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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
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, 1998
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)
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<S> <C>
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)
</TABLE>
------------------------------------
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 [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of September 15, 1998 was $217,561,040.
There were 20,209,053 shares of the Registrant's Common Stock, $.001 par
value per share, outstanding as of September 15, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use at the Annual
Shareholders Meeting on November 19, 1998 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.
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PAGE
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Cautionary Statement Regarding Forward Looking Statements............. 2
Risk Factors.......................................................... 2
PART I
Item 1. Business.................................................... 7
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
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....................................... 24
Item 6. Selected Financial Data..................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 40
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 41
SIGNATURES............................................................ 44
EXHIBIT INDEX
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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. Those 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) potential acquisitions or joint ventures by the Company;
(ii) the Company's financing plans; (iii) trends affecting the Company's
financial condition or results of operations; (iv) continued growth of the metal
halide lighting market; (v) the Company's operating strategy and growth
strategy; (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 7% of domestic lamp sales in
1997 compared to fluorescent and incandescent lamps which represented
approximately 87% 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.
OUR DEGREE OF INDEBTEDNESS COULD LIMIT OUR ABILITY TO GROW AND REACT TO CHANGES
IN MARKET CONDITIONS
At June 30, 1998, we had approximately $119.3 million of total indebtedness
outstanding and $154.1 million of shareholders' equity. At June 30, 1998, we
also had $78.5 million available (subject to financial ratio compliance and
other limitations) to be drawn under our $85.0 million revolving credit facility
that we entered into on January 2, 1998 (the "Credit Facility").
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.
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OUR ABILITY TO DEVELOP AND BROADEN PRODUCT LINES IS IMPORTANT FOR OUR BUSINESS
We have recently broadened our systems and components product line. We also
have recently introduced a limited range of products for residential use and
expect to develop additional types of metal halide lighting systems. 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, and we may not be able to do so. 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 prospective
acquisition or investment candidate in respect of a specific transaction, but we
are engaged in preliminary discussions with 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
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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, 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 48% of our net sales for fiscal
1998. 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 28% of our net sales in fiscal 1998, on a pro forma basis for
the acquisition of Ruud Lighting, 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.
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, President, Chief Executive Officer, and principal shareholder. We and
Mr. Hellman have entered into an employment agreement providing for a term
ending December 31, 1998. 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 $13 million, and Mr. Ruud, in the amount of $2 million, and in
varying amounts on certain other key members of senior management.
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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 (the "Common Stock") and, individually and in other
capacities, has the power to vote a total of 23.3% of the outstanding shares of
Common Stock. Mr. Ruud individually owns approximately 7.4% of the outstanding
shares of Common Stock and, individually and as a voting trustee, has the power
to vote a total of approximately 14.9% of the outstanding shares of Common
Stock. As a result, although Mr. Hellman and Mr. Ruud have no arrangement or
understanding of any kind with each other as to the voting of their shares,
either Mr. Hellman or Mr. Ruud, or the two 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.
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 General Electric Company
and its subsidiaries ("General Electric" or "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
for 1997, 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 $18.7
million in fiscal 1998, of which $9.3 million was from GE) and derive
significant revenue from sales of our materials, components, and systems to each
of these three companies (aggregating $13.8 million in fiscal 1998, of which
$5.6 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.
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OUR AGREEMENTS WITH CREDITORS IMPOSE RESTRICTIONS THAT COULD IMPEDE OUR GROWTH
The Credit Facility and the indenture relating to our 8% 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 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 December 31, 2000.
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 energy efficient superior 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 15% since 1993, although growth has varied
substantially from year to year. The Company's strong market position, new
product development capabilities, participation in international markets and
strategic acquisitions 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 59.0% to $163.9 million in fiscal 1998 from $40.8 million in fiscal 1995. The
Company has experienced growth in net sales in each of the past 20 consecutive
quarters, and the Company's sales from continuing operations increased 91.4% to
$163.9 million in fiscal 1998 from $85.6 million in fiscal 1997.
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, lamps and other components for lighting systems, and complete metal
halide lighting systems. The Company also manufactures and markets equipment
used to produce metal halide lamps. The Company's materials and components are
used in the manufacture of its own
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lighting systems for sale to end-users and are sold to third-party manufacturers
for use 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
Metal Halide Products
Vertical Integration from Materials through Systems
Products for Manufacturers Products for End Users Innovative Products
for End Users
- ---------------------- -------------------
| | | Metal Halide |
| MATERIALS |--------| Systems |----
| | | Produced by the | |
| LAMPS | | Company | | -----------------
| | ------------------ | | New |
| POWER SUPPLIES |----------------------------------------| Applications |
| | | | |
| CONTROLS | --------------- | -Fiber Optics |
| |------------------------| Commercial | | -Residential |
| OPTICS/COATINGS | |Industrial/ | | -Headlights |
| | Replacement Parts | Outdoor | | -Projection TV |
| EQUIPMENT | Sold to End Users | Applications| -----------------
| | -------------
| | |
| | ----------------------- |
| |--| 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 4% since 1993, domestic metal halide lamp
sales have grown at a compound annual rate of approximately 15% over the same
period, making metal halide the fastest growing segment of the approximately
$2.9 billion domestic lamp market. In 1997, metal halide accounted for
approximately 7% 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 and lamp production equipment, 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"),
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a lamp manufacturer, soon thereafter. By 1995, management had either formed or
acquired 17 operating 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 completed in fiscal 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 $14.5 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 HID lighting systems,
principally focusing on metal halide installations for commercial, industrial
and outdoor lighting applications.
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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 $35.5 million in cash.
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. In consideration for a
50% interest in Unison, the Company contributed its subsidiary, Advanced Cable
Lite Corporation, $2.0 million in cash, other optic lighting system assets and
is obligated to contribute an additional $3.0 million in cash on January 1,
2000.
In July 1997, the Company purchased an equity interest in Fiberstars, Inc.
("Fiberstars"), a marketer and distributor of fiber optic lighting products. On
February 11, 1998, the Company increased its equity ownership to approximately
29% of Fiberstars' total shares outstanding. 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.
Recently Published Interview of Mr. Hellman
In a July 1998 interview with Crain's Cleveland Business, Wayne R. Hellman,
the Company's Chairman and Chief Executive Officer, discussed the Company's
plans regarding the Company's Solon, Ohio facility. The facility has been
partially leased by the Company for several years and used for metal halide lamp
manufacturing and related administrative, marketing and engineering. The
facility was purchased by the Company in fiscal 1998.
The Company has expanded the existing lamp manufacturing facility to
include, among other things, major additions to house lighting training, a
research facility, and facilities for the Company's world headquarters. The
Solon location will also be home to the Company's fiber optic lighting joint
venture with Rohm and Haas.
The Company has spent approximately $15 million on capital equipment at the
Solon facility since September 1996. A portion of this amount is included in the
description of the Company's recent capital expenditures included in the
discussion of "Liquidity and Capital Resources" under Item 7 to this Report. If
the Company's current expectations for metal halide lamp sales growth are met,
the Company believes it will spend another $30 million on capital equipment at
the Solon facility over the next four to five years. $10.5 million of this
amount is included within the capital expenditures expected to be made
Company-wide in the next twelve months, as discussed in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." If the Company completes its
plan to install this additional capital equipment at the Solon facility, the
Company expects that the lamp production capacity at the plant would be tripled
from its 1997 capacity and that employment at the Solon facility would be
increased by approximately 600 employees.
In the same interview, Mr. Hellman made some observations with respect to
the Company's prospects. He observed that "[Analysts'] [e]stimates are that we
will have $270 million in sales [in fiscal 1999]." This statement accurately
reflects the consensus views published in research reports available to the
public at the time of the interview of securities analysts who follow the
Company's stock, although there can be no assurance that such views are correct.
The Company does not ordinarily make public projections of its expectations with
respect to sales, since actual sales are subject to a wide range of variables,
including factors over which the Company has no control, such as general
economic conditions and conditions which may affect the Company's customers or
products. See "Cautionary Statement Regarding Forward Looking Statements."
Mr. Hellman was also quoted as saying, "Within five years we will be a
billion dollar company." Mr. Hellman's statement is based on his personal vision
for the Company, as its leader. This statement is a reference to the Company's
goal to achieve market capitalization in excess of $1 billion. This goal was
previously evidenced by the Company's adoption, in 1997, of its Billion Dollar
Market Capitalization Incentive Award Plan, which rewards participating
employees upon achievement of a billion dollar market capitalization. No
assurances can be made with respect to the Company's future market
capitalization, since the market capitalization depends
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not only on the Company's future results of operations, which are subject to a
large number of variables as indicated above, but also on the market perception
of the state of the Company's business and the valuation generally of businesses
in the marketplace. See "Cautionary Statement Regarding Forward Looking
Statements" and "Risk Factors."
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
represented approximately 32% of U.S. lighting fixture sales in 1997 (source:
Economic Industry Reports, Inc. from the U.S. Department of Commerce). 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 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 exceeded approximately $150 million in 1996, 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 sales and related hospitality
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. International markets represent
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
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lighting for which metal halide products are well suited. 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.
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 and production equipment 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 acquisitions and strategic investments. The Company acquires or
invests in businesses that, when combined with the Company's existing
capabilities and metal halide focus, 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 July 1997, as described under Item 1. "Business -- Background of the
Company -- Recent Acquisitions and Strategic Investments." The Company is
currently considering other possible acquisition and strategic investment
opportunities and will continue to do so in the future.
OPERATING STRATEGY
The Company focuses its resources primarily on designing, manufacturing and
marketing metal halide materials, system components, systems and production
equipment. 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.
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), fiber optic systems
(through the Unison joint venture), and magnetic and electronic power supplies
(through the acquisitions of Ballastronix Inc. ("Ballastronix") and Parry Power
Supply Ltd. ("Parry")). The Company has broadened 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 recent 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.
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 growth strategy include:
Introduce New Products and Systems
The Company believes it has introduced over 75% of the approximately 200
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 anticipates that it also will be
able 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 express delivery. In addition,
this interaction with customers provides the Company with the opportunity to
market additional metal halide products.
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Participate in Growing International Markets
The Company intends to continue to capitalize on opportunities in growing
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 in which the Company directly
markets products are the United Kingdom, 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 either
sells production equipment or enters into joint ventures with local lamp
manufacturers. Purchasers of production equipment can become customers for the
Company's metal halide salts and other materials. The Company has existing joint
ventures in China, Korea and Japan and has entered into joint venture agreements
in India and Vietnam to which it expects to sell production equipment and, when
lamp production commences, certain materials.
Penetrate the Residential Lighting Market
The Company believes that residential and consumer applications will
represent a substantial 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; (ii) developing the use of metal halide
fiber optic systems through a joint venture; and (iii) manufacturing components
for compact metal halide lighting systems, utilizing MICROSUN(TM) technology
developed by the Company.
In connection with the market-testing, the Company developed the first
metal halide lamp system for residential markets and MicroSun has begun the
roll-out of its products. This roll-out began with the sale of table and floor
lamps to certain premium hotel chains in the United States in March 1997, with
these placements serving as the basis of a direct marketing program. MicroSun
also has implemented a direct marketing program to up-scale consumers. To
further facilitate the penetration of the residential market, the Company
developed a "gear pack" which permits existing incandescent table and floor lamp
designs to be adapted to the Company's MICROSUN(TM) technology. The Company has
announced that it intends to spin off MicroSun as an independent company for
developing, designing, assembling, marketing and distributing these portable
fixtures. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Spin-Off of MicroSun Business."
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:
<TABLE>
<S> <C> <C>
- -- floodlighting -- sports arena lighting -- general lighting
- -- architectural area -- commercial downlighting -- industrial highbays
lighting -- airport and railway -- tunnel lighting
- -- general industrial station -- indirect outdoor
lighting lighting lighting
- -- billboard and sign -- gas station canopy -- office lighting
lighting lighting -- parking garage lighting
- -- site lighting -- interior downlighting -- security lighting
- -- soffit lighting -- decorative lighting -- landscape lighting and
- -- hazardous location -- retail store tracklighting
lighting downlighting
- -- accent lighting
</TABLE>
The Company also designs, manufactures and sells lamp, power supply and
production equipment for the metal halide industry and thin film deposition
equipment for the lighting, ophthalmics and optics industries. The Company also
designs, manufactures and sells photometric measurement instruments.
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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 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 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
anti-reflection 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.
Through Ballastronix, the Company's Canadian subsidiary which manufactures
magnetic and electronic power supplies, and Parry, the Company's United Kingdom
subsidiary which manufactures magnetic power supplies for HID lighting systems,
the Company currently offers over 400 power supply products, including a variety
of HID (including metal halide) and fluorescent power supplies. The Company also
offers electronic controls for metal halide lighting systems.
A metal halide lighting system consists of a 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,
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<PAGE> 17
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 residential metal halide lighting systems marketed by MicroSun use a
compact 68 watt metal halide lamp (and the necessary electronic power supply)
emitting light equivalent to a 300 watt halogen lamp while using less than 25%
of the electricity. Additional benefits include longer life and greatly reduced
operating temperatures, which dramatically lessen safety concerns. To further
facilitate the penetration of the residential market, the Company's "gear pack"
permits manufacturers to adapt existing incandescent table and floor lamp
designs to the MICROSUN(TM) technology. Although the Company has announced its
intention to spin off its MicroSun subsidiary, the Company believes that if
MicroSun is successful in penetrating the residential market, MicroSun's success
will result in increased sales by the Company of system components and related
materials.
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 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. The Company
expects to introduce, through its Rohm and Haas joint venture, metal halide
fiber optic systems for retail applications, such as downlighting and display
case lighting.
Production Equipment
The Company is the only manufacturer and marketer of turnkey metal halide
lamp production equipment groups, and in fiscal 1997 began to market
internationally its power supply production equipment. 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 sells 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 leverages its
manufacturing expertise by selling lamp production equipment groups in
international markets to independent companies or to joint ventures formed by
the Company. In connection with each lamp production equipment group sale, the
Company provides lamp designs and specifications, trains the purchaser in
production and creates a customer for materials products.
With its recent 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 $78.8 million (48% of net sales) for fiscal
1998, $41.0 million (47% of net sales) for fiscal 1997 and $16.3 million (30% of
net sales) for fiscal 1996. For more detailed information regarding the
Company's international operations, see Note S to "Notes to Consolidated
Financial Statements," included in Item 8.
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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 $17.3 million or 5.7% of net sales
from continuing operations into research and development over the last three
full fiscal years. In fiscal 1998 the Company invested $9.3 million (5.7% of net
sales) in research and development; in fiscal 1997, $5.1 million (6.0% of net
sales); and in fiscal 1996, $2.9 million (5.3% of net sales). 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. For example, the "gear pack" was designed by leveraging
the Company's expertise in materials and components. The Company expects efforts
in this area to become increasingly important as the Company seeks to develop
new fiber optic applications and systems for the residential and hospitality
markets 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 11.4% of the Company's revenues in fiscal
1998, 14.1% in 1997 and 19.5% in 1996.
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
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<PAGE> 19
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.
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 59.0% of the Company's
revenues in fiscal 1998, 74.3% in fiscal 1997 and 74.3% in fiscal 1996.
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 20.1% of the Company's revenues
in fiscal 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 lamps, power supplies
and thin-film coatings. The Company also markets production equipment to its
joint venture partners. External sales of production equipment accounted for
approximately 9.5% of the Company's revenues in fiscal 1998, 11.4% in fiscal
1997 and 6.2% in fiscal 1996.
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
18
<PAGE> 20
and remodeled housing, building on Ruud Lighting's expertise in direct marketing
to contractors; (ii) developing the use of metal halide fiber optic systems
through a joint venture; and (iii) manufacturing components for compact metal
halide lighting systems utilizing the MICROSUN(TM) technology developed by the
Company. As noted above, during 1998 the Company announced that it intends to
spin-off MicroSun to its shareholders following a capital injection of $34
million to $45 million. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Spin-Off of MicroSun Business."
In connection with the market-testing, MicroSun has begun assembling and
marketing of portable metal halide fixtures for the residential and hospitality
markets. The Company intends to pursue a strategy of selling components for
these products to MicroSun, which is expected to brand its products under the
MICROSUN(TM) brand name to create brand identity, differentiating it from
potential competitors, as well as establishing brand loyalty. In fiscal 1996,
MicroSun conducted focus groups where various examples of incandescent table
lamps and table lamps containing the MICROSUN(TM) metal halide lighting system
were presented to and compared by various potential customers. The responses
received by MicroSun were favorable, and using information obtained in the focus
group sessions, MicroSun designed a line of table lamps and produced a catalogue
to market these lamps. MicroSun has successfully marketed similar lamps to
selected hotel chains to provide well-lit work areas for business travelers.
MicroSun has received orders from several select lighting showrooms in
Cleveland, Ohio to further test market the sale of table lamps using its
MICROSUN(TM) brand name. MicroSun has commenced commercial production of
MICROSUN(TM) brand products. There can be no assurance that MicroSun will
continue to increase its sales of metal halide lighting into the residential
market.
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 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 60
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 Company manufactures production equipment for metal halide lamp
production at its facility in Bellevue, Ohio. This equipment is used internally
for the Company's lamp production and is also sold to other lamp manufacturers.
The Company manufactures many critical and proprietary parts for its production
equipment. It purchases commercial components and has other parts built to its
specifications by a number of local suppliers. The Company assembles and tests
this production equipment as well as trains customers in its use. The Company
supplies extensive product, quality, process and training documentation with the
production equipment.
19
<PAGE> 21
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 paint
finishing facility is ISO 9002-registered. The facility is five 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 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.
The power supplies for the MICROSUN(TM) systems are manufactured by a
single supplier. The Company believes that in the case of any disruption of this
supply, alternative sources of these power supplies can be arranged prior to any
material adverse effect on MicroSun's sales.
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 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
20
<PAGE> 22
uniformity and purity. In other materials categories, the Company's chief
competition for external sales is internal production by GE, Philips and
Sylvania. The competition in these products is based primarily on price and
delivery, with some competition is 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 sells 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.
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 Ballastronix and Parry units 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
applications. 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 and believes that its focus and this service component
give it a competitive advantage over competitors. Competitors generally market
these systems through distributors and lighting agents. The initial fiber optic
systems to be marketed by the joint venture with Rohm and Haas will compete
primarily with fiber optic products using older lighting technology as well as
conventional systems using multiple lamps and fixtures. The Company's portable
metal halide lighting fixtures, sold by the MicroSun business to be spun off,
are in the early stages of commercial introduction and compete with portable
lamps using older technology, primarily incandescent, including halogen, and
compact fluorescent, manufactured by a large
21
<PAGE> 23
number of established manufacturers. MicroSun currently intends to compete
primarily on basis of quality of light and aesthetic design.
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. However, routine sampling of the effluent by 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 mercury discharges within required limits. The Company has
implemented a plan intended to prevent intermittently exceeding Solon's mercury
standards in the future. The Company believes the cost of continued compliance
will not have a material effect on its financial position or results of
operations.
The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its future financial position or results of operations. Capital expenditures and
operating expenses in fiscal 1998, fiscal 1997 and fiscal 1996 attributable to
compliance with such legislation were not material.
EMPLOYEES
As of June 30, 1998, the Company had approximately 1,776 full-time
employees, consisting of employees engaged in the designing, manufacturing and
marketing of materials (76 employees), system components (1,017 employees),
systems (538 employees) and production equipment (96 employees) and 49 employees
in corporate/ administrative services. As a result of the Ruud Lighting and DSI
acquisitions, the employees of these companies have become employees of the
Company. 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.
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<PAGE> 24
ITEM 2. PROPERTIES
The Company's headquarters are located in Solon, Ohio, and the Company
maintains manufacturing facilities in California, Ohio, Illinois, Wisconsin,
Nova Scotia, Canada and Draycott, England. Set forth below is certain
information with respect to the Company's principal facilities as of June 30,
1998:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
FACILITY LOCATION ACTIVITIES FOOTAGE LEASED
- ----------------- ---------- ----------- ------
<S> <C> <C> <C>
NORTH AMERICA
Racine, Wisconsin.................... Office, manufacturing, finishing, 440,000 Owned
warehouse
Solon, Ohio.......................... Office, systems components 330,000 Owned
manufacturing
Bellevue, Ohio....................... Systems components manufacturing, 60,000 Leased
production equipment manufacturing
Cleveland, Ohio...................... Residential fixture assembly 45,000 Owned
(discontinued operations)
Santa Rosa, California............... Offices, manufacturing 12,000 Owned
20,000 Leased
Amherst, Nova Scotia, Canada......... Power supply manufacturing 45,000 Owned
Urbana, Illinois..................... Materials manufacturing 30,000 Owned
Scarborough, Ontario, Canada......... Distribution warehouse, office space 28,000 Leased
Mississauga, Ontario, Canada......... Power supply distribution warehouse 13,000 Leased
OTHER
Draycott, England.................... Power supply manufacturing 125,000 Owned
Mitcham, Victoria, Australia......... Distribution warehouse, office space 24,000 Leased
</TABLE>
The owned facilities are subject to mortgages in the following approximate
outstanding amounts as of June 30, 1998: Solon -- $4.8 million;
Amherst -- $223,000; Urbana -- $686,000; Cleveland -- $336,000; Santa
Rosa -- $1.3 million. The aggregate annual rental cost of the leased facilities
is approximately $1.1 million, and the average remaining lease term is 2.5
years.
On March 11, 1998 a single purpose subsidiary of the Company purchased the
Company's existing Solon, Ohio facility for a purchase price of $7.8 million,
which includes the assumption of an existing mortgage with a principal amount
outstanding of approximately $4.8 million at March 31, 1998. The Company intends
to invest an additional amount of approximately $8.9 million at the facility,
which will become the Company's world headquarters, will have expanded
manufacturing facilities, including manufacturing space for the Unison joint
venture, and will have expanded sales and training facilities. See Item 7.
"Management Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 3. LEGAL PROCEEDINGS
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. Favorable 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 that 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.
23
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended June 30, 1997
First Quarter............................................. $19.875 $13.125
Second Quarter............................................ 25.250 16.375
Third Quarter............................................. 27.250 22.000
Fourth Quarter............................................ 26.500 19.000
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
</TABLE>
As of September 15, 1998, there were approximately 245 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. The Company has previously
announced its intention to spin off the capital stock of MicroSun in a tax-free
distribution.
Information with respect to sales of the Company's Common Stock in fiscal
1998 which were not registered under the Securities Act have been previously
filed in the Company's Quarterly Reports on Form 10-Q for the Quarters Ended
December 31, 1997 and March 31, 1998.
In connection with the acquisition of Spectro Electric, Inc. (now known as
Advanced Lighting Technologies Canada, Inc.) on March 25, 1996, the Company
issued 34,783 shares of its Common Stock to Mr. Dominic Romanetti in May 1998.
The shares were issued in reliance upon the exemption granted in Section 4(2) of
the Securities Act of 1933, as amended, (the "Securities Act"). The securities
were issued to a single individual, who was a principal owner of Spectro
Electric.
24
<PAGE> 26
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $163,893 $85,645 $54,636 $40,767 $30,938
Costs and expenses:
Cost of sales....................... 95,341 45,703 29,164 21,899 17,253
Marketing and selling............... 25,746 15,165 8,656 6,381 4,472
Research and development............ 9,319 5,097 2,894 1,673 1,006
General and administrative.......... 10,851 7,133 6,152 5,452 3,928
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).................. 15,918 -- -- -- --
Amortization of intangible assets... 1,454 397 90 55 55
Restructuring(4).................... -- -- -- (121) 852
-------- ------- ------- ------- -------
Income (loss) from operations......... (13,168) 11,093 4,948 5,428 3,372
Interest income (expense), net........ (2,365) (668) (1,316) (2,074) (2,095)
Loss from equity investments.......... (501) -- -- -- --
-------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes and
extraordinary items................. (16,034) 10,425 3,632 3,354 1,277
Income taxes.......................... 1,802 2,869 965 212 71
-------- ------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
items............................... (17,836) 7,556 2,667 3,142 1,206
Loss from discontinued operations, net
of income tax benefits.............. (7,292) (452) (150) -- --
-------- ------- ------- ------- -------
Income (loss) before extraordinary
items............................... (25,128) 7,104 2,517 3,142 1,206
Extraordinary charge, net of
applicable income tax benefits(5)... (604) -- (135) (253) --
-------- ------- ------- ------- -------
Net income (loss)..................... $(25,732) $ 7,104 $ 2,382 $ 2,889 $ 1,206
======== ======= ======= ======= =======
Earnings (loss) per
share -- diluted(6):
Income (loss) from continuing
operations....................... $ (.98) $ .55 $ .14 $ .10 $ .13
Before extraordinary item Loss from
discontinued operations.......... (.40) (.03) (.02) -- --
Extraordinary items................. (.03) -- (.01) (.03) --
-------- ------- ------- ------- -------
Net earnings (loss) per
share -- diluted.................... $ (1.41) $ .52 $ .11 $ .07 $ .13
======== ======= ======= ======= =======
Shares used for computing per share
amounts -- diluted.................. 18,195 13,558 9,479 7,818 7,818
======== ======= ======= ======= =======
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments.............. $ 22,267 $ 8,273 $ 1,682 $ 1,030 $ 663
Working capital (deficit)............. 77,637 42,380 17,341 (870) (25)
Total assets.......................... 311,852 134,838 56,297 29,402 23,454
Total long-term debt.................. 117,332 35,908 11,034 8,853 7,821
Total shareholders' equity
(deficit)........................... 154,120 66,032 26,594 (1,035) 1,165
</TABLE>
- ---------------
(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 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 1998, the Company incurred an extraordinary loss on the early
extinguishment of debt of $604. In fiscal 1996, the Company incurred an
extraordinary loss on the early extinguishment of debt of $135. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In fiscal 1995, the Company incurred an extraordinary loss on
the early extinguishment of debt of $253.
(6) 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, $2,360 ($.30 per share) in fiscal 1995 and $170 ($.02 per
share) in fiscal 1994. See Note H to "Notes to Consolidated Financial
Statements," included in Item 8 for further information on fiscal years
1998, 1997, and 1996.
26
<PAGE> 28
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 and production equipment.
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. Systems
and components and materials revenue is recognized when products are shipped,
and production 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 $17,310 on research and development, representing 5.7% of aggregate
net sales from continuing operations over that period. Such expenditures have
enabled the Company to introduce new specialized products, develop new
applications for metal halide lighting and improve the quality of its materials.
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. Since December 31, 1997, the Company has acquired Ruud
Lighting and DSI and increased its equity investment in Fiberstars. From
February 11, 1997 to February 25, 1998, the Company's investment in notable
acquisitions and strategic investments aggregated approximately 3.6 million
shares of Common Stock and approximately $78,700 in cash, plus certain
additional contingent amounts and shares. See Item 1. "Business -- Background of
the Company -- Recent Acquisitions and Strategic Investments" and "-- Liquidity
and Capital Resources" below.
SPIN-OFF OF MICROSUN BUSINESS
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 each of their core strategies in pursuit of their
growth objectives.
Summary operating information for MicroSun for the last three fiscal years
ended June 30, 1998 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997 1996
------- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Sales................................................... $ 4,456 $ 845 $ --
Costs and expenses...................................... 13,530 1,469 205
------- ------ ----
Loss before income taxes................................ 9,074 624 205
Income tax benefit...................................... 3,113 172 55
------- ------ ----
Net loss................................................ $ 5,961 $ 452 $150
======= ====== ====
</TABLE>
27
<PAGE> 29
Operating losses through the intended date of the spin-off follow:
<TABLE>
<CAPTION>
BEFORE INCOME
INCOME TAX
TAXES BENEFIT NET
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating losses for the year ended June 30, 1998..... $ 9,074 $3,113 $5,961
Estimated operating losses from July 1, 1998 to
December 31, 1998................................... 2,023 692 1,331
------- ------ ------
Operating losses through spin-off..................... $11,097 $3,805 $7,292
======= ====== ======
</TABLE>
The estimated date of disposition extends to December 31, 1998 pending the
determination by the Internal Revenue Service of the spin-off as tax-free and
other matters. As a result of the Board of Directors' approval to spin-off the
MicroSun business, the consolidated financial statements of the Company have
been adjusted and restated to reflect the results of operations of MicroSun as a
discontinued operation in accordance with generally accepted accounting
principles.
