<PAGE> 1
Registration No. 333-58609
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 4
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
ADVANCED LIGHTING TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 3641 34-1803229
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
32000 AURORA ROAD
SOLON, OH 44139
TELEPHONE: (440) 519-0500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WAYNE R. HELLMAN
CHIEF EXECUTIVE OFFICER
ADVANCED LIGHTING TECHNOLOGIES, INC.
32000 AURORA ROAD
SOLON, OH 44139
TELEPHONE: (440) 519-0500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
The Commission is requested to send copies of all communications to:
<TABLE>
<S> <C>
JAMES S. HOGG, ESQ. JONATHAN B. MILLER, ESQ.
COWDEN, HUMPHREY & SARLSON CO., L.P.A. BROWN & WOOD LLP
1414 TERMINAL TOWER ONE WORLD TRADE CENTER
CLEVELAND, OH 44113 NEW YORK, NY 10048
(216) 241-2880 (212) 839-5300
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8% Senior Notes due 2008................ $100,000,000 100% $100,000,000 $29,500(2)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f).
(2) Previously paid.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 24, 2000
PROSPECTUS
ADVANCED LIGHTING
TECHNOLOGIES, INC.
OFFER TO EXCHANGE ITS
8% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
8% SENIOR NOTES DUE 2008
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON , 2000, UNLESS EXTENDED.
------------------------
Advanced Lighting Technologies, Inc., an Ohio corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $100,000,000 aggregate
principal amount of its 8% Senior Notes due 2008 (the "New Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like principal amount of its outstanding 8%
Senior Notes due 2008 (the "Old Notes" and, together with the New Notes, the
"Notes"), of which $100,000,000 aggregate principal amount is outstanding.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that (i) the New Notes have been registered under
the Securities Act and therefore will not be subject to certain restrictions on
transfer applicable to the Old Notes and will not be entitled to registration
rights and (ii) the New Notes will not provide for any increase in the interest
rate thereon. In that regard, on September 14, 1998, the interest rate borne by
the Old Notes increased by 0.50% per annum. This interest rate will continue in
effect until the Exchange Offer is consummated, at which time it will return to
the original interest rate. See "Description of the Old Notes." The New Notes
are being offered for exchange in order to satisfy certain obligations of the
Company under the Registration Rights Agreement dated as of March 18, 1998 (the
"Registration Rights Agreement") between the Company and Morgan Stanley & Co.
Incorporated (the "Placement Agent"), the Placement Agent of the Old Notes. The
New Notes will be issued under the same Indenture (as defined herein) as the Old
Notes, and the New Notes and the Old Notes will constitute a single series of
debt securities under the Indenture. In the event that the Exchange Offer is
consummated, any Old Notes which remain outstanding after consummation of the
Exchange Offer and the New Notes issued in the Exchange Offer will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount of Notes have taken certain actions
or exercised certain rights under the Indenture. See "Description of the New
Notes" and "Description of the Old Notes."
THE NEW NOTES ARE REDEEMABLE AT THE OPTION OF THE COMPANY, IN WHOLE OR IN
PART, AT ANY TIME ON OR AFTER MARCH 15, 2003, AT THE REDEMPTION PRICES SET FORTH
HEREIN. 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 WITH THE PROCEEDS OF
ONE OR MORE PUBLIC EQUITY OFFERINGS (AS DEFINED HEREIN), AT 108% OF THEIR
PRINCIPAL AMOUNT; PROVIDED THAT AFTER ANY SUCH REDEMPTION NOTES REPRESENTING AT
LEAST 65% OF THE AGGREGATE PRINCIPAL AMOUNT OF THE NOTES ORIGINALLY ISSUED
REMAIN OUTSTANDING AND THAT NOTICE OF SUCH REDEMPTION IS MAILED WITHIN 60 DAYS
OF ANY SUCH PUBLIC EQUITY OFFERING.
THE OLD NOTES ARE, AND THE NEW NOTES WILL BE, UNSECURED SENIOR INDEBTEDNESS
OF THE COMPANY RANKING PARI PASSU WITH THE COMPANY'S EXISTING AND FUTURE
UNSUBORDINATED UNSECURED INDEBTEDNESS AND SENIOR IN RIGHT OF PAYMENT TO ALL
SUBORDINATED INDEBTEDNESS OF THE COMPANY. THE NEW NOTES WILL BE EFFECTIVELY
SUBORDINATED TO ALL SECURED INDEBTEDNESS OF THE COMPANY WITH RESPECT TO THE
ASSETS SECURING SUCH INDEBTEDNESS AND WILL BE EFFECTIVELY SUBORDINATED TO ALL
LIABILITIES OF THE COMPANY'S SUBSIDIARIES, INCLUDING TRADE PAYABLES. AT DECEMBER
31, 1999, THE COMPANY HAD APPROXIMATELY $147.4 MILLION OF INDEBTEDNESS
OUTSTANDING, INCLUDING APPROXIMATELY $23.0 MILLION OF INDEBTEDNESS OF THE
COMPANY'S SUBSIDIARIES, AND THE COMPANY'S SUBSIDIARIES HAD APPROXIMATELY $37.3
MILLION OF ADDITIONAL LIABILITIES. AT DECEMBER 31, 1999, THE COMPANY AND ITS
SUBSIDIARIES ALSO HAD $35.2 MILLION AVAILABLE (SUBJECT TO BORROWING BASE
COMPLIANCE AND OTHER LIMITATIONS) TO BE DRAWN UNDER THE COMPANY'S BANK CREDIT
FACILITY, WHICH IS SECURED BY SUBSTANTIALLY ALL OF THE PERSONAL PROPERTY OF THE
COMPANY AND EACH OF ITS NORTH AMERICAN AND UNITED KINGDOM SUBSIDIARIES AND A
PLEDGE OF STOCK OF EACH OF THE COMPANY'S PRINCIPAL SUBSIDIARIES.
------------------------
FOR A DESCRIPTION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE NOTES, SEE
"RISK FACTORS" BEGINNING ON PAGE 16.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 2000.
Advanced Logo
<PAGE> 3
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the Securities and Exchange
Commission (the "Commission") as set forth in certain interpretive letters
addressed to third parties in other transactions. However, the Company has not
sought its own interpretive letter and there can be no assurance that the staff
of the Division of Corporation Finance of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such interpretive
letters to third parties. Based on these interpretations by the staff of the
Division of Corporation Finance, and subject to the two immediately following
sentences, the Company believes that New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than a holder who is a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Notes. However, any holder of Old Notes who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing New Notes, or any broker-dealer who purchased Old Notes from the
Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A")
or any other available exemption under the Securities Act, (a) will not be able
to rely on the interpretations of the staff of the Division of Corporation
Finance of the Commission set forth in the above-mentioned interpretive letters,
(b) will not be permitted or entitled to tender such Old Notes in the Exchange
Offer and (c) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other transfer
of such Old Notes unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds Old
Notes acquired for its own account as a result of market-making or other trading
activities and exchanges such Old Notes for New Notes, then such broker-dealer
must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts, as a result of market-making activities or other
trading activities ("Participating Broker-Dealers") may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company has agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such New Notes
for a period ending 90 days after the Expiration Date referred to below (subject
to extension under certain limited circumstances described below) or, if
earlier, when all such New Notes have been disposed of by such Participating
Broker-Dealer. See "Plan of Distribution." Any Participating Broker-Dealer who
is an "affiliate" of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus
2
<PAGE> 4
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer -- Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 90-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
The New Notes will be a new issue of securities for which there currently
is no market. Accordingly, there can be no assurance as to the development or
liquidity of any market for the New Notes. The Company currently does not intend
to apply for listing of the New Notes on any securities exchange or for
quotation through the National Association of Securities Dealers Automated
Quotation System.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the same rights and will be subject to
the same limitations applicable thereto under the Indenture (except those rights
which terminate upon consummation of the Exchange Offer). Following consummation
of the Exchange Offer, the holders of Old Notes will continue to be subject to
the existing restrictions upon transfer thereof and the Company will have no
further obligation to such holders (other than to the Placement Agent under
certain limited circumstances) to provide for registration under the Securities
Act of the Old Notes held by them. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old Notes
could be adversely affected. See "Risk Factors -- Certain Consequences of a
Failure to Exchange Old Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
Old Notes may be tendered for exchange on or prior to 5:00 p.m., New York
City time, on , 2000 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended). Tenders of Old Notes may be
withdrawn at any time on or prior to the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain events and
conditions which may be waived by the Company and to the terms and provisions of
the Registration Rights Agreement. Old Notes may be tendered in whole or in part
in a principal amount of $1,000 and integral multiples thereof. The Company has
agreed to pay all expenses of the Exchange Offer. See "The Exchange
Offer -- Fees and Expenses." Each New Note will bear interest from the most
recent date to which interest has been paid or duly provided for on the Old Note
surrendered in exchange for such New Note. Holders of the Old Notes whose Old
Notes are accepted for exchange will not receive accrued interest on such Old
Notes for any period from and after the last Interest Payment Date to which
interest has been paid or duly provided for on such Old Notes prior to the
original issue
3
<PAGE> 5
date of the New Notes, and will be deemed to have waived the right to receive
any interest on such Old Notes accrued from and after such Interest Payment
Date.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of , 2000.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE COMPANY AT 32000 AURORA ROAD, SOLON, OHIO, 44139 (TELEPHONE (440) 519-0500)
ATTENTION: CORPORATE SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE FIVE BUSINESS DAYS PRIOR TO THE DATE ON
WHICH THE FINAL INVESTMENT DECISION MUST BE MADE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C., and at the regional offices of the Commission at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such information
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, or on the Internet at
http://www.sec.gov. The Indenture will require the Company to file with the
Commission and provide to Holders the reports and other information required to
be filed with the Commission by the Exchange Act, whether or not the Company is
then subject to such requirements. See "Description of the New Notes."
This Prospectus constitutes a part of a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act. This Prospectus, which
forms a part of the Registration Statement, does not contain all the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and related exhibits and
schedules filed therewith for further information with respect to the Company
and the New Notes offered hereby. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed or incorporated by
reference as an exhibit to the Registration Statement or otherwise filed by the
Company with the Commission and each such statement is qualified in its entirety
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the public reference facilities
maintained by the Commission at the addresses described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed with the Commission by the Company
pursuant to the Exchange Act are incorporated herein by reference: (i) the
Company's Annual Report on Form 10-K/A No. 3 for the fiscal year ended June 30,
1999; (ii) the Company's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1999 and (iii) the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the termination of the Exchange Offer for the New Notes, or subsequent to the
filing of the initial Registration Statement and prior to effectiveness of the
Registration
4
<PAGE> 6
Statement shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the respective dates of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated or deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement or document so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Subject to the foregoing, all information appearing in this Prospectus is
qualified in its entirety by the information appearing in the documents
incorporated herein by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, upon request, a copy of any and all of the documents
incorporated by reference other than exhibits to such documents which are not
specifically incorporated by reference in such documents. Written or telephone
requests should be directed to the Company at: 32000 Aurora Road, Solon, Ohio,
44139 (telephone (440) 519-0500) Attention: Corporate Secretary.
------------------------
THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE STATEMENTS APPEAR
IN A NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS
OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (I) THE COMPANY'S RELATIONSHIP
WITH GENERAL ELECTRIC 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) POTENTIAL ACQUISITIONS OR JOINT
VENTURES BY THE COMPANY; 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 PROSPECTUS, 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.
5
<PAGE> 7
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including Consolidated Financial Statements and Notes thereto,
appearing elsewhere in this Prospectus. 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"). Unless the context otherwise requires, the "Company" refers to
Advanced Lighting Technologies, Inc., its subsidiaries and the Predecessors.
Industry data in this Prospectus with respect to the lighting market is reported
on a calendar year basis and includes the industrial, commercial and residential
sectors, but not the automotive sector. Unless otherwise stated herein, such
industry data is derived from selected reports published by the National
Electrical Manufacturers Association ("NEMA").
THE COMPANY
Advanced Lighting Technologies, Inc. is an innovation-driven designer,
manufacturer and marketer of metal halide lighting products. Metal halide
lighting combines superior energy efficient illumination with long lamp (i.e.,
light bulb) life, excellent color rendition and compact lamp size. The Company
believes that it is the only designer and manufacturer in the world focused
primarily on metal halide lighting. As a result of this unique focus, the
Company has developed substantial expertise in all aspects of metal halide
lighting. The Company believes that this focus enhances its responsiveness to
customer demand and has contributed to its technologically advanced product
development and manufacturing capabilities.
The metal halide market is the fastest growing segment of the domestic
lighting market, demonstrated by metal halide lamp sales having grown at a
compound annual rate of approximately 15% since 1993, although growth has varied
substantially from year to year. The Company's strong market position, new
product development capabilities, strategic acquisitions and participation in
international markets have enabled the Company to increase its revenues at rates
in excess of the growth of the domestic metal halide market. The Company's sales
increased at a compound annual growth rate of 52% to $193.2 million in fiscal
1999 from $54.6 million in fiscal 1996. The Company has experienced growth in
net sales in each of the past six years, and the Company's sales increased 15%
to $193.2 million in fiscal 1999 from $168.3 million in fiscal 1998. The
Company's sales increased 28% to $116.1 million in the six months ended December
31, 1999 from $91.0 million in the six months ended December 31, 1998 (the
percentage increase in the Company's commercial and industrial business was 15%
for the period).
The Company has integrated vertically to design, manufacture and market a
broad range of metal halide products, including materials used in the production
of lamps, and lamps and other components for lighting systems as well as
complete metal halide lighting systems. The Company's materials and components
are used in the manufacture of its own lighting systems for sale to end-users
and are sold to third-party manufacturers for use
6
<PAGE> 8
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]
The Company produces over 300 ultra pure metal halide salts and believes
that it produces 100% of the metal halide salts used in the manufacture of metal
halide lamps in the United States and over 80% of salts used worldwide. Metal
halide salts are the primary ingredient within the arc tube of metal halide
lamps and determine the lighting characteristics of the lamp. The Company also
develops and manufactures thin film coatings for metal halide and other
applications. The Company currently markets over 460 different types of metal
halide lamps (76 specialty, 258 "second-generation" Uni-Form(R) pulse start and
132 standard-type), giving it the most diverse product line of any metal halide
lamp manufacturer. In addition, the Company offers components such as more than
450 power supply products for metal halide and other discharge lamp systems. The
Company also produces and markets complete metal halide systems, which consist
of a lamp, power supply, related electronic controls, optical systems, housing,
support systems and other components.
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 have grown at a
compound annual rate of approximately 3% 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 1999, metal halide accounted for
approximately 10% 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. Metal halide
systems have been introduced in fiber optic, projection television and
automotive headlamp applications. The Company believes that additional
opportunities for metal halide lighting exist in other applications where energy
efficiency and light quality are important. As a result of the Company's
dominant position in metal halide materials, the Company expects to benefit from
continued growth in metal
7
<PAGE> 9
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.
STRATEGY
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 use its vertical integration to introduce new products and
applications; (ii) using its experience and technology to continually reduce
cost and improve quality to improve cash flow from operations; (iii)
strengthening the Company's relationships with original equipment manufacturers
("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 (iv) seeking to demonstrate the superiority of metal halide lighting
solutions, thereby stimulating domestic and international demand for the
Company's products.
