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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
or
________TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-27202
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ADVANCED LIGHTING TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1803229
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
32000 AURORA ROAD, SOLON, OHIO 44139
(Address of principal executive offices) (Zip Code)
440/519-0500
(Registrant's telephone number, including area code)
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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 ([X]) 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 nonaffiliates of the
Registrant as of August 31, 1999 was $102,330,873.
There were 20,294,679 shares of the Registrant's Common Stock, $.001 par
value per share, outstanding as of August 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use at the Annual
Shareholders Meeting on December 16, 1999 are incorporated by reference into
Part III of this Form 10-K to the extent stated herein.
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INDEX
ADVANCED LIGHTING TECHNOLOGIES, INC.
PAGE
----
Cautionary Statement Regarding Forward Looking Statements............... 2
Risk Factors............................................................ 2
PART I
Item 1. Business.................................................... 9
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 25
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 49
Item 8. Financial Statements and Supplementary Data................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 50
Item 13. Certain Relationships and Related Transactions.............. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 50
SIGNATURES.............................................................. 55
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Report contains statements which constitute forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include statements regarding the intent, belief or
current expectations of Advanced Lighting Technologies, Inc. and its
subsidiaries (the "Company"), its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; (iii) continued growth
of the metal halide lighting market; (iv) the Company's operating strategy and
growth strategy; (v) potential acquisitions or joint ventures by the Company;
(vi) the declaration and payment of dividends; and (vii) litigation affecting
the Company. Prospective investors are cautioned that any such forward looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward looking statements as a result of various factors. The
accompanying information contained in this Report, including without limitation
the information set forth under the headings "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," identifies important factors that could cause such differences.
RISK FACTORS
You should consider carefully the following factors, as well as the other
information that we include or incorporate by reference in this report, in
evaluating an investment in our securities. To make the discussion of these
factors easier to read, when we discuss the Company we refer to it as "we."
METAL HALIDE LAMPS, OUR PRIMARY PRODUCT, MUST GAIN WIDER MARKET ACCEPTANCE
We derive almost all of our net sales and income from selling metal halide
materials, systems and components, and production equipment. Our current
operations and growth strategy are focused on the metal halide lighting
industry. Metal halide is the newest of all commercial lighting technologies.
Metal halide lamp sales represented approximately 8% of domestic lamp sales in
1998 compared to fluorescent and incandescent lamps which represented
approximately 86% of the same market. We attribute our success to the increased
acceptance of metal halide lighting in commercial and industrial uses. Our
future results are dependent upon continued growth of metal halide lighting for
these and other uses. However, metal halide lamps are not compatible with the
substantial installed base of incandescent and fluorescent lighting fixtures,
and the installation of a metal halide lighting system typically involves higher
initial costs than incandescent and fluorescent lighting systems. Metal halide
products may not continue to gain market share within the overall lighting
market or competitors may introduce better lighting technologies, displacing
metal halide lighting in the market. Either of these occurrences could have a
material adverse effect on our business and our results of operations.
GENERAL ELECTRIC COMPANY'S INVESTMENT IN THE COMPANY REQUIRES APPROVAL UNDER
ANTITRUST LAW
On September 28, 1999, General Electric Company ("GE") executed a
definitive agreement to invest over $20 million in shares of our convertible
preferred stock, in addition to their existing ownership of 2.6% of our common
stock. However, the investment is subject to certain closing conditions. We
believe that all closing conditions have been satisfied or are within our
control, other than the consent to the transaction pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act. Our representatives and GE have
been discussing this matter with the appropriate authorities and we believe that
this approval will be obtained very quickly. However, no assurance can be given
that the approval will be obtained. If the GE investment is not made promptly,
it could adversely affect our banking relationships, our liquidity and our
common stock price.
GENERAL ELECTRIC COMPANY'S RELATIONSHIP WITH US COULD AFFECT OUR RELATIONSHIP
WITH OTHER LIGHTING COMPANIES AND LIMIT OUR ABILITY TO GROW
The GE investment would improve our balance sheet and is expected to
increase our operating flexibility. In addition, we anticipate that this will
strengthen our supplier-customer relationship with GE. However, we do not
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yet know if this increased investment would have an adverse affect on our
relationship with other major companies in the lighting business. The Company
has not experienced any adverse impact from these other companies since the
March 1999 public announcement of the agreement in principle regarding the
investment. Pursuant to the terms of the GE investment agreement, GE will have
the right, by converting its preferred shares and exercising warrants, to
acquire approximately 4 million of our common shares. If the Company fails to
maintain the required ratio of earnings before interest and taxes to interest
charges for two different measurement periods, GE would obtain the right to
purchase and vote additional shares of our stock and, upon failure for a third
measurement period, to acquire voting control of the Company. The existence of a
large block of shares which could effectively control our shareholder votes, or
which could be sold in public or private sales, may limit our ability to obtain
financing in the future from other sources, including public offerings or
private sale of our common stock.
GENERAL ELECTRIC COMPANY'S RIGHTS COULD LIMIT OUR FINANCIAL ALTERNATIVES
After the GE investment, GE would have the right to make us redeem their
preferred stock after five years. GE also would have the right to make us redeem
their preferred stock if our shareholders don't approve matters related to the
GE transaction, if the necessary governmental approvals are not granted in
connection with GE's rights to acquire more of our shares in the future, or if
we take certain actions, including issuing additional common shares and
borrowing more than a total of $210 million. The existence of these limits may
reduce the ability of the Company to obtain financing in the future. If we have
to redeem the preferred stock after the GE investment, our financial resources
will be reduced. Under certain circumstances, redeeming the preferred stock
would cause a default under the indenture governing our Senior Notes due 2008,
with a principal amount of $100,000,000. Although GE cannot make us redeem their
preferred stock if such a default would occur, the failure to redeem GE's
preferred stock after GE makes a request for redemption could adversely affect
our relationship with GE.
OPERATING WITHOUT ADDITIONAL CASH RESOURCES COULD AFFECT OUR OPERATIONS AND
GROWTH
In the last half of fiscal 1999, we instituted cost reduction measures
intended to allow our operations to produce more cash revenues than we spend on
operations. We have spent more money on our operations than the revenues our
operations have generated in each of our last three fiscal years and have spent
more money on operations and investing in our business than our operations have
generated in each of our last four fiscal years. While we believe we are now
generating more cash in our operations than we are spending on operations, we
can't assure investors that the cost-saving measures will continue to generate
positive cash flow from our operations in the future. In addition, we are not
currently generating sufficient cash in our business to make the investments in
our future growth which we would like. Our ability to borrow additional money
under our $60 million revolving and term credit facility which we entered into
on May 21, 1999 ("Credit Facility") is limited. In order to have enough cash for
future operations and growth, we must generate greater net cash flow and/or
demonstrate our ability to achieve acceptable financial results in order to
increase our access to additional cash resources from lenders and investors.
OUR LOAN TO MR. HELLMAN MAY AFFECT OUR CAPITAL RESOURCES
On October 8, 1998, we made a $9 million loan to Wayne R. Hellman, our
Chairman and CEO. See "Certain Transactions." The loan is due on October 6,
1999. Mr. Hellman has paid interest accrued on the loan through October 6, 1999.
If Mr. Hellman doesn't repay the loan in accordance with its terms, it could
materially and adversely affect our ability to obtain money from lenders and
investors. If we take action to make Mr. Hellman pay the loan, it may hurt Mr.
Hellman's performance, which could hurt our operations.
OUR DEGREE OF INDEBTEDNESS COULD LIMIT OUR ABILITY TO GROW AND REACT TO CHANGES
IN MARKET CONDITIONS
At June 30, 1999, we had approximately $161.0 million of total indebtedness
outstanding and $77.4 million of shareholders' equity. At June 30, 1999, we also
had $6.1 million available (subject to borrowing base compliance and other
limitations) to be drawn under our Credit Facility (which was then a $75 million
facility).
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The indentures under which we have issued and may issue our debt securities
permit us and our subsidiaries to incur substantial amounts of additional
indebtedness in the future. The degree to which we are leveraged could have
important consequences to holders of our securities, including the following:
our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be
limited; and
our flexibility in planning for or reacting to changes in market
conditions may be limited, causing us to be more vulnerable in the event
of a downturn in our business.
OUR ABILITY TO DEVELOP AND BROADEN PRODUCT LINES IS IMPORTANT FOR OUR BUSINESS
We have recently broadened our systems and components product line. The
marketing efforts and strategies for such product extensions are quite different
from those we have used for our historical operations. We may not be successful
in adding new products to our current product categories or in developing new
categories of products. If we are unable to successfully add new products or
develop new product categories, this could adversely affect our financial
results.
OUR BUSINESS SUCCESS HAS BEEN BASED ON NEW PRODUCTS AND NEW PRODUCTS ARE
DIFFICULT TO INTRODUCE SUCCESSFULLY
We attribute our historical success, in large part, to the introduction of
new products in each of our product lines to meet the requirements of our
customers. Our future success will depend upon our continued ability to develop
and introduce innovative products. Even though we spent significant amounts on
research and development in fiscal 1999 and in prior years, we may not be able
to develop or introduce innovative products in the future. Even if a new product
is developed for a particular type of lighting fixture or use, the product may
not be commercially successful in the lighting market. In addition, competitors
occasionally have followed our introduction of successful products with similar
product offerings. As a result of these and other factors, we may not continue
to be successful in introducing new products. If we are unable to successfully
introduce new products, this inability could adversely affect our financial
results.
OUR SIGNIFICANT PAST GROWTH AND FUTURE GROWTH OBJECTIVES STRAIN OUR RESOURCES
We have experienced significant growth in recent years. This has placed a
strain on our management, employees, finances and operations. We have set
aggressive growth objectives for our net sales and net income which may continue
to strain our resources. These objectives may be increasingly difficult to
achieve. To achieve these objectives, we will seek to develop new products and
new uses for our products and seek to expand our distribution capabilities. We
will also seek to acquire and/or invest in related businesses inside and outside
of the United States. Any of our efforts in pursuit of these objectives may
expose us to risks that could adversely affect our results of operations and
financial condition. To manage growth effectively, we must continue to implement
changes in many aspects of our business, expand our information systems,
increase the capacity and productivity of our materials, components, systems and
production equipment operations, develop our metal halide systems capability and
hire, develop, train and manage an increasing number of managerial, production
and other employees. We have made and will continue to make certain of our
product line extensions through acquisitions. The success of these acquisitions
will depend on the integration of the acquired operations with our existing
operations. If we are unable to anticipate or manage growth effectively, our
operating results could be adversely affected. Likewise, if we are unable to
successfully integrate acquired operations and manage expenses and risks
associated with integrating the administration and information systems of
acquired companies, our operating results could be adversely affected.
WE MAY NOT BE ABLE TO REALIZE BENEFITS FROM ACQUISITIONS AND INVESTMENTS
In order to implement our business strategy, we will from time-to-time
consider expansion of our products and services through joint ventures,
strategic partnerships and acquisitions of, and/or investments in, other
business entities. We have no agreement or understanding with any significant
prospective acquisition or investment candidate in respect of a specific
transaction, but we are engaged in preliminary discussions with
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certain candidates at the date of this report. We cannot be certain that any
agreement will result from such discussions or that we will be able to identify,
acquire or manage future acquisition candidates profitably. In addition, we
cannot be certain as to the timing or amount of any return or anticipated
benefits that we might realize on any acquisition or investment.
Acquisitions or investments could require us to commit funds, which could
reduce our future liquidity. Our possible future acquisitions or investments
could result in additional debt, contingent liabilities and amortization
expenses related to goodwill and other intangible assets, as well as write-offs
of unsuccessful acquisitions, any or all of which could materially adversely
affect our performance, and, therefore, holders of our securities. We have made
several acquisitions since January 1997, including our largest acquisition to
date, Ruud Lighting, Inc. ("Ruud Lighting"), the effect of which has been to
almost double our revenues on a pro forma basis. There can be no assurance that
we will be able to integrate these acquisitions or to manage our expanded
operations effectively. In addition, since that date we have made substantial
investments in entities that we do not and will not be able to control. We may
find it difficult or impossible to realize cash flows from such investments, or
to liquidate such investments, which could adversely affect the holders of our
securities.
THE EXTENT OF OUR INTERNATIONAL BUSINESS OPERATIONS COULD HURT OUR PERFORMANCE
We have derived, and expect to derive in the future, a substantial portion
of our net sales from our international business. Revenues from customers
outside of the United States represented approximately 37% of our net sales for
fiscal 1999. Our international joint ventures and operations and our export
sales are subject to the risks inherent in doing business abroad, including
delays in shipments, adverse fluctuations in currency exchange rates, increases
in import duties and tariffs, and changes in foreign regulations and political
climate. We have granted and will grant our joint ventures and operations in
foreign countries rights to use our technology. While we will attempt to protect
our intellectual property rights in these foreign joint ventures and operations,
the laws of many foreign countries do not protect intellectual property rights
to the same extent as the laws of the United States.
Approximately 25% of our net sales in fiscal 1999 were denominated in
currencies other than U.S. dollars, principally pounds sterling, Australian
dollars and Canadian dollars. A weakening of such currencies versus the U.S.
dollar could have a material adverse effect on our business and results of
operations and, therefore, holders of our securities. We currently do not hedge
our foreign currency exposure.
WE MAY NOT BE ABLE TO PROTECT OUR IMPORTANT PATENTS AND TRADE SECRETS AND OTHERS
MAY ENFORCE RIGHTS AGAINST US
We rely primarily on trade secret, trademark and patent laws to protect our
rights to certain aspects of our products, including proprietary manufacturing
processes and technologies, product research, concepts and trademarks. These
rights are important to the success of our products and our competitive
position. The actions that we take to protect our proprietary rights may not be
adequate to prevent imitation of our products, processes or technology. Our
proprietary information may become known to competitors; we may not be able to
effectively protect our rights to unpatented proprietary information; and others
may independently develop substantially equivalent or better products that do
not infringe on our intellectual property rights. Other parties may assert
rights in, and ownership of, our patents and other proprietary rights.
In recent years, we have successfully taken legal action to enjoin
misappropriation of trade secrets by other parties. Any increase in the level of
activities involving misappropriation of our trade secrets or other intellectual
property rights could require us to increase significantly the resources devoted
to such efforts. In addition, an adverse determination in litigation could
subject us to the loss of our rights to a particular trade secret, trademark or
patent, could require us to grant licenses to third parties, could prevent us
from manufacturing, selling or using certain aspects of our products, or could
subject us to substantial liability. Any of these occurrences could have a
material adverse effect on our results of operations.
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IF WE LOSE OUR KEY PERSONNEL, IT WOULD ADVERSELY AFFECT OUR BUSINESS
We are highly dependent on the continued services of Wayne R. Hellman, our
founder, Chairman, Chief Executive Officer, and principal shareholder. We and
Mr. Hellman have entered into an employment agreement providing for a term
ending December 31, 2003. We are also highly dependent on the services of Alan
J. Ruud, our Vice Chairman and a principal shareholder. We and Mr. Ruud have
entered into an employment agreement providing for a term ending January 1,
2001. The loss of the services of Mr. Hellman or Mr. Ruud for any reason could
have a material adverse effect on our business and, in turn, to investors in our
securities. We maintain "key man" life insurance with respect to Mr. Hellman, in
the amount of $10 million, and Mr. Ruud, in the amount of $2 million.
CONTROL OF OUR STOCK BY PRINCIPAL SHAREHOLDERS MAY ALLOW THEM TO INFLUENCE
SIGNIFICANTLY SHAREHOLDER DECISIONS
Mr. Hellman individually owns approximately 9.5% of the outstanding shares
of our common stock and, individually and in other capacities, has the power to
vote a total of 19.4% of the outstanding shares of common stock (or
approximately 16.9% of the shareholder voting power assuming the GE investment
is completed). Mr. Ruud individually owns approximately 10.2% of the outstanding
shares of common stock and, individually and as a voting trustee, has the power
to vote a total of approximately 17.6% of the outstanding shares of common stock
(or approximately 15.3% of the shareholder voting power assuming the GE
investment is completed). After the GE investment, GE would own shares of our
preferred stock with voting power equivalent to approximately 13% of our common
stock and GE owns approximately 2.6% of our common stock. This would give GE
approximately 15.3% of total shareholder voting power, subject to increase upon
exercise of warrants to purchase common stock. After the GE investment, in
addition to GE's ownership, under certain circumstances GE may in the future
gain the right to vote shares owned or voted by Mr. Hellman and Mr. Ruud. As a
result, although GE, Mr. Hellman and Mr. Ruud have no arrangement or
understanding of any kind with each other as to the current voting of their
shares (except Mr. Ruud has agreed to vote his shares in favor of two proposals
at our 1999 Annual Meeting), either GE, Mr. Hellman or Mr. Ruud, or any
combination of them together, may be able to significantly influence, and may be
able effectively to control, all matters requiring shareholder approval,
including the election of directors (and thereby the affairs and management of
the Company), amendments to our Articles of Incorporation, mergers, share
exchanges, the sale of all or substantially all of our assets, going-private
transactions and other fundamental transactions.
IF GE OR ANOTHER INVESTOR CAN VOTE MORE THAN 35% OF OUR STOCK, WE MAY HAVE TO
REPAY LOANS
If GE, or any investor or group of investors, other than Mr. Hellman or his
family, get the right to vote more than 35% of our stock, our Credit Facility
banks will have the right to demand payment under our revolving and term loans
and we will have to offer to repurchase our Senior Notes due 2008 (currently
totaling $100 million) at a purchase price of 101% of the face amount thereof,
together with unpaid interest. These provisions may make it more difficult for
someone to take us over. We can't be sure that we will have adequate resources
to meet our obligations relating to these loans and notes if an investor gains a
35% voting interest. Even if we can meet these obligations, if we have to repay
the Credit Facility banks and repurchase our Senior Notes, it could hurt our
ability to finance operations and future growth.
OUR STOCK PRICE HAS VARIED WIDELY
Our common stock first became publicly traded in December 1995. After the
initial public offering, the stock price rose substantially from the initial
public offering price of $10 per share. The price of our common stock has varied
widely. In October 1998, the closing price of our stock reached as low as
$4.875. Such wide variation and the possibility of wide variation in the future
may make it difficult for us to sell additional shares of stock at prices which
we believe reflect the value of our stock or make it difficult to sell stock at
all. If we can't sell stock to obtain the money we need, it may be difficult to
operate and grow.
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ENVIRONMENTAL REGULATIONS COULD STRAIN OUR RESOURCES
Our 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. We believe that our business operations
and facilities are being operated in compliance in all material respects with
applicable environmental, 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 we could
incur material costs or liabilities. In addition, we could be required to make
potentially significant expenditures to comply with evolving environmental,
health and safety laws, regulations or requirements that may be adopted or
imposed in the future. The imposition of significant environmental liabilities
on us could have a material adverse effect on our business and financial
results.
OUR PRIMARY COMPETITORS ARE MORE ESTABLISHED AND HAVE MORE RESOURCES
We compete with respect to our major products with numerous
well-established producers of materials, components, and systems and equipment,
many of which possess greater financial, manufacturing, marketing and
distribution resources than we do. In addition, many of these competitors'
products utilize technology that has been broadly accepted in the marketplace
(i.e., incandescent and fluorescent lighting) and is better known to consumers
than is our metal halide technology. We compete with GE, Philips Electronics
N.V. ("Philips") and Siemens A.G.'s OSRAM/Sylvania, Inc. subsidiary ("Sylvania")
in the sale of metal halide lamps. We estimate, based on published industry
data, that these three companies had a combined domestic market share of
approximately 85% for metal halide lamps based on units sold and approximately
95% of the total domestic lamp market. Accordingly, these companies dominate the
lamp industry and exert significant influence over the channels through which
all lamp products, including ours, are distributed and sold. Our component
products and systems also face strong competition, particularly in the power
supply market, in which our two largest competitors each have a larger market
share than we do. Our competitors may increase their focus on metal halide
materials, systems and components, and expand their product lines to compete
with our products. Any such increase or expansion could have a material adverse
effect on our business and financial results.
WE SELL PRODUCTS TO OUR COMPETITORS AND PURCHASE COMPONENTS FROM OUR COMPETITORS
Notwithstanding the fact that we compete with GE, Philips and Sylvania in
the sale of certain of our products, we purchase a significant quantity of raw
materials and private label lamps from these three companies (aggregating $18.5
million in fiscal 1999, of which $13.5 million was from GE) and derive
significant revenue from sales of our materials, components, and systems to each
of these three companies (aggregating $18.8 million in fiscal 1999, of which
$4.6 million was to GE). Any significant change in our relationships with these
companies, or in the manner in which these companies participate in the
manufacturing, distribution, and sale of metal halide lighting products, could
have a material adverse effect on our business and financial results and, in
turn, holders of our securities.
OUR AGREEMENTS WITH CREDITORS IMPOSE RESTRICTIONS THAT COULD IMPEDE OUR GROWTH
The Credit Facility and the indenture relating to our Senior Notes Due 2008
contain certain restrictive covenants, including, among others:
covenants limiting our ability and certain of our subsidiaries' ability
to incur additional indebtedness, pay dividends, make certain
investments, consummate certain asset sales, enter into transactions
with affiliates and incur liens; and
covenants imposing restrictions on the ability of certain subsidiaries
to pay dividends or make certain payments to us, merge or consolidate
with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets.
Although the covenants are subject to various exceptions which are designed
to allow us and our subsidiaries to operate without undue restraint, such
restrictions could adversely affect our ability to finance our future
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operations or capital needs or engage in other business activities which may be
in our interest. In addition, the Credit Facility requires that we maintain
specified financial ratios. Our growth will depend in part upon our ability to
fund acquisitions and investments, any of which may make it more difficult to
maintain financial ratios. Our ability to comply with such provisions may be
affected by events beyond our control. A breach of any of these covenants or the
inability to comply with the required financial ratios could result in a default
under the Credit Facility that would entitle the lenders to accelerate payment
of the entire debt. Such an event would adversely affect us and holders of our
securities. As a growth company, we may need to amend or replace the Credit
Facility prior to its maturity on May 21, 2002.
OUR DATA SYSTEMS AND THOSE OF OUR SUPPLIERS AND CUSTOMERS MUST BECOME YEAR 2000
COMPLIANT FOR US TO TRANSITION INTO THE NEXT MILLENIUM
We use and depend on data processing systems and software to conduct our
business. The data processing systems and software include those that we have
developed and maintained as well as the purchased software which is run on
in-house computer networks. We have initiated a review and assessment of all
hardware and software to determine whether it will function properly in the year
2000. To date, our vendors that have been contacted have indicated that their
hardware or software is or will be year 2000 compliant in time frames that meet
our requirements. We presently believe that costs associated with the compliance
efforts will not have a significant impact on our ongoing results of operations
although there can be no assurance in this regard. We also have initiated
communications with our significant suppliers regarding the year 2000 issue.
However, there can be no assurance that the systems of such suppliers, or of
customers, will be year 2000 compliant. The failure of suppliers and customers
to timely modify their systems to be year 2000 compliant could have a
significant impact on our results of operations.
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PART I
ITEM 1. BUSINESS
SUMMARY
The Company was formed on May 19, 1995 and acquired ownership, primarily by
merger (the "Combination"), of affiliated companies that were previously under
common ownership and management (the "Predecessors") and engaged in some aspect
of the metal halide lighting business. Unless the context otherwise requires,
the "Company" refers to Advanced Lighting Technologies, Inc., its subsidiaries
and the Predecessors. Industry data in this Report with respect to the lighting
industry is reported on a calendar year basis and includes the industrial,
commercial and residential sectors, but not the automotive sector. Unless
otherwise stated herein, such industry data is derived from selected reports
published by the National Electrical Manufacturers Association ("NEMA").
THE COMPANY
Advanced Lighting Technologies, Inc. is an innovation-driven designer,
manufacturer and marketer of metal halide lighting products. Metal halide
lighting combines superior energy efficient illumination with long lamp (i.e.
light bulb) life, excellent color rendition and compact lamp size. The Company
believes that it is the only designer and manufacturer in the world focused
primarily on metal halide lighting. As a result of this unique focus, the
Company has developed substantial expertise in all aspects of metal halide
lighting. 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 metal halide market is the fastest growing segment of the domestic
lighting market, demonstrated by metal halide lamp sales having grown at a
compound annual rate of approximately 14% since 1993, although growth has varied
substantially from year to year. The Company's strong market position, new
product development capabilities, strategic acquisitions and participation in
international markets have enabled the Company to increase its revenues at rates
in excess of the growth of the domestic metal halide market. The Company's sales
from its continuing operations increased at a compound annual growth rate of 51%
to $188.5 million in fiscal 1999 from $54.6 million in fiscal 1996. The Company
has experienced growth in net sales in each of the past six years, and the
Company's sales from continuing operations increased 15% to $188.5 million in
fiscal 1999 from $163.9 million in fiscal 1998.
The Company has integrated vertically to design, manufacture and market a
broad range of metal halide products, including materials used in the production
of lamps, and lamps and other components for lighting systems as well as
complete metal halide lighting systems. The Company's materials and components
are used in the manufacture of its own lighting systems for sale to end-users
and are sold to third-party manufacturers for use
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in the production of their metal halide products. The vertical integration of
the Company's approach to its products is illustrated below:
METAL HALIDE INTEGRATION CHART
Vertical Integration from Materials through Systems
Products for Manufacturers Products for End Users Innovative Products
MATERIALS Metal Halide
Systems
LAMPS Produced by the New
Company Applications
POWER SUPPLIES Commercial/
Industrial/ -Fiber Optics
CONTROLS Outdoor -Residential
Replacement Parts Applications -Headlights
OPTICS/COATINGS Sold to End Users -Projection TV
EQUIPMENT Metal Halide Systems
Produced by
Third Parties
METAL HALIDE
Invented approximately 35 years ago, metal halide is the newest of all
major lighting technologies and can produce the closest simulation to sunlight
of any available lighting technology. Metal halide lighting is currently used
primarily 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
"metal halidize" applications currently dominated by older incandescent and
fluorescent lighting 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. However, metal halide lamps are not compatible
with the substantial installed base of incandescent and fluorescent lighting
fixtures. While metal halide systems generally offer lower costs over the life
of a system, the installation of a metal halide lighting system typically
involves higher initial costs than incandescent and fluorescent lighting
systems.
While domestic sales of incandescent and fluorescent lamps grew at a
compound annual rate of approximately 3% since 1993, domestic metal halide lamp
sales have grown at a compound annual rate of approximately 14% over the same
period, making metal halide the fastest growing segment of the approximately
$2.8 billion domestic lamp market. In 1998, metal halide accounted for
approximately 8% of domestic lamp sales by dollar volume.
The Company believes that the majority of the growth of metal halide
lighting has occurred in commercial and industrial applications. Recently, metal
halide systems have been introduced in fiber optic, projection television and
automotive headlamp applications. The Company believes that additional
opportunities for metal halide lighting exist in other applications where energy
efficiency and light quality are important. As a result of the Company's
dominant position in metal halide materials, the Company expects to benefit from
continued growth in metal halide markets. In addition, the Company expects to be
a leader in metal halide's continued market expansion by providing innovative
metal halide system components and integrated systems.
BACKGROUND OF THE COMPANY
History
The Company's business was established in 1983 by Wayne R. Hellman, the
Company's current Chief Executive Officer, and other members of the Company's
senior management to focus on the design and manufacture of metal halide lamps.
Management initially acquired an entity engaged in the production of metal
halide salts necessary to make metal halide lamps and founded Venture Lighting
International, Inc. ("Venture"), a lamp manufacturer, soon thereafter. By 1995,
management had either formed or acquired 17 operating
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companies, each of which was engaged in some aspect of the metal halide lighting
business and all of which were under common ownership (the "Predecessors").
The Predecessors financed early operations through a combination of venture
capital financing and significant bank borrowing. The Predecessors experienced
significant growth between fiscal 1983 and fiscal 1989, with metal halide
products representing slightly less than half of the Predecessors' net aggregate
revenue in fiscal 1989. In January 1989, the senior lender to Venture, one of
the 17 Predecessor companies, requested that it obtain alternative financing
sources for the approximately $32.0 million of bank debt which Venture then had
outstanding. However, Venture was unable to consummate alternative financing
arrangements that would have retired the outstanding debt because of its venture
capital investor's refusal to accept the terms and values offered for its
investment in Venture in two potential transactions with major lamp
manufacturers. In June 1990, Venture and the venture capital investor negotiated
an exchange of the investor's preferred equity for subordinated notes of
Venture. Following this exchange, Venture was able to reduce the $32.0 million
of indebtedness owed to its senior lender to $6.7 million by December 1990
through dispositions of certain subsidiaries, including its German quartz
halogen lamp manufacturer. As a result of these dispositions, non-metal halide
product sales declined to approximately 17% of net sales in fiscal 1991.