FISCAL THIRD QUARTER 1998 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 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. The
amounts the Company may ultimately incur may change as the plans are executed.
Actions required by the plans are expected to be completed by June 30,
1999. Cash outlays to complete the balance of the Company's initiative to
rationalize the Company's global power supply operations are estimated to be
approximately $700.
After an income tax benefit of $5,015, these special 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.
IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the 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 represents 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.
28
<PAGE> 30
DSI's in-process research and development value is comprised of five primary
research and development programs. DSI had five major research and development
programs in progress 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. These projects will involve
between 19 and 33 people. Completion of the first of these projects may occur in
fiscal 1999 and the final project is projected for completion in 2003. At the
acquisition date, programs ranged in completion from 15 to 40 percent and the
Company estimates the expenditures after the acquisition to complete these
projects to be approximately $7,000.
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 fiscal 1999 and fiscal 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, and are
estimated at $2,400, $2,300, and $1,500 in fiscal 1999 through fiscal 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.
As evidenced by their continued support for these projects, 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.
An examination of DSI's research and development history revealed a variety of
projects which either failed outright or were substantially delayed in their
completion due to the Company's inability to attain a technologically feasible
project, technology and/or process. The delay or outright failure of the DSI
in-process research and development may materially impact the Company's
financial condition.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors. Historically, DSI has generated revenues from
contract research and development arrangements (many in classified government
programs), whereas future revenue growth is highly dependent upon the in-
process projects resulting in commercially viable technologies which will allow
the Company to offer advanced products to various untapped markets.
In order to develop a valuation for the various DSI assets, the Company
developed revenue and expense projections. Revenue projections were based on
DSI's historical growth and comparable companies. Estimated revenue from DSI's
existing technologies is expected to nearly double in fiscal 1999, then begin a
rapid decline as the in-process technologies are completed and existing
processes and know-how continue to rapidly approach
29
<PAGE> 31
obsolescence. The estimated revenues for the in-process projects peak in 2002
and then decline as other new products and technologies are expected to enter
the market.
Cost of sales were estimated based on DSI's historical results and
discussions with management regarding anticipated gross margin improvements. A
substantial gross margin improvement is expected in fiscal 1999 due to
restructuring of compensation to levels consistent with ADLT's existing plan.
General and administrative expense was increased to reflect DSI's intention to
maintain its general and administrative spending, while substantially increasing
its internal level of research and development spending to complete its
in-process projects.
The rates used to discount the net cash flows to their present value are
based on cost of capital calculations and several studies of investment rates of
return. Due to the nature of the forecast and the risks associated with the
projected growth, profitability and developmental projects, a discount rate of
35.0 percent was appropriate for the business enterprise, 30.0 percent for the
existing products and technology, and 37.5 to 40.0 percent for the in-process
research and development. These discount rates are commensurate with DSI's
corporate maturity; the uncertainties in the economic estimates described above;
the inherent uncertainty surrounding the successful development of the purchased
in-process technology; the useful life of such technology; the profitability
levels of such technology; and, the uncertainty of technological advances that
are unknown at this time.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate, and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary from the projected
results.
30
<PAGE> 32
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, the
components of the Company's Consolidated Statements of Income for the indicated
periods:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales............................................. 58.2 53.4 53.4
Marketing and selling..................................... 15.7 17.7 15.8
Research and development.................................. 5.7 6.0 5.3
General and administrative................................ 6.6 8.3 11.3
Fiber optic joint venture formation costs................. 0.1 0.3 --
Purchased research and development........................ 11.1 -- --
Special charges........................................... 9.7 -- --
Settlement of claims...................................... -- 0.9 5.0
Amortization of intangible assets......................... 0.9 0.4 0.2
----- ----- -----
Income (loss) from operations............................... (8.0) 13.0 9.1
Other income (expense):
Interest expense.......................................... (2.4) (1.8) (2.8)
Interest income........................................... 0.9 1.0 0.4
Loss from equity investment............................... (0.3) -- --
----- ----- -----
Income (loss) from continuing operations before income taxes
and extraordinary charge.................................. (9.8) 12.2 6.7
Income taxes................................................ 1.1 3.4 1.8
----- ----- -----
Income (loss) from continuing operations before
extraordinary charge...................................... (10.9) 8.8 4.9
Loss from discontinued operations, net of income tax
benefits.................................................. (4.4) (0.5) (0.3)
----- ----- -----
Income (loss) before extraordinary charge................... (15.3) 8.3 4.6
Extraordinary charge from early extinguishment of debt, net
of income tax benefits.................................... (0.4) -- (0.2)
----- ----- -----
Net income (loss)........................................... (15.7)% 8.3% 4.4%
===== ===== =====
</TABLE>
Factors which have affected the results of operations and net income during
fiscal 1998 as compared to fiscal 1997 are discussed below.
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 $17,836 compared to income from
continuing operations before extraordinary charge of $7,556 for fiscal 1997. The
Company realized a net loss of $25,732 for fiscal 1998, compared to net income
of $7,104 for fiscal 1997.
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 ($0.99 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 ($0.06 per
share) in settlement of a claim.
31
<PAGE> 33
After excluding the above charges, the Company's operating activities would
have resulted in income from continuing operations before income taxes and
extraordinary item of $20,170 for fiscal 1998, an 80.2% increase over the
$11,196 of income from continuing operations 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 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 and 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.
32
<PAGE> 34
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.
Income(Loss) from Operations. The Company incurred a loss from operations
of $13,168 during fiscal 1998 as compared to income from operations of $11,093
during fiscal 1997. As discussed above in "Overview of Results of Operations,"
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 $23,036, a 94.2% increase over the income from
operations of $11,864 for fiscal 1997. As a percentage of net sales, income from
operations excluding these items increased to 14.1% in fiscal 1998 from 13.9% in
fiscal 1997.
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 of
$16,034 during fiscal 1998 as compared to income from continuing operations 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 for fiscal 1998 increased to $20,170, a
80.2% increase over the income from continuing operations of $11,196 for fiscal
1997. As a percentage of net sales, income from continuing operations excluding
these items decreased to 12.3% 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.
33
<PAGE> 35
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.
OVERVIEW OF THE RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED TO FISCAL 1996
The Company's operations for fiscal 1997 resulted in income from operations
of $10,425 compared to income from operations of $3,642 for fiscal 1996. The
Company realized net income of $7,104 for fiscal 1997, compared to net income of
$2,382 for fiscal 1996.
The following factors should be considered in comparing the Company's
operations for fiscal 1997 and fiscal 1996:
- Results for fiscal 1997 include a nonrecurring charge of $771 ($0.06 per
share) in settlement of a claim.
- Results for fiscal 1996 include a noncash charge of $2,732 ($0.29 per
share) in settlement of threatened litigation.
After excluding the above nonrecurring charges, the Company's operating
activities would have resulted in income from operations of $11,864 for fiscal
1997, a 54.5% increase over the $7,680 of income from operations that would have
been reported for fiscal 1996.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales. Net sales increased 56.8% to $85,645 for the fiscal year ended
June 30, 1997 from $54,636 for the fiscal year ended June 30, 1996. This
increase consisted of a $23,141 increase in system components, a $6,345 increase
in production equipment sales, a $199 increase in systems, and a $1,394 increase
in materials. The increase in systems components is primarily the result of
increased unit sales of the Company's core businesses and the addition, during
fiscal 1997, of the Company's newly-acquired power supply businesses. The
increase in systems and materials sales arose primarily from increased unit
volume, while the increase in equipment sales was attributable to an increase in
the number of equipment contracts in progress for the sale of production
equipment currently in-progress, as compared with the contracts in-progress
during fiscal 1996.
Cost of Sales. Cost of sales increased 56.7% to $45,703 in fiscal 1997
from $29,164 in fiscal 1996, relatively consistent with the increase in net
sales. As a percentage of net sales, cost of sales was 53.4% for both fiscal
1997 and fiscal 1996.
Marketing and Selling Expenses. Marketing and selling expense increased
75.2% to $15,165 for fiscal 1997, compared with $8,656 for fiscal 1996.
Marketing and selling expense, as a percentage of net sales, increased to 17.7%
during fiscal 1997, from 15.8% during fiscal 1996. The increase as a percentage
of net sales primarily reflects increased spending to develop new domestic and
foreign market opportunities.
Research and Development Expenses. Research and development expenses
increased 76.1% to $5,097 in fiscal 1997 from $2,894 in fiscal 1996. As a
percentage of net sales, research and development expenses increased to 6.0% in
fiscal 1997 from 5.3% in fiscal 1996. The increased spending in this vital area
reflected the Company's continued emphasis on the development of additional
commercial and industrial products, the introduction of new lamp types and metal
halide systems development.
34
<PAGE> 36
General and Administrative Expenses. General and administrative expenses
increased 15.9% to $7,133 in fiscal 1997 from $6,152 in fiscal 1996. As a
percentage of net sales, general and administrative expenses decreased to 8.3%
in fiscal 1997 from 11.2% in fiscal 1996. The decrease primarily reflects a
spending growth rate considerably lower than sales increases, achieved through
the leveraging of fixed costs as sales levels increase.
Settlement of Claims. During 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 ($0.06 per share) represents
the $475 settlement plus legal and other directly-related costs, net of
insurance recoveries.
During fiscal 1996, a settlement agreement was entered into by certain
principal shareholders of the Company with former holders of preferred stock of
a subsidiary of the Company (the "Settlement"). Since the Settlement resulted in
a transfer of personal shares held by such shareholders, there was no dilution
of the ownership interest of the remaining shareholders of the Company. The
Settlement was recorded as a noncash expense in fiscal 1996 and an increase to
the Company's paid-in-capital. This Settlement resulted in a noncash charge of
$2,732 ($0.29 per share).
Fiber Optic Joint Venture Formation Costs. In May 1997, the Company
entered into a joint development agreement with Rohm and Haas Company, for the
development of advanced fiber optic cable systems using metal halide lamps. The
Company negotiated with Rohm and Haas to form the Unison joint venture focused
on the manufacture and sale of fiber optic cable and illuminators and fiber
optic lighting systems. In connection with this joint venture, the Company
incurred $286 of formation and preoperating costs which was charged to
operations during fiscal 1997.
Income from Operations. Income from operations during fiscal 1997
increased to $11,093 from $4,948 during fiscal 1996. As discussed above,
excluding the nonrecurring charges for the settlements noted above, income from
operations for fiscal 1997 would have increased to $11,864, a 54.5% increase
over the income from operations of $7,680 that would have been reported for
fiscal 1996. As a percentage of net sales, income from operations before the
nonrecurring charges would have decreased to 13.9% in fiscal 1997 from 14.1% in
fiscal 1996.
Interest Income. Interest income increased to $845 in fiscal 1997, as
compared to $232 in fiscal 1996. This increase is attributable to the short-term
investments and cash equivalents arising from the availability of the net
proceeds of the Common Stock offering completed during July 1996.
Income Taxes. Income tax expense increased to $2,869 for fiscal 1997 from
$965 during the preceding year. The increase was caused by increased
profitability in fiscal 1997 and by the utilization of lesser amounts of net
operating loss carryforwards ("NOLs") in 1997, compared with the utilization of
NOLs in fiscal 1996. At June 30, 1997, the Company had United States NOLs for
tax purposes of approximately $4,500 to offset future taxable income. These NOLs
expire in the fiscal years 2006 through 2011.
Extraordinary Charge. The Company recorded an extraordinary charge in 1996
of $135 (net of applicable income tax benefits of $91), representing costs
associated with the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for developing
manufacturing equipment, 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 Common Stock.
Net cash (used in) provided by operating activities. The Company recorded a
net loss of $25,732 for fiscal 1998. However, the Company incurred $41,544 of
noncash expenses including $18,220 of purchased research and development,
$17,984 of special charges, $4,942 of depreciation and amortization, $2,023 of
future estimated operating losses recorded as part of the discontinued
operations treatment of the MicroSun spinoff, and $669 of other items, net of a
$2,294 increase in net deferred tax assets. Adding these noncash items back to
the net loss
35
<PAGE> 37
results in funds from operations of $15,812 for fiscal 1998 as compared to
$10,130 for fiscal 1997, a 56.1% increase.
Trade receivables increased $10,185 and inventories increased $7,856,
excluding those acquired through the purchase of businesses. The increase in
receivables includes an increase of approximately $5,000 in accounts receivable
related to production equipment contracts. Production equipment contracts affect
cash flow because production equipment revenues are recognized under the
percentage of completion method of accounting, while cash payments are received
in accordance with contract terms. The remaining increase in receivables
resulted from the increased level of sales.
Inventory also increased as a result of the Company's efforts to introduce
new products which are accepted slowly into the marketplace, but must be
initially stocked. Inventory levels across the Company increased as a result of
the Company's efforts to improve customer service levels, e.g., minimizing
out-of-stock items. Efforts were concentrated at units abroad where shipping
time to distribution centers causes longer delays in the shipping process.
Net cash used in investment activities. Capital expenditures, primarily for
production equipment and leasehold and facility improvements, totaled $30,564 in
fiscal 1998 as compared to $18,095 in fiscal 1997. Capital expenditures in
fiscal 1998 related to additional machinery and equipment to improve production
processes, resulting in increased productivity and capacity in the production of
lamps, power supplies and other lighting system products. In March 1998 the
Company purchased its existing Solon, Ohio facility for a purchase price of
$7,800, including the assumption of an existing mortgage in the amount of
approximately $4,800.
The Company intends to spend an additional $17,500 on the expansion and
upgrading of this multipurpose facility, which serves as its world headquarters,
lamp manufacturing and distribution center, and will, after the completion of
construction, serve as a showroom and training center for its lighting products.
See "Business -- Properties." The Company also intends to spend about $20,000 on
additional capital expenditures, primarily production equipment, over the next
twelve months. The Company is considering funding its planned building expansion
through financings using its presently owned real estate.
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 fiscal 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.
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. In consideration for a
50% interest in Unison, the Company contributed its subsidiary, Advanced Cable
Lite Corporation, $2,000 in cash, other optic lighting system assets and is
obligated to contribute an additional $3,000 in cash on January 1, 2000.
In July 1997, the Company purchased an equity interest in Fiberstars, Inc.
("Fiberstars"), a marketer and distributor of fiber optic lighting products. On
February 11, 1998, the Company increased its equity ownership to approximately
29% of Fiberstars' total shares outstanding. Pursuant to its agreements with
Rohm and Haas,
36
<PAGE> 38
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.
Net cash used in financing activities. During July 1997, the Company
received net proceeds of $69,320 from the sale of three million shares of its
Common Stock in a public offering, of which $33,000 was used to reduce debt
outstanding under the Company's domestic Revolving Credit and Security Agreement
and Term Note (the "Loan Agreement") (subsequently terminated and replaced by
the Credit Facility, as described below). Approximately $8,500 of such
borrowings had been incurred to fund the Parry acquisition in June 1997, and
approximately $5,500 had been incurred in February 1997 to finance the cash
portion of the Ballastronix acquisition. Of the remaining net proceeds, $14,500
was used for capital expenditures, primarily production equipment and leasehold
improvements, $4,800 was used to purchase 29.0% of Fiberstars, 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 $11,200 was used for working capital purposes.
On January 2, 1998, the Company replaced the Loan Agreement and other
borrowings in North America with the Credit Facility. 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 DSI acquisition. Proceeds were
also used to repay $19,200 of existing and outstanding North American bank
borrowings of the Company, Ruud Lighting and DSI. As a growth company, the
Company may need to amend or replace the Credit Facility prior to its maturity
on December 31, 2000.
The early extinguishment of debt under the Loan Agreement resulted in a
noncash write-off of deferred financing costs and an extraordinary charge of
$604 (net of applicable income tax benefits of $311) in fiscal 1998.
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 8% Senior Notes due March 15, 2008 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.
Ability to advance future operations. The Company's working capital
(current assets less current liabilities) at June 30, 1998 was $77,637,
resulting in a working capital ratio of current assets to current liabilities of
3.1 to 1.0, as compared to $42,380 or 2.5 to 1.0 at June 30, 1997. As of June
30, 1998, the Company had approximately $22,267 in cash and cash equivalents and
short-term investments and had no working capital advances outstanding under the
Credit Facility described above.
The Company believes that the successful completion of the July 1997 stock
offering and the March 1998 Senior Notes offering has strengthened its financial
position and enhanced its ability to obtain additional financing. In addition,
the Company believes that the acquisition of Ruud Lighting will favorably impact
its cash flow from operations, as Ruud Lighting has historically achieved
significant positive cash flows from its operations.
The Company believes that the combination of its anticipated cash flows
from Ruud Lighting's operations, available cash, current borrowing facilities
and strengthened financial position will be sufficient for the Company to fund
its operations for at least the next 12 months. In addition, it is the Company's
intention to avail itself of appropriate financing alternatives to ensure that
growth opportunities, including those arising from acquisitions and additional
investments in existing relationships, are realized. If the Company engages in
significant acquisition or strategic investment activity in the near to medium
term, it may need to obtain additional capital. In this regard, the Company is
in position to incur additional amounts of indebtedness under its currently
available financing arrangements.
Production equipment will be funded through future cash flow from
operations, which will be supported by the existing revolving credit arrangement
and, if required, by the Company's ability to raise other sources of debt or
equity capital. The revolving credit arrangement also will be used to partially
fund existing and future working
37
<PAGE> 39
capital requirements. The Company estimates its maintenance level of capital
expenditures to approximate $7,500 over the next twelve months. Future capital
expenditures beyond this level will be discretionary, as the Company presently
has sufficient capacities to support several years of sales increases at its
historical rate of sales growth.
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 principle
cash flows and related weighted-average interest rates by expected maturity
dates or applicable floating rate index. For interest rate swaps, the table
presents notional amounts and weighted-average interest rates by contractual
maturity dates.
<TABLE>
<CAPTION>
JUNE 30, FAIR VALUE
---------------------------------------------------------------- JUNE 30,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
(DOLLARS IN MILLIONS) ------------ ------------ ------------ -------- -------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt,
including Current
Portion
Fixed Rate: $ .8 $ 3.7 $ .7 $ .5 $ .3 $ 105.0 $111.0 $111.0
Average Interest
Rate: 7.9% 8.1% 8.1% 8.1% 8.1% 8.1%
Variable Rate: $ 1.1 $ 4.1 $ 2.0 -- -- -- $ 7.2 $ 7.2
Average Interest
Rate: LIBOR, plus LIBOR, plus LIBOR, plus -- -- --
1.0% to 2.3% 1.0% to 2.3% 1.0% to 2.3%
Interest Rate Derivative
Financial Instruments
Related to Debt
Interest Rate Swaps
Pay fixed, notional
amount -- -- $ 25.0 -- $ 25.0 -- $ 50.0 $ --
Average Pay Rate 6.5% 6.5% 6.5% 6.5% 6.5% --
Average Receive
Rate LIBOR+.8% LIBOR+.8% LIBOR+.8% LIBOR+.8% LIBOR+.8%
</TABLE>
The Company is obligated under its Credit Facility to limit its exposure to
fluctuating interest rates for a minimum of $35,000. During fiscal 1998, the
Company entered into two interest rate swaps with notional amounts of $25,000
each, as set forth in the table above. The notional amounts are used to
calculate the contractual cash flow to be exchanged and do not represent
exposure to credit loss. If these agreements were settled at June 30, 1998, the
Company would receive approximately $5.
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, 1998
are not expected to result in a significant impact on earnings or cash flows.
Revenues from customers outside the United States represented approximately
48% of net sales during fiscal 1998. 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.
38
<PAGE> 40
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
statement requires a "management" approach to reporting financial and
descriptive information about a Company's operating segments. The Company must
adopt this statement in the first quarter of fiscal 1999. Management is
currently studying the potential effect of adopting this statement.
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 Company is
required to adopt the SOP on or before July 1, 1999 and, upon adoption, expense
all previously capitalized start-up costs and organization costs as a cumulative
effect of a change in accounting principle. Management is reviewing its
capitalization policies and determining the impact that the adoption of this SOP
is expected to have on its consolidated results of operations and financial
position. At June 30, 1998, the Company estimates that it had approximately
$2,600 of start-up costs included in its consolidated balance sheet.
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 COMPLIANCE
State of Readiness. During the past two fiscal years, the Company has been
actively involved in finding and correcting 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 which are no longer being supported by the original
supplier.
The most critical non-information 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 not revealed any Year
2000 problems; however, investigation in this area continues.
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.
Since the Company's key suppliers are in the process of conducting similar
investigations with their key suppliers, and so on, the Company has had limited
success in obtaining reliable Year 2000 compliance certifications.
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 does not anticipate that the future Year
2000 costs related to information technology that are beyond the scope of normal
operations will be significant.
The Company is in the process of developing contingency plans to protect it
from Year 2000 failures. These plans will likely result in some expenditures,
primarily increased inventory costs to assure adequate supplies, the exact
amount of which is not known at this time.
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 U.S. experiences
significant interruptions in basic services, such as the electric power grid,
telephone service or the banking system.
39
<PAGE> 41
Contingency Plans. The Company, through its various purchasing and
production control departments, is in the early stages 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.
Completion. Based on management's assessment of current progress, the
Company believes it will complete necessary Year 2000 modifications and
contingency plans by mid-1999. 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 the 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, 1998
ADVANCED LIGHTING TECHNOLOGIES, INC.
SOLON, OHIO
40
<PAGE> 42
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997.... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1998, 1997 and 1996.............................. F-4
Statements of Consolidated Shareholders' Equity for the
Years Ended
June 30, 1998, 1997 and 1996.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
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
<PAGE> 43
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
ADVANCED LIGHTING TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of Advanced
Lighting Technologies, Inc. as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows, for
each of the three 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 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/ S / ERNST & YOUNG LLP
Cleveland, Ohio
September 28, 1998
F-2
<PAGE> 44
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,917 $ 4,198
Short-term investments.................................... 350 4,075
Trade receivables, less allowances of $375 and $315....... 40,779 28,916
Receivables from related parties.......................... 1,034 346
Inventories:
Finished goods......................................... 29,556 21,143
Raw materials and work-in-process...................... 15,184 7,982
-------- --------
44,740 29,125
Prepaid expenses.......................................... 3,200 1,363
Deferred taxes............................................ 2,192 2,566
-------- --------
Total current assets........................................ 114,212 70,589
Property, plant and equipment:
Land and buildings........................................ 31,429 6,143
Machinery and equipment................................... 52,235 32,712
Furniture and fixtures.................................... 18,316 7,704
-------- --------
101,980 46,559
Less accumulated depreciation............................. 11,952 8,558
-------- --------
90,028 38,001
Deferred taxes.............................................. 2,892 535
Receivables from related parties............................ 3,157 1,209
Net assets associated with discontinued operations.......... 5,193 --
Investments in affiliates................................... 20,591 7,565
Other assets................................................ 8,878 4,217
Intangible assets........................................... 34,377 4,737
Excess of cost over net assets of businesses acquired,
net....................................................... 32,524 7,985
-------- --------
$311,852 $134,838
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 1,960 $ 3,731
Accounts payable.......................................... 14,967 15,773
Payables to related parties............................... 618 699
Employee-related liabilities.............................. 3,259 2,674
Accrued income and other taxes............................ 2,729 1,689
Other accrued expenses.................................... 13,042 3,643
-------- --------
Total current liabilities................................... 36,575 28,209
Long-term debt.............................................. 117,332 35,908
Other liabilities........................................... 766 463
Deferred taxes.............................................. 3,059 4,226
Shareholders' equity
Preferred stock, $.001 par value, 1,000 shares authorized,
no shares issued
Common stock, $.001 par value, 80,000 shares authorized,
20,188 shares issued and outstanding in 1998 and 13,435
issued and outstanding in 1997......................... 20 13
Paid-in-capital........................................... 172,900 59,087
Retained earnings (deficit)............................... (18,800) 6,932
-------- --------
154,120 66,032
======== ========
$311,852 $134,838
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 45
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C>
Net sales.................................................. $163,893 $85,645 $54,636
Costs and expenses:
Cost of sales............................................ 95,341 45,703 29,164
Marketing and selling.................................... 25,746 15,165 8,656
Research and development................................. 9,319 5,097 2,894
General and administrative............................... 10,851 7,133 6,152
Fiber optic joint venture formation costs................ 212 286 --
Purchased research and development....................... 18,220 -- --
Special charges.......................................... 15,918 -- --
Settlement of claims..................................... -- 771 2,732
Amortization of intangible assets........................ 1,454 397 90
-------- ------- -------
Income (loss) from operations.............................. (13,168) 11,093 4,948
Other income (expense):
Interest expense......................................... (3,801) (1,513) (1,548)
Interest income.......................................... 1,436 845 232
Loss from equity investments............................. (501) -- --
-------- ------- -------
Income (loss) from continuing operations before income
taxes and extraordinary charge........................... (16,034) 10,425 3,632
Income taxes............................................... 1,802 2,869 965
-------- ------- -------
Income (loss) from continuing operations before
extraordinary charge..................................... (17,836) 7,556 2,667
Loss from discontinued operations, net of income tax
benefits................................................. (7,292) (452) (150)
-------- ------- -------
Income (loss) before extraordinary charge.................. (25,128) 7,104 2,517
Extraordinary charge from early extinguishment of debt, net
of income tax benefits................................... (604) -- (135)
-------- ------- -------
Net income (loss).......................................... $(25,732) $ 7,104 $ 2,382
======== ======= =======
Earnings per share -- Basic:
Income (loss) from continuing operations................. $ (.98) $ .57 $ .14
Loss from discontinued operations........................ (.40) (.03) (.02)
Extraordinary charge..................................... (.03) -- (.01)
-------- ------- -------
Earnings (loss) per share -- Basic......................... $ (1.41) $ .54 $ .11
======== ======= =======
Earnings per share -- Diluted:
Income (loss) from continuing operations................. $ (.98) $ .55 $ .14
Loss from discontinued operations........................ (.40) (.03) (.02)
Extraordinary charge..................................... (.03) -- (.01)
-------- ------- -------
Earnings (loss) per share -- Diluted....................... $ (1.41) $ .52 $ .11
======== ======= =======
Weighted average shares outstanding
Basic.................................................... 18,195 13,269 9,207
======== ======= =======
Diluted.................................................. 18,195 13,558 9,479
======== ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 46
ADVANCED LIGHTING TECHNOLOGIES, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------ PAID-IN PREFERRED EARNINGS
SHARES PAR VALUE CAPITAL STOCK (DEFICIT) TOTAL
------ --------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1995........... $ 360 $ -- $ 50 $ (1,445) $ (1,035)
Net income........................ -- -- -- 2,382 2,382
Activities prior to initial public
offering of stock:
Purchases of common stock....... 148 -- -- -- 148
Redemption of preferred and
common stock................. (252) -- (50) (1,109) (1,411)
Stock options exercised......... 10 -- -- -- 10
Exchange of subsidiary companies
stock for parent company
stock........................ (259) 259 -- -- --
Noncash settlement of claim..... -- 2,732 -- -- 2,732
------ ----- -------- ---- -------- --------
7,282 7 2,991 -- (172) 2,826
Activities following initial
public offering of stock:
Net proceeds from initial public
offering of common shares.... 2,900 3 23,927 -- -- 23,930
Issuance of common stock in
exchange for warrants and
other consideration.......... 536 -- (1,350) -- -- (1,350)
Exchange of subsidiary company
stock for parent company
stock........................ 50 -- 313 -- -- 313
Issuance of shares in connection
with purchase of business.... 77 1 874 -- -- 875
------ ----- -------- ---- -------- --------
BALANCE AT JUNE 30, 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
Stock options exercised........... 50 -- 706 -- -- 706
Issuance of shares in connection
with purchases of businesses.... 88 -- 1,537 -- -- 1,537
------ ----- -------- ---- -------- --------
BALANCE AT JUNE 30, 1997.......... 13,435 13 59,087 -- 6,932 66,032
Net loss.......................... -- -- -- (25,732) (25,732)
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 42,727 -- -- 42,731
Stock options exercised........... 98 -- 1,570 1,570
Stock purchases by employees...... 10 -- 199 -- -- 199
------ ----- -------- ---- -------- --------
BALANCE AT JUNE 30, 1998.......... 20,189 $ 20 $172,900 $ -- $(18,800) $154,120
====== ===== ======== ==== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 47
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $(25,732) $ 7,104 $ 2,382
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Purchased in-process research and development........... 18,220 -- --
Depreciation............................................ 3,488 2,182 1,548
Amortization............................................ 1,454 397 90
Provision for doubtful accounts......................... 65 28 43
Deferred income taxes................................... (2,294) 419 695
Noncash settlement of claim............................. -- -- 2,732
Discontinued operations................................. 2,023 -- --
Special charges......................................... 17,984 -- --
Extraordinary charge.................................... 604 -- 135
Changes in operating assets and liabilities:
Trade receivables..................................... (10,185) (10,890) (4,057)
Inventories........................................... (7,856) (12,174) (4,128)
Prepaid expenses and other assets..................... (7,173) (2,995) (3,032)
Net assets associated with discontinued operations.... (5,193) -- --
Accounts payable and accrued expenses................. (1,562) 10,373 4,930
Other liabilities..................................... 303 1,373 (12)
-------- -------- --------
Net cash (used in) provided by operating
activities........................................ (15,854) (4,183) 1,326
INVESTING ACTIVITIES
Capital expenditures...................................... (16,057) (16,015) (5,050)
(Purchase) sale of short-term investments, net............ 3,725 (4,075) --
Purchases of businesses................................... (50,706) (14,960) (3,075)
Investments in affiliates................................. (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............... (89,601) (44,058) (8,125)
FINANCING ACTIVITIES
Proceeds from revolving credit facility................... 319,786 92,001 10,580
Payments of revolving credit facility..................... (312,213) (60,822) (8,192)
Net proceeds from long-term debt.......................... 96,790 16,775 22,362
Payments of long-term debt and capital leases............. (19,278) (8,159) (19,453)
Issuance of common stock.................................. 1,769 706 157
Redemption of common stock................................ -- -- (311)
Redemption of preferred stock and dividends............... -- -- (1,100)
Net proceeds from public offering......................... 69,320 30,091 23,930
Use of net proceeds from public offering:
Payment of long-term debt............................... (7,400) -- (3,350)
Payment of revolving credit facility.................... (25,600) (16,800) (4,429)
Redemption of warrants.................................. -- -- (6,199)
Payment of trade payables............................... -- (3,035) (4,447)
Payment of note......................................... -- -- (1,541)
Other................................................... -- -- (556)
-------- -------- --------
Net cash provided by financing activities........... 123,174 50,757 7,451
-------- -------- --------
Increase in cash and cash equivalents....................... 17,719 2,516 652
Cash and cash equivalents, beginning of year................ 4,198 1,682 1,030
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 21,917 $ 4,198 $ 1,682
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 2,128 $ 1,375 $ 1,112
Capitalized interest...................................... 1,118 455 98
Income taxes paid......................................... 2,829 81 375
Noncash transactions:
Equipment acquired through capital leases............... 376 1,683 149
Property acquired by assuming mortgage.................. 4,807 -- --
Stock issued for purchases of businesses................ 42,731 1,537 1,188
Detail of acquisitions:
Assets acquired......................................... $121,871 $ 23,033 $ 9,904
Liabilities assumed..................................... 26,295 6,142 5,546
Stock issued............................................ 42,731 1,537 1,188
-------- -------- --------
Cash paid............................................... 52,845 15,354 3,170
Less cash acquired...................................... 2,139 394 95
-------- -------- --------
Net cash paid for acquisitions.......................... $ 50,706 $ 14,960 $ 3,075
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 48
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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, including 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%
ownership 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. The resulting translation adjustments were not
significant in all years presented.