The Company seeks to achieve its strategic objective through internal
growth and, in recent years, acquisitions and strategic investments and focus on
cost and quality. The Company's acquisitions and investments have been made in
businesses that, when combined with the Company's existing capabilities and
metal halide focus, are intended to provide technological, product or
distribution synergies and offer the potential to enhance the Company's
competitive position or accelerate development of additional metal halide market
opportunities. The Company has made a number of acquisitions and investments
since 1997, as described under "Business -- Recent Developments." To the extent
its capital resources allow, the Company may consider other possible acquisition
and strategic investment opportunities.
The Company's long-term growth strategy contains four key elements:
- Introduce New Products and Systems. To advance the Company's integrated
systems strategy, the Company has completed the Ruud Lighting,
Ballastronix and Parry transactions. This has resulted in the ability of
the Company to 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. The Company's expanding production and
design capabilities should allow it to develop additional specialty
systems, such as fiber optic lighting systems and projection television
optical systems.
- Increase Sales of Existing Products. By expanding relationships and
developing new relationships with lighting agents and OEMs, the Company
expects to increase sales of existing specialty lamps and power supplies.
The Company is beginning to utilize Ruud Lighting's distribution
capability to expand sales of existing products, particularly replacement
lamps. The Company uses a novel direct marketing approach for end-users.
By printing its toll-free number and e-commerce web site address on each
lamp, the Company enables customers to make direct replacement lamp
orders, and utilizes this interaction opportunity to market additional
metal halide products.
- Participate in International Markets. The Company intends to capitalize
on opportunities in international markets first by directly exporting
products into markets where there are few artificial legal constraints to
free trade. Since July 1995, the Company has strengthened its presence in
such markets by acquiring distribution capabilities in these countries.
Further, the Company may continue its attempts to pursue other strategic
acquisitions or build manufacturing facilities in foreign markets. In
countries where artificial legal constraints on trade exist, the Company
seeks to penetrate the markets in indirect ways. These methods include
entering into joint ventures with local lamp manufacturers, or simply
selling them production equipment.
- Penetrate the Residential Lighting Market. Over the next 5 years, 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 primarily through its relationship with Fiberstars, Inc.
and (iii) marketing metal halide portable lighting fixtures (e.g., table
and floor lamps) in an e-commerce format (Microsun.com).
8
<PAGE> 10
RECENT DEVELOPMENTS
To expand the Company's ability to develop and market new metal halide
products and systems and exploit other business opportunities, since 1997 the
Company has completed a number of actions, the most notable of which are
described below.
In February 2000, the Company acquired the interest of Rohm and Haas
Company in Unison Fiber Optic Lighting Systems LLC ("Unison"), the fiber optic
lighting joint venture with Rohm and Haas Company. Simultaneously, Unison
transferred a substantial portion of its personal property (including
intellectual property) to Fiberstars, Inc. The Company believes that Fiberstars,
Inc. is in the best position to develop Unison's fiber optic lighting technology
into commercially accepted lighting products. The transaction included
cross-licensing of technology and a commitment by the Company to continue
support of fiber optic lighting research and development. The Company paid $3.0
million, of which $2.3 million is represented by a note, to obtain the remaining
interest in Unison. As consideration for the transferred assets, the Company
received four warrants to purchase a total of 1,000,000 shares of Fiberstars,
Inc. common stock for nominal consideration. These warrants are exercisable
based on stock price and sales of products using Unison technology, but may be
converted into at least 445,000 shares of Fiberstars, Inc. common stock at any
time.
Effective January 2000, the Company obtained a controlling interest in its
lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its total
ownership to approximately 90%. In conjunction with this increased investment,
the Company has shipped new metal halide lamp-making equipment, available as a
result of the fiscal 1999 termination of joint venture equipment contracts, as
part of an expansion of its facility in Chennai (Madras), India. The Chennai
factory offers a very beneficial cost structure while meeting the Company's
product quality standards. The products produced in the Indian facility are
intended for use around the world and are expected to consist of both the
Company's new Uni-Form(R) pulse start products as well as more-mature metal
halide lamp types.
On October 6, 1999, General Electric Company ("GE") completed an investment
in the Company of $20.6 million. The GE investment includes 761,250 shares of
the Company's newly-created Series A Preferred Stock convertible at any time
into 3,045,000 shares of Company Common Stock (subject to adjustment). GE also
received a warrant to purchase an additional 1,000,000 shares of Common Stock of
the Company (subject to adjustment), which is immediately exercisable. GE has
been a holder of 535,887 shares of Company Common Stock since the Company's
initial public offering in 1995. In connection with the transaction, GE also
received certain additional rights which would entitle GE, under certain
circumstances, to voting control of the Company, through a combination of share
purchases and proxies.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing Company businesses.
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. DSI has subsequently
achieved technological feasibility on certain telecommunications products under
development at the time of the acquisition.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets high-intensity discharge ("HID")
lighting systems, principally focusing on metal halide installations for
commercial, industrial and
9
<PAGE> 11
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 $35.5 million in cash.
10
<PAGE> 12
THE EXCHANGE OFFER
The Exchange Offer......... Up to $100,000,000 aggregate principal amount of
New Notes are being offered in exchange for a like
aggregate principal amount of Old Notes. Old Notes
may be tendered for exchange in whole or in part in
a principal amount of $1,000 and integral multiples
thereof. The Company is making the Exchange Offer
in order to satisfy its obligations under the
Registration Rights Agreement relating to the Old
Notes. For a description of the procedures for
tendering Old Notes, see "The Exchange
Offer -- Procedures for Tendering Old Notes."
Expiration Date............ 5:00 p.m., New York City time, on ,
2000 (such time on such date being hereinafter
called the "Expiration Date") unless the Exchange
Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended).
See "The Exchange Offer -- Expiration Date;
Extensions; Amendments."
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain
conditions. The Company reserves the right in its
sole and absolute discretion, subject to applicable
law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange,
(ii) to terminate the Exchange Offer if certain
specified conditions have not been satisfied, (iii)
to extend the Expiration Date of the Exchange Offer
and retain all Old Notes tendered pursuant to the
Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered Old
Notes, or (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any
respect. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments" and "--Certain
Conditions to the Exchange Offer."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
on or prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent in conformity with certain procedures set
forth below under "The Exchange Offer -- Withdrawal
Rights."
Procedures for Tendering
Old Notes.................. Tendering holders of Old Notes must complete and
sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same
by mail, facsimile or hand delivery, together with
any other required documents, to the Exchange Agent
(as defined below), either with the Old Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Old Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Old
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Old Notes pursuant to the Exchange Offer.
See "The Exchange Offer -- Procedures for Tendering
Old Notes." Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed to
the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
Resales of New Notes....... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Division of Corporation Finance of the Commission
as set
10
<PAGE> 13
forth in certain interpretive letters addressed to
third parties in other transactions. However, the
Company has not sought its own interpretive letter
and there can be no assurance that the staff of the
Division of Corporation Finance of the Commission
would make a similar determination with respect to
the Exchange Offer as it has in such interpretive
letters to third parties. Based on these
interpretations by the staff of the Division of
Corporation Finance, and subject to the two
immediately following sentences, the Company
believes that New Notes issued pursuant to this
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof (other than a
holder who is a broker-dealer) without further
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such New Notes are acquired in the
ordinary course of such holder's business and that
such holder is not participating, and has no
arrangement or understanding with any person to
participate, in a distribution (within the meaning
of the Securities Act) of such New Notes. However,
any holder of Old Notes who is an "affiliate" of
the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the
New Notes, or any broker-dealer who purchased the
Old Notes from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of
Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will
not be permitted or entitled to tender such Old
Notes in the Exchange Offer and (c) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption
from such requirements. In addition, as described
below, if any broker-dealer holds Old Notes
acquired for its own account as a result of
market-making or other trading activities and
exchanges such Old Notes for New Notes, then such
broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old
Notes for New Notes in the Exchange Offer will be
required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to
be received by it are being acquired in the
ordinary course of its business, (iii) it has no
arrangement or understanding with any person to
participate in a distribution (within the meaning
of the Securities Act) of such New Notes, and (iv)
if such holder is not a broker-dealer, such holder
is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the
Securities Act) of such New Notes. Each
broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must
acknowledge that it acquired the Old Notes for its
own account as the result of market-making
activities or other trading activities and must
agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection
with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. Based on
the position taken by the staff of the Division of
Corporation Finance of the Commission in the
interpretive letters referred to above, the Company
believes that broker-dealers who acquired Old Notes
for their own accounts as a result of market-making
11
<PAGE> 14
activities or other trading activities
("Participating Broker-Dealers") may fulfill their
prospectus delivery requirements with respect to
the New Notes received upon exchange of such Old
Notes (other than Old Notes which represent an
unsold allotment from the original sale of the Old
Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it
contains a description of the plan of distribution
with respect to the resale of such New Notes.
Accordingly, this Prospectus, as it may be amended
or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as
a result of market-making or other trading
activities. Subject to certain provisions set forth
in the Registration Rights Agreement and to the
limitations described below under "The Exchange
Offer -- Resale of New Notes," the Company has
agreed that this Prospectus, as it may be amended
or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resales of such New Notes for a period ending 90
days after the Expiration Date (subject to
extension under certain limited circumstances) or,
if earlier, when all such New Notes have been
disposed of by such Participating Broker-Dealer.
See "Plan of Distribution." Any Participating
Broker-Dealer who is an "affiliate" of the Company
may not rely on such interpretive letters and must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. See "The
Exchange Offer -- Resales of New Notes."
Exchange Agent............. The exchange agent with respect to the Exchange
Offer is The Bank of New York (the "Exchange
Agent"). The addresses and telephone and facsimile
numbers of the Exchange Agent are set forth in "The
Exchange Offer -- Exchange Agent" and in the Letter
of Transmittal.
Use of Proceeds............ The Company will not receive any cash proceeds from
the issuance of the New Notes offered hereby. See
"Use of Proceeds."
Certain United States
Federal Income Tax
Considerations........... Holders of Old Notes should review the information
set forth under "-- Certain United States Federal
Income Tax Considerations" prior to tendering Old
Notes in the Exchange Offer.
12
<PAGE> 15
THE NEW NOTES
Securities Offered......... Up to $100,000,000 aggregate principal amount of
the Company's 8% Senior Notes due 2008 which have
been registered under the Securities Act.
The New Notes will be issued and the Old Notes were
issued under an Indenture, dated as of March 18,
1998, as amended (the "Indenture"), between the
Company and The Bank of New York (the "Trustee").
The New Notes and any Old Notes which remain
outstanding after consummation of the Exchange
Offer will constitute a single series of debt
securities under the Indenture and, accordingly,
will vote together as a single class for purposes
of determining whether Holders of the requisite
percentage in outstanding principal amount thereof
have taken certain actions or exercised certain
rights under the Indenture. See "Description of the
New Notes -- General." The terms of the New Notes
are identical in all material respects to the terms
of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and
therefore are not subject to certain restrictions
on transfer applicable to the Old Notes and will
not be entitled to registration rights or other
rights under the Registration Rights Agreement and
(ii) the New Notes will not provide for any
increase in the interest rate thereon. See "The
Exchange Offer -- Purpose of the Exchange Offer,"
"Description of the New Notes" and "Description of
the Old Notes."
Maturity................... March 15, 2008.
Interest................... March 15 and September 15 of each year, commencing
on the first such date following the original
issuance of the New Notes.
Optional Redemption by the
Company.................. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after March 15, 2003 at the redemption prices set
forth herein. 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 with
the proceeds of one or more Public Equity Offerings
(as defined herein), at 108% of their principal
amount; provided that after any such redemption
Notes representing at least 65% of the Notes
initially issued remain outstanding and that notice
of such redemption is mailed within 60 days of any
such Public Equity Offering. See "Description of
the New Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the Notes at a purchase price equal to
101% of their principal amount, plus accrued
interest. There can be no assurance that the
Company will have sufficient funds available at the
time of any Change of Control to make any required
debt repayment (including repurchases of the
Notes). See "Description of the New
Notes -- Repurchase of Notes upon a Change of
Control."
Ranking.................... The Notes will be unsecured senior indebtedness
ranking pari passu with existing and future
unsubordinated unsecured indebtedness and senior in
right of payment to all subordinated indebtedness
of the Company. The Notes will be effectively
subordinated to all secured indebtedness of the
Company and its subsidiaries with respect to the
collateral securing such indebtedness, and the
Notes will be effectively subordinated to all
liabili-
13
<PAGE> 16
ties of the Company's subsidiaries, including trade
payables. (At December 31, 1999, the Company had
approximately $147.4 million of indebtedness
outstanding, including approximately $23.0 million
of indebtedness of the Company's subsidiaries, and
the Company's subsidiaries had approximately $37.3
million of additional liabilities. At December 31,
1999, the Company and its subsidiaries also had
$35.2 million available (subject to borrowing base
compliance and other limitations) to be drawn under
the Company's bank credit facility, which is
secured by substantially all of the personal
property of the Company and each of its North
American and United Kingdom subsidiaries and a
pledge of stock of each of the Company's principal
subsidiaries.) See "Risk Factors-- Our Secured
Creditors and Creditors of Our Subsidiaries Will
Have Advantages in Right to Payment Upon Default"
and "-- Our Degree of Indebtedness Could Limit Our
Ability to Grow and React to Changes in Market
Conditions."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries (as defined
herein) 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.
However, these limitations will be subject to a
number of important qualifications and exceptions.
See "Description of the New Notes -- Covenants."
RISK FACTORS
See "Risk Factors" beginning on page 16 for a discussion of certain factors
relating to an investment in the Notes.
14
<PAGE> 17
SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company as of the dates and for the periods indicated. The summary financial
data for the years ended June 30, 1999, 1998 and 1997 have been derived from the
audited consolidated financial statements of the Company. The balance sheet data
as of December 31, 1999 and the operating statement data for the six months
ended December 31, 1999 and 1998 have been derived from the unaudited
consolidated financial statements of the Company which have been prepared by
management on the same basis as the audited consolidated financial statements of
the Company and, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) which the Company considers necessary
for fair presentation of the results for such periods. The summary consolidated
financial data should be read in conjunction with the consolidated financial
statements and related notes thereto of the Company and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
------------------- -------------------------------
1999 1998 1999 1998 1997
-------- ------- -------- -------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net sales.................................. $116,065 $90,991 $193,203 $168,349 $86,490
Cost of sales.............................. 71,696 62,352 135,773 101,697 45,738
Gross margin............................... 44,369 28,639 57,430 66,652 40,752
Operating expenses......................... 37,238 58,573 117,803 89,082 30,283
Income (loss) from continuing operations
before extraordinary charge and
cumulative effect of accounting change... 198 (39,103) (81,739) (24,008) 7,104
Net income (loss).......................... 198 (42,233) (83,753) (25,943) 7,104
OTHER FINANCIAL DATA:
Interest expense........................... $ 7,113 $ 6,181 $ 13,889 $ 3,818 $ 1,513
Depreciation and amortization.............. 4,978 4,614 9,176 5,314 2,579
EBITDA(1).................................. 12,194 (25,781) (57,515) (17,617) 13,048
Ratio of EBITDA to interest expense(1)..... 1.7 -- -- -- 8.6
Capital expenditures....................... $ 2,878 $17,956 $ 22,130 $ 32,579 $18,095
Cash flow from (used in) operating
activities............................... (3,670) (17,819) (19,312) (13,528) (4,183)
Cash flow from (used in) investing
activities............................... (4,478) (26,278) (28,914) (92,117) (44,058)
Cash flow from (used in) financing
activities............................... 6,382 32,521 29,889 123,614 50,757
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 2,064
Working capital........................................... 23,974
Total assets.............................................. 294,340
Total long-term debt...................................... 138,887
Preferred stock (Redemption value -- $20,965)............. 15,806
Total common shareholders' equity......................... 83,727
</TABLE>
- ---------------
(1) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
provided because it is a measure commonly used to evaluate a company's
ability to service its indebtedness. EBITDA is presented to enhance the
understanding of the Company's operating results and is not intended to
represent cash flows or results of operations in accordance with generally
accepted accounting principles ("GAAP") for the periods indicated. EBITDA is
not a measurement under GAAP and is not necessarily comparable with
similarly titled measures of other companies. Net cash flows from operating,
investing and financing activities as determined using GAAP are also
presented in Other Financial Data. In the six months ended December 31,
1998, EBITDA was inadequate to cover interest by $31,962. In the year ended
June 30, 1999, EBITDA was inadequate to cover interest by $71,404. In the
year ended June 30, 1998, EBITDA was inadequate to cover interest expense by
$21,435.