During fiscal 1992, Venture was unsuccessful in refinancing the remaining
outstanding senior debt, which had risen to $8.0 million at June 30, 1992 and
was limited to that amount by its senior lender. As a result, Venture
experienced working capital constraints, and its management made a strategic
decision to refocus its manufacturing operations on the core business of
specialty metal halide lamps. Venture contracted its operations by significantly
reducing the number of product lines it manufactured, reducing its work force
and eliminating its second manufacturing shift.
At the end of fiscal 1992, the senior lender expressed its intention not to
further extend the term of the remaining bank debt of Venture. Although Venture
was in default of certain covenants, it had never missed a scheduled interest or
principal payment to the senior lender. Unable to obtain acceptable refinancing,
Venture voluntarily filed for protection under Chapter 11 of the United States
Bankruptcy Code on July 29, 1992. None of the other Predecessors filed for
Chapter 11 protection. Venture successfully emerged from Chapter 11 protection
in July 1993. The Predecessors' aggregate net sales declined to $25.5 million in
fiscal 1993 from $26.4 million in fiscal 1992. During fiscal 1993, the
Predecessors maintained substantially all of their relationships with existing
customers and suppliers. As part of the plan of reorganization, Venture's
management received complete ownership of Venture for an additional equity
investment of $250,000. Venture's reorganization was facilitated by financing
arrangements totaling $8.0 million provided by GE (the "GE Loan"), which were
personally guaranteed by Mr. Hellman. In addition, at that time, GE was issued a
warrant to purchase common stock of Venture (the "GE Warrant"). In connection
with the Company's initial public offering in December 1995, GE received $3.0
million in cash plus 5.0% of the Company's then outstanding Common Stock in
exchange for the cancellation of the GE Warrant and for other consideration.
Recent Acquisitions and Strategic Investments
To expand the Company's ability to develop and market new metal halide
products and systems, the Company has made a number of acquisitions and
strategic investments, the most notable of which were completed in fiscal 1998
and are described below.
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is a leader in the
development of sophisticated thin film deposition systems and coatings for
lighting applications, with particular emphasis on coatings for metal halide
lighting systems, and other applications, including aerospace, defense and
automotive applications. The stock of DSI was acquired in a privately-negotiated
transaction. The purchase price consisted of 599,717 shares of the Company's
Common Stock and approximately $14.5 million in cash.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets high-intensity discharge ("HID")
lighting systems, principally focusing on metal halide installations for
commercial, industrial and outdoor lighting applications. The Ruud Stock was
acquired from the five shareholders of Ruud Lighting in a
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privately negotiated purchase transaction. The purchase price for the Ruud Stock
consisted of three million shares of the Company's Common Stock and
approximately $35.5 million in cash.
Executive Offices
The Company's principal executive offices are located at 32000 Aurora Road,
Solon, Ohio 44139 and its telephone number is (440) 519-0500.
LIGHTING INDUSTRY
Opportunities in Metal Halide
The Company currently produces metal halide lighting products for
commercial, industrial and residential applications. Until recently, metal
halide technology served primarily the industrial and outdoor sectors, which the
Company estimates represents approximately 32% of U.S. lighting fixture sales.
However, with the miniaturization of metal halide lamps and fixtures and the
recognition of the benefits of metal halide technology, including improved light
color, energy efficiency, lower operating temperature and safety of metal halide
products relative to other technologies, significant opportunities for growth
exist. Key factors driving growth in the metal halide industry include:
Demand for Specialized Lamps. The demand for specialized metal halide lamps
has increased as the Company's original equipment manufacturer ("OEM") and
lighting agent customers have recognized the benefits associated with using
specialized metal halide products. While the lighting industry is dominated by
GE, Philips and Sylvania, each of these companies has traditionally focused on
the larger incandescent and fluorescent market and has generally limited its
production of metal halide lamps to those found in the most common commercial
and industrial applications. Although these standard-type metal halide lamps
represent a substantial majority of total metal halide lamp sales, they do not
afford the OEM or lighting agent complete flexibility in designing lighting
contract bids. For example, a lighting agent may attempt to differentiate its
bid by designing a lighting solution which incorporates a specialized metal
halide lamp to reduce energy costs while still achieving desired lighting
levels.
Development of New and Advanced Metal Halide Power Supplies. Historically,
the introduction of new metal halide lamps and systems has been constrained by
the lack of complementary metal halide power supplies. Significant engineering
expertise is required to adapt existing power supplies for new metal halide
products. The Company believes that while domestic sales of metal halide power
supplies approximated $200 million in 1998, power supply manufacturers, like
lamp manufacturers, have focused on the larger fluorescent power supply market
and, to a lesser extent, on the standard-type metal halide lamp market rather
than development of new power supply products for specialized metal halide
products and applications. The development of appropriate power supply sources
focused on metal halide should significantly enhance the expansion of metal
halide applications, reduce the development time currently required to introduce
new metal halide products and improve the reliability and durability of existing
metal halide products.
Opportunity for Integrated Metal Halide Systems. Metal halide systems for
commercial and industrial applications are assembled primarily by fixture
manufacturers, lighting agents, and intermediaries who are limited in their
ability to integrate different components which comprise a metal halide system.
The Company believes that significant growth opportunities exist through the
packaging of compatible, reliable system components for OEM customers from a
single supplier. In addition, the Company believes that metal halide systems
have significant potential to displace older lighting technologies in
traditional applications and that residential applications will represent a
substantial market for metal halide lighting within the next five years. Other
potential applications for metal halide systems include fiber optic systems,
projection television displays and automotive headlamps.
International Demand for Metal Halide. Despite the recent financial crisis
in the Pacific Rim, international markets represent long-term attractive
opportunities for metal halide products as developing nations continue to build
infrastructure to support their growing economies. Facilities such as train
stations, airports, government buildings, highways and factories all require
substantial lighting for which metal halide products are well suited.
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In addition, given the high energy efficiency of metal halide and the high cost
of energy in developing nations (including the high cost of power plant
construction), the Company believes that the international metal halide market
will grow faster than the United States market in the long term.
STRATEGY
The Company believes that metal halide technology represents the best
lighting technology for a wide variety of applications, many of which are not
yet served by an appropriate metal halide product. As the principal supplier of
metal halide materials to the metal halide lamp industry, the Company expects to
benefit from continued growth in metal halide markets. The Company also expects
to lead metal halide's continued market expansion, by providing innovative metal
halide system components and integrated systems through the operating and growth
strategies highlighted below.
The Company's strategic objective is to remain focused on the metal halide
market and expand its leadership position in the metal halide lighting industry
by: (i) continuing to pursue vertical integration to expand the Company's
ability to introduce new products and applications; (ii) strengthening the
Company's relationships with OEMs and lighting agents to increase the number of
metal halide applications and the penetration of the Company's products in new
metal halide installations; and (iii) seeking to demonstrate the superiority of
metal halide lighting solutions, thereby stimulating domestic and international
demand for the Company's products.
The Company seeks to achieve its strategic objective through internal
growth and, in recent years, acquisitions and strategic investments. The
Company's acquisitions and investments have been made in businesses that, when
combined with the Company's existing capabilities and metal halide focus, are
intended to provide technological, product or distribution synergies and offer
the potential to enhance the Company's competitive position or accelerate
development of additional metal halide market opportunities. The Company has
made a number of acquisitions and investments since January 1997, as described
under Item 1. "Business -- Background of the Company -- Recent Acquisitions and
Strategic Investments." To the extent its capital resources allow, the Company
will consider other possible acquisition and strategic investment opportunities.
OPERATING STRATEGY
The Company focuses its resources primarily on designing, manufacturing and
marketing metal halide materials, system components, and systems. By focusing on
metal halide, the Company believes it has developed unique design, manufacturing
and marketing expertise. Such expertise provides the Company with significant
competitive advantages, which enable the Company to deliver highly customized
products to meet customer needs. The Company's experienced workforce is
dedicated to improving metal halide lighting products, production processes and
developing new applications for this technology. The Company's recent decision
to temporarily cease manufacture and sale of turnkey lamp production equipment
groups has not altered this strategy. The Company has retained key personnel in
the consolidation of equipment operations at its Solon facility.
In addition, in order to increase the number of metal halide applications
and the penetration of the Company's products, the Company pursues the following
operating strategies:
Continue Vertical Integration
The Company began operations as a manufacturer of metal halide salts and
expanded into production of system components, initially lamps. The Company has
expanded its focus on systems and components to include commercial and
industrial systems (through the Ruud Lighting acquisition), and magnetic and
electronic power supplies (through the acquisitions of Ballastronix, Inc.
("Ballastronix") and Parry Power Supply Ltd. ("Parry")). The Company is
broadening its materials manufacturing capabilities to include filtering and
optical coatings for lighting applications, through its acquisition of DSI in
January 1998. Through vertical integration, the Company is able to develop and
package complementary system components and develop systems which enable metal
halide lighting to penetrate applications and markets currently served by older
technologies.
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Strengthen OEM and Lighting Agent Relationships
The Company concentrates on developing strong relationships with lighting
fixture OEMs by providing the key system components for a lighting fixture,
either alone or packaged as a unit, tailored to meet their needs. Historically,
the Company provided specialized lamps tailored to meet OEM needs. With its
ability to design and manufacture power supplies, achieved through the
acquisition of Ballastronix and Parry, the Company expects to better meet OEM
needs by packaging the principal system components (lamps, power supplies,
switches and controls) for a lighting fixture. Frequent interaction with OEMs
serves dual purposes, providing the Company with valuable ideas for new
component products and providing OEMs with the information necessary to market
the Company's new products. Lamps and power supplies designed for a specific
fixture are included with the fixture when sold by the OEM, increasing
distribution of the Company's products. The Company has also entered into
agreements with lighting agents to pay commissions for selling the Company's
lamps. Such commissions, unique among lamp manufacturers, provide the agent an
incentive to include the Company's metal halide lamps in its bids on a
construction or renovation project. With its January 1998 acquisition of Ruud
Lighting, which is a leading direct marketer of HID systems, the Company expects
to significantly enhance its ability to directly market HID systems for
commercial, industrial, outdoor and retail lighting applications, as well as
replacement lamps.
Seek to Demonstrate Superiority of Metal Halide Lighting Solutions
The Company seeks to demonstrate the superiority of metal halide lighting
solutions to its customer base, including OEMs, lighting agents and contractors,
thereby stimulating domestic and international demand for the Company's
products. The Company believes that metal halide lighting systems have
significant potential to displace older lighting technologies in traditional
applications, as well as potential applications such as fiber optic systems,
projection television displays and automotive headlamps.
LONG-TERM GROWTH STRATEGY
The Company is continuing to introduce more products for new applications
and to expand the distribution channels for its products. The key elements of
the Company's long-term growth strategy include:
Introduce New Products and Systems
The Company believes it has introduced a majority of the new lamps in the
domestic metal halide lamp industry since 1985. As applications become
increasingly complex, the advantage of simultaneous design of components as an
integrated system is becoming more significant. To further the Company's
integrated systems strategy, the Company completed the Ruud Lighting,
Ballastronix and Parry transactions. As a result, the Company can now
manufacture and market complete metal halide lighting systems for end-users, as
well as complementary component packages for OEMs. The Company intends to
develop, manufacture and market additional types of high performance and
technologically advanced metal halide materials, components and systems.
Capitalizing on its expanding production capability, design capability and
unique metal halide focus, the Company expects to develop additional specialty
systems, such as fiber optic lighting systems and projection television optical
systems.
Increase Sales of Existing Products
By expanding existing relationships and developing new relationships with
lighting agents and OEMs, the Company expects to increase sales of existing
specialty lamps and power supplies. The Company is beginning to utilize Ruud
Lighting's distribution capability to expand sales of existing products,
particularly replacement lamps. The Company also expects its sales of
replacement lamps, as well as power supplies, to increase through its recently
expanded distribution capability (resulting from the Ruud Lighting acquisition)
and as the installed base of fixtures for the Company's specialty lamps
increases. The Company expects to increase sales in the replacement lamp market,
in part through a novel direct marketing approach to end users. The Company
prints its toll-free phone number on each lamp, and customers can order
replacement lamps directly from the Company for
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express delivery. In addition, this interaction with customers provides the
Company with the opportunity to market additional metal halide products.
Participate in International Markets
The Company intends to capitalize on opportunities in international markets
in three ways. First, the Company directly exports its products to countries
that do not impose restrictive tariffs, local content laws and other trade
barriers. The primary countries and regions in which the Company directly
markets products are the United Kingdom, Western Europe, Australia, Canada and
Japan. Since July 1995, the Company has strengthened its distribution
capabilities by acquiring or investing in its distributors in these countries.
Second, the Company may pursue strategic acquisitions or build manufacturing
facilities in international markets. Third, in countries that impose trade
restrictions, the Company has sold production equipment or has entered into
joint ventures with local lamp manufacturers. Purchasers of production equipment
have become customers for the Company's metal halide salts and other materials.
The Company has existing joint ventures in India, China, Korea and Japan.
Penetrate the Residential Lighting Market
The Company believes that residential and consumer applications will
represent a promising market for metal halide lighting within the next five
years. Over the longer term, the Company intends to lead metal halide's
penetration of the residential lighting market by: (i) expanding the marketing
of its products, especially contractor-installed fixtures used in the
construction of new and remodeled housing, building on Ruud Lighting's expertise
in direct marketing to contractors; and (ii) developing the use of metal halide
fiber optic systems.
PRODUCTS
The Company designs, manufactures and sells metal halide materials,
components and systems, which are used in a wide variety of applications and
locations including:
- -- floodlighting -- sports arena lighting -- general lighting
- -- architectural area -- commercial downlighting -- industrial highbays
lighting -- airport and railway -- tunnel lighting
- -- general industrial station lighting -- indirect indoor sports
lighting -- gas station canopy and office lighting
- -- billboard and sign lighting -- parking garage lighting
lighting -- interior downlighting -- security lighting
- -- site lighting -- decorative lighting -- landscape lighting
- -- soffit lighting -- retail store
- -- hazardous location downlighting and track
lighting lighting
- -- accent lighting
The Company also designs, manufactures and sells thin film deposition
equipment for the lighting, ophthalmics and optics industries. The Company also
designs, manufactures and sells photometric measurement instruments.
Materials
The Company produces and sells metal halide salts, electrodes, amalgams and
getters. Metal halide salts are the primary ingredient within the arc tube of
metal halide lamps, which determine the lighting characteristics of the lamp.
Electrodes form the electrical connections within the lamp. Amalgams are
chemicals which are used in the arc tubes of HPS lamps and in fluorescent lamps.
Getters are devices required to be included in each metal halide lamp to prevent
impurities from interfering with lamp operation.
The Company produces over 300 different metal halide salts that can be used
in metal halide lamps to produce different lighting characteristics. In addition
to meeting its own needs, the Company believes it produces all of the metal
halide salts used in metal halide lamps manufactured in the United States,
including those manufactured by GE, Philips and Sylvania, and 80% of the metal
halide salts used in metal halide lamps manufactured overseas. The Company
serves all major lamp manufacturers, each of which uses different metal halide
salts. The Company vigorously guards each customers' specific formulas from
other customers, including
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the Company's own lamp engineers. Because of its ability to produce these ultra
pure metal halide doses, the Company has also been called upon by its lamp
manufacturer customer base to produce most of the amalgams used in the domestic
production of high pressure sodium ("HPS") lighting and, most recently, to
develop and supply a new amalgam for fluorescent applications.
With the January 1998 acquisition of DSI, the Company also now produces
optical thin film coatings, including coatings for lighting applications with
particular emphasis on coatings for metal halide arc tubes, as well as
antireflection coatings, and electrochromic coatings for glass and plastic
ophthalmic lenses, multilayer magnetic films and emissivity modification films
for classified government applications, and infrared multilayer optical films on
flexible polymeric substrates. Through a reactive sputtering process, these
coatings are electrostatically attached to a product surface. When used in
lighting applications, these coatings can significantly improve the optical
performance of the light source, protect the system and its components from
harmful ultra-violet and infra-red radiation, and increase the energy efficiency
of the entire system.
Systems and Components
The Company's component products include specialty and standard lamps,
magnetic and electronic power supplies, system controls and switches and fiber
optic cable. Specialty lamps are lamps designed and manufactured for particular
OEM applications. Standard lamps are high-volume lamps which the Company
typically buys for resale under arrangements with GE and Sylvania. Power
supplies are devices which regulate power and are necessary for operation of HID
and fluorescent lamps. System controls and switches are auxiliary electrical
controls included in fixtures and systems.
The Company believes it differentiates itself from other metal halide lamp
manufacturers by offering a wider variety of lamps, many of which have been
customized to offer a specific solution to a lighting problem. Since 1985, the
Company believes that it has introduced over 75% of the approximately 200 new
lamps in the domestic metal halide lamp industry. Currently, the Company offers
over 240 specialty lamp types and 40 standard-type lamps in 20 different watt
variations ranging from 32 watts to 2,000 watts for over 30 different
applications. In certain instances, the Company produces these products for its
competitors on a private label basis in order to capture sales through
competitors' distribution channels. The Company also sells standard-type lamps
which it sources from other manufacturers.
In fiscal 1999, the Company introduced its new line of Uni-Form(R)pulse
start products. Uni-Form(R) pulse start products are a new generation of metal
halide components and systems which permit (a) increased light output with lower
power utilization, (b) faster starting, (c) a quicker restart of lamps which
have been recently turned off, and (d) better color uniformity.
Through Venture Lighting Power Systems, North America (f/k/a Ballastronix),
the Company's Canadian subsidiary which manufactures magnetic power supplies,
and Venture Lighting Europe (f/k/a Parry Power Systems), the Company's United
Kingdom subsidiary which manufactures magnetic and electronic power supplies for
HID lighting systems, the Company currently offers over 400 power supply
products. The Company also offers electronic controls for metal halide lighting
systems.
A metal halide lighting system consists of a fixture, lamp, power supply
and related electronic controls and switches and any other necessary components
assembled into a product for an end user. The Company believes it will be able
to combine its metal halide expertise and system component manufacturing
capabilities to design, develop, produce and market metal halide systems for
innovative applications. Through its acquisition of Ruud Lighting, the Company
has recently expanded its capability to manufacture and direct market HID
lighting systems, particularly metal halide installations for commercial,
industrial and outdoor lighting applications.
The Company is in the early stages of development of an optical light
system for use in projection systems, including televisions. Recent innovations
in projection display have made it possible for a compact light unit to generate
substantially larger and clearer imaging than that available in existing
projection systems. Currently, television manufacturers are limited by the high
cost of existing lighting units for projection systems. The
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Company is working with projection system manufacturers to develop a low-cost
system using a metal halide lamp, electronic power supply and optical controls.
The Company also believes that it has a significant opportunity to
introduce metal halide technology to fiber optic lighting systems. Because of
metal halide lighting's ability to produce varied lighting effects, it is
particularly well-suited to be adapted as the light source for fiber optic
lighting systems. Fiber optic lighting systems are currently used in accent
applications, such as swimming pool lighting or as replacement lighting for neon
lighting. In applications such as these, it is important that electricity and
heat be located separately from the desired point of light emission.
Production Equipment
Due to economic conditions in general, especially outside the United
States, and as a result of the Company's cash preservation strategy, the
Company's equipment manufacturing operation in Bellevue, Ohio has been closed.
Machinery, equipment and research and development facilities necessary to allow
the Company to continue manufacturing and support of lamp production equipment,
at reduced levels, has been moved to the Company's Solon, Ohio facility. The
Company has temporarily ceased the manufacture and sale of turnkey lamp
production manufacturing groups.
The Company has been the only manufacturer and marketer of turnkey metal
halide lamp production equipment groups. A metal halide lamp production
equipment group consists of up to 50 different production machines. The Company
has also begun to manufacture and sell photometric measuring equipment, which is
used to measure quantity and quality of light for design and testing of lighting
products and systems.
Each lamp production equipment group sold for between $1.0 million to $6.0
million. In order to maintain manufacturing flexibility, the Company must
continually update its own component production equipment, through the internal
design and fabrication of production equipment. The Company had leveraged its
manufacturing expertise by selling lamp production equipment groups in
international markets to independent companies or to joint ventures with local
lamp manufacturers. In connection with each lamp production equipment group
sale, the Company provided lamp designs and specifications, trained the
purchaser in production and created a customer for its materials products.
With its January 1998 acquisition of DSI, a leader in the development of
sophisticated thin film deposition equipment and measurement instrumentation and
thin film products, the Company also has the capability to manufacture and
market turnkey deposition equipment to produce thin film coatings for a variety
of applications. These systems employ sputtering technology to place optically
precise thin coatings on lighting components and other materials. When DSI sells
a system to a customer, DSI will either operate the system for the customer at
DSI's facility or transfer the system to the customer's facility.
International Sales
International sales aggregated $68.9 million (34% of net sales) for fiscal
1999, $78.8 million (48% of net sales) for fiscal 1998 and $41.0 million (47% of
net sales) for fiscal 1997. For more detailed information regarding the
Company's international operations, see Note R to "Notes to Consolidated
Financial Statements," included in Item 8.
PRODUCT DESIGN AND DEVELOPMENT
Management believes one of its key strengths is its ability to design and
develop new products. The Company has dedicated research and development efforts
in each of its product lines having invested $31.5 million or 7.2% of net sales
from continuing operations into research and development over the last three
full fiscal years. In fiscal 1999 the Company invested $17.1 million (9.1% of
net sales) in research and development; in fiscal 1998, $9.3 million (5.7% of
net sales); and in fiscal 1997, $5.1 million (6.0% of net sales). Such
expenditures have enabled the Company to develop new applications for metal
halide lighting, improve the quality of its materials, and introduce new
specialized products, such as the Uni-Form(R) pulse start products. Uni-Form(R)
pulse start products are a new generation of metal halide components and systems
which permit
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(a) increased light output with lower power utilization, (b) faster starting,
(c) a quicker restart of lamps which have been recently turned off, and (d)
better color uniformity. Historically, the Company's efforts primarily have been
focused on the development of materials and system components.
Materials. The Company is focused on improving the purity of, and
production processes for, metal halide salts. The Company pursues these efforts
proactively as well as in response to customer requests for specific metal
halide salts. The Company also focuses on designing and developing improved
electrodes, amalgams and getters used in lamp manufacturing. Through DSI, the
Company expects to continue producing thin film coatings primarily for lighting
applications with particular emphasis on coatings for metal halide lighting
systems, as well as develop related software, measurement and test
instrumentation and reliable, cost-effective application processes.
Systems and Components. The Company's product design and development has
focused on developing innovative components to meet the specialized needs of
various customers, including lighting fixture OEMs. The Company's product design
teams work together with OEMs on the design, development and commercialization
of new system components. Such collaborative development efforts have resulted
in the design of improved metal halide lamps with reduced wattage, better energy
efficiency, smaller size and increased life expectancy.
Since 1996, the Company has increased its focus on design and development
of integrated systems. The Company expects efforts in this area to become
increasingly important as the Company seeks to develop new fiber optic
applications and utilizes the capability of Ruud Lighting to manufacture and
directly market HID lighting systems.
MARKETING AND DISTRIBUTION
Commercial Products
The marketing and distribution of the Company's diverse range of commercial
products varies by individual product and by product category, as described
below. All sales data are exclusive of intercompany sales.
Materials
The Company markets materials (metal halide and other salts) directly to
all high intensity discharge lamp manufacturers, primarily GE, Philips and
Sylvania for use in their manufacture of lamps. The Company also markets lamp
materials to its joint venture partners. In addition, the Company works very
closely with its customers to manufacture materials according to their
specifications. Certain customer-developed materials are considered proprietary
to the Company's customers. The other lamp components manufactured by the
Company are used primarily in the manufacture of its own lamps; however, some
outside sales are made to other lamp manufacturers. The principal customers for
the thin-film coating products of the Company include major lamp manufacturers.
In addition, the Company markets its thin-film coatings to government suppliers
for use in aerospace applications and to jewelry manufacturers. Sales of
materials accounted for approximately 12.3% of the Company's revenues in fiscal
1999, 11.4% in 1998 and 14.1% in 1997.
System Components
Electrical distributors typically market only standard-type lamps, and the
Company believes that its specialty lamp products do not lend themselves to the
traditional marketing channels associated with standard-type lamp products.
Accordingly, the Company has adopted innovative marketing techniques for its
lamps. As a result, in initial distribution, the Company markets its metal
halide system components through OEMs, which generally have been involved in the
design of the lamp, and commissioned lighting agents, who package the Company's
lamps and power supplies in their bids on construction or renovation projects.
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 intends to market complementary lamps and power supplies as a package to
provide better service to its OEM customers and lighting agents, as well as to
increase sales.
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The Company also has distributed its metal halide lamps through lighting
agents. Unlike GE, Philips and 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
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 generally do not receive from
other lamp suppliers.
The Company intends to increase its sales of replacement lamps through
direct marketing by exploiting both the Company's internally developed
capabilities and Ruud Lighting's direct marketing relationships with contractors
and end-users. Since 1994, the Company has printed its toll-free number on each
lamp that it sells, allowing a customer to call the Company, rather than an
electrical distributor, to order a replacement lamp. This enables the customer
to speak to a more knowledgeable representative, thereby increasing the accuracy
and efficiency of service to the end user. This interaction 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 express courier to end users, thereby
providing service efficiency comparable to local electrical distributors. The
Company estimates it sold less than 1% of all replacement metal halide lamps in
1996. Given the expected life of the Company's lamps, the Company is only now
beginning to benefit from this strategy. Replacement lamps are typically sold at
a higher gross margin than lamps sold initially through OEMs or lighting agents.
In addition to packaging power supplies with lamps, the Company is
continuing direct marketing to OEMs and sales through electrical distributors.
Sales of system components accounted for approximately 47.8% of the Company's
revenues in fiscal 1999, 59.0% in fiscal 1998 and 74.3% in fiscal 1997.
Systems
The Company's commercial lighting systems are marketed primarily under the
trade name "Ruud Lighting." Ruud Lighting markets and distributes its products
primarily by direct marketing to lighting contractors. By marketing complete
metal halide systems, the Company believes it may capture a greater market share
in the metal halide industry. As a direct marketer of these commercial lighting
systems, Ruud Lighting should enable the Company's new systems and technologies
(embedded with the Company's system components) to gain wider acceptance in the
marketplace. Ruud Lighting works closely with lighting contractors and is able
to efficiently assist them in implementing these new systems and technologies.
Commercial systems accounted for approximately 35.6% of the Company's revenues
in fiscal 1999 and 20.1% in 1998. Prior to the Ruud Lighting acquisition in
January 1998, the Company had no significant sales of commercial lighting
systems.
Production Equipment
The Company's production equipment is manufactured for internal use and is
marketed to existing companies for turnkey production of thin-film coatings.
Until the recent temporary cessation, the Company also marketed turnkey lamp
production equipment groups to existing companies and its joint venture
partners. The Company also markets production equipment to its joint venture
partners. External sales of production equipment accounted for approximately
4.3% of the Company's revenues in fiscal 1999, 9.5% in fiscal 1998 and 11.4% in
fiscal 1997.
Residential Products
The Company is seeking to lead metal halide's penetration of the
residential lighting market by: (i) expanding the marketing of its products,
especially contractor-installed fixtures used in the construction of new and
remodeled housing, building on Ruud Lighting's expertise in direct marketing to
contractors; and (ii) developing the use of metal halide fiber optic systems
through a joint venture.
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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 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(R) are used in the production of metal halide
lamps because of their durability and ability to retain shape and function at
extremely high temperatures. Finished lamps are inspected, tested and then
shipped in accordance with customer instructions. The Solon facility also houses
the remaining production equipment research and development operations and
reduced production capability.