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
F-7
<PAGE> 49
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
excess 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.
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:
<TABLE>
<S> <C>
Excess of cost over net assets acquired..................... 10 - 40 years
Patents, trademarks and tradenames.......................... 17 - 40 years
Other intangibles........................................... 10 - 40 years
</TABLE>
The Company examines the carrying value of its intangible assets when
indicators of impairment are present. When undiscounted cash flows are not
sufficient to recover the assets' carrying amount, an impairment loss is charged
to expense in the period identified. An impairment loss of $9,354 was charged to
expense in fiscal 1998 and classified as "Special Charges." Accumulated
amortization was $2,313 and $720 at June 30, 1998 and 1997, 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 production equipment revenues 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.
F-8
<PAGE> 50
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Research and Development
Research and development costs, primarily the development of new products
and modifications of existing products, are charged to expense as incurred.
Stock Compensation Arrangements
The Company accounts for its stock compensation arrangements under the
provisions of APB Opinion No. 25 "Accounting for Stock Issued to Employees." The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based
Compensation." These provisions require the Company to disclose pro forma net
income as if compensation expense related to grants of stock options were
recognized based on fair value accounting rules.
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 Company is
required to adopt the SOP on or before July 1, 1999 and, upon adoption, expense
all previously capitalized start-up costs and organization costs as a cumulative
effect of a change in accounting principle. Management is reviewing its
capitalization policies and determining the impact that the adoption of this SOP
is expected to have on its consolidated results of operations and financial
position. At June 30, 1998, the Company estimates that it had approximately
$2,600 of start-up costs included in its consolidated balance sheet.
Financial Statement Presentation Changes
Certain amounts for prior years have been reclassified to conform to the
current year reporting presentation.
C. ACQUISITIONS
During fiscal 1998, 1997 and 1996, the Company completed the business
combinations discussed below, 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. Pro forma
information is presented where the impact is considered significant to the
results of operations.
On January 2, 1998, the Company acquired all of the capital stock
outstanding (the "Stock") of Ruud Lighting, Inc. ("Ruud"), located in Racine,
Wisconsin. Ruud manufactures and directly markets high-intensity discharge
("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 $33,023). The excess of the purchase price over the net
tangible assets acquired of $59,919 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 ($29,991), all of which are being
amortized over 40 years.
The following unaudited pro forma results of operations give effect to the
acquisition of Ruud Lighting as if it had occurred on July 1, 1996. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which would have resulted
had the acquisition occurred on July 1, 1996, or which may result in the future.
F-9
<PAGE> 51
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $200,054 $153,543
Income (loss) from continuing operations before
extraordinary charge...................................... (16,963) 9,628
Net income (loss)........................................... (24,859) 9,176
Earnings (loss) per share -- diluted:
Before extraordinary charge............................... $ (1.23) $ .55
Net income (loss)......................................... $ (1.26) $ .55
</TABLE>
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
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 that are not considered to have
reached technological feasibility and, in accordance with generally accepted
accounting principles, was capitalized but immediately written-off upon the
acquisition of DSI. The in-process research and development 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 high
intensity discharge lighting systems, based in the United Kingdom. The purchase
price resulted in an excess of cost over net assets acquired of $1,121. 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 L.
On February 11, 1997, the Company acquired the shares outstanding 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 L.
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
F-10
<PAGE> 52
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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. During fiscal 1998, the Company contributed Advanced
Cable Lite Corporation to Unison Fiber Optics Lighting Systems LLC, a joint
venture with Rohm and Haas Company discussed in Note D.
On June 28, 1996, the Company acquired the net assets of Venture Lighting
Australia Pty Ltd ("VLA"), a leading lamp marketing organization in Australia,
for $100 and 76,923 shares of the Company's Common Stock (valued at $875). VLA
was the exclusive agent for the Company's products in Australia from 1987. The
purchase resulted in an excess of cost over net assets acquired of $1,698, which
is being amortized over 20 years.
On March 25, 1996, the Company acquired the net assets of Spectro Electric,
Inc., ("Spectro") for $1,636 and 34,783 shares of the Company's Common Stock
(valued at $500). Spectro (renamed Advanced Lighting Technologies, Canada, Inc.)
distributes the Company's products in the Canadian market and has facilities in
Toronto, Vancouver, Calgary and Montreal. The purchase price resulted in an
excess of cost over net assets acquired of $72. 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 L.
On February 5, 1996, the Company acquired the net assets of Current
Industries, Inc. ("Current") of Oceanside, New York for $1,689. Current designs,
manufacturers and markets specialized electrical and electromagnetic lighting
control systems used in metal halide and other high intensity discharge lighting
systems. The purchase price resulted in an excess of cost over net assets
acquired of $1,456. 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 as discussed in Note L.
On July 1, 1995, and February 9, 1996 the Company acquired all of the
common stock outstanding of Venture Lighting-UK ("VLI-UK"), for 50,000 shares of
the Company's Common Stock (valued at $313). VLI-UK was the exclusive
distributor of the Company's products in the United Kingdom. The purchase
resulted in an excess of cost over net assets acquired of $675, which is being
amortized over 20 years.
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 accounts
for its investment in Unison using the equity method.
The transaction had the following noncash impact of increasing (decreasing)
the Company's December 31, 1997 unaudited consolidated balance sheet:
<TABLE>
<S> <C>
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
</TABLE>
F-11
<PAGE> 53
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In connection with this joint venture, the Company incurred $212 of
formation and development costs charged to operations during the first quarter
of fiscal 1998 and $286 of such costs charged to operations during the fourth
quarter of fiscal 1997.
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. Accordingly, the Company changed its method of accounting
for its 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 is required to agree to complete such divestiture within
two years subject to reasonable extension upon consent of Rohm and Haas.
F. INVESTMENT IN VENTURE LIGHTING JAPAN
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.
G. FINANCING ARRANGEMENTS
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Multioption facility.................................. $ 483 $ 711
Trade facility........................................ 506 253
Installment loan...................................... 62 --
Revolving line of credit.............................. -- 1,391
-------- -------
1,051 2,355
Current portion of long-term debt..................... 909 1,376
-------- -------
$ 1,960 $ 3,731
======== =======
</TABLE>
In June 1996, the Company, on behalf of a foreign subsidiary, entered into
a multioption credit facility with a foreign bank that provides a short-term
credit line of $1,200 and is collateralized with certain operating assets
($4,893 at June 30, 1998) and a $500 deposit with the foreign bank. Amounts
borrowed and related interest are settled quarterly. The foreign bank also
provides a trade facility which 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. The weighted average interest rate on the
multioption credit facility was 7.63% and 9.33% during fiscal 1998 and fiscal
1997. The weighted
F-12
<PAGE> 54
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
average interest rate of the trade facility was approximately 7.75% during
fiscal 1998 and 7.58% during fiscal 1997.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Senior unsecured 8% notes, due March 2008............. $100,000 $ --
Credit Facility....................................... 6,084 --
Loan Agreement........................................ -- 24,754
Promissory note, due January 2000..................... 3,000 --
Mortgage notes payable................................ 7,323 2,499
Obligations under capital leases...................... 1,608 1,598
Prime rate term note.................................. -- 8,000
Other................................................. 226 433
-------- -------
118,241 37,284
Less current portion............................. 909 1,376
-------- -------
$117,332 $35,908
======== =======
</TABLE>
On December 31, 1997, the Company executed a noninterest bearing promissory
note in the amount of $3,000, due January 1, 2000, in partial consideration for
a 50% interest in Unison Fiber Optic Lighting Systems LLC, a joint venture with
Rohm and Haas, that focuses on the manufacture and sale of fiber optic lighting
systems to the worldwide lighting market.
On January 2, 1998, the Company replaced its existing Loan Agreement and
other borrowings in North America with an $85,000 revolving credit facility
provided by several North American financial institutions ("Credit Facility").
Proceeds from this facility were partially used to finance the $35,500 cash
portion of the Ruud purchase price and the $14,500 cash portion of the DSI
purchase price. Proceeds were also used to repay $19,200 of existing and
outstanding North American bank borrowings of ADLT, Ruud and DSI.
The Credit Facility has a three-year term expiring in December 2000,
extendable annually for a three-year term. Interest rates on loans outstanding
are based, at the Company's option, on LIBOR (plus 1.0% to 2.25%) or the agent
bank's prime rate. The Company is also obligated to pay commitment fees of
between .20% and .375% on the unused portion of the facility. The facility
contains certain affirmative and negative covenants customary for this type of
agreement, prohibits cash dividends, and includes financial covenants with
respect to interest coverage, cash flow and tangible net worth. The principal
security for the facility is substantially all of the personal property of the
Company and each of its North American subsidiaries and a pledge of stock of
each of the Company's principal subsidiaries.
On March 13, 1998, the Company sold $100,000 of Senior Notes due March 15,
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 beginning on September
15, 1998. There are no sinking fund requirements.
F-13
<PAGE> 55
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Note 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.
Approximately $76,300 of the net proceeds from the Notes were used to repay
amounts outstanding under the Credit Facility, thereby extending the average
maturity of the Company's debt, most of which had been incurred to finance the
acquisitions of Ruud Lighting and DSI.
The aggregate maturities of long-term debt (including capital lease
obligations) for the five fiscal years subsequent to June 30, 1998, were as
follows: 1999 -- $909; 2000 -- $3,758; 2001 -- $6,776; 2002 -- $513; and
2003 -- $258.
Mortgages payable consisted of nine separate notes at various rates of
interest, ranging from 7.5% to 9.5%, and at June 30, 1998 were collateralized by
land and buildings with a net carrying value of $12,131.
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 $2,052 at June 30, 1998, are included in
the consolidated balance sheet as machinery and equipment.
During fiscal 1998 and 1996, the Company recorded an extraordinary charge
of $604 (net of applicable income tax benefits of $311) and of $135 (net of
applicable income tax benefits of $91), respectively, for the write-off of
deferred financing costs related to the early extinguishment of debt.
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 Credit Facility to limit its exposure to
fluctuating interest rates for a minimum of $35,000. During fiscal 1998, the
Company entered into two interest rate swap agreements. One expires in February
2001 and has a notional amount of $25,000 with a fixed pay rate of 6.45% and a
receive rate of LIBOR plus .75%. The other expires in February 2003 and has a
notional amount of $25,000 with a fixed pay rate of 6.53% and a receive rate of
LIBOR plus .75%. The swap agreements are contracts to exchange floating rate for
fixed interest payments quarterly over the life of the agreements without the
exchange of the underlying notional amounts. The notional amount of the interest
rate agreements 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 agreements are recognized as an adjustment to interest expense.
If these agreements were settled at June 30, 1998, the Company would have
received approximately $5.
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, 1998 were
$417. 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 the Loan Agreement. Of the remaining net proceeds,
$14,507 was
F-14
<PAGE> 56
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
On December 12, 1995, the Company completed an initial public offering and
issued 2,900,000 shares of its Common Stock. Prior to the initial public
offering, shares of the Predecessors were exchanged for 7,281,849 shares of
Common Stock of the Company; and 535,887 shares were issued to a warrant holder
in exchange for the warrants. During fiscal 1996, the Company issued 126,923
shares of Common Stock in connection with certain acquisitions. The Common Stock
authorized, issued and outstanding as of June 30, 1995 represents the aggregate
of the Predecessor's common stock. The shares authorized, issued and outstanding
of the individual issues of common stock of the Predecessors are not presented
as the information is not meaningful.
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 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, 1998, the
Company had 3,152,130 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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year......... 914,214 $14.38 791,850 $12.33 -- --
Granted................................ 1,939,689 19.56 228,150 19.73 814,350 $12.26
Exercised.............................. (97,209) 11.57 (50,661) 10.32 -- --
Forfeited.............................. (155,347) 16.16 (55,125) 10.63 (22,500) 10.00
---------- -------- --------
Outstanding, end of year............... 2,601,347 18.24 914,214 14.38 791,850 12.33
========== ======== ========
Weighted-average fair value of options
granted during the year.............. $ 8.69 -- $ 6.62 -- $ 3.77 --
</TABLE>
F-15
<PAGE> 57
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes additional information concerning
outstanding and exercisable options at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- --------------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$10.00 to 16.00 322,197 7.4 years $10.12 138,787 $10.10
16.00 to 23.00 2,040,500 9.3 years 18.85 163,466 17.88
23.00 to 26.00 238,650 9.5 years 24.00 -- --
--------- -------
2,601,347 302,253 14.31
========= =======
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996
-------- ------ ------
<S> <C> <C> <C>
Net income (loss) as reported.................... $(25,732) $7,104 $2,382
Pro forma........................................ (27,384) 6,540 2,208
Earnings (loss) per share as reported............ (1.41) .52 .11
Pro forma........................................ (1.51) .48 .09
</TABLE>
The fair values of the stock options used to calculate the pro forma net
income (loss) and pro forma earnings (loss) per share were estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997 and 1996, respectively:
expected volatility of 38%, 30% and 25%; risk-free interest rates of 5.78%,
6.41% and 6.06%; and expected lives of 5 years, 4 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, but such purchases are limited 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 9,577 shares of
stock through June 30, 1998. At June 30, 1998, 90,423 shares were available for
future purchases.
I. REDEEMABLE STOCK PURCHASE WARRANTS
Warrants issued in connection with a financing entered into during 1994
were redeemed in December 1995 for $3,000 plus 5.0% of the Company's then
existing common stock. Warrants issued in connection with a financing entered
into during 1990 were redeemed by the Company for $3,199 in March 1996.
F-16
<PAGE> 58
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
J. INCOME TAXES
Income (loss) from continuing operations before income taxes and
extraordinary charges were attributable to the following sources:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
United States....................................... $ (9,079) $ 9,548 $ 3,291
Foreign............................................. (6,955) 877 341
-------- ------- -------
Total............................................... $(16,034) $10,425 $ 3,632
======== ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 2,917 $1,545 $ (83)
State and local...................................... 372 550 281
Foreign.............................................. 807 355 72
------- ------ ------
4,096 2,450 270
Deferred:
Federal.............................................. (176) 313 485
State and local...................................... (228) 149 167
Foreign.............................................. (1,890) (43) 43
------- ------ ------
(2,294) 419 695
------- ------ ------
$ 1,802 $2,869 $ 965
======= ====== ======
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-17
<PAGE> 59
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Significant components of the Company's net deferred tax assets and
liabilities at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 892 $ 1,536
Alternative Minimum Tax carryforward...................... -- 262
Tax under financial reporting accruals.................... 1,212 768
Intangible amortization................................... 486 --
Tax under financial reporting special charges accrual..... 1,718 --
Tax under financial reporting inventory reserves.......... 252 210
Other..................................................... 524 325
------ -------
5,084 3,101
Deferred tax liabilities:
Tax over financial reporting depreciation................. 2,720 2,989
Other..................................................... 339 1,238
------ -------
Total deferred tax liabilities.............................. 3,059 4,227
------ -------
Net deferred tax assets (liabilities)....................... $2,025 $(1,126)
====== =======
</TABLE>
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Statutory tax rate........................................ (35.0)% 35.0% 35.0%
State and local income taxes, net of federal benefit...... .6 3.6 9.2
Nondeductible purchased research and development.......... 39.8 -- --
Research and development tax credit....................... (4.1) -- --
Effect of foreign taxes................................... (1.4) (1.4) --
Nondeductible foreign special charges..................... 9.8 -- --
Net operating loss carryforward........................... -- (2.8) (56.4)
Adjustment of deferred tax liabilities.................... -- (10.9) --
Nondeductible settlement of a claim....................... -- -- 30.9
Other..................................................... 1.5 4.0 7.8
----- ----- ------
Effective tax rate........................................ 11.2% 27.5% 26.5%
===== ===== ======
</TABLE>
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.
Income taxes paid (net of refunds) were $3,129 in 1998, $81 in 1997, and
$375 in 1996.
K. 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 2% of eligible
F-18
<PAGE> 60
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
employee earnings. Contribution expense for the defined contribution plans was
$465 in fiscal 1998, $373 in fiscal 1997 and $250 in fiscal 1996.
L. SPECIAL CHARGES
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
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
amounts the Company may ultimately incur may change as the plans are executed.
The Company periodically reviews its exposures versus the amounts accrued
related to these charges and adjusts the accrual as necessary. The amounts are
classified in the fiscal 1998 statement of operations as: cost of
sales -- $2,066 and special charges -- $15,918. The activity impacting the
accrual related to special charges is summarized in the following table:
<TABLE>
<CAPTION>
CHARGED TO CHARGES BALANCE AS OF
OPERATIONS UTILIZED JUNE 30, 1998
---------- -------- -------------
<S> <C> <C> <C>
Inventories........................................ $ 2,066 $ 158 $1,908
Asset write-downs:
Intangibles...................................... 9,354 9,354 --
Fixed assets..................................... 3,056 2,972 84
Other assets..................................... 2,184 2,184 --
Contractual commitments and other accruals......... 1,209 496 713
Other.............................................. 115 115 --
------- ------- ------
$17,984 $15,279 $2,705
======= ======= ======
</TABLE>
The write-down of intangible assets primarily represents 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.
Actions required by the Company's plans are expected to be completed by
June 30, 1999. Cash outlays to complete the balance of the Company's initiative
to rationalize the Company's global power supply operations are estimated to be
approximately $700.
F-19
<PAGE> 61
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The June 30, 1998 balance of the accrual for special charges is classified
within the balance sheet as follows:
<TABLE>
<S> <C>
Inventories................................................. $1,940
Property, plant and equipment............................... 84
Other accrued expenses...................................... 681
</TABLE>
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.
M. DISCONTINUED OPERATIONS, SPIN-OFF OF MICROSUN BUSINESS
In March 1998, the Company approved a plan to distribute to its
shareholders all of the ownership of Microsun Technologies, Inc., 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.
Summary operating information for Microsun for the years ended June 30,
1998, 1997 and 1996 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997 1996
------- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Sales........................................... $ 4,456 $ 845 $ --
Costs and expenses.............................. 13,530 1,469 205
------- ------ ----
Loss before income taxes........................ 9,074 624 205
Income tax benefit.............................. 3,113 172 55
------- ------ ----
Net loss........................................ $ 5,961 $ 452 $150
======= ====== ====
</TABLE>
Operating losses through the intended date of the spin-off follow:
<TABLE>
<CAPTION>
BEFORE INCOME
INCOME TAX
TAXES BENEFIT NET
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating losses for the year ended June 30,
1998........................................ $ 9,074 $3,113 $5,961
Estimated operating losses from July 1, 1998
to December 31, 1998........................ 2,023 692 1,331
------- ------ ------
Operating losses through spin-off............. $11,097 $3,805 $7,292
======= ====== ======
</TABLE>
The estimated date of disposition extends to December 31, 1998 pending the
determination of the spin-off as tax-free and certain other matters. As a result
of the Board of Directors' approval to spin-off the Microsun business, the
consolidated financial statements of the Company have been adjusted and restated
to reflect MicroSun's results of operations as a discontinued operation in
accordance with generally accepted accounting principles.
F-20
<PAGE> 62
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
N. 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.
On October 27, 1995, several former preferred shareholders of the Company's
lamp manufacturing subsidiary, whose shares were redeemed in August 1995 (prior
to the Combination), asserted a claim against certain officers of the Company.
On November 15, 1995, such officers entered into a settlement agreement with the
former preferred shareholders, whereby such officers and certain other
shareholders transferred, from their personal holdings, an aggregate of 273,185
shares of the Company's common stock to the former preferred shareholders. Since
the settlement resulted in a transfer of personal shares held by such officers,
there was no dilution of the ownership interest of shareholders of the Company.
The settlement was recorded as a noncash expense and paid-in-capital of the
Company.
O. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 128, "Earnings per Share." FAS No.
128 replaced the previously reported primary and fully-diluted earnings per
share with basic earnings per share and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported fully-diluted earnings per share. The Company adopted FAS No. 128 in
fiscal 1998. Prior year amounts have been restated to comply with FAS No. 128.
F-21
<PAGE> 63
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Earnings (loss) per share is computed as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
<S> <C> <C> <C>
Income available to common shareholders:
Income (loss) from continuing operations.................. $(17,836) $ 7,556 $2,667
Less: Increase in warrants' value(1)...................... -- -- 1,350
-------- ------- ------
Income (loss) from continuing operations attributable to
common shareholders.................................... $(17,836) $ 7,556 $1,317
======== ======= ======
Net income (loss)......................................... $(25,732) $ 7,104 $2,382
Less: Increase in warrants' value(1)...................... -- -- 1,350
-------- ------- ------
Net income (loss) attributable to common shareholders..... $(25,732) $ 7,104 $1,032
======== ======= ======
Weighted average shares -- Basic:
Outstanding at beginning of period........................ 13,435 10,844 7,282
Issued pursuant to public offering........................ 2,942 2,327 1,601
Issued upon conversion of warrant......................... -- -- 296
Issued in acquisitions.................................... 1,768 41 --
Issued for exercise of stock options...................... 47 22 --
Issued pursuant to employee stock purchase plan........... 3 -- --
Issued during the period in exchange of subsidiary
stock.................................................. -- -- 20
Issuable in connection with an acquisition................ -- 35 8
-------- ------- ------
Basic weighted average shares.......................... 18,195 13,269 9,207
======== ======= ======
Weighted average shares -- Diluted:
Basic from above.......................................... 18,195 13,269 9,207
Effect of options......................................... -- 289 272
-------- ------- ------
Diluted weighted average shares........................ 18,195 13,558 9,479
======== ======= ======
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations.................. $ (.98) $ .57 $ .14
Loss from discontinued operations......................... (.40) (.03) (.02)
Extraordinary charge...................................... (.03) -- (.01)
-------- ------- ------
Earnings (loss) per share -- Basic........................ $ (1.41) $ .54 $ .11
======== ======= ======
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations.................. $ (.98) $ .55 $ .14
Loss from discontinued operations......................... (.40) (.03) (.02)
Extraordinary charge...................................... (.03) -- (.01)
-------- ------- ------
Earnings (loss) per share -- Diluted...................... $ (1.41) $ .52 $ .11
======== ======= ======
</TABLE>
- ---------------
(1) The warrants were redeemed in 1996.
F-22
<PAGE> 64
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
P. RELATED PARTY TRANSACTIONS
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 $2,161 in fiscal 1998, $554 in fiscal 1997, and $244 in fiscal
1996.
The Company paid a director of the Company $129 in fiscal 1998, $79 in
fiscal 1997 and $100 in fiscal 1996 for consulting services.
The Company sold lamps, lamp components, and lamp production equipment to
an overseas company aggregating $1,254 in fiscal 1998, $3,853 in fiscal 1997 and
$2,363 in fiscal 1996. An executive officer and director of the overseas company
became a Director of the Company in January 1996.
Prior to the initial public offering, management fees paid by the Company
to an affiliate were $1,254 in fiscal 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, 1998 and 1997, 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, 1998 was $269.
Q. COMMITMENTS
The Company leases buildings and certain equipment under noncancelable
operating lease agreements. Total rent expense was $1,495 in 1998, $1,478 in
1997, and $893 in 1996. Future minimum lease commitments, as of June 30, 1998,
were as follows:
<TABLE>
<S> <C>
YEAR:
1999........................................................ $1,009
2000........................................................ 623
2001........................................................ 540
2002........................................................ 426
2003........................................................ 387
Thereafter.................................................. 313
------
Minimum lease payments...................................... $3,298
======
</TABLE>
Estimated costs to complete construction in progress at June 30, 1998 were
$14,838.