15
<PAGE> 18
RISK FACTORS
You should consider carefully the following factors, as well as the other
information that we include or incorporate by reference in this Prospectus, 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 a substantial portion 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 10% of domestic lamp sales in
1999 compared to fluorescent and incandescent lamps which represented
approximately 85% 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, our results of operations and on our
ability to make payments on the Notes. See "Business -- Lighting Industry."
GENERAL ELECTRIC COMPANY'S RELATIONSHIP WITH US COULD AFFECT OUR RELATIONSHIP
WITH OTHER LIGHTING COMPANIES AND LIMIT OUR ABILITY TO GROW
The GE investment improved our balance sheet and is expected to increase
our operating flexibility. In addition, we anticipate that this will strengthen
our supplier-customer relationship with GE. However, we do not yet know if this
increased investment will have an adverse affect on our relationship with other
major companies in the lighting business. The Company has not experienced any
adverse impact from these other companies since the March 1999 public
announcement of the agreement in principle regarding the investment. Pursuant to
the terms of the GE investment agreement, GE has the right, by converting its
preferred shares and exercising warrants, to acquire approximately 4 million of
our common shares. If the Company fails to maintain the required ratio of
earnings before interest and taxes to interest charges for a six-month
measurement period, GE would obtain the right to purchase and vote additional
shares of our stock and, upon failure for a second measurement period, to
acquire voting control of the Company. The existence of a large block of shares
which could effectively control our shareholder votes, or which could be sold in
public or private sales, may limit our ability to obtain financing in the future
from other sources, including public offerings or private sale of our common
stock.
GENERAL ELECTRIC COMPANY'S RIGHTS COULD LIMIT OUR FINANCIAL ALTERNATIVES
GE has the right to make us redeem their preferred stock after five years.
GE also has the right to make us redeem their preferred stock if the necessary
governmental approvals are not granted in connection with GE's rights to acquire
more of our shares in the future or if we take certain actions, including
issuing additional common shares and borrowing more than a total of $210
million. The existence of these limits may reduce the ability of the Company to
obtain financing in the future. If we have to redeem the preferred stock, our
financial resources will be reduced. Under certain circumstances, redeeming the
preferred stock would cause a default under the Indenture governing the Notes.
Although GE cannot make us redeem their preferred stock if such a default would
result, the failure to redeem GE's preferred stock after GE makes a request for
redemption could adversely affect our relationship with GE.
OUR SECURED CREDITORS AND CREDITORS OF OUR SUBSIDIARIES WILL HAVE ADVANTAGES IN
RIGHT TO PAYMENT UPON DEFAULT
Although the Notes rank pari passu in right of payment with indebtedness
outstanding under our $60 million bank credit facility, such indebtedness is
secured by substantially all of our personal property and
16
<PAGE> 19
each of our North American and United Kingdom subsidiaries and a pledge of stock
of each of our principal subsidiaries. The Notes are unsecured and therefore do
not have the benefit of such collateral. If an event of default occurs under the
bank credit facility, our banks will have preferential claims to those assets
and may foreclose upon such collateral for the benefit of our banks to the
exclusion of the holders of the Notes, even if there is an event of default with
respect to the Notes. If that were to happen, our assets would first be used to
repay in full amounts outstanding under the bank credit facility, resulting in
virtually all of our assets being unavailable to satisfy the claims of holders
of the Notes until the indebtedness under our credit facility is repaid in full.
Any remaining unpaid claims of our banks under the credit facility will be pari
passu with the Notes and entitled to share in any of our remaining assets.
We conduct substantially all of our operations through subsidiaries and
substantially all of our assets consist of the capital stock of its
subsidiaries. Accordingly, the Notes will be effectively subordinated to
liabilities of our subsidiaries, including trade payables. At December 31, 1999,
the total liabilities of our subsidiaries, excluding intercompany debt but
including trade payables, were approximately $60.2 million. At December 31,
1999, we also had $35.2 million available (subject to borrowing base compliance
and other limitations) to be drawn under our bank credit facility, which is
secured as described above.
Our rights and the rights of our creditors, including holders of the Notes,
to participate in the assets of any subsidiary upon such subsidiary's
liquidation or recapitalization will be subject, in the case of any subsidiary,
to the prior claims of such subsidiary's creditors, except to the extent that we
may be a creditor with recognized claims against the subsidiary, in which case
our claims would still be effectively subordinated to any mortgage or other lien
on the assets of such subsidiary and would be subordinate to any indebtedness of
such subsidiary senior to debt held by us. Accordingly, there can be no
assurance that, after providing for all prior claims and all pari passu claims,
there would be sufficient assets available to satisfy our obligations under the
Notes.
Because we conduct substantially all of our operations through our
subsidiaries, we are and will be dependent upon the distribution of the earnings
of its subsidiaries to service our debt obligations, including the Notes. Our
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay any amounts due on the Notes or to make any
funds available therefor.
OUR DEGREE OF INDEBTEDNESS COULD LIMIT OUR ABILITY TO GROW AND REACT TO CHANGES
IN MARKET CONDITIONS
At December 31, 1999, we had approximately $147.4 million of total
indebtedness outstanding (including the Notes) and $99.5 million of preferred
and common shareholders' equity. At December 31, 1999, we also had $35.2 million
available (subject to borrowing base compliance and other limitations) to be
drawn under our bank 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.
OPERATING WITHOUT ADDITIONAL CASH RESOURCES COULD AFFECT OUR OPERATIONS AND
GROWTH
In the last half of fiscal 1999, we instituted cost reduction measures
intended to allow our operations to produce more cash revenues than we spend on
operations. We have spent more money on our operations than the revenues our
operations have generated in each of our last three fiscal years and the first
six months of fiscal year 2000, and have spent more money on operations and
investing in our business than our operations have generated in each of our last
four fiscal years and in the first six months of fiscal year 2000. While we
believe we are now generating more cash in our operations than we are spending
on operations, we can't assure investors that the cost-saving measures will
continue to generate positive cash flow from our operations in the future. In
addition,
17
<PAGE> 20
we are not currently generating sufficient cash in our business to make the
investments in our future growth which we would like. Our ability to borrow
additional money under our $60 million bank credit facility which we entered
into on May 21, 1999 is limited. In order to have enough cash for future
operations and growth, we must generate greater net cash flow and/or demonstrate
our ability to achieve acceptable financial results in order to increase our
access to additional cash resources from lenders and investors.
OUR LOAN TO MR. HELLMAN MAY AFFECT OUR CAPITAL RESOURCES
On October 8, 1998, we made a $9 million loan to Wayne R. Hellman, our
Chairman and CEO. See "Certain Transactions." The loan was due on October 6,
1999. Mr. Hellman has paid interest accrued on the loan through October 6, 1999.
The term of the loan has been extended. If Mr. Hellman doesn't repay the loan in
accordance with the current understanding, it could materially and adversely
affect our ability to obtain money from lenders and investors. If we take action
to make Mr. Hellman pay the loan, it may hurt Mr. Hellman's performance, which
could hurt our operations.
OUR ABILITY TO DEVELOP AND BROADEN PRODUCT LINES IS IMPORTANT FOR OUR BUSINESS
We have recently broadened our systems and components product line. The
marketing efforts and strategies for such product extensions are quite different
from those we have used for our historical operations. We may not be successful
in adding new products to our current product categories or in developing new
categories of products. If we are unable to successfully add new products or
develop new product categories, this could adversely affect our financial
results.
OUR BUSINESS SUCCESS HAS BEEN BASED ON NEW PRODUCTS, AND NEW PRODUCTS ARE
DIFFICULT TO INTRODUCE SUCCESSFULLY
We attribute our historical success, in large part, to the introduction of
new products in each of our product lines to meet the requirements of our
customers. Our future success will depend upon our continued ability to develop
and introduce innovative products. Even though we spent significant amounts on
research and development in fiscal 1999 and in prior years, we may not be able
to develop or introduce innovative products in the future. Even if a new product
is developed for a particular type of lighting fixture or use, the product may
not be commercially successful in the lighting market. In addition, competitors
occasionally have followed our introduction of successful products with similar
product offerings. As a result of these and other factors, we may not continue
to be successful in introducing new products. If we are unable to successfully
introduce new products, this inability could adversely affect our financial
results.
OUR SIGNIFICANT PAST GROWTH AND FUTURE GROWTH OBJECTIVES STRAIN OUR RESOURCES
We have experienced significant growth in recent years. This has placed a
strain on our management, employees, finances and operations. We have set
aggressive growth objectives for our net sales and net income which may continue
to strain our resources. These objectives may be increasingly difficult to
achieve. To achieve these objectives, we will seek to develop new products and
new uses for our products and seek to expand our distribution capabilities. We
may 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 may 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.
18
<PAGE> 21
WE MAY NOT BE ABLE TO REALIZE BENEFITS FROM ACQUISITIONS AND INVESTMENTS
In order to implement our business strategy, we may from time-to-time
consider expansion of our products and services through joint ventures,
strategic partnerships and acquisitions of, and/or investments in, other
business entities. We have no agreement or understanding with any significant
prospective acquisition or investment candidate in respect of a specific
transaction, but we are engaged in preliminary discussions with certain
candidates at the date of this Prospectus. We cannot be certain that any
agreement will result from such discussions or that we will be able to identify,
acquire or manage future acquisition candidates profitably. In addition, we
cannot be certain as to the timing or amount of any return or anticipated
benefits that we might realize on any acquisition or investment.
Acquisitions or investments could require us to commit funds, which could
reduce our future liquidity. Our possible future acquisitions or investments
could result in additional debt, contingent liabilities and amortization
expenses related to goodwill and other intangible assets, as well as write-offs
of unsuccessful acquisitions, any or all of which could materially adversely
affect our performance, and, therefore, holders of our securities. We have made
several acquisitions since 1997, including our largest acquisition to date, Ruud
Lighting, Inc., the effect of which has been to almost double our revenues on a
pro forma basis. There can be no assurance that we will be able to integrate
these acquisitions or to manage our expanded operations effectively. In
addition, since that date we have made substantial investments in entities that
we do not and will not be able to control. We may find it difficult or
impossible to realize cash flows from such investments, or to liquidate such
investments, which could adversely affect the holders of our securities.
THE EXTENT OF OUR INTERNATIONAL BUSINESS OPERATIONS COULD HURT OUR PERFORMANCE
We have derived, and expect to derive in the future, a substantial portion
of our net sales from our international business. Revenues from customers
outside of the United States represented approximately 33% of our net sales for
fiscal 1999. Our international joint ventures and operations and our export
sales are subject to the risks inherent in doing business abroad, including
delays in shipments, adverse fluctuations in currency exchange rates, increases
in import duties and tariffs, and changes in foreign regulations and political
climate. We have granted and will grant our joint ventures and operations in
foreign countries rights to use our technology. While we will attempt to protect
our intellectual property rights in these foreign joint ventures and operations,
the laws of many foreign countries do not protect intellectual property rights
to the same extent as the laws of the United States.
Approximately 25% of our net sales in fiscal 1999 were denominated in
currencies other than U.S. dollars, principally pounds sterling, Australian
dollars and Canadian dollars. A weakening of such currencies versus the U.S.
dollar could have a material adverse effect on our business and results of
operations and, therefore, holders of our securities. We currently do not hedge
our foreign currency exposure.
WE MAY NOT BE ABLE TO PROTECT OUR IMPORTANT PATENTS AND TRADE SECRETS AND OTHERS
MAY ENFORCE RIGHTS AGAINST US
We rely primarily on trade secret, trademark and patent laws to protect our
rights to certain aspects of our products, including proprietary manufacturing
processes and technologies, product research, concepts and trademarks. These
rights are important to the success of our products and our competitive
position. The actions that we take to protect our proprietary rights may not be
adequate to prevent imitation of our products, processes or technology. Our
proprietary information may become known to competitors; we may not be able to
effectively protect our rights to unpatented proprietary information; and others
may independently develop substantially equivalent or better products that do
not infringe on our intellectual property rights. Other parties may assert
rights in, and ownership of, our patents and other proprietary rights.
In recent years, we have successfully taken legal action to enjoin
misappropriation of trade secrets by other parties. Any increase in the level of
activities involving misappropriation of our trade secrets or other intellectual
property rights could require us to increase significantly the resources devoted
to such efforts. In addition, an adverse determination in litigation could
subject us to the loss of our rights to a particular trade secret, trademark or
patent, could require us to grant licenses to third parties, could prevent us
from manufacturing, selling or using
19
<PAGE> 22
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, Chairman, Chief Executive Officer, and principal shareholder. We and
Mr. Hellman have entered into an employment agreement providing for a term
ending December 31, 2003. We are also highly dependent on the services of Alan
J. Ruud, our Vice Chairman and a principal shareholder. We and Mr. Ruud have
entered into an employment agreement providing for a term ending January 1,
2001. The loss of the services of Mr. Hellman or Mr. Ruud for any reason could
have a material adverse effect on our business and, in turn, to investors in our
securities. We are the beneficiary of life insurance which we maintain with
respect to Mr. Hellman, in the amount of $8 million, and Mr. Ruud, in the amount
of $2 million.
CONTROL OF OUR STOCK BY PRINCIPAL SHAREHOLDERS MAY ALLOW THEM TO INFLUENCE
SIGNIFICANTLY SHAREHOLDER DECISIONS
Mr. Hellman individually owns approximately 9.5% of the outstanding shares
of our common stock and, individually and in other capacities, has the power to
vote a total of 19.5% of the outstanding shares of common stock (or
approximately 17.0% of the shareholder voting power). Mr. Ruud individually owns
approximately 10.6% of the outstanding shares of common stock and, individually
and as a voting trustee, has the power to vote a total of approximately 17.9% of
the outstanding shares of common stock (or approximately 15.6% of the
shareholder voting power). GE owns shares of our preferred stock with voting
power equivalent to approximately 13.0% of our common stock and GE owns
approximately 2.6% of our common stock. This gives GE approximately 15.3% of
total shareholder voting power, subject to increase upon exercise of its warrant
to purchase one million shares common stock. In addition to GE's ownership,
under certain circumstances GE may in the future gain the right to vote shares
owned or voted by Mr. Hellman and Mr. Ruud. As a result, although GE, Mr.