The Company produces magnetic power supplies at its facility in Amherst,
Nova Scotia, which operates five days a week with one full shift and a partial
second shift. The Company produces magnetic and electronic power supplies at its
facility in Draycott, England, which operates five days a week with one full
shift. The manufacture of magnetic power supplies is a combination of batch and
production line processes. The production line process starts with a coil
winding department, progresses to an in-line coil and core operation and then to
final assembly. Subassemblies for ignitors and capacitors are located off-line
in a batch operation for inclusion in final assembly.
The Company produces all of the metal halide salts it uses and sells at its
facility in Urbana, Illinois. The Urbana facility, with approximately 80
employees working a single shift, also produces precision metal pieces,
precision metal electrode leads and high speed dose dispensers which are used by
the Company and sold to other metal halide lamp manufacturers.
The Ruud Lighting manufacturing facility in Racine, Wisconsin operates five
days per week, with two eight-hour shifts per day. The manufacturing process is
primarily assembly-to-order based on customer needs. Ruud Lighting's facility is
ISO 9001-registered. The paint finishing facility is six years old and is
capable of providing the combination of E-Coat primer and acrylic powder topcoat
finishing style typically required by the automotive industry.
At the Company's DSI facility in Santa Rosa, California, the Company
produces optical thin film coatings for a variety of applications, as well as
measurement and test instrumentation and equipment for deposition of thin film
coatings. The facility operates five days per week with three eight-hour shifts
per day. Coatings and systems are produced in accordance with exacting customer
specifications. Management believes that DSI has expertise over a broad range of
thin film deposition technologies allowing application of the coating technology
most suitable for a particular client need.
RAW MATERIALS AND SUPPLIERS
The Company sources its raw materials from a variety of suppliers.
Presently, it sources most of its quartz tubing and pyrex(R) bulbs for lamps
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 or sales. The materials for the Company's power supply
products are readily available on the open market. The Company also purchases
certain of its industrial standard-type lamps from GE and Sylvania. This enables
the Company to devote its production equipment to higher margin specialty lamps.
Most of the raw materials used in the production of metal halide salts can
be sourced from several suppliers. 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 materials. 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.
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Components for Ruud Lighting's systems are sourced from the Company as well
as outside suppliers. The great majority of components are readily available
from multiple suppliers.
Raw materials and components for DSI coatings and equipment are sourced
from outside suppliers. The Company has multiple qualified sources for critical
materials and components.
COMPETITION
General
Metal halide systems compete with other types of lighting technology for
many applications. The Company's metal halide lamps compete with lamps produced
by other metal halide lamp manufacturers, primarily GE, Philips and
Osram-Sylvania. Metal halide technology is the newest of all lighting
technologies and although the market awareness and the uses of metal halide
lamps continue to grow, competition exists from older technologies in each metal
halide application.
Materials
The Company produces materials which are used by the Company and virtually
all other manufacturers of metal halide lamps. In metal halide salts, where the
Company has successfully used its technology focus and manufacturing capability
to develop superior products, the Company believes it has no competitors in the
United States. In overseas markets, one lamp manufacturer produces metal halide
salts, principally for its own use. The competition in salts is based on the
technological ability to develop salt formulation for customers and product
uniformity and purity. The Company believes it is the leading producer of salts
because it is the leader in uniformity and purity. In other materials
categories, the Company's chief competition is internal production by GE,
Philips and Sylvania. The competition in these products is based primarily on
price and delivery, with some competition based on technological ability to
create solutions for unique applications. The Company's products compete most
effectively for external sales where they are created for unique applications.
DSI has one or two principal competitors in each of its markets (lighting,
coating equipment and government/aerospace). The Company believes that
competition in thin film coatings is generally based on quality of coatings,
technological expertise to design and deliver customized coating solutions and
customer service. The Company believes that it competes successfully on the
basis of all three of these measures. While competition is strenuous with these
existing competitors, management believes that the high technical content of the
products and services in these markets make entry by new thin film coating
manufacturers relatively difficult.
System Components
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 emphasized
sales of a relatively small variety of standard-type metal halide lamps, such as
those found in the most common commercial and industrial applications, which the
Company believes represents approximately 75% of the total metal halide lamp
segment. 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, substantially
greater financial, technical and other resources and larger marketing and
distribution organizations than the Company and could expand their focus into
specialty lamps.
The Company does not believe that the foreign lamp manufacturers to whom
the Company has sold lamp production 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 standard-type lamps in which they have been trained by the Company.
Although these purchasers could potentially produce specialty lamp types to
compete with the Company, these purchasers would need to develop or acquire the
expertise required to produce specialty metal halide lamps.
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23
The Company's North American and European power supply products compete
primarily with products of two manufacturers, Advance Transformers, a subsidiary
of Philips, and MagneTek, both headquartered in the United States. Both these
companies have focused on the large fluorescent power supply market whereas the
focus of the Company's acquisitions, Ballastronix and Parry, has been in HID
magnetic power supplies for use primarily in metal halide applications.
Competition in power supplies has traditionally depended on price and delivery,
which has resulted in the failure to develop power supplies to optimize metal
halide lighting systems. The Company's power supply operations intend to compete
on the ability to deliver power supplies which are designed to enhance
performance of metal halide lighting systems.
Systems
Lighting systems compete on the basis of system cost, operating cost,
quality of light and service. The Company feels that metal halide systems
compete effectively against other technologies in each of these areas in many
application. Although the lighting systems market is highly fragmented, Ruud
Lighting is the only metal halide systems manufacturer which uses direct
marketing to contractors. Ruud Lighting has over 10,000 customers for this
direct marketing effort. Competitors generally market these systems through
distributors and lighting agents.
DSI has one or two principal competitors in each of its markets (lighting,
coating equipment and government/aerospace). While competition is strenuous with
these existing competitors, management believes that the high technical content
of the products and services in these markets make entry by new thin film
coating manufacturers relatively difficult.
INTELLECTUAL PROPERTY
The Company relies primarily 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. See also Item 3. "Legal Proceedings."
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,
which could potentially result in significant expenditures 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 ("Solon") 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. Routine monthly sampling of the effluent by City of
Solon between September 1995 and September 1996 revealed instances of mercury
discharge in excess of the limits imposed by Solon. Subsequent tests conducted
by Solon showed
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mercury discharges within required limits. In March 1999, there was a single
instance which showed mercury discharges above the required limits. The Company
has reviewed and updated its plan intended to prevent intermittently exceeding
Solon's mercury standards. 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 will not have a material effect on
its future financial position or results of operations. Capital expenditures and
operating expenses in fiscal 1999, fiscal 1998 and fiscal 1997 attributable to
compliance with such legislation were not material.
EMPLOYEES
As of June 30, 1999, the Company had approximately 1,731 full-time
employees, consisting of employees engaged in the designing, manufacturing and
marketing of materials (81 employees), system components (956 employees),
systems (634 employees) and production equipment (15 employees) and 45 employees
in corporate/administrative services. The Company believes that its employee
relations are 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's headquarters are located in Solon, Ohio, and the Company
maintains manufacturing facilities in California, Ohio, Illinois, Wisconsin,
Rhode Island, Nova Scotia, Canada and Draycott, England. Set forth below is
certain information with respect to the Company's principal facilities as of
June 30, 1999:
APPROXIMATE
SQUARE OWNED/
FACILITY LOCATION ACTIVITIES FOOTAGE LEASED
----------------- ---------- ----------- ------
NORTH AMERICA
Racine, Wisconsin.................... Office, manufacturing, finishing, 440,000 Owned
distribution warehouse
Solon, Ohio.......................... Office, systems components 330,000 Owned
manufacturing, distribution warehouse
Urbana, Illinois..................... Materials manufacturing 62,000 Owned
Santa Rosa, California............... Office, manufacturing 23,000 Owned
20,000 Leased
Amherst, Nova Scotia, Canada......... Office, power supply manufacturing, 45,000 Owned
warehouse
Middletown, Rhode Island............. Office, fixture manufacturing 37,000 Owned
Mississauga, Ontario, Canada......... Distribution warehouse, office 13,000 Leased
OTHER
Draycott, England.................... Office, power supply manufacturing, 125,000 Owned
warehouse
Wantirna South, Victoria,
Australia.......................... Distribution warehouse, office 33,000 Owned
Mitcham, Victoria, Australia......... Distribution warehouse, office 15,000 Leased
Florence, Italy...................... Office, fixture assembly, warehouse 10,000 Leased
The owned facilities are subject to mortgages in the following approximate
outstanding amounts as of June 30, 1999: Racine -- $10.3 million; Solon -- $4.7
million; Santa Rosa -- $1.2 million; Urbana -- $620,000; and, Amherst --
$35,000. The aggregate annual rental cost of the leased facilities is
approximately $700,000, and the average remaining lease term is 1.6 years.
The Company has vacated its equipment manufacturing facility in Bellevue,
Ohio. The Company currently leases approximately 77,000 square feet at a cost of
$42,000 per month under a lease which extends to November 2005. The Company is
seeking ways to mitigate this liability including termination, buyout or
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sublease. An accrual has been made as part of special charges to provide for the
estimated cost of exiting this lease agreement.
ITEM 3. LEGAL PROCEEDINGS
In April and May 1999, three class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
shareholders of the Company on behalf of themselves and purported classes
consisting of Company shareholders, other than the defendants and their
affiliates, who purchased stock during the period from December 30, 1997 through
September 30, 1998 or various portions thereof. The named defendants are the
Company and Wayne R. Hellman, its Chairman and Chief Executive Officer. The
lawsuits are now pending, in an action captioned In Re Advanced Lighting
Technologies Securities Litigation (99 CV 836), before a single judge who has
required the plaintiffs to file a single consolidated complaint on or before
September 30, 1999. The complaints allege generally that certain disclosures
attributed to the Company contained misstatements and omissions alleged to be
violations of Section 10(b) of the Securities Act of 1934 and Rule 10b-5,
including claims for "fraud on the market" arising from alleged
misrepresentations and omissions with respect to the Company's financial
performance and prospects and alleged violations of generally accepted
accounting principles by improperly recognizing revenues. The complaints seek
certification of their respective purported classes, unspecified compensatory
and punitive damages, pre- and post-judgment interest and attorneys' fees and
costs. The Company and Mr. Hellman believe that these claims lack merit and they
intend to vigorously defend these actions.
Excluding the case noted above, the Company does not have pending any
litigation which, 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.
The Company's DSI subsidiary has received notice from a competitor, which
manufactures and markets equipment for the application of thin-films and
provides thin-film coatings for lighting and other markets. The competitor
believes certain of DSI's equipment may infringe on the competitor's patented
process. Dialogue is currently in process between the parties that may result in
a mutually amicable resolution. Further, the competitor has taken no further
action at the date of this Report. In the event formal patent infringement
claims are made, DSI's management believes that it has valid defenses to such
patent infringement claims, and the Company intends to vigorously defend any
claims which may actually be filed by the competitor. In light of the foregoing,
however, the liability, if any, of the Company in relation to such possible
claims cannot be quantified.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
"ADLT." The following table sets forth for the periods indicated the range of
high and low closing sale prices for the Common Stock, as reported on the Nasdaq
National Market:
HIGH LOW
------- -------
Fiscal Year Ending June 30, 1998
First Quarter............................................. $27.000 $22.875
Second Quarter............................................ 26.500 18.250
Third Quarter............................................. 27.000 18.250
Fourth Quarter............................................ 29.938 20.875
Fiscal Year Ended June 30, 1999
First Quarter............................................. 27.250 8.500
Second Quarter............................................ 10.625 4.875
Third Quarter............................................. 10.313 6.750
Fourth Quarter............................................ 9.000 5.813
As of August 31, 1999, there were approximately 300 record holders of the
Company's Common Stock. The Company has never declared or paid a cash dividend.
The terms of the Credit Facility prohibit the payment of dividends, other than
dividends consisting of Company stock, without the consent of the lending banks.
The Indenture limits the payment of cash dividends by the Company to certain
amounts determined by the Company's earnings and equity investment in the
Company after March 31, 1998. In addition, financial covenants, including
ratios, contained in the Credit Facility, may limit payment of dividends
indirectly.
The Company does not intend to declare or pay any cash dividends for the
foreseeable future and intends to retain earnings, if any, for the future
operation and expansion of the Company's business.
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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,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
INCOME STATEMENT DATA:
Net sales............................. $188,484 $163,893 $85,645 $54,636 $40,767
Costs and expenses:
Cost of sales....................... 128,492 95,341 45,703 29,164 21,899
Marketing and selling............... 42,025 25,746 15,165 8,656 6,381
Research and development............ 17,123 9,319 5,097 2,894 1,673
General and administrative.......... 20,114 10,851 7,133 6,152 5,452
Settlement of claims(1)(2).......... -- -- 771 2,732 --
Fiber optic joint venture formation
costs............................ -- 212 286 -- --
Purchased in-process research and
development(3)................... -- 18,220 -- -- --
Special charges(3).................. 27,309 15,918 -- -- --
Amortization of intangible assets... 2,773 1,665 397 90 55
Restructuring(4).................... -- -- -- -- (121)
-------- -------- ------- ------- -------
Income (loss) from operations......... (49,352) (13,379) 11,093 4,948 5,428
Interest income (expense), net........ (12,723) (2,365) (668) (1,316) (2,074)
Loss from equity investment(5)........ (6,318) (501) -- -- --
-------- -------- ------- ------- -------
Income (loss) from continuing
operations before income taxes and
extraordinary charge and cumulative
effect of accounting change......... (68,393) (16,245) 10,425 3,632 3,354
Income taxes.......................... 2,972 1,802 2,869 965 212
-------- -------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
charge and cumulative effect of
accounting change................... (71,365) (18,047) 7,556 2,667 3,142
Loss from discontinued operations, net
of income taxes..................... (9,043) (7,292) (452) (150) --
-------- -------- ------- ------- -------
Income (loss) before extraordinary
charge and cumulative effect of
accounting change................... (80,408) (25,339) 7,104 2,517 3,142
Extraordinary charge, net of
applicable income tax benefits(6)... (902) (604) -- (135) (253)
Cumulative effect for change in
accounting(7)....................... (2,443) -- -- -- --
-------- -------- ------- ------- -------
Net income (loss)..................... $(83,753) $(25,943) $ 7,104 $ 2,382 $ 2,889
======== ======== ======= ======= =======
Earnings (loss) per
share -- diluted(8):
Income (loss) from continuing
operations....................... $ (3.53) $ (.99) $ .55 $ .14 $ .10
Loss from discontinued operations... (.45) (.40) (.03) (.02) --
Extraordinary charge................ (.04) (.04) -- (.01) (.03)
Cumulative effect for change in
accounting....................... (.12) -- -- -- --
-------- -------- ------- ------- -------
Net earnings (loss) per
share -- diluted.................... $ (4.14) $ (1.43) $ .52 $ .11 $ .07
======== ======== ======= ======= =======
Shares used for computing per share
amounts -- diluted.................. 20,232 18,195 13,558 9,479 7,818
======== ======== ======= ======= =======
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FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments............ $ 4,180 $ 22,267 $ 8,273 $ 1,682 $ 1,030
Working capital (deficit)........... 18,629 77,637 42,380 17,341 (870)
Total assets........................ 284,506 328,569 134,838 56,297 29,402
Total long-term debt................ 152,496 117,332 35,908 11,034 8,853
Total shareholders' equity
(deficit)......................... 77,441 170,837 66,032 26,594 (1,035)
- ---------------
(1) On March 1, 1996, a former Venture shareholder, asserted a claim against
certain officers and directors of the Company, and subsequently against the
Company, seeking $3,600 in damages relating to the redemption of his Venture
shares prior to the Combination. On August 23, 1996, another former Venture
shareholder filed a similar claim against the Company and such officers and
directors seeking damages of $1,600. On November 29, 1996, the Company and
such officers and directors entered into a settlement of both claims for an
aggregate amount of $475. The pretax charge of $771 in fiscal 1997
represents the $475 settlement plus legal and other directly-related costs,
net of insurance recoveries.
(2) On October 27, 1995, several former Venture shareholders, 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. Since the settlement resulted in a transfer of
personal shares held by such officers, there was no dilution of the
ownership interests of other 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.
(3) Fiscal 1999 results include special charges related to the Company's plans
to accelerate its focus on metal halide products, insulate it from
deteriorating economic conditions in the Pacific Rim, exit its noncore
products, integrate fully its core and acquired U.S. operations to produce
profitable growth and reduce its use of cash. Specific initiatives by the
Company included principally: (a) limiting further Pacific Rim expansion,
(b) changing global lamp manufacturing strategy, (c) restructuring marketing
operations in North America and Europe, (d) accelerating exit from noncore
product lines, (e) consolidating equipment manufacturing operations, (f)
reducing corporate and administrative overhead, and (g) evaluating
long-lived assets. The amounts are classified in the fiscal 1999 statement
of operations as: cost of sales -- $1,508 and, special charges -- $27,309.
Fiscal 1998 results include special charges related to the purchase price
allocation for Deposition Sciences, Inc. ("DSI") of $18,220 for purchased
in-process research and development. The special charges also include
$17,984 principally relating to the rationalization of the Company's global
power supply operations, principally: (a) the discontinuance of certain
power supply products at the Company's power supply facilities, (b) the
write-down of certain intangible and fixed assets and (c) charges related to
the consolidation and rationalization cost of distribution activities and of
new information systems and a reassessment of investments. The amounts are
classified in the fiscal 1998 statement of operations as: cost of sales --
$2,066; purchased in-process research and development -- $18,220; and,
special charges -- $15,918.
(4) In fiscal 1994, the Company recorded a provision of $852 for the costs,
principally inventory and equipment write-downs, in connection with exiting
a product line unrelated to lighting. In fiscal 1995, the disposition plan
was revised, resulting in a reduction of the original estimate by $121.
(5) In fiscal 1999, the loss from equity investments includes a pretax noncash
write-down of $5,883 related to the Company's investment in the Unison joint
venture.
(6) In fiscal 1999, the Company incurred an extraordinary loss on the early
extinguishment of debt of $902. In fiscal 1998, the Company incurred an
extraordinary loss on the early extinguishment of debt of $604. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In fiscal
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1996, the Company incurred an extraordinary loss on the early extinguishment
of debt of $135. In fiscal 1995, the Company incurred an extraordinary loss
on the early extinguishment of debt of $253.
(7) In fiscal 1999, the Company recorded $2,443 as a cumulative change in
accounting principle relating to the write-off of start-up costs in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs, and required
that the Company expense all previously capitalized start-up costs and
organization costs as a cumulative effect of a change in accounting
principle.
(8) Net earnings per share is based upon the income attributable to holders of
Common Stock. 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 and $2,360 ($.30 per share) in fiscal 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousands, except per share data amounts)
The following discussion should be read in connection with the Company's
Consolidated Financial Statements and Notes thereto included in Item
8 -- Financial Statements and Supplementary Data.
GENERAL
The Company designs, manufactures and markets metal halide lighting
products, including materials, systems and components. Metal halide lighting is
currently used primarily in commercial and industrial applications such as
factories and warehouses, outdoor site and landscape lighting, sports facilities
and large retail spaces such as superstores. With the January 1998 acquisition
of Deposition Sciences, Inc.("DSI"), the Company also manufactures and markets
turnkey deposition equipment to produce thin film coatings for a variety of
applications. Systems, components and materials revenue is recognized when
products are shipped, and deposition equipment revenue is recognized under the
percentage of completion method.
Consistent with the Company's strategy for new product introductions, the
Company invests substantial resources in research and development to engineer
materials and system components to be included in customers' specialized
lighting systems. Over the last three fiscal years, the Company has spent an
aggregate of $31,539 on research and development, representing 7.2% of aggregate
net sales from continuing operations over that period. Such expenditures have
enabled the Company to develop new applications for metal halide lighting,
improve the quality of its materials, and introduce new specialized products,
such as the Uni-Form(R) pulse start products. Uni-Form(R) pulse start products
are a new generation of metal halide components and systems which permit (a)
increased light output with lower power utilization, (b) faster starting, (c) a
quicker restart of lamps which have been recently turned off, and (d) better
color uniformity. 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 to make substantial expenditures
on research and development to enhance its position as the leading innovator in
the metal halide lighting industry.
The Company also has invested substantial resources in acquisitions and
strategic investments. In January 1998, the Company acquired Ruud Lighting, Inc.
and DSI. These acquisitions enabled the Company to complete the assembly of the
necessary operations to take a leadership role in the development, manufacturing
and marketing of new and better systems in the growing metal halide lighting
industry. See Item 1. "Background of the Company -- Recent Acquisitions and
Strategic Investments" above and " -- Liquidity and Capital Resources" below.
RECENT DEVELOPMENTS
GENERAL ELECTRIC COMPANY INVESTMENT
On September 28, 1999, GE entered into a definitive agreement to make an
investment in the Company of $20,554. The Company's management believes that all
closing conditions have been satisfied or are within the Company's control,
other than the approval of the transaction pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act. Representatives of the Company and GE have been
discussing this matter with the appropriate authorities and believe that this
approval will be obtained very quickly. However, no assurance can be given that
the approval will be obtained.
The additional capital resources provided by the agreed investment by GE
are expected to provide additional flexibility to pursue opportunities in the
metal halide business. In addition, at the time of the investment, GE and the
Company will enter into a five year, renewable agreement for the supply of metal
halide salts to GE. The Company and GE are in discussions with respect to other
supply arrangements. The Company anticipates that the GE investment and the
expansion which it will permit will result in an expanded supplier-customer
relationship with GE, enhancing the Company's earnings and competitive position
in the metal halide marketplace.
The GE investment will include 761,250 shares of the Company's
newly-created Series A Stock convertible at any time into 3,045,000 shares of
Company Common Stock (subject to adjustment). GE also will receive a
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Warrant (the "Initial Warrant") to purchase an additional 1,000,000 shares of
Common Stock of the Company, which will be immediately exercisable. GE has been
a holder of 535,887 shares of Company Common Stock since the Company's initial
public offering in 1995. The Series A Stock, Common Stock issuable on exercise
of the Initial Warrant and the Common Stock held by GE represent (after giving
effect to the shares issued on exercise of the Initial Warrant) approximately
18.9% of the voting power and equity ownership of the Company. See "Terms of the
Series A Stock" and "Terms of the Initial Warrant."
The proceeds of the GE transaction are expected to be applied principally
to the reduction of short-term liabilities and outstanding amounts under the
Company's Credit Facility, and to have the effect of increasing available
borrowings under the Company's Credit Facility.
The following summaries of the terms of the Series A Stock, the Terms of
the Initial Warrant and Additional Terms of the GE Transaction are summaries of
the definitive documents in connection with the GE investment.
Terms of the Series A Stock
The Series A Stock is a newly authorized series of preferred stock of the
Company to be created for issuance in the GE transaction. 761,250 shares of
Series A Stock will be authorized and issued to GE at the time of its
investment. The Series A Stock will have a liquidation preference of $27 per
share, plus an amount equal to 8% per annum from the date of issuance to the
date of payment ("Liquidation Preference Amount").
Each outstanding share of Series A Stock will be convertible at any time
into four shares (subject to adjustment as described below) of Common Stock of
the Company. Prior to conversion, holders of Series A Stock will be entitled to
vote in all shareholder matters together with the holders of Company Common
Stock as a single class. In any such vote, the holders of Series A Stock will be
entitled to four votes (equal to the number of shares of Common Stock into which
the Series A Stock held may initially be converted).
The Company will be required to redeem any shares of Series A Stock which
have not been converted or retired on September 30, 2010. Any such redemption
would be made at the Liquidation Preference Amount. In addition, holders of the
Series A Stock may require the Company to redeem their shares of Series A Stock
by giving notice to the Company on or before September 30, 2004. If such notice
is given, the Company will be required make such redemption on or prior to
September 30, 2005. In addition, holders of Series A Stock will be entitled to
require the Company to redeem the Series A Stock following the occurrence of any
of the following events (each a "Triggering Event"): (1) failure of the
shareholders of the Company to approve, at the 1999 annual meeting, proposals
necessary for exercise of any rights to acquire beneficial ownership of
additional shares of Common Stock as described in "Additional Terms of the GE
Transaction"; (2) failure of the Company and GE to obtain any HSR Approval (as
defined below) required in connection with GE's exercise of any rights to
acquire beneficial ownership of additional shares of Common Stock as described
in "Additional Terms of the GE Transaction"; or (3) any action by the Company to
give effect to certain major corporate actions, including actions to merge, sell
all or a substantial portion of its assets (other than in the ordinary course of
business), issue capital stock, incur or have outstanding indebtedness for
borrowed money in excess of $210,000. Upon the occurrence of a Triggering Event,
the holders of the Series A Stock may require the Company to redeem their shares
of Series A Stock by giving notice to the Company within 90 days following the
Triggering Event. If such notice is given, the Company will be required to make
such redemption within one year following such notice. Any such redemption would
be made at the Liquidation Preference Amount. Under the terms of the bank's
revolving credit facility and the indenture (the "Indenture") relating to the
Company's Senior Notes due 2008, the redemption of the Series A Stock would
currently constitute an event of default, permitting acceleration of the related
indebtedness. If prior consent of the banks is obtained, the redemption is
permitted under the credit facility. Payments for the redemption of equity
securities are "Restricted Payments" under the Indenture. The total of all
"Restricted Payments" under the Indenture (with exceptions not applicable to
stock redemption) cannot exceed one-half total of consolidated net earnings of
the Company (excluding consideration of certain unusual items) from April 1,
1998 (taken as a single period) plus the amount of proceeds received from sales
of non-redeemable stock. As of June 30, 1999, the Company had a net loss,
excluding extraordinary items, of $78,660 for the period. Until this deficit has
been cured, the Company cannot redeem the Series A Stock without causing an
event of default with respect to the Senior Notes. In addition, the Indenture
prohibits Restricted
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Payments (with exceptions not applicable to stock redemptions) at any time where
the ratio of EBITDA to Interest Expense for the preceding four fiscal quarters
does not exceed 2.5:1.
Subject to approval by Company shareholders, if the Company fails to make
any redemption as required (subject to permitted deferrals in the event that
such redemption would cause an event of default with respect to certain
indebtedness of the Company), the conversion ratio of the Series A Stock would
be increased from four shares of Common Stock to eight shares of Common Stock
per share of Series A Stock. In addition, also subject to the approval of
Company shareholders, the conversion ratio will be subject to adjustment to
prevent dilution of the interest of GE by the issuance of Common Stock after the
closing of the GE transaction. Except for issuance of shares under existing
employee benefit plans, and certain other enumerated exceptions, any shares of
Common Stock issued at a price below $6.75 per share, or, if higher, below the
then current market price, would result in adjustment of the conversion ratio.
Any adjustment in the conversion ratio would not affect the voting power
represented by shares of Series A Stock prior to conversion.
Upon liquidation, each share of Series A Stock will be entitled to be paid
the Liquidation Preference Amount prior to any payment or distribution to the
holders of Company Common Stock. Following such payment, holders of Series A
Stock will be entitled to a proportional share of any distribution to holders of
Company Common Stock based on the number of shares of Common Stock into which
the Series A Stock could have been converted at the time of the liquidation.
Terms of the Initial Warrant
The Initial Warrant will entitle the holder to purchase shares of Company
Common Stock at $.01 per share. The Initial Warrant will be immediately
exercisable for 1,000,000 shares (subject to adjustment) of Common Stock. The
number of shares subject to the Initial Warrant will be subject to adjustment,
after approval by Company shareholders, at any time prior to exercise if the
Company issues Common Stock at a price below $6.75 per share or, if higher,
below the then current market price.
Additional Terms of the GE Transaction
In addition to GE's initial investment, under certain circumstances, GE
will be entitled to make additional investments in the Company and receive the
right to vote additional shares of Company Common Stock. The exercise of certain
of these rights is subject to applicable law, including the Ohio Control Share
Acquisition Act and the Hart-Scott-Rodino Antitrust Improvements Act of 1976
("HSR Approval"). GE and the Company will enter into a Contingent Warrant
Agreement ("Contingent Warrant Agreement"). The Contingent Warrant Agreement
identifies certain occurrences which will entitle GE to exercise these rights.
Upon the Second Occurrence (defined below), if it occurs, GE would be
required to exercise in full the Initial Warrant. In addition, GE would receive
the right to vote the number of shares then owned by Wayne R. Hellman and
Hellman, LTD. pursuant to proxies granted by Messrs. Hellman and Ruud. GE would
receive the right to vote the number of shares as to which Mr. Hellman then has
voting power pursuant to the Hellman Voting Trust or Irrevocable Proxies granted
with respect to shares removed from the Hellman Voting Trust (all shares voted
by Mr. Hellman, currently approximately 3.9 million shares, are referred to
collectively as the "Hellman Shares"). GE would also have an option, at the then
current market price, to purchase from Messrs. Hellman and Ruud, the number of
shares of Common Stock which, together with the shares owned by GE, would
represent 25% of the voting power of the Company. The Company would also be
required to grant to GE an additional warrant (the "First Contingent Warrant")
to purchase shares of Company Common Stock at the then current market price. The
number of shares subject to the First Contingent Warrant would be equal to the
number of shares required to allow GE to have a majority of the voting power of
the Company, assuming GE had effective proxies with respect to all shares as to
which Messrs. Hellman and Ruud then have voting power. The exercise of the First
Contingent Warrant, the options on shares held by Messrs. Hellman and Ruud, and
effectiveness of GE's proxy with respect to any such shares, is subject to prior
compliance with the Ohio Control Share Acquisition Act (which condition would be
fulfilled by shareholder approval to be sought at the Company's annual meeting)
and HSR Approval (which requires the Company and GE to provide information to
the federal government to allow it to determine whether to contest an increase
by GE to an interest in the Company in excess of 25% pursuant to
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antitrust law). If the proxies become effective after the Second Occurrence, GE
will have the proxies to vote the number of Hellman Shares and will be entitled
to exercise approximately 35% of the then outstanding voting power of the
Company (assuming that none of the Hellman Shares have been transferred by the
beneficial owners and no issuance of additional shares by the Company other than
pursuant to the GE transaction) or approximately 34% of the voting power of the
Company on a fully diluted basis. GE has not indicated that it will acquire
additional shares of Company Common Stock. However, if GE were to acquire
additional shares of Common Stock (other than shares subject to effective
proxies as described above or shares obtained on the exercise of the First
Contingent Warrant), or if the number of outstanding shares on a fully diluted
basis were reduced, GE could obtain in excess of 35% of the voting power of the
Company on a fully diluted basis. In addition, if a substantial number
(currently approximately 300,000 shares) of Hellman Shares were transferred
(other than to GE) prior to the Second Occurrence, and if GE exercised the First
Contingent Warrant, GE would acquire in excess of 35% of the voting power of the
Company on a fully diluted basis. If GE were to acquire in excess of 35% of the
voting power of the Company on a fully diluted basis, the terms of the Indenture
relating to the Senior Notes would require that the Company offer to repurchase
the $100,000 principal amount of outstanding Senior Notes due 2008 at a price of
101% of the principal amount thereof, plus accrued interest ("Offer to
Repurchase Notes").
Upon the Third Occurrence (defined below), GE would receive the right to
vote the number of shares then owned by Mr. Ruud, and the right to vote the
number of shares as to which Mr. Ruud then has voting power pursuant to the Ruud
Voting Trust or Irrevocable Proxies granted with respect to shares removed from
the Ruud Voting Trust, currently approximately 3.6 million shares (the "Ruud
Shares"). The effectiveness of this right requires that the conditions for the
effectiveness of the proxies following the Second Occurrence have been
satisfied, and that any additional provisions of the Ohio Control Share
Acquisition Act required with respect to proxies or the Ruud Shares be
satisfied. If the proxies on the Ruud Shares become effective after the Third
Occurrence, GE will have the right to vote the Ruud Shares and will be entitled
to exercise approximately 48.4% of the then outstanding voting power of the
Company (assuming that none of the Hellman Shares or the Ruud Shares have been
sold by the beneficial owners, no exercise by GE of the Contingent Warrants and
no issuance of additional shares by the Company other than pursuant to the GE
transaction). If the Company has not already made an Offer to Purchase Notes, it
will be required to make the offer upon effectiveness of the proxy on the Ruud
Shares. In addition, GE will receive an additional warrant (the "Second
Contingent Warrant") which will entitle GE to purchase additional shares of
Common Stock at the then current market price. The number of shares subject to
the Second Contingent Warrant will be the number of shares necessary to give GE
50% plus one vote of the voting power of the Company (including the exercise of
all outstanding Warrants, shares subject to irrevocable proxies, the shares
subject to the Second Contingent Warrant and all proxies held with respect to
Hellman Shares and Ruud Shares). Subject to shareholder approval, after the
Third Occurrence, if the Company issues additional shares of Common Stock to
anyone other than GE, GE will be entitled to purchase, on the same terms given
to the third party, the number of shares required to maintain GE's voting power.
The basis for GE's additional rights will be the failure of the Company to
maintain a 2.0:1 ratio of EBITDA (as defined) to Interest Expense (as defined)
over the applicable measurement periods. The first measurement period is the six
months ended December 31, 1999. Thereafter, the measurement periods are the six
months ending on the last day of each successive fiscal quarter until September
30, 2010. The first failure to maintain the required ratio would be the "First
Occurrence," the second such failure would be the "Second Occurrence" and the
third such failure would be the "Third Occurrence." However, after the First
Occurrence, if the Company maintains the required ratio in the three fiscal
quarters immediately prior to the measurement period in which a failure occurs,
a Second Occurrence or Third Occurrence, as the case may be, would not be
effective, if the Company maintained the required ratio for the measurement
period immediately following the measurement period in which such occurrence
would otherwise have been effective. Under the terms of the transaction, EBITDA
consists of net earnings, plus interest expense, plus depreciation and
amortization, plus income taxes, less extraordinary gains and gains from asset
sales plus extraordinary losses and losses from asset sales. Interest Expense
consists of interest expense (net of interest income) calculated in accordance
with generally accepted accounting principles, but excludes amortization of
deferred financing costs not exceeding $125 in any fiscal quarter.
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BANK CREDIT FACILITY
In May 1999, the Company replaced its existing Credit Facility with a
$50,000 revolving credit loan and $25,000 term loan provided by several
financial institutions. Subsequent to June 30, 1999 the Company reduced its
commitment to a $60,000 facility. Proceeds from the facility were used to repay
the Company's existing credit facility and certain other long-term debt. The
revolving credit loan has a three-year term expiring in May 2002. Interest rates
on revolving credit loans outstanding are based, at the Company's option, on
LIBOR plus 2.75% or the agent bank's prime rate. Availability of borrowings is
determined by the Company's eligible accounts receivable and inventories. The
term loan has a five-year term expiring in May 2004. The Company pays monthly
principal payments that total $3,576 annually, with the unpaid balance due at
maturity. Interest rates on the term loan are based, at the Company's option, on
LIBOR plus 3.25% or the agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
FISCAL 1999 SPECIAL CHARGES
The Company has implemented plans resulting in changes to its operations
intended to accelerate and intensify the Company's focus on its metal halide
products, insulate it from deteriorating economic conditions in the Pacific Rim
and the anticipated decline of noncore products, integrate fully its core and
acquired U.S. operations to produce profitable growth, and reduce and redirect
its use of cash resources. This came in response to a reduction in the Company's
revenues in the first quarter of fiscal 1999 as compared to the fourth quarter
of fiscal 1998 and due to economic conditions in general, especially outside the
United States. To implement this strategy, the Company has taken or is taking
the following actions:
Limiting Pacific Rim Expansion. In recognition of the near-term effects of
the crisis in Asian capital markets, the Company modified its expansion plans in
the Pacific Rim and is acting to limit its exposure by limiting further
investment in Pacific Rim ventures. The Company evaluated its existing foreign
investments and joint ventures in the Pacific Rim region and wrote-off
investments of $475. In addition, future contract commitments totaling $1,160
were accrued in connection with the Company's decision to limit its exposure in
the Pacific Rim area.
The Company has retained several lamp manufacturing equipment groups, which
were originally expected to be shipped to Asia pursuant to equipment contracts
with Pacific Rim companies. The decision to terminate the foreign equipment
contracts resulted in a reversal of sales of $14,961 and cost of sales of $6,413
in the second quarter, which were previously recorded under the percentage of
completion method. This reversal reduced operating income by $8,548 ($.42 per
share). Had the sales related to the terminated equipment contracts not been
reversed, reported sales and cost of sales would have been as follows:
YEAR ENDED JUNE 30, 1999
------------------------
SALES COST OF SALES
-------- -------------
As reported................................................. $188,484 $128,492
Pro forma................................................... 203,445 134,905
Changing Global Lamp Manufacturing Strategy. The Company revised its
current global lamp manufacturing strategy to reduce the overall cost of its
lamps, including moving some production to the manufacturing facilities of
certain foreign joint ventures. With this change in its global manufacturing
strategy the Company discontinued a major program that was in progress to
increase its U.S. lamp manufacturing capability and productivity. This decision
resulted in abandoning and disposing of fixed assets of $7,841, the majority of
which had not been placed in service. Substantially all of these fixed assets
were disposed of prior to June 30, 1999. The impact of suspending depreciation
related to these fixed assets was not material to depreciation expense for the
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year. Further, certain joint venture investments of $465 made for the purpose of
developing additional lamp production were terminated as these specific
investments were not considered integral to the Company's future manufacturing
strategy.
In addition, to reduce costs related to its lamp production activities, the
Company has consolidated its Bellevue, Ohio specialty lamp manufacturing
operations into its Solon lamp manufacturing facility. The cost to close this
facility, including $328 in severance and benefits for terminated employees, was
$708.
Restructuring Marketing Operations in North America and Europe. The Company
restructured its marketing operations in Canada to eliminate certain
distribution channels and centers. Warehouses in Toronto and Vancouver have been
closed and $338 recorded to cover primarily future lease commitments for these
facilities. OEM and plant growth sales channels have been retained and serviced
out of Amherst, Nova Scotia, while aftermarket lamp sales are being serviced
through a distributor. The Company incurred shutdown costs, including $132 in
severance and benefits for terminated employees, of $279 to close its marketing
facilities in Canada.
The Company also restructured its marketing operations in Europe and the
U.K. to make them more cost efficient. The restructuring of marketing operations
in the U.K. resulted in selling its subsidiaries in France and Germany and
recognizing a loss on the sale of these subsidiaries of $559. Costs related to
the shut-down of these facilities, including $184 in severance and benefits for
terminated employees, and streamlining remaining operations amounted to $873.
Accelerating Exit from Noncore Products Lines. The Company has eliminated
the remaining non-metal halide product lines being sold by its Canadian
operations. The Company has sold these product lines and inventory to a third
party. Revenues related to the noncore product lines approximated $4,100 for
fiscal 1999.
Consolidating Equipment Manufacturing Operation into Solon, Ohio Facility.
The Company's equipment manufacturing operation in Bellevue, Ohio has been
closed. Machinery, equipment and research and development facilities necessary
to allow the Company to continue manufacturing and support of lamp production
equipment, at reduced levels, has been moved to the Company's Solon, Ohio
facility. The Company has temporarily ceased the manufacturing and sale of
turnkey lamp production equipment groups.
In connection with closing its equipment manufacturing facility in
Bellevue, Ohio, $642 of fixed assets, primarily leaseholds and equipment, were
abandoned and written-off. In addition, the Company recorded $2,449 for a future
lease commitment on this manufacturing facility and $1,139 for shut-down costs,
including $642 in severance and benefits for terminated employees.
Reducing Corporate and Administrative Overhead. The Company was increasing
its corporate and administrative staff levels to support its aggressive growth
goals. In light of its focus on internal growth, instead of continued
acquisitions and joint ventures, the Company reduced its corporate and
administrative overhead, including a significant reduction in staff levels and
benefit programs.
Severance and employee benefits for corporate and administrative staff,
including the termination of an employee benefit program, resulted in total
costs of $3,779 enterprise-wide. The Company has a $586 liability recorded at
June 30, 1999 to cover unpaid severance and employee benefit costs.
All of the above actions resulted in the termination of approximately 240
employees at substantially all locations. All terminated employees have left the
company and will be paid by December 31, 1999.
Evaluation of Long-Lived Assets. Certain long-lived assets, principally
related to fixed assets and investments were evaluated for impairment in value.
Fair value for these assets was based on whether the carrying amount of the
asset was recoverable. Based on this analysis, an impairment loss of $3,830 and
$1,544 was recognized for certain long-term assets and investments. All
long-term assets were disposed by June 30, 1999. The impact of suspending
depreciation related to these long-lived assets was not material to depreciation
expense for the year.
Reducing Capital Expenditures. Previously announced plans to spend
approximately $20,000 on capital expansion, primarily production equipment, and
approximately $14,500 on facilities improvements in fiscal 1999
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were substantially reduced. Capital expenditures for the third quarter of fiscal
1999 totaled $2,982, and capital expenditures for the fourth quarter of fiscal
1999 were approximately $800.
Future cash outlays are anticipated to be completed by December 31, 1999,
excluding certain lease commitments that could continue through fiscal year
2005. The Company will continue to evaluate its strategy and cost structure and
adjust its organization to reflect the changing business environment.
The cost related to the actions noted above are included in special charges
of $28,817 ($1.42 per share) for fiscal 1999. The charges are classified in the
consolidated statement of operations as cost of sales ($1,508) and special
charges ($27,309). In connection with these actions, the Company incurred
additional costs of $596 and $764 related to cost of sales and research and
development expense for transactions with affiliates.
FISCAL 1999 IMPLEMENTATION COSTS
Certain of the actions resulting in fiscal 1999 special charges also caused
substantial implementation costs, which are not included in the special charges
classification. Three manufacturing sites were consolidated into one, which
together with employee terminations, resulted in severe workforce disruption.
The Company also incurred costs to relocate and consolidate its marketing
operations in North America and transition its marketing operations in Europe.
The launch of the Company's Uni-Form(R) pulse start products resulted in
substantial quality, rework and productivity issues. In addition, the Company
also undertook other initiatives enterprise-wide in fiscal 1999 that resulted in
nonrecurring costs that are not expected to continue in fiscal 2000.
Specifically, the Company began the implementation of new information systems
resulting in various installation costs in fiscal 1999. In addition, during
fiscal 1999 the Company incurred one-time costs to establish a sales office in
Japan to sell its metal halide materials to lamp manufacturers in the Pacific
Rim.
DISCONTINUED OPERATIONS, MICROSUN BUSINESS
Microsun Technologies, Inc. was identified in March 1998 for disposition
through a plan to distribute to ADLT shareholders all of the ownership of
Microsun Technologies, Inc. in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
in December 1998, the Company revised its plan for the disposition to wind-down
the operations, close the manufacturing facilities and liquidate the assets of
Microsun. During fiscal 1998, a loss on disposal of $9,100 (net of income tax
benefits of $3,086) for operating losses through the planned date of spin-off
was recorded. During fiscal 1999, an additional loss on disposal of $9,043 was
recorded, which included $2,796 for additional operating losses during the
phase-out period, $3,134 related to the write-down and disposal of assets and
costs related to shut-down and severance and a deferred tax asset valuation
allowance of $3,113.
At June 30, 1999, the plan of wind-down had been accomplished, the
manufacturing facilities closed and substantially all assets had been disposed.
Accordingly, there were no remaining discontinued operations accrued losses
associated with Microsun at June 30, 1999.
FISCAL 1998 SPECIAL CHARGES
During fiscal 1998, the Company recorded special charges related to the
purchase price allocation for DSI and an assessment of the Company's global
power supply operations.
The Company completed the acquisition of DSI in January 1998. The special
charges include $18,220 for purchased in-process research and development,
determined by an independent valuation, relating to the DSI acquisition.
The special charges also include $17,984 principally relating to the
Company's decision to refocus and restructure its recently acquired global power
supply operations to focus on opportunities in metal halide. With the January
1998 acquisition of Ruud Lighting, the Company accelerated this rationalization
of its existing power supply manufacturing operations and distribution
activities in order to capitalize on new opportunities not
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previously available. This assessment resulted in (a) the discontinuance of
certain power supply products at the Company's power supply facilities, (b) the
write-down of certain intangible and fixed assets and (c) a $2,066 million
write-down of inventory which is classified in cost of sales.
In addition, the charges cover the cost of consolidating distribution
activities and facilities, the write-down of assets in connection with the
implementation of new information systems and a reassessment of investments
resulting from a change in expansion strategy arising from the Ruud Lighting
acquisition.
The special charges were determined in accordance with formal plans
developed by the Company's management using the best information available to it
at the time and, subsequently approved by the Company's Board of Directors.
After an income tax benefit of $5,015, these charges reduced net income by
$31,189, or $1.71 diluted earnings per share for fiscal 1998.
See "Notes to Consolidated Financial Statements," included in Item 8.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the January 1998 purchase of Deposition Sciences, Inc.
("DSI"), the Company allocated $18,220 of the $24,100 purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date. DSI's in-process research and development value is comprised
of five primary research and development programs, which were in-process at the
time of the acquisition.
The MicroDyn/Automation Project is intended to improve the coating process
of optical thin-films to both rigid and flexible surfaces so that the process
can be used in a wider array of applications. The Plastics (Acrylic) Coating
Project is designed to produce a method for applying thin-film coatings to
plastics or other similar materials that cannot withstand the heat and pressure
generated during the standard coating process. The goal of the Deposition
Material Development Project is to develop new thin-film materials that can be
used in coatings and to improve existing coating materials. The Lighting
Projects are intended to develop improvements to existing lighting technologies
by using coatings to improve efficiency and increase the longevity of lamp life.
The Fiber Optic Project is intended to improve telecommunications by providing
optical thin-film coatings that are used in conjunction with optical fibers to
increase the transmission capacity of the fiber. Completion of the first of
these projects may occur in fiscal 2000 and the final project is projected for
completion in 2003.
Remaining development efforts for these programs are highly complex and
include the development and advancement of the necessary physics and chemistry,
various stages of academic and computer simulation, prototype design and
testing, refinement, initial small-scale deployment, further refinement and
eventually full-scale market introduction. As such, the projects are generally
considered to have effective lives of three-to-five years during which time the
science, technology, and processes are researched, designed, developed, and
tested.
Certain projects within the in-process research and development programs
will, if successful, begin to bear results in 2000, but will not be fully
complete for two to three years thereafter. Annual Company expenditures to
complete these projects included $800 in fiscal 1998, $1,800 in fiscal 1999, and
are estimated at $2,600 and $1,600 in 2000 and 2001, respectively. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur. Additionally, even if successfully completed, these projects will
require maintenance research and development after they have reached a state of
technological and commercial feasibility. In addition to usage of DSI's internal
cash flows, ADLT will likely provide a substantial amount of funding to complete
the DSI programs.
Management believes the Company has a reasonable chance of successfully
completing each of the major research and development programs. However, there
is substantial risk associated with the completion of the projects and there is
no steadfast assurance that each will meet with either technological or
commercial success.
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The delay or outright failure of the DSI in-process research and development may
materially impact the Company's financial condition.
At June 30, 1999, significant progress had been achieved on each of the
primary in-process research and development efforts that were underway at DSI as
of the acquisition date. In general, the Company believes that DSI's research
and development efforts are on track with management's plans at the time the
transaction occurred. DSI is continuing to invest heavily in the development of
new technologies and projects that were underway at the consummation of the
transaction. Through June 30, 1999, no significant adjustments have been made in
the economic assumptions or expectations which underlie the Company's
acquisition decision and related purchase accounting. All of the cited
in-process research and development projects are active, and DSI is advancing
the science and technology at a rate consistent with both DSI and ADLT
expectations. At June 30, 1999, programs ranged in completion from 50 to 70
percent complete and the Company estimates the costs to complete these projects
to be $4,300.
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, the
components of the Company's Consolidated Statements of Operations for the
indicated periods:
YEAR ENDED JUNE 30,
-----------------------
1999 1998 1997
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales............................................. 68.2 58.2 53.4
Marketing and selling..................................... 22.3 15.7 17.7
Research and development.................................. 9.1 5.7 6.0
General and administrative................................ 10.6 6.6 8.3
Fiber optic joint venture formation costs................. -- 0.1 0.3
Purchased in-process research & development............... -- 11.1 --
Special charges........................................... 14.5 9.7 --
Settlement of claim....................................... -- -- 0.9
Amortization of intangible assets......................... 1.5 1.0 0.4
----- ----- -----
Income (loss) from operations............................... (26.2) (8.1) 13.0
Other income (expense):
Interest expense.......................................... (7.3) (2.4) (1.8)
Interest income........................................... 0.6 0.9 1.0
Loss from equity investments.............................. (3.4) (0.3) --
----- ----- -----
Income (loss) from continuing operations before income
taxes, extraordinary charge and cumulative effect of
accounting change......................................... (36.3) (9.9) 12.2
Income taxes................................................ 1.6 1.1 3.4
----- ----- -----
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of accounting
change.................................................... (37.9) (11.0) 8.8
Loss from discontinued operations, net of income tax
benefits.................................................. (4.8) (4.4) (0.5)
----- ----- -----
Income (loss) before extraordinary charge and cumulative
effect of accounting change............................... (42.7) (15.4) 8.3
Extraordinary charge from early extinguishment of debt, net
of income tax benefits.................................... (0.4) (0.4) --
Cumulative effect of change in accounting principle......... (1.3) -- --
----- ----- -----
Net income (loss)........................................... (44.4)% (15.8)% 8.3%
===== ===== =====
Factors which have affected the results of operations and net income during
fiscal 1999 as compared to fiscal 1998 are discussed below.
OVERVIEW OF THE RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998
The Company's operations for fiscal 1999 resulted in a loss from continuing
operations before extraordinary charge and cumulative effect of change in
accounting principle of $71,365 compared to a loss from continuing operations
before extraordinary charge of $18,047 for fiscal 1998. The Company realized a
net loss of $83,753 for fiscal 1999, compared to a net loss of $25,943 for
fiscal 1998.
The following factors should be considered in comparing the Company's
continuing operations for fiscal 1999 and fiscal 1998:
- Results for fiscal 1999 include $28,817 in special charges ($1.42 per
share) and the effect of termination of equipment contracts of $8,548
($42. per share).
- Results for fiscal 1998 include $17,984 in special charges ($0.99 per
share) and $18,220 of purchased in-process research and development
($1.00 per share).
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After excluding the above charges, the Company's operating activities would
have resulted in a loss from continuing operations before income taxes and
extraordinary charge of $31,028 for fiscal 1999, as compared to income from
continuing operations before income taxes and extraordinary charges of $19,959
for fiscal 1998.
FISCAL 1999 COMPARED WITH FISCAL 1998
Net sales. Net sales increased 24.1% to $203,445 for the fiscal year ended
June 30, 1999 from $163,893 for the fiscal year ended June 30, 1998, excluding
the effect of termination of equipment contracts noted above. Net sales,
excluding lamp equipment sales and terminated equipment contracts, rose 32.4% to
$200,474 for fiscal 1999 from $151,368 for fiscal 1998.
Results for fiscal 1999 reflect continued growth in the sales of the
Company's core U.S. metal halide operations, which was offset by reductions in
overseas sales and in non-metal halide products. The Company's metal halide
sales for fiscal 1999 increased 15% (17% increase in the United States) from
fiscal 1998, excluding acquisitions, lamp equipment sales and the effect of
termination of equipment contracts. Metal halide sales grew to 74% of total
sales from 71% a year earlier, excluding lamp equipment sales and the effect of
termination of equipment contracts. The Company's core metal halide materials
business, a key indicator of industry trends, was up 9% from fiscal 1998.
Geographically, these sales of materials were up 5% in the U.S. and grew 16%
outside the U.S.
Sales outside the U.S. declined 8%, excluding acquisitions, lamp equipment
sales and the effect of termination of equipment contracts. The Company
attributes the soft overseas market to difficult international economic
environment in fiscal 1999. Sales of non-metal halide products, an area where
the Company has been strategically reducing its presence, declined 27% excluding
acquisitions and equipment sales.
Sales increases, excluding acquisitions, lamp equipment sales and the
effect of termination of equipment contracts, were driven by increased volume in
the Company's materials, components and systems. Pricing in the metal halide
lighting business is competitive, and prices for the Company's products have
remained flat or declined slightly. The introduction of new products has helped
to stabilize the Company's product pricing.
Costs and Expenses. The Company's restructuring efforts in fiscal 1999
resulted in a significant disruption of the ongoing business of the Company, and
as a result, a significant increase in its costs and expenses. The biggest
single area of increased costs over fiscal 1998 occurred as a result of the
consolidation of the lamp and equipment operations. Three manufacturing sites
were consolidated into one, which together with employee terminations, resulted
in severe workforce disruption. Simultaneously, the Company attempted to
accelerate production of new products such as Uni-Form(R) pulse start and began
the implementation of new information systems. Largely as a result of these
initiatives, the Company incurred significantly higher costs related to quality,
rework and productivity issues, which are not included within the special
charges classification.
Cost of Sales. Cost of sales increased 43.0% to $133,397 in fiscal 1999
from $93,275 in fiscal 1998, excluding the $6,413 reduction in cost of sales in
fiscal 1999 related to the effect of termination of equipment contracts
discussed above and inventory write-downs related to special charges of $1,508
in fiscal 1999 and $2,066 in fiscal 1998. The increase was primarily
attributable to higher sales levels and to the disruption caused by the
Company's restructuring activities noted above. As a percentage of net sales,
excluding the effect of termination of equipment contracts and inventory
write-downs, cost of sales increased to 65.6% in fiscal 1999 from 56.9% in
fiscal 1998. The Company believes that the benefit of its restructuring actions,
together with its ongoing efforts to cut costs, should begin to gradually reduce
the Company's cost of sales as a percentage of sales to 60% or less within the
next twelve months.
Marketing and Selling Expenses. Marketing and selling expenses increased
63.2% to $42,025 in fiscal 1999 from $25,746 in fiscal 1998. As a percentage of
net sales, excluding the effect of termination of equipment contracts, marketing
and selling expenses increased to 20.6% in fiscal 1999 from 15.7% in fiscal
1998. This increase is a result of increased expenses incurred in connection
with the launch of the Company's Uni-Form(R) pulse start products, increased
expenses involved in opening new markets to the Company's products, and
increased product promotional costs. The Company anticipates the sales of
Uni-Form(R) pulse start products and
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sales into new markets should increase and that the level of marketing and
selling expenses will decline gradually over the next several quarters to
approximately 17% to 18% of sales.
Research and Development Expenses. Research and development expenses
increased 83.7% to $17,123 in fiscal 1999 from $9,319 in fiscal 1998. This
increase arose from increased spending for the: (i) expansion of the new line of
Uni-Form(R) pulse start products (with improved energy efficiency, quicker
starting and restarting and a more compact arc source, which improves the light
and reduces material costs) intended to replace many first generation metal
halide lamps in industrial and commercial applications; (ii) development and
testing of electronic power supply systems; (iii) development of new materials
for the world's major lighting manufacturers; and, (iv) research and development
efforts aimed at improving the coating process of optical thin-films to broaden
the applications, developing new thin-film materials, and using coatings to
develop improvements to lighting and telecommunications technologies. As a
percentage of net sales, excluding the effect of termination of equipment
contracts, research and development expenses increased to 8.4% in fiscal 1999
from 5.7% in fiscal 1998. The Company anticipates this level of expense to
decline gradually over the next several quarters to approximately 7%.
General and Administrative Expenses. General and administrative expenses
increased 85.4% to $20,114 in fiscal 1999 from $10,851 in fiscal 1998. The
increase in general and administrative expenses of $9,263 relates to an overall
increase in the size and complexity of the Company and relates in part to
fully-integrating its core and acquired U.S. operations and the implementation
of new information systems. Expense increases primarily reflect legal,
accounting and consulting fees; personnel and related costs; travel;
communications costs; relocation costs; and equipment depreciation and rent. As
a percentage of net sales, excluding the effect of termination of equipment
contracts, general and administrative expenses increased to 9.9% in fiscal 1999
from 6.6% in fiscal 1998.
Fiber Optic Joint Venture Formation Costs. On May 6, 1997, the Company
entered into a joint development agreement with Rohm and Haas Company ("Rohm and
Haas"), for the development of advanced fiber optic cable systems using metal
halide lamps. On December 31, 1997, the Company and Rohm and Haas completed a
series of agreements that resulted in the formation of Unison Fiber Optics
Lighting Systems LLC ("Unison"). In connection with this joint venture, the
Company incurred $212 of formation and development costs which was charged to
operations during fiscal 1998.
Purchased Research & Development. In connection with its acquisition of DSI
in January 1998, the Company acquired in-process research and development valued
at $18,220. In accordance with generally accepted accounting principles, the
entire amount has been recorded as an expense in fiscal 1998.
Special Charges. See discussion of special charges under "Recent
Developments" and Note K of "Notes to Consolidated Financial Statements" for
further discussion.
Amortization of Intangible Assets. Amortization expense increased to $2,773
in fiscal 1999 from $1,665 in fiscal 1998 due to the amortization of goodwill
and other intangible assets related to the January 1998 acquisitions of Ruud
Lighting and Deposition Sciences.
Income (Loss) from Operations. As a result of the aforementioned factors,
during fiscal 1999, the Company incurred a loss from operations of $49,352, as
compared to a loss from operations of $13,379 during fiscal 1998. Excluding the
special charges and the effect of termination of equipment contracts mentioned
above, the loss from operations in fiscal 1999 was $11,987. In fiscal 1998,
income from operations was $22,825, excluding purchased in-process research and
development of $18,220 and special charges of $17,984.
Interest Expense. Interest expense increased to $13,845 in fiscal 1999, as
compared to $3,801 in fiscal 1998. This increase was primarily the result of the
higher average debt outstanding.
Interest Income. Interest income decreased to $1,122 in fiscal 1999 from
$1,436 in fiscal 1998. This decrease is attributable to lower average cash
equivalents and short-term investments in the fiscal 1999 as compared to fiscal
1998, partially offset by $520 in interest earnings from the $9,000 loan to an
officer.
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42
Loss from Equity Investments. The loss from equity investments represents
$109 of earnings from the Company's investment in Fiberstars, Inc., a marketer
and distributor of fiber optic lighting products, offset by a pretax noncash
write-down of $5,883 related to the Company's investment in the Unison joint
venture and a $544 loss from the Company's investment in Venture Lighting Japan,
a manufacturer and marketer of metal halide lamps in Japan.
Loss from Continuing Operations before Income Taxes, Extraordinary Charge
and Cumulative Effect of Change in Accounting Principle. As a result of the
aforementioned factors, during the fiscal 1999, the Company incurred a loss from
continuing operations before income taxes, extraordinary charge and cumulative
effect of change in accounting principle of $68,393, as compared to a loss from
continuing operations before income taxes and extraordinary charges of $16,245
during fiscal 1998. Excluding the total special charges and the effect of
termination of equipment contracts mentioned above, the Company incurred a loss
from continuing operations before income taxes, extraordinary charge and
cumulative effect of change in accounting principle of $31,028 during fiscal
1999. In fiscal 1998, income from continuing operations before income taxes and
extraordinary charges was $19,959, excluding purchased in-process research and
development of $18,220 and special charges of $17,984.
Income Taxes. At June 30, 1999, the Company had net operating loss
carryforwards ("NOLs") of $57,309 available to reduce future United States
federal taxable income, which expire in 2008 through 2019.
The Company also has research and development credit carryforwards for tax
purposes of approximately $3,006, which expire in 2005 through 2019.
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules, the
Company had available AMT credit carryforwards for tax purposes of approximately
$162, which may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 1999, the Company had foreign net operating loss
carryforwards for tax purposes totaling $5,209 that expire in 2000 to 2005 and
$10,587 that have no expiration dates.
For fiscal 1999, the Company reported a pretax loss from continuing
operations, including special charges, of $68,393; and a pretax loss on the
discontinued operations of the Microsun business of $9,043; an extraordinary
charge from the early extinguishment of debt of $902; and, a cumulative effect
of change in accounting for start-up costs of $2,443, all of which created
$80,781 of operating losses and future tax deductions for financial reporting
purposes. Accordingly, at June 30, 1999, the Company has recorded a valuation
allowance for deferred tax assets of $30,322 related to all NOLs, tax credits
and net deductible tax differences.
Loss from Discontinued Operations. See discussion of loss from discontinued
operations under "Discontinued Operations, Microsun Business" and Note L of
"Notes to Consolidated Financial Statements" for further discussion.
Extraordinary Charge. The Company recorded a $902 extraordinary charge
during fiscal 1999 and a $604 extraordinary charge (net of applicable income
taxes of $311) during fiscal 1998, representing costs associated with the early
extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. The Company recorded a
cumulative effect of a change in accounting principle of $2,443 ($.12 per
diluted common share) related to the adoption of the American Institute of
Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities."
OVERVIEW OF THE RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997
The Company's operations for fiscal 1998 resulted in a loss from continuing
operations before extraordinary charge of $18,047 compared to income from
continuing operations before extraordinary charge of $7,556 for fiscal 1997. The
Company realized a net loss of $25,943 for fiscal 1998, compared to net income
of $7,104 for fiscal 1997.
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The following factors should be considered in comparing the Company's
continuing operations for fiscal 1998 and fiscal 1997:
- Results for fiscal 1998 include $17,984 in special charges ($.99 per
share) and $18,220 of purchased in-process research and development
($1.00 per share).
- Results for fiscal 1997 include a nonrecurring charge of $771 ($.06 per
share) in settlement of a claim.
After excluding the above charges, the Company's operating activities would
have resulted in income from continuing operations before income taxes and
extraordinary charge of $19,959 for fiscal 1998, a 78.3% increase over the
$11,196 of income from continuing operations before income taxes and
extraordinary charge that would have been reported for fiscal 1997.
FISCAL 1998 COMPARED WITH FISCAL 1997
Net sales. Net sales increased 91.4% to $163,893 for the fiscal year ended
June 30, 1998 from $85,645 for the fiscal year ended June 30, 1997. The increase
in system components, materials and systems ($72,357) was primarily attributable
to increased unit volume, including a $25,419 increase from the Company's power
supply subsidiaries acquired in the second half of fiscal 1997 and a $32,384
increase from the Company's Ruud Lighting subsidiary, which was acquired on
January 2, 1998. The increase in equipment sales ($5,891) resulted from an
increase in equipment contracts-in-progress, as compared with the number of
contracts-in-progress during fiscal 1997.
Cost of Sales. Cost of sales increased 108.6% to $95,341 in fiscal 1998
from $45,703 in fiscal 1997. As a percentage of net sales, cost of sales
increased to 58.2% for fiscal 1998 from 53.4% for fiscal 1997. Cost of sales
included a $2,066 write-down of inventory related to the rationalization of the
Company's global power supply operations and the elimination of certain nonfocus
product lines. After excluding this write-down, cost of sales increased 104.1%
to $93,275, or 56.9% of net sales. The increase was primarily attributable to
increased unit volume, but also reflects a change in the product mix, whereby
lower-margin power supply products represented a larger component of total sales
in fiscal 1998.
Marketing and Selling Expenses. Marketing and selling expenses increased
69.8% to $25,746 for fiscal 1998, compared with $15,165 for fiscal 1997.
Marketing and selling expenses, as a percentage of net sales, decreased to 15.7%
during fiscal 1998, from 17.7% during fiscal 1997. This decrease as a percentage
of net sales reflects the leveraging of certain fixed marketing and selling
expenses as sales levels increase and relatively lower marketing expenses
associated with the sale of power supplies, partially offset by increased
expenses in connection with the launch of the Company's Pulse Start(TM)
products.
Research and Development Expenses. Research and development expenses
increased 82.8% to $9,319 in fiscal 1998 from $5,097 in fiscal 1997. This
increase arose from increased spending for the: (i) expansion of the line of new
lamps (with improved energy efficiency, quicker starting and restarting and a
more compact arc source, which improves the light and reduces material costs)
intended to replace many first generation metal halide lamps in industrial and
commercial applications; (ii) development and testing of electronic power supply
systems; and, (iii) development of new materials for the world's major lighting
manufacturers. As a percentage of net sales, research and development expenses
decreased to 5.7% in fiscal 1998 from 6.0% in fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased 52.1% to $10,851 in fiscal 1998 from $7,133 in fiscal 1997. As a
percentage of net sales, general and administrative expenses decreased to 6.6%
in fiscal 1998 from 8.3% in fiscal 1997. The decrease as a percentage of net
sales primarily reflects a spending growth rate considerably lower than sales
increases through the leveraging of fixed costs as sales levels increase.
Fiber Optic Joint Venture Formation Costs. On May 6, 1997, the Company
entered into a joint development agreement with Rohm and Haas Company ("Rohm and
Haas"), for the development of advanced fiber optic cable systems using metal
halide lamps. On December 31, 1997, the Company and Rohm and Haas completed a
series of agreements that resulted in the formation of Unison Fiber Optics
Lighting Systems LLC ("Unison"), a
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joint venture that focuses on the manufacture and sale of fiber optic lighting
systems to the worldwide lighting market. In connection with this joint venture,
the Company incurred $212 of formation and development costs which was charged
to operations during fiscal 1998, in addition to $286 of such costs which were
charged to operations during fiscal 1997.
Purchased Research & Development. In connection with its acquisition of DSI
in January 1998, the Company acquired in-process research and development valued
at $18,220. In accordance with generally accepted accounting principles, the
entire amount has been recorded as an expense in fiscal 1998.
Special Charges. During the third quarter of fiscal 1998, the Company
recorded special charges related to the Company's decision to refocus and
restructure its recently acquired global power supply operations to focus on
opportunities in metal halide. With the January 1998 acquisition of Ruud
Lighting, Inc., the Company accelerated this rationalization of its existing
power supply manufacturing operations and distribution activities in order to
capitalize on new opportunities not previously available. This assessment
resulted in (a) the discontinuance of certain power supply products at the
Company's power supply facilities, (b) the write-down of certain intangible and
fixed assets and (c) a $2,066 write-down of inventory which is classified in
cost of sales. Additionally, the special charges, which total $17,984 (including
the $2,066 write-down of inventory discussed above), cover the elimination of
certain nonfocus product lines, the cost of consolidating distribution
activities and facilities, the write-down of assets in connection with the
implementation of new information systems and a reassessment of investments.
Settlement of Claim. During the second quarter of fiscal 1997, the Company
paid $475 in an out-of-court settlement of a claim brought by certain former
common shareholders of a predecessor of the Company. The charge of $771 ($.06
per share) represents the $475 settlement plus legal and other directly-related
costs, net of insurance recoveries.
Amortization of Intangible Assets. Amortization expense increased to $1,665
in fiscal 1998 from $397 in fiscal 1997 due to the amortization of goodwill and
other intangible assets related to the acquisitions of Ruud Lighting and
Deposition Sciences which were completed in January 1998.
Income (Loss) from Operations. The Company incurred a loss from operations
of $13,379 during fiscal 1998 as compared to income from operations of $11,093
during fiscal 1997. Excluding the special charges, purchased in-process research
and development, and nonrecurring charge for the settlement noted above, income
from operations for fiscal 1998 increased to $22,825, a 92.4% increase over the
income from operations of $11,864 for fiscal 1997. As a percentage of net sales,
income from operations excluding these items remained at 13.9% in both years.
Interest Expense. Interest expense increased to $3,801 during fiscal 1998
as compared to $1,513 during fiscal 1997. This increase resulted primarily from
the higher average debt outstanding during fiscal 1998 as compared to fiscal
1997.
Interest Income. Interest income increased to $1,436 in fiscal 1998 as
compared to $845 in fiscal 1997. This increase is attributable to higher average
cash equivalents and short-term investments during fiscal 1998 as compared to
fiscal 1997.
Loss from equity investments. Loss from equity investments for fiscal 1998
resulted from recognition of the Company's proportionate share of losses
recorded by equity investees accounted for by the equity method. There were no
comparable amounts in fiscal 1997.
Income (Loss) from Continuing Operations before Income Taxes and
Extraordinary Charge. The Company incurred a loss from continuing operations
before income taxes and extraordinary charge of $16,245 during fiscal 1998 as
compared to income from continuing operations before income taxes and
extraordinary charge of $10,425 during fiscal 1997. Excluding the special
charges, purchased in-process research and development, and nonrecurring charge
for the settlement noted above, income from continuing operations before income
taxes and extraordinary charge for fiscal 1998 increased to $19,959, a 78.3%
increase over the income from continuing
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operations before income taxes and extraordinary charge of $11,196 for fiscal
1997. As a percentage of net sales, income from continuing operations before
income taxes and extraordinary charge excluding these items decreased to 12.2%
in fiscal 1998 from 13.1% in fiscal 1997.
Income Taxes. The Company recorded income tax expense of $1,802 for fiscal
1998 as compared to $2,869 for fiscal 1997. As a percentage of income (loss)
from continuing operations before income taxes and extraordinary items, the
effective income tax rate was 11.2% in fiscal 1998 as compared to 27.5% in
fiscal 1997.
A number of items affect the comparability of the fiscal 1998 and fiscal
1997 effective tax rates. The most significant of these items in fiscal 1998 are
the nondeductibility of purchased research and development of $18,220 and
certain of the Company's special charges, offset by research and development tax
credits. The most significant item reducing the effective tax rate in fiscal
1997 from the Company's statutory rate was the adjustment of deferred tax
liabilities, which reduced the Company's tax provision by $1,000. See Note J to
"Notes to Consolidated Financial Statements," included in Item 8, for further
information.
At June 30, 1998, the Company had United States net operating loss
carryforwards ("NOLs") for tax purposes of approximately $1,960 to offset future
taxable income. The domestic NOLs expire in fiscal years 2008 through 2011. In
addition, the Company had foreign tax loss carryforwards of $579 with various
expiration dates.
Loss from Discontinued Operations. In March 1998, the Company approved a
plan to distribute to its shareholders all of the ownership of MicroSun, the
Subsidiary primarily responsible for development, design, assembly and marketing
of metal halide portable fixtures for residential and hospitality uses, in a
spin-off transaction which is expected to be tax-free. The Company believes the
creation of two separate companies will enable the Company and MicroSun to
devote the resources necessary to develop their core strategies in pursuit of
their growth objectives. The loss from discontinued operations of $7,292
represents the total of MicroSun's loss from operations in fiscal 1998 and
estimated operating losses through the intended date of the spin-off.
Extraordinary Charge. The Company recorded a $604 extraordinary charge (net
of applicable income tax benefits of $311) in fiscal 1998, representing costs
associated with the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for market development
activities, research and development efforts, investments in business
acquisitions, joint ventures and working capital. These requirements have been,
and the Company expects they will continue to be, financed through a combination
of cash flow from operations, borrowings under various credit facilities and the
sale of stock.
Cash Decreased $18,087 During Fiscal 1999. Uses of cash consisted of
$12,075 used in operating activities, $28,628 used in investing activities, and
$7,288 used in discontinued operations. These uses of cash were offset by net
financing activities of $29,904.
Net Cash Used in Operating Activities. Net cash used in operating
activities totaled $12,075 in fiscal 1999 as compared to $7,511 in fiscal 1998.
Net cash provided by operating activities totaled $1,542 in the last nine months
of fiscal 1999. The Company intends to manage its cash resources to generate
positive cash flow from operating activities in fiscal 2000 and beyond.
Inventory levels decreased $4,674, excluding the effect of noncash special
charges and terminated equipment contracts, as a result of the Company's efforts
to manage its inventory levels more effectively. Accounts payable and accrued
expenses increased $3,843, excluding the items noted above, as a result of the
Company's efforts to manage the timing of its cash disbursements.
Net Cash Used in Investment Activities. During fiscal 1999, investing
activities used $28,628 of cash including $21,844 for capital expenditures,
$4,390 related to the purchases of businesses and $2,394 related to investments
in affiliates.
Capital expenditures, primarily for production equipment and leasehold and
facility improvements, totaled $21,844 in fiscal 1999 as compared to $31,105 in
fiscal 1998. Capital expenditures in fiscal 1999 related to
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facilities enhancements, primarily at the Company's headquarters in Solon, Ohio,
and at several of its subsidiaries, and additional machinery and equipment to
improve production processes, which should result in increased productivity and
capacity in the production of lamps, power supplies and other lighting system
products.
The Company has modified its current growth and capital expansion plans due
to the present limited availability of cash resources. Specifically, the Company
will limit its capital expenditures for at least the next twelve months and, as
a result, the Company has postponed certain capital equipment and, for all
practical purposes, facilities expenditures have been completed.
As a result of the Company's decision to terminate joint venture equipment
contracts, approximately $6,500 of new production equipment is available for
installation at the Company's Solon, Ohio lamp manufacturing facility. The
Company estimates its maintenance level for capital expenditures will
approximate $6,000 to $8,000 over the next twelve months. Future capital
expenditures beyond this level will be discretionary, as the Company presently
has sufficient operating capacities to support several years of sales growth at
its historical rates.
To expand the Company's ability to develop and market new metal halide
products and systems, the Company has made a number of acquisitions and
strategic investments, the most notable of which, completed in January 1998, are
described below.
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is a leader in the
development of sophisticated thin film deposition systems and coatings for
lighting applications, with particular emphasis on coatings for metal halide
lighting systems, and other applications, including aerospace, defense and
automotive applications. The stock of DSI was acquired in a privately-negotiated
transaction. The purchase price consisted of 599,717 shares of the Company's
Common Stock and approximately $14,500 in cash.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets HID lighting systems,
principally focusing on metal halide installations for commercial, industrial
and outdoor lighting applications. The Ruud Stock was acquired from the five
shareholders of Ruud Lighting in a privately negotiated purchase transaction.
The purchase price for the Ruud Stock consisted of three million shares of the
Company's Common Stock and approximately $35,500 in cash.
Net Cash Provided by Financing Activities. During fiscal 1999, net
financing activities provided cash of $29,904, which included $5,456 of cash
provided from net borrowings under the Company's revolving credit facilities,
net borrowings of long-term debt and capital leases of $32,651 and a loan to an
officer of $9,000.
On January 2, 1998, the Company replaced its then existing loan agreement
and other borrowings in North America with a Credit Facility subsequently
replaced in May 1999. Proceeds from this facility were used to finance the
$35,500 cash portion of the Ruud Lighting acquisition and the $14,500 cash
portion of the Deposition Sciences acquisition. Proceeds were also used to repay
$19,200 of existing and outstanding North American bank borrowings of ADLT, Ruud
Lighting and DSI.
On March 13, 1998, the Company sold $100,000 of 8% Senior Notes due March
15, 2008, resulting in net proceeds of $96,150. Approximately $76,300 of the net
proceeds of the Senior Notes were used to repay amounts outstanding under the
Credit Facility, thereby lengthening the average term of the Company's debt,
most of which had been incurred to finance the acquisitions of Ruud Lighting and
DSI. From September 14, 1998 until completion of a registered exchange offer to
existing noteholders, the Senior Notes bear interest at 8.5%. The offer is
expected to be completed within 45 days following effectiveness of the Company's
related registration statement.
Pursuant to a loan agreement dated October 8, 1998, between the Company and
its Chairman and Chief Executive Officer (the "CEO"), the Company has loaned
$9,000 to its CEO for a one-year term at an interest rate of 8%. The loan was
made following approval by the Company's Board of Directors. The proceeds of the
loan were used by the Company's CEO to reduce the principal balance outstanding
of a margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In
45
47
connection with the loan, the Company's Board of Directors asked for and
received the CEO's agreement to extend the term of his employment agreement to
December 31, 2003. The loan agreement prohibits the CEO from encumbering his
shares of the Company's Common Stock in any manner except pursuant to the
existing agreements governing the CEO's margin account, without the consent of
the Company's Board of Directors.
Ability to Advance Future Operations. The Company has begun to implement,
and will continue to implement, changes in its operations and investment
activities intended to reduce the use of its cash resources to a level at or
below the cash flow generated by its operations and investments.
The Company's working capital (current assets less current liabilities) at
June 30, 1999 was $18,629, resulting in a working capital ratio of current
assets to current liabilities of 1.3 to 1.0, as compared to $77,637 or 3.1 to
1.0 at June 30, 1998. As of June 30, 1999, the Company had $4,180 in cash and
cash equivalents and short-term investments.
The interest-bearing obligations of the Company totaled $161,039 as of June
30, 1999, and consisted of: $37,468 of borrowings under the Bank Credit
Facility; $100,000 of 8% Senior Notes; mortgages of $18,443; a promissory note
due to an affiliate of $3,000; borrowing of a foreign subsidiary of $221;
capital leases of $1,401; and, other obligations of $506.
In May 1999, the Company replaced its existing Credit Facility with a
$50,000 revolving credit loan and $25,000 term loan provided by several
financial institutions. Subsequent to June 30, 1999 the Company reduced its
commitment to a $40,000 revolver and $20,000 term loan. Proceeds from the
facility were used to repay the Company's existing credit facility and certain
other long-term debt. The revolving credit loan has a three-year term expiring
in May 2002. Interest rates on loans outstanding are based, at the Company's
option, on LIBOR plus 2.75% or the agent bank's prime rate. Availability of
borrowings is determined by the Company's eligible accounts receivable and
inventories. The Company had unused availability of $6,080 as of June 30, 1999.
The term loan has a five-year term expiring in May 2004. The Company pays
monthly principal payments of $298, with the unpaid balance due at maturity.
Interest rates on the term loan are based, at the Company's option, on LIBOR
plus 3.25% or the agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
The Company's implementation of the cost reduction and cash flow
enhancement initiatives including consolidation of equipment and lamp-making
operations, reductions in capital expenditures, consolidation of international
operations, reduction of corporate expenses, and overall workforce reductions
should favorably impact the future cash flow of the Company. The Company intends
to manage its expenditures to generate positive cash flow in fiscal 2000 and
beyond.
The Company believes that the available cash, cash flow from operations,
and the initiatives outlined above, along with the GE investment and
availability under its existing Bank Credit Facility, will enable the Company to
fund its operations for at least the next 12 months. Nevertheless, the Company
can provide no assurance that the GE investment can be completed.
MARKET RISK DISCLOSURES
Market Risk Disclosures. The following discussion about the Company's
market risk disclosures involves forward looking statements. Actual results
could differ materially from those projected in the forward looking statements.
The Company is exposed to market risk related to changes in interest rates and
foreign currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
Interest Rate Sensitivity. The following table provides information about
the Company's debt obligations and financial instruments that are sensitive to
changes in interest rates. For debt obligations, the table presents
46
48
principle cash flows and related weighted-average interest rates by expected
maturity dates. Weighted-average variable rates are based on implied forward
rates as derived from published spot rates. For interest rate swaps, the table
presents notional amounts and weighted-average interest rates by contractual
maturity dates.
JUNE 30, FAIR VALUE
------------------------------------- JUNE 30,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
(DOLLARS IN MILLIONS) ----- ----- ----- ----- ----- ---------- ------ ----------
Liabilities
Long-term Debt, including
Current Portion
Fixed Rate...................... $ 0.9 $ 0.9 $ 0.7 $ 0.4 $ 0.4 $105.7 $109.0 $106.2
Average Interest Rate........... 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Variable Rate................... $ 7.4 $ 4.4 $17.2 $ 4.3 $18.0 $ 0.5 $ 51.8 $ 51.8
Average Interest Rate........... 8.1% 8.6% 8.8% 8.8% 8.9% 10.0%
Interest Rate Derivative
Financial Instruments Related to
Debt
Interest Rate Swaps
Pay fixed, notional amount...... -- -- -- -- $10.0 -- $ 10.0 $ (0.2)
Average Pay Rate................ 6.6% 6.6% 6.6% 6.6% 6.6%
Average Receive Rate............ 5.7% 6.2% 6.4% 6.5% 6.6%
The Company is obligated under its Credit Facility to limit its exposure to
fluctuating interest rates for a minimum of $10,000. During fiscal 1999, the
Company terminated two interest rate swaps with notional amounts of $25,000
each, and entered into an interest rate swap with a notional amount of $10,000,
as set forth in the table above. The notional amount is used to calculate the
contractual cash flow to be exchanged and does not represent exposure to credit
loss. If this agreement was settled at June 30, 1999, the Company would pay
approximately $200.
Liabilities at June 30, 1998, included $111,000 of fixed-rate debt and
$7,200 of variable-rate debt. Interest rates on the fixed-rate debt to maturity
ranged from 7.9% to 8.1%, while interest rates on the variable-rate debt to
maturity was LIBOR plus 1% to 2%. The Company terminated during fiscal 1999 two
interest rate swaps that were in place at June 30, 1998.
Foreign Currency Exchange Risk. The Company currently does not hedge its
foreign currency exposure and, therefore, has not entered into any forward
foreign exchange contracts to hedge foreign currency transactions.
The Company has operations outside the United States with foreign-currency
denominated assets and liabilities, primarily denominated in pounds sterling,
Australian dollars, and Canadian dollars. Because the Company has
foreign-currency denominated assets and liabilities, financial exposure may
result, primarily from the timing of transactions and the movement of exchange
rates. The unhedged foreign currency balance sheet exposures as of June 30, 1999
are not expected to result in a significant impact on earnings or cash flows.
Revenues from customers outside the United States represented approximately
34% of net sales during fiscal 1999. As the Company has expanded its
international operations, its sales and expenses denominated in foreign
currencies have expanded and that trend is expected to continue. Thus, certain
sales and expenses have been, and are expected to be subject to the effect of
foreign currency fluctuations and these fluctuations may have an impact on
margins.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has not yet adopted FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires that all derivatives, such
as interest rate exchange agreements (swaps), be recognized on the balance sheet
at fair value. Derivatives which are not hedges must be adjusted to fair value
through the results of operations. Derivatives determined to be hedges will be
adjusted to fair value through either the results of operations or other
comprehensive income, depending on the nature of the hedge. The Company is
required to adopt FAS No. 133, as subsequently amended by FAS No. 137, on July
1, 2000. The impact, if any,
47
49
on net income, comprehensive income and financial position will depend on the
amount, timing and nature of any agreements entered into by the Company.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it continues to be 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.
YEAR 2000 READINESS
State of Readiness. During the past three fiscal years, the Company has
been actively involved in finding and correcting the Year 2000 problems within
its information technology structure. The information system correction process
is essentially complete. The Company maintains its critical information
technology systems in close cooperation with its suppliers. The Company is not
currently operating any legacy systems that are no longer being supported by the
original supplier.
The most critical noninformation technology systems, such as robots and
other numerically controlled equipment, are relatively new and are being
upgraded and maintained with the help of the Company's various suppliers. To
date, the Company's investigation of these systems has revealed only minor Year
2000 problems which were quickly corrected and the Company does not expect to
find any further problems.
Each operating unit's purchasing and production control departments are in
the process of analyzing the unit's key third-party dependencies and working
with each of these key suppliers to determine the suppliers' Year 2000 status.
The Company has had reasonable success in obtaining reliable Year 2000
compliance certifications. The Company continues to be concerned with the
potential loss of energy (electricity and natural gas) at its facilities
worldwide, with the most vulnerable facilities presently preparing contingency
plans to protect their plant and equipment.
Costs. The Company has had only limited expenditures related to Year 2000
issues, consisting principally of personnel costs incurred in the scope of
normal operations. In addition, software replacements and upgrades in the
ordinary course of business have enhanced the Company's Year 2000 readiness
without incremental costs. The Company is in the final stages of its projects
and does not anticipate that future Year 2000 costs related to information
technology operations will be significantly beyond the scope of normal
operations.
The Company is in the process of implementing contingency plans to protect
it from Year 2000 failures. These plans are mostly complete and will result in
limited additional expenditures. Primarily these expenditures have been in the
form of increased inventory and the addition of some generating and auxiliary
heating equipment to protect facilities. The Company anticipates that additional
total costs will not have a material impact on the ongoing results of
operations.
Risks. In the early weeks of 2000, the Company may experience some random
supply chain disruptions that may affect its ability to produce and distribute
key products. These disruptions will be material if the United States
experiences significant interruptions in basic services, such as the electric
power grid, natural gas, telephone service or the banking systems. And while
recent data on the readiness of the electric power utilities have been
increasingly more positive, the Company's highest level of contingency planning
is being focused in this area.
Contingency Plans. The Company, through its various purchasing and
production control departments, is in the process of developing contingency
plans at each of its worldwide operations. These plans will be particularly
focused on preparing the operation for the inability of key third-party
suppliers to perform their normal functions. Of critical importance will be the
development of alternative suppliers, the enhancements of on-hand materials and
the augmentation of the most critical finished goods. Facilities in very cold
climates are preparing to minimize the potential effects of the loss of
electricity.
Completion. Based on management's assessment of current progress, the
Company believes it will complete the limited amount of Year 2000 modifications
and contingency plans that remain before the end of
48
50
1999. The Company is in close contact with its key hardware and software
suppliers, and will implement any future updates shortly after they are
released. The Company can give no assurance that the Company's Year 2000
preparations will prevent disruptions in its business resulting from Year 2000
problems of the Company, its suppliers or its customers, or that costs to the
Company of its preparations or any disruptions will not be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the subcaption "Market Risk Disclosures"
contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1999
ADVANCED LIGHTING TECHNOLOGIES, INC.
SOLON, OHIO
49
51
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 Grant Thornton LLP, Independent Auditors..... F-2
Report of Ernst & Young LLP, Independent Auditors...... F-3
Consolidated Balance Sheets as of June 30, 1999 and
1998.................................................. F-4
Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998 and 1997.................... F-5
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997.............. F-6
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997.................... F-7
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
52
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
ADVANCED LIGHTING TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of Advanced
Lighting Technologies, Inc. as of June 30, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows, for the year then
ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Lighting Technologies, Inc. as of June 30, 1999, and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
September 24, 1999 (except for Note U,
as to which the date is September 28, 1999)
F-2
53
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
ADVANCED LIGHTING TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of Advanced
Lighting Technologies, Inc. as of June 30, 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows, for each of the
two years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Lighting Technologies, Inc. as of June 30, 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
September 28, 1998, except for the sixth
paragraph of Note C, as to
which the date is March 15, 1999
F-3
54
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, JUNE 30,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,830 $ 21,917
Short-term investments.................................... 350 350
Trade receivables, less allowances of $1,257 and $375..... 25,485 40,779
Receivables from related parties.......................... 48 1,034
Inventories:
Finished goods......................................... 24,275 29,556
Raw materials and work-in-process...................... 16,501 15,184
-------- --------
40,776 44,740
Prepaid expenses.......................................... 2,354 3,200
Deferred taxes............................................ -- 2,192
-------- --------
Total current assets........................................ 72,843 114,212
Property, plant and equipment:
Land and buildings........................................ 38,364 31,429
Production machinery and equipment........................ 53,508 52,235
Other equipment........................................... 6,413 --
Furniture and fixtures.................................... 20,426 18,316
-------- --------
118,711 101,980
Less accumulated depreciation............................. 16,263 11,952
-------- --------
102,448 90,028
Deferred taxes.............................................. -- 2,892
Receivables from related parties............................ 5,048 3,157
Net assets associated with discontinued operations.......... -- 5,193
Investments in affiliates................................... 13,475 20,591
Other assets................................................ 6,586 8,878
Intangible assets........................................... 32,695 34,377
Excess of cost over net assets of businesses acquired,
net....................................................... 51,411 49,241
-------- --------
$284,506 $328,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 8,543 $ 1,960
Accounts payable.......................................... 23,310 14,967
Payables to related parties............................... 1,126 618
Employee-related liabilities.............................. 3,781 3,259
Accrued income and other taxes............................ 904 2,729
Other accrued expenses.................................... 16,550 13,042
-------- --------
Total current liabilities................................... 54,214 36,575
Long-term debt.............................................. 152,496 117,332
Other liabilities........................................... 355 766
Deferred taxes.............................................. -- 3,059
Shareholders' equity
Preferred stock, $.001 par value, 1,000 shares authorized,
no shares issued....................................... -- --
Common stock, $.001 par value, 80,000 shares authorized,
20,278 shares issued and outstanding as of June 30,
1999 and 20,189 shares issued and outstanding as of
June 30, 1998.......................................... 20 20
Paid-in-capital........................................... 190,654 189,828
Accumulated other comprehensive income (loss)............. (949) --
Loan receivable from officer.............................. (9,520) --
Retained earnings (deficit)............................... (102,764) (19,011)
-------- --------
77,441 170,837
-------- --------
$284,506 $328,569
======== ========
See notes to consolidated financial statements
F-4
55
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
Net sales................................................. $188,484 $163,893 $85,645
Costs and expenses:
Cost of sales........................................... 128,492 95,341 45,703
Marketing and selling................................... 42,025 25,746 15,165
Research and development................................ 17,123 9,319 5,097
General and administrative.............................. 20,114 10,851 7,133
Fiber optic joint venture formation costs............... -- 212 286
Purchased research and development...................... -- 18,220 --
Special charges......................................... 27,309 15,918 --
Settlement of claim..................................... -- -- 771
Amortization of intangible assets....................... 2,773 1,665 397
-------- -------- -------
Income (loss) from operations............................. (49,352) (13,379) 11,093
Other income (expense):
Interest expense........................................ (13,845) (3,801) (1,513)
Interest income......................................... 1,122 1,436 845
Loss from equity investments............................ (6,318) (501) --
-------- -------- -------
Income (loss) from continuing operations before income
taxes, extraordinary charge and cumulative effect of
accounting change....................................... (68,393) (16,245) 10,425
Income taxes.............................................. 2,972 1,802 2,869
-------- -------- -------
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of accounting
change.................................................. (71,365) (18,047) 7,556
Discontinued operations
Loss from operations of discontinued business (net of
income tax benefits of $719 in 1998 and $172 in
1997)................................................ -- (1,278) (452)
Loss on disposal of discontinued business, including
provision for operating losses during phase-out
period of $2,796 in 1999 and $9,100 in 1998 (net of
income tax benefits of $3,086 in 1998)............... (9,043) (6,014) --
-------- -------- -------
Income (loss) before extraordinary charge and cumulative
effect of accounting change............................. (80,408) (25,339) 7,104
Extraordinary charge from early extinguishment of debt,
net of income tax benefits.............................. (902) (604) --
Cumulative effect of change in accounting for start-up
costs................................................... (2,443) -- --
-------- -------- -------
Net income (loss)......................................... $(83,753) $(25,943) $ 7,104
======== ======== =======
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations................ $ (3.53) $ (.99) $ .57
Loss from discontinued operations....................... (.45) (.40) (.03)
Extraordinary charge.................................... (.04) (.04) --
Cumulative effect of accounting change.................. (.12) -- --
-------- -------- -------
Earnings (loss) per share -- Basic........................ $ (4.14) $ (1.43) $ .54
======== ======== =======
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations................ $ (3.53) $ (.99) $ .55
Loss from discontinued operations....................... (.45) (.40) (.03)
Extraordinary charge.................................... (.04) (.04) --
Cumulative effect of accounting change.................. (.12) -- --
-------- -------- -------
Earnings (loss) per share -- Diluted...................... $ (4.14) $ (1.43) $ .52
======== ======== =======
Weighted average shares outstanding:
Basic................................................... 20,232 18,195 13,269
======== ======== =======
Diluted................................................. 20,232 18,195 13,558
======== ======== =======
See notes to consolidated financial statements
F-5
56
ADVANCED LIGHTING TECHNOLOGIES, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1999
ACCUMULATED LOAN
COMMON STOCK COMPREHENSIVE OTHER RECEIVABLE RETAINED
------------------- PAID-IN INCOME COMPREHENSIVE FROM EARNINGS
SHARES PAR VALUE CAPITAL (LOSS) INCOME (LOSS) OFFICER (DEFICIT) TOTAL
------- --------- -------- ------------- ------------- ---------- --------- -------
(IN THOUSANDS)
BALANCE AT JULY 1, 1996... 10,845 $11 $ 26,755 $ -- $ -- $ -- $ (172) $26,594
Net income................ -- -- -- -- -- 7,104 7,104
Net proceeds from public
offering of common
shares.................. 2,452 2 30,089 30,091
Issuance of shares in
connection with
purchases of
businesses.............. 88 -- 1,537 -- -- -- -- 1,537
Stock options exercised... 50 -- 706 -- -- -- -- 706
------ --- -------- -------- ----- ------- --------- -------
BALANCE AT JUNE 30,
1997.................... 13,435 13 59,087 -- -- -- 6,932 66,032
Net loss.................. -- -- -- -- -- (25,943) (25,943)
Net proceeds from public
offering of common
shares.................. 3,000 3 69,317 -- -- -- -- 69,320
Issuance of shares in
connection with
purchases of
businesses.............. 3,646 4 59,655 -- -- -- -- 59,659
Stock options exercised... 98 -- 1,570 -- -- -- -- 1,570
Stock purchases by
employees............... 10 -- 199 -- -- -- -- 199
------ --- -------- -------- ----- ------- --------- -------
BALANCE AT JUNE 30,
1998.................... 20,189 20 189,828 -- -- -- (19,011) 170,837
Net loss.................. (83,753) (83,753) (83,753)
Loan to officer........... (9,520) (9,520)
Issuance of shares in
connection with the
purchase of a
business................ 2 -- 29 -- -- -- -- 29
Stock options exercised... 18 -- 279 -- -- -- -- 279
Stock issued pursuant to
employee benefit plan... 41 -- 312 -- -- -- -- 312
Stock purchases by
employees............... 28 -- 206 -- -- -- -- 206
Other comprehensive income
(loss):
Foreign currency
translation
adjustment............ (949) (949)
--------
Other comprehensive income
(loss).................. (949) (949)
------ --- -------- -------- ----- ------- --------- -------
Comprehensive income
(loss).................. $(84,702)
========
BALANCE AT JUNE 30,
1999.................... 20,278 $20 $190,654 $(949) $(9,520) $(102,764) $77,441
====== === ======== ===== ======= ========= =======
See notes to consolidated financial statements
F-6
57
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $(71,365) $(18,047) $ 7,556
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
Depreciation.......................................... 6,335 3,384 2,151
Amortization.......................................... 2,773 1,665 397
Provision for doubtful accounts....................... 882 65 28
Special charges and terminated equipment contracts.... 34,119 17,984 --
Deferred income taxes................................. 3,584 (2,294) 419
Loss from equity investments.......................... 6,318 -- --
Purchased research and development.................... -- 18,220 --
Changes in operating assets and liabilities, excluding
effects of acquisitions and discontinued operations:
Trade receivables................................. (153) (9,876) (10,562)
Inventories....................................... 4,674 (7,410) (10,838)
Prepaids and other assets......................... (1,348) (7,609) (2,442)
Accounts payable and accrued expenses............. 3,843 (3,896) 10,032
Other............................................. (1,737) 303 1,373
-------- -------- --------
Net cash used in continuing operating
activities.................................... (12,075) (7,511) (1,886)
INVESTING ACTIVITIES
Capital expenditures...................................... (21,844) (16,598) (14,287)
(Purchase) sale of short-term investments, net............ -- 3,725 (4,075)
Purchases of businesses................................... (4,390) (50,706) (14,960)
Investments in affiliates................................. (2,394) (5,276) (2,827)
Use of net proceeds from public offering:
Capital expenditures.................................... -- (14,507) (2,080)
Investments in affiliates............................... -- (6,780) (4,101)
-------- -------- --------
Net cash used in investing activities........... (28,628) (90,142) (42,330)
FINANCING ACTIVITIES
Proceeds from revolving credit facility................... 216,977 319,786 92,001
Payments of revolving credit facility..................... (211,521) (312,213) (60,822)
Net proceeds from long-term debt.......................... 36,622 96,790 16,326
Payments of long-term debt and capital leases............. (3,971) (19,267) (8,159)
Issuance of common stock.................................. 797 1,769 706
Loan to officer........................................... (9,000) -- --
Net proceeds from public offering......................... -- 69,320 30,091
Use of net proceeds from public offering:
Payment of long-term debt and revolving credit
facility.............................................. -- (33,000) (16,800)
Payment of trade payables............................... -- -- (3,035)
-------- -------- --------
Net cash provided by financing activities....... 29,904 123,185 50,308
Net cash used in discontinued operations........ (7,288) (7,813) (3,576)
-------- -------- --------
Increase (Decrease) in cash and cash equivalents............ (18,087) 17,719 2,516
Cash and cash equivalents, beginning of year................ 21,917 4,198 1,682
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,830 $ 21,917 $ 4,198
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 12,241 $ 2,128 $ 1,375
Income taxes paid (refunds received), net................. (1,660) 2,829 81
Capitalized interest...................................... 645 1,118 455
Noncash transactions:
Equipment acquired through capital leases............... 77 376 1,683
Property acquired by assuming mortgage.................. -- 4,807 --
Cumulative effect of change in accounting principle..... 2,443 -- --
Extraordinary loss on early extinguishment of debt...... 902 604 --
Stock issued for purchases of businesses................ 29 59,659 1,537
Detail of acquisitions:
Assets acquired......................................... $ 10,143 $138,799 $ 23,033
Liabilities assumed..................................... 5,659 26,295 6,142
Stock issued for purchase of business................... 29 59,659 1,537
-------- -------- --------
Cash paid............................................... 4,455 52,845 15,354
Less cash acquired...................................... 65 2,139 394
-------- -------- --------
Net cash paid for acquisitions.......................... $ 4,390 $ 50,706 $ 14,960
======== ======== ========
See notes to consolidated financial statements
F-7
58
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A. ORGANIZATION
Advanced Lighting Technologies, Inc. (the "Company") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, which include materials, system components, systems, and production
equipment.
The Company was formed 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. 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.
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.
Investments in 50% or less owned companies and joint ventures over which the
Company has the ability to exercise significant influence are accounted for
under the equity method. All other investments and investments of less than 20%
are accounted for under the cost method.
Accounting Estimates
The preparation of the 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
those estimates.
Translation of Foreign Currency
The functional currency of consolidated subsidiaries outside of the United
States is the local currency. All assets and liabilities of foreign subsidiaries
are translated into United States dollars at year-end exchange rates while
revenues and expenses are translated at weighted-average exchange rates in
effect during the year.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-term Investments
Short-term investments are recorded at fair market value, which
approximates cost.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risks consist primarily of temporary cash and cash equivalents,
short-term investments and trade receivables. The Company invests its cash
primarily in a high quality institutional money-market portfolio and high
quality securities and limits the amount of credit exposure to any one financial
institution.
F-8
59
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company provides credit in the normal course of business, primarily to
major manufacturers and distributors in the lighting industry and, generally,
collateral or other security is not required. The Company conducts ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses which, when realized, have been within the range of management's
expectations. Credit risk on trade receivables is minimized as a result of the
large and diverse nature of the Company's worldwide customer base.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
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.
Depreciation is computed for financial reporting purposes by the
straight-line method based on the estimated useful lives of the assets, both
those owned and under capital lease, as follows: buildings, 15 to 40 years;
machinery and equipment, 5 to 25 years; furniture and fixtures, 5 to 15 years;
and, leasehold improvements, the lease periods.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following lives:
Excess of cost over net assets acquired..................... 10 - 40 years
Patents, trademarks and tradenames.......................... 17 - 40 years
Other intangibles........................................... 10 - 40 years
The Company examines the carrying value of its intangible assets when
indicators of impairment are present. When the undiscounted cash flows are not
sufficient to recover the assets' carrying amount, an impairment loss would be
charged to expense in the period identified. During the fiscal year ended June
30, 1998, an impairment loss of $9,354 was charged to expense and classified as
"Special Charges", which are further discussed at Note K. Accumulated
amortization was $4,135 and $2,524 at June 30, 1999 and 1998, respectively.
Revenue Recognition
Revenues from the sale of metal halide materials, system components (lamps,
power supplies, system controls, fiber optic cable) and systems are recognized
when products are shipped and revenues on production equipment contracts are
recognized under the percentage of completion method.
Advertising Expense
External costs incurred in providing media advertising and promoting
products are expensed the first time the advertising or promotion takes place.
Research and Development
Research and development costs, primarily the development of new products
and modifications of existing products, are charged to expense as incurred.
F-9
60
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock Compensation Arrangements
In accordance with Statement of Financial Accounting Standards ("FAS") No.
123, "Accounting and Disclosure of Stock-Based Compensation," the Company
accounts for stock compensation arrangements using the intrinsic value based
method in APB Opinion No. 25 "Accounting for Stock Issued to Employees," and
discloses the effect on net income (loss) and earnings (loss) per share of the
fair value based method in FAS No. 123.
Accounting Change -- Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs. The SOP requires
that costs related to start-up activities (defined as those one-time activities
related to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing facility,
commencing some new operation and organizing a new entity) be expensed as
incurred and is effective for fiscal years beginning after December 31, 1998.
The Company has elected to adopt the provisions of this SOP in fiscal year 1999,
the effect of which ($2,443 or $.12 per diluted common share) is reflected as a
cumulative effect of change in accounting principle.
New Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income" and FAS No. 131
"Disclosures about Segments of an Enterprise and Related Information."
The Company has not yet adopted FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires that all derivatives, such
as interest rate exchange agreements (swaps), be recognized on the balance sheet
at fair value. Derivatives which are not hedges must be adjusted to fair value
through the results of operations. Derivatives determined to be hedges will be
adjusted to fair value through either the results of operations or other
comprehensive income, depending on the nature of the hedge. The Company is
required to adopt FAS No. 133, as subsequently amended by FAS No. 137, on July
1, 2000. The impact, if any, on net income, comprehensive income and financial
position will depend on the amount, timing and nature of any agreements entered
into by the Company.
Financial Statement Presentation Changes
Certain amounts for prior years have been reclassified to conform to the
current year reporting presentation.
C. ACQUISITIONS
During fiscal 1999, 1998 and 1997, the Company completed the following
business combinations, all of which were accounted for by the purchase method
and, accordingly, results of operations for the acquired businesses have been
included in the consolidated statement of operations from their respective dates
of acquisition. Assets acquired and liabilities assumed have been recorded at
fair value based on appraisals and the best estimates available.
On September 15, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting Europe, Srl. ("RLE"), located in Florence, Italy.
RLE assembles and directly markets, in Europe and the Middle East,
high-intensity discharge ("HID") lighting systems, with a strong focus on metal
halide installations, for commercial, industrial, outdoor and related lighting
applications. The total purchase price consisted of $930 in
F-10
61
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
cash. The purchase price resulted in an excess of cost over net assets acquired
of $1,329, which is being amortized over 20 years.
On August 31, 1998, the Company acquired all the assets and liabilities of
Venture Lighting New Zealand ("VLNZ"), located in Auckland, New Zealand. VLNZ
was the exclusive distributor of the Company's products in New Zealand. The
total purchase price consisted of $225 in cash and 2,000 shares of the Company's
Common Stock. The purchase price resulted in an excess of cost over net assets
acquired of $562, which is being amortized over 20 years.
On July 8, 1998, the Company acquired all of the capital stock outstanding
of Kramer Lighting, Inc. ("Kramer"), located in Middleton, Rhode Island, and
purchased the land and building of Kramer from an affiliate of Kramer. Kramer
manufactures and directly markets HID lighting systems, with a strong focus on
metal halide installations, for commercial, industrial, outdoor, and related
lighting applications. The total purchase price consisted of $2,612 in cash. The
purchase price resulted in an excess of cost over net assets acquired of $2,466,
which is being amortized over 25 years.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting, Inc. ("Ruud"), located in Racine, Wisconsin. Ruud
manufactures and directly markets HID lighting systems, with a strong focus on
metal halide installations, for commercial, industrial, outdoor, and related
lighting applications. The purchase price consisted of $35,500 in cash and three
million shares of the Company's Common Stock (valued at $49,950). The excess of
the purchase price over the net tangible assets acquired was allocated to
various intangible assets such as trade name ($13,013), customer service
infrastructure ($16,915) and excess of cost over net assets acquired ($46,690),
all of which are being amortized over 40 years.
During 1999, the Company received a comment letter from the Securities and
Exchange Commission ("SEC") related to the Company's Form 10-K for the year
ended June 30, 1998. In response to the SEC's view related to the valuation of
the three million shares of restricted common stock issued in connection with
the acquisition of Ruud Lighting, Inc., the value of the shares was restated and
increased to $49,950, which resulted in an increase in the excess of cost over
net assets of businesses acquired of $16,928. The effect of the restatement on
the June 30, 1998 financial statements follows:
AS RESTATED AS PREVIOUSLY REPORTED
----------- ----------------------
Balance Sheet
Excess of cost over net assets of business acquired,
net.................................................... $ 49,241 $ 32,524
Paid-in-capital........................................... 189,828 172,900
Retained earnings (deficit)............................... (19,011) (18,800)
Statement of Operations
Amortization of intangible assets......................... $ 1,665 $ 1,454
Loss before extraordinary charge.......................... 25,339 25,128
Net loss.................................................. 25,943 25,732
Per share loss -- basic and diluted
Before extraordinary charge............................ 1.39 1.38
Net loss............................................... 1.43 1.41
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is the leader in the
development of sophisticated thin film deposition systems (equipment) and
coatings for lighting applications, with particular emphasis on coatings for
metal halide lighting systems. The purchase price consisted of $14,500 in cash
and 599,717 shares of the Company's Common Stock (valued at $9,600). The excess
of the purchase price over the net tangible assets acquired of $22,060 was
F-11
62
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
allocated to in-process research and development ("R&D") ($18,220) and
intangible assets ($3,840). Intangibles consist of trade names and assembled
workforce, and are amortized over 10 years. Purchased in-process R&D includes
the value of products in the development stage and not considered to have
reached technological feasibility and, in accordance with generally accepted
accounting principles, was capitalized but immediately written-off subsequent to
the acquisition of DSI. The in-process R&D write-off reduced earnings per share
by $1.00 in fiscal 1998.
On January 31, 1998, the Company acquired the remaining 50% partnership
interest (the Company acquired the first 50% as part of its acquisition of Ruud
Lighting) in Ruud Lighting Australia Pty Ltd. ("RLA"), the exclusive distributor
of the Ruud Lighting's products in Australia, for $82 and 5,292 shares of the
Company's Common Stock (valued at $108). The purchase resulted in an excess of
cost over net assets acquired of $338, which is being amortized over 20 years.
On June 2, 1997, the Company purchased for approximately $8,500, the system
component manufacturing and operating assets of W. J. Parry & Co. (Nottingham)
Ltd. ("Parry"), a manufacturer and marketer of magnetic power supplies for HID
lighting systems, based in the United Kingdom. The purchase price resulted in an
excess of cost over net assets acquired of $1,121. The remaining unamortized
excess of cost over net assets acquired was written off due to their impairment
in fiscal 1998 and are recorded as part of the special charges discussed at Note
K.
On February 11, 1997, the Company acquired the outstanding shares of
Ballastronix, Inc., a company focused on designing, manufacturing and marketing
of electromagnetic power supplies for metal halide lighting systems. The
purchase price consisted of $5,511 in cash and 38,024 shares of the Company's
Common Stock (valued at $562). The purchase price resulted in an excess of cost
over net assets acquired of $2,018. In fiscal 1998, the unamortized excess of
cost over net assets acquired was determined to be impaired and accordingly, was
included as a component of the special charges discussed in Note K.
On January 31, 1997, the Company completed the purchase of certain assets
of Web Design Associates, Inc., a company engaged in consumer product design and
development for approximately $600 in cash. The purchase price resulted in an
excess of cost over net assets acquired of $526, which is being amortized over
15 years.
During December 1996, the Company acquired all the assets (and assumed
certain liabilities) of Cable Lite Corporation in exchange for 50,000 shares of
the Company's Common Stock (valued at $975), with up to an additional 50,000
shares of Common Stock contingently issuable if the per share market price of
the Company's stock was less than $30.00 during the month of June 1998. Based on
the June 1998 stock price, an additional 5,933 shares were issued under the
terms of the purchase agreement. Advanced Cable Lite Corporation designs,
manufactures and sells fiber optic and fiber optic lighting systems. The Company
contributed Advanced Cable Lite Corporation to the Unison Fiber Optics Lighting
Systems LLC, a joint venture with Rohm and Haas Company which is described
further in Note D.
D. FIBER OPTICS JOINT VENTURE
On December 31, 1997, the Company and Rohm and Haas Company ("Rohm and
Haas") completed a series of agreements that resulted in the formation of Unison
Fiber Optics Lighting Systems LLC ("Unison"), a joint venture that focuses on
the manufacture and sale of fiber optic lighting systems to the worldwide
lighting market. In consideration for a 50% interest in Unison, the Company
contributed its subsidiary, Advanced Cable Lite Corporation, $2,000 in cash,
other fiber optic lighting system assets and is obligated to contribute an
additional $3,000 in cash under a note due January 1, 2000. The Company
accounted for its investment in Unison under the equity method.
F-12
63
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The transaction had the following noncash impact of increasing (decreasing)
the Company's December 31, 1997 condensed consolidated balance sheet:
Investments in affiliates................................... $4,592
Working capital, net........................................ (505)
Property, plant and equipment, net.......................... (53)
Other assets................................................ (51)
Excess of cost over net assets of businesses acquired,
net....................................................... (983)
Long-term debt.............................................. 3,000
In connection with this joint venture, the Company incurred $212 of
formation and development costs which were charged to operations during the
first quarter of fiscal 1998 and $286 of such costs which were charged to
operations during the fourth quarter of fiscal 1997.
During the fourth quarter of fiscal 1999, the Company began an effort to
restructure its investment, considering the joint venture's financial condition,
and reviewed various strategic alternatives, including possible ownership
changes. In connection with the restructuring and review process, the Company
concluded that sufficient uncertainty existed regarding the ultimate recovery of
the investment. As a result, the Company revalued its investment to $569 and
recorded a pretax noncash write-down of $5,883, which is reflected in the
consolidated statement of operations as a loss from equity investments.
E. INVESTMENT IN FIBERSTARS, INC.
During July 1997, the Company purchased an equity interest in Fiberstars,
Inc., a marketer and distributor of fiber optic lighting products. At December
31, 1997, the Company owned approximately 669,000 common shares, or 19.6% of
Fiberstars' shares outstanding. On February 11, 1998, the Company increased its
equity ownership to approximately 1,023,000 common shares, or 29% of Fiberstars'
shares outstanding (26% as of June 30, 1999). Accordingly, the Company changed
its method of carrying the investment to equity from cost in the quarter ended
March 31, 1998.
Pursuant to its agreements with Rohm and Haas, Rohm and Haas has the right
to request that the Company divest its interest in Fiberstars. Upon such
request, the Company agrees to complete such divestiture within two years
subject to reasonable extension upon consent of Rohm and Haas.
F. INVESTMENT IN JOINT VENTURE
On April 2, 1997, the Company invested approximately $3,800 of cash in
exchange for a 30% interest in Koto Luminous Co., Ltd. ("Koto"), the Company's
sole agent in Japan. Subsequent to the date of investment, Koto, a marketer and
distributor of metal halide lamps, began doing business under the name Venture
Lighting Japan. Using the proceeds of the investment and an additional
investment by an affiliate, Venture Lighting Japan has equipped and is operating
a metal halide lamp manufacturing facility in Japan. During the fourth quarter
of fiscal 1998, the Company changed its method of accounting for the investment
to equity from cost, with the results of operations of this investment being
insignificant in prior quarters. During the second quarter of fiscal 1999, the
Company exchanged its common stock interest for nonvoting preferred stock and
also purchased additional nonvoting preferred stock in Koto. As a result, the
Company changed its method of accounting for its investment in Koto to the lower
of cost or net realizable value.
G. FINANCING ARRANGEMENTS
Short-term debt consisted of the following:
F-13
64
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30,
-------------------
1999 1998
-------- -------
Trade facility........................................ $ 221 $ 506
Short-term credit facility............................ -- 483
Installment loan...................................... -- 62
-------- -------
221 1,051
Current portion of long-term debt..................... 8,322 909
-------- -------
$ 8,543 $ 1,960
======== =======
The Company, on behalf of a foreign subsidiary, maintains a multioption
borrowing facility with a foreign bank that includes a trade facility with
borrowing capacity of $601 and a short-term credit facility that matured in
August 1998. The trade facility, along with other borrowings with the foreign
bank, are collateralized with substantially all the assets of the subsidiary.
This facility allows the foreign subsidiary to issue documentary letters of
credit for imports and term-trade finance for importing its inventory. The
interest rate of this facility varies, depending upon the denomination of the
currency advanced, and ranged from 5.25% to 8.26% in fiscal 1999. The weighted
average interest rate on the trade facility was approximately 7.80% and 7.75%
during fiscal 1999 and fiscal 1998. The weighted average interest rate on the
short-term credit facility was 7.27% and 7.63% during fiscal 1999 and 1998.
Long-term debt consisted of the following:
JUNE 30,
--------------------
1999 1998
-------- --------
Senior unsecured 8% notes, due March 2008............ $100,000 $100,000
Bank Credit Facility -- term loan.................... 24,702 --
Bank Credit Facility -- revolving credit loan........ 12,766 --
Credit Facility...................................... -- 6,084
Mortgage notes payable............................... 18,443 7,323
Promissory note, due January 2000.................... 3,000 3,000
Obligations under capital leases..................... 1,401 1,608
Other................................................ 506 226
-------- --------
160,818 118,241
Less current portion............................... 8,322 909
-------- --------
$152,496 $117,332
======== ========
On May 21, 1999, the Company replaced its existing Credit Facility with a
$50,000 revolving credit loan and a $25,000 term loan provided by several
financial institutions ("Bank Credit Facility"). Subsequent to June 30, 1999,
the Company reduced the Bank Credit Facility to a $60,000 facility. Proceeds
from the Bank Credit Facility were used to repay the Company's existing Credit
Facility and certain other long-term debt.
The revolving credit loan has a three-year term expiring in May 2002.
Interest rates on loans outstanding are based, at the Company's option, on LIBOR
plus 2.75% or the agent bank's prime rate. The Company is also obligated to pay
a commitment fee of .375% on the unused portion of the loan. Availability of
borrowings under the revolving credit loan is determined by the Company's
eligible accounts receivable and inventories. The term loan has a five-year term
expiring in May 2004. The Company pays monthly principal payments that total
$3,576 annually, with the unpaid balance due at maturity. Interest rates on the
term loan are based, at the Company's option, on LIBOR plus 3.25% or the agent
bank's prime rate. The Bank Credit Facility contains certain
F-14
65
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
affirmative and negative covenants customary for this type of agreement,
prohibits cash dividends, and includes a financial covenant with respect to the
coverage of certain fixed charges. The principal security for the revolving
credit loan is substantially all of the personal property of the Company and
each of its North American and United Kingdom subsidiaries. The term loan is
secured by substantially all the Company's machinery and equipment and is cross
collateralized and secured with the revolving credit loan.
On March 13, 1998, the Company sold $100,000 of Senior Notes due March
2008, resulting in net proceeds of approximately $96,150. The Notes have an
annual coupon of 8% and are redeemable at the Company's option, in whole or in
part, on or after March 15, 2003 at certain preset redemption prices. In
addition, at any time prior to March 15, 2001, the Company may redeem up to 35%
of the aggregate principal amount of the Notes at 108% of par with the proceeds
of one or more public equity offerings. Interest on the Senior Notes is payable
semiannually on March 15 and September 15 of each year. Until the completion of
a registered exchange offer to existing noteholders, the Senior Notes bear
interest at 8.5%. The offer is expected to be completed within 45 days following
the effectiveness of the Company's related registration statement. There are no
sinking fund requirements. Approximately $76,300 of the net proceeds from the
senior notes were used to repay amounts outstanding under an existing credit
facility, thereby lengthening the term of the Company's debt, most of which had
been incurred to finance the acquisitions of Ruud Lighting and DSI. The Notes
Indenture contains covenants that, among other things, limit the ability of the
Company and its Restricted Subsidiaries (as defined therein) to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and, with respect to the Company,
engage in mergers and consolidations.
Mortgages payable consisted of ten separate notes at various rates of
interest, ranging from 7.3% to 9.5%, and at June 30, 1999 were collateralized by
land and buildings with a net carrying value of $23,525.
On December 31, 1997, the Company executed an 8% promissory note in the
amount of $3,000, due January 1, 2000, in partial consideration for a 50%
interest in Unison Fiber Optic Systems LLC, a joint venture with Rohm and Haas
Company that focuses on the manufacture and sale of fiber optic lighting systems
to the worldwide lighting market.
The Company leases certain equipment under agreements which are classified
as capital leases. The lease agreements have varying terms and the leased
assets, with a net carrying value of $2,045 at June 30, 1999, are included in
the consolidated balance sheet as machinery and equipment.
Aggregate maturities of long-term debt (including capital lease
obligations) for the five fiscal years subsequent to June 30, 1999, were as
follows: 2000 -- $8,322; 2001 -- $5,252; 2002 -- $17,879; 2003 -- $4,705; and
2004 -- $18,388.
The fair value of debt, based on market rates and maturity dates,
approximates carrying value. Debt issuance costs, classified with other assets,
are being amortized over the terms of the related debt.
The Company is obligated under its Bank Credit Facility to limit its
exposure to fluctuating interest rates for a minimum of $10,000. During fiscal
1999, the Company entered into an interest rate swap agreement that expires in
May 2004 and has a notional amount of $10,000 with a fixed pay rate of 6.63% and
a receive rate of LIBOR. The swap agreement is a contract to exchange floating
rate for fixed interest payments quarterly over the life of the agreement
without the exchange of the underlying notional amounts. The notional amount of
the interest rate agreement is used to measure interest to be paid or received
and does not represent the amount of exposure to credit loss. The net cash
amounts paid or received on the agreement are recognized as an adjustment to
interest expense. If these agreements were settled at June 30, 1999, the Company
would have paid approximately $200.
F-15
66
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company uses standby letters of credit to satisfy certain security
deposits with service providers, to make borrowings, and as security for a loan
to a foreign investee. These letters are irrevocable and expire within 12 months
of issuance. Standby letters of credit outstanding as of June 30, 1999 were
$464. Historically, the Company has not experienced any significant claims
against these financial instruments. Management does not expect any material
losses to result from these off-balance-sheet instruments because performance is
not expected to be required, and therefore, is of the opinion that the fair
value of these instruments is zero.
H. SHAREHOLDERS' EQUITY
Shareholders' Equity
In July 1997, the Company issued three million shares of its Common Stock
in a public offering, resulting in net proceeds of $69,320. Approximately
$33,000 of the net proceeds from this offering were used to repay substantially
all amounts outstanding under a loan agreement. Of the remaining net proceeds,
$14,507 was used for capital expenditures, primarily production equipment and
leasehold improvements, $4,780 was used to purchase 29% of Fiberstars, Inc., a
company specializing in the marketing and distribution of fiber optic lighting
products, $2,000 was contributed to Unison, the Company's joint venture with
Rohm and Haas, and the remainder was used for working capital purposes.
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 offering costs,
amounted to $30,091.
Employee Stock Options
The Company's 1995 Incentive Award Plan and 1998 Incentive Award Plan
provide for the granting of "A" and "B" incentive stock options to purchase
common stock of the Company. The "A" options become exercisable based on stock
price or 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. The
Company's 1997 Billion Dollar Market Capitalization Incentive Award Plan
provides for the granting of incentive stock options to purchase common stock of
the Company. The options become exercisable when the Company's market
capitalization, excluding the impact of stock issued in completing acquisitions,
reaches one billion dollars or after six years, whichever comes first. All
options have been granted at market value on the date of grant and expire ten
years from the date of grant. At June 30, 1999, the Company had 3,133,540 shares
reserved for future issuance upon exercise of stock options granted under the
option plans.
Information related to stock options for the years ended June 30 are as
follows:
1999 1998 1997
---------------------- ---------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- -------- ---------
Outstanding, beginning of year........ 2,601,347 $18.24 914,214 $14.38 791,850 $12.33
Granted............................... 682,600 10.18 1,939,689 19.56 228,150 19.73
Exercised............................. (18,590) 15.13 (97,209) 11.57 (50,661) 10.32
Forfeited............................. (513,491) 17.68 (155,347) 16.16 (55,125) 10.63
---------- ---------- --------
Outstanding, end of year.............. 2,751,866 16.36 2,601,347 18.24 914,214 14.38
========== ========== ========
Weighted-average fair value of options
granted during the year............. $ 4.69 -- $ 8.69 -- $ 6.62 --
F-16
67
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes additional information concerning
outstanding and exercisable options at June 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ---------------- --------- ----------- --------- ------- ---------
$ 6.94 to 9.99 524,700 9.9 years $ 7.04 -- --
10.00 to 15.99 257,642 6.8 years 10.06 190,267 $10.06
16.00 to 22.99 1,665,999 8.3 years 18.89 442,657 18.55
23.00 to 26.00 303,525 8.7 years 23.97 57,530 24.00
--------- -------
2,751,866 690,454
========= =======
If the Company had elected to report compensation expense for the Incentive
Award Plan based on the fair value at the grant dates for all awards consistent
with the methodology prescribed by Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation", net income and earnings per
share would be as follows:
YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
-------- -------- ------
Net income (loss) as reported.................. $(83,753) $(25,943) $7,104
Pro forma...................................... (85,763) (27,595) 6,540
Earnings (loss) per share as reported.......... (4.14) (1.43) 0.52
Pro forma...................................... (4.24) (1.52) 0.48
The fair values of the stock options used to calculate the pro forma net
income and pro forma earnings per share were estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in fiscal 1999, 1998 and 1997, respectively: expected volatility of 54%,
38% and 30%; risk-free interest rates of 5.61%, 5.78%, and 6.41%; and expected
lives of 4 years, 5 years, and 4 years with no dividend yield.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan authorized and made
available for sale to employees, at a discount of 15%, a total of 100,000 shares
of the Company's Common Stock. The Plan provides substantially all employees who
have completed six months of service an opportunity to purchase shares through
payroll deductions, up to 10% of eligible compensation.
The purchase price of each share is 85% of the month-end closing market
price of the Company's Common Stock. Employees purchased 41,233 shares in fiscal
1999 and 9,577 shares of stock in fiscal 1998. At June 30, 1999, 49,190 shares
were available for future purchases.
Shares Issued Pursuant to Defined Contribution Plan
Beginning in February 1999, pursuant to the terms of the Company's 401(k)
Retirement and Savings Plan, the Company partially matches, with its Common
Stock, the contributions made by employees to their plan accounts. The Company
has authorized and made available for contribution a total of 100,000 shares of
Common
F-17
68
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock, and contributed 28,107 shares in fiscal 1999. At June 30, 1999, 71,893
shares were available for future contributions.
I. EMPLOYEE BENEFITS
The Company has defined contribution elective savings and retirement plans
that cover substantially all full-time employees in its domestic and foreign
subsidiaries. The Company matches the contributions of participating employees
on the basis of the percentages specified in the respective plans, ranging from
1% to 4% of eligible employee earnings. Contributions charged to income for the
defined contribution plans, including expense associated with the Common Stock
issuances related to the 401(k) Retirement and Savings Plan described in Note H,
were $1,218 in fiscal 1999, $465 in fiscal 1998 and $373 in fiscal 1997.
J. INCOME TAXES
Income (loss) from continuing operations before income taxes, extraordinary
charges and cumulative effect of change in accounting principle were
attributable to the following sources:
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
United States...................................... $(62,730) $ (9,290) $ 9,548
Foreign............................................ (5,663) (6,955) 877
-------- -------- -------
Totals............................................. $(68,393) $(16,245) $10,425
======== ======== =======
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:
YEAR ENDED JUNE 30,
---------------------------
1999 1998 1997
------ ------- ------
Current:
Federal.............................................. $ 669 $ 2,917 $1,545
State and local...................................... 219 372 550
Foreign.............................................. (253) 807 355
------ ------- ------
635 4,096 2,450
Deferred:
Federal.............................................. 339 (176) 313
State and local...................................... (94) (228) 149
Foreign.............................................. 2,092 (1,890) (43)
------ ------- ------
2,337 (2,294) 419
------ ------- ------
$2,972 $ 1,802 $2,869
====== ======= ======
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.
Significant components of the Company's net deferred tax assets and
liabilities at June 30, 1999 and 1998 are as follows:
F-18
69
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
-------------------
1999 1998
-------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... $21,317 $ 892
Research and development tax credits...................... 3,006 --
Tax under financial reporting accruals.................... -- 1,212
Intangible amortization................................... -- 486
Tax under financial reporting special charges, equity
write-down and discontinued operations................. 8,454 1,718
Tax under financial reporting inventory reserves.......... -- 252
Other..................................................... 2,266 524
------- ------
35,043 5,084
Deferred tax liabilities:
Tax over financial reporting depreciation................. 4,721 2,720
Other..................................................... -- 339
------- ------
4,721 3,059
------- ------
Net deferred tax assets (liabilities) before valuation
allowance................................................. 30,322 2,025
Valuation allowance......................................... (30,322) --
------- ------
Net deferred tax assets (liabilities)....................... $ -- $2,025
======= ======
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
YEAR ENDED JUNE 30,
------------------------
1999 1998 1997
----- ----- ------
Statutory tax rate........................................ (35.0)% (35.0)% 35.0%
State and local income taxes, net of federal benefit...... 0.2 0.6 3.6
Nondeductible purchased research and development.......... -- 39.8 --
Research and development tax credit....................... (0.8) (4.1) --
Effect of foreign taxes................................... 2.3 (1.4) (1.4)
Nondeductible foreign special charges..................... 0.3 9.8 --
Net operating loss carryforward........................... -- -- (2.8)
Valuation allowance....................................... 37.5 -- --
Adjustment of deferred tax liabilities.................... -- -- (10.9)
Other..................................................... (0.8) 1.4 4.0
----- ----- ------
Effective tax rate........................................ 3.7% 11.1% 27.5%
===== ===== ======
Income taxes paid (net of refunds) were $(1,660) in fiscal 1999, $3,129 in
fiscal 1998, and $81 in fiscal 1997.
At June 30, 1999, the Company had net operating loss carryforwards ("NOLs")
of $57,309 available to reduce future United States federal taxable income,
which expire 2008 through 2019.
The Company also had research and development credit carryforwards for tax
purposes of approximately $3,006, which expire 2005 through 2019. Additionally,
in conjunction with the Alternative Minimum Tax
F-19
70
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
("AMT") rules, the Company had available AMT credit carryforwards for tax
purposes of approximately $162, which may be used indefinitely to reduce regular
federal income taxes.
Also, at June 30, 1999, the Company had foreign net operating loss
carryforwards for tax purposes totaling $5,209 that expire in 2000 to 2005 and
$10,587 that have no expiration dates.
For fiscal 1999, the Company reported a pretax loss from continuing
operations, including special charges, of $68,393; and a pretax loss on the
discontinued operations of the Microsun business of $9,043; an extraordinary
charge from the early extinguishment of debt of $902; and, a cumulative effect
of change in accounting for start-up costs of $2,443, all of which created
$80,781 of operating losses and future tax deductions for financial reporting
purposes. Accordingly, at June 30, 1999, the Company has recorded a valuation
allowance for deferred tax assets of $30,322 related to all NOLs, tax credits
and net deductible tax differences.
K. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS
During the year ended June 30, 1999, the Company recorded special charges
related to significant changes in its operations, which are intended to
accelerate and intensify the Company's focus on its metal halide products.
The special charges principally relate to the execution of the Company's
shift in strategic direction and include: limiting Pacific Rim expansion;
changing global lamp manufacturing strategy; restructuring marketing operations
in North America and Europe; accelerating an exit from noncore product lines;
reducing excess overhead including staffing reductions; consolidating an
equipment manufacturing operation into the Company's Solon, Ohio facility and
significantly reducing the size of the operation; and, reducing capital
expenditures.
The special charges were determined in accordance with formal plans
developed by the Company's management and approved by the Company's Board of
Directors using the best information available to it at the time. Actions
associated with closing facilities began in the second quarter and were
substantially completed by the end of fiscal 1999. Employees were terminated
enterprise-wide from almost all areas and units of the Company. Assets related
to the above actions are no longer in use and have been sold or were
written-down to their estimated fair values. The amounts the Company will
ultimately incur may change as the Company's plans are executed and actions are
completed.
Details of the actions and related special charges recorded during fiscal
1999 are summarized as follows:
F-20
71
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE AS OF
CHARGED TO CHARGES JUNE 30,
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED 1999
----------- -------------- ---------- -------- -------------
Limit Pacific Rim Expansion:
Severance............................... Cash $ 642 $ 492 $ 150
Lease/contract cancellations............ Cash/Noncash 3,841 488 3,353
Write-down of assets.................... Noncash 2,237 2,237 --
Shut-down costs of facilities........... Cash 497 493 4
Change in Global Manufacturing Strategy:
Severance............................... Cash 328 328 --
Write-down of assets.................... Noncash 8,502 8,502 --
Shut-down costs of facilities........... Cash 380 380 --
Program cancelation..................... Cash 128 -- 128
Restructure Marketing Operations in North
America and Europe:
Severance............................... Cash 317 287 30
Lease/contract cancellations............ Cash 436 110 326
Write-down of assets.................... Noncash 1,701 1,701 --
Shut-down costs of facilities........... Cash 738 664 74
Reduce Staffing Requirements.............. Cash/Noncash 2,262 1,761 501
Terminate Management Benefit Program...... Cash/Noncash 1,516 1,430 86
Exit Noncore Inventory Products........... Noncash 261 261 --
Write-off Long-Lived Assets............... Cash/Noncash 4,611 4,562 49
Other..................................... Cash 420 267 153
------- ------- ------
$28,817 $23,963 $4,854
======= ======= ======
The special charges for fiscal 1999 of $28,817 are classified in the
consolidated statement of operations as cost of goods sold ($1,508) and special
charges ($27,309). The Company incurred additional costs of $596 and $764, as
described in Note O, related to the above actions. All actions required by the
plans are expected to be completed by December 31, 1999.
In conjunction with limiting its Pacific Rim expansion, the Company
terminated production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the quarter ended December 31,
1998, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
These special charges reduced net income by $37,365, or $1.85 diluted
earnings per share for fiscal 1999.
During fiscal 1998, the Company recorded special charges related to an
assessment of the Company's global power supply operations.
The special charges of $17,984 principally relate to the Company's decision
to refocus and restructure its recently acquired global power supply operations
to focus exclusively on opportunities in metal halide. With the January 1998
acquisition of Ruud Lighting, Inc., the Company accelerated this rationalization
of its existing power supply manufacturing operations and distribution
activities in order to capitalize on new opportunities not previously available.
This assessment resulted in (a) the discontinuance of certain power supply
products at the Company's power supply facilities, (b) the write-down of certain
intangible and fixed assets and (c) a $2,066 write-down of inventory which is
classified in cost of sales. In addition, the charges cover the cost of
F-21
72
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
consolidating distribution activities and facilities, the write-down of assets
in connection with the implementation of new information systems and a
reassessment of investments resulting from a change in expansion strategy
arising from the Ruud Lighting acquisition.
The special charges were determined in accordance with formal plans
developed by the Company's management using the best information available to it
at the time and, subsequently, approved by the Company's Board of Directors.
The special charges for fiscal 1998 of $17,984 in the statement of
operations are classified as cost of sales ($2,066) and special charges
($15,918).
YEAR ENDED
JUNE 30, 1998
---------------------- BALANCE AS OF
CHARGED TO CHARGES JUNE 30,
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED 1998
----------- ------------ ---------- -------- -------------
Asset write-downs:
Inventories............................... Noncash $ 2,066 $ 2,066 $ --
Intangibles............................... Noncash 9,354 9,354 --
Fixed assets.............................. Noncash 3,056 3,056 --
Other assets.............................. Noncash 2,184 2,184 --
Contractual commitments and other
accruals.................................. Cash 1,209 496 713
Other....................................... Cash 115 115 --
------- ------- ------
$17,984 $17,271 $ 713
======= ======= ======
The $713 balance, as of June 30, 1998, was utilized during 1999.
The write-down of intangible assets primarily represent the excess of the
purchase price over the fair value of the net assets acquired and costs
allocated to tradenames, know-how, and other specifically identifiable
intangibles arising from business combinations. Asset write-downs for the
impairment of long-lived intangibles and fixed assets were determined in
accordance with Statement of Financial Accounting Standards No. 121.
After an income tax benefit of $5,015, these special charges reduced net
income by $12,969, or $.71 diluted earnings per share for fiscal 1998.
L. DISCONTINUED OPERATIONS, MICROSUN BUSINESS
Microsun Technologies, Inc. was identified in March 1998 for disposition
through a plan to distribute to ADLT shareholders all of the ownership of
Microsun Technologies, Inc. in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
in December 1998, the Company revised its plan for the disposition to wind-down
the operations, close the manufacturing facilities and liquidate the assets of
Microsun. During fiscal 1998, a loss on disposal of $9,100 (net of income tax
benefits of $3,086) for operating losses through the planned date of spin-off
was recorded. During fiscal 1999, an additional loss on disposal of $9,043 was
recorded, which included $2,796 for additional operating losses during the
phase-out period, $3,134 related to the write-down and disposal of assets and
costs related to shut-down and severance, and a deferred tax asset valuation
allowance of $3,113.
Summary operating information for Microsun for fiscal 1999, 1998 and 1997,
is presented below for informational purposes only and does not necessarily
reflect what the results of operations would have been had Microsun operated as
a stand-alone entity.
F-22
73
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
------ ------ ------
Sales.................................................... $4,719 $4,456 $ 845
Costs and expenses....................................... 9,538 13,530 1,469
------ ------ ------
Loss before income taxes................................. 4,819 9,074 624
Deferred income tax benefit (expense).................... (3,113) 3,113 172
------ ------ ------
Net loss................................................. $7,932 $5,961 $ 452
====== ====== ======
Operating losses from the measurement date (March 31, 1998) through June
30, 1999 were $11,896.
At June 30, 1999, the plan of wind-down had been accomplished, the
manufacturing facilities closed and substantially all assets had been disposed.
Accordingly, there were no remaining discontinued operations accrued losses
associated with Microsun at June 30, 1999.
M. SETTLEMENT OF CLAIMS
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
Executive Vice President and a director of the Company, and subsequently, a
claim against the Company. The claim alleged that 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 alleged
that the misrepresentations and/or omissions caused direct damages which
exceeded $900. The suit also claimed 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 Officer and Executive Vice President and the Company seeking direct
damages of $400 and punitive damages of $1,200. The Chief Executive Officer, the
Executive Vice President and the Company denied all of the allegations and
vigorously defended against the claims.
On November 29, 1996, the Company, the Chief Executive Officer and the
Executive Vice President reached an out-of-court settlement of both former
common shareholders' claims. The charge of $771 represents the settlement of
$475 plus legal and other directly-related costs, net of insurance recoveries.
F-23
74
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
N. EARNINGS PER SHARE
Earnings (loss) per share is computed as follows:
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- ------
Income available to common shareholders:
Income (loss) from continuing operations................. $(71,365) $(18,047) $7,556
======== ======== ======
Net income (loss)........................................ $(83,753) $(25,943) $7,104
======== ======== ======
Weighted average shares -- Basic:
Outstanding at beginning of period....................... 20,189 13,435 10,844
Issued pursuant to public offering....................... -- 2,942 2,327
Issued in acquisitions................................... 2 1,768 41
Issued for exercise of stock options..................... 17 47 22
Issued pursuant to employee stock purchase plan.......... 19 3 --
Issued pursuant to 401(k) plan........................... 5 -- --
Issuable in connection with an acquisition............... -- -- 35
-------- -------- ------
Basic weighted average shares......................... 20,232 18,195 13,269
======== ======== ======
Weighted average shares -- Diluted:
Basic from above......................................... 20,232 18,195 13,269
Effect of stock options.................................. -- -- 289
-------- -------- ------
Diluted weighted average shares....................... 20,232 18,195 13,558
======== ======== ======
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations................. $ (3.53) $ (.99) $ .57
Loss from discontinued operations........................ (.45) (.40) (.03)
Extraordinary charge..................................... (.04) (.04) --
Cumulative effect of change in accounting principle...... (.12) -- --
-------- -------- ------
Earnings (loss) per share -- Basic....................... $ (4.14) $ (1.43) $ .54
======== ======== ======
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations................. $ (3.53) $ (.99) $ .55
Loss from discontinued operations........................ (.45) (.40) (.03)
Extraordinary charge..................................... (.04) (.04) --
Cumulative effect of change in accounting principle...... (.12) -- --
-------- -------- ------
Earnings (loss) per share -- Diluted..................... $ (4.14) $ (1.43) $ .52
======== ======== ======
O. RELATED PARTY TRANSACTIONS
Pursuant to a loan agreement dated October 8, 1998, between the Company and
its Chairman and Chief Executive Officer (the "CEO"), the Company has loaned
$9,000 to its CEO for a one-year term at an interest rate of 8%. The loan was
made following approval by the Company's Board of Directors. The proceeds of the
loan were used by the Company's CEO to reduce the principal balance outstanding
of a margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO
F-24
75
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
from encumbering his shares of the Company's Common Stock in any manner except
pursuant to the existing agreements governing the CEO's margin account, without
the consent of the Company's Board of Directors. As of June 30, 1999, $520 of
interest was accrued on the loan.
In connection with the fiscal 1999 actions described in Note K, the Company
recognized $596 in cost of sales for the write-down of specialty inventory and
$764 in research and development expenses related to transactions with
affiliates. During fiscal 1999, the Company also recognized a $700 provision for
uncollectible advances and receivables related to transactions with affiliates.
During January 1996, the Company entered into a six-year Aircraft Operating
Agreement ("Agreement") with an unrelated company to charter certain airplanes
for service into locations which are not adequately served by commercial
carriers. The unrelated company leases the airplanes from an affiliate of the
Company owned by certain officers of the Company. These officers have guaranteed
the repayment of $11,200 of indebtedness incurred by the affiliate to purchase
the airplanes. The Company's minimum annual commitments under the Agreement are
$911. During May 1998, the Company began to charter another airplane from
another unrelated company. This unrelated company also leases the airplane from
an affiliate of the Company owned by certain officers of the Company. These
officers have guaranteed the repayment of $6,400 of indebtedness incurred by the
affiliate to purchase the airplane. Fees paid by the Company under these
arrangements were $1,616 in fiscal 1999, $2,161 in fiscal 1998, and $554 in
fiscal 1997.
The Company paid a director of the Company $100 in fiscal 1999, $129 in
fiscal 1998, and $79 in fiscal 1997 for consulting services.
The Company sold lamps, lamp components, and lamp production equipment to
an overseas company aggregating $625 in fiscal 1999, $1,254 in fiscal 1998, and
$3,853 in fiscal 1997. An executive officer and director of the overseas company
became a Director of the Company in January 1996.
During fiscal 1996, one of the Company's subsidiaries sold the assets of
its nonlamp product line to an affiliate of the Company owned principally by
certain officers of the Company for an amount equal to the carrying amount of
such assets as of June 30, 1995. As of June 30, 1999 and 1998, the Company had
an 8.5% note from the affiliate for $220 related to the sale of the assets of
the nonlamp product line which is recorded as a long-term receivable from
related parties in the consolidated balance sheet. Total principal and accrued
interest at June 30, 1999 was $284.
P. COMMITMENTS
The Company leases buildings and certain equipment under noncancelable
operating lease agreements. Total rent expense was $1,878 in 1999, $1,495 in
1998, and $1,478 in 1997. Future minimum lease commitments, as of June 30, 1999,
were as follows:
YEAR:
Fiscal 2000................................................. $1,946
Fiscal 2001................................................. 1,837
Fiscal 2002................................................. 1,486
Fiscal 2003................................................. 1,319
Fiscal 2004................................................. 894
Thereafter.................................................. 756
------
Minimum lease payments...................................... $8,238
======
F-25
76
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Q. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended June 30, 1999 and 1998.
FISCAL 1999, THREE MONTHS ENDED
-----------------------------------------------
JUN 30(A) MAR 31(B) DEC 31(C) SEP 30
---------- --------- --------- -------
Net sales....................................... $ 50,160 $ 50,022 $ 37,944 $50,358
Gross profit.................................... 14,053 17,346 7,871 20,722
Income (loss) from operations................... (21,402) (4,163) (26,916) 3,129
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of
accounting change............................. (30,019) (7,722) (33,806) 182
Loss from discontinued operations............... (2,877) -- (6,166) --
Net income (loss)............................... $ (36,241) $ (7,722) $(39,972) $ 182
========== ======== ======== =======
Earnings (loss) per share -- Basic.............. $ (1.79) $ (.38) $ (1.98) $ .01
========== ======== ======== =======
Earnings (loss) per share -- Diluted............ $ (1.79) $ (.38) $ (1.98) $ .01
========== ======== ======== =======
Price Range of Common Stock:
High.......................................... $ 9.000 $ 10.313 $ 10.625 $27.250
Low........................................... $ 5.813 $ 6.750 $ 4.875 $ 8.500
THREE MONTHS ENDED FISCAL 1998
-----------------------------------------------
JUN 30 MAR 31(D) DEC 31 SEP 30
---------- --------- --------- -------
Net sales....................................... $ 53,002 $ 49,075 $31,879 $29,937
Gross profit.................................... 23,902 18,627 13,412 12,611
Income (loss) from operations................... 7,369 (29,362) 4,458 4,156
Income (loss) from continuing operations before
extraordinary charge.......................... 4,191 (28,059) 3,033 2,788
Loss from discontinued operations, net of tax
benefits...................................... -- (6,753) (241) (298)
Net income (loss)............................... $ 4,191 $(35,416) $ 2,792 $ 2,490
========== ======== ======= =======
Earnings (loss) per share -- Basic.............. $ .21 $ (1.78) $ .17 $ .15
========== ======== ======= =======
Earnings (loss) per share -- Diluted............ $ .20 $ (1.78) $ .17 $ .15
========== ======== ======= =======
Price Range of Common Stock:
High.......................................... $ 29.938 $ 27.000 $26.500 $27.000
Low........................................... $ 20.875 $ 18.250 $18.250 $22.875
- ---------------
(a) Fourth Quarter 1999 -- Net income was reduced by: (a) charges of $12,972
consisting of $700 in cost of sales and special charges of $12,272; (b) a
$700 provision for uncollectible advances and receivables related to
transactions with affiliates; (c) a pretax noncash write-down of $5,883,
related to the Company's investment in Unison; (d) extraordinary charge
from the early extinguishment of debt of $902; and, (e) a $2,443 cumulative
effect of a change in accounting principle.
(b) Third Quarter 1999 -- Net income was reduced by $1,745 of special charges.
F-26
77
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(c) Second Quarter 1999 -- Net income was reduced by: (a) $8,548 from the
reversal of $14,961 in sales and $6,413 in cost of sales related to the
termination of lamp equipment contracts; (b) charges of $15,238 consisting
of: $1,182 in cost of sales ($374 with an affiliate), $764 of research and
development with an affiliate, and $13,292 of special charges; and, (c)
establishment of deferred tax valuation allowance of $3,515.
(d) Third Quarter 1998 -- Net income was reduced by the write-off of purchased
research and development and special charges, net of income tax benefits,
of $32,056.
R. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single business segment: the design, manufacture
and sales of metal halide lighting products including materials, system
components, systems and production equipment.
Net sales by country, based on the location of the business unit, for
fiscal 1999, 1998 and 1997 follows:
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
United States....................................... $136,721 $107,287 $59,689
Canada.............................................. 20,524 29,427 14,406
United Kingdom...................................... 19,998 20,287 5,786
Australia........................................... 10,092 6,892 5,764
Other............................................... 1,149 -- --
-------- -------- -------
$188,484 $163,893 $85,645
======== ======== =======
Long-lived assets by country, based on the location of the asset, as of
June 30, 1999 and 1998 follows:
JUNE 30,
-------------------
1999 1998
-------- -------
United States............................................... $ 90,769 $80,825
Canada...................................................... 2,845 2,709
United Kingdom.............................................. 6,396 6,120
Australia................................................... 1,760 300
Other....................................................... 678 74
-------- -------
$102,448 $90,028
======== =======
In fiscal 1999, 1998 and 1997, no single customer accounted for 10% or more
of the Company's net sales.
S. PURCHASE OF CORPORATE HEADQUARTERS
During March 1998, the Company purchased land and building in Solon, Ohio
for $7,758, which includes the assumption of an existing mortgage of
approximately $4,800. The mortgage has a 9.39% interest rate, a prepayment
penalty that approximates $1,000, requires monthly amortizing payments and a
final payment of $4,100 due in June 2006. Prior to the purchase, a portion of
the property was leased and used by the Company for system components
manufacturing and office space. Subsequent to purchase, the Company relocated
its world headquarters to the facility.
F-27
78
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
T. CONTINGENCY
In April and May 1999, three class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
shareholders of the Company on behalf of themselves and purported classes
consisting of Company shareholders, other than the defendants and their
affiliates, who purchased stock during the period from December 30, 1997 through
September 30, 1998 or various portions thereof. The named defendants are the
Company and its Chairman and Chief Executive Officer ("CEO"). The lawsuits are
now pending before a single judge who has required the plaintiffs to file a
single consolidated complaint on or before September 30, 1999. The complaints
allege generally that certain disclosures attributed to the Company contained
misstatements and omissions alleged to be violations of Section 10(b) of the
Securities Act of 1934 and Rule 10b-5, including claims for "fraud on the
market" arising from alleged misrepresentations and omissions with respect to
the Company's financial performance and prospects and alleged violations of
generally accepted accounting principles by improperly recognizing revenues. The
complaints seek certification of their respective purported classes, unspecified
compensatory and punitive damages, pre- and post-judgment interest and
attorneys' fees and costs. The Company and its CEO believe that these claims
lack merit and they intend to vigorously defend these actions.
U. SUBSEQUENT EVENT
During September 1999, General Electric Company ("GE") executed a
definitive agreement to make an investment in the Company of $20,554. In
exchange for the investment, GE will receive 761,250 shares of the Company's
newly-created Series A Stock convertible at any time into 3,045,000 shares of
Company Common Stock (subject to adjustment as described below). GE also will
receive a Warrant (the "Initial Warrant") to purchase an additional 1,000,000
shares of Company Common Stock, which is immediately exercisable at $.01 per
share. GE has been a holder of 535,887 shares of Company Common Stock since the
Company's initial public offering in 1995. The Series A Stock, Common Stock
issuable on exercise of the Initial Warrant and the Common Stock held by GE will
represent (after giving effect to the shares issued on exercise of the Initial
Warrant) approximately 18.9% of the voting power and equity ownership of the
Company after the GE investment. The proceeds of the transaction will be applied
principally to the reduction of short-term liabilities and outstanding amounts
under the Company's Bank Credit Facility.
The Series A Stock will have a liquidation preference of $27 per share,
plus an amount equal to 8% per annum from the date of issuance to the date of
payment ("Liquidation Preference Amount"). The Company will be required to
redeem any shares of Series A Stock which have not been converted or retired on
September 30, 2010. In addition, GE may, by notice, require the Company to
redeem the outstanding Series A Stock, within one year following: September 30,
2004, failure of the transaction to get required approvals or the occurrence of
corporate events. If the Company fails to maintain certain financial ratios, GE
will have the right to a combination of subscription rights to additional shares
and proxies with respect to shares voted by certain officers of the Company
which would give GE the ability to obtain the majority of the voting power of
the Company.
The transaction will be completed only after termination of the
Hart-Scott-Rodino waiting period as required under antitrust laws.
F-28
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 5, 1999 the Company filed a Current Report on Form 8-K dated March
29, 1999, reporting under Item 4 the resignation of the Company's independent
auditors, Ernst & Young LLP.
On May 24, 1999 the Company filed a Current Report on Form 8-K dated May
17, 1999, reporting under Item 4 the engagement of the Company's new independent
auditors, Grant Thornton LLP.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to
the Registrant's definitive Proxy Statement relating to its 1999 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, 1999.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The following consolidated financial statements of Advanced
Lighting Technologies, Inc. are included in Item 8:
Report of Grant Thornton LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Operations for the Years Ended June 30, 1999,
1998 and 1997
Statements of Consolidated Shareholders' Equity for the Years Ended June
30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules:
(2) The following Financial Statement Schedules are included in Item 14(d):
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.
50
80
(3) List of Exhibits (Exhibits available upon request)
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
2.1 Stock Purchase Agreement among Advanced Lighting
Technologies, Inc., Ruud Lighting, Inc. and Alan J. Ruud,
Theodore O. Sokoly, Donald Wandler, Christopher A. Ruud and
Cynthia A. Johnson (Form 10 Q/A Exhibit 2.1)............... (10)
2.2 Agreement and Plan of Reorganization among Advanced
Lighting Technologies, Inc., Advanced Acquisitions, Inc.,
Deposition Sciences, Inc., and Lee Bartolomei, Frances and
John Aguilera, Jr. 1992 Trust, Michael Robbins, James
Brosnan and Norman Boling dated as of January 9, 1998...... (11)
3.1 Amended and Restated Articles of Incorporation............. (1)
3.2 Code of Regulations........................................ (2)
4.1 Reference is made to Exhibits 3.1 and 3.2..................
4.2 Form of Stock Certificate of Common Stock of the Company... (2)
4.3 Indenture between Advanced Lighting Technologies, Inc. and
The Bank of New York as Trustee dated as of March 18, 1998
(Form 10-Q/A Exhibit 4.3).................................. (10)
4.4 First Supplemental Indenture dated September 25, 1998
between Advanced Lighting Technologies, Inc. and The Bank
of New York amending the Indenture dated March 18, 1998
(Form 10-Q/A No. 2 Exhibit 4.1)............................ (14)
4.5 Registration Rights Agreement dated as of March 18, 1998
between the Registrant and Morgan Stanley & Co.,
Incorporated (Form S-4 Exhibit 4.2)........................ (16)
4.6 Form of Security for 8% Senior Notes due 2008 originally
issued by Advanced Lighting Technologies, Inc. on March 18,
1998 (Form S-4 Exhibit 4.3)................................ (16)
4.7 Form of Security for 8% Senior Notes due 2008 to be issued
by Advanced Lighting Technologies, Inc. and registered
under the Securities Act of 1933 (Form S-4 Exhibit 4.4).... (16)
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 ("Hellman Voting Trust")................. (3)
9.2 Form of Irrevocable Proxy relating to shares formerly held
under the Hellman Voting Trust............................. (3)
9.3 Form of Voting Trust Agreement dated as of January 2, 1998
by and among the Company, Alan J. Ruud, Donald Wandler,
Theodore Sokoly, Christopher Ruud and Cynthia Johnson (the
"Rudd Voting Trust") and Form of Irrevocable Proxy relating
to shares formerly held under the Ruud Voting Trust........ (9)
10.1 Employment Agreement dated as of January 2, 1998 among Ruud
Lighting, Inc., Advanced Lighting Technologies, Inc., and
Alan J. Ruud............................................... (11)
51
81
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
10.2 Aircraft Lease Agreement between LightAir, Ltd., an Ohio
limited liability company, of which Wayne R. Hellman 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).................. (7)
10.3 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 10.2)................................... (7)
10.4 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).............................................. (7)
10.5 Aircraft Dry Lease Agreement dated as of May 27, 1997 by
and between LightAir, Ltd. and Advanced Lighting
Technologies, Inc. (Registration Statement Exhibit
10.26)..................................................... (8)
10.6 Employment Agreement dated as of February 12, 1998 between
Advanced Lighting Technologies, Inc. and Nicholas R. Sucic
(Form 10-Q/A Exhibit 10.5)................................. (10)
10.7 Loan Agreement dated as of October 8, 1998 between Advanced
Lighting Technologies, Inc. and Wayne R. Hellman (Form
10-Q/A Exhibit 10.1)....................................... (12)
10.8 Secured Promissory Note of Wayne R. Hellman dated as of
October 8, 1998 in the amount of $9,000,000 to Advanced
Lighting Technologies, Inc. at the rate of 8% per annum
(Form 10-Q/A Exhibit 10.2)................................. (12)
10.9 Amended and Restated Employment Agreement between Wayne R.
Hellman and Advanced Lighting Technologies, Inc. dated as
of October 8, 1998 (Form 10-Q/A Exhibit 10.4).............. (12)
10.10 Copy of the Company's Amended and Restated 1995 Incentive
Award Plan (Registration Statement Exhibit 10.1 and
10.1/A).................................................... (2)
10.11 Copy of the Company's 1997 Billion Dollar Market
Capitalization Incentive Award Plan........................
10.12 Copy of the Company's Amended and Restated 1998 Incentive
Award Plan.................................................
10.13 Credit Agreement by and among the Company and certain of
its subsidiaries and PNC Bank, National Association, as
agent for certain other banks dated as of May 21, 1999.....
10.14 Collateral Assignment of Split-Dollar Insurance Agreement
dated July 10, 1993 by and between Louis S. Fisi, as
employee, and Venture Lighting International, Inc., a
wholly-owned subsidiary of the Company.....................
10.15 Collateral Assignment of Split-Dollar Insurance Agreement
dated December 7, 1993 by and between Louis S. Fisi, as
employee, and H & F Management, Inc., a wholly-owned
subsidiary of the Company..................................
10.16 Collateral Assignment of Split-Dollar Insurance Agreement
dated July 10, 1993 by and between Wayne R. Hellman, as
employee, and Venture Lighting International, Inc., a
wholly-owned subsidiary of the Company.....................
52
82
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
10.17 Collateral Assignment of Split-Dollar Insurance Agreement
dated December 7, 1993 by and between Wayne R. Hellman, as
employee, and H & F Management, Inc., a wholly-owned
subsidiary of the Company..................................
10.18 Market Clearance Side Letter dated May 21, 1999, by and
among PNC Bank, National Association; PNC Capital Markets,
Inc., Advanced Lighting Technologies, Inc.; Ballastronix,
Incorporated; Canadian Lighting Systems Holding
Incorporated; Parry Power Systems Limited; and Venture
Lighting Europe Ltd........................................
10.19 Credit Agreement between Advanced Lighting Technologies,
Inc., the institutions named therein and National City
Bank, as Administrative Agent, dated as of January 2, 1998
(Form 10-Q/A Exhibit 10.2) (Replaced, see 10.13)........... (10)
10.20 Amendment No. 1 dated as of February 26, 1998 to Credit
Agreement between Advanced Lighting Technologies, Inc., the
lending institutions named therein and National City Bank,
as Administrative Agent, dated as of January 2, 1998 (Form
10-Q/A Exhibit 10.3) (Replaced, see 10.13)................. (10)
10.21 Amendment No. 2 dated as of May 13, 1998 to Credit
Agreement between Advanced Lighting Technologies, Inc., the
lending institutions named therein and National City Bank,
as Administrative Agent, dated as of January 2, 1998
(Replaced, see 10.13)...................................... (6)
10.22 Letter Amendment, dated as of September 1, 1998, among
Advanced Lighting Technologies, Inc., National City Bank
and other financial institutions, to the Credit Agreement
dated as of January 2, 1998 (Form 10-Q/A Exhibit 10.2)
(Replaced, see 10.13)...................................... (14)
10.23 Consolidated Amendment No. 1 to Credit Agreement dated
September 10, 1998 among Advanced Lighting Technologies,
Inc., National City Bank, and other financial institutions
amending the Credit Agreement dated January 2, 1998 (Form
10-Q/A Exhibit 10.1) (Replaced, see 10.13)................. (14)
10.24 Letter Amendment dated as of December 22, 1998 amending the
Credit Agreement dated January 2, 1998, among Advanced
Lighting Technologies, Inc., National City Bank, and other
financial institutions (Form 10-Q/A Exhibit 10.3)
(Replaced, see 10.13)...................................... (12)
10.25 Consolidated Amendment No. 2 to Credit Agreement, dated as
of February 12, 1999, amending the Credit Agreement dated
January 2, 1998, among Advanced Lighting Technologies,
Inc., National City Bank, and other financial institutions
(Form 8-K Exhibit 10.5) (Replaced, see 10.13).............. (13)
10.26 Fee Letter in connection with Consolidated Amendment No. 2
dated February 16, 1999 from Advanced Lighting
Technologies, Inc. to the Administrative Agent and the
Lenders (Form 8-K Exhibit 10.6) (Replaced, see 10.13)...... (13)
11 Statement of Computation of Per Share Earnings.............
12 Statement Regarding Computation of Ratios..................
16.0 Letter regarding Change in Certifying Accountant........... (15)
21.0 Subsidiaries of the Registrant as of June 30, 1999.........
23.1 Consent of Grant Thornton LLP..............................
53
83
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
23.2 Consent of Ernst & Young LLP...............................
24.1 Powers of Attorney.........................................
27 Financial Data Schedule....................................
- ---------------
(1) 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,
1996.
(2) Incorporated by reference to referenced Exhibit in Company's Registration
Statement on Form S-1, Registration No. 33-97902, effective December
11,1995.
(3) 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.
(4) Incorporated by reference to Exhibit 2.1 in Company's Current Report on
Form 8-K dated January 2, 1998.
(5) Intentionally omitted.
(6) Incorporated by reference to Exhibit 10.1 to Company's Current Report on
Form 8-K dated April 21, 1998 and filed May 5, 1998.
(7) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q for the Quarterly Period ended December 31, 1995.
(8) Incorporated by reference to referenced Exhibit in Company's Registration
Statement on Form S-1, Registration No. 333-28529, effective July 1, 1997.
(9) Incorporated by reference to Exhibit 1 to Schedule 13D filed by Alan Ruud,
et al., January 12, 1998.
(10) Incorporated by reference to referenced Exhibits in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 1998 filed
on March 15, 1999.
(11) Incorporated by reference to Exhibit of the same number in Company's Annual
Report on Form 10-K/A No. 2 for the Annual Period ended June 30, 1998 filed
March 16, 1999.
(12) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended December 31, 1998
filed March 15, 1999.
(13) Incorporated by reference to referenced Exhibit in Company's Current Report
on Form 8-K dated February 16, 1999 and filed on February 23, 1999.
(14) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A No. 2 for the Quarterly Period ended September 30,
1998 filed March 15, 1999.
(15) Incorporated by reference to Exhibit of the same number on Company's
Current Report on Form 8-K dated March 29, 1999 and filed April 5, 1999.
(16) Incorporated by reference to referenced Exhibit in Company's Registration
Statement on Form S-4, Registration No. 333-58609 filed July 7, 1998.
(b). Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed two Reports on
Form 8-K.
On April 5, 1999 the Company filed a Current Report dated March 29, 1999,
reporting under Item 4 the resignation of the Company's independent auditors,
Ernst & Young LLP.
On May 24, 1999 the Company filed a Current Report dated May 17, 1999,
reporting under Item 4 the engagement of the Company's new independent auditors,
Grant Thornton LLP.
(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.
54
84
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.
By: /s/ LOUIS S. FISI
------------------------------------
Louis S. Fisi
Executive Vice President
Date: September 28, 1999
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 and September 28, 1999
- --------------------------------------------- Director
Wayne R. Hellman
/s/ NICHOLAS R. SUCIC Chief Financial Officer, September 28, 1999
- --------------------------------------------- Vice President and Treasurer
Nicholas R. Sucic (Chief Accounting Officer)
/s/ FRANCIS H. BEAM Director September 28, 1999
- ---------------------------------------------
Francis H. Beam
/s/ JOHN R. BUERKLE Director September 28, 1999
- ---------------------------------------------
John R. Buerkle
/s/ THEODORE A. FILSON Director September 28, 1999
- ---------------------------------------------
Theodore A. Filson
/s/ LOUIS S. FISI Director September 28, 1999
- ---------------------------------------------
Louis S. Fisi
/s/ SUSUMA HARADA Director September 28, 1999
- ---------------------------------------------
Susuma Harada
/s/ ALAN J. RUUD Director September 28, 1999
- ---------------------------------------------
Alan J. Ruud
/s/ A GORDON TUNSTALL Director September 28, 1999
- ---------------------------------------------
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:
--------------------------------------
Louis S. Fisi
Attorney-in-Fact
55
85
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ADVANCED LIGHTING TECHNOLOGIES, INC.
86
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- -----------------------------------------------------------------------------------------------------------
2.1 Stock Purchase Agreement among Advanced Lighting
Technologies, Inc., Ruud Lighting, Inc. and Alan J. Ruud,
Theodore O. Sokoly, Donald Wandler, Christopher A. Ruud
and Cynthia A. Johnson (Form 10 Q/A Exhibit 2.1) (10)
2.2 Agreement and Plan of Reorganization among Advanced
Lighting Technologies, Inc., Advanced Acquisitions, Inc.,
Deposition Sciences, Inc., and Lee Bartolomei, Frances and
John Aguilera, Jr. 1992 Trust, Michael Robbins, James Brosnan
and Norman Boling dated as of January 9, 1998 (11)
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Code of Regulations (2)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Form of Stock Certificate of Common Stock of the Company (2)
4.3 Indenture between Advanced Lighting Technologies, Inc. and
The Bank of New York as Trustee dated as of March 18, 1998
(Form 10-Q/A Exhibit 4.3) (10)
4.4 First Supplemental Indenture dated September 25, 1998 between
Advanced Lighting Technologies, Inc. and The Bank of New York
amending the Indenture dated March 18, 1998
(Form 10-Q/A No. 2 Exhibit 4.1) (14)
4.5 Registration Rights Agreement dated as of March 18, 1998 between
the Registrant and Morgan Stanley & Co., Incorporated
(Form S-4 Exhibit 4.2) (16)
4.6 Form of Security for 8% Senior Notes due 2008 originally issued by
Advanced Lighting Technologies, Inc. on March 18, 1998
(Form S-4 Exhibit 4.3) (16)
4.7 Form of Security for 8% Senior Notes due 2008 to be issued by
Advanced Lighting Technologies, Inc. and registered under
the Securities Act of 1933 (Form S-4 Exhibit 4.4) (16)
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 ("Hellman Voting Trust") (3)
9.2 Form of Irrevocable Proxy relating to shares formerly held
under the Hellman Voting Trust (3)
87
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------------------------------------------------------------------------------------------------------
9.3 Form of Voting Trust Agreement dated as of January 2, 1998 by
and among the Company, Alan J. Ruud, Donald Wandler,
Theodore Sokoly, Christopher Ruud and Cynthia Johnson (the
"Rudd Voting Trust") and Form of Irrevocable Proxy relating to
shares formerly held under the Ruud Voting Trust (9)
10.1 Employment Agreement dated as of January 2, 1998 among Ruud
Lighting, Inc., Advanced Lighting Technologies, Inc., and Alan
J. Ruud (11)
10.2 Aircraft Lease Agreement between LightAir, Ltd., an Ohio
limited liability company, of which Wayne R. Hellman 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) (7)
10.3 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 10.2) (7)
10.4 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) (7)
10.5 Aircraft Dry Lease Agreement dated as of May 27, 1997 by and
between LightAir, Ltd. and Advanced Lighting Technologies, Inc.
(Registration Statement Exhibit 10.26) (8)
10.6 Employment Agreement dated as of February 12, 1998 between
Advanced Lighting Technologies, Inc. and Nicholas R. Sucic
(Form 10-Q/A Exhibit 10.5) (10)
10.7 Loan Agreement dated as of October 8, 1998 between Advanced
Lighting Technologies, Inc. and Wayne R. Hellman
(Form 10-Q/A Exhibit 10.1) (12)
10.8 Secured Promissory Note of Wayne R. Hellman dated as of
October 8, 1998 in the amount of $9,000,000 to Advanced
Lighting Technologies, Inc. at the rate of 8% per annum
(Form 10-Q/A Exhibit 10.2) (12)
10.9 Amended and Restated Employment Agreement between
Wayne R. Hellman and Advanced Lighting Technologies, Inc.
dated as of October 8, 1998 (Form 10-Q/A Exhibit 10.4) (12)
10.10 Copy of the Company's Amended and Restated 1995 Incentive
Award Plan (Registration Statement Exhibit 10.1 and 10.1/A) (2)
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10.11 Copy of the Company's 1997 Billion Dollar Market Capitalization
Incentive Award Plan
10.12 Copy of the Company's Amended and Restated 1998 Incentive
Award Plan
10.13 Credit Agreement by and among the Company and certain of its
subsidiaries and PNC Bank, National Association, as agent for
certain other banks dated as of May 21, 1999
10.14 Collateral Assignment of Split-Dollar Insurance Agreement
dated July 10, 1993 by and between Louis S. Fisi, as employee,
and Venture Lighting International, Inc., a wholly-owned
subsidiary of the Company
10.15 Collateral Assignment of Split-Dollar Insurance Agreement
dated December 7, 1993 by and between Louis S. Fisi, as
employee, and H & F Management, Inc., a wholly-owned
subsidiary of the Company
10.16 Collateral Assignment of Split-Dollar Insurance Agreement dated
July 10, 1993 by and between Wayne R. Hellman, as employee, and
Venture Lighting International, Inc., a wholly-owned subsidiary of the
Company
10.17 Collateral Assignment of Split-Dollar Insurance Agreement
dated December 7, 1993 by and between Wayne R. Hellman, as
employee, and H & F Management, Inc., a wholly-owned
subsidiary of the Company
10.18 Market Clearance Side Letter dated May 21, 1999, by and among
PNC Bank, National Association; PNC Capital Markets, Inc.,
Advanced Lighting Technologies, Inc.; Ballastronix,
Incorporated; Canadian Lighting Systems Holding Incorporated;
Parry Power Systems Limited; and Venture Lighting Europe Ltd.
10.19 Credit Agreement between Advanced Lighting Technologies,
Inc., the institutions named therein and National City Bank,
as Administrative Agent, dated as of January 2, 1998
(Form 10-Q/A Exhibit 10.2) (Replaced, see 10.13) (10)
10.20 Amendment No. 1 dated as of February 26, 1998 to Credit
Agreement between Advanced Lighting Technologies, Inc., the
lending institutions named therein and National City Bank, as
Administrative Agent, dated as of January 2, 1998
(Form 10-Q/A Exhibit 10.3) (Replaced, see 10.13) (10)
10.21 Amendment No. 2 dated as of May 13, 1998 to Credit Agreement
between Advanced Lighting Technologies, Inc., the lending
institutions named therein and National City Bank, as
Administrative Agent, dated as of January 2, 1998
(Replaced, see 10.13) (6)
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10.22 Letter Amendment, dated as of September 1, 1998, among Advanced
Lighting Technologies, Inc., National City Bank and other financial
institutions, to the Credit Agreement dated as of January 2, 1998
(Form 10-Q/A Exhibit 10.2) (Replaced, see 10.13) (14)
10.23 Consolidated Amendment No. 1 to Credit Agreement dated
September 10, 1998 among Advanced Lighting Technologies, Inc.,
National City Bank, and other financial institutions amending the
Credit Agreement dated January 2, 1998 (Form 10-Q/A Exhibit 10.1)
(Replaced, see 10.13) (14)
10.24 Letter Amendment dated as of December 22, 1998 amending the
Credit Agreement dated January 2, 1998, among Advanced
Lighting Technologies, Inc., National City Bank, and other
financial institutions (Form 10-Q/A Exhibit 10.3) (Replaced, see 10.13) (12)
10.25 Consolidated Amendment No. 2 to Credit Agreement, dated as of
February 12, 1999, amending the Credit Agreement dated
January 2, 1998, among Advanced Lighting Technologies, Inc.,
National City Bank, and other financial institutions
(Form 8-K Exhibit 10.5) (Replaced, see 10.13) (13)
10.26 Fee Letter in connection with Consolidated Amendment No. 2 dated
February 16, 1999 from Advanced Lighting Technologies, Inc. to
the Administrative Agent and the Lenders
(Form 8-K Exhibit 10.6) (Replaced, see 10.13) (13)
11 Statement of Computation of Per Share Earnings
12 Statement Regarding Computation of Ratios
16.0 Letter regarding Change in Certifying Accountant (15)
21.0 Subsidiaries of the Registrant as of June 30, 1999
23.1 Consent of Grant Thornton LLP
23.2 Consent of Ernst & Young LLP
24.1 Powers of Attorney
27 Financial Data Schedule
- --------------------------------
(1) 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, 1996.
(2) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-1, Registration No. 33-97902,
effective December 11, 1995.
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(3) 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.
(4) Incorporated by reference to Exhibit 2.1 in Company's Current Report
on Form 8-K dated January 2, 1998.
(5) Intentionally ommited.
(6) Incorporated by reference to Exhibit 10.1 to Company's Current Report
on Form 8-K dated April 21, 1998 and filed May 5, 1998.
(7) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q for the Quarterly Period ended December 31, 1995.
(8) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-1, Registration No. 333-28529,
effective July 1, 1997.
(9) Incorporated by reference to Exhibit 1 to Schedule 13D filed by Alan
Ruud, et al., January 12, 1998.
(10) Incorporated by reference to referenced Exhibits in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 1998
filed on March 15, 1999.
(11) Incorporated by reference to Exhibit of the same number in Company's
Annual Report on Form 10-K/A No. 2 for the Annual Period ended June 30,
1998 filed March 16, 1999.
(12) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended December 31, 1998
filed March 15, 1999.
(13) Incorporated by reference to referenced Exhibit in Company's Current
Report on Form 8-K dated February 16, 1999 and filed on February 23, 1999.
(14) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A No. 2 for the Quarterly Period ended
September 30, 1998 filed March 15, 1999.
(15) Incorporated by reference to Exhibit of the same number on Company's
Current Report on Form 8-K dated March 29, 1999 and filed April 5, 1999.
(16) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-4, Registration No. 333-58609 filed
July 7, 1998.