F-23
<PAGE> 65
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
R. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
FISCAL 1998, THREE MONTHS ENDED
-----------------------------------------------
JUN 30 MAR 31(a) DEC 31 SEP 30
---------- --------- --------- -------
<S> <C> <C> <C> <C>
Net sales....................................... $ 53,002 $ 49,075 $31,879 $29,937
Gross profit.................................... 23,902 18,627 13,412 12,611
Income from operations.......................... 7,474 (29,256) 4,458 4,156
Income from continuing operations before
extraordinary charge.......................... 4,296 (27,953) 3,033 2,788
Loss from discontinued operations, net of tax
benefits...................................... -- (6,753) (241) (298)
Net income (loss)............................... $ 4,296 $(35,310) $ 2,792 $ 2,490
========== ======== ======= =======
Earnings per share -- Basic..................... $ 0.21 $ (1.77) $ .17 $ .15
========== ======== ======= =======
Earnings per share -- Diluted................... $ 0.21 $ (1.77) $ .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
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997, THREE MONTHS ENDED
----------------------------------------------
JUN 30(b) MAR 31 DEC 31(c) SEP 30
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Net sales....................................... $ 25,354 $ 22,034 $19,948 $18,309
Gross profit.................................... 11,997 10,232 9,330 8,383
Income from operations.......................... 3,596 3,202 1,874 2,421
Income from continuing operations before
extraordinary charge.......................... 2,812 1,970 1,212 1,562
Loss from discontinued operations, net of tax
benefits...................................... (211) (88) (61) (92)
Net income...................................... $ 2,601 $ 1,882 $ 1,151 $ 1,470
========== ======== ======= =======
Earnings per share -- Basic..................... $ .19 $ .14 $ .09 $ .11
========== ======== ======= =======
Earnings per share -- Diluted................... $ .19 $ .14 $ .08 $ .11
========== ======== ======= =======
Price Range of common Stock:
High.......................................... $ 26.500 $ 27.250 $25.250 $19.875
Low........................................... $ 19.000 $ 22.000 $16.375 $13.125
</TABLE>
- ---------------
(a) 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.
(b) Fourth Quarter 1997 -- Net income was increased by $1,000 for a change in
accounting estimate related to income taxes.
(c) Second Quarter 1997 -- See Note N regarding claims settlements.
F-24
<PAGE> 66
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
S. INDUSTRY SEGMENT AND GEOGRAPHIC FINANCIAL AREA INFORMATION
The Company operates in a single industry, on a global basis: the design,
manufacture and sales of metal halide lighting products including materials,
components, systems and production equipment.
Information concerning the Company's operations in different geographic
areas at June 30, 1998 and June 30, 1997 and for the years then ended follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AND FOR THE YEAR THEN ENDED
----------------------------------------------------------
NORTH UNITED OTHER
AMERICA KINGDOM FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers..... $136,714 $20,287 $6,892 $ -- $163,893
Transfers between geographic areas...... 4,701 91 -- (4,792) --
-------- ------- ------ ------- --------
Net sales............................... $141,415 $20,378 $6,892 $(4,792) $163,893
======== ======= ====== ======= ========
Operating loss from continuing
operations............................ $(10,251) $(7,895) $ 265 $ 4,713 $(13,168)
Identifiable assets..................... 309,320 19,557 6,707 (23,732) 311,852
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AND FOR THE YEAR THEN ENDED
---------------------------------------------------------
NORTH UNITED OTHER
AMERICA KINGDOM FOREIGN ELIMINATIONS CONSOLIDATED
------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers..... $74,095 $ 5,786 $ 5,764 $ -- $85,645
Transfers between geographic areas...... 3,424 -- -- (3,424) --
------- ------- ------- ------- -------
Net sales............................... $77,519 $ 5,786 $ 5,764 $(3,424) $85,645
======= ======= ======= ======= =======
Operating profit from continuing
operations............................ $10,811 $ 347 $ 270 $ (335) $11,093
Identifiable assets..................... 130,363 14,937 4,895 (15,357) 134,838
</TABLE>
The information presented above may not be indicative of the results of
operations if the geographic areas were independent organizations. Transfers
between geographic areas and other geographic transactions are made at
established transfer prices. Operating profit by geographic segment is net sales
less operating costs, excluding interest and income taxes. Net sales generated
by the foreign operations or identifiable assets of foreign operations were less
than 10% of related consolidated totals for fiscal 1996.
Export sales from the Company's United States operations, which did not
exceed 10% of consolidated sales to any individual country, amounted to $27,153,
$16,696 and $12,129 in fiscal 1998, 1997 and 1996, respectively.
In fiscal 1998 and 1997 no single customer accounted for 10% or more of the
Company's net sales, while approximately $5,689, or 10%, of fiscal 1996 net
sales were made to one customer.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Reporting Disaggregated Information
about a Business Enterprise". The statement requires a "management" approach to
reporting financial and descriptive information about a Company's operating
segments. The Company must adopt this statement in the first quarter of fiscal
1999. Management is currently studying the potential effect of adopting this
statement.
T. PURCHASE OF CORPORATE HEADQUARTERS
During March 1998, the Company purchased land and a 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
F-25
<PAGE> 67
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
$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. The Company has invested and intends to invest additional amounts
for expanded manufacturing, sales and training facilities.
F-26
<PAGE> 68
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10. DIRECTORS AND 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 1998 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, 1998.
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). The following consolidated financial statements of Advanced
Lighting Technologies, Inc. are included in Item 8:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the Years Ended June 30, 1998,
1997 and 1996
Statements of Consolidated Shareholders' Equity for the Years Ended June
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(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.
41
<PAGE> 69
(3) List of Exhibits
<TABLE>
<CAPTION>
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation............. (1)
3.2 Code of Regulations........................................ (2)
4.1 References 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....................................................... (5)
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 Stock Purchase Agreement among Advanced Lighting
Technologies, Inc. Rudd Lighting, Inc. and Alan J. Rudd,
Theodore O. Sokoly, Donald Wandler, Christopher A. Rudd and
Cynthia A. Johnson......................................... (4)
10.2 Credit Agreement between Advanced Lighting Technologies,
Inc., the Institutions Named Therein and National City
Bank, as Administrative Agent, Dated as of January 2,
1998....................................................... (5)
10.3 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....... (5)
10.4 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,
without Exhibits...........................................
10.5 Employment Agreement dated as of January 2, 1998 among Ruud
Lighting, Inc., Advanced Lighting Technologies, Inc., and
Alan J. Ruud...............................................
10.6 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....... (6)
10.7 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)
</TABLE>
42
<PAGE> 70
<TABLE>
<CAPTION>
SEQUENTIAL PAGE NUMBER/
EXHIBIT NO. TITLE INCORPORATED BY REFERENCE
- ----------- ----- -------------------------
<C> <S> <C>
10.8 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)
10.9 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)
10.10 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)
11 Statement of Computation of Per Share Earnings.............
12 Statement Regarding Computation of Ratios..................
21 Subsidiaries of the Registrant as of June 30, 1998.........
23 Consent of Independent Auditors............................
24.1 Powers of Attorney.........................................
27 Financial Data Schedule....................................
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-K for the Quarterly Period ended December 31,
1997.
(2) Incorporated by reference to Exhibit of same number in Company's
Registration Statement on Form S-1, Registration No. 33-97902, effective
December 11, 1995.
(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) Incorporated by referenced to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Period ended March 31, 1998.
(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 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 Company's Schedule 13D filed
January 12, 1998.
(b). Reports on Form 8-K.
During the fourth quarter of fiscal 1998, the Company's Report on Form 8-K
dated April 21, 1998, was filed on May 5, 1998. The Form 8-K reported, pursuant
to Item 5, the Company's intention to spin-off its MicroSun subsidiary.
(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.
43
<PAGE> 71
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.
/s/ LOUIS S. FISI
By:
--------------------------------------
Louis S. Fisi
Executive Vice President
Date: September 28, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WAYNE R. HELLMAN Chief Executive Officer and September 28, 1998
- --------------------------------------------- Director
Wayne R. Hellman
/s/ NICHOLAS R. SUCIC Chief Financial Officer, September 28, 1998
- --------------------------------------------- Vice President and Treasurer
Nicholas R. Sucic (Chief Accounting Officer)
/s/ FRANCIS H. BEAM Director September 28, 1998
- ---------------------------------------------
Francis H. Beam
/s/ JOHN R. BUERKLE Director September 28, 1998
- ---------------------------------------------
John R. Buerkle
/s/ THEODORE A. FILSON Director September 28, 1998
- ---------------------------------------------
Theodore A. Filson
/s/ LOUIS S. FISI Director September 28, 1998
- ---------------------------------------------
Louis S. Fisi
/s/ SUSUMA HARADA Director September 28, 1998
- ---------------------------------------------
Susuma Harada
/s/ ALAN J. RUUD Director September 28, 1998
- ---------------------------------------------
Alan J. Ruud
/s/ A GORDON TUNSTALL Director September 28, 1998
- ---------------------------------------------
A Gordon Tunstall
</TABLE>
- ---------------
* 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
44
<PAGE> 72
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ADVANCED LIGHTING TECHNOLOGIES, INC.
<PAGE> 73
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT NO. TITLE SEQUENTIAL PAGE NUMBER/
- ----------- ----- -------------------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation.............. (1)
3.2 Code of Regulations......................................... (2)
4.1 References 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........................................................ (5)
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 Stock Purchase Agreement among Advanced Lighting
Technologies, Inc. Rudd Lighting, Inc. and Alan J. Rudd,
Theodore O. Sokoly, Donald Wandler, Christopher A. Rudd and
Cynthia A. Johnson.......................................... (4)
10.2 Credit Agreement between Advanced Lighting Technologies,
Inc., the Institutions Named Therein and National City Bank,
as Administrative Agent, Dated as of January 2, 1998........ (5)
10.3 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........ (5)
10.4 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, without
Exhibits....................................................
10.5 Employment Agreement dated as of January 2, 1998 among Ruud
Lighting, Inc., Advanced Lighting Technologies, Inc., and
Alan J. Ruud
10.6 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........... (6)
10.7 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)
10.8 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)
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT NO. TITLE SEQUENTIAL PAGE NUMBER/
- ----------- ----- -------------------------
<C> <S> <C>
10.9 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)
10.10 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)
11 Statement of Computation of Per Share Earnings..............
12 Statement Regarding Computation of Ratios...................
21 Subsidiaries of the Registrant as of June 30, 1998..........
23 Consent of Independent Auditors.............................
24.1 Powers of Attorney..........................................
27 Financial Data Schedule.....................................
</TABLE>
- ---------------
(1) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-K for the Quarterly Period ended December 31,
1997.
(2) Incorporated by reference to Exhibit of same number in Company's
Registration Statement on Form S-1, Registration No. 33-97902, effective
December 11, 1995.
(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) Incorporated by referenced to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Period ended March 31, 1998.
(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 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 Company's Schedule 13D filed
January 12, 1998.
<PAGE> 1
EXHIBIT 10.4
CONFORMED COPY
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
January 9, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 THE TRANSACTIONS.......................................................................................1
Section 1.1 Agreement to Consummate Transactions...................................................1
Section 1.2 Formation of Acquisition; Merger Agreement.............................................1
Section 1.3 Shareholder Approval...................................................................1
Section 1.4 Closing................................................................................1
Section 1.5 Consummation of Transactions...........................................................2
Section 1.6 Issuance of ADLT Stock; Payment of Cash Consideration..................................2
Section 1.7 Conversion of DSI Stock................................................................2
Section 1.8 Effect of Transactions.................................................................2
Section 1.9 Tax Consequences.......................................................................3
Section 1.10 Deliveries and Proceedings at Closing..................................................3
ARTICLE 2 REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS AND DSI..................................................5
Section 2.1 Title to DSI Shares....................................................................6
Section 2.2 Organization and Qualification.........................................................6
Section 2.3 Shares; Capitalization.................................................................6
Section 2.4 Subsidiaries...........................................................................6
Section 2.5 Authorization and Enforceability.......................................................6
Section 2.6 No Violation of Laws or Agreements.....................................................7
Section 2.7 Financial Statements; Minimum Cash Balance.............................................8
Section 2.8 Undisclosed Liabilities................................................................8
Section 2.9 No Changes.............................................................................8
Section 2.10 Tax Matters............................................................................9
Section 2.11 Receivables; Inventory................................................................10
Section 2.12 Business; Assets......................................................................10
Section 2.13 Litigation............................................................................11
Section 2.14 Contracts; Compliance.................................................................11
Section 2.15 Permits...............................................................................12
Section 2.16 Compliance With Laws..................................................................12
Section 2.17 Real Property.........................................................................12
Section 2.18 Transactions With Related Parties.....................................................12
Section 2.19 Insurance.............................................................................13
Section 2.20 Employee Relations....................................................................14
Section 2.21 Patents and Intellectual Property Rights..............................................14
Section 2.22 Benefit Plans.........................................................................15
Section 2.23 Finder's Fees.........................................................................16
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 2.24 Confidentiality Agreements............................................................17
Section 2.25 Compliance with Environmental Laws....................................................17
Section 2.26 Disclosure............................................................................18
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS........................................................18
Section 3.1 Title to DSI Shares...................................................................18
Section 3.2 Purchase Entirely for Own Account.....................................................18
Section 3.3 Restricted Securities.................................................................19
Section 3.4 Disclosure of Information.............................................................19
Section 3.5 Investment Experience.................................................................19
Section 3.6 Accredited Investor...................................................................19
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF ADLT................................................................19
Section 4.1 Title to ADLT Shares..................................................................19
Section 4.2 Organization..........................................................................19
Section 4.3 Shares; Capitalization................................................................20
Section 4.4 Subsidiaries..........................................................................20
Section 4.5 Authorization and Enforceability......................................................20
Section 4.6 No Violation of Laws or Agreements....................................................21
Section 4.7 SEC Reports...........................................................................21
Section 4.8 Finder's Fees.........................................................................22
Section 4.9 No Material Adverse Change............................................................22
Section 4.10 Disclosure............................................................................22
Section 4.11 Litigation............................................................................22
Section 4.12 Registration Rights...................................................................22
ARTICLE 5 COVENANTS OF THE PRINCIPAL SHAREHOLDERS..............................................................22
Section 5.1 Conduct of Business Pending Closing...................................................22
Section 5.2 Access, Information and Documents.....................................................24
Section 5.3 Preserve Accuracy of Representations and Warranties...................................25
Section 5.4 Filings and Authorizations............................................................25
Section 5.5 Notice of Changes.....................................................................25
Section 5.6 Resale of ADLT Shares.................................................................25
Section 5.7 No Negotiations.......................................................................26
Section 5.8 Schedules.............................................................................26
Section 5.9 Exercise of DSI Options...............................................................26
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 6 COVENANTS OF ADLT.....................................................................................26
Section 6.1 Preserve Accuracy of Representations and Warranties...................................26
Section 6.2 Filings and Authorizations............................................................26
Section 6.3 Notice of Changes.....................................................................26
Section 6.4 Stock Legends.........................................................................26
Section 6.5 Stock Option Plan.....................................................................27
Section 6.6 Employee Benefits.....................................................................27
Section 6.7 Post-Closing Indemnification of Certain Persons.......................................27
Section 6.8 DSI Security Clearances...............................................................28
Section 6.9 Acquisition...........................................................................28
ARTICLE 7 CONDITIONS TO CLOSING.................................................................................29
Section 7.1 Mutual Conditions Precedent...........................................................29
Section 7.2 Conditions Precedent to Obligations of ADLT...........................................29
Section 7.3 Conditions Precedent to the Obligations of DSI........................................30
ARTICLE 8 TERMINATION...........................................................................................31
Section 8.1 Termination...........................................................................31
ARTICLE 9 SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION..........................................................32
Section 9.1 Survival of Representations...........................................................32
Section 9.2 Indemnification by the Shareholders...................................................32
Section 9.3 Indemnification by ADLT...............................................................33
Section 9.4 Notice of Claims......................................................................33
Section 9.5 Third Party Claims....................................................................33
Section 9.6 Limitation on Damages; Insurance; Etc.................................................34
Section 9.7 Good Faith Effort to Settle Disputes..................................................34
Section 9.8 Sole Remedy...........................................................................34
ARTICLE 10 MISCELLANEOUS........................................................................................35
Section 10.1 Construction..........................................................................35
Section 10.2 Notices...............................................................................35
Section 10.3 Successors and Assigns................................................................36
Section 10.4 Governing Law.........................................................................36
</TABLE>
iii
<PAGE> 5
TABLE OF CONTENTS - CONTINUED
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 10.5 No Assignment.........................................................................36
Section 10.6 Approvals and Actions by the Shareholders.............................................37
Section 10.7 Amendment and Waiver; Cumulative Effect...............................................37
Section 10.8 Entire Agreement......................................................................37
Section 10.9 Severability..........................................................................37
Section 10.10 No Third Party Beneficiaries..........................................................37
Section 10.11 Counterparts..........................................................................38
Section 10.12 Expenses..............................................................................38
Section 10.13 Arbitration...........................................................................38
</TABLE>
iv
<PAGE> 6
EXHIBITS
Exhibit A Merger Agreement
Exhibit B Form of Release
Exhibit C Form of Employment Agreements
Exhibit D Intentionally Omitted
Exhibit E Intentionally Omitted
Exhibit F Form of Registration Rights Agreement
v
<PAGE> 7
SCHEDULES
Schedule 1.10A Shareholders
Schedule 1.10B Restrictive Legend
Schedule 2.2 Foreign Qualifications
Schedule 2.3 Securities Rights
Schedule 2.6 DSI Required Consents
Schedule 2.7 Description of New Line
Schedule 2.8 Other Liabilities
Schedule 2.9 Material Transactions
Schedule 2.10 Tax Matters
Schedule 2.11 Receivables
Schedule 2.12 Business; Permitted Encumbrances
Schedule 2.13 Litigation
Schedule 2.14 Contracts
Schedule 2.17 Real Property
Schedule 2.18 Transactions with Related Parties
Schedule 2.19 Insurance; Warranty Claims
Schedule 2.20 Employee Relations
Schedule 2.21 Intellectual Property
Schedule 2.22 Benefit Plans
Schedule 2.23 Confidentiality Agreements
Schedule 2.25 Environmental Matters
Schedule 4.4 ADLT Equity Investments
Schedule 4.6 ADLT Required Consents
vi
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement")
entered into as of the 9th day of January, 1998 by and among Advanced Lighting
Technologies, Inc., an Ohio corporation ("ADLT"), Advanced Acquisitions, Inc.,
an Ohio corporation ("Acquisition") and Deposition Sciences, Inc., a California
corporation ("DSI"), and Lee Bartolomei, Frances and John Aguilera, Jr. 1992
Trust (the "Trust"), Michael Robbins, James Brosnan, and Norman Boling (Messrs.
Bartolomei, Robbins, Brosnan and Boling and the Trust are sometimes referred to
herein individually as a "Principal Shareholder" and collectively as the
"Principal Shareholders");
WITNESSETH:
WHEREAS, ADLT, Acquisition and DSI and the Principal
Shareholders desire to complete a merger transaction pursuant to which DSI shall
be merged with and into Acquisition, a wholly-owned subsidiary of ADLT, all
under and subject to the terms and conditions set forth herein,
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:
ARTICLE 1
THE TRANSACTIONS
Section 1.1 AGREEMENT TO CONSUMMATE TRANSACTIONS. Subject to
the terms and conditions of this Agreement and of the merger agreement referred
to in Section 1.2, ADLT, Acquisition and DSI agree to consummate or cause to be
consummated the transactions contemplated by Sections 1.5, 1.6 and 1.7 of this
Agreement (the "Transactions") and agree that the consummation of each of the
Transactions is conditional upon the consummation of each of the other
Transactions.
Section 1.2 FORMATION OF ACQUISITION; MERGER AGREEMENT. ADLT
has formed Acquisition as a wholly owned Ohio subsidiary in order to effect the
merger of DSI with and into Acquisition in accordance with the terms and
conditions of the Agreement and Plan of Merger by and between Acquisition and
DSI in substantially the form appended hereto as Exhibit A (the "Merger
Agreement").
Section 1.3 SHAREHOLDER APPROVAL. ADLT, as the sole
shareholder of Acquisition, hereby approves this Agreement and the issuance of
shares of its Common Stock ("ADLT Common Stock") required to consummate the
Transactions. DSI will submit to its shareholders for approval this Agreement
and the Merger Agreement at a meeting to be held as soon as reasonably possible.
Section 1.4 CLOSING. A meeting of the parties to this
Agreement (the "Closing") will take place at which certificates, opinions,
letters and other documents required by this
<PAGE> 9
Agreement will be delivered or exchanged. The Closing will take place at the
offices of Messrs. Cowden, Humphrey & Sarlson Co., L.P.A., 1414 Terminal Tower,
Cleveland, Ohio 44113, at 10:00 A.M. on January 23, 1998, PROVIDED, HOWEVER,
that if any condition of Closing in Article 7 has not been satisfied or waived
or if any party shall deem a temporary postponement advisable because of any
threatened private or governmental proceedings, ADLT or DSI, respectively, may
postpone the Closing until a date promptly after the satisfaction of such
conditions or the resolution of such other events, but in no event shall such
postponement extend beyond March 31, 1998. Notwithstanding the foregoing, the
Closing may take place at such other place, time or date as may be agreed upon
by ADLT and DSI. The date of the Closing is referred to herein as the "Closing
Date."
Section 1.5 CONSUMMATION OF TRANSACTIONS. If, on the Closing
Date scheduled in Section 1.4, no condition exists which would permit any of the
parties to terminate this Agreement or a condition then exists and the party
entitled to terminate because of that condition elects not to do so, then the
Transactions shall be consummated on such date and promptly thereafter on that
date Acquisition and DSI will file appropriate certificates of merger, (a) in
the office of the Secretary of State of the State of Ohio in accordance with the
General Corporation Law of the State of Ohio and (b) in the office of the
Secretary of State of California in accordance with the California General
Corporation Law; and upon such filing, the merger of DSI into Acquisition
contemplated by the Merger Agreement will become effective (said date being
hereinafter referred to as the "Effective Date"). If, on such scheduled Closing
Date, it is determined that all conditions have not been met or waived, the
parties will fix a mutually agreeable date for purposes of consummating the
Transaction, not later than the latest applicable Closing Date specified in
Section 1.4.
Section 1.6 ISSUANCE OF ADLT STOCK; PAYMENT OF CASH
CONSIDERATION. As of the Effective Date, ADLT will issue that number of shares
of ADLT Common Stock, subject to restrictions on transfer as provided in the
Merger Agreement ("Restricted ADLT Common Stock"), required to consummate the
merger contemplated by the Merger Agreement and will deliver (a) the
certificates for such shares and (b) $14,501,260.62, to the exchange agent
designated in the Merger Agreement (the "Exchange Agent"). ADLT will also
deliver an amount sufficient to pay the required amount with respect to
fractional shares in accordance with Section 4(c) of the Merger Agreement.
Section 1.7 CONVERSION OF DSI STOCK. As of the Effective Date,
each share of Common Stock of DSI then issued and outstanding shall, by virtue
of the merger and without any action on the part of the holder thereof, be
converted into and be deemed to become (a) that number of shares of Restricted
ADLT Common Stock provided for in the Merger Agreement and (b) the right to
receive cash consideration provided for in the Merger Agreement.
Section 1.8 EFFECT OF TRANSACTIONS. As a result of the
Transactions, ADLT will continue to own all of the issued and outstanding shares
of Acquisition and the shareholders of DSI will own only Restricted ADLT Common
Stock and the right to receive cash compensation.
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<PAGE> 10
Section 1.9 TAX CONSEQUENCES. For federal tax purposes, it is
intended that the merger will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as
amended.
Section 1.10 DELIVERIES AND PROCEEDINGS AT CLOSING.
(a) DELIVERIES BY SHAREHOLDERS. Shareholders of DSI
("Shareholders") shall deliver or cause to be delivered to ADLT at the Closing
and shall cause DSI to deliver the documents required to be delivered pursuant
to subsection 1.10(b) below:
i. Certificates representing the shares of DSI Common
Stock owned by each Shareholder;
ii. A Shareholder Questionnaire containing the
representations and warranties set forth in Article 3
hereof, executed by each Shareholder, and each
Shareholder's spouse, if applicable;
iii. General releases, executed by each of the Principal
Shareholders, in substantially the form set forth in
Exhibit B;
iv. Individual Employment Agreements, in substantially
the form set forth in Exhibit C, duly executed by Lee
Bartolomei, John Aguilera, Norman Boling, James
Brosnan, Erik Krisl, David McDuffie, and Michael
Robbins;
v. Such other documents and agreements as ADLT may
reasonably request; and
vi. Duly executed copies of such other documents and
agreements provided for herein.
(b) DELIVERIES BY DSI. DSI shall deliver or cause to be
delivered to ADLT at the Closing:
i. A good standing certificate of DSI issued by the
Secretary of State for the State of California within
20 days prior to Closing;
ii. An incumbency and specimen signature certificate
signed by the officers of DSI and certified by the
Secretary of DSI;
iii. A true and correct copy of the Articles of
Incorporation (and all amendments thereto) of DSI in
effect as of the Closing Date and a complete charter
history of DSI, each certified by the Secretary of
State for the State of California and the By-Laws of
DSI (together with all amendments thereto) certified
by the Secretary of DSI;
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<PAGE> 11
iv. Resolutions of (1) the Board of Directors of DSI
authorizing the execution and delivery of this
Agreement and the Merger Agreement and the
performance by DSI of the transactions contemplated
hereby and thereby and (2) the Shareholders approving
this Agreement and the Merger Agreement in accordance
with California Law, each certified by the Secretary
of DSI;
v. A certificate dated the Closing Date certifying to
the fulfillment of the conditions set forth in
Section 7.2 hereof;
vi. An opinion of Sonnenschein Nath & Rosenthal, in form
reasonably satisfactory to ADLT;
vii. The minute books, stock ledgers and corporate seal of
DSI;
viii. Duly executed copies of such other documents and
agreements provided for herein; and
viii. Such other agreements and documents as ADLT may
reasonably request.
(c) DELIVERIES BY ADLT. ADLT shall deliver or cause to be
delivered at the Closing:
i. To each Shareholder delivering shares in accordance
with paragraph (a) of this Section, a certificate
representing the ADLT Shares registered in the name
of such Shareholder in the name and at the address
and using the Social Security Number set forth on DSI
Shareholder records, or as set forth in the Letter of
Transmittal and such share certificates shall bear
restrictive legends in substantially the form set
forth on Schedule 1.10B;
ii. To each Shareholder delivering shares in accordance
with paragraph (a) of this Section, an ADLT check
payable to the order of such Shareholder, in the
amount set forth on Schedule 1.10A;
iii. Duly executed copies of such other documents and
agreements provided for herein;
iv. A Good Standing certificate of each of ADLT and
Acquisition issued within 20 days prior to Closing
certified by the Secretary of State of the State of
Ohio;
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<PAGE> 12
v. An incumbency and specimen signature certificate for
each of ADLT and Acquisition signed by the officers
of ADLT and Acquisition, respectively, and certified
by the Secretary of ADLT and Acquisition,
respectively;
vi. A true and correct copy of the Articles of
Incorporation (and all amendments thereto) of each of
ADLT and Acquisition in effect as of the Closing Date
certified by the Secretary of State of the State of
Ohio and Code of Regulations of each of ADLT and
Acquisition (together with all amendments thereto)
certified by the Secretary of ADLT and Acquisition,
respectively;
vii. Resolutions of the Board of Directors of ADLT and
Acquisition authorizing the execution and delivery of
this Agreement and the Merger Agreement and the
performance of the transactions contemplated hereby,
certified by the Secretary of ADLT and Acquisition,
respectively;
viii. A certificate dated the Closing Date of an officer of
ADLT certifying to the fulfillment of the conditions
set forth in Section 7.3;
ix. The opinion of Cowden, Humphrey & Sarlson Co., L.P.A.
in form reasonably satisfactory to DSI;
x. A Registration Rights Agreement, in substantially the
form attached as Exhibit F, relating to piggy back
registration rights of Shareholders (and their
permitted transferees), duly executed by ADLT; and
xi. Employment Agreements, in substantially the forms set
forth as Exhibit C, relating to the employment of Lee
Bartolomei, John Aguilera, Norman Boling, James
Brosnan, Erik Krisl, David McDuffie and Michael
Robbins, duly executed by Acquisition.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
OF THE PRINCIPAL SHAREHOLDERS AND DSI
The Principal Shareholders and DSI, jointly and severally,
represent and warrant to ADLT as set forth in this Article 2. Where any
representation or warranty is made "to the knowledge of the Principal
Shareholders," such representation or warranty is made to actual knowledge of
each Principal Shareholder and John Aguilera, without any duty of investigation
or inquiry. Where any matter, fact or circumstance is disclosed in a Schedule to
this Agreement, it shall be deemed disclosed in all Schedules to this Agreement.
As used herein, the term "Person" means any person, corporation, association,
partnership, limited liability company, trust, business trust, joint venture,
unincorporated organization or any other legal entity and the term "Other
Agreement" with respect to any party shall
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<PAGE> 13
mean the Merger Agreement and all other agreements and documents contemplated
hereby to be executed and delivered by such party or any Affiliate (as defined
in Section 2.8) thereof on or before the Closing.
Section 2.1 TITLE TO DSI SHARES. Each Shareholder is the
record holder of the number of shares set forth opposite such Shareholder's name
on Schedule 1.10A.
Section 2.2 ORGANIZATION AND QUALIFICATION. DSI has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the State of California, has requisite corporate power and authority to
own or lease its property as now owned or leased and to conduct the Business (as
defined in Section 2.12) as it is now conducted. Except as set forth in Schedule
2.2, DSI is not qualified to transact business, or required to be qualified to
transact business, in any jurisdiction other than California.
Section 2.3 SHARES; CAPITALIZATION. The authorized capital
stock of DSI consists solely of 5,000,000 shares of Common Stock, of which
1,108,900 shares are issued and outstanding and an additional 4,500 shares are
expected to be issued and outstanding on the Closing Date (the "DSI Shares") and
2,000,000 shares of preferred stock, none of which is issued or outstanding.
Except as set forth in Schedule 2.3, there are no Securities Rights with respect
to any DSI Shares nor are there any securities convertible into or exchangeable
for any DSI Common Stock or any other Security Rights with respect to any
unissued DSI Common Stock. "Securities Right" means any option, warrant, other
right, proxy, put, call, demand, plan, commitment, agreement, understanding or
arrangement of any kind relating to any DSI Shares. "Security Right" means any
right relating to issuance, sale, assignment, transfer, purchase, redemption,
conversion, exchange, registration or voting rights with respect to any capital
stock of the issuer, whether issued or unissued, or any other security
convertible into or exchangeable for capital stock of the issuer conferred by
statute, by the issuer's articles of incorporation or by-laws or by agreement,
including any subscription right, option preemptive purchase right or
registration right. All rights and powers to vote the DSI Shares held by the
Principal Shareholders are held exclusively by the respective Principal
Shareholders owning such DSI Shares. Except as set forth in Schedule 2.3, all of
the DSI Shares are validly issued, fully paid and nonassessable, were not issued
in violation of the terms of any agreement or other understanding, and were
issued in compliance with all applicable federal and state securities or
"blue-sky" laws and regulations.
Section 2.4 SUBSIDIARIES. DSI does not own any equity interest
in any Person.
Section 2.5 AUTHORIZATION AND ENFORCEABILITY. The execution,
delivery and performance by DSI of this Agreement and the Merger Agreement have
been duly authorized by all necessary action on its part and the part of the
Shareholders. This Agreement has been duly executed and delivered by the
Principal Shareholders and constitutes, and each Other Agreement which is to be
executed and delivered by the Principal Shareholders, when executed and
delivered by such Shareholders, shall constitute, the valid and binding
obligation of each of the Principal Shareholders, enforceable in accordance with
its own terms, subject to applicable bankruptcy, insolvency,
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<PAGE> 14
reorganization, receivership, moratorium or other laws relating to or affecting
the rights and remedies of creditors generally and to general equitable
principles (regardless of whether at law or in equity). This Agreement has been
duly executed and delivered by DSI and constitutes, and each Other Agreement
which is to be executed and delivered by DSI, when executed and delivered by
DSI, shall constitute, the valid and binding obligation of DSI, enforceable in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, receivership, moratorium or other laws relating to or affecting
the rights and remedies of creditors generally and to general equitable
principles (regardless of whether at law or in equity).
Section 2.6 NO VIOLATION OF LAWS OR AGREEMENTS. Except as set
forth on Schedule 2.6, none of the execution and delivery of this Agreement or
any Other Agreement, the consummation of the transactions contemplated hereby or
thereby or the compliance with or fulfillment of the terms, conditions and
provisions hereof or thereof by the Principal Shareholders or DSI will: (i)
contravene any provision of the charter or bylaws of DSI, (ii) conflict with,
result in a breach of or constitute a default or an event of default (or an
event which would, with the passage of time or the giving of notice or both,
constitute a default) under any term, condition or provision of, or result in
the termination or loss of any right (or give others the right to cause such a
termination or loss) under, any license, franchise, indenture, mortgage or any
other Contract (as defined in Section 2.14), agreement or instrument to which
any Principal Shareholder or DSI is a party or by which any of them or any of
their assets may be bound or, to the knowledge of the Principal Shareholders,
affected, (iii) violate any Law (as defined in Section 2.16) or violate any
judgment or order of any court, government, department, commission, board,
bureau, agency, official or other regulatory, administrative or governmental
authority or instrumentality, whether federal, state, local or foreign
("Governmental Body") to which DSI or any of its Affiliates are subject, (iv)
result in the creation or imposition of any Encumbrance upon any DSI Common
Stock or the assets of DSI or give to others any interests or rights therein, or
(v) result in the creation, maturation or acceleration of any Liability (as
defined in Section 2.8) or obligation of DSI (or give others the right to cause
such a creation, maturation or acceleration), that, in the case of clauses (ii)
through (v), would have a material adverse effect on the financial condition,
assets, Liabilities, net worth or Business of DSI ("Material Adverse Effect") or
give any person the right to prevent the consummation of the transactions
contemplated by this Agreement or any Other Agreement. Except as may be required
by the U.S. Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended
(the "HSR Act"), and except as set forth on Schedule 2.6 (collectively, the
"Consents"), no consent, approval, declaration or authorization of, or
registration or filing with, any Person (including any Governmental Body) is
required in connection with the execution and delivery by the Principal
Shareholders or DSI of this Agreement or the Other Agreements to which they are
a party and the consummation of the transactions contemplated hereby and thereby
by the Principal Shareholders or DSI except for those as to which the failure to
obtain, register or file would not have a Material Adverse Effect or give any
person the right to prevent the consummation of the transactions contemplated by
this Agreement or any Other Agreement. "Encumbrance" or "Encumbrances" means any
security interest, pledge, mortgage, lien (including, without limitation,
environmental and tax liens), charge, encumbrance, adverse claim, preferential
arrangement or
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<PAGE> 15
restriction of any kind, including, without limitation, any restriction on the
use, voting, transfer receipt of income or other exercise of any attributes of
ownership.
Section 2.7 FINANCIAL STATEMENTS; MINIMUM CASH BALANCE. The
Shareholders have previously delivered to ADLT a balance sheet and an income
statement for DSI for the twelve month period ended June 30, 1997 (such balance
sheet is sometimes referred to herein as the "Balance Sheet," and all of the
foregoing are referred to herein collectively as the "DSI Financial
Statements"). The DSI Financial Statements fairly present the financial
condition, assets and Liabilities (as defined in Section 2.8) and results of
operations and cash flows of DSI in accordance with GAAP (except that the
Balance Sheet does not include notes) at the date and for the year indicated. On
the Closing Date, DSI shall have cash and Cash Equivalents of at least
$1,500,000, less (i) amounts expended on DSI's new coating line, described in
Schedule 2.7 (the "New Line") to the extent such amounts are not paid out of the
proceeds of the related financing and (ii) reasonable expenses paid by DSI in
connection with the negotiation and execution of this Agreement and the Other
Agreements and the performance of its obligations pursuant hereto and thereto.
As used herein, "Cash Equivalent" means highly liquid investments with a
maturity of 3 months or less.
Section 2.8 UNDISCLOSED LIABILITIES. Except as disclosed in
the DSI Financial Statements and as otherwise disclosed in Schedule 2.8 hereto
and any other Schedules hereto, at November 28, 1997, DSI had no liabilities of
any nature whatsoever (whether absolute, fixed, contingent or otherwise) whether
due or to become due, including any unasserted claim, whether incurred directly
or by any predecessor, and whether arising out of any act, omission,
transaction, circumstance, sale of goods or services, state of facts or other
condition ("Liabilities"), that would be required to be reflected on a balance
sheet prepared in accordance with GAAP or that would, individually or in the
aggregate, have a Material Adverse Effect. Liabilities that have arisen in the
ordinary course of business of DSI after the date of the Balance Sheet through
the date hereof have been consistent in amount and character with past practice
and experience. Without limiting the foregoing, on the Closing Date, DSI shall
have no outstanding Liabilities of any kind or nature to the Shareholders or any
other Affiliate of DSI and, except as disclosed on Schedule 2.8 or another
Schedule to this Agreement, DSI shall have no outstanding Liabilities to any
Person for borrowed money. As used herein, "Affiliate" means, with respect to
any Person, any other Person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with such
Person.
Section 2.9 NO CHANGES. Since the date of the Balance Sheet,
DSI has conducted its business only in the ordinary course. Without limiting the
generality of the foregoing sentence, since the date of the Balance Sheet, there
has not been any (i) material adverse change in the financial condition, assets,
Liabilities, net worth, Business or, to the knowledge of the Principal
Shareholders and DSI, prospects of DSI; (ii) declaration or payment of any
dividend or other distribution on or with respect to, or redemption or purchase
by DSI, of any shares of DSI Common Stock, including any of the DSI Shares;
(iii) change in any method of accounting; (iv) payment, prepayment or discharge
of any Liability other than in the ordinary course of business or any failure to
pay any Liability when due except in the ordinary course of business consistent
with past practice;
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<PAGE> 16
(v) write-offs or write-downs of any assets of DSI in excess of $25,000 in the
aggregate except in the ordinary course of business; (vi) termination or waiver
of any material right under any agreement of DSI; (vii) agreement or commitment
to do any of the foregoing; (viii) disposition of any asset for more than
$25,000 or for less than fair market value; or (ix) asset acquisitions or
expenditures, including capital expenditures, in excess of $100,000 in the
aggregate, excluding expenditures with respect to the New Line. During the
one-year period ending on the date hereof, except as set forth in Schedule 2.9A,
there has been no (a) damage or destruction to any material asset of DSI,
whether or not covered by insurance; (b) strike or other labor trouble at DSI;
(c) increase in the salary, wage or bonus of any employee of DSI; (d) change in
any DSI Plan (as defined in Section 2.22(a)); (e) payment to or transaction with
any Related Party, which payment or transaction is not specifically disclosed on
Schedule 2.18; (f) material change in the manner in which DSI conducts its
Business; (g) exercise of any options or other Security Rights with respect to
DSI capital stock; or (h) agreement or commitment to do any of the foregoing.
Section 2.10 TAX MATTERS.
(a) All federal, state, local and other income or franchise
taxes, gross receipts, payroll, withholding and capital stock taxes and any
interest and penalties related thereto (collectively, "Taxes") that were or are
required under Law to be paid by DSI (or by any DSI Affiliate in respect of DSI)
have been paid, other than Taxes arising after the date of the Balance Sheet in
the ordinary course of business, none of which are overdue. There are no Tax
liens upon any property or assets of DSI, except liens for current Taxes
reflected on the Balance Sheet, or arising after the date of the Balance Sheet
in the ordinary course of business, none of which are overdue. Except as set
forth in Schedule 2.10, DSI is not currently the beneficiary of any extension of
time within which to file any Tax Return. Except as set forth in Schedule 2.10,
no claim has been made by a taxing authority of a jurisdiction where DSI does
not file Tax Returns that it is or may be subject to taxation in that
jurisdiction. All Taxes that DSI (or any DSI Affiliate in respect of DSI) was
required by Law to withhold or collect, have been and are being withheld or
collected by it and have been and are being timely paid over to the proper
Governmental Body.
(b) All Tax Returns that are required to be filed by DSI (or
by any DSI Affiliate in respect of DSI) prior to or on the Closing Date,
pursuant to the Law of each governmental authority with taxing power over it
have been filed or caused to be filed on a timely basis, or will be filed or
cause to be filed on a timely basis. All such Tax Returns were or will be, as
the case may be, correct and complete in all material respects. All such Taxes
that have become due as shown on such Tax Returns or pursuant to any assessment
received as an adjustment to such Tax Returns have been paid.
(c) DSI has not received from the Internal Revenue Service or
from any other tax authority from any state, foreign, county, local or other
jurisdiction a notice of underpayment of Taxes, a proposed assessment of Tax, a
proposed adjustment to any Tax return filed or other deficiency that has not
been paid.
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<PAGE> 17
(d) Neither DSI nor any Affiliate of DSI has waived
restrictions on assessment or collection of Taxes or executed a waiver or
consented to the extension of any statute of limitations for federal income or
other Tax Liability that remains outstanding. Except as set forth on Schedule
2.10, neither DSI nor any DSI Affiliate in respect of DSI has made any payments,
is obligated to make any payments, or is a party to any agreement that under any
circumstances could obligate it to make any payments that will not be deductible
under Code Section 280G or 162(m).
Section 2.11 RECEIVABLES; INVENTORY.
(a) RECEIVABLES. Schedule 2.11 discloses all trade and other
accounts receivable of DSI ("Receivables") outstanding as of November 28, 1997
presented on an aged basis and separately identifies the name of, or DSI's code
name for, each account debtor and the total amount of each related Receivable.
All Receivables, whether disclosed on Schedule 2.11 or created after November
28, 1997, arose from bona fide sale transactions of DSI, and except as disclosed
on Schedule 2.11 and to the extent of the recorded reserve for doubtful accounts
specified on the Balance Sheet, no portion of any Receivable is subject to
counterclaim, defense or set-off or is otherwise in dispute. Except to the
extent of the recorded reserve for doubtful accounts specified on the Balance
Sheet, and the Receivables subject to counterclaim, defense or set-off or
otherwise in dispute disclosed on Schedule 2.11, all of the Receivables are
collectible in the ordinary course of business and will be fully collected
within 120 days after having been created using commercially reasonable efforts
with payments by each debtor being applied first to accounts as specified by
such debtor and, if no account is specified, to accounts of such debtor first
created.
(b) INVENTORY. The inventories of DSI are sufficient to permit
the conduct of the DSI Business in the ordinary course of business immediately
following the Closing in the manner in which the DSI Business is presently
conducted.
(c) TRADE PAYABLES. The trade payables of DSI are, and will at
Closing be, consistent with historical levels and aging.
Section 2.12 BUSINESS; ASSETS. DSI is engaged in the business
of manufacturing and selling thin-film coated products and custom designed
deposition equipment and software and developing and licensing deposition
technology using conventional and enhanced deposition by evaporation,
sputtering, chemical vapor deposition and plasma chemical vapor deposition for
consumer, commercial, aerospace and government customers (collectively, the
"Business") and no other businesses. DSI's equipment and DSI's buildings,
fixtures, improvements, machinery, equipment, tools, furniture, improvements and
tangible personal property, including those reflected on the Balance Sheet, are,
in the aggregate, in good operating condition and repair and are suitable for
the purposes for which they are used in the Business. DSI has good, marketable,
legal, beneficial and exclusive title to all of its assets; all of such assets
are reflected on the Balance Sheet or, under GAAP, are not required to be
reflected thereon; and none of such assets is subject to any Encumbrance, except
Permitted Encumbrances. As used herein, the term "Permitted Encumbrances" means
liens for governmental charges that are not yet due and payable and liens
identified in
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Schedule 2.12. Schedule 2.12 identifies each material asset of DSI that is not
located on property owned or leased by DSI, other than vehicles owned or leased
by DSI.
Section 2.13 LITIGATION. Except as set forth on Schedule 2.13,
there are no actions, suits, investigations, claims or proceedings of any nature
or kind whatsoever ("Litigation") pending or, to the knowledge of the Principal
Shareholders, threatened against or affecting DSI, its assets, the Business, or
the DSI Shares (i) where the claim is stated to be in excess of $25,000, in any
individual instance, or in excess of $100,000, in the aggregate, or (ii) which
if adversely determined, would be reasonably expected to materially and
adversely affect the Business or the operations of DSI or the transactions
contemplated by this Agreement or any Other Agreement. There are no outstanding
judgments, decrees or orders of any Governmental Body against or affecting DSI,
the DSI Shares, the Business or DSI's assets. DSI has not commenced and does not
have pending any action, suit or proceeding against any third party, except as
set forth on Schedule 2.13. Except as set forth in Schedule 2.13, DSI has not
been a party to any other Litigation during the past three years which resulted
in a liability in excess of $25,000, in any individual instance, or which
adversely affected the Business or the operations of DSI.
Section 2.14 CONTRACTS; COMPLIANCE.
(a) Disclosed on Schedule 2.14 is a brief description of each
contract, lease, indenture, mortgage, instrument, commitment or other agreement,
arrangement or understanding, oral or written, formal or informal, to which DSI
is a party with respect to which DSI has continuing Liability and that (i)
involves the purchase, sale or lease of any asset, materials, supplies,
inventory or services in excess of $150,000 per year, (ii) relates to the
borrowing or lending of any money or guarantee of any obligation, (iii) limits
the right of DSI to compete in any line of business or otherwise restricts any
right DSI may have (excluding contracts that are terminable with no continuing
Liability by DSI on thirty (30) days (or less) written notice), (iv) is an
employment or consulting contract involving payment of compensation and benefits
in excess of $100,000 per year or is not terminable at will by DSI; (v) involves
the pending or former purchase or sale of any business; (vi) is with any Related
Party; or (vii) was not entered into in the ordinary course (each, a "Contract"
and collectively, the "Contracts"). Schedule 2.14 discloses any outstanding
stand-by letters of credit issued for the account of DSI (the "Letters of
Credit").
(b) Each Contract is a legal, valid and binding obligation of
DSI and is in full force and effect. Except as disclosed on Schedule 2.14, DSI
and, to the knowledge of the Principal Shareholders, each other party to each
Contract has performed all obligations required to be performed by it thereunder
and is not in breach or default, and is not alleged to be in breach or default,
in any material respect thereunder, and no event has occurred and no condition
or state of facts exists (or would exist upon the giving of notice or the lapse
of time or both) that would become or cause a breach, default or event of
default thereunder, which would give to any Person the right to cause such a
termination or would cause an acceleration of any obligation thereunder. Except
as disclosed on Schedule 2.14, DSI is not currently renegotiating any Contract
nor has DSI received any
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notice of non-renewal or, except as provided in the Contract, price increase or
sales or production allocation with respect to any Contract.
The parties recognize that there are certain Contracts the
existence and/or the terms of which cannot be disclosed to ADLT as a result of
the nature thereof and that Schedule 2.14 discloses only general information
with respect to such Contracts in the aggregate. ADLT agrees that,
notwithstanding the terms of this Section 2.14 or Article 9 of this Agreement,
the Shareholders shall have no liability to ADLT as a result of the failure to
have disclosed any information with respect to such Contracts or as a result of
the performance of such Contracts.
Section 2.15 PERMITS. DSI holds and is in compliance in all
material respects with all permits, certificates, licenses, franchises,
privileges, approvals, registrations and authorizations required under all Laws,
rules and regulations or advisable in connection with the operation of DSI's
assets and the Business (collectively, the "Permits"), except that DSI may have
performed certain construction activities prior to the receipt of the requisite
construction permits, and each of such Permits is in full force and effect. No
notice of cancellation of or default, dispute or complaint concerning any
Permit, or of any event, condition or state of facts described in the preceding
sentence, has been received by DSI.
Section 2.16 COMPLIANCE WITH LAWS. DSI is not, and has
received no notice that it is, in violation in any material respect of any
applicable foreign, federal, state and local statutes, laws, ordinances, rules
or regulations (collectively, "Laws"), and no event has occurred or condition or
state of facts exists that could give rise to any such violation.
Section 2.17 REAL PROPERTY. Schedule 2.17 sets forth a correct
list and summary descriptions (showing the record title holder, location, uses
being made thereof and indebtedness of DSI secured by a mortgage or other
Encumbrance thereon) of all real properties currently owned or leased by DSI or
in which DSI has an interest (including options) (collectively, the "Real
Property"). Except as described in Schedule 2.17, there are no leases,
subleases, tenancies or other rights of occupancy affecting all or any part of
the Real Property owned by DSI, and DSI has not granted any options to purchase
or otherwise acquire, and there are no outstanding offers to purchase, all or
any part of the Real Property owned by DSI. DSI has the right to quiet enjoyment
of all Real Property in which it holds a leasehold interest for the full term,
including all renewal rights, of the lease or similar agreement relating
thereto. DSI has not received any written or oral notice of assessments for
public improvements or condemnation against any Real Property.
Section 2.18 TRANSACTIONS WITH RELATED PARTIES. Except for
employment relationships and salaries disclosed in Schedule 2.18 or as otherwise
disclosed on Schedule 2.18, no Related Party (as hereafter defined) has directly
or indirectly:
(a) Any Liability to or any right to receive property from
DSI;
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(b) Any contractual or other claim against DSI or any
obligation under any contractual or other claim to or from DSI;
(c) Any interest in any property or assets used or owned by
DSI or necessary for use in the Business or used any of the assets of DSI (other
than ownership of the DSI Shares);
(d) Any agreement or plan providing for payment or vesting (or
acceleration of either) of property, severance benefits or other benefits that
are contingent on the transactions contemplated by this Agreement or conditioned
upon a change of control after the termination of employment of such employee
regardless of the reason for such termination of employment or the value of any
of the benefits which will be calculated on the basis of any of the transactions
contemplated by this Agreement;
(e) Any agreement relating to DSI providing any term of
employment that is not terminable at will;
(f) Become a party to any Contract or has any agreement or
understanding of any nature with any party to any Contract; or
(g) Has any other agreement or understanding or is engaged in
any other transaction of any nature with DSI, its officers or directors
(relating to DSI), its suppliers, vendors or customers.
As used herein, the term "Related Party" means (i) the Shareholders, (ii) any
Affiliate of the Shareholders or DSI, (iii) any officer or director of DSI and
(iv) any spouse, sibling, ancestor or lineal descendant of any natural person
identified in preceding clauses. Without limiting the foregoing, (A) Schedule
2.18 identifies any assets, arrangements or services to which DSI is a party or
with respect to which DSI benefits that will have to be replaced or would be
materially adversely affected after Closing because DSI will after Closing no
longer be owned directly by the Shareholders and (B) Schedule 2.18 identifies
any and all assets (including insurance claims files, legal files, accounting
information, tax returns, etc.) of DSI in the possession of the Shareholders.
Section 2.19 INSURANCE. Schedule 2.19 sets forth a complete
list of all policies of insurance (collectively, the "Insurance Policies") of
which DSI is the owner, insured or beneficiary or programs of self insurance and
identifies whether such policies are claims made or occurrence policies. Except
as set forth on Schedule 2.19, all premiums under the Insurance Policies have
been paid in accordance with the terms of the policies and there are no deposits
or other amounts for the benefit of DSI held by any third party relating to any
insurance or self insurance program of DSI. There have been no material defaults
with respect to any provision contained in any such Insurance Policies, nor has
there been any material failure to give any notice or present any material claim
under any such policies in a timely fashion or in the manner or detail required
by the Insurance Policies. No notice of cancellation or non-renewal with respect
to, or disallowance of any claim under, or increase of the premium for any such
insurance policy has been received by the
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Shareholders or DSI except in the ordinary course of business. Schedule 2.19
describes in detail any program of self-insurance maintained by DSI or by any
Affiliate of DSI for or on behalf of DSI. All of DSI's environmental pollution
insurance coverage policies are identified on Schedule 2.19.
Section 2.20 EMPLOYEE RELATIONS. No employee of DSI is
represented by any union or other labor organization. Except as set forth in
Schedule 2.20, no representation election, arbitration proceeding, grievance,
labor strike, dispute, slowdown, stoppage or other labor trouble is pending or,
to the knowledge of the Principal Shareholders, threatened against, involving,
affecting or potentially affecting DSI. No complaint against DSI is pending or,
to the knowledge of the Principal Shareholders, threatened before the National
Labor Relations Board, the Equal Employment Opportunity Commission or any
similar state or local agency, by or on behalf of any employee of DSI. DSI has
no contingent Liability for sick leave, vacation time, severance pay or any
similar item not fully reserved on the Balance Sheet or incurred in the ordinary
course of business after the date of the Balance Sheet. To the knowledge of the
Principal Shareholders, DSI has no contingent Liability for any occupational
disease of any of its employees, former employees or others. Neither the
execution and delivery of this Agreement, the performance of the provisions
hereof nor the consummation of the transactions contemplated hereby will trigger
any severance pay obligation under any contract to which DSI or any Affiliate of
DSI is a party or under any Law.
Section 2.21 PATENTS AND INTELLECTUAL PROPERTY RIGHTS.
(a) Schedule 2.21 contains a complete list of all trademark
rights, trademark applications, trademark registrations, service marks, trade
names and brand names, copyright registrations and copyright applications,
letters patent, patent applications, logos and licenses (except for licenses
whereby DSI licenses software not material to the Business from third parties or
the amount of the obligation for such license is less than $20,000 in any one
year) used in the Business including the expiration dates, if any, of each such
intellectual property right.
(b) DSI owns or possesses, licenses, has the right to use or
can acquire on reasonable terms, the intellectual property rights identified
pursuant to subparagraph (a) above, any other processes, know-how and related
formulae, trade secrets, inventions, discoveries, improvements, blueprints,
specifications, drawings, designs, shop and royalty rights and other similar
types of proprietary intellectual property, and all research and development
necessary for the conduct of the Business including, but not limited to, all
laboratory research aimed at discovery of new knowledge; searching for
applications of new research findings or other knowledge; conceptual formulation
and design of possible product or process alternatives; testing in search for or
evaluation of product or process alternatives; modification of the formulation
or design of a product or process; design, construction and testing of
preproduction prototypes and models; design and tools, jigs, molds and dies
involving new technology; and engineering activity required to advance the
design of a product to the point that it meets specific functional and economic
requirements and is ready for manufacture (collectively, "Intellectual Property
Rights") used in or applicable to the Business. Other than as reflected in
Schedules 2.8, 2.13 or 2.21, DSI has not received any notice of, nor does it
have any reasonable belief that its use constitutes, a material infringement of
or conflict with
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asserted rights of any third party with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition, financial
or otherwise, or in the management, business prospects, earnings, business or
operations of DSI. Schedule 2.21 identifies any Intellectual Property Right
which is used by DSI but not owned by DSI.
Section 2.22 BENEFIT PLANS.
(a) BENEFIT PLANS; DSI PLANS. Schedule 2.22 discloses all
written and unwritten "employee benefit plans" within the meaning of Section
3(3) of the U.S. Employee Retirement Income Security Act of 1974, as amended,
and the applicable rulings and regulations thereunder ("ERISA"), and any other
written and unwritten profit sharing, pension, savings, deferred compensation,
fringe benefit, insurance, medical, medical reimbursement, life, disability,
accident, post-retirement health or welfare benefit, stock option, stock
purchase, sick pay, vacation, employment, severance, termination or other plan,
agreement, contract, policy, trust fund or arrangement (each, a "Benefit Plan"),
whether or not funded, (i) maintained or sponsored by DSI, (ii) with respect to
which DSI (or the Shareholders with respect to DSI) has or may have Liability or
is obligated to contribute, (A) that otherwise covers any of the current or
former employees of DSI or its Affiliates or (B) as to which any such current or
former employees or their beneficiaries participated or were entitled to
participate or accrue or have accrued any rights thereunder (each, a "DSI
Plan").
(b) DSI GROUP MATTERS; FUNDING. Neither DSI nor any
corporation that may be aggregated with DSI under Sections 414(b), (c), (m) or
(o) of the Code (the "DSI Group") has any obligation to contribute to or any
direct or indirect Liability under or with respect to any Benefit Plan of the
type described in Sections 4063 and 4064 of ERISA or Section 413(c) of the Code.
DSI does not have any Liability, and after the Closing DSI will not have any
Liability, with respect to any Benefit Plan of any other member of the DSI
Group, whether as a result of delinquent contributions, distress terminations,
fraudulent transfers, failure to pay premiums to the Pension Benefit Guaranty
Corporation (the "PBGC"), withdrawal Liability or otherwise. No accumulated
funding deficiency (as defined in Section 302 of ERISA and Section 412 of the
Code) exists nor has any funding waiver from the IRS been received or requested
with respect to any DSI Plan or any Benefit Plan of any member of the DSI Group
and no excise or other Tax is due or owing because of any failure to comply with
the minimum funding standards of the Code or ERISA with respect to any of such
plans.
(c) COMPLIANCE. To the knowledge of the Principal
Shareholders, each of the DSI Plans and all related trusts, insurance contracts
and funds have been created, maintained, funded and administered, in all
material respects, in compliance with all applicable Laws and in compliance, in
all material respects, with the plan document, trust agreement, insurance policy
or other writing creating the same or applicable thereto. No DSI Plan is or, to
the knowledge of the Principal Shareholders, is proposed to be under audit or
investigation, and no completed audit of any DSI Plan has resulted in the
imposition of any Tax, fine or penalty.
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(d) QUALIFIED PLANS. Schedule 2.22 discloses each DSI Plan
that purports to be a qualified plan under Section 401(a) of the Code and exempt
from United States federal income Tax under Section 501(a) of the Code (a
"Qualified Plan"). With respect to each Qualified Plan, a determination letter
(or opinion or notification letter, if applicable) covering the U.S. Tax Reform
Act of 1986 and later Code changes for which the remedial amendment period has
closed has been received from the IRS that such plan is qualified under Section
401(a) of the Code and exempt from federal income Tax under Section 501(a) of
the Code. Except as disclosed on Schedule 2.22, no Qualified Plan has been
amended since the date of the most recent such letter. To the knowledge of the
Principal Shareholders, no member of DSI Group, nor any fiduciary of any
Qualified Plan, nor any agent of any of the foregoing, has done anything that
would adversely affect the qualified status of a Qualified Plan or the qualified
status of any related trust.
(e) NO DEFINED BENEFIT PLANS. No DSI Plan is a defined benefit
plan within the meaning of Section 3(35) of ERISA (a "Defined Benefit Plan"). No
Defined Benefit Plan sponsored or maintained by any member of DSI Group has been
terminated or partially terminated after September 1, 1974. During the five year
period ending on the Closing Date, no member of DSI Group has transferred a
Defined Benefit Plan to a corporation that was not, at the time of transfer,
related to the transferor in any manner described in Sections 414(b), (c), (m)
or (o) of the Code.
(f) MULTIEMPLOYER PLANS. No DSI Plan is a multiemployer plan
within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA (a
"Multiemployer Plan"). No member of DSI Group has withdrawn from any
Multiemployer Plan or incurred any withdrawal Liability to or under any
Multiemployer Plan. No DSI Plan covers any employees of any member of DSI Group
in any foreign country or territory.
(g) PROHIBITED TRANSACTIONS; FIDUCIARY DUTIES; POST-RETIREMENT
BENEFITS. No prohibited transaction (within the meaning of Section 406 of ERISA
and Section 4975 of the Code) with respect to any DSI Plan exists or has
occurred that could subject DSI to any Liability or Tax under Part 5 of Title I
of ERISA or Section 4975 of the Code. Neither DSI nor, to the knowledge of the
Principal Shareholders, any administrator or fiduciary of any DSI Plan, nor any
agent of any of the foregoing, has engaged in any transaction or acted or failed
to act in a manner that will subject DSI to any material Liability for a breach
of fiduciary or other duty under ERISA or any other applicable Law. With the
exception of the requirements of Section 4980B of the Code and except as
disclosed on Schedule 2.22, no post-retirement benefits are provided under any
DSI Plan that is a welfare benefit plan as described in ERISA Section 3(1).
Section 2.23 FINDER'S FEES. Neither the Principal Shareholders
nor DSI nor any of DSI's officers, directors or employees has employed any
broker or finder or incurred any Liability for any brokerage fees, commissions
or finder's fees in connection with the transactions contemplated herein.
Neither the Principal Shareholders nor, to the knowledge of the Principal
Shareholders, any of DSI's other officers, directors or employees has made any
agreement or taken
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any other action which might cause anyone to become entitled to a broker's fee
or commission as a result of the transactions contemplated hereunder.
Section 2.24 CONFIDENTIALITY AGREEMENTS. Schedule 2.24 sets
forth a true, correct and complete list of all confidentiality agreements to
which DSI is a party. All such agreements are valid and binding agreements,
enforceable in accordance with their terms and are in full force and effect. DSI
has performed all obligations required to be performed by DSI under such
agreements and is not in breach or default in any material respect thereunder,
and there has been no event which, with the giving of notice or the lapse of
time or both, would become a material breach or default by DSI thereunder.
Section 2.25 COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as
provided in Schedule 2.25:
(a) COMPLIANCE; NO LIABILITY. DSI has operated its Business
and each parcel of Real Property in compliance in all material respects with all
applicable Environmental Laws. To the knowledge of the Principal Shareholders,
DSI is not subject to any Liability, penalty or expense (including legal fees)
and will not hereafter suffer or incur any loss, Liability, penalty or expense
(including legal fees) by virtue of any violation of any Environmental Law
occurring prior to the Closing, any environmental activity conducted on or with
respect to the Real Property at or prior to the Closing or any environmental
condition existing on or with respect to the Real Property at or prior to the
Closing, in each case whether or not DSI permitted or participated in such act
or omission.
"Environmental Law" means any applicable Law relating to the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants, including common law nuisance, property damage and similar common
law theories.
(b) TREATMENT; CERCLIS. DSI has not treated, stored, recycled
or disposed of any Regulated Material on any real property except in compliance
with applicable Environmental Laws, and, to the knowledge of the Principal
Shareholders, no other Person has treated, stored, recycled or disposed of any
Regulated Material on any part of the Real Property except in compliance with
applicable Environmental Laws. To the knowledge of the Principal Shareholders,
there has been no release of, and there is not present any Regulated Material
at, on or under any Real Property. To the knowledge of the Principal
Shareholders, DSI has not transported any Regulated Material or arranged for the
transportation of any Regulated Material to any location that is listed or
proposed for listing on the National Priorities List pursuant to Superfund, on
CERCLIS or to the knowledge of the Principal Shareholders, any other location
that is the subject of federal, state or local enforcement action or other
investigation that may lead to claims against DSI for cleanup costs, remedial
action, damages to natural resources, to other property or for personal injury
including claims under Superfund. None of the Real Property is listed or to the
knowledge of the Principal Shareholders, proposed for listing on the National
Priorities List pursuant to Superfund, CERCLIS or any state or local list of
sites requiring investigation or cleanup. "Regulated Material" means any
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hazardous substance as defined by any Environmental Law and any other material
regulated by any applicable Environmental Law, including, polychlorinated
biphenyls, petroleum, petroleum-related material, crude oil or any fraction
thereof. "CERCLIS" means the Comprehensive Environmental Response Compensation
Liability Information System List pursuant to Superfund. "Superfund" means the
U.S. Comprehensive Environmental Response Compensation and Liability Act of
1980, 42 U.S.C. Sections 9601 et seq., as amended.
(c) NOTICES; EXISTING CLAIMS; CERTAIN REGULATED MATERIALS;
STORAGE TANKS. DSI has not received any request for information, notice of
claim, demand or other notification that it is or may be potentially responsible
with respect to any investigation, abatement or cleanup of any threatened or
actual release of any Regulated Material. DSI has not transported any Regulated
Material for recycling, treatment, disposal, other handling or otherwise other
than in compliance with applicable law. There has been no past, and there is no
pending or contemplated, claim by DSI under any Environmental Law or Laws based
on actions of others that may have impacted on the Real Property, and DSI has
not entered into any agreement with any Person regarding any Environmental Law,
remedial action or other environmental Liability or expense. To the knowledge of
the Principal Shareholders, all storage tanks located on the Real Property
whether underground or aboveground are in sound condition and are not leaking
and have not leaked, except as disclosed on Schedule 2.25.
Section 2.26 DISCLOSURE. None of the representations or
warranties of the Principal Shareholders or DSI contained in this Article 2 and
none of the information contained in the Schedules referred to in Article 2 is
false or misleading in any material respect or omits to state a fact herein or
therein necessary to make the statements herein or therein not misleading in any
material respect.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
Each Principal Shareholder individually represents and
warrants to ADLT, with respect to such Shareholder's DSI Shares, as follows:
Section 3.1 TITLE TO DSI SHARES. Such Shareholder has legal,
valid, beneficial and exclusive title to his DSI Shares, free of all
Encumbrances, and upon delivery of such DSI Shares at Closing against receipt of
the Purchase Price to be delivered to such Shareholder, ADLT shall acquire legal
and valid title to such DSI Shares, free of all encumbrances.
Section 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. Such
Shareholder confirms he is acquiring the ADLT Shares solely for his or her own
account for investment, not as a nominee or agent and not with a view to the
resale or distribution of any part thereof and such Shareholder has no present
intention of selling, granting any participation in, or otherwise distributing
the same. Such Shareholder further represents that he does not have any
contract, undertaking, agreement or
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arrangement with any person to sell, transfer or grant participation to such
person or any third person, with respect to any of the ADLT Shares.
Section 3.3 RESTRICTED SECURITIES.
(a) Such Shareholder understands that the issuance of the ADLT
shares pursuant to this Agreement and the Merger Agreement have not been
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), or under any state securities laws, that the ADLT Shares are
characterized as "restricted securities" under the federal securities laws
inasmuch as they will be initially acquired from ADLT in a transaction not
involving a public offering and that under such laws and applicable regulations,
such securities may be resold without registration under the Securities Act,
only in certain limited circumstances. In this connection, such Shareholder
represents that he is familiar with SEC Rule 144 as presently in effect, and
understands the resale limitations imposed thereby and by the Securities Act.
(b) Such Shareholder further understands that the transfer of
the ADLT Shares is further limited by the terms of this Agreement and that
transfers of the ADLT Shares are generally not permitted prior to the first
anniversary of the Closing Date without the consent of ADLT, which consent is in
the sole and absolute discretion of ADLT.
Section 3.4 DISCLOSURE OF INFORMATION. Such Shareholder
represents he has had an opportunity to ask questions of and receive answers
from ADLT regarding ADLT and its business. Such Shareholder believes he has
received all the information he considers necessary or appropriate for deciding
whether to acquire the ADLT Shares.
Section 3.5 INVESTMENT EXPERIENCE. Such Shareholder
acknowledges he is able to fend for himself, can bear the economic risk of his
investment and has such knowledge and experience in financial or business
matters that he is capable of evaluating the merits of acquiring the ADLT
Shares.
Section 3.6 ACCREDITED INVESTOR. Such Shareholder represents
he is an "accredited investor" as that term is defined in Rule 501 of Regulation
D of the Act, as presently in effect.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF ADLT
ADLT represents and warrants to the Shareholders as follows:
Section 4.1 TITLE TO ADLT SHARES. Upon delivery of the ADLT
Shares at Closing against receipt of the DSI Shares, each Shareholder shall
acquire legal and valid title to his or her ADLT Shares free of any
Encumbrances.
Section 4.2 ORGANIZATION. Each of ADLT and Acquisition has
been duly incorporated, is validly existing as a corporation in good standing
under the laws of the State of
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Ohio, has the corporate power and authority to own or lease its property as now
owned or leased and to conduct its business as it is now conducted and is duly
qualified to transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on
ADLT and its subsidiaries, taken as a whole.
Section 4.3 SHARES; CAPITALIZATION. The authorized capital
stock of ADLT consists of (i) 80,000,000 shares of ADLT Common Stock, of which
16,471,036 were issued and outstanding as of November 10, 1997, and (ii)
1,000,000 shares of Preferred Stock, $.001 par value, none of which is issued
and outstanding. On the Effective Date under the Merger Agreement, the ADLT
Shares will be duly authorized, validly issued, fully paid and nonassessable and
not subject to preemptive rights created by statute, ADLT's Articles of
Incorporation or Regulations or any agreement to which ADLT is a party or is
bound. The authorized capital stock of Acquisition consists of 850 shares of
common stock, of which 100 shares are issued and outstanding.
Section 4.4 SUBSIDIARIES. Each subsidiary of ADLT has been
duly incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power and
authority to own or lease its property and to conduct its business as described
in the Prospectus and the Annual Report (as defined in Section 4.8) and is duly
qualified to transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on
ADLT and its subsidiaries, taken as a whole; all of the issued shares of capital
stock of each subsidiary of ADLT have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by ADLT or a
subsidiary of ADLT, free and clear of all liens, encumbrances, equities or
claims. For the purposes of this Agreement, the term subsidiary shall exclude
any entity as to which ADLT (and all subsidiaries of ADLT, taken as a whole)
does not own an equity interest entitling ADLT to exercise in excess of 50% of
the voting power of such entity. A list of entities in which the equity interest
of ADLT (and all subsidiaries of ADLT, taken as a whole) exceeds 20% is set
forth on Schedule 4.4.
Section 4.5 AUTHORIZATION AND ENFORCEABILITY. The execution,
delivery and performance by ADLT of this Agreement, and by Acquisition of this
Agreement and the Merger Agreement, have been duly authorized by all necessary
action on the part of ADLT and Acquisition. The execution, delivery and
performance by ADLT and Acquisition of each Other Agreement to which ADLT or
Acquisition, as the case may be, is a party has been duly authorized by all
necessary action on its part. This Agreement has been duly executed and
delivered by and constitutes the valid and binding obligation of ADLT,
enforceable in accordance with its terms, this Agreement has been duly executed
and delivered by and constitutes the valid and binding obligation of
Acquisition, enforceable in accordance with its terms, and each Other Agreement
which is to be executed and delivered by ADLT or Acquisition, when executed and
delivered by
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ADLT or Acquisition, as the case may be, shall constitute, the valid and binding
obligation of ADLT or Acquisition, as the case may be, enforceable in accordance
with its terms.
Section 4.6 NO VIOLATION OF LAWS OR AGREEMENTS. Except as set
forth on Schedule 4.6, none of the execution and delivery of this Agreement or
any Other Agreements, the consummation of the transactions contemplated hereby
or thereby or the compliance with or fulfillment of the terms, conditions and
provisions hereof or thereof by ADLT or Acquisition, nor the execution and
delivery of any Other Agreement, the consummation of the transactions
contemplated thereby or the compliance with or fulfillment of the terms,
conditions and provisions thereof by ADLT or Acquisition, will: (i) contravene
any provision of the charter or regulations of ADLT or any of ADLT's
subsidiaries, (ii) conflict with, result in a breach of or constitute a default
or an event of default (or an event which would, with the passage of time or the
giving of notice or both, constitute a default) under any term, condition or
provision of, or results in the termination or loss of any right (or give others
the right to cause such a termination or loss) under, any license, franchise,
indenture, mortgage or any other contract, agreement or instrument to which ADLT
or any of its subsidiaries is a party or by which the assets of ADLT or any of
its subsidiaries may be bound or affected, and which is material to ADLT and its
subsidiaries, taken as a whole, (iii) violate any Law or violate any judgment or
order of any Governmental Body to which ADLT or any of its subsidiaries is
subject, (iv) result in the creation or imposition of any Encumbrance upon the
ADLT Shares or any material assets of ADLT or any of its subsidiaries, or give
to others any interests or rights therein, or (v) result in the creation,
maturation or acceleration of any Liability or obligation of ADLT or Acquisition
(or give others the right to cause such a maturation or acceleration). Except as
may be required by the HSR Act and the Exchange Act (as defined below), and the
listing of the ADLT Shares on the NASDAQ National Market, no consent, approval,
declaration or authorization of, or registration or filing with, any Person
(including any Governmental Body) is required in connection with the execution
and delivery by ADLT of this Agreement, the execution and delivery by
Acquisition of this Agreement and the Merger Agreement, or the execution by ADLT
or Acquisition of the Other Agreements, and the consummation of the transactions
contemplated hereby and thereby by ADLT or Acquisition; provided, however, that,
in making this representation, ADLT is relying on certain representations of the
Shareholders in Article 3, pursuant to which the issuance of the ADLT Shares is
exempt from registration under the Securities Act.
Section 4.7 SEC REPORTS. ADLT has delivered to DSI and the
Principal Shareholders a copy of each report (including the Company's Annual
Report on Form 10-K for the 12 months ended June 30, 1997 (the "Annual Report")
and the Company's Report on Form 10-Q for the three months ended September 30,
1997) and proxy statement filed by it since June 30, 1997 and prior to the date
hereof (excluding exhibits filed therewith) (the "Exchange Act Filings"), each
in the form filed with the Securities and Exchange Commission ("SEC") under the
U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and a copy
of the 424(b) prospectus dated July 1, 1997 relating to ADLT's Registration
Statement No. 333-28529 under the Securities Act (the "Prospectus"; the Exchange
Act Filings and the Prospectus are sometimes referred to collectively as the
"SEC Filings"). The SEC Filings, as of their respective filing dates, (i)
complied as to form in all material respects with all applicable requirements of
the Securities Act or the Exchange Act,
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as the case may be, and (ii) did not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 4.8 FINDER'S FEES. Neither ADLT or its subsidiaries,
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any Liability for any brokerage fees, commissions
or finder's fees in connection with the transactions contemplated herein.
Neither ADLT, its Affiliates nor any of their respective officers, directors or
employees has made an agreement or taken any other action which might cause
anyone to become entitled to a broker's fee or commission as a result of the
transactions contemplated hereunder.
Section 4.9 NO MATERIAL ADVERSE CHANGE. There has not occurred
any material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
business, operations or prospects of ADLT and its subsidiaries, taken as a
whole, from that set forth in the Exchange Act Filings.
Section 4.10 DISCLOSURE. None of the representations or
warranties of ADLT contained herein is false or misleading in any material
respect or omits to state a fact herein necessary to make the statements herein
not misleading in any material respect.
Section 4.11 LITIGATION. There is no Litigation pending, or to
the knowledge of ADLT, threatened to which ADLT or any of its subsidiaries is a
party or to which any of the properties of ADLT or any of its subsidiaries is
subject (i) affecting the transactions contemplated by this Agreement or any
Other Agreement or (ii) that are required to be described in the Exchange Act
Filings and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Exchange Act Filings or
to be filed as exhibits to the Exchange Act Filings that are not described or
filed as required.
Section 4.12 REGISTRATION RIGHTS. Other than the Registration
Rights and Option Agreement dated December 15, 1995 among General Electric
Company, ADLT and Wayne R. Hellman, there are no contracts, agreements or
understandings between ADLT and any person granting such person the right to
require ADLT to file a registration statement under the Securities Act with
respect to any securities of ADLT.
ARTICLE 5
COVENANTS OF THE PRINCIPAL SHAREHOLDERS AND DSI
Section 5.1 CONDUCT OF BUSINESS PENDING CLOSING. During the
period commencing on the date of this Agreement and ending on the earlier to
occur of (i) the Closing or (ii) the termination of this Agreement (the "Interim
Period"), and unless ADLT shall otherwise consent or agree in writing and
without limiting any other provision herein, DSI shall, and the Principal
Shareholders shall cause DSI to, conduct its affairs as follows:
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(a) ORDINARY COURSE; COMPLIANCE. The Business shall be
conducted in the ordinary course and substantially consistent with past
practice. DSI shall use reasonable best efforts to maintain its property,
equipment and other assets consistent with past practice and shall comply timely
in all material respects with the provisions of all its leases, agreements,
contracts and commitments in connection with the Business or its assets.
(b) PRESERVATION OF BUSINESS. During the Interim Period, DSI
shall use reasonable efforts to preserve its business organization intact, keep
available the services of its employees and preserve the goodwill of its
suppliers, customers and others having business relations with it.
(c) PROHIBITED TRANSACTIONS. During the Interim Period without
the prior consent of ADLT, which consent, with respect to ii, iii, viii, ix or
xi, shall not be unreasonably withheld, DSI shall not, nor shall the
Shareholders cause or permit DSI or any Subsidiary to:
i. Amend its charter documents or bylaws;
ii. Enter into any contract or commitment which is made
other than in the ordinary course of business,
consistent with past practice;
iii. Enter into any employment or consulting contract or
similar arrangement that is not terminable at will or
upon thirty (30) days (or less) notice by DSI,
without penalty or obligation continuing after the
Closing Date;
iv. Fail to pay all Taxes when due (as any such due date
may be extended) or fail to pay when due any other
Liability or charge inconsistent with past practice,
except any Tax, Liability or charge which DSI may be
contesting in good faith and under circumstances that
will not result in any Encumbrance on any asset of
DSI;
v. Make, change or revoke any Tax election or make any
agreement or settlement with any taxing authority
that relates to the period after Closing;
vi. Create any Encumbrance, other than Permitted
Encumbrances, on any assets, tangible or intangible;
vii. Declare, set aside or pay any dividend or other
distribution (whether in cash, stock, property or any
combination thereof), in respect of DSI Common Stock,
or directly or indirectly issue, sell, redeem,
purchase or otherwise acquire or dispose of, or
create any Securities Rights with respect to, DSI
Common Stock or any rights to purchase DSI Common
Stock or securities convertible into or exchangeable
DSI Common Stock;
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viii. Increase, except in the ordinary course of business
consistent with past practice, any of the salaries or
other compensation payable or to become payable to,
or make any advance or loan to, any employee, or make
any increase in, or any addition to, other benefits
(including any DSI Benefit Plan) to which any
employee may be entitled, or make any payments to or
in respect of any DSI Benefit Plan or any change in
any DSI Benefit Plan, unless requested to do so by
the IRS or other regulatory authority in connection
with any application or filing therewith or review
thereby with respect to any DSI Benefit Plan;
ix. Make or authorize any single capital expenditure or
series of related capital expenditures in excess of
$100,000 other than expenditures with respect to the
New Line or acquire (by merger, consolidation or
acquisition of stock or assets) any corporation,
partnership or other business organization or
division thereof, or make any investment either by
purchase of stock or securities, contribute capital,
make any loan or advance of funds to any Person or,
except in the ordinary course of business, purchase
any property or assets;
x. Sell, transfer or otherwise dispose of any assets
(other than inventory), except sales of assets in the
ordinary course of business not in excess of $25,000
in any individual instance or $100,000 in the
aggregate; sell, transfer or otherwise dispose of any
assets for less than fair market value; or purchase
any assets for greater than fair market value; or
xi. Make any payment, loan or advance of any amount to or
in respect of, or any sale, transfer or lease of any
properties or assets (whether real, personal or
mixed, tangible or intangible) to, or consummate any
transaction or create any agreement or arrangement
with, any Related Party, except for (A) compensation
to the officers and employees at rates not exceeding
the rates of compensation existing on the date hereof
except in the ordinary course consistent with past
practice, or (B) otherwise as contemplated by this
Agreement.
Section 5.2 ACCESS, INFORMATION AND DOCUMENTS. During the
Interim Period, the Shareholders and DSI shall give to ADLT and to its employees
and representatives (including independent public accountants, attorneys,
environmental consultants and engineers) access during normal business hours and
upon reasonable notice to all of the properties (including Real Property for
purposes of an environmental assessment), books, Tax returns, contracts,
commitments, records, officers, personnel and accountants (including independent
public accountants) of DSI and shall furnish to ADLT all such documents and
copies of documents and all information with respect to the affairs of DSI as
ADLT may reasonably request; provided that ADLT shall conduct such due diligence
in such manner as to minimize the disruption of the Business and operations of
DSI; and
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provided further that, with respect to any environmental assessment, copies of
any such assessment shall be provided to DSI and no on-site testing shall be
performed without the consent of DSI, which consent may not be unreasonably
withheld.
Section 5.3 PRESERVE ACCURACY OF REPRESENTATIONS AND
WARRANTIES. The Principal Shareholders shall use their reasonable efforts to
ensure that DSI conducts, and DSI shall use its reasonable best efforts to
conduct, the Business in such a manner that, at the Closing, the representations
and warranties of the Principal Shareholders and DSI contained in this Agreement
shall be true and correct in all material respects as though such
representations and warranties were made on, as of, and with reference to such
date. The Principal Shareholders and DSI shall each promptly notify ADLT of any
lawsuit, claim, proceeding or investigation of which they obtain knowledge that
may be threatened, brought, asserted or commenced after the date hereof against
DSI that would be required to be disclosed pursuant to Article 2 or 3 of this
Agreement. The Principal Shareholders and DSI shall each notify ADLT of any
facts or circumstances as to which it obtains knowledge that cause any
representation and warranty contained in Article 2 or 3 of this Agreement or
relating to any matters required to be set forth in the related Schedules hereto
to be untrue.
Section 5.4 FILINGS AND AUTHORIZATIONS. (a) As promptly as
practicable, each of DSI and the Shareholders shall make, or cause to be made,
such filings and submissions under law, rules and regulations applicable to it,
including the HSR Act, as may be required for it to consummate the purchase and
transfer of the DSI Shares hereunder, and shall use its best efforts to obtain,
or cause to be obtained, all authorizations, approvals, consents and waivers
from all Governmental Bodies necessary to be obtained by it.
(b) As promptly as practicable, DSI shall use its best efforts
to obtain the approval of Shareholders of this Agreement and the Merger
Agreement as required by California Law; provided that best efforts does not
include the obligation to provide any financial incentive to any Shareholder.
Section 5.5 NOTICE OF CHANGES. During the Interim Period, the
Shareholders and DSI shall give ADLT prompt written notice of any material
change or inaccuracies in any data previously given or made available to ADLT
pursuant to this Agreement.
Section 5.6 RESALE OF ADLT SHARES. No Shareholder (and no
permitted transferee of the ADLT Shares of any Shareholder) shall transfer any
ADLT Shares prior to the first anniversary of the Closing Date (the "Restricted
Period"), other than in accordance with the Registration Rights Agreement,
without the prior written consent of ADLT, which consent is and shall be in the
sole and absolute discretion of ADLT; provided, however, that any Shareholder
may make a charitable donation of some or all of such Shareholder's shares or a
transfer, other than a transfer for value, to such Shareholder's spouse,
children or parents, or a trust for the benefit of any such person or persons;
provided, in either such case, that such transferee is bound by the transfer
restrictions set forth in this Section 5.6. After expiration of the Restricted
Period, any Shareholder
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(and any permitted transferee) may transfer his or her ADLT shares only in
accordance with applicable securities laws.
Section 5.7 NO NEGOTIATIONS. Until the termination of this
Agreement, neither DSI nor any Principal Shareholder shall, nor shall any of
them give authorization or permission to any other person to institute, continue
or otherwise entertain or maintain negotiations or discussions with any person,
other than ADLT, with respect to the sale of any of the capital stock, business
or assets of DSI other than the sale of inventory in the ordinary course of
business.
Section 5.8 SCHEDULES. Prior to January 16, 1998, DSI may
provide any Schedule hereto, and (except as set forth in Section 8.1(iv)) such
schedules shall have the effect of amending the representations and warranties
of DSI and the Principal Shareholders in this Agreement with the same effect as
if the schedules or information were attached hereto on the date hereof.
Section 5.9 EXERCISE OF DSI OPTIONS. DSI shall cause the
outstanding options for DSI common stock to be exercised effective as of the
Closing Date.
ARTICLE 6
COVENANTS OF ADLT
Section 6.1 PRESERVE ACCURACY OF REPRESENTATIONS AND
WARRANTIES. ADLT shall use its reasonable efforts to conduct its business in
such a manner that, at the Closing, the representations and warranties of ADLT
contained in this Agreement shall be true and correct in all material respects
as though such representations and warranties were made on, as of, and with
reference to such date. ADLT shall promptly notify the Shareholders of any
lawsuit, claim, proceeding or investigation that may be threatened, brought,
asserted or commenced after the date hereof against ADLT or any subsidiary of
ADLT. ADLT shall notify the Shareholders of any facts or circumstances as to
which it obtains knowledge that cause any representation and warranty contained
in Article 4 of this Agreement or relating to any matters required to be set
forth in the related Schedules hereto to be untrue.
Section 6.2 FILINGS AND AUTHORIZATIONS. As promptly as
practicable, ADLT shall make, or cause to be made, such filings and submissions
under law, rules and regulations applicable to it, including the HSR Act, as may
be required for it to consummate the purchase and transfer of the DSI Shares
hereunder, and shall use its best efforts to obtain, or cause to be obtained,
all authorizations, approvals, consents and waivers from all Governmental Bodies
necessary to be obtained by it.
Section 6.3 NOTICE OF CHANGES. During the Interim Period, ADLT
shall deliver to the Shareholders copies of any material public disclosures made
by ADLT.
Section 6.4 STOCK LEGENDS. After expiration of the Restricted
Period, ADLT shall instruct its transfer agent to reissue to any Shareholder (or
its permitted transferee), upon surrender of the certificates for their ADLT
Shares, a certificate or certificates representing such Shareholder's
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(or transferee's) ADLT Shares without the restrictive legend set forth on such
certificate referring to the transfer restrictions set forth in Section 5.6 of
this Agreement.
Section 6.5 STOCK OPTION PLAN. Within 30 days following the
Closing Date, ADLT will amend its 1998 Incentive Award Plan to provide for the
grant of awards of options for the purchase of at least 200,000 additional
shares of ADLT Common Stock. To the extent required to permit options under such
plan to be incentive stock options under the Code, ADLT will include approval of
such stock option plan in its proxy statement for its 1998 annual meeting of
shareholders. Within 30 days following the Closing Date, ADLT shall grant
options to purchase not less than 200,000 shares of ADLT common stock to
employees of DSI, as reasonably agreed between ADLT and the Principal
Shareholders.
Section 6.6 EMPLOYEE BENEFITS. ADLT will maintain in force
each DSI Plan which is in force on the date hereof until the first anniversary
of the Closing Date, unless ADLT can provide improved benefit plans reasonably
acceptable to DSI management; provided, however, that the DSI Profit Sharing
Plan shall be amended to eliminate any preferential contributions and shall
remain in effect to include contributions for the fiscal years ending June 30,
1998 and June 30, 1999.
Section 6.7 POST-CLOSING INDEMNIFICATION OF CERTAIN PERSONS.
(a) From and after the Closing, ADLT shall, and shall cause
DSI to, indemnify, defend and hold harmless the present and former officers,
directors, employees, agents and representatives of DSI (collectively, the
"Indemnified Parties") against all losses, expenses, claims, damages or
liabilities arising out of actions or omissions occurring at or prior to the
Closing (including, without limitation, the transactions contemplated by this
Agreement) to the fullest extent permitted or required under the California
General Corporation Law (the "California Law") or other applicable state law
(and shall also advance reasonable expenses as incurred to the fullest extent
permitted under the California Law or other applicable state law, provided that
the persons to whom expenses are advanced provide an undertaking to repay such
advances contemplated by the California Law). ADLT agrees that all rights to
indemnification, including provisions relating to advances of expenses incurred
in defense of any claim, action, suit, proceeding or investigation (a "Claim")
existing in favor of the Indemnified Parties as provided in DSI's Articles of
Incorporation or By-Laws or other agreement or provisions, as in effect as of
the date hereof, with respect to matters occurring through the Closing, shall
survive the Closing and shall continue in full force and effect.
(b) Without limiting the foregoing, in the event any Claim is
brought against any Indemnified Party (whether arising before or after the
Closing) after the Closing (i) the Indemnified Parties may retain counsel
satisfactory to them (subject to approval by ADLT and DSI, which approval will
not be unreasonably withheld or delayed), (ii) ADLT and DSI shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received subject to the ability of ADLT and
DSI to receive such information relative to the legal services provided as is
customarily provided and reasonably requested by ADLT and DSI, and (iii) ADLT
and DSI will use all reasonable efforts to assist in the vigorous defense of any
such
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matter, provided that neither ADLT nor DSI shall be liable for any settlement of
any Claim effected without its written consent, which consent, however, shall
not be unreasonably withheld or delayed. Any Indemnified Party wishing to claim
indemnification under this Section 6.7, upon learning of any such Claim, shall
notify ADLT (but the failure so to notify ADLT shall not relieve it from any
liability which it may have under this Section 6.7 except to the extent such
failure materially prejudices ADLT). The Indemnified Parties as a group may
retain only one law firm to represent them with respect to each such matter
unless there is, as evidenced by the written opinion of counsel reasonably
acceptable to ADLT and DSI, under applicable standards of professional conduct,
a conflict on any significant issue between the positions of any two or more
Indemnified Parties.
(c) This section 6.7 is intended to benefit the Indemnified
Parties and shall be binding on all successors and assigns of ADLT and DSI.
Section 6.8 DSI SECURITY CLEARANCES. Following the Closing,
ADLT shall take reasonable actions to preserve DSI's facility security
clearances, including, without limitation, assuring that the composition of the
DSI board of directors complies with any applicable security clearance
requirements and adopting resolutions of the ADLT board of directors relating to
custody and disclosure of classified information.
Section 6.9 ACQUISITION. For a period of two (2) years
following the Closing:
(a) ADLT shall not permit Acquisition to issue additional
shares of stock that would result in ADLT losing control of Acquisition within
the meaning of Section 368(c) of the Code;
(b) ADLT shall not liquidate Acquisition or merge Acquisition
with another company (other than DSI) or sell or otherwise dispose of the stock
of Acquisition if such liquidation, merger or disposition would cause the
transactions contemplated by this Agreement to fail to satisfy continuity of
proprietary interest as required by the regulations under Section 368 of the
Code and the case law related thereto; and
(c) ADLT shall not permit Acquisition to sell or otherwise
dispose of any of its assets or of any of the assets acquired from DSI, directly
or indirectly, except for (i) dispositions made in the ordinary course of
business, (ii) transfers of assets to a corporation all of whose outstanding
stock is owned directly by Acquisition, (iii) transfers of assets by direct or
indirect wholly-owned subsidiaries of Acquisition to other direct or indirect
wholly-owned subsidiaries of Acquisition or (iv) such other dispositions which
will not cause the transactions contemplated by this Agreement to fail to
satisfy continuity of business enterprise as required by the regulations under
Section 368 of the Code and the case law related thereto.
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ARTICLE 7
CONDITIONS TO CLOSING
Section 7.1 MUTUAL CONDITIONS PRECEDENT. The obligations of
ADLT, Acquisition and DSI to proceed with the Closing under this Agreement are
subject to the fulfillment prior to the Closing of the following conditions:
(a) LITIGATION. No order of any Governmental Body shall be in
effect which enjoins, restrains or prohibits the transactions contemplated
hereby or that would limit or adversely affect ADLT's ownership of the DSI
Shares or the merger contemplated by the Merger Agreement, and there shall not
have been threatened, nor shall there be pending, any action or proceeding by or
before any Governmental Body challenging any of the transactions contemplated by
this Agreement or the Other Agreements or seeking monetary relief by reason of
the consummation of such transactions.
(b) FILINGS. The filing and waiting period requirements of any
applicable federal or state law or Governmental Body relating to the
consummation of the transactions contemplated by this Agreement and the Other
Agreements shall have been complied with.
Section 7.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF ADLT. The
obligation of ADLT to proceed with the Closing under this Agreement is subject
to the fulfillment prior to or at Closing of the following conditions (any one
or more of which may be waived in whole or in part by ADLT at ADLT's option):
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each of the
representations and warranties of the Principal Shareholders and DSI contained
in Article 2 of this Agreement, and each of the representations and warranties
of the Principal Shareholders contained in Article 3 of this Agreement, shall be
true and correct in all material respects on and as of the Closing Date, with
the same force and effect as though such representations and warranties had been
made on, as of and with reference to such date.
(b) PERFORMANCE AND COMPLIANCE. The Principal Shareholders and
DSI shall each have performed in all material respects all of the covenants and
complied in all material respects with all of the provisions required by this
Agreement to be performed or complied with by it on or before the Closing.
(c) NO MATERIAL ADVERSE CHANGE. Between the date of the
Balance Sheet and the Closing Date, except as may be disclosed in this Agreement
and the Schedules hereto, there shall have been no material adverse change in
the financial condition, assets, Liabilities, net worth, Business or prospects
of DSI, and no event or condition shall have occurred or exist that might be
expected to cause such a change in the future.
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(d) APPROVAL BY ADLT BOARD OF DIRECTORS. The Board of
Directors of ADLT shall have approved this Agreement, the Other Agreements and
the consummation of the transactions contemplated hereby and thereby.
(e) APPROVAL BY DSI SHAREHOLDERS. The shareholders of DSI
shall have approved this Agreement and the Merger in the manner required by the
California General Corporation Law.
(f) CLOSING DOCUMENTS. Receipt of the deliveries referred to
in Section 1.10(a) and (b).
(g) CONSENTS. Receipt of evidence reasonably satisfactory to
ADLT that the consents set forth in Schedule 2.6 have been obtained.
(h) MERGER CERTIFICATES. Receipt of evidence reasonably
satisfactory to ADLT that the certificates required to be filed with the
Secretary of State of the State of Ohio and the Secretary of State of the State
of California to effect the Merger contemplated by the Merger Agreement shall
have been delivered and accepted for filing.
(i) APPRAISAL RIGHTS. Appraisal rights as a result of the
merger contemplated by the Merger Agreement shall be available with respect to
no more than 110,000 shares.
(j) PRIVATE PLACEMENT. ADLT and its counsel shall be satisfied
that the issuance of the ADLT shares pursuant to the Merger Agreement will not
require the registration under the Securities Act or any state securities act.
(k) MERGER AGREEMENT. DSI shall have executed and delivered
the Merger Agreement.
Section 7.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DSI.
The obligation of DSI to proceed with the Closing hereunder is subject to the
fulfillment prior to or at Closing of the following conditions (any one or more
of which may be waived in whole or in part by DSI at DSI's option):
(a) ACCURACY OF REPRESENTATIONS AND WARRANTIES. Receipt of
evidence reasonably satisfactory to DSI that each of the representations and
warranties of ADLT contained in Article 4 of this Agreement shall be true and
correct in all material respects on, as of, and with reference to the Closing
Date, with the same force and effect as though such representations and
warranties had been made on, as of and with reference to such date, except with
respect to Section 4.3 concerning the number of outstanding and reserved shares
of stock, which number is likely to fluctuate prior to Closing.
(b) PERFORMANCE AND COMPLIANCE. Receipt of evidence reasonably
satisfactory to DSI that ADLT and Acquisition shall each have performed in all
material respects all of the covenants and complied in all material respects
with all of the provisions required by this Agreement
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to be performed or complied with by it on or before the Closing and that ADLT
and Acquisition shall each have performed in all material respects all of the
covenants and complied in all material respects with all of the provisions
required by the Other Agreements to which it is a party to be performed or
complied with by it on or before Closing.
(c) NO MATERIAL ADVERSE CHANGE. Receipt of evidence reasonably
satisfactory to DSI that, between September 30, 1997 and the Closing Date, there
shall have been no material adverse change in the financial condition, assets,
liabilities, net worth, business or prospects of ADLT and its subsidiaries taken
as a whole, and no event or condition shall have occurred or exist that might be
expected to cause such a change in the future.
(d) CLOSING DOCUMENTS. The Shareholders shall have received
the deliveries referred to in Section 1.10(c).
(e) TAX DEFERRED TRANSACTION. The Principal Shareholders and
their counsel shall be satisfied that the receipt of the ADLT Shares will not
trigger payment of income tax on all or a portion of the value of the ADLT
Shares.
(f) MERGER AGREEMENT. Acquisition shall have executed and
delivered the Merger Agreement.
ARTICLE 8
TERMINATION
Section 8.1 TERMINATION. This Agreement may be terminated at
any time prior to Closing by: (i) mutual consent of ADLT, Shareholders holding a
majority of the DSI Shares and DSI; (ii) ADLT, if any of the conditions
specified in Sections 7.1 or 7.2 hereof shall not have been fulfilled by March
31, 1998 and shall not have been waived by ADLT, (iii) ADLT if DSI does not
consent to environmental testing which ADLT requested pursuant to Section 5.2,
(iv) ADLT, at any time prior to the earlier of (I) the fifth business day
following the last delivery of any schedule pursuant to Section 5.8 or (II) the
Closing Date, if the substance of any such schedule is not satisfactory to ADLT;
or (v) DSI, if any of the conditions specified in Sections 7.1 or 7.3 hereof
shall not have been fulfilled by March 31, 1998 and shall not have been waived
by DSI. Nothing in this Section 8.1 shall be construed as excusing the breach of
any obligation under this Agreement or as limiting the remedies which may be
available to any non-breaching party in respect of such breach. Notwithstanding
the foregoing, in the event that this Agreement is terminated by one party
hereto pursuant to clause (ii) or (v) of the first sentence of this Section
solely as a result of a breach by another party hereto of a representation or
warranty of such other party as of a date after the date of this Agreement,
which breach could not have been reasonably anticipated by such other party and
was beyond the reasonable control of such other party, then neither party shall
have any liability to the other hereunder. Any dispute arising under this
Section 8.1 shall be resolved by arbitration in accordance with the rules of the
American Arbitration Association in the City of San Francisco, California using
three arbitrators, one being chosen by Shareholders holding a majority of the
DSI Shares, one being chosen by ADLT and the third being chosen by the other two
arbitrators. In the
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event of any termination, other than (A) a termination pursuant to (iii) above
or (B) a termination by reason of the breach of any representation by warranty
by DSI or any Shareholder, or the failure by DSI or any Shareholder to perform
any obligation pursuant to this Agreement or any Other Agreement, ADLT shall
promptly pay DSI $600,000, less any expenses paid by ADLT on behalf of DSI
pursuant to Section 10.12 hereof.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
Section 9.1 SURVIVAL OF REPRESENTATIONS. All representations,
warranties, covenants and agreements made by any party in this Agreement or
pursuant hereto shall survive the Closing, but no claim may be made with respect
to any breach of any representation or warranty hereunder after June 30, 1999;
provided, however, that claims for breach of the representations and warranties
contained in Sections 2.10, 2.18 and 2.25 and claims for breach of any
representations and warranties relating to title may be made at any time during
the period of the applicable statute of limitations relating to the subject
matter thereof plus 90 days. If, prior to Closing, any party learns of any fact
or circumstance that would cause a representation or warranty of the other party
or parties to be untrue, incorrect or breached and proceeds with the Closing,
such discovering party shall be deemed to have waived any claim for
indemnification against the other party or parties with respect to such fact or
condition.
Section 9.2 INDEMNIFICATION BY THE SHAREHOLDERS. Subject to
Section 9.6 below, the Principal Shareholders, severally but not jointly, shall
indemnify, defend, save and hold ADLT and Acquisition and their respective
officers, directors, employees, Affiliates and agents (including, after Closing,
DSI) (collectively, "ADLT Indemnitees") harmless from and against all demands,
claims, actions or causes of action, assessments, losses, damages, deficiencies,
Liabilities, costs and expenses, including reasonable attorneys' fees, interest,
penalties, and all reasonable amounts paid in investigation, defense or
settlement of any of the foregoing (collectively, "ADLT Damages") asserted
against, imposed upon, resulting to or incurred by any of the ADLT Indemnitees,
directly or indirectly, in connection with, or arising out of, or resulting from
(i) a breach of any of the representations and warranties made by the Principal
Shareholders or DSI in Article 2 of this Agreement, except as set forth above in
Section 9.1, (ii) a breach of any of the representations and warranties of the
Principal Shareholders in Article 3 except that, with respect to Article 3, each
Principal Shareholder will be severally responsible only for his own
representations and warranties or (iii) a breach of any of the covenants or
agreements made by the Principal Shareholders, or a breach of any of the
covenants or agreements of DSI, to be completed before the Closing, in or
pursuant to this Agreement and in any Other Agreement to which any Principal
Shareholder or DSI is a party; PROVIDED, HOWEVER, that (a) none of the ADLT
Indemnitees shall have any claim for indemnification pursuant to subsection (i)
of this Section (except representations and warranties contained in Section
2.10, 2.18, 2.23, 2.25, and relating to title) and related expenses unless and
until the aggregate amount of all such claims exceeds $500,000, from and after
which time the Principal Shareholders shall be responsible for claims only to
the extent of such excess and (b) in no event shall the Principal Shareholders'
liability for ADLT Damages exceed, in the aggregate, $2,000,000. Any claim for
such liability of any Principal Shareholder may be satisfied
32
<PAGE> 40
by the delivery to ADLT of that number of ADLT Shares determined by dividing the
amount of the liability by the greater of (A) $24 or (B) the closing price of
the ADLT Shares on NASDAQ on the last trading date prior to such delivery. The
Liability of each Principal Shareholder with respect to any claim for indemnity
shall be equal to the Principal Shareholder's Pro Rata Share, provided, however,
that each Principal Shareholder shall be entirely responsible for any violation
of his own representations contained in Article 3. As used herein, Pro Rata
Share means, with respect to any Principal Shareholder, the number of DSI Shares
held by such Principal Shareholder, as set forth on Schedule 1.10A, divided by
805,000.
Section 9.3 INDEMNIFICATION BY ADLT. Subject to Section 9.6
below, ADLT shall indemnify, defend, save and hold the Shareholders harmless
from and against any and all demands, claims, actions or causes of action,
assessments, losses, damages, deficiencies, Liabilities, costs and expenses,
including reasonable attorneys' fees, interest, penalties, and all reasonable
amounts paid in investigation, defense or settlement of any of the foregoing
(collectively, "Shareholder Damages") asserted against, imposed upon, resulting
to or incurred by any of the Shareholders, directly or indirectly, in connection
with, or arising out of, or resulting from (i) a breach of any of the
representations and warranties made by ADLT in this Agreement, except as set
forth above in Section 9.1, or (ii) a breach of any of the covenants or
agreements made by ADLT in or pursuant to this Agreement and in any Other
Agreement to which ADLT or Acquisition is a party; PROVIDED, HOWEVER, that the
Shareholders shall have no claim for indemnification pursuant to subsection (i)
of this Section (except representations and warranties contained in Section 4.8)
and related expenses unless and until the aggregate amount of all such claims
against ADLT exceeds $500,000, from and after which time ADLT shall be
responsible for claims only to the extent of such excess.
Section 9.4 NOTICE OF CLAIMS. If any ADLT Indemnitees or
Shareholder (an "Indemnified Party") believes that it has suffered or incurred
or will suffer or incur any ADLT Damages or Shareholder Damages ("Damages") for
which it is entitled to indemnification under this Article 9, or if any legal,
governmental or administrative proceeding which may result in such damages is
threatened or asserted (including any written notice from any taxing authority),
such Indemnified Party shall so notify the party or parties from whom
indemnification is being claimed (the "Indemnifying Party") with reasonable
promptness and reasonable particularity in light of the circumstances then
existing. If any action at law or suit in equity is instituted by or against a
third party with respect to which any Indemnified Party intends to claim any
Damages, such Indemnified Party shall promptly notify the Indemnifying Party of
such action or suit. The failure of an Indemnified Party to give any notice
required by this Section 9.4 shall not affect any of such party's rights under
this Article 9 except to the extent such failure is actually prejudicial to the
rights or obligations of the Indemnifying Party.
Section 9.5 THIRD PARTY CLAIMS. In case any legal,
governmental or administrative proceeding which may result in such Damages is
instituted, threatened or asserted (including any
33
<PAGE> 41
written notice from any taxing authority) by or against a third party with
respect to which an Indemnified Party intends to claim any Damages and the
Indemnified Party notifies the Indemnifying Party of such proceeding as provided
in Section 9.4, the Indemnifying Party shall be entitled to participate therein
and, to the extent that it may wish, jointly with any other Indemnifying Party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such Indemnified Party, and after notice from the Indemnifying
Party to such Indemnified Party of its election so to assume the defense
thereof, the Indemnifying Party will not be liable to such Indemnified Party
under this Article 9 for any legal or other expenses subsequently incurred by
such Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending or threatened action in respect of which any Indemnified Party is or
could have been a party and indemnity could have been sought hereunder by such
Indemnified Party unless such settlement includes an unconditional release of
such Indemnified Party from all Liability on any claims that are the subject
matter of such proceeding.
Section 9.6 LIMITATION ON DAMAGES; INSURANCE; ETC. In
determining Damages hereunder, (i) each Indemnified Party shall be required to
pursue all valid claims against any insurance carrier providing coverage with
respect to the matter giving rise to such Damages, and Damages shall be computed
net of any insurance proceeds received by the Indemnified Party with respect
thereto under policies (which are not retrospectively rated or issued by
Affiliates of the Indemnified Party) which reduces the Damages which would
otherwise be sustained, (ii) if such Damages arise out of matters concerning any
customers of DSI, DSI shall use its best efforts to pursue its rights and
remedies against such customers (without litigation or arbitration), (iii) if
such Damages arise out of matters involving Persons other than customers of DSI
and DSI has indemnification rights against such Persons, then DSI shall permit
the Shareholders, at the Shareholders' expense, to pursue any and all remedies
against such Persons and the Shareholders shall be entitled to the proceeds
thereof to the extent that the Shareholders have provided indemnity in respect
of such Damages; provided, however, that no such requirement shall delay the
Shareholders' obligations to indemnify ADLT or DSI hereunder (except that the
indemnification obligation hereunder shall be delayed if and to the extent that
the applicable insurance company under clause (i) above assumes the defense or
acknowledges liability) and (iv) damages shall not include any amount for
special or consequential damages for the party seeking indemnification.
Section 9.7 GOOD FAITH EFFORT TO SETTLE DISPUTES. The parties
agree that, prior to commencing any litigation against the other concerning any
matter with respect to which such party intends to claim a right of
indemnification in such proceeding, Lee Bartolomei and the chief executive
officer of ADLT shall meet in a timely manner and attempt in good faith to
negotiate a settlement of such dispute during which time such individuals shall
disclose to the other Principal Shareholders all relevant information relating
to such dispute.
Section 9.8 SOLE REMEDY. The right to indemnification provided
for in this Article 9 shall be the sole and exclusive remedy of any party hereto
in connection with any breach by any other party of the representations or
warranties in this Agreement.
34
<PAGE> 42
ARTICLE 10
MISCELLANEOUS
Section 10.1 CONSTRUCTION. As used herein, unless the context
otherwise requires: (i) the terms defined herein shall have the meaning set
forth herein for all purposes; (ii) references to "Article" or "Section" are to
an article or section hereof; (iii) all "Exhibits" and "Schedules" referred to
herein are to Exhibits and Schedules attached hereto and are incorporated herein
by reference and made a part hereof; (iv) "include," "includes" and "including"
are deemed to be followed by "without limitation" whether or not they are in
fact followed by such words or words of like import; (v) "writing," "written"
and comparable terms refer to printing, typing, lithography and other means of
reproducing words in a visible form; (vi) "hereof," "herein," "hereunder" and
comparable terms refer to the entirety of this Agreement and not to any
particular article, section or other subdivision hereof or attachment hereto;
(vii) references to any gender include references to all genders, and references
to the singular include references to the plural and vice versa; (viii)
references to an agreement or other instrument or law, statute or regulation are
referred to as amended and supplemented from time to time (and, in the case of a
statute or regulation, to any successor provision) and all regulations, rulings
and interpretations promulgated pursuant thereto; (ix) the preliminary
statements made on page 1 hereof are incorporated herein and made a part hereof;
(x) the headings of the various articles, sections and other subdivisions hereof
are for convenience of reference only and shall not modify, define or limit any
of the terms or provisions hereof; (xi) the deadline for all deliveries and
notices hereunder shall be determined by reference to the local time of the
place such delivery or notice is properly made; and (l) all currency references
herein are to U.S. dollars.
Section 10.2 NOTICES. All notices, and other communications
given or made pursuant to this Agreement shall be in writing and shall be deemed
to have been duly given or made (i) the second day after mailing, if sent by
registered or certified mail, return receipt requested, (ii) upon delivery, if
sent by hand delivery, (iii) when received, if sent by prepaid overnight
carrier, with a record of receipt, or (iv) the first day after dispatch, if sent
by cable, telegram, facsimile or telecopy (with a copy simultaneously sent by
registered or certified mail, return receipt requested), to the parties at the
following addresses (or at such other addresses as shall be specified by the
parties by like notice):
(a) if to ADLT, to:
Advanced Lighting Technologies, Inc.
2307 East Aurora Road Suite 1
Twinsburg, Ohio 44087
35
<PAGE> 43
with a copy to:
Cowden, Humphrey & Sarlson Co., L.P.A.
1414 Terminal Tower
50 Public Square
Cleveland, Ohio 44113
(b) if to the Principal Shareholders, to:
Lee Bartolomei
Frances and John Aguilera, Jr. 1992 Trust, John Aguilera, Trustee
Michael Robbins
James Brosnan
Norman Boling
At the addresses set forth on Schedule 1.10A with a copy to:
Sonnenschein Nath & Rosenthal
685 Market Street
San Francisco, CA 94105
Attention: Robin M. Edwards, Esq.
(c) If to DSI, to:
Deposition Sciences, Inc.
386 Tesconi Court
Santa Rosa, CA 95401
Attention: Mr. Lee Bartolomei
with a copy to:
Sonnenschein Nath & Rosenthal
685 Market Street
San Francisco, CA 94105
Attention: Robin M. Edwards, Esq.
Section 10.3 SUCCESSORS AND ASSIGNS. This Agreement and all the rights
and powers granted hereby shall bind and inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
Section 10.4 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Ohio without regard to its
conflict of law doctrines.
Section 10.5 NO ASSIGNMENT. This Agreement and the rights, interests and
obligations hereunder may not be assigned by any party hereto without the prior
written consent of
36
<PAGE> 44
the other parties hereto, except that ADLT may assign its rights hereunder to
any direct or indirect wholly owned subsidiary of ADLT, so long as ADLT remains
fully liable hereunder.
Section 10.6 APPROVALS AND ACTIONS BY THE SHAREHOLDERS.
Whenever any approval or action by the Shareholders is required or permitted
pursuant to this Agreement, or any Other Agreement, including any consent,
waiver or amendment, such approval or action shall be sufficient if it is made
by Shareholders holding (or who held prior to the Closing) a majority of the DSI
Shares, and such approval or action shall be binding on all Shareholders.
Section 10.7 AMENDMENT AND WAIVER; CUMULATIVE EFFECT. The
parties may by mutual agreement amend this Agreement in any respect, and any
party, as to such party, may (i) extend the time for the performance of any of
the obligations of any other party or waive any inaccuracies in representations
by any other party, (ii) waive compliance by any other party with any of the
agreements contained herein and performance of any obligations by such other
party, and (iii) waive the fulfillment of any condition that is precedent to the
performance by such party of any of its obligations under this Agreement. To be
effective, any such amendment or waiver must be in writing and be signed by the
party against whom enforcement of the same is sought. Neither the failure of any
party hereto to exercise any right, power or remedy provided under this
Agreement where otherwise available in respect hereof at law or in equity, or to
insist upon compliance by any other party with its obligations hereunder, nor
any custom or practice of the parties at variance with the terms hereof, shall
constitute a waiver by such party of its right to exercise any such right, power
or remedy or to demand such compliance. The rights and remedies of the parties
hereto are cumulative and not exclusive of the rights and remedies that they
otherwise might have now or hereafter, at law, in equity, by statute or
otherwise.
Section 10.8 ENTIRE AGREEMENT. This Agreement and the
Schedules and Exhibits set forth all of the promises, covenants, agreements,
conditions and undertakings between the parties hereto with respect to the
subject matter hereof, and supersede all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, other than the Confidentiality Agreement dated December 5, 1997 between
DSI and ADLT.
Section 10.9 SEVERABILITY. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other terms, conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the extent possible.
Section 10.10 NO THIRD PARTY BENEFICIARIES. This Agreement is
not intended to confer upon any Person other than the parties hereto any rights
or remedies hereunder, except the provisions of Section 9.2 relating to ADLT
Indemnitees, which are intended to benefit such indemnitees.
37
<PAGE> 45
Section 10.11 COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original but
all of which together shall be deemed to be one and the same instrument.
Section 10.12 EXPENSES. ADLT shall be responsible for all of
its costs and expenses in connection with this Agreement and the transactions
contemplated hereby. DSI shall be responsible for all of the costs and expenses
of DSI and the Shareholders in connection with this Agreement and the
transactions contemplated hereby; provided, however, ADLT may, in its sole
discretion, advance any such amounts on behalf of DSI and any termination
payment required pursuant to Section 8.1 shall be reduced by the aggregate
amount of such advances.
Section 10.13 ARBITRATION. Except as provided in Section 8.1,
any dispute arising under this Agreement shall be resolved by arbitration in
accordance with the rules of the American Arbitration Association in the City of
Cleveland, Ohio using three arbitrators, one being chosen by Shareholders
holding a majority of the DSI Shares, one being chosen by ADLT and the third
being chosen by the other two arbitrators (collectively, the "Arbitrators"). The
decision by the Arbitrators of any dispute shall be binding on the parties for
all purposes. In addition to any other contractual remedy granted in any such
arbitration, the Arbitrators shall grant the prevailing party its reasonable
costs and legal fees incurred in connection with the arbitration proceeding.
38
<PAGE> 46
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
ADVANCED LIGHTING TECHNOLOGIES, INC.
By: /s/
---------------------------------------------
Wayne R. Hellman, CEO
ADVANCED ACQUISITIONS, INC.
By: /s/
---------------------------------------------
Wayne R. Hellman, President
DEPOSITION SCIENCES, INC.
By: /s/
---------------------------------------------
Lee Bartolomei, CEO
/s/
Lee Bartolomei, Shareholder
FRANCES AND JOHN AGUILERA, JR.
1992 TRUST, Shareholder
By: /s/
---------------------------------------------
John Aguilera, Trustee
/s/
------------------------------------------------
Michael Robbins, Shareholder
/s/
------------------------------------------------
James Brosnan, Shareholder
/s/
------------------------------------------------
Norman Boling, Shareholder
39
<PAGE> 47
CONSENTS
I, the undersigned, being the spouse of a Principal Shareholder, have
read and clearly understand the foregoing Agreement and Plan of Reorganization
("Agreement") which has been executed by my spouse. I recognize that under the
terms of said Agreement, for a period of one year following the merger, the
shares of Advanced Lighting Technologies, Inc. common stock, including any
interest therein which may be owned by or with me as surviving spouse as
community property, are subject to transfer restrictions in accordance with the
provisions of said Agreement and that my spouse has certain indemnity
obligations.
Being fully convinced of the reasonableness of the Agreement, I hereby
approve and consent to said Agreement and hereby agree to be bound by its
provisions.
<TABLE>
<CAPTION>
<S> <C>
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
Spouse of Lee Bartolomei, Shareholder
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
Spouse of Michael Robbins, Shareholder
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
Spouse of James Brosnan, Shareholder
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
Spouse of Norman Boling, Shareholder
</TABLE>
The undersigned, being the grantors and/or primary beneficiaries of a
Principal Shareholder, have read and clearly understand the foregoing Agreement
and Plan of Reorganization ("Agreement") which has been executed by the Frances
and John Aguilera, Jr. 1992 Trust. I recognize that under the terms of said
Agreement, for a period of one year following the merger, the shares of Advanced
Lighting Technologies, Inc. common stock, including any interest therein which
may be owned by or with me as a grantor and/or primary beneficiary, are subject
to transfer restrictions in accordance with the provisions of said Agreement and
that the Trust has certain indemnity obligations.
Being fully convinced of the reasonableness of the Agreement, I hereby
approve and consent to said Agreement and hereby agree to be bound by its
provisions.
<TABLE>
<CAPTION>
<S> <C>
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
John Aguilera
Dated: January 9, 1998 /s/
--------------------------- -----------------------------------------------
Frances Aguilera
</TABLE>
40
<PAGE> 1
EXHIBIT 10.5
CONFIDENTIAL EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT entered into and effective as of January 2,
1998, among RUUD LIGHTING, INC., a Wisconsin corporation ("RLI" or "EMPLOYER"),
ADVANCED LIGHTING TECHNOLOGIES, INC., an Ohio corporation ("ADLT"), and ALAN J.
RUUD ("EMPLOYEE");
WITNESSETH:
WHEREAS, RLI and Employee desire to terminate any and all prior
agreements, whether oral or written, between the parties and between Employee
and ADLT relating to Employee's employment; and
WHEREAS, RLI and Employee desire to enter into an Employment Agreement
as set forth herein below to ensure RLI and ADLT of the services of Employee as
Vice Chairman of ADLT and Chief Executive Officer of RLI, and to set forth the
rights and duties of the parties hereto,
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. TERMINATION OF PRIOR AGREEMENTS. RLI and Employee hereby terminate any
and all prior agreements, whether oral or written, between the parties
or ADLT relating to Employee's employment.
2. EMPLOYMENT.
(a) RLI hereby employs Employee, and Employee hereby accepts
employment, upon the terms and conditions hereinafter set
forth.
(b) During the term of this Employment Agreement, (for purposes
hereof, all references to the term of this Employment
Agreement shall be deemed to include all renewals or
extensions hereof, if any), Employee shall devote his full
business time to his employment and shall perform diligently
such duties as are, or may be, required by the Board of
Directors of RLI and the Board of Directors of ADLT or their
designee, which duties shall be within the bounds of
reasonableness and acceptable business standards and ethics.
(c) During the term of this Employment Agreement, Employee shall
not, without the prior written consent of RLI, which shall not
be unreasonably withheld, directly or indirectly, render
services of a business, professional or commercial nature to
any other person or firm, whether for compensation or
otherwise, other than in the performance of duties naturally
inherent in the businesses of RLI or any subsidiary or
affiliate of RLI, including but not limited to ADLT; provided,
however, that Employee may continue (i) to serve on the board
of directors of companies to the extent such service and
service on the ADLT Board of Directors is permitted by law,
and (ii) to render services to and participate in
philanthropic and charitable causes, in each case, in a manner
and to the extent consistent with his past practice.
<PAGE> 2
3. TERM AND POSITION.
(a) Subject to the termination provisions contained herein, the
term of this Employment Agreement shall commence as of January
1, 1998 and shall continue for a term of three years from such
date, subject, however, to the provisions of Section 6.
(b) Employee shall serve as Vice Chairman of ADLT and as Chief
Executive Officer of RLI, and in such offices or positions
with ADLT and RLI as shall be agreed upon by Employee and the
Board of Directors of RLI or the Board of Directors of ADLT,
as the case may be, without, however, any change in Employee's
compensation (but such offices or positions shall be
consistent with the office and position stated herein).
(c) Employee shall promptly be appointed to a term on the ADLT
Board of Directors expiring at the ADLT annual meeting in the
year 2000 and be appointed Vice Chairman of ADLT and as a
member of the Executive Committee of the ADLT Board of
Directors.
(d) The principal business office of Employee shall be in Racine,
Wisconsin; provided, however, Employee maintains a residence
and a business office in Florida, from which the Employee may
perform his duties under this Agreement. Employee shall not be
required to relocate without Employee's consent. Employee's
travel expenses for travel to and from the Wisconsin and
Florida offices shall be paid by RLI.
4. COMPENSATION.
(a) Subject to the provisions of this Employment Agreement, for
all services which Employee may render to RLI or ADLT during
the term of this Employment Agreement, Employee shall receive
a salary at the rate of One Hundred Eighty Five Thousand
Dollars ($185,000) per annum for the first year of this
Agreement, which shall be payable in equal, consecutive
biweekly installments.
(b) Provided that Employee satisfactorily performs his services
under this Employment Agreement, Employee shall be entitled to
salary increases from time to time as determined by the
Compensation Committee of ADLT.
(c) Provided that Employee has satisfactorily performed his
services under this Employment Agreement, Employee shall be
eligible for bonuses from time to time as determined by the
Compensation Committee of ADLT.
5. OTHER BENEFITS.
During the term of this Employment Agreement, Employee shall be
entitled to such vacation privileges, life insurance, medical and
hospitalization benefits, and such other benefits as are typically provided to
other executive officers of ADLT and its subsidiaries in comparable positions;
provided, however, that such benefits shall be not less valuable to Employee
than those benefits provided by Employer in the recent past, provided that, on
or after January 1, 1999, any benefit reduction to executive officers of ADLT
may be applied to Employee's non-vacation benefits.
2
<PAGE> 3
6. TERMINATION AND FURTHER COMPENSATION.
(a) The employment of Employee under this Employment Agreement,
for the term thereof, may be terminated by the Board of
Directors of RLI or ADLT for cause at any time. For purposes
hereof, the term "cause" shall mean:
(i) Employee's fraud, dishonesty, willful misconduct or
gross negligence in the performance of his duties
hereunder; or
(ii) Employee's material breach of this Agreement, in
whole or in part.
Any termination by reason of the foregoing shall not be in
limitation of any other right or remedy RLI may have under
this Employment Agreement or otherwise.
(b) In the event of (i) termination of the Employment Agreement
for any of the reasons set forth in Subparagraph (a) of this
Section 6, or (ii) if Employee shall voluntarily terminate his
employment hereunder prior to the end of the term of this
Employment Agreement, then in either event Employee shall be
entitled to no further salary, bonus or other benefits under
this Employment Agreement, except as to that portion of any
unpaid salary and other benefits accrued and earned by him
hereunder up to and including the effective date of such
termination. In the event the Employee voluntarily terminates
this Agreement, Employee shall provide 30 days' prior written
notice to RLI of such voluntary termination.
(c) In the event that RLI terminates Employee's employment without
"cause" (as defined herein above) or Employee terminates
employment with "good reason" (as defined below) prior to the
end of the term of this Employment Agreement, then Employee
shall be entitled to all salary and medical benefits for the
remainder of the term of this Employment Agreement all upon
the terms and as set forth herein. At the conclusion of the
term of this Employment Agreement, all salary, medical and
other benefits as set forth herein shall cease. Employee shall
have no other rights and remedies except as set forth in this
Section 6. For purposes hereof, the term "good reason" shall
mean (i) without the express written consent of Employee, a
material reduction of Employee's duties, authority,
compensation, benefits or responsibilities or (ii) a material
breach of this Agreement by RLI or ADLT.
(d) In the event of Employee's death or permanent disability (as
defined herein below) occurring during the term of this
Employment Agreement, this Employment Agreement shall be
deemed terminated for cause and Employee or his estate, as the
case may be, shall be entitled to no further salary or other
compensation provided for herein except as to that portion of
any unpaid salary accrued or earned by Employee hereunder up
to and including the date of death or permanent disability,
and any benefits under any insurance policies or other plans.
(e) "Permanent disability" means the inability of Employee to
perform satisfactorily his usual or customary occupation for a
period of 120 days in the aggregate out of 150 consecutive
days as a result of a physical or mental illness or other
disability which in the written opinion of a physician of
recognized ability and reputation, is likely to continue for a
significant period of time.
3
<PAGE> 4
(f) In the event this Employment Agreement is terminated with
cause, before the end of the term, RLI may, in its sole
discretion, notify Employee that RLI intends to continue to
pay all compensation, benefits and monies due under the terms
of the Employment Agreement for the remainder of the term. In
such event, and provided RLI continues to make such payments,
Employee shall continue to be bound by the terms of the
non-competition provisions in Section 7 hereof.
7. COVENANTS REGARDING NON-COMPETITION AND CONFIDENTIAL INFORMATION.
(a) Non-Competition.
(i) Recognizing that Employee will have been involved as
an executive officer of RLI and ADLT and that RLI and
its affiliates, including ADLT, are engaged in the
supply of products and/or services in every state of
the United States and internationally, therefore,
upon termination of his employment, for any reason,
he agrees that he will not, for a period of three
years immediately following such termination, engage,
in the United States or in any country where RLI,
ADLT or any of their affiliates conducts business,
either directly or indirectly on behalf of himself or
on behalf of any employee, consultant, principal,
substantial shareholder or investor, partner or
officer of any corporation, in any business of the
type and character or in competition with the
business carried on by RLI, ADLT or their affiliates
(as conducted on the date Employee ceases to be
employed by RLI in any capacity).
(ii) Employee will not, for a period of three years
immediately following the termination of his
employment, either directly or indirectly or on
behalf of another as an employee, agent, principal,
partnership or other entity, recruit, hire or
otherwise entice any employees of RLI, ADLT or their
affiliates to leave the Employer.
(iii) Employee will not disclose, divulge, discuss, copy or
otherwise use or suffer to be used in any manner, in
competition with, or contrary to the interests of
RLI, ADLT or their affiliates, the customer lists,
manufacturing methods, product research or
engineering data or other trade secrets of RLI, ADLT
or any of their affiliates, it being acknowledged by
Employee that all such information regarding the
business of RLI, ADLT or their affiliates developed,
compiled or obtained by or furnished to Employee
while Employee shall have been employed by or
associated with RLI, ADLT or their affiliates is
confidential information and RLI's, ADLT's or their
affiliates' exclusive property. Employee's
obligations under this Section 7(a)(iii) will not
apply to any information which (A) is known to the
public other than as a result of Employee's acts or
omissions, (B) is approved for release, in writing,
by the Company, (C) is disclosed to Employee by a
third party without restriction, or (D) Employee is
legally required to disclose.
(b) Employee expressly agrees and understands that the remedy at
law for any breach by him of this Section 7 will be inadequate
and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly,
it is acknowledged that upon adequate proof of Employee's
violation of any legally enforceable provision of
4
<PAGE> 5
this Section 7, RLI shall be entitled to immediate injunctive
relief and may obtain a temporary order restraining any
threatened or further breach. Nothing in this Section 7 shall
be deemed to limit RLI's remedies at law or in equity for any
breach by Employee of any of the provisions of this Section 7
which may be pursued or availed of by RLI or any of its
affiliates including but not limited to ADLT.
(c) In the event Employee shall violate any legally enforceable
provision of this Section 7 as to which there is a specific
time period during which he is prohibited from taking certain
actions or from engaging in certain activities as set forth in
such provision then, in such event, such violation shall toll
the running of such time period from the date of such
violation until such violation shall cease.
8. RENEWAL.
Not later than six (6) months prior to the termination of this
Agreement, Employer shall be entitled to notify Employee whether it desires to
renew this Employment Agreement with Employee for an additional period of three
(3) years, which notice, if given, shall contain the compensation and other
benefits proposed to be paid and provided to Employee by Employer. For a period
of thirty (30) days after receipt of such notice, Employee shall have the option
to accept such offer of renewal or, in the alternative, shall be entitled to
consult with Employer with respect to different compensation and/or benefits to
be paid and provided to Employee by Employer during said renewal period of
employment. If at the end of said thirty (30) day period Employee and Employer
are unable to agree, then this Employment Agreement shall not be renewed at the
end of the term thereof, unless otherwise agreed to by the parties. In the
event, however, that Employer does not, timely notify Employee of its desire to
renew this Employment Agreement, then this Employment Agreement shall not be
renewed at the end of the term thereof, unless otherwise agreed upon by the
parties.
9. SEVERABLE PROVISIONS.
The provisions of this Employment Agreement are severable and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any partially
unenforceable provision to the extent enforceable in any jurisdiction shall,
nevertheless, be binding and enforceable.
10. ARBITRATION.
Any controversy or claim arising out of or relating to this Employment
Agreement, or the breach thereof, shall be settled by arbitration by a single
arbitrator in the City of Racine, State of Wisconsin, in accordance with the
Rules of the American Arbitration Association, and judgment upon the award
rendered by the Arbitrator may be entered in any court having jurisdiction
thereof. The Arbitrator shall be deemed to possess the powers to issue mandatory
orders and restraining orders in connection with such arbitration; provided,
however, that nothing in this Section 10 shall be construed so as to deny RLI
the right and power to seek and obtain injunctive relief in a court of equity
for any breach or threatened breach of Employee of any of his covenants
contained in Section 7 hereof.
11. NOTICES.
(a) Each notice, request, demand or other communication ("NOTICE")
by either party to the other party pursuant to this Agreement
shall be in writing and shall be personally delivered
5
<PAGE> 6
or sent by U.S. certified mail, return receipt requested,
postage prepaid, or by nationally recognized overnight
commercial courier, charges prepaid, or by facsimile
transmission (but each such Notice sent by facsimile
transmission shall be confirmed by sending a copy thereof to
the other party by U.S. mail or commercial courier as provided
herein no later than the following business day), addressed to
the address of the receiving party or to such other address as
such party shall have communicated to the other party in
accordance with this Section. Any Notice hereunder shall be
deemed to have been given and received on the date when
personally delivered, on the date of sending when sent by
facsimile, on the third business day following the date of
sending when sent by mail or on the first business day
following the date of sending when sent by commercial courier.
(b) If a Notice is to RLI, then such Notice shall be addressed to
Ruud Lighting, Inc., attention of the Board of Directors.
(c) If a Notice is to Employee, then such Notice shall be
addressed to Employee at his home address last known on the
payroll records of RLI.
12. WAIVER.
The failure of either party to enforce any provision or provisions of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision or provisions as to any future violations thereof, nor prevent
that party thereafter from enforcing each and every other provision of this
Employment Agreement. The rights granted the parties herein are cumulative and
the waiver of any single remedy shall not constitute a waiver of such party's
right to assert all other legal remedies available to it under the
circumstances.
13. MISCELLANEOUS.
This Employment Agreement supersedes all prior agreements and
understandings between the parties and may not be modified or terminated orally.
No modification, termination or attempted waiver shall be valid unless in
writing and signed by the party against whom the same it is sought to be
enforced.
14. GOVERNING LAW.
This Employment Agreement shall be governed by and construed according
to the laws of the State of Wisconsin.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement on the day and year first set forth above.
WITNESS: RUUD LIGHTING, INC.
By: /s/ Donald Christl By: /s/ Alan J. Ruud
---------------------------- ------------------------------
Name: Name:
---------------------------- ------------------------------
Its:
------------------------------
WITNESS: ADVANCED LIGHTING TECHNOLOGIES, INC.
By: /s/ James S. Hogg By: /s/ Wayne R. Hellman
---------------------------- ------------------------------
Name: James S. Hogg Name: Wayne R. Hellman
---------------------------- ------------------------------
Its: CEO
------------------------------
WITNESS:
By: /s/ Donald Christl /s/ Alan J. Ruud
---------------------------- ------------------------------
Name: ALAN J. RUUD
----------------------------
7
<PAGE> 1
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Shares Amount EPS Shares Amount EPS Shares Amount EPS
------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations $(17,836) $ 7,556 $ 2,667
Less: Increase in warrants' value -- -- 1,350
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
ATTRIBUTABLE TO COMMON SHAREHOLDERS $(17,836) $ 7,556 $ 1,317
======== ======= =======
Net income (loss) $(25,732) $ 7,104 $ 2,382
Less: Increase in warrants' value -- -- 1,350
-------- ------- -------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(25,732) $ 7,104 $ 1,032
======== ======= =======
Weighted Average Shares -- Basic
Outstanding at beginning of period 13,435 10,844 7,282
Weighted average shares issued pursuant to
public offering 2,942 2,327 1,601
Weighted average shares issued upon
warrant conversion -- -- 296
Weighted average shares issued in acquisition 1,768 41 --
Weighted average shares issued for exercise of
stock options 47 22 --
Weighted average common shares issued pursuant
to employee stock purchase plan 3 -- --
Weighted average shares issued during the
period in exchange of subsidiary stock -- -- 20
Weighted average shares issuable in connection
with an acquisition -- 35 8
------- ------- -------
18,195 13,269 9,207
======= ======= =======
Weighted Average Shares -- Diluted
Basic from above 18,195 13,269 9,207
Effect of options -- 289 272
------- ------- -------
18,195 13,558 9,479
======= ======= =======
Earnings (loss) per share -- Basic
Income (loss) from continuing operations $ (.98) $ .57 $ .14
Loss from discontinued operations (.40) (.03) (.02)
Extraordinary charge (.03) -- (.01)
------- ------- -------
Earnings (loss) per share -- Basic $(1.41) $ .54 $ .11
======= ======== =======
Earnings (loss) per share -- Diluted
Income (loss) from continuing operations $ (.98) $ .55 $ .14
Loss from discontinued operations (.40) (.03) (.02)
Extraordinary charge (.03) -- (.01)
------- ------- -------
Earnings (loss) per share -- Diluted $(1.41) $ .52 $ .11
======= ======== =======
</TABLE>
<PAGE> 1
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated pretax income (loss)
from continuing operations .... $(16,034) $ 10,425 $ 3,632 $ 3,354 $ 1,277
Interest ........................... 3,801 1,513 1,548 2,107 2,113
Increase in value of warrants ...... -- -- 1,350 2,302 --
Interest portion of rent expense ... 498 492 297 204 193
Preferred stock dividend
requirements of majority-owned
subsidiaries .................. -- -- -- 62 180
-------- -------- -------- -------- --------
EARNINGS .................. $(11,735) $ 12,430 $ 6,827 $ 8,029 $ 3,763
======== ======== ======== ======== ========
Interest ........................... $ 3,801 $ 1,513 $ 1,548 $ 2,107 $ 2,113
Increase in value of warrants ...... -- -- 1,350 2,302 --
Interest capitalized ............... 1,118 455 98 9 9
Interest portion of rent expense ... 498 492 297 204 193
Preferred stock dividend
requirements of majority-owned
subsidiaries .................. -- -- -- 62 180
-------- -------- -------- -------- --------
FIXED CHARGES ............. $ 5,417 $ 2,460 $ 3,293 $ 4,684 $ 2,495
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES . -- 5.1 2.1 1.7 1.5
======== ======== ======== ======== ========
</TABLE>
For purposes of calculating the unaudited ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations before provision
for income taxes plus fixed charges. Fixed charges consist of interest charges
and amortization of debt issuance cost, whether expensed or capitalized, and
that portion of rental expense that is representative of interest. In fiscal
1998, earnings were inadequate to cover fixed charge requirements by $21,451.
<PAGE> 1
EXHIBIT 21.0
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT AS OF JUNE 30, 1998
The following is a list of significant subsidiaries of Advanced
Lighting Technologies, Inc., all of which are organized under the laws of the
State of Ohio, except where indicated:
ADLT Realty Corp I, Inc.
Advanced Cable Lite Corporation
Advanced Lighting, Inc.
Advanced Lighting Technologies Australia, Inc.
APL Engineered Materials, Inc.
Bio Light, Inc.
Bright Ideas Advertising and Design, Inc.
Deposition Sciences, Inc.
Energy Efficient Products, Inc.
H&F Management, Inc.
HID Recycling, Inc.
Lighting Resources International, Inc.
Lighting Systems Leasing, Inc.
Metal Halide Controls, Inc.
Metal Halide Technologies, Inc.
Microsun Technologies, Inc.
Specialty Discharge Lighting, Inc.
Venture Lighting International, Inc.
Advanced Lighting Systems, Inc.
(organized under the laws of the State of Arizona)
Advanced Lighting Technologies Canada, Inc.
(organized under the laws of Ontario)
Advanced Lighting Technologies Europe Ltd.
(organized under the laws of the United Kingdom)
Advanced Lighting Technologies Ltd.
(organized under the laws of the United Kingdom)
Ballastronix (Delaware), Inc.
(a Delaware corporation)
Ballastronix, Inc.
(organized under the laws of Canada)
Canadian Lighting Systems Holding, Inc.
(organized under the laws of Canada)
Pacific Lighting, Inc.
(organized under the laws of the British Virgin Islands)
Parry Power Systems, Ltd.
(organized under the laws of the United Kingdom)
Ruud Lighting, Inc.
(organized under the laws of the State of Wisconsin)
Venture Lighting International, Ltd.
(organized under the laws of the United Kingdom)
Venture Lighting SRL
(organized under the laws of Italy)
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-34642) pertaining to the Amended and Restated Advanced Lighting
Technologies, Inc. 1995 Incentive Award Plan, in the Registration Statement
(Form S-8 No. 333-22159) pertaining to the Advanced Lighting Technologies, Inc.
Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No.
333-45689) pertaining to the Amended and Restated Advanced Lighting
Technologies, Inc. 1998 Incentive Award Plan, in the Registration Statement
(Form S-8 No. 333-45695) pertaining to the Advanced Lighting Technologies, Inc.
1997 Billion Dollar Market Capitalization Incentive Award Plan in the
Registration Statement (Form S-4 No. 333-58609) pertaining to the Company's 8%
Senior Notes due 2008, in the Registration Statement (Form S-3 No. 333-58613)
pertaining to the Company's securities and securities of ADLT Trust I and in the
Registration Statement (Form S-4 No. 333-58621) pertaining to the Company's
securities of our report dated September 28, 1998 with respect to the
consolidated financial statements of Advanced Lighting Technologies, Inc.
included in this Annual Report (Form 10-K) for the year ended June 30, 1998.
/s/ Ernst & Young LLP
Cleveland, Ohio
September 28, 1998
<PAGE> 1
Exhibit 24.1
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Wayne R.
Hellman and/or Louis S. Fisi his attorney-in-fact, with the power of
substitution, for him in his capacity as director of Advanced Lighting
Technologies, Inc., to sign the Form 10-K Annual Report for the fiscal year
ending on June 30, 1998, and any amendments thereto, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Francis H. Beam Director September 28, 1998
- -----------------------------
Francis H. Beam
/s/ John R. Buerkle Director September 28, 1998
- -----------------------------
John R. Buerkle
/s/ Theodore A. Filson Director September 28, 1998
- -----------------------------
Theodore A. Filson
/s/ Louis S. Fisi Director September 28, 1998
- -----------------------------
Louis S. Fisi
/s/ Susumu Harada Director September 28, 1998
- -----------------------------
Susumu Harada
/s/ Wayne R. Hellman Director September 28, 1998
- -----------------------------
Wayne R. Hellman
/s/ Alan J. Ruud Director September 28, 1998
- -----------------------------
Alan J. Ruud
/s/ A Gordon Tunstall Director September 28, 1998
- -----------------------------
A Gordon Tunstall
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Advanced
Lighting Technologies, Inc. Condensed Consolidated Financial Statements for the
twelve months ended June 30, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 21,917
<SECURITIES> 350
<RECEIVABLES> 45,345
<ALLOWANCES> 375
<INVENTORY> 44,740
<CURRENT-ASSETS> 114,212
<PP&E> 101,980
<DEPRECIATION> 11,952
<TOTAL-ASSETS> 311,852
<CURRENT-LIABILITIES> 36,575
<BONDS> 117,332
<COMMON> 20
0
0
<OTHER-SE> 154,100
<TOTAL-LIABILITY-AND-EQUITY> 311,852
<SALES> 163,893
<TOTAL-REVENUES> 163,893
<CGS> 95,341
<TOTAL-COSTS> 141,192
<OTHER-EXPENSES> 35,804
<LOSS-PROVISION> 65
<INTEREST-EXPENSE> 3,801
<INCOME-PRETAX> (16,034)
<INCOME-TAX> 1,802
<INCOME-CONTINUING> (17,836)
<DISCONTINUED> (7,292)
<EXTRAORDINARY> (604)
<CHANGES> 0
<NET-INCOME> (25,732)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