Hellman and Mr. Ruud have no arrangement or understanding of any kind with each
other as to the current voting of their shares, either GE, Mr. Hellman or Mr.
Ruud, or any combination of them, 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 our affairs and our
management), amendments to our Articles of Incorporation, mergers, share
exchanges, the sale of all or substantially all of our assets, going-private
transactions and other fundamental transactions.
IF GE OR ANOTHER INVESTOR CAN VOTE MORE THAN 35% OF OUR STOCK, WE MAY HAVE TO
REPAY LOANS
If GE, or any investor or group of investors, other than Mr. Hellman or his
family, get the right to vote more than 35% of our stock, our credit facility
banks will have the right to demand payment under our revolving and term loans
and we will have to offer to repurchase the Notes at a purchase price of 101% of
the face amount thereof, together with unpaid interest. These provisions may
make it more difficult for someone to take us over. We can't be sure that we
will have adequate resources to meet our obligations relating to these loans and
the Notes if an investor gains a 35% voting interest. Even if we can meet these
obligations, if we have to repay the credit facility banks and repurchase the
Notes, it could hurt our ability to finance operations and future growth.
OUR STOCK PRICE HAS VARIED WIDELY
Our common stock first became publicly traded in December 1995. After the
initial public offering, the stock price rose substantially from the initial
public offering price of $10 per share. The price of our common stock has varied
widely. In October 1998, the closing price of our stock reached as low as
$4.875. Such wide variation and the possibility of wide variation in the future
may make it difficult for us to sell additional shares of stock at prices which
we believe reflect the value of our stock or make it difficult to sell stock at
all. If we can't sell stock to obtain the money we need, it may be difficult to
operate and grow.
20
<PAGE> 23
ENVIRONMENTAL REGULATIONS COULD STRAIN OUR RESOURCES
Our operations are subject to federal, state, local and foreign laws and
regulations governing, among other things, emissions to air, discharge to
waters, and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. We believe that our business operations
and facilities are being operated in compliance in all material respects with
applicable environmental, health and safety laws and regulations, many of which
provide for substantial fines and criminal sanctions for violations. However,
the operations of manufacturing plants entail risks in these areas, and we could
incur material costs or liabilities. In addition, we could be required to make
potentially significant expenditures to comply with evolving environmental,
health and safety laws, regulations or requirements that may be adopted or
imposed in the future. The imposition of significant environmental liabilities
on us could have a material adverse effect on our business and financial
results.
OUR PRIMARY COMPETITORS ARE MORE ESTABLISHED AND HAVE MORE RESOURCES
We compete with respect to our major products with numerous
well-established producers of materials, components, and systems and equipment,
many of which possess greater financial, manufacturing, marketing and
distribution resources than we do. In addition, many of these competitors'
products utilize technology that has been broadly accepted in the marketplace
(i.e., incandescent and fluorescent lighting) and is better known to consumers
than is our metal halide technology. We compete with GE, Philips Electronics
N.V. ("Philips") and Siemens A.G.'s OSRAM/Sylvania, Inc. subsidiary ("Sylvania")
in the sale of metal halide lamps. We estimate, based on published industry
data, that these three companies had a combined domestic market share of
approximately 85% for metal halide lamps based on units sold and approximately
95% of the total domestic lamp market. Accordingly, these companies dominate the
lamp industry and exert significant influence over the channels through which
all lamp products, including ours, are distributed and sold. Our component
products and systems also face strong competition, particularly in the power
supply market, in which our two largest competitors each have a larger market
share than we do. Our competitors may increase their focus on metal halide
materials, systems and components, and expand their product lines to compete
with our products. Any such increase or expansion could have a material adverse
effect on our business and financial results.
WE SELL PRODUCTS TO OUR COMPETITORS AND PURCHASE COMPONENTS FROM OUR COMPETITORS
Notwithstanding the fact that we compete with GE, Philips and Sylvania in
the sale of certain of our products, we purchase a significant quantity of raw
materials and private label lamps from these three companies (aggregating $18.5
million in fiscal 1999, of which $13.5 million was from GE and $8.2 million in
the first six months of fiscal 2000, of which $6.4 million was from GE) and
derive significant revenue from sales of our materials, components, and systems
to each of these three companies (aggregating $18.8 million in fiscal 1999, of
which $4.6 million was to GE and $11.9 million in the first six months of fiscal
2000, of which $4.0 million was to GE). Any significant change in our
relationships with these companies, or in the manner in which these companies
participate in the manufacturing, distribution, and sale of metal halide
lighting products, could have a material adverse effect on our business and
financial results and, in turn, holders of our securities.
OUR AGREEMENTS WITH CREDITORS IMPOSE RESTRICTIONS THAT COULD IMPEDE OUR GROWTH
Our bank credit facility and the indenture relating to the New Notes (the
terms of which are identical in all material respects to those of the Old Notes)
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.
21
<PAGE> 24
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, our bank 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 our bank 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. We replaced our earlier credit facility in 1999 and we have
amended our bank credit facility since it was put into place, in part to amend
these covenants. As a growth company, we may need to amend or replace our bank
credit facility prior to its maturity on May 21, 2002.
THE NEW NOTES WILL NOT BE TRADED IN THE PUBLIC MARKET
The New Notes are a new issue of securities for which there is currently no
trading market. Therefore, there can be no assurance that a market for the New
Notes will develop. In addition, if the New Notes trade after their initial
issuance, their prices may vary depending upon prevailing interest rates, the
market for similar securities and other factors, including general economic
conditions, our financial condition, performance and prospects, and expectations
and ratings of securities analysts.
CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions, including our and the
Trustee's right in certain cases to require the delivery of opinions of counsel,
certifications and other information prior to any such transfer. Old Notes which
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Old Notes which remain
outstanding will not be entitled to any rights to have such Old Notes registered
under the Securities Act or to any similar rights under the Registration Rights
Agreement (subject to certain limited exceptions applicable solely to the
Placement Agent). We currently do not intend to register under the Securities
Act any Old Notes which remain outstanding after consummation of the Exchange
Offer (subject to such limited exceptions, if applicable).
To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. In addition, although the Old Notes are eligible for trading in the
Private Offerings, Resale and Trading through Automatic Linkages ("PORTAL")
market, to the extent that Old Notes are tendered and accepted in connection
with the Exchange Offer, any trading market for Old Notes which remain
outstanding after the Exchange Offer could be adversely affected.
The New Notes and any Old Notes which remain outstanding after consummation
of the Exchange Offer will constitute a single series of debt securities under
the Indenture and, accordingly, will vote together as a single class for
purposes of determining whether holders of the requisite percentage in
outstanding principal amount thereof have taken certain actions or exercised
certain rights under the Indenture. See "Description of the New
Notes -- General."
Since September 14, 1998, the interest rate borne by the Old Notes has been
increased by 0.50% per annum until the Exchange Offer is consummated. See
"Description of the Old Notes." Following consummation of the Exchange Offer,
the Old Notes will not be entitled to any increase in the interest rate thereon.
The New Notes will not be entitled to any such increase in the interest rate
thereon.
22
<PAGE> 25
BACKGROUND OF THE COMPANY
HISTORY
The Company's business was established in 1983 by Wayne R. Hellman, the
Company's current Chief Executive Officer, and other members of the Company's
senior management to focus on the design and manufacture of metal halide lamps.
Management initially acquired an entity engaged in the production of metal
halide salts necessary to make metal halide lamps and founded Venture Lighting
International, Inc. ("Venture"), a lamp manufacturer, soon thereafter. By 1995,
management had either formed or acquired 17 operating 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"). In 1985, certain of the
Predecessors produced their first metal halide lamps and, over the next several
years, designed, introduced and manufactured a wide range of specialty metal
halide lamps, as well as certain commodity lamps. In order to support the growth
of their metal halide operations, the Predecessors manufactured and sold
non-metal halide products such as high pressure sodium lamps. To gain entrance
into the European lamp market, management acquired a German quartz halogen lamp
manufacturer in 1984, which was sold in 1990, as described below.
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 totalling $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. In
addition, with approximately $400,000 of the proceeds of the initial public
offering, the Company paid all amounts remaining to be paid pursuant to the plan
of reorganization.
23
<PAGE> 26
The Company was formed as an Ohio corporation on May 19, 1995 for the
purpose of acquiring ownership, primarily by merger, of the 17 affiliated
Predecessors, including Venture, that were previously under common ownership and
management and were each engaged in some aspect of the metal halide lighting
business. The Combination was effected in October 1995 through a series of
mergers or stock exchanges in which the Predecessors' shareholders received
Common Stock of the Company, except that certain investors and former employees
of the Predecessors received, in the aggregate, an insignificant amount of cash
for their shares. See "Certain Transactions -- The Combination" and "Principal
Shareholders."
RECENT DEVELOPMENTS
To expand the Company's ability to develop and market new metal halide
products and systems and exploit other business opportunities, since 1997 the
Company has completed a number of transactions, the most notable of which are
described below.
In February 2000, the Company acquired the interest of Rohm and Haas
Company in Unison, the fiber optic lighting joint venture with Rohm and Haas
Company. Simultaneously, Unison transferred a substantial portion of its
personal property (including intellectual property) to Fiberstars, Inc. The
Company believes that Fiberstars, Inc. is in the best position to develop
Unison's fiber optic lighting technology into commercially accepted lighting
products. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3.0 million, of which $2.3 million is
represented by a note, to obtain the remaining interest in Unison. As
consideration for the transferred assets, the Company received four warrants to
purchase a total of 1,000,000 shares of Fiberstars, Inc. common stock for
nominal consideration. These warrants are exercisable based on stock price and
sales of products using Unison technology, but may be converted into at least
445,000 shares of Fiberstars, Inc. common stock at any time.
Effective January 2000, the Company obtained a controlling interest in its
lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its total
ownership to approximately 90%. In conjunction with this increased investment,
the Company has shipped approximately $3 million worth of new metal halide
lamp-making equipment as part of an expansion of its facility in Chennai
(Madras), India. The Chennai factory offers a very beneficial cost structure
while meeting the Company's product quality standards. The products produced in
the Indian facility are intended for use around the world and are expected to
consist of both the Company's new Uni-Form(R) pulse start products as well as
more-mature metal halide lamp types. See "Business -- Recent
Developments -- Expansion of Operations in India."
On October 6, 1999, GE completed an investment in the Company of $20.6
million. The GE investment includes 761,250 shares of the Company's
newly-created Series A Stock convertible at any time into 3,045,000 shares of
Company Common Stock (subject to adjustment). GE also received a warrant to
purchase an additional 1,000,000 shares of Common Stock of the Company (subject
to adjustment), which is immediately exercisable. GE has been a holder of
535,887 shares of Company Common Stock since the Company's initial public
offering in 1995. In connection with the transaction, GE also received certain
additional rights which would entitle GE, under certain circumstances, to voting
control of the Company, through a combination of share purchases and proxies.
See "Business -- Recent Developments -- General Electric Company Investment."
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing Company businesses. See
"Business -- Recent Developments -- Discontinued Operations Subsequently
Retained."
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
24
<PAGE> 27
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. DSI has subsequently achieved technological
feasibility on certain telecommunications products under development at the time
of the acquisition.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets high-intensity discharge ("HID")
lighting systems, principally focusing on metal halide installations for
commercial, industrial and outdoor lighting applications. The Ruud Stock was
acquired from the five shareholders of Ruud Lighting in a privately negotiated
purchase transaction. The purchase price for the Ruud Stock consisted of three
million shares of the Company's Common Stock and approximately $35.5 million in
cash.
EXECUTIVE OFFICES
The Company's principal executive offices are located at 32000 Aurora Road,
Solon, Ohio 44139 and its telephone number is (440) 519-0500.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes in exchange for
Old Notes as described in this Prospectus, the Company will receive Old Notes in
like principal amount. The Old Notes surrendered in exchange for the New Notes
will be retired and cancelled. Accordingly, the issuance of the New Notes will
not result in any change in the indebtedness of the Company.
The net proceeds to the Company from the issuance and sale of the Old Notes
were approximately $96.2 million.
The Company used a portion of the net proceeds of the issuance of the Old
Notes to repay borrowings outstanding under the Company's former credit facility
(approximately $76.3 million). The loans under the former credit facility were
refinanced on May 21, 1999. See "Description of Certain Indebtedness." The
Company used the balance of the net proceeds to fund capital expenditures,
acquisitions, investments in joint ventures, working capital and general
corporate purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Strategy."
25
<PAGE> 28
CAPITALIZATION
The table below sets forth the Company's cash, cash equivalents and
short-term investments, short-term debt and current portion of long-term debt
and capitalization at December 31, 1999. This table should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1999
------------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
Cash and cash equivalents................................... $ 2,064
=========
Short-term debt and current portion of long-term debt....... $ 8,480
=========
Long-term debt:
Bank borrowings and other................................. $ 38,887
Old Notes................................................. 100,000
Preferred Stock, $.001 par value per share; 1,000,000 shares
authorized; 761,250 Series A convertible redeemable shares
issued and outstanding (redemption value -- $20,965)...... 15,806
Common Shareholders' equity:
Common Stock, $.001 par value per share; 80,000,000 shares
authorized; 20,368,000 shares issued and
outstanding(1)......................................... 20
Additional paid-in capital................................ 195,906
Accumulated other comprehensive income (loss)............. (463)
Loan receivable from officer.............................. (9,170)
Retained earnings (deficit)............................... (102,566)
---------
Total common shareholders' equity...................... 83,727
---------
Total capitalization................................... $ 238,420
=========
</TABLE>
- ---------------
(1) Does not include (i) 3,045,000 shares of Common Stock issuable upon
conversion of issued and outstanding Series A convertible redeemable
preferred stock; (ii) 1,000,000 shares of Common Stock issuable upon
exercise of the Initial Warrant held by GE; (iii) 833,540 shares of Common
Stock reserved for issuance under the 1995 Incentive Award Plan, of which
options to purchase 802,359 shares of Common Stock had been granted and were
outstanding as of December 31, 1999, (iv) 800,000 shares of Common Stock
reserved for issuance under the Billion Dollar Market Capitalization
Incentive Award Plan, of which options to purchase 681,100 shares of Common
Stock have been granted and were outstanding as of December 31, 1999, (v)
1,500,000 shares of Common Stock reserved for issuance under the 1998
Incentive Award Plan, of which options to purchase 1,495,124 shares of
Common Stock have been granted and were outstanding as of December 31, 1999,
(vi) 30,436 shares reserved for issuance under the Employee Stock Purchase
Plan as of December 31, 1999 and (vii) 34,085 shares reserved for issuance
under the 401(k) Retirement and Savings Plan.
26
<PAGE> 29
SELECTED FINANCIAL DATA
The following table contains certain selected consolidated and combined
financial data and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus. The balance sheet data as of June 30, 1999, 1998, 1997 and 1996 and
the operating statement data for each of the fiscal years ended June 30, 1999,
1998, 1997, 1996 and 1995 are derived from the audited Consolidated Financial
Statements of the Company. The balance sheet data as of June 30, 1995 are
derived from the audited Combined Financial Statements of the Company's
Predecessor companies. The balance sheet data as of December 31, 1999 and the
operating statement data for the six months ended December 31, 1999 and 1998
have been derived from the Unaudited Consolidated Financial Statements of the
Company, which have been prepared by management on the same basis as the audited
Consolidated Financial Statements of the Company and, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
which the Company considers necessary for a fair presentation of the results for
such periods. 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 elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- -------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net sales............................ $116,065 $ 90,991 $193,203 $168,349 $86,490 $54,636 $40,767
Costs and expenses:
Cost of sales...................... 71,696 62,352 135,773 101,697 45,738 29,164 21,899
Marketing and selling.............. 20,792 21,552 45,035 29,990 15,832 8,755 6,381
Research and development........... 6,978 9,562 17,680 10,843 5,804 3,000 1,673
General and administrative......... 8,121 9,843 21,192 12,208 7,184 6,152 5,452
Settlement of claims (1) (2)....... -- -- -- -- 771 2,732 --
Fiber optic joint venture formation
costs............................ -- -- -- 212 286 -- --
Purchased research and development
(3).............................. -- -- -- 18,220 -- -- --
Special charges (3)................ -- 16,273 31,107 15,918 -- -- --
Amortization of intangible
assets........................... 1,347 1,343 2,789 1,691 406 90 55
Restructuring (4).................. -- -- -- -- -- -- (121)
-------- -------- -------- -------- ------- ------- -------
Income (loss) from operations.......... 7,131 (29,934) (60,373) (22,430) 10,469 4,743 5,428
Interest income (expense), net......... (6,679) (5,615) (12,767) (2,388) (668) (1,316) (2,074)
Income (loss) from equity investment
(5).................................. 85 (461) (6,318) (501) -- -- --
Income (loss) from continuing
operations before income taxes,
extraordinary charge and cumulative
effect of accounting change.......... 537 (36,010) (79,458) (25,319) 9,801 3,427 3,354
Income taxes (benefit)................. 339 3,093 2,281 (1,311) 2,697 910 212
-------- -------- -------- -------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
charge and cumulative effect of
accounting change.................... 198 (39,103) (81,739) (24,008) 7,104 2,517 3,142
Recontinuance of previously
discontinued operations (6).......... -- (687) 1,331 (1,331) -- -- --
-------- -------- -------- -------- ------- ------- -------
Income (loss) before extraordinary
charge and cumulative effect of
accounting change.................... 198 (39,790) (80,408) (25,339) 7,104 2,517 3,142
Extraordinary charge, net of applicable
income tax benefits (7).............. -- -- (902) (604) -- (135) (253)
Cumulative effect for change in
accounting (8)....................... -- (2,443) (2,443) -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Net income (loss)...................... $ 198 $(42,233) $(83,753) $(25,943) $ 7,104 $ 2,382 $ 2,889
======== ======== ======== ======== ======= ======= =======
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- -----------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
-------- -------- -------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) per share -- diluted
(9):
Income (loss) from continuing
operations....................... $ (.02) $ (1.93) $ (4.04) $ (1.32) $ .52 $ .12 $ .10
Recontinuance of previously
discontinued operations.......... -- (.04) .07 (.07) -- -- --
Extraordinary charge............... -- -- (.05) (.04) -- (.01) (.03)
Cumulative effect for change in
accounting....................... -- (.12) (.12) -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Net earnings (loss) per
share -- diluted................... $ (.02) $ (2.09) $ (4.14) $ (1.43) $ .52 $ .11 $ .07
======== ======== ======== ======== ======= ======= =======
Shares used for computing per share
amounts -- diluted................. 20,800 20,215 20,232 18,195 13,558 9,479 7,818
======== ======== ======== ======== ======= ======= =======
OTHER FINANCIAL DATA:
Depreciation and amortization.......... $ 4,978 $ 4,614 $ 9,176 $ 5,314 $ 2,579 $ 1,638 $ 1,399
EBITDA (10)............................ 12,194 (25,781) (57,515) (17,617) 13,048 6,381 6,827
Ratio of EBITDA to interest expense
(10)................................. 1.7 -- -- -- 8.6 4.1 3.2
Ratio of earnings to fixed
charges(11).......................... -- -- -- -- 4.8 2.0 1.7
Capital expenditures................... $ 2,878 $ 17,956 $ 22,130 $ 32,579 $18,095 $ 5,050 $ 1,530
Cash flow from (used in) operations.... (3,670) (17,819) (19,312) (13,528) (4,183) 1,326 4,464
Cash flow from (used in) investing
activities........................... (4,478) (26,278) (28,914) (92,117) (44,058) (8,125) (1,530)
Cash flow from (used in) financing
activities........................... 6,382 32,521 29,889 123,614 50,757 7,451 (2,567)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF JUNE 30,
DECEMBER 31, ------------------------------------------------------
1999 1999 1998 1997 1996 1995
------------ -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,064 $ 3,830 $ 21,917 $ 4,198 $ 1,682 $ 1,030
Working capital (deficit).................. 23,974 18,629 79,852 42,380 17,341 (870)
Total assets............................... 294,340 284,506 329,434 134,838 56,297 29,402
Total long-term debt....................... 138,887 152,496 117,756 35,908 11,034 8,853
Preferred stock (Redemption
value -- $20,965)........................ 15,806 -- -- -- -- --
Total common shareholders' equity
(deficit)................................ 83,727 77,441 170,837 66,032 26,594 (1,035)
</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 1999 results include special charges related to the Company's plans
to accelerate its focus on metal halide products, insulate it from
deteriorating economic conditions in the Pacific Rim, exit its noncore
products, integrate fully its core and acquired U.S. operations to produce
profitable growth and reduce its use of cash. Specific initiatives by the
Company included principally: (a) limiting further Pacific Rim expansion,
(b) changing global lamp manufacturing strategy, (c) restructuring
marketing operations in North America and Europe, (d) accelerating exit
from noncore product lines, (e) consolidating equipment manufacturing
operations, (f) reducing corporate and administrative overhead, and (g)
evaluating long-lived assets. Also included in special charges are amounts
related to the wind-down of portable fixture manufacturing operations. The
amounts are classified in the fiscal 1999 statement of operations as: cost
of sales -- $3,956 and, special charges -- $31,107. The Company recorded
$17,081 of these special charges in the first six months of fiscal 1999,
which were classified in the statement of operations as: cost of
sales -- $808 and, special charges -- $16,273.
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
28
<PAGE> 31
the Company's global power supply operations, principally: (a) the
discontinuance of certain power supply products at the Company's power
supply facilities, (b) the write-down of certain intangible and fixed
assets and (c) charges related to the consolidation and rationalization
cost of distribution activities and of new information systems and a
reassessment of investments. The amounts are classified in the fiscal 1998
statement of operations as: cost of sales -- $2,066; purchased in-process
research and development -- $18,220; and, special charges -- $15,918.
(4) In fiscal 1994, the Company recorded a provision of $852 for the costs,
principally inventory and equipment write-downs, in connection with exiting
a product line unrelated to lighting. In fiscal 1995, the disposition plan
was revised, resulting in a reduction of the original estimate by $121.
(5) In fiscal 1999, the loss from equity investments includes a pretax noncash
write-down of $5,883 related to the Company's investment in the Unison
joint venture.
(6) Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to the Company's shareholders all
of the ownership of Microsun in a tax-free spin-off transaction estimated
to be completed by December 1998. Because of the deterioration of the
capital markets and the inability to raise capital necessary to spin-off
the Microsun business, the Company concluded that it would wind-down the
operations, close the manufacturing facilities and liquidate the assets of
Microsun. In October 1999, management decided, with the approval of the
Board of Directors to retain the Microsun business -- the portable lighting
fixture products business that uses metal halide lighting technology -- as
part of the Company's continuing operation. In accordance with the
accounting requirements for recontinuance, the financial statements have
been reclassified to present Microsun within continuing operations. See
Note L of "Notes to Consolidated Financial Statements" for further
discussion.
(7) In fiscal 1999, the Company incurred an extraordinary loss on the early
extinguishment of debt of $902. In fiscal 1998, the Company incurred an
extraordinary loss on the early extinguishment of debt of $604. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In fiscal 1996, the Company incurred an extraordinary loss on
the early extinguishment of debt of $135. In fiscal 1995, the Company
incurred an extraordinary loss on the early extinguishment of debt of $253.
(8) In fiscal 1999, the Company recorded $2,443 as a cumulative change in
accounting principle relating to the write-off of start-up costs in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs, and required
that the Company expense all previously capitalized start-up costs and
organization costs as a cumulative effect of a change in accounting
principle.
(9) Net earnings per share is based upon the income attributable to holders of
Common Stock. Such income has been decreased by preferred share accretion
of $603 ($.03 per share) in the six months ended December 31, 1999, and by
preferred stock dividends and increases in the value of warrants
aggregating $1,350 ($.14 per share) in fiscal 1996 and $2,360 ($.30 per
share) in fiscal 1995.
(10) EBITDA is provided because it is a measure commonly used to evaluate a
company's ability to service its indebtedness. EBITDA is presented to
enhance the understanding of the Company's operating results and is not
intended to represent cash flows or results of operations in accordance
with GAAP for the periods indicated. EBITDA is not a measurement under GAAP
and is not necessarily comparable with similarly titled measures of other
companies. Net cash flows from operating, investing and financing
activities as determined using GAAP are also presented in Other Financial
Data. In the six months ended December 31, 1998, EBITDA was inadequate to
cover interest expense by $31,962. In fiscal 1999, EBITDA was inadequate to
cover interest expense by $71,404. In fiscal 1998, EBITDA was inadequate to
cover interest expense by $21,435.
(11) 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 the six months ended December 31, 1999,
earnings were inadequate to cover fixed charge requirements by $262. In the
six months ended December 31, 1998, earnings were inadequate to cover fixed
charge requirements by $36,468. In fiscal 1999, earnings were inadequate to
cover fixed charge requirements by $80,103. In fiscal 1998, earnings were
inadequate to cover fixed charge requirements by $17,152.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following discussion should be read in connection with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
The following is management's discussion and analysis of certain
significant factors which have affected the results of operations and should be
read in conjunction with the accompanying unaudited Condensed Consolidated
Financial Statements and notes thereto.
GENERAL
The Company designs, manufactures and markets metal halide lighting
products, including materials, systems and components. Metal halide lighting is
currently used primarily in commercial and industrial applications such as
factories and warehouses, outdoor site and landscape lighting, sports facilities
and large retail spaces such as superstores. With the January 1998 acquisition
of Deposition Sciences, Inc.("DSI"), the Company also manufactures and markets
turnkey deposition equipment to produce thin film coatings for a variety of
applications. Systems, components and materials revenue is recognized when
products are shipped, and deposition equipment revenue is recognized under the
percentage of completion method.
Consistent with the Company's strategy for new product introductions, the
Company invests substantial resources in research and development to engineer
materials and system components to be included in customers' specialized
lighting systems. Over the last three full fiscal years, the Company has spent
an aggregate of $34,327 on research and development, representing 7.7% of
aggregate net sales over that period. During the six months ended December 31,
1999, the Company has spent $6,978 on research and development, representing
6.0% of net sales for that period. Such expenditures have enabled the Company to
develop new applications for metal halide lighting, improve the quality of its
materials, and introduce new specialized products, such as the Uni-Form(R) pulse
start products. Uni-Form(R) pulse start products are a new generation of metal
halide components and systems which permit (a) increased light output with lower
power utilization, (b) faster starting, (c) a quicker restart of lamps which
have been recently turned off, and (d) better color uniformity. The Company has
spent additional amounts for manufacturing process and efficiency enhancements,
which were charged to cost of goods sold when incurred. The Company expects to
continue to make substantial expenditures on research and development to enhance
its position as the leading innovator in the metal halide lighting industry.
The Company also has invested substantial resources in acquisitions and
strategic investments. In January 1998, the Company acquired Ruud Lighting, Inc.
and DSI, which enabled the Company to complete the assembly of the necessary
operations to take a leadership role in the development, manufacturing and
marketing of new and better systems in the growing metal halide lighting
industry.
RECENT DEVELOPMENTS
General Electric Company Investment
On October 6, 1999, General Electric Company ("GE") completed an investment
in the Company of $20,554. For a description of the terms of the investment, see
"Business--Recent Developments--General Electric Company Investment."
The additional capital resources provided by the GE investment are expected
to provide additional flexibility to pursue opportunities in the metal halide
business. In addition, GE and the Company have entered into a five year,
renewable agreement for the supply of metal halide salts to GE. The Company and
GE are in discussions with respect to other supply arrangements. The Company
anticipates that the GE investment and the expansion which it will permit will
result in an expanded supplier-customer relationship with GE, enhancing the
Company's earnings and competitive position in the metal halide marketplace.
30
<PAGE> 33
The proceeds of the GE transaction have been applied principally to the
reduction of short-term liabilities and outstanding amounts under the Company's
bank credit facility, and have the effect of increasing available borrowings
under the Company's bank credit facility.
The GE investment includes 761,250 shares of the Company's newly created
Series A Preferred Stock ("Series A Stock") convertible at any time into
3,045,000 shares of Company Common Stock (subject to adjustment). The Company is
required to redeem any shares of Series A Stock on September 30, 2010, which
have not then been converted or retired. Any such redemption would be made at
$27 per share plus an amount equal to 8% per annum compounded annually (the
"Liquidation Preference Amount"). In addition, holders of the Series A Stock may
require the Company to redeem their shares of Series A Stock by giving notice to
the Company on or before September 30, 2004. If such notice is given, the
Company will be required to make such redemption on or prior to September 30,
2005. In addition, holders of Series A Stock will be entitled to require the
Company to redeem the Series A Stock following the occurrence of any of the
following events (each a "Triggering Event"): any action by the Company to give
effect to certain major corporate actions, including actions to merge, sell all
or a substantial portion of its assets (other than in the ordinary course of
business), issue capital stock, or incur or have outstanding indebtedness for
borrowed money in excess of $210,000. Upon the occurrence of a Triggering Event,
the holders of the Series A Stock may require the Company to redeem their shares
of Series A Stock by giving notice to the Company within 90 days following the
Triggering Event. If such notice is given, the Company will be required to make
such redemption within one year following such notice. Any such redemption would
be made at the Liquidation Preference Amount. Under the terms of the bank credit
facility and the Indenture, the redemption of the Series A Stock would currently
constitute an event of default, permitting acceleration of the related
indebtedness. If prior consent of the banks is obtained, the redemption is
permitted under the bank credit facility. Payments for the redemption of equity
securities are "Restricted Payments" under the Indenture. The total of all
"Restricted Payments" under the Indenture (with exceptions not applicable to
stock redemption) cannot exceed one-half of the total of consolidated net
earnings of the Company (excluding consideration of certain unusual items) from
April 1, 1998 (taken as a single period) plus the amount of proceeds received
from sales of non-redeemable stock. As of December 31, 1999, the Company had a
net loss, excluding extraordinary items, of $80,150 for the period. Until this
deficit has been cured, and sufficient proceeds are received and/or earnings are
achieved, the Company cannot redeem the Series A Stock without causing an event
of default with respect to the Notes. In addition, the Indenture prohibits
Restricted Payments (with exceptions not applicable to stock redemptions) at any
time where the ratio of EBITDA to Interest Expense for the preceding four fiscal
quarters does not exceed 2.5 to 1. See "Description of the New
Notes -- Covenants."
Fiberstars/Unison Transaction
In February 2000, the Company acquired the interest of Rohm and Haas
Company in Unison, the fiber optic lighting joint venture with Rohm and Haas
Company. Simultaneously, Unison transferred a substantial portion of its
personal property (including intellectual property) to Fiberstars, Inc. The
Company believes that Fiberstars, Inc. is in the best position to develop
Unison's fiber optic lighting technology into commercially accepted lighting
products. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3,000, of which $2,300 is represented by a
note, to obtain the remaining interest in Unison. As consideration for the
transferred assets, the Company received four warrants to purchase a total of
1,000,000 shares of Fiberstars, Inc. common stock for nominal consideration.
These warrants are exercisable based on stock price and sales of products using
Unison technology, but may be converted into at least 445,000 shares of
Fiberstars, Inc. common stock at any time.
Expansion of Operations in India
Effective January 2000, the Company obtained controlling, majority interest
in its lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its combined
ownership to approximately 90%. In conjunction with this increased investment,
the Company has shipped new metal halide lamp-making equipment, available as a
result of the fiscal 1999 termination of joint venture equipment contracts, and
is expanding its facility in Chennai (Madras), India.
31
<PAGE> 34
The Indian joint venture was created in March 1998 and began operations in
January 1999. The Tamilnadu Industrial Development Corporation Limited (TIDCO, a
governmental enterprise) in Chennai will remain as the Company's minority
partner.
The Chennai factory offers a very beneficial cost structure while meeting
the Company's product quality standards. The Company believes that in the fourth
quarter of fiscal 2000, the Chennai operation should be producing at an annual
rate of approximately one million metal halide units. By the end of the calendar
year 2000, the Company projects an annual production rate of over 1.4 million
units, or approximately $18,000 worth of potential product sales. The products
produced in the Indian facility will be used around the world and will consist
of both the Company's new Uni-Form(R) pulse start products as well as
more-mature metal halide lamp types.
Discontinued Operations Subsequently Retained
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to Company ("ADLT") shareholders all of
the ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing ADLT businesses.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing ADLT businesses utilizing existing
facilities and operations. The Company utilizes the customer service systems and
personnel of an existing ADLT business, as well as the Internet at
http://www.microsun.com, to receive, process and fill orders. Therefore, the
Microsun business has been retained but without the use of the manufacturing
processes or assets used in the previous operations.
In accordance with the accounting requirements for recontinuance, the
accompanying financial statements have been reclassified to present Microsun
within continuing operations. At June 30, 1999, substantially all assets had
been disposed and no remaining accrued losses associated with discontinued
operations remained. At June 30, 1998, assets related to discontinued operations
totaled $8,510 and total liabilities were $3,317. The
32
<PAGE> 35
revenues and the net amount charged to operations for the six months ended
December 31, 1998 and for each of the years the business was reported as
discontinued operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
SIX MONTHS ENDED --------------------
DECEMBER 31, 1998 1999 1998
----------------- -------- --------
<S> <C> <C> <C>
Net sales...................................... $ 2,689 $ 4,719 $ 4,456
======= ======= =======
Reclassification of discontinued operations to
continuing operations........................ $ 5,479 $10,374 $ 4,683
Discontinued operations provision.............. (6,166) (9,043) (6,014)
------- ------- -------
Recontinuance of previously discontinued
operations................................... $ (687) $ 1,331 $(1,331)
======= ======= =======
</TABLE>
The $5,479 reclassified to continuing operations for the six months ended
December 31, 1998 consisted of a loss from operations of $2,498; write-downs to
net realizable value of $2,844 in connection with the decision in November 1998
to wind-down the Microsun business related to fixed assets ($1,449) and other
assets ($1,395); and costs related to lease/contract cancellations of $137.
These costs and write-downs are classified in special charges.
The $10,374 reclassified to continuing operations for the year ended June
30, 1999 consisted of a loss from operations of $4,128; write-downs of assets to
net realizable value of $5,533 in connection with the decision in November 1998
to wind-down the Microsun business related to inventory ($2,448), fixed assets
($1,690), and other assets ($1,395); and costs related to severance,
lease/contract cancellations and facility shut-down costs of $713. These costs
and write-downs are classified in special charges ($3,798) and cost of sales
($2,448). The $4,683 reclassified to continuing operations for the year ended
June 30, 1998 represents loss from operations.
FISCAL 1999 SPECIAL CHARGES
The Company has implemented plans resulting in changes to its operations
intended to accelerate and intensify the Company's focus on its metal halide
products, insulate it from deteriorating economic conditions in the Pacific Rim
and the anticipated decline of noncore products, integrate fully its core and
acquired U.S. operations to produce profitable growth and reduce and redirect
its use of cash resources. This came in response to a reduction in the Company's
revenues in the first quarter of fiscal 1999 as compared to the fourth quarter
of fiscal 1998 and due to economic conditions in general, especially outside the
United States. To implement this strategy, the Company has taken or is taking
the following actions:
Limiting Pacific Rim Expansion. In recognition of the near-term effects of
the crisis in Asian capital markets, the Company modified its expansion plans in
the Pacific Rim and is acting to limit its exposure by limiting further
investment in Pacific Rim ventures. The Company evaluated its existing foreign
investments and joint ventures in the Pacific Rim region and wrote-off
investments of $475. In addition, future contract commitments totaling $1,160
were accrued in connection with the Company's decision to limit its exposure in
the Pacific Rim area.
The Company has retained several lamp manufacturing equipment groups, which
were originally expected to be shipped to Asia pursuant to equipment contracts
with Pacific Rim companies. The decision to terminate the foreign equipment
contracts resulted in a reversal of sales of $14,961 and cost of sales of $6,413
in the second quarter of fiscal 1999, which were previously recorded under the
percentage of completion method. This reversal reduced operating income by
$8,548 ($.42 per share). Had the sales related to the terminated equipment
contracts not been reversed, reported sales and cost of sales would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
------------------------
SALES COST OF SALES
-------- -------------
<S> <C> <C>
As reported................................................. $193,203 $135,773
Pro forma................................................... 208,164 142,186
</TABLE>
33
<PAGE> 36
Changing Global Lamp Manufacturing Strategy. The Company revised its
current global lamp manufacturing strategy to reduce the overall cost of its
lamps, including moving some production to the manufacturing facilities of
certain foreign joint ventures. With this change in its global manufacturing
strategy, the Company discontinued a major program that was in progress to
increase its U.S. lamp manufacturing capability and productivity. This decision
resulted in abandoning and disposing of fixed assets of $7,841, the majority of
which had not been placed in service. Substantially all of these fixed assets
were disposed of prior to June 30, 1999. The impact of suspending depreciation
related to these fixed assets was not material to depreciation expense for the
year. Further, certain joint venture investments of $465 made for the purpose of
developing additional lamp production were terminated as these specific
investments were not considered integral to the Company's future manufacturing
strategy.
In addition, to reduce costs related to its lamp production activities, the
Company has consolidated its Bellevue, Ohio specialty lamp manufacturing
operations into its Solon lamp manufacturing facility. The cost to close this
facility, including $328 in severance and benefits for terminated employees, was
$708.
Restructuring Marketing Operations in North America and Europe. The Company
restructured its marketing operations in Canada to eliminate certain
distribution channels and centers. Warehouses in Toronto and Vancouver have been
closed and $338 recorded to cover primarily future lease commitments for these
facilities. OEM and plant growth sales channels have been retained and serviced
out of Amherst, Nova Scotia, while aftermarket lamp sales are being serviced
through a distributor. The Company incurred shutdown costs, including $132 in
severance and benefits for terminated employees, of $279 to close its marketing
facilities in Canada.
The Company also restructured its marketing operations in Europe and the
U.K. to make them more cost efficient. The restructuring of marketing operations
in the U.K. resulted in selling its subsidiaries in France and Germany and
recognizing a loss on the sale of these subsidiaries of $559. Costs related to
the shut-down of these facilities, including $184 in severance and benefits for
terminated employees, and streamlining remaining operations amounted to $873.
Accelerating Exit from Noncore Products Lines. The Company has eliminated
the remaining non-metal halide product lines being sold by its Canadian
operations. The Company has sold these product lines and inventory to a third
party. Revenues related to the noncore product lines approximated $4,100 for
fiscal 1999.
Consolidating Equipment Manufacturing Operation into Solon, Ohio Facility.
The Company's equipment manufacturing operation in Bellevue, Ohio has been
closed. Machinery, equipment and research and development facilities necessary
to allow the Company to continue manufacturing and support of lamp production
equipment, at reduced levels, has been moved to the Company's Solon, Ohio
facility. The Company has temporarily ceased the manufacturing and sale of
turnkey lamp production equipment groups.
In connection with closing its equipment manufacturing facility in
Bellevue, Ohio, $642 of fixed assets, primarily leaseholds and equipment, were
abandoned and written-off. In addition, the Company recorded $2,449 for a future
lease commitment on this manufacturing facility and $1,139 for shut-down costs,
including $642 in severance and benefits for terminated employees.
Reducing Corporate and Administrative Overhead. The Company was increasing
its corporate and administrative staff levels to support its aggressive growth
goals. In light of its focus on internal growth, instead of continued
acquisitions and joint ventures, the Company reduced its corporate and
administrative overhead, including a significant reduction in staff levels and
benefit programs.
Severance and employee benefits for corporate and administrative staff,
including the termination of an employee benefit program, resulted in total
costs of $3,779 enterprise-wide. The Company has a $586 liability recorded at
June 30, 1999 to cover unpaid severance and employee benefit costs.
All of the above actions resulted in the termination of approximately 240
employees at substantially all locations. All terminated employees have left the
Company and were paid by December 31, 1999.
34
<PAGE> 37
Evaluation of Long-Lived Assets. Certain long-lived assets, principally
related to fixed assets and investments were evaluated for impairment in value.
Fair value for these assets was based on whether the carrying amount of the
asset was recoverable. Based on this analysis, an impairment loss of $3,830 and
$1,544 was recognized for certain long-term assets and investments. All
long-term assets were disposed by June 30, 1999. The impact of suspending
depreciation related to these long-lived assets was not material to depreciation
expense for the year.
Reducing Capital Expenditures. Previously announced plans to spend
approximately $20,000 on capital expansion, primarily production equipment, and
approximately $14,500 on facilities improvements in fiscal 1999 were
substantially reduced. Capital expenditures for the third quarter of fiscal 1999
totaled $2,982, and capital expenditures for the fourth quarter of fiscal 1999
were approximately $800.
Cash outlays were substantially completed by December 31, 1999, excluding
certain lease commitments that could continue through fiscal year 2005. The
Company will continue to evaluate its strategy and cost structure and adjust its
organization to reflect the changing business environment.
In addition to the costs noted above, the Company incurred special charges
related to the wind-down of portable fixture manufacturing operations, which are
described in the section "Discontinued Operations Subsequently Retained."
The cost related to the actions noted above, along with those related to
the wind-down of portable fixture manufacturing operations, are included in
special charges of $35,063 ($1.73 per share) for fiscal 1999. The charges are
classified in the consolidated statement of operations as cost of sales ($3,956)
and special charges ($31,107). In connection with these actions, the Company
incurred additional costs of $596 and $764 related to cost of sales and research
and development expense for transactions with affiliates.
FISCAL 1999 IMPLEMENTATION COSTS
Certain of the actions resulting in fiscal 1999 special charges also caused
substantial implementation costs, which are not included in the special charges
classification. Three manufacturing sites were consolidated into one, which
together with employee terminations, resulted in severe workforce disruption.
The Company also incurred costs to relocate and consolidate its marketing
operations in North America and transition its marketing operations in Europe.
The launch of the Company's Uni-Form(R) pulse start products resulted in
substantial quality, rework and productivity issues. In addition, the Company
also undertook other initiatives enterprise-wide in fiscal 1999 that resulted in
nonrecurring costs that are not expected to continue in fiscal 2000.
Specifically, the Company began the implementation of new information systems
resulting in various installation costs in fiscal 1999. In addition, during
fiscal 1999 the Company incurred one-time costs to establish a sales office in
Japan to sell its metal halide materials to lamp manufacturers in the Pacific
Rim.
FISCAL 1998 SPECIAL CHARGES
During fiscal 1998, the Company recorded special charges related to the
purchase price allocation for DSI and an assessment of the Company's global
power supply operations.
The Company completed the acquisition of DSI in January 1998. The special
charges include $18,220 for purchased in-process research and development,
relating to the DSI acquisition, which represented management's best estimate of
the value of purchased in-process research and development as of the date of
acquisition of DSI.
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.
35
<PAGE> 38
In addition, the charges cover the cost of consolidating distribution
activities and facilities, the write-down of assets in connection with the
implementation of new information systems and a reassessment of investments
resulting from a change in expansion strategy arising from the Ruud Lighting
acquisition.
The special charges were determined in accordance with formal plans
developed by the Company's management using the best information available to it
at the time and, subsequently approved by the Company's Board of Directors.
After an income tax benefit of $5,015, these charges reduced net income by
$31,189, or $1.71 diluted earnings per share for fiscal 1998.
See "Notes to Consolidated Financial Statements."
BANK CREDIT FACILITY
In May 1999, the Company replaced its existing credit facility with a
$50,000 revolving credit loan and $25,000 term loan provided by several
financial institutions. Subsequent to June 30, 1999 the Company reduced its
commitment to a $60,000 facility (the "Bank Credit Facility"). Proceeds from the
facility were used to repay the Company's existing credit facility and certain
other long-term debt. The revolving credit loan has a three-year term expiring
in May 2002. Interest rates on revolving credit loans outstanding are based, at
the Company's option, on LIBOR plus 2.75% or the agent bank's prime rate.
Availability of borrowings is determined by the Company's eligible accounts
receivable and inventories. The term loan has a five-year term expiring in May
2004. The Company makes monthly principal payments that total $3,576 annually,
with the unpaid balance due at maturity. Interest rates on the term loan are
based, at the Company's option, on LIBOR plus 3.25% or the agent bank's prime
rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the January 1998 purchase of Deposition Sciences, Inc.
("DSI"), the Company allocated $18,220 of the $24,100 purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date. DSI's in-process research and development value is comprised
of five primary research and development programs, which were in-process at the
time of the acquisition.
The MicroDyn/Automation Project is intended to improve the coating process
of optical thin-films to both rigid and flexible surfaces so that the process
can be used in a wider array of applications. The Plastics (Acrylic) Coating
Project is designed to produce a method for applying thin-film coatings to
plastics or other similar materials that cannot withstand the heat and pressure
generated during the standard coating process. The goal of the Deposition
Material Development Project is to develop new thin-film materials that can be
used in coatings and to improve existing coating materials. The Lighting
Projects are intended to develop improvements to existing lighting technologies
by using coatings to improve efficiency and increase the longevity of lamp life;
including ultra-violet blockers, color enhancement/correction and lumen
maintenance. 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. Two segments
of this project directed at the development of filters to reduce insertion loss
in fiber optic communication systems and filters for wavelength division
multiplexing (WDM) have reached commercial feasibility. The third segment of the
project related to the development of filters for dense wavelength division
multiplexing (DWDM) has not achieved technical and
36
<PAGE> 39
commercial feasibility as of December 31, 1999. For a description of the
Company's telecommunications business, see "Business -- Non-Metal Halide
Application of Company Technology -- Telecommunications Business Unit." These
projects are expected to be completed between fiscal 2000 and fiscal 2003.
Remaining development efforts for these projects 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,
if successful, will not be fully complete for two to three years after attaining
technical feasibility. Annual Company expenditures to complete these projects
included $800 in fiscal 1998, $1,800 in fiscal 1999, and are estimated at $2,600
and $1,700 in fiscal 2000 and 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, the Company will likely provide a substantial amount of funding to
complete the DSI programs.
Management believes the Company has a reasonable chance of successfully
completing each of the major research and development programs. However, there
is substantial risk associated with the completion of the projects and there is
no steadfast assurance that each will meet with either technological or
commercial success. The delay or outright failure of the DSI in-process research
and development may materially impact the Company's financial condition.
At December 31, 1999, significant progress had been achieved on each of the
primary in-process research and development efforts that were underway at DSI as
of the acquisition date. In general, the Company believes that DSI's research
and development efforts are on track with management's plans at the time the
transaction occurred. DSI is continuing to invest heavily in the development of
new technologies and projects that were underway at the consummation of the
transaction. Through December 31, 1999, no significant adjustments have been
made in the economic assumptions or expectations which underlie the Company's
acquisition decision and related purchase accounting. All of the cited
in-process research and development projects are active, and DSI is advancing
the science and technology at a rate consistent with both DSI and Company
expectations. At December 31, 1999, incompleted programs ranged from 60 to 70
percent complete and the Company estimates the costs to complete these projects
to be approximately $2,900.
37
<PAGE> 40
RESULTS OF OPERATIONS -- SELECTED ITEMS AS A PERCENTAGE OF NET SALES
The following table sets forth, as a percentage of net sales, certain items
in the Company's Condensed Consolidated Statements of Operations for the
indicated periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------- -----------------------
1999 1998 1999 1998 1997
------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales................................... 61.8 68.5 70.3 60.4 52.9
Marketing and selling........................... 17.9 23.7 23.3 17.8 18.3
Research and development........................ 6.0 10.5 9.1 6.4 6.7
General and administrative...................... 7.0 10.8 11.0 7.3 8.3
Fiber optic joint venture formation costs....... -- -- -- 0.1 0.3
Purchased research and development.............. -- -- -- 10.8 --
Special charges................................. -- 17.9 16.1 9.5 --
Settlement of claim............................. -- -- -- -- 0.9
Amortization of intangible assets............... 1.2 1.5 1.4 1.0 0.5
----- ----- ----- ----- -----
Income (loss) from operations..................... 6.1 (32.9) (31.2) (13.3) 12.1
Other income (expense):
Interest expense................................ (6.1) (6.8) (7.2) (2.3) (1.8)
Interest income................................. 0.4 0.6 0.6 0.9 1.0
Income (loss) from equity investments........... 0.1 (0.5) (3.3) (0.3) --
----- ----- ----- ----- -----
Income (loss) from continuing operations before
income taxes, extraordinary charge and
cumulative effect of accounting change.......... 0.5 (39.6) (41.1) (15.0) 11.3
Income taxes...................................... 0.3 3.4 1.2 (0.7) 3.1
----- ----- ----- ----- -----
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of
accounting change............................... 0.2 (43.0) (42.3) (14.3) 8.2
Recontinuance of previously discontinued
operations...................................... -- (0.7) 0.7 (0.8) --
----- ----- ----- ----- -----
Income (loss) before extraordinary charge and
cumulative effect of accounting change.......... 0.2 (43.7) (41.6) (15.1) 8.2
Extraordinary charge from early extinguishment of
debt, net of income tax benefits................ -- -- (0.5) (0.3) --
Cumulative effect of accounting change............ -- (2.7) (1.2) -- --
----- ----- ----- ----- -----
Net income (loss)................................. 0.2% (46.4%) (43.3%) (15.4%) 8.2%
===== ===== ===== ===== =====
</TABLE>
Factors which have affected the results of operations for the first six
months of fiscal 2000 as compared to the first six months of fiscal 1999 are
discussed below.
OVERVIEW OF THE RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF FISCAL 2000
COMPARED TO FIRST SIX MONTHS OF FISCAL 1999
The Company's operations for the first six months of fiscal 2000 resulted
in net income of $198 compared to a net loss of $42,233 for the first six months
of fiscal 1999.
During the second quarter of fiscal 1999, the Company recorded special
charges of $14,100 related to significant changes in its operations, which were
intended to accelerate and intensify the Company's focus on its metal halide
products. The special charges principally related to the execution of the
Company's shift in strategic
38
<PAGE> 41
direction and included: limiting Pacific Rim expansion; changing global lamp
manufacturing strategy; restructuring marketing operations in North America and
Europe; accelerating an exit from noncore product lines; reducing excess
overhead including staffing reductions; consolidating an equipment manufacturing
operation into the Company's Solon, Ohio facility and significantly reducing the
size of its operation; and, reducing capital expenditures. In addition, the
Company incurred special charges of $2,981 related to the wind-down of portable
fixture manufacturing operations, which are described in the section
"Discontinued Operations Subsequently Retained." The special charges for the
first six months of fiscal 1999 of $17,081 are classified in the consolidated
statement of operations as cost of sales ($808) and special charges ($16,273).
In conjunction with limiting its Pacific Rim expansion, the Company
terminated production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the second quarter of fiscal
1999, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH SIX MONTHS ENDED DECEMBER 31,
1998
Net sales. Net sales increased 27.6% to $116,065 in the first six months of
fiscal 2000 from $90,991 in the first six months of fiscal 1999. Commercial and
industrial sales increased 14.7% to $115,097 in the first half of fiscal 2000 as
compared to $100,352 in the first half of fiscal 1999. Sales of Microsun
residential product decreased to $968 in the first half of fiscal 2000 from
$2,689 in the first half of fiscal 1999 due to the decision to wind-down the
portable residential fixture manufacturing operations in the second quarter of
fiscal 1999. No lamp equipment sales were recorded in the first half of fiscal
2000 due to the cessation of these sales in the second quarter of fiscal 1999.
The first half of fiscal 1999 includes the reversal of $14,961 in lamp equipment
sales due to the termination of equipment contracts noted above, offset by
$2,911 of lamp equipment sales.
Fiscal 2000 second quarter commercial and industrial sales (which exclude
the residential and lamp equipment amounts discussed above) reflect continued
growth in the sales of the Company's core U.S. metal halide operations, in
non-metal halide products, and in overseas sales. The Company's commercial and
industrial metal halide sales increased 13% (12% increase in the United States)
from the year ago period. The Company's core metal halide materials business, a
key indicator of industry trends, was up 46% from fiscal 1999. Geographically,
these sales of materials were up 28% in the U.S. and grew 76% outside the U.S.
The Company does not anticipate growth in materials sales to approach these
rates in the second half of fiscal 2000, but does expect materials sales to
continue to show strong growth.
Commercial and industrial sales outside the U.S. increased 22%. The Company
attributes the increase in international sales to increased sales of its
materials and optical coatings, especially in the Pacific Rim. Sales of
non-metal halide products grew 19%, representing strong sales of the Company's
materials, particularly thin-film optical coating materials.
Sales increases were driven by increased volume in the Company's materials,
components and systems. Pricing in the metal halide lighting business is
competitive, and prices for the Company's products have remained flat or
declined slightly. The introduction of new products has helped to stabilize the
Company's product pricing.
The Company expects to see continued strong sales performance throughout
fiscal 2000. It also believes that its expanded relationship with GE Lighting,
along with its own e-commerce initiatives, could add a significant amount of
revenues. However, the Company expects to reduce and manage its operating
expense ratios with the goal of generating profits irrespective of its revenue
growth. The Company has returned to profitability in the second quarter of
fiscal 2000 and believes it prospects for continued profitability are good.
Cost of Sales. Cost of sales increased 15.0% to $71,696 in the first six
months of fiscal 2000 from $62,352 in the first six months of fiscal 1999. As a
percentage of net sales, cost of sales decreased to 61.8% in the first six
months of fiscal 2000 from 68.5% in the first six months of fiscal 1999. The
Company's restructuring efforts in the second quarter of fiscal 1999 resulted in
a significant disruption of the ongoing business of the Company, and as a
result, a significant increase in its costs and expenses. The biggest single
area of increased costs occurred as a result of the consolidation of the lamp
and equipment operations. Three manufacturing sites were consolidated into one,
which together with employee terminations, resulted in severe workforce
disruption. Simultaneously,
39
<PAGE> 42
the Company attempted to accelerate production of new products such as
Uni-Form(R) pulse start and began the implementation of extensive, new
information systems. Largely as a result of these initiatives, the Company
incurred significantly higher costs related to quality, rework and productivity
issues.
Cost of sales in the first six months of fiscal 1999 include a credit of
$6,413 related to the termination of equipment contracts and $808 of inventory
write-downs related to the exit of nonfocus product lines. Excluding these
items, cost of sales increased 5.5% to $71,696 in the first six months of fiscal
2000 from $67,957 in the first six months of fiscal 1999. The abnormally high
level of cost of sales in fiscal 1999 was primarily a result of the production
problems noted above in the second quarter of fiscal 1999 as compared to a more
normalized cost of sales amount in the second quarter of fiscal 2000. As a
percentage of net sales, excluding the effect of the terminated equipment
contracts and inventory write-downs, cost of sales decreased to 61.8% in the
first six months of fiscal 2000 from 64.1% in the first six months of fiscal
1999.
Marketing and Selling Expenses. Marketing and selling expenses decreased
3.5% to $20,792 in the first six months of fiscal 2000 from $21,552 in the first
six months of fiscal 1999. Marketing and selling expenses for the first six
months of fiscal 2000 increased in proportion to the increase in net sales
(excluding the equipment sales reversal of $14,961 in fiscal 1999). Offsetting
this increase was a reduction in marketing and selling expenses related to a
change in the manner in which the Company is selling its residential portable
lighting fixtures. In the first six months of fiscal 1999, the Company was
utilizing newspaper ads in major metropolitan newspapers and catalogues to sell
these fixtures. As described in the section "Discontinued Operations
Subsequently Retained," the Company is now utilizing the customer service
systems and personnel of an existing Company business, as well as the Internet
at http://www.microsun.com, to receive, process and fill orders, which has
resulted in a reduction in marketing and selling expenses. As a percentage of
net sales, excluding the effect of the terminated equipment contracts in fiscal
1999, marketing and selling expenses decreased to 17.9% in the first six months
of fiscal 2000 from 20.3% in the first six months of fiscal 1999.
Research and Development Expenses. Research and development expenses
decreased 27.0% to $6,978 in the first six months of fiscal 2000 from $9,562 in
the first six months of fiscal 1999. Research and development expenses are
incurred related to: (i) expansion of the new line of Uni-Form(R) pulse start
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; (iii) development of new materials for the world's major lighting
manufacturers; and, (iv) research and development efforts aimed at improving the
coating process of optical thin-films to broaden the applications, developing
new thin-film materials, and using coatings to develop improvements to lighting
and telecommunications technologies. The decrease in research and development
was primarily a result of a reduction in spending related to the development of
Uni-Form(R) pulse start lamps and the Company's efforts to control the level of
its research and development spending. As a percentage of net sales, excluding
the effect of the terminated equipment contracts in fiscal 1999, research and
development expenses decreased to 6.0% in the first six of fiscal 2000 from 9.0%
in the first six months of fiscal 1999.
General and Administrative Expenses. General and administrative expenses
decreased 17.5% to $8,121 in the first six months of fiscal 2000 from $9,843 in
the first six months of fiscal 1999. The decrease reflects the Company's efforts
to control general and administrative costs and was primarily related to
reductions in salaries and benefits and travel costs. As a percentage of net
sales, excluding the effect of the terminated equipment contracts in fiscal
1999, general and administrative expenses decreased to 7.0% in the first six
months of fiscal 2000 from 9.3% in the first six months of fiscal 1999.
Special Charges. See discussion of special charges above.
Amortization of Intangible Assets. Amortization expense remained relatively
constant at $1,347 in the first six months of fiscal 2000 from $1,343 in the
first six months of fiscal 1999. Amortization expense relates primarily to the
amortization of goodwill and other intangible assets related to the January 1998
acquisitions of Ruud Lighting, Inc. and Deposition Sciences, Inc.
40
<PAGE> 43
Income (Loss) from Operations. As a result of the items noted above, income
from operations in the first six months of fiscal 2000 was $7,131 as compared to
a loss from operations in the first six months of fiscal 1999 of $29,934. Income
from operations represented 6.1% of sales in fiscal 2000.
Interest Expense. Interest expense increased to $7,113 in the first six
months of fiscal 2000 from $6,181 in the first six months of fiscal 1999. This
increase resulted primarily from the higher average debt outstanding during the
first six months of fiscal 2000 as compared to the first six months of fiscal
1999.
Interest Income. Interest income decreased to $434 in the first six months
of fiscal 2000 from $566 in the first six months of fiscal 1999. This decrease
is attributable to lower average cash equivalents and short-term investments in
fiscal 2000 as compared to fiscal 1999, offset by an increase of approximately
$200 in interest income from the loan to officer.
Income (Loss) from Equity Investments. The income from equity investments
in the first six months of fiscal 2000 represents $85 of earnings from the
Company's investment in Fiberstars, Inc., a marketer and distributor of fiber
optic lighting products. The loss from equity investments in fiscal 1999
represents $83 of earnings from the Company's investment in Fiberstars, Inc.,
offset by a $544 loss from the Company's investment in Venture Lighting Japan, a
manufacturer and marketer of metal halide lamps in Japan.
Income (Loss) from Continuing Operations before Income Taxes. The Company
had income from continuing operations before income taxes of $537 during the
first six months of fiscal 2000 as compared to a loss from continuing operations
before income taxes of $36,010 during the first six months of fiscal 1999.
Income Taxes. Income tax expense was $339 for the first six months of
fiscal 2000 as compared to $3,093 in the first six months of fiscal 1999. The
income tax expense in the first six months of fiscal 2000 relates primarily to
certain of the Company's foreign operations.
For the second quarter of fiscal 1999, the Company reported a pretax loss
from continuing operations, including special charges, of $35,165, which created
operating losses and future tax deductions for financial reporting purposes.
Accordingly, at December 31, 1998, the Company recorded a valuation allowance
for deferred tax assets related to all NOLs, tax credits and net deductible tax
differences at December 31, 1998 in the amount of $15,503.
At June 30, 1999, the Company had net operating loss carryforwards ("NOLs")
of $57,309 available to reduce future United States federal taxable income,
which expire in varying amounts from 2008 to 2019.
The Company also has research and development credit carryforwards for tax
purposes of approximately $3,006, which expire in varying amounts from 2005 to
2019. Additionally, in conjunction with the Alternative Minimum Tax ("AMT")
rules, the Company had available AMT credit carryforwards for tax purposes of
approximately $162, which may be used indefinitely to reduce regular federal
income taxes.
Also at June 30, 1999, the Company had foreign net operating loss
carryforwards for tax purposes totaling $5,209 that expire in varying amounts
from 2000 to 2005 and $10,587 that have no expiration dates.
Recontinuance of Previously Discontinued Operations. See "Discontinued
Operations Subsequently Retained" and Note I of "Notes to Condensed Consolidated
Financial Statements (Unaudited)" for further discussion.
Cumulative Effect of Accounting Change. During the fourth quarter of fiscal
1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities," effective July 1, 1998. The first six months of
fiscal 1999 have been restated to reflect the cumulative effect of the
accounting change of $2,443.
OVERVIEW OF THE RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998
The Company's operations for fiscal 1999 resulted in a loss from continuing
operations before extraordinary charge and cumulative effect of change in
accounting principle of $81,739 compared to a loss from continuing
41
<PAGE> 44
operations before extraordinary charge of $24,008 for fiscal 1998. The Company
realized a net loss of $83,753 for fiscal 1999, compared to a net loss of
$25,943 for fiscal 1998.
The following factors should be considered in comparing the Company's
continuing operations for fiscal 1999 and fiscal 1998:
- Results for fiscal 1999 include $35,063 in special charges ($1.73 per
share) and the effect of termination of equipment contracts of $8,548
($.42 per share).
- Results for fiscal 1998 include $17,984 in special charges ($0.99 per
share) and $18,220 of purchased in-process research and development
($1.00 per share).
After excluding the above charges, the Company's operating activities would
have resulted in a loss from continuing operations before income taxes and
extraordinary charge of $35,847 for fiscal 1999, as compared to income from
continuing operations before income taxes and extraordinary charges of $10,885
for fiscal 1998.
FISCAL 1999 COMPARED WITH FISCAL 1998
Net sales. Net sales increased 14.8% to $193,203 for the fiscal year ended
June 30, 1999 from $168,349 for the fiscal year ended June 30, 1998. This
increase includes a 31.7% increase in sales (excluding lamp equipment sales and
reversals which ceased in the second quarter of fiscal 2000) to $205,193 for
fiscal 1999 from $155,824 for fiscal 1998, offset by the impact of lamp
equipment sales and reversals. Net sales in fiscal 1999 include the reversal of
$14,961 related to the termination of lamp equipment contracts, and $2,971 of
lamp equipment sales recorded prior to the reversal of lamp equipment contracts.
Net sales of lamp equipment in fiscal 1998 totaled $12,525.
The 31.7% increase in net sales noted above reflects continued growth in
the sales of the Company's core U.S. metal halide operations. The Company's
metal halide sales for fiscal 1999 increased 38% (54% increase in the United
States) from fiscal 1998, substantially from the acquisition of Ruud Lighting,
Inc. as well as internal growth. Metal halide sales grew to 74% of total sales
from 71% a year earlier. The Company's core metal halide materials business, a
key indicator of industry trends, was up 9% from fiscal 1998. Geographically,
these sales of materials were up 5% in the U.S. and grew 16% outside the U.S.
The 31.7% increase in net sales also includes a reduction in sales outside
the U.S. of 2%. The Company attributes the soft overseas market to the difficult
international economic environment in fiscal 1999. Sales of non-metal halide
products increased 17% due primarily to the acquisitions of Ruud Lighting, Inc.
and Deposition Sciences, Inc. in fiscal 1998. The increase resulting from the
acquisitions was offset by a 27% decline in sales of non-metal halide products
from the Company's existing businesses, as the Company has been strategically
reducing its presence in the non-metal halide market.
Sales increases were driven by increased volume in the Company's materials,
components and systems. Pricing in the metal halide lighting business is
competitive, and prices for the Company's products have remained flat or
declined slightly. The introduction of new products has helped to stabilize the
Company's product pricing.
Costs and Expenses. The Company's restructuring efforts in fiscal 1999
resulted in a significant disruption of the ongoing business of the Company, and
as a result, a significant increase in its costs and expenses. The biggest
single area of increased costs over fiscal 1998 occurred as a result of the
consolidation of the lamp and equipment operations. Three manufacturing sites
were consolidated into one, which together with employee terminations, resulted
in severe workforce disruption. Simultaneously, the Company attempted to
accelerate production of new products such as Uni-Form(R) pulse start and began
the implementation of new information systems. Largely as a result of these
initiatives, the Company incurred significantly higher costs related to quality,
rework and productivity issues, which are not included within the special
charges classification.
Cost of Sales. Cost of sales increased 33.5% to $135,773 in fiscal 1999
from $101,697 in fiscal 1998. The increase was primarily attributable to higher
sales levels and to the disruption caused by the Company's restructuring
activities noted above. As a percentage of net sales, cost of sales increased to
70.3% in fiscal 1999 from 60.4% in fiscal 1998 (As a percentage of net sales,
excluding the effect of termination of equipment
42
<PAGE> 45
contracts and inventory write-downs, cost of sales increased to 66.4% from
59.2%). The Company believes that the benefit of its restructuring actions,
together with its ongoing efforts to cut costs, should begin to gradually reduce
the Company's cost of sales as a percentage of sales to 60% or less within the
next twelve months.
Marketing and Selling Expenses. Marketing and selling expenses increased
50.2% to $45,035 in fiscal 1999 from $29,990 in fiscal 1998. As a percentage of
net sales, marketing and selling expenses increased to 23.3% in fiscal 1999 from
17.8% in fiscal 1998. This increase is a result of increased expenses incurred
in connection with the launch of the Company's Uni-Form(R) pulse start products,
increased expenses involved in opening new markets to the Company's products,
and increased product promotional costs. The Company anticipates the sales of
Uni-Form(R) pulse start products and sales into new markets should increase and
that the level of marketing and selling expenses will decline gradually over the
next several quarters to approximately 17% to 18% of sales.
Research and Development Expenses. Research and development expenses
increased 63.1% to $17,680 in fiscal 1999 from $10,843 in fiscal 1998. This
increase arose from increased spending for the: (i) expansion of the new line of
Uni-Form(R) pulse start products (with improved energy efficiency, quicker
starting and restarting and a more compact arc source, which improves the light
and reduces material costs) intended to replace many first generation metal
halide lamps in industrial and commercial applications; (ii) development and
testing of electronic power supply systems; (iii) development of new materials
for the world's major lighting manufacturers; and, (iv) research and development
efforts aimed at improving the coating process of optical thin-films to broaden
the applications, developing new thin-film materials, and using coatings to
develop improvements to lighting and telecommunications technologies. As a
percentage of net sales, research and development expenses increased to 9.1% in
fiscal 1999 from 6.4% in fiscal 1998. The Company anticipates this level of
expense to decline gradually over the next several quarters to approximately 7%.
General and Administrative Expenses. General and administrative expenses
increased 73.6% to $21,192 in fiscal 1999 from $12,208 in fiscal 1998. The
increase in general and administrative expenses of $8,984 relates to an overall
increase in the size and complexity of the Company and relates in part to
fully-integrating its core and acquired U.S. operations and the implementation
of new information systems. Expense increases primarily reflect legal,
accounting and consulting fees; personnel and related costs; travel;
communications costs; relocation costs; and equipment depreciation and rent. As
a percentage of net sales, general and administrative expenses increased to
11.0% in fiscal 1999 from 7.3% in fiscal 1998.
Fiber Optic Joint Venture Formation Costs. On May 6, 1997, the Company
entered into a joint development agreement with Rohm and Haas Company ("Rohm and
Haas"), for the development of advanced fiber optic cable systems using metal
halide lamps. On December 31, 1997, the Company and Rohm and Haas completed a
series of agreements that resulted in the formation of Unison Fiber Optics
Lighting Systems LLC ("Unison"). In connection with this joint venture, the
Company incurred $212 of formation and development costs which was charged to
operations during fiscal 1998.
Purchased Research & Development. In connection with its acquisition of DSI
in January 1998, the Company acquired in-process research and development valued
at $18,220. In accordance with generally accepted accounting principles, the
entire amount has been recorded as an expense in fiscal 1998.
Special Charges. See discussion of special charges under "Fiscal 1999
Special Charges" and "Fiscal 1998 Special Charges" and Note K of "Notes to
Consolidated Financial Statements" for further discussion.
Amortization of Intangible Assets. Amortization expense increased to $2,789
in fiscal 1999 from $1,691 in fiscal 1998 due to the amortization of goodwill
and other intangible assets related to the January 1998 acquisitions of Ruud
Lighting and DSI.
Income (Loss) from Operations. As a result of the aforementioned factors,
during fiscal 1999, the Company incurred a loss from operations of $60,373, as
compared to a loss from operations of $22,430 during fiscal 1998. Excluding the
special charges and the effect of termination of equipment contracts mentioned
above, the loss from operations in fiscal 1999 was $16,762. In fiscal 1998,
income from operations was $13,774, excluding purchased in-process research and
development of $18,220 and special charges of $17,984.
43
<PAGE> 46
Interest Expense. Interest expense increased to $13,889 in fiscal 1999, as
compared to $3,818 in fiscal 1998. This increase was primarily the result of the
higher average debt outstanding.
Interest Income. Interest income decreased to $1,122 in fiscal 1999 from
$1,430 in fiscal 1998. This decrease is attributable to lower average cash
equivalents and short-term investments in fiscal 1999 as compared to fiscal
1998, partially offset by $520 in interest earnings from the $9,000 loan to an
officer.
Loss from Equity Investments. The loss from equity investments represents
$109 of earnings from the Company's investment in Fiberstars, Inc., a marketer
and distributor of fiber optic lighting products, offset by a pretax noncash
write-down of $5,883 related to the Company's investment in the Unison joint
venture and a $544 loss from the Company's investment in Venture Lighting Japan,
a manufacturer and marketer of metal halide lamps in Japan.
Loss from Continuing Operations before Income Taxes, Extraordinary Charge
and Cumulative Effect of Change in Accounting Principle. As a result of the
aforementioned factors, during fiscal 1999, the Company incurred a loss from
continuing operations before income taxes, extraordinary charge and cumulative
effect of change in accounting principle of $79,458, as compared to a loss from
continuing operations before income taxes and extraordinary charges of $25,319
during fiscal 1998. Excluding the total special charges and the effect of
termination of equipment contracts mentioned above, the Company incurred a loss
from continuing operations before income taxes, extraordinary charge and
cumulative effect of change in accounting principle of $35,847 during fiscal
1999. In fiscal 1998, income from continuing operations before income taxes and
extraordinary charges was $10,885, excluding purchased in-process research and
development of $18,220 and special charges of $17,984.
Income Taxes. At June 30, 1999, the Company had net operating loss
carryforwards ("NOLs") of $57,309 available to reduce future United States
federal taxable income, which expire in 2008 through 2019.
The Company also has research and development credit carryforwards for tax
purposes of approximately $3,006, which expire in 2005 through 2019.
Additionally, in conjunction with the Alternative Minimum Tax ("AMT") rules, the
Company had available AMT credit carryforwards for tax purposes of approximately
$162, which may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 1999, the Company had foreign net operating loss
carryforwards for tax purposes totaling $5,209 that expire in 2000 to 2005 and
$10,587 that have no expiration dates.
For fiscal 1999, the Company reported a pretax loss from continuing
operations, including special charges, of $79,458; an extraordinary charge from
the early extinguishment of debt of $902; and, a cumulative effect of change in
accounting for start-up costs of $2,443, all of which created $82,803 of
operating losses and future tax deductions for financial reporting purposes.
Accordingly, at June 30, 1999, the Company has recorded a valuation allowance
for deferred tax assets of $30,322 related to all NOLs, tax credits and net
deductible tax differences.
Recontinuance of Previously Discontinued Operations. See discussion under
"Discontinued Operations Subsequently Retained" and Note L of "Notes to
Consolidated Financial Statements" for further discussion.
Extraordinary Charge. The Company recorded a $902 extraordinary charge
during fiscal 1999 and a $604 extraordinary charge (net of applicable income
taxes of $311) during fiscal 1998, representing costs associated with the early
extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. The Company recorded a
cumulative effect of a change in accounting principle of $2,443 ($.12 per
diluted common share) related to the adoption of the American Institute of
Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities."
44
<PAGE> 47
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 $24,008 compared to income from
continuing operations before extraordinary charge of $7,104 for fiscal 1997. The
Company realized a net loss of $25,943 for fiscal 1998, compared to net income
of $7,104 for fiscal 1997.
The following factors should be considered in comparing the Company's
continuing operations for fiscal 1998 and fiscal 1997:
- Results for fiscal 1998 include $17,984 in special charges ($.99 per
share) and $18,220 of purchased in-process research and development
($1.00 per share).
- Results for fiscal 1997 include a nonrecurring charge of $771 ($.06 per
share) in settlement of a claim.
After excluding the above charges, the Company's operating activities would
have resulted in income from continuing operations before income taxes and
extraordinary charge of $10,885 for fiscal 1998, as compared to $10,572 of
income from continuing operations before income taxes and extraordinary charge
that would have been reported for fiscal 1997.
FISCAL 1998 COMPARED WITH FISCAL 1997
Net sales. Net sales increased 94.6% to $168,349 for the fiscal year ended
June 30, 1998 from $86,490 for the fiscal year ended June 30, 1997. The increase
in system components, materials and systems ($75,968) 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 122.3% to $101,697 in fiscal 1998
from $45,738 in fiscal 1997. As a percentage of net sales, cost of sales
increased to 60.4% for fiscal 1998 from 52.9% for fiscal 1997. 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. Cost of sales in fiscal 1998 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 117.8% to
$99,631, or 59.2% of net sales.
Marketing and Selling Expenses. Marketing and selling expenses increased
89.4% to $29,990 for fiscal 1998, compared with $15,832 for fiscal 1997.
Marketing and selling expenses, as a percentage of net sales, decreased to 17.8%
during fiscal 1998, from 18.3% 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 Uni-Form (R) pulse start
products and increased newspaper advertising and catalogue costs related to the
marketing of residential portable lighting fixtures.
Research and Development Expenses. Research and development expenses
increased 86.8% to $10,843 in fiscal 1998 from $5,804 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 6.4% in fiscal 1998 from 6.7% in fiscal 1997.
General and Administrative Expenses. General and administrative expenses
increased 69.9% to $12,208 in fiscal 1998 from $7,184 in fiscal 1997. As a
percentage of net sales, general and administrative expenses decreased to 7.3%
in fiscal 1998 from 8.3% in fiscal 1997. The decrease as a percentage of net
sales primarily
45
<PAGE> 48
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, 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, 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 & Development. In connection with its acquisition of DSI
in January 1998, the Company acquired in-process research and development valued
at $18,220. In accordance with generally accepted accounting principles, the
entire amount has been recorded as an expense in fiscal 1998.
Special Charges. During the third quarter of fiscal 1998, the Company
recorded special charges related to the Company's decision to refocus and
restructure its recently acquired global power supply operations to focus on
opportunities in metal halide. With the January 1998 acquisition of Ruud
Lighting, Inc., the Company accelerated this rationalization of its existing
power supply manufacturing operations and distribution activities in order to
capitalize on new opportunities not previously available. This assessment
resulted in (a) the discontinuance of certain power supply products at the
Company's power supply facilities, (b) the write-down of certain intangible and
fixed assets and (c) a $2,066 write-down of inventory which is classified in
cost of sales. Additionally, the special charges, which total $17,984 (including
the $2,066 write-down of inventory discussed above), cover the elimination of
certain nonfocus product lines, the cost of consolidating distribution
activities and facilities, the write-down of assets in connection with the
implementation of new information systems and a reassessment of investments.
Settlement of Claim. During the second quarter of fiscal 1997, the Company
paid $475 in an out-of-court settlement of a claim brought by certain former
common shareholders of a predecessor of the Company. The charge of $771 ($.06
per share) represents the $475 settlement plus legal and other directly-related
costs, net of insurance recoveries.
Amortization of Intangible Assets. Amortization expense increased to $1,691
in fiscal 1998 from $406 in fiscal 1997 due to the amortization of goodwill and
other intangible assets related to the acquisitions of Ruud Lighting and
Deposition Sciences which were completed in January 1998.
Income (Loss) from Operations. The Company incurred a loss from operations
of $22,430 during fiscal 1998 as compared to income from operations of $10,469
during fiscal 1997. Excluding the special charges, purchased in-process research
and development, and nonrecurