -- -- --
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Restructuring -- (121)(2) 852(2) 7,152(3) --
------- ------- --------- ----- -------
Income (loss) from operations 4,743 5,483 3,427 (5,396) 2,296
Interest expense 1,316 2,129 2,150 938(4) 1,691
------- ------- --------- ----- -------
Income (loss) before income taxes
and extraordinary items 3,427 3,354 1,277 (6,334) 605
Income taxes (5) 910 212 71 48 101
------- ------- ------- ------- -------
items 2,517 3,142 1,206 (6,382) 504
Extraordinary gain (charge) (135)(6) (253)(7) -- 11,368(8) --
------- ------- ------- ------- -------
Net income $ 2,382 $ 2,889 $ 1,206 $ 4,986 $ 504
======= ======= ======= ======= =====
Income (loss) per share (9):
Before extraordinary items $0.12 $ 0.10 $ 0.13 $ (0.96) $ (0.01)
Extraordinary items (0.01) (0.03) -- 1.45 --
------- ------- ------- ------- ---------
Net income (loss) $ 0.11 $ 0.07 $ 0.13 $ 0.49 $ (0.01)
======= ====== ======= ======= =========
Shares used for computing per
share amounts (9) 9,479 7,818 7,818 7,818 7,818
======= ======= ======= ======= =======
JUNE 30,
--------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,682 $ 1,030 $663 $ 1,095 $ 315
Working capital (deficit) 17,341 (870) (25) 853 (8,448)
Total assets 56,297 29,402 23,454 23,001 27,631
Total long-term debt 11,034 8,853 7,821 10,246 11,737
Total shareholders' equity (deficit) 26,594 (1,035) 1,165 (320) (4,345)
(1) On October 27, 1995, several former preferred shareholders of the
Company's largest Predecessor, whose shares were redeemed in August
1995 (prior to the Combination), asserted a claim against certain
officers of the Company. On November 15, 1995, such officers entered
into a settlement agreement with the former preferred shareholders
whereby certain principal shareholders transferred, from their
personal holdings, an aggregate of 273,185 shares of Common Stock to
the former preferred shareholders. Since the settlement resulted in a
transfer of personal shares held by such officers, there was no
dilution of the ownership interest of shareholders of the Company.
The settlement was recorded as a noncash expense and an increase in
paid-in capital of the Company in December 1995.
(2) In fiscal 1994, the Company recorded a provision of $852 for the
costs, principally inventory and equipment write-downs, in connection
with exiting its nonlamp component product line. In fiscal 1995, the
disposition plan was revised resulting in a reduction of the original
estimate by $121.
(3) On July 29, 1992, the Company's largest Predecessor, though never
having missed any scheduled payments on its then existing senior debt
was unable to refinance such senior debt, and therefore voluntarily
filed for protection under Chapter 11 of the United States Bankruptcy
Code. This Predecessor emerged from such protection in July 1993.
While under such protection, the Company maintained substantially all
of its relationships with existing customers and suppliers. The
one-time reorganization charge of $7,152 in fiscal 1993 consisted
of the write-downs related to disposal of assets for exiting certain
product lines, professional fees and administrative expense.
(4) While under Chapter 11 protection during fiscal 1993, the Company's
largest Predecessor was not required to accrue interest on certain
outstanding indebtedness, which, if accrued, would have increased
interest expense by approximately $507.
10
11
(5) At June 30, 1996, the Company had net operating loss tax carryforwards
of approximately $8,200, which expire in fiscal years 2006 through
2011. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(6) In fiscal 1996, the Company incurred an extraordinary loss on the
early extinguishment of debt of $135. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(7) In fiscal 1995, the Company refinanced certain senior and subordinated
indebtedness. This refinancing resulted in an extraordinary loss on
the early extinguishment of debt of $253. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(8) Upon emergence of the Company's largest Predecessor from Chapter 11
reorganization, the Company recognized an extraordinary gain in fiscal
1993 from the discharge of certain indebtedness.
(9) Assumes 7,817,736 shares were outstanding in fiscal 1995, 1994,
1993 and 1992. For fiscal 1996, assumes 7,817,736 shares outstanding
prior to December 12, 1995 and the weighted average number of shares
outstanding thereafter. Net income per share is based upon the income
attributable to common shareholders. Such income has been decreased by
preferred stock dividends and increases in the value of warrants
aggregating $1,350 ($.14 per share) in fiscal 1996, $2,360 ($.30 per
share) in fiscal 1995, $170 ($.02 per share) in fiscal 1994 and
$1,131 ($.14 per share) in fiscal 1993. See Note K to "Notes to
Financial Statements."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in connection with the
Company's Consolidated Financial Statements and related Notes.
OVERVIEW OF THE RESULTS OF OPERATIONS - FISCAL 1996 COMPARED WITH FISCAL 1995
The results of operations for fiscal 1996 resulted in income from
operations of $4.7 million compared to income from operations of $5.5
million for fiscal 1995. The Company realized net income of $2.4 million for
fiscal 1996, compared to net income of $2.9 million for fiscal 1995.
The overall comparability of fiscal 1996 and fiscal 1995 was
influenced by the following factors:
o The results of operations for fiscal 1996 include a noncash charge
of $2.7 million ($.29 per share) in settlement of threatened
litigation (the "Settlement"), with a corresponding increase to
shareholder's equity (paid-in-capital). The noncash charge arose
from the transfer of shares of the Company's Common Stock from the
personal holdings of certain principal shareholders of the Company to
former preferred shareholders in settlement of their claim. This
matter is also discussed in Note I to the Consolidated Financial
Statements.
o Operating costs and expenses for fiscal 1995 include a $121,000
restructuring credit ($.02 per share) resulting from a revision
of the Company's disposition plan for exiting its nonlamp
component product line.
11
12
After excluding the above, on a comparative basis the Company's
operating activities would have resulted in income from operations of $7.5
million for fiscal 1996, a 39.4% increase over the $5.4 million of income from
operations that would have been recognized for fiscal 1995.
Current Operations
The Company's product categories currently consist of lamps, lamp components and
lamp production equipment. The following table sets forth the product category
contributions to the Company's net sales for the years indicated:
FISCAL YEAR ENDED JUNE 30,
-------------------------
1996 1995 1994
---- ---- ----
Lamps 73.2% 68.8% 73.8%
Lamp components 20.7 23.8 23.0
Lamp production equipment 6.1 7.4 3.2
----- ----- -----
100.0% 100.0% 100.0%
====== ===== =====
Lamp and lamp component revenue is recognized when products are
shipped, and lamp production equipment revenue is recognized under the
percentage of completion method.
To sustain the Company's new product strategy, the Company invests
substantially in research and development efforts. In the last three fiscal
years, the Company spent an aggregate of $5.7 million on research and
development, representing 4.5% of aggregate net sales over that period. During
fiscal 1996, however, the Company spent $3.0 million on research and
development, representing 5.5% of net sales. These efforts have enabled the
Company to introduce new lamp types for an increasing number of applications,
develop solid state electronic systems, and develop new lamp components as well
as increase the quality of its existing lamp components. Further, the Company
has spent additional amounts for manufacturing process and efficiency
enhancements, which were charged to cost of goods sold when incurred. The
Company expects to continue increasing the spending on research and development
as a percentage of net sales in the future to enhance its position as the
leading innovator in the metal halide industry.
12
13
RESULTS OF OPERATIONS - SELECTED ITEMS AS A PERCENTAGE OF NET SALES
The following table sets forth, as a percentage of net sales, certain
items in the Company's consolidated income statement for the indicated periods:
FISCAL YEAR ENDED JUNE 30,
-------------------------
1996 1995 1994
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 53.5 53.7 55.8
Selling, general and administrative 27.3 29.1 27.2
Research and development 5.5 4.1 3.2
Noncash settlement of claim 5.0 0.0 0.0
Restructuring 0.0 (0.3) 2.8
---- ----- ----
Income from operations 8.7 13.4 11.0
Interest expense, net 2.4 5.2 6.9
--- --- ---
Income before income taxes and
extraordinary items 6.3 8.2 4.1
Income taxes 1.7 0.5 0.2
--- --- ---
Income before extraordinary items 4.6 7.7 3.9
Extraordinary charge (0.3) (0.6) 0.0
------ ----- -----
Net income 4.3% 7.1% 3.9%
====== ====== ======
FISCAL 1996 COMPARED WITH FISCAL 1995
Net Sales. Net sales increased 34.0% to $54.6 million for fiscal 1996
from $40.8 million for fiscal 1995. This increase consisted of an $11.6 million
increase in lamp sales, a $1.8 million increase in lamp component sales, and
the remainder from increased lamp production equipment sales. The increase in
lamp and component sales arose primarily from increased unit volume in all
major lamp sales channels and component categories and increased sales of new
products.
Cost of Goods Sold. Cost of goods sold increased 33.6% to $29.3
million for fiscal 1996 from $21.9 million for fiscal 1995. As a percentage of
net sales, cost of goods sold decreased to 53.5% for fiscal 1996 from 53.7% for
fiscal 1995. This slight decrease was primarily the result of improved margins
on lamp and component sales, which were somewhat offset by transitional costs
of operational integration associated with the electronic systems acquisition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 26.0% to $14.9 million for fiscal 1996 from
$11.8 million for fiscal 1995. As a percentage of net sales, such expenses
decreased to 27.3% in fiscal 1996 from 29.0% in fiscal 1995. The overall
decrease is a combination of (i) higher spending related to significant
promotional activities for new product introductions, (ii) increased marketing
focus on replacement lamp sales in the U.S. and (iii) costs associated with
Japanese market penetration; all offset by lower general and administrative
expenses as a percentage of sales for fiscal 1996.
Research and Development Expense. Research and development expenses
increased 79% to $3.0 million for fiscal 1996 from $1.7 million for fiscal
1995. As a percentage of net sales, research and development expenses
increased to 5.5% for fiscal 1996 from 4.1% for fiscal 1995. These increases
arose from increased spending for the: (i) expansion of the line of new lamps
intended to replace many first generation metal halide lamps in industrial and
commercial applications; (ii) development and testing of electronic ballast
systems and (iii) development of new lamp components for the world's major
lighting manufacturers.
Noncash Settlement of Claim and Restructuring Credit. As discussed in
Note I to the Consolidated Financial Statements, a settlement agreement was
entered into by certain principal shareholders of the Company with former
preferred shareholders of a subsidiary company during fiscal 1996 (the
"Settlement").
13
14
Since the Settlement resulted in a transfer of personal shares held by certain
principal shareholders, there was no dilution of the ownership interest of the
remaining shareholders of the Company. The Settlement was recorded as a noncash
expense and an increase to the Company's paid-in-capital.
The Company recorded a $121,000 credit to operating expenses in fiscal
1995. This credit resulted from a revision of the Company's plan of disposition
for exiting its nonlamp component product line. There was no such credit in the
fiscal 1996.
Income from Operations. Income from operations was $4.7 million for
fiscal 1996, compared to $5.5 million for fiscal 1995. As discussed in the
Overview of Results of Operations for the respective years, excluding (i) the
noncash charge for the Settlement during fiscal 1996 and (ii) the
restructuring credit recognized in fiscal 1995, income from operations for
fiscal 1996 would have increased to $7.5 million (13.7% of net sales) from
$5.4 million (13.2% of net sales) in fiscal 1995.
Interest Expense, Net. Interest expense decreased 38.2% to $1.3
million for fiscal 1996 from $2.1 million for fiscal 1995. This decrease
resulted from lower average debt outstanding, lower noncash amortization of
debt issuance costs and higher interest income for fiscal 1996 as compared to
the average debt outstanding, noncash amortization of debt issuance costs and
interest income for fiscal 1995.
Income Taxes. Income tax expense for fiscal 1996 increased by $698,000
from fiscal 1995 primarily due to higher state and local income taxes and an
increase in deferred tax expense attributable to accelerated depreciation for
tax purposes. As of June 30, 1996, the Company's available NOLs were
approximately $8.2 million and will expire in fiscal years 2006 through 2011.
Extraordinary Item. The Company recorded a $135,000 extraordinary
charge (net of applicable income taxes of $91,000) during fiscal 1996,
representing costs associated with the early extinguishment of debt using a
portion of the net proceeds from its initial public offering. In fiscal 1995,
the Company recorded a $253,000 extraordinary charge (net of applicable income
taxes of $168,000), which also represented costs associated with the early
extinguishment of debt.
FISCAL 1995 COMPARED WITH FISCAL 1994
Net Sales. Net sales increased 32.0% to $40.8 million for fiscal 1995
from $30.9 million for fiscal 1994. This increase consisted of a $5.2 million
increase in lamp sales, a $2.6 million increase in lamp component sales and a
$2.0 million increase in lamp production equipment sales. Lamp sales increased
primarily as a result of new product introductions and higher unit volumes. Unit
lamp sales increased even though the lamp manufacturing operations experienced
capacity constraints during the first half of fiscal 1995. The addition of a
second shift in January 1995 doubled annual production capacity from 700,000
lamps to 1.4 million lamps. Lamp component sales increased primarily
14
15
as a result of higher unit volumes driven by substantial growth in global metal
halide lamp sales. Lamp production equipment sales increased as a result of the
shipment of a complete equipment group to a lamp manufacturer in the People's
Republic of China in April 1995.
Cost of Goods Sold. Cost of goods sold increased 26.6% to $21.9
million for fiscal 1995 from $17.3 million for fiscal 1994. Cost of goods sold
as a percentage of net sales decreased to 53.7% in fiscal 1995 from 55.8% in
fiscal 1994. This decrease was due primarily to increased sales of higher margin
lamp components and lamp production equipment, which increased to 23.8% and
7.4%, respectively, of fiscal 1995 net sales from 23.0% and 3.2%, respectively,
of fiscal 1994 net sales. In addition, the Company experienced higher margins on
lamp component sales during fiscal 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 40.5% to $11.8 million for fiscal 1995 from
$8.4 million for fiscal 1994. Selling, general and administrative expenses as a
percentage of net sales increased to 29.1% in fiscal 1995 from 27.2% in fiscal
1994. This increase was due primarily to: (i) a greater percentage of
international lamp sales on which the Company pays higher commission rates; (ii)
increased spending on employee incentive programs; and (iii) non-recurring
organizational expenses associated with the Combination, which amounted to
approximately $176,000.
Research and Development Expenses. Research and development expenses
increased 70.0% to $1.7 million for fiscal 1995 from $1.0 million for fiscal
1994. Research and development expenses as a percentage of net sales increased
to 4.1% in fiscal 1995 from 3.2% in fiscal 1994. This increase was due primarily
to increased spending on new commercial and industrial lamp development and
component quality improvement. As a result of the increase in research and
development, the Company introduced more new products in fiscal 1995 than it had
in any prior year. The Company introduced the Energy Master Plus(TM) product
line in fiscal 1995 targeted at many large industrial and commercial
applications currently served by first generation metal halide lamps.
Reorganizing and Restructuring Expenses (Credit). The Company recorded
a $121,000 restructuring credit in fiscal 1995 compared to an $852,000
restructuring charge in fiscal 1994. The fiscal 1995 credit resulted from a
revision in the Company's plan of disposition for exiting its nonlamp component
product line.
Income from Operations. As a result of the above factors, income from
operations increased 61.8% to $5.5 million for fiscal 1995 from $3.4 million for
fiscal 1994. Income from operations as a percentage of net sales increased to
13.4% in fiscal 1995 from 11.0% in fiscal 1994. Excluding the effects of the
restructuring credit for fiscal 1995 and the restructuring charge for fiscal
1994, income from operations increased 25.6% to $5.4 million (13.2% of net
sales) for fiscal 1995 from $4.3 million (13.9% of net sales) for fiscal 1994.
Income Taxes. Income taxes increased to $212,000 for fiscal 1995 from
$71,000 for fiscal 1994. The difference between the effective tax rate and the
statutory tax rate is primarily attributable to the reversal of valuation
allowances due to utilization of NOLs. As of June 30, 1995, the Company had NOLs
of approximately $11.0 million available to offset future taxable income, which
expire in fiscal 2006 through fiscal 2011.
Extraordinary Charge. The Company recorded a $253,000 extraordinary
charge in fiscal 1995 representing costs associated with the early
extinguishment of debt. Such debt was extinguished in October 1994 and
refinanced at a lower interest rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for manufacturing
equipment, research and development efforts, investments in joint ventures and
working capital. These requirements have been, and will continue to be, financed
through a combination of cash flow from operations, borrowings under various
credit facilities and remaining proceeds from the July 1996 issuance of Common
Stock.
In December 1995, the Company received net proceeds of $24.0 million
from an initial public offering of 2,900,000 shares of its Common Stock. Also,
in July 1996, the Company received an
15
16
additional $30.0 million from the second public issuance of 2,452,050 shares
of its Common Stock. The proceeds from these two stock offerings were used
primarily to: (i) pay off substantially all of the outstanding borrowings as of
the offering dates, which aggregated $26.6 million; (ii) redeem outstanding
stock warrants of two Predecessors in the aggregate amount of $6.2 million and
(iii) reduce trade credit extended beyond normal terms which aggregated
approximately $3.0 million.
Subsequent to the initial public offering the Company made three
acquisitions for a combined cash consideration of approximately $3.4 million
and invested $300,000 in a joint venture.
Net cash provided by operating activities in fiscal 1996 totaled $1.3
million. Uses of operating cash flow were primarily for: (i) an increase in
inventories in support of higher lamp service levels and (ii) increased accounts
receivable arising from increased sales. Operating cash flow was provided
principally by increases in accounts payable and net income.
The Company's working capital at June 30, 1996 was $17.3 million.
Capital expenditures totaled $5.0 million for fiscal 1996, primarily
for the acquisition of production equipment. In addition, during fiscal 1997
the Company plans to add lamp manufacturing equipment requiring expenditures
of approximately $8 million.
On March 25, 1996, the Company entered into a Revolving Credit and
Security Agreement with BNY Financial Corporation (the "Loan Agreement").
Pursuant to the Loan Agreement, BNY Financial Corporation ("BNY") has agreed to
extend working capital advances to the Company in aggregate amounts equal to the
lesser of: (i) $25.0 million less the current outstanding amount of advances
under the Capex Facility (defined below) (the "Maximum Revolving Loan Amount")
or (ii) an amount based on eligible receivables and inventory (the "Working
Capital Facility"). At June 30, 1996, working capital advances outstanding were
$9.8 million and additional available capacity under the Working Capital
Facility was approximately $1.1 million. Subsequent to the July 1996 offering,
the outstanding balance was reduced to $1.2 million. The unpaid principal
balance of the Working Capital Facility (together with accrued interest
thereon) is payable on March 24, 1999. Advances under the Working Capital
Facility bear interest at the option of the Company at a rate per annum equal
to: (i) the higher of (a) the prime rate minus 0.5% or (b) the Federal Funds
Rate; or (ii) the average LIBOR plus 2.5%.
The Company is able to obtain advances aggregating up to $5.0 million
to permit the Company to finance permitted capital expenditures (the "Capex
Facility"), which bear interest at a rate per annum equal to the higher of (a)
the prime rate plus 0.5% or (b) the Federal Funds Rate plus 1.0%. The unpaid
principal balance of the Capex Facility (together with accrued interest thereon)
is payable on March 24, 1999. BNY has also agreed to issue letters of credit in
an aggregate amount of up to $5.0 million, at anytime, provided the outstanding
letters of credit and working capital advances do not exceed the Maximum
Revolving Loan Amount.
In summary, the Company believes that the cash flow from operations
and available borrowings will be sufficient to fund its operations for at
least the next 12 months.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, Statement of Financial Accounting Standards (FAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", was issued. FAS No. 121 requires long-lived assets
to be reviewed for impairment losses whenever events or changes in
circumstances indicate the carrying amount may not be recovered through future
net cash flows generated by the assets. The Company must adopt FAS No. 121 in
the first quarter of fiscal 1997 and, although the Company has not completed
the analysis necessary to assess the impact of adoption, it believes the
effect of adoption will not be significant.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it is still a factor
in our economy. However, management does not believe that inflation has or will
have a significant impact on its operations. Although, the Company has not
raised prices significantly in recent years, it has been able to lower
overall costs sufficiently to offset inflation. The Company expects this trend
to continue for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
17
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JUNE 30, 1996
ADVANCED LIGHTING TECHNOLOGIES, INC.
TWINSBURG, OHIO
17
18
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
Form 10-K--Item 14(a)(1) AND (2), (c) and (d)
ADVANCED LIGHTING TECHNOLOGIES, INC.
The following consolidated financial statements of Advanced Lighting
Technologies, Inc. are included in Item 8:
Audited Consolidated Financial Statements:
Page
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets as of June 30, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended June 30, 1996, 1995 and 1994 F-4
Statements of Consolidated Shareholders' Equity for the Years Ended June 30, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995
and 1994 F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedules:
None
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
F-1
19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Advanced Lighting Technologies, Inc.
We have audited the consolidated balance sheets of Advanced Lighting
Technologies, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Advanced Lighting
Technologies, Inc. as of June 30, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Cleveland, Ohio
September 26, 1996
F-2
20
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30
1996 1995
-------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 1,682 $ 1,030
Trade receivables, less allowances of $287 and $243 13,736 7,417
Receivables from related parties 98 129
Inventories:
Finished goods 10,344 3,560
Raw materials and work-in-progress 2,363 1,496
-------- -------
12,707 5,056
Prepaid expenses 526 448
Deferred taxes 3,517 560
-------- -------
Total current assets 32,266 14,640
Fixed assets:
Land and buildings 2,304 1,849
Machinery and equipment 17,298 13,673
Furniture and fixtures 2,994 1,687
-------- -------
22,596 17,209
Less accumulated depreciation 6,359 5,199
-------- -------
16,237 12,010
Deferred taxes 231 1,354
Receivables from related parties 913 304
Other assets 3,085 1,094
Excess of cost over net assets of businesses acquired, net 3,565 --
-------- -------
$ 56,297 $29,402
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 790 $ 2,041
Accounts payable 8,790 6,574
Payables to related parties 434 172
Employee-related liabilities 1,859 1,651
Accrued income and other taxes 263 714
Other accrued expenses 2,607 1,758
Current portion of long-term debt 182 2,600
-------- -------
Total current liabilities 14,925 15,510
Long-term debt 11,034 8,853
Other liabilities 161 171
Deferred taxes 3,583 1,054
Redeemable warrants -- 4,849
Shareholders' Equity:
Preferred stock -- 50
Common stock 11 360
Additional paid-in-capital 26,755 --
Retained earnings (deficit) (172) (1,445)
-------- -------
26,594 (1,035)
-------- -------
$ 56,297 $29,402
======== =======
See notes to consolidated financial statements
F-3
21
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended June 30
(In thousands, except per share amounts)
1996 1995 1994
------- ------- -------
Net sales $54,636 $40,767 $ 30,938
Costs and expenses:
Cost of sales 29,254 21,899 17,253
Selling, general and administrative 14,907 11,833 8,400
Research and development 3,000 1,673 1,006
Noncash settlement of claim 2,732 -- --
Restructuring -- (121) 852
------- ------- -------
Income from operations 4,743 5,483 3,427
Interest expense, net 1,316 2,129 2,150
------- ------- -------
Income before income taxes and extraordinary items 3,427 3,354 1,277
Income taxes 910 212 71
------- ------- -------
Income before extraordinary items 2,517 3,142 1,206
Extraordinary charge (net of applicable income
taxes of $91 in 1996 and $168 in 1995) 135 253 --
------- ------- -------
Net income $ 2,382 $ 2,889 $ 1,206
======= ======= =======
Earnings per share:
Before extraordinary items $ .12 $ .10 $ .13
Extraordinary items (.01) (.03) --
------- ------- -------
Net income $ .11 $ .07 $ .13
======= ======= =======
Shares used for computing per share amounts 9,479 7,818 7,818
======= ======= =======
See notes to the consolidated financial statements
F-4
22
ADVANCED LIGHTING TECHNOLOGIES, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
For the Years Ended June 30, 1996, 1995 and 1994
(In thousands)
ADDITIONAL SHARE-
PREFERRED COMMON PAID-IN RETAINED HOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----- ----- ------- -------- ------
Balance at July 1, 1993 $ 2,125 $ 254 $ -- $ (2,699) $ (320)
Net income - Year ended June 30, 1994 -- -- -- 1,206 1,206
Capitalization of a subsidiary 50 105 -- -- 155
Redemption of warrants -- -- -- (340) (340)
Change in value of warrants -- -- -- 464 464
------- ------- -------- -------- -------
Balance at June 30, 1994 2,175 359 -- (1,369) 1,165
Net income - Year ended June 30, 1995 -- -- -- 2,889 2,889
Redemption of preferred stock (2,125) -- -- (663) (2,788)
Change in value of warrants -- -- -- (2,302) (2,302)
Capitalization of a subsidiary -- 1 -- -- 1
------- ------- -------- -------- -------
Balance at June 30, 1995 50 360 -- (1,445) (1,035)
Net income - Year ended June 30, 1996 -- -- -- 2,382 2,382
Activities prior to initial public offering of stock:
Purchases of common stock -- 147 -- -- 147
Redemption of preferred and common
stock (50) (252) -- (1,109) (1,411)
Stock options exercised -- 10 -- -- 10
Exchange of subsidiary companies'
stock for parent company stock -- (259) 259 -- --
Noncash settlement of claim -- -- 2,732 -- 2,732
Activities subsequent to initial public offering of stock:
Proceeds from initial public offering,
net of commissions and costs -- 3 23,927 -- 23,930
Issuance of common stock in exchange for
warrants and other consideration -- 1 (1,350) -- (1,349)
Exchange of subsidiary company stock
for parent company stock -- -- 313 -- 313
Issuance of shares in connection with
purchase of business -- 1 874 -- 875
------- ------- -------- -------- -------
Balance at June 30, 1996 $ -- $ 11 $ 26,755 $ (172) $26,594
======= ======= ======== ======== =======
See notes to consolidated financial statements
F-5
23
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30
(In thousands)
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
Net income $ 2,382 $ 2,889 $ 1,206
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,638 1,399 1,467
Provision for doubtful accounts 43 32 70
Noncash settlement of claim 2,732 -- --
Restructuring -- 286 852
Deferred income taxes 695 (959) (19)
Extraordinary charge 135 253 --
Changes in operating assets and liabilities (excluding
the effects of purchases of businesses):
Change in receivables (4,057) (2,338) (2,289)
Change in inventories (4,128) (986) 794
Change in prepaids and other assets (3,032) (412) (425)
Changes in accounts payable and accrued expenses 4,930 4,369 (228)
Changes in other liabilities (12) (69) (25)
--------- -------- --------
Net cash provided by operating activities 1,326 4,464 1,403
INVESTING ACTIVITIES
Purchases of fixed assets (5,050) (1,530) (1,043)
Purchase of businesses (3,075) -- --
--------- ----------- -----------
Net cash used in investing activities (8,125) (1,530) (1,043)
FINANCING ACTIVITIES
Proceeds from revolving facility 10,580 24,630 19,904
Payments on revolving facility (8,192) (24,088) (18,569)
Proceeds from long-term debt 22,362 1,726 191
Payments on long-term debt and capital leases (19,453) (4,776) (2,152)
Issuance of common stock 157 -- 155
Borrowings for preferred stock redemption and dividends -- 2,788 --
Redemption of preferred stock and dividends (1,100) (2,788) --
Redemption of common stock (311) -- --
Other -- (59) (321)
Net proceeds from initial public offering 23,930 -- --
Use of proceeds:
Repayment of long-term debt (3,350) -- --
Repayment of revolving credit facility (4,429) -- --
Redemption of warrants (6,199) -- --
Payment of trade payables (4,447) -- --
Payment of note (1,541) -- --
Other (556) -- --
------- ---------- ----------
Net cash provided by (used in) financing activities 7,451 (2,567) (792)
------- ---------- ----------
Change in cash and cash equivalents 652 367 (432)
Cash and cash equivalents at beginning of year 1,030 663 1,095
---------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,682 $ 1,030 $ 663
======== ======== =========
F-6
24
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 1,112 $ 1,688 $ 1,362
Income taxes paid 375 280 117
Noncash transactions:
Equipment acquired by capital leases 149 145 79
Stock issued for purchase of businesses 1,188 -- --
Detail of acquisitions:
Assets acquired 9,904 -- --
Liabilities assumed 5,546 -- --
Stock issued 1,188 -- --
--------- -------- --------
Cash paid 3,170 -- --
less cash acquired 95 -- --
--------- -------- --------
Net cash paid for acquisitions $ 3,075 -- --
========= ======== ========
See notes to consolidated financial statements
F-7
25
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30, 1996
(Dollars in thousands except per share amounts)
A. ORGANIZATION AND PRESENTATION
Advanced Lighting Technologies, Inc. (the "Company") is an innovation-driven
designer, manufacturer and marketer of metal halide lighting products, including
lamps (light bulbs), lamp components and lamp production equipment.
The Company was formed as an Ohio corporation on May 19, 1995 for the purpose of
acquiring ownership, primarily by merger (the "Combination"), of 17 affiliated
operating corporations that were previously under common ownership and
management (the "Predecessors"), each one of which is engaged in an aspect of
the metal halide lighting business. More specifically, the Combination was
principally effected through a series of nonmonetary mergers or stock exchanges
in which the shareholders of the former companies received shares of the
Company, except that certain former employees received, in the aggregate, an
insignificant amount of cash for their shares.
The Combination has been accounted for as a reorganization of entities under
common control. Historical financial statements of each of the Predecessors for
periods prior to the Combination have been combined. Certain adjustments have
been recorded primarily to eliminate intercompany transactions that would have
been required had the Company been a consolidated entity during such periods.
The Company operates in a single industry, on a global basis: the design,
manufacture and sale of metal halide lighting products including lamps,
components and production equipment. Substantially all of the Company's products
are manufactured in the United States. Export sales, which did not exceed 10% of
consolidated sales in any individual country, amounted to $16,349, $12,129 and
$6,442 in fiscal 1996, 1995 and 1994, respectively. Approximately $5,689 of net
sales in 1996 were made to one customer.
Reference to the Company, in the following notes to consolidated financial
statements, refers to one or more of the Predecessors.
B. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries, after elimination of all
significant intercompany accounts and transactions and related revenues and
expenses.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
ACCOUNTS RECEIVABLE
Trade accounts receivable are principally from major manufacturers and
distributors in the lighting industry. Generally, collateral or other security
is not required.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
F-8
26
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The cost of
self-constructed assets include related materials, labor, overhead and interest.
Repair and maintenance costs are expensed as incurred.
In March 1995, Statement of Financial Accounting Standards (FAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", was issued. FAS No. 121 requires long-lived assets to be
reviewed for impairment losses whenever events or changes in circumstances
indicate the carrying amount may not be recovered through future net cash flows
generated by the assets. The Company must adopt FAS No. 121 in the first quarter
of 1997 and, although the Company has not completed the analysis necessary to
assess the impact of adoption, it believes the effect of adoption will not be
significant.
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment is provided to amortize
the assets' costs over their estimated useful lives and is computed by the
straight-line method for financial reporting purposes.
The weighted average useful lives for each major category of fixed
assets follow:
Buildings 30 years
Machinery and equipment 17 years
Furniture and fixtures 8 years
The excess of cost over net assets of businesses acquired is amortized
over 20 to 25 years. Accumulated amortization was $24 at June 30, 1996.
REVENUE RECOGNITION
Lamp and lamp component revenue is recognized when products are shipped
and lamp production equipment revenue is recognized using the percentage of
completion method.
ESTIMATES
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
consolidated financial statements and notes. Actual results could differ
from these estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency of consolidated subsidiaries outside the United
States is the local currency. Financial statements for the subsidiaries are
translated into United States dollars at year-end exchange rates as to assets
and liabilities and weighted-average exchange rates as to revenues and expenses.
The resulting translation adjustments were not significant in all years
presented.
FINANCIAL STATEMENT PRESENTATION CHANGES
Certain amounts for prior years have been reclassified to conform to
the current year presentation.
C. ACQUISITIONS
During 1996, the Company completed four business combinations, all of which were
accounted for by the purchase method and, accordingly, results of operations for
the acquired businesses have been
F-9
27
included in the consolidated statement of income from their respective dates of
acquisition. Proforma financial information is not presented because the impact
is not significant to the results of operations.
On July 1, 1995, and February 9, 1996, the Company acquired all of the
outstanding common stock of Venture Lighting-UK ("VLI-UK"), for 50,000 shares
(valued at $313) of the Company's common stock. VLI-UK was the exclusive
distributor of the Company's products in the United Kingdom. The purchase
resulted in an excess of cost over net assets acquired of $363, which is being
amortized over 20 years.
On February 5, 1996, the Company acquired the net assets of Current Industries,
Inc. ("Current") of Oceanside, New York for $1,689. Current designs,
manufacturers and markets specialized electrical and electromagnetic lighting
control systems used in metal halide and other high intensity discharge lighting
systems. The purchase resulted in an excess of cost over net assets acquired of
$1,456, which is being amortized over 25 years.
On March 25, 1996, the Company acquired the net assets of Spectro Electric,
Inc., ("Spectro") for $1,636 and 34,783 shares (valued at $500) of the Company's
common stock. Spectro (renamed Advanced Lighting Technologies, Canada, Inc.)
distributes the Company's products in the Canadian market and has facilities in
Toronto, Vancouver, Calgary and Montreal. The purchase resulted in an excess of
cost over net assets acquired of $72, which is being amortized over 20 years.
On June 28, 1996, the Company acquired the net assets of Venture Lighting
Australia Pty Ltd ("VLA"), a leading lamp marketing organization in Australia,
for $100 and 76,923 shares (valued at $875) of the Company's common stock. VLA
has been the exclusive agent for the Company's products in Australia since 1987.
The purchase resulted in an excess of cost over net assets acquired of $1,698,
which is being amortized over 20 years.
D. FINANCING ARRANGEMENTS
Short-term debt consisted of the following:
JUNE 30
1996 1995
Multioption credit facility $790
Revolving credit facility -- $1,867
Other -- 174
---- -------
$790 $2,041
==== ======
In June 1996, the Company entered into a Multioption Credit Facility
with a foreign bank that provides a line of short-term credit. Such facility
provides an aggregate line of credit of $1,200 and is collateralized with
certain operating assets that totaled $1,982 at June 30, 1996, and a $750
standby letter of credit. Amounts borrowed and related interest are payable
quarterly.
The weighted average interest rate on short-term borrowings was 7.89% and 10.00%
at June 30, 1996 and 1995.
F-10
28
Long-term debt consisted of the following:
JUNE 30
1996 1995
---- ----
Revolving credit and security agreement $9,924 --
7.5% mortgage note payable in monthly principal installments of $5,
plus accrued interest through October 1, 2008 819 $886
7.5% mortgage note payable in monthly principal installments of $2,
plus accrued interest through August 1, 2010 166 --
Senior note payable -- 6,254
Term notes payable -- 3,678
Other 307 635
--------- -------
11,216 11,453
Less current portion 182 2,600
--------- -------
$ 11,034 $ 8,853
======== =======
In March 1996, the Company entered into a three-year domestic Revolving
Credit and Security Agreement (the "Loan Agreement") with a bank. The Loan
Agreement permits working capital advances to the Company in aggregate amounts
equal to the lesser of: (i) $25.0 million less the current outstanding amount of
the advances under the Capex Facility (defined below) (the "Maximum Revolving
Loan Amount") or (ii) an amount based on eligible receivables and inventory (the
"Working Capital Facility"). The unpaid principal balance of the working capital
facility (together with accrued interest thereon) is payable on March 24, 1999.
Advances under the Working Capital Facility bear interest at the option of the
Company at a rate per annum (the "Working Capital Interest Rate") equal to: (i)
the higher of (a) the prime rate minus 0.5% or (b) the Federal Funds Rate; or
(ii) the average LIBOR plus 2.5%. Under the terms of the Loan Agreement, the
bank may make advances in excess of the applicable percentages of eligible
receivables and inventory, provided that, if such excess amounts remain
outstanding for five or more days in any calendar month, all outstanding
advances bear interest at the Working Capital Interest Rate plus 0.5% for such
month. At June 30, 1996, the interest rate was 7.75%.
The Company is able to obtain advances under the Loan Agreement up to
$5.0 million to permit the Company to finance permitted capital expenditures
(Capex Facility), which bear interest at a rate per annum equal to the higher of
(a) the prime rate plus 0.5% or (b) the Federal Funds Rate plus 1.0%. The unpaid
principal balance of the Capex Facility (together with accrued interest thereon)
is payable on March 24, 1999. The bank has also agreed to issue letters of
credit in an amount of up to $5.0 million, at anytime, provided the outstanding
letters of credit and working capital advances do not exceed the Maximum
Revolving Loan Amount. At June 30, 1996 no amounts were outstanding under the
Capex Facility.
In July 1996, a foreign subsidiary of the Company entered into a
similar Revolving Credit and Security Agreement with a foreign affiliate of the
bank (the "Foreign Loan Agreement"). Pursuant to the Foreign Loan Agreement,
the bank has agreed to extend working capital advances in the aggregate amount
equal to the lesser of (i) the United States dollar equivalent of approximately
$2,196 in the local currency or (ii) an amount based on eligible receivables and
inventory. All amounts advanced under the Foreign Loan Agreement reduce, by the
United States dollar value of outstanding amounts, the Maximum Revolving Loan
Amount available to the Company under the Loan Agreement. The unpaid principal
balance of the Foreign Loan Agreement (together with accrued interest thereon)
is payable in March 1999. Advances under the Foreign Loan Agreement bear
interest at the rate per annum set at a formula intended to approximate that of
the Loan Agreement.
In July 1996, the Company repaid $8,774 of amounts outstanding at June
30, 1996 under the Loan Agreement with a portion of the proceeds of a common
stock offering completed in July 1996.
The provisions of the Loan Agreement contain certain restrictive
covenants concerning the incurrence of indebtedness and liens, capital
expenditures, investments, guarantees of indebtedness of others, providing
loans to others, the sale of assets, and the payment of dividends. In addition,
F-11
29
the Company must maintain certain working capital, leverage, cash flow, debt,
and tangible net worth ratios.
The 7.5% mortgage note payable in 2008 is secured by land and a building
(approximately $1,670 net carrying value at June 30, 1996).
The 7.5% mortgage note payable in 2010 is secured by land purchased for future
development (approximately $215 net carrying value at June 30, 1996).
All items of debt outstanding at June 30, 1995, showing no balance at June 30,
1996, were fully-paid during the second and third quarters of 1996, primarily
with proceeds from the initial public offering. During 1996, the Company
recorded an extraordinary loss of $135 (net of applicable income taxes of $91)
for the write-off of deferred financing costs related to the early
extinguishment of debt.
In October 1994, the Company refinanced certain of its borrowings resulting in
an extraordinary loss on the early extinguishment of debt of $253 (net of
applicable income taxes of $168).
The fair value of debt, based on market rates, approximates carrying value.
Debt issuance costs, classified with other assets, are being amortized over the
terms of the related debt.
The Company incurred interest expense of $1,467, $2,163 and $2,177 during
fiscal 1996, 1995 and 1994, respectively.
E. SHAREHOLDERS' EQUITY
Shareholders' Equity
On December 12, 1995, the Company completed an initial public offering and
issued 2,900,000 shares. Prior to the initial public offering, shares of the
Predecessors were exchanged for 7,281,849 shares of common stock of the
Company; and 535,887 shares were issued to a warrant holder in exchange for the
warrants. During fiscal 1996, the Company issued 126,923 shares of common stock
in connection with certain acquisitions and, at June 30, 1996, 34,783 shares of
Common Stock were issuable in connection with an acquisition. At June 30, 1996,
there were 22,000,000 shares of common stock authorized and 10,844,659 shares
issued and outstanding. The common stock authorized, issued and outstanding as
of June 30, 1995 represents the aggregate of the Predecessors' common stocks.
The shares authorized, issued and outstanding of the individual issues of
common stock of the Predecessors are not presented as the information is not
meaningful.
On July 16, 1996, the Company issued 2,452,000 shares of its common stock in a
public offering at $13.50 a share. Net proceeds, after the underwriters'
discount and other costs associated with the offering, amounted to
approximately $30,000, of which $9,200 was used to pay-down a portion of bank
debt outstanding as of July 16, 1996.
At June 30, 1995, the Company had 892,500 preferred shares outstanding (without
par value). In August 1995, the Company redeemed such preferred shares for
$1,012,500.
Employee Stock Options
The Company's 1995 Incentive Award Plan provides for granting of "A" and "B"
incentive options to purchase common stock of the Company. The "A" options
become exercisable over one-to-five years from the date of grant depending on
the Company's operating performance. The "B" options become exercisable at the
rate of 25% after one year, 35% after two years, and 40% after three years. All
"A" and "B" options have been granted at market value on the date of grant. At
June 30, 1996, the Company had 1,000,000 shares reserved for future issuance
upon exercise of stock options granted under the Incentive Award Plan.
F-12
30
Stock option activity under the 1995 Incentive Award Plan was as follows:
Number of Option Price
Shares per Share
--------------------- ---------------------
Outstanding at July 1, 1995 0
Granted 814,350 $10 to $17
Canceled (22,500) $10
---------------------
Outstanding at June 30, 1996 791,850 $10 to $17
=====================
At June 30, 1996, no options were exercisable.
F. REDEEMABLE STOCK PURCHASE WARRANTS
Warrants issued in connection with a financing entered into during 1994 were
valued at $1,300 on date of issuance based on an independent appraisal.
In December 1995, the warrant holder exchanged the warrants for $3,000 plus 5.0%
of the Company's common stock.
Warrants issued in connection with a financing entered into during 1990 were
redeemed by the Company for $3,199 in March 1996.
G. INCOME TAXES
The provision for income taxes is computed using the liability method and is
based on applicable federal and state statutory rates adjusted for permanent
differences between financial and taxable income.
Income taxes have been provided as follows:
1996 1995 1994
---- ---- ----
Federal:
Current $(138) $ 776 $ 253
Deferred 485 (538) (188)
----- ----- -----
State and Local:
Current 281 160 50
Deferred 167 (186) (44)
----- ------ ----
Foreign:
Current 72 0 0
Deferred 43 0 0
-- --- --
$910 $212 $71
==== ==== ===
The income tax provision for periods prior to the Combination has been
calculated as if the Company filed a consolidated tax return.
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
F-13
31
Significant components of the Company's net deferred tax assets and liabilities
at June 30, 1996 and 1995 are as follows:
1996 1995
------- -------
Deferred tax liabilities:
Tax over book depreciation $3,380 $1,016
Other 203 38
------- -------
Total deferred tax liabilities 3,583 1,054
Deferred tax assets:
Net operating loss carryforwards 2,882 4,100
AMT carryforward 208 43
Tax under book accrued expenses 630 39
Other 304 604
------- -------
4,024 4,786
Valuation allowance (276) (2,872)
------- -------
Total deferred tax assets 3,748 1,914
------- -------
Net deferred tax assets $ 165 $ 860
======= =======
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
1996 1995 1994
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes net of federal benefit 9.2 1.0 5.0
Net operating loss carryforwards (56.4) (31.0) (15.0)
Nondeductible settlement of a claim 30.9 0.0 0.0
Other 7.8 2.0 5.0
----- ----- -----
Effective tax rate 26.5% 7.0% 30.0%
===== ==== ======
Income taxes paid (net of refunds) were $375 in 1996; $280 in 1995 and $117 in
1994.
As of June 30, 1996, the Company had United States net operating loss
carryforwards for tax purposes of approximately $8,200 available to offset
future taxable income. These carryforwards expire in the years 2006 through
2011.
H. EMPLOYEE BENEFITS
The Company has two elective savings and retirement plans covering substantially
all full-time employees at two of its subsidiaries. The Plans are funded by
participants' contributions with a portion matched by the Company if certain
criteria are met. Administrative expenses of the plan are paid by the Company.
Total expenses recognized for the plans were $234 in 1996 and 1995 and $163 in
1994.
The Company also has two profit-sharing retirement plans covering substantially
all salaried employees at two of its subsidiaries. The plans are funded through
participant contributions, which are matched by Company contributions up to 2%.
Company contributions were $16 in 1996 and 1995, and $11 in 1994.
I. NONCASH SETTLEMENT OF CLAIM
On October 27, 1995, several former preferred shareholders of the Company's
lamp manufacturing subsidiary, whose shares were redeemed in August 1995 (prior
to the Combination), asserted a claim against certain officers of the Company.
On November 15, 1995, such officers entered into a settlement agreement with
the former preferred shareholders, whereby such officers and certain other
shareholders transferred, from their personal holdings, an aggregate of 273,185
shares of the Company's common stock to the former preferred shareholders.
Since the settlement resulted in a transfer of personal shares held by such
F-14
32
officers, there was no dilution of the ownership interest of shareholders of the
Company. The settlement was recorded as a noncash expense and paid-in-capital of
the Company.
J. RESTRUCTURING CHARGES
In June 1994, one of the Company's subsidiaries recorded a provision of $852
for the costs, principally inventory and equipment write-downs, to exit its
nonlamp product line. During 1995, the disposition plan was revised resulting
in a reduction of $121 in the estimated costs to exit the nonlamp product line.
During 1996, the assets of the nonlamp product line (principally inventory and
equipment) were sold to an affiliate of the Company for an amount equal to the
carrying value of such assets as of June 30, 1995. As of June 30, 1996, the
Company has an 8.5% note from the affiliate for $220 related to the sale of the
assets of the nonlamp product line which is classified as a receivable from
related parties.
K. NET INCOME PER SHARE
Net income per share is computed as follows:
1996 1995 1994
-------- ------- ------
Income :
Income before extraordinary items $ 2,517 $ 3,142 $1,206
Less: Preferred stock dividends(1) -- 58 170
Increase in warrants' value(2) 1,350 2,302 --
-------- ------- ------
Income before extraordinary items attributable to
common shareholders $ 1,167 $ 782 $1,036
======= ======= ======
Net income $ 2,382 $ 2,889 $1,206
Less: Preferred stock dividends(1) -- 58 170
Increase in warrants' value(2) 1,350 2,302 --
-------- ------- ------
Net income attributable to common shareholders $ 1,032 $ 529 $1,036
======= ======= ======
Income (loss) per share:
Income before extraordinary items $ .12 $ .10 $ .13
Extraordinary charges (.01) (.03) --
-------- ------- ------
Net income $ .11 $ .07 $ .13
======= ======= ======
Weighted average shares used (in thousands) 9,479 7,818 7,818
======= ======= ======
Weighted average shares were computed as follows:
Shares deemed outstanding at beginning of period 7,282 7,282 7,282
Weighted average shares issued pursuant to initial
public offering 1,601 - -
Weighted average shares issued upon
warrant conversion 296 - -
Weighted average common share equivalents 272 536 536
Weighted average shares issued during the period 20 - -
Weighted average shares issuable 8 - -
------- ------- ------
9,479 7,818 7,818
======= ======= ======
F-15
33
(1) The preferred stock dividends represent cumulative dividends in arrears. No
dividends were declared on the preferred stock in any of the years
presented. The cumulative dividends in arrears were paid to the preferred
shareholders when the related preferred shares were redeemed in October
1994.
(2) There was no accretion in the value of the warrants in 1994. The warrants
were redeemed in 1996.
L. RELATED PARTY TRANSACTIONS
Prior to the initial public offering, management fees paid by the Company to an
affiliate were $764 in 1996, $831 in 1995 and $173 in 1994.
During January 1996, the Company entered into a six-year Aircraft Operating
Agreement ("Agreement") with an unrelated company to charter an airplane for
service into locations which are not adequately served by commercial carriers.
The unrelated company leases the airplane from an affiliate of the Company owned
by certain officers of the Company. These officers have guaranteed the repayment
of $1.7 million of indebtedness incurred by the affiliate to purchase the
airplane. The Company's minimum annual commitments under the Agreement are $261.
Fees paid by the Company under this agreement were $244 in 1996.
During 1996, 1995 and 1994, the Company paid a director of the Company $100 per
annum for consulting services.
The Company sold lamps and lamp components to an overseas company aggregating
$2,363 in 1996 and $650 in 1995. A director of the Company is also an executive
officer and director of the overseas company.
M. COMMITMENTS
The Company leases buildings and certain equipment under noncancelable operating
lease agreements. Total rent expense was $893 in 1996, $613 in 1995, and $580 in
1994. Future minimum lease commitments, as of June 30, 1996, were as follows:
Year:
1997 $ 1,049
1998 1,176
1999 1,159
2000 1,091
2001 1,060
Thereafter 1,128
-------
Minimum lease payments $ 6,663
=======
Estimated costs to complete construction-in-progress, at June 30, 1996, were
$605.
N. CONTINGENCY
On March 1, 1996, a former common shareholder of a Predecessor
asserted a claim in the United States District Court for the Northern District
of Ohio against the Chief Executive Officer and a director of the Company, and
the Chief Financial Officer and a director of the Company, and
F-16
34
subsequently, a claim against the Company, alleging certain misrepresentations
and/or omissions were made to the former common shareholder in connection with:
(i) the Company's purchase of his equity interest effected by a merger of a
Predecessor into the Company, as to which the former common shareholder waived
his statutory appraisal rights and (ii) the purchase by the Chief Executive
Officer of the former common shareholder's beneficial interest in a trust
controlled by the Chief Executive Officer. The former common shareholder
alleges that the misrepresentations and/or omissions made by the Chief
Financial Officer and others on behalf of the Chief Executive Officer and the
Chief Financial Officer caused direct damages which exceed $900. The suit also
claims punitive damages in an undetermined amount believed by the former
common shareholder to exceed $2,700.
On August 23, 1996, another former common shareholder filed similar claims
against the Chief Executive and Chief Financial Officers and the Company seeking
direct damages of $400 and punitive damages of $1,200.
The Chief Executive and Chief Financial Officers have denied all of the above
allegations and are vigorously defending the claims. Management of the Company
does not believe the outcome of these claims will have a material adverse effect
on the financial condition, results of operations or liquidity of the Company.
F-17
35
NOTE O. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended June 30, 1996 and 1995.
THREE MONTHS ENDED
-----------------------------------------------------------------
1996 JUN 30 MAR 31 DEC 31 (a) SEP 30
--------------- -------------- -------------- --------------
Net sales $ 17,341 $ 13,786 $ 12,037 $ 11,472
Gross profit(c) 8,043 6,382 5,615 5,342
Income (loss) from operations(c) 2,110 1,911 (905) 1,627
Income (loss) before extraordinary items 1,559 1,487 (1,453) 924
Net income (loss) $ 1,559 $ 1,455 $ (1,556) $ 924
Income (loss) per share:
Before extraordinary items $ 0.14 $ 0.14 $ (0.33) $ 0.12
Extraordinary items - - (0.01) -
========= ========= ========= ==========
Net income (loss) $ 0.14 $ 0.14 $ (0.34) $ 0.12
========= ========= ========= ==========
Average shares outstanding 11,000 10,749 8,448 7,818
Price Range of Common Stock (b)
High $ 18.250 $ 14.875 $ 10.250 N/A
Low $ 12.625 $ 7.625 $ 10.000 N/A
THREE MONTHS ENDED
-----------------------------------------------------------------
1995 JUN 30 MAR 31 DEC 31 SEP 30
--------------- -------------- -------------- --------------
Net sales $ 10,748 $ 10,721 $ 9,988 $ 9,310
Gross profit 5,129 4,948 4,481 4,310
Income from operations 960 1,419 1,557 1,547
Income before extraordinary items 1,074 463 855 749
Net income $ 1,074 $ 463 $ 602 $ 749
Income (loss) per share:
Before extraordinary items $ 0.06 $ (0.01) $ (0.03) $ 0.02
Extraordinary items - - 0.03 -
========= ========= ========= ==========
Net income (loss) $ 0.06 $ (0.01) $ - $ 0.02
========= ========= ========= ==========
Average shares outstanding 7,818 7,818 7,818 7,818
Price Range of Common Stock (b)
High N/A N/A N/A N/A
Low N/A N/A N/A N/A
(a) The three months ended December 31, 1995 includes a nondeductible noncash
charge of $2,732 for the settlement of a claim
(b) The Company completed its initial public offering on December 12, 1995.
(c) Capitalization of overhead variances increased gross profit and income from
operations for the three months ended June 30, 1996 by approximately $300.
F-18
36
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
The information required by Item 10 is incorporated herein by
reference to the Registrant's definitive Proxy Statement relating to its 1996
Annual Shareholders Meeting ("Proxy Statement"), under the captions "Nominees,"
"Continuing Directors and Executive Officers," and "Compliance With Section
16(a) of the Securities Exchange Act of 1934." This Proxy Statement will be
filed with the SEC prior to October 28, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "COMPENSATION" in the
Proxy Statement is included by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "CERTAIN HOLDERS OF VOTING
SECURITIES" in the Proxy Statement is included by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "OTHER TRANSACTIONS WITH
DIRECTORS AND OFFICERS" in the Proxy Statement is included by reference.
36
37
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1) and (2). The financial statements responsive to this item are
found beginning on page F-1 herein.
(3) Exhibits
Sequential Page Number/
Exhibit No. Title Incorporated by Reference
- ----------- -------------------------
To
3.1 Amended and Restated Articles of Incorporation *
3.2 Code of Regulations *
9.1 Form of Voting Trust Agreement dated as of October 10, 1995
by and among the Company, Wayne R. Hellman, Louis S. Fisi,
David L. Jennings, Robert S. Roller, Juris Sulcs, James F.
Sarver, Brian A. Hellman and Lisa Hellman, as amended
December 20, 1995. ****
9.2 Form of Irrevocable Proxy ****
10.1 Copy of the Company's Incentive Award Plan *
10.1/A Form of Amended Option "A" Grant, qualifying as an
Incentive Stock Option *
10.2 Copy of the Non-Employee Director Stock Purchase
Plan for Venture Lighting International, Inc. *
10.3 Plan and Agreement of Merger Among H&F Four, Inc.,
VLI Partners II, Inc. and Venture Lighting International,
Inc., effective as of October 6, 1995 *
10.4 Plan and Agreement of Merger With of H&F Six, Inc., H&F Seven,
Inc., H&F Eight, Inc., H&F Nine, Inc., H&F Twelve, Inc. and
Into Advanced Lighting Technologies, Inc., effective as of
October 6, 1995 *
10.5 Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Shareholders of Metal Halide
Technologies, Inc., effective as of October 10, 1995 *
10.6 Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Shareholders of Microsun
Technologies, Inc. and Shareholders of Microsun Technologies,
37
38
Inc., effective as of October 10, 1995 *
10.7 Plan and Agreement of Merger of VLI Partners II, Inc. With
and Into Advanced Lighting Technologies, Inc., effective as of
October 10, 1995, as amended *
10.8 Plan and Agreement of H&F One, Inc. With and Into Advanced
Lighting Technologies, Inc., effective as of October 10, 1995,
as amended *
10.9 Form of Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Individual Shareholders of APL
Engineered Materials, Inc., effective as of October 10, 1995 *
10.10 Form of Preferred Stock Redemption Agreement between VLI
Partners II, Inc. and its preferred shareholders (all are
substantially the same except the number of shares being
redeemed and the total redemption price) *
10.11 Agreement to Repay, dated October 5, 1995 with GE *
10.12 Bill of Sale dated September 15, 1995 from APL Engineered
Materials, Inc. to H&F Five, Inc. *
10.13 Letter Agreement between Greyrock Financial Group and
APL Engineered Materials, Inc. dated October 10, 1995 *
10.14 Lease Agreement dated January 1, 1993, by and between
Weston, Inc. and Venture Lighting International, Inc. *
10.15 Amended Lease Agreement dated September 30, 1992, by and
between LR Properties and Lighting Resources International,
Inc. *
10.16 Employment Agreement dated October 6, 1995, by and between
the Company and Wayne R. Hellman *
10.17 Employment Agreement dated October 6, 1995, by and between
the Company and Louis S. Fisi *
10.18 Settlement Agreement, Covenant Not To Sue and Mutual Release II *
10.19 Aircraft Lease Agreement between LightAir, Ltd., an Ohio
limited liability company, of which Wayne R. Hellman owns
owns 80% of the membership interests and Louis S. Fisi owns
20% of the membership interests, and Levetz Investments, Inc.
an unrelated corporation engaged in the business of chartering
aircraft and otherwise providing general aviation services
Levetz Investments"), dated as of January 22, 1996.
(Form 10-Q Exhibit 10.1) **
10.20 Aircraft Operating Agreement between Levetz Investments and
Venture Lighting International, Inc., a wholly-owned subsidiary
of the Company, dated as of January 22, 1996. (Form 10-Q
Exhibit 10.1) **
10.21 Aircraft Operating Agreement between Levetz Investments and
APL Engineered Materials, Inc., a wholly-owned subsidiary of
the Company, dated as of January 22, 1996. (Form 10-Q
38
39
Exhibit 10.3) **
10.22 Asset Purchase Agreement between Current Industries, Inc.,
Metal Halide Controls, Inc. and Advanced Lighting Technologies,
Inc. dated January 26, 1996. (Form 10-Q Exhibit 10.1) ***
10.23 Letter Agreement between Venture Lighting International, Inc.
and the Bank of Nova Scotia dated March 11, 1996 regarding
the purchase of capital stock and certain indebtedness of
Spectro Electric, Inc. (form 10-Q Exhibit 10.2) ***
10.24 Revolving Credit and Security Agreement between the Company
and BNY Financial Corporation dated March 25, 1996. (Form 10-Q
Exhibit 10.3) ***
11.0 Statement of Computation of Per Share Earnings ____
21.0 Subsidiaries of the Registrant *
23.0 Consent of Ernst & Young LLP ____
24.1 Powers of Attorney ____
27.1 Financial Data Schedule ____
* Incorporated by reference to Exhibit of same number in Company's
Registration Statement on Form S-1, Registration No. 33-97902, effective
December 11, 1995.
** Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December 31,
1995.
*** Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 31,
1996.
**** Incorporated by reference to Exhibit of the same number in the Company's
Registration Statement on Form S-1, Registration No. 333-05953, effective
July 16, 1996.
(b). Reports on Form 8-K.
During the fourth quarter of fiscal 1996, the Company filed a Report
on Form 8-K dated March 25, 1996, relating to the Company's acquisition of
Spectro Electric, Inc.
(c). Exhibits.
The exhibits to this Form 10-K are submitted as a separate section of
this Report. See Exhibit Index.
(d). Financial Statement Schedules
None.
39
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(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.
ADVANCED LIGHTING TECHNOLOGIES, INC.
Date: September 30, 1996 By: /s/ Louis S. Fisi
Louis S. Fisi
Executive Vice President and
Chief Financial Officer
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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Wayne R. Hellman Chief Executive Officer September 30, 1996
Wayne R. Hellman and Director
/s/ Louis S. Fisi Chief Financial Officer, September 30, 1996
Louis S. Fisi Chief Accounting Officer and
Director
/s/ Richard D. Capra* Director September 30, 1996
Richard D. Capra
/s/ Theodore A. Filson* Director September 30, 1996
Theodore A. Filson
/s/ Francis H. Beam* Director September 30, 1996
Francis H. Beam
/s/ Susuma Harada* Director September 30, 1996
Susuma Harada
/s/ A Gordon Tunstall* Director September 30, 1996
A Gordon Tunstall
*The undersigned, by signing his name hereto, does hereby execute this
Report on behalf of the above indicated directors of Advanced Lighting
Technologies, Inc. pursuant to Powers of Attorney executed by each such
director appointing the undersigned as attorney-in-fact and filed with the
Securities and Exchange Commission.
By: /s/ Louis S. Fisi
Louis S. Fisi
Attorney-in-Fact
40
41
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ADVANCED LIGHTING TECHNOLOGIES, INC.
41
42
EXHIBIT INDEX
Sequential Page Number/
Exhibit No. Title Incorporated by Reference
- ----------- ----- -------------------------
To
- --
3.1 Amended and Restated Articles of Incorporation *
3.2 Code of Regulations *
9.1 Form of Voting Trust Agreement dated as of October 10, 1995
by and among the Company, Wayne R. Hellman, Louis S. Fisi,
David L. Jennings, Robert S. Roller, Juris Sulcs, James F.
Sarver, Brian A. Hellman and Lisa Hellman, as amended
December 20, 1995. ****
9.2 Form of Irrevocable Proxy ****
10.1 Copy of the Company's Incentive Award Plan *
10.1/A Form of Amended Option "A" Grant, qualifying as an
Incentive Stock Option *
10.2 Copy of the Non-Employee Director Stock Purchase
Plan for Venture Lighting International, Inc. *
10.3 Plan and Agreement of Merger Among H&F Four, Inc.,
VLI Partners II, Inc. and Venture Lighting International,
Inc., effective as of October 6, 1995 *
10.4 Plan and Agreement of Merger With of H&F Six, Inc., H&F Seven,
Inc., H&F Eight, Inc., H&F Nine, Inc., H&F Twelve, Inc. and
Into Advanced Lighting Technologies, Inc., effective as of
October 6, 1995 *
10.5 Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Shareholders of Metal Halide
Technologies, Inc., effective as of October 10, 1995 *
10.6 Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Shareholders of Microsun
Technologies, Inc. and Shareholders of Microsun Technologies,
Inc., effective as of October 10, 1995 *
10.7 Plan and Agreement of Merger of VLI Partners II, Inc. With
and Into Advanced Lighting Technologies, Inc., effective as of
October 10, 1995, as amended *
10.8 Plan and Agreement of H&F One, Inc. With and Into Advanced
Lighting Technologies, Inc., effective as of October 10, 1995,
as amended *
10.9 Form of Plan and Agreement for Exchange of Stock Among Advanced
Lighting Technologies, Inc. and Individual Shareholders of APL
Engineered Materials, Inc., effective as of October 10, 1995 *
10.10 Form of Preferred Stock Redemption Agreement between VLI
42
43
Partners II, Inc. and its preferred shareholders (all are
substantially the same except the number of shares being
redeemed and the total redemption price) *
10.11 Agreement to Repay, dated October 5, 1995 with GE *
10.12 Bill of Sale dated September 15, 1995 from APL Engineered
Materials, Inc. to H&F Five, Inc. *
10.13 Letter Agreement between Greyrock Financial Group and
APL Engineered Materials, Inc. dated October 10, 1995 *
10.14 Lease Agreement dated January 1, 1993, by and between
Weston, Inc. and Venture Lighting International, Inc. *
10.15 Amended Lease Agreement dated September 30, 1992, by and
between LR Properties and Lighting Resources International,
Inc. *
10.16 Employment Agreement dated October 6, 1995, by and between
the Company and Wayne R. Hellman *
10.17 Employment Agreement dated October 6, 1995, by and between
the Company and Louis S. Fisi *
10.18 Settlement Agreement, Covenant Not To Sue and Mutual Release II *
10.19 Aircraft Lease Agreement between LightAir, Ltd., an Ohio
limited liability company, of which Wayne R. Hellman owns
owns 80% of the membership interests and Louis S. Fisi owns
20% of the membership interests, and Levetz Investments, Inc.
an unrelated corporation engaged in the business of chartering
aircraft and otherwise providing general aviation services
Levetz Investments"), dated as of January 22, 1996.
(Form 10-Q Exhibit 10.1) **
10.20 Aircraft Operating Agreement between Levetz Investments and
Venture Lighting International, Inc., a wholly-owned subsidiary
of the Company, dated as of January 22, 1996. (Form 10-Q
Exhibit 10.1) **
10.21 Aircraft Operating Agreement between Levetz Investments and
APL Engineered Materials, Inc., a wholly-owned subsidiary of
the Company, dated as of January 22, 1996. (Form 10-Q
Exhibit 10.3) **
10.22 Asset Purchase Agreement between Current Industries, Inc.,
Metal Halide Controls, Inc. and Advanced Lighting Technologies,
Inc. dated January 26, 1996. (Form 10-Q Exhibit 10.1) ***
10.23 Letter Agreement between Venture Lighting International, Inc.
and the Bank of Nova Scotia dated March 11, 1996 regarding
the purchase of capital stock and certain indebtedness of
Spectro Electric, Inc. (Form 10-Q Exhibit 10.2) ***
10.24 Revolving Credit and Security Agreement between the Company
and BNY Financial Corporation dated March 25, 1996. (Form 10-Q
Exhibit 10.3) ***
11.0 Statement of Computation of Per Share Earnings ____
43
44
21.0 Subsidiaries of the Registrant *
23.0 Consent of Ernst & Young LLP ____
24.1 Powers of Attorney ____
27.1 Financial Data Schedule ____
* Incorporated by reference to Exhibit of same number in Company's
Registration Statement on Form S-1, Registration No. 33-97902, effective
December 11, 1995.
** Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December 31,
1995.
*** Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended March 31,
1996.
**** Incorporated by reference to Exhibit of the same number in the Company's
Registration Statement on Form S-1, Registration No. 333-05953, effective
July 16, 1996.
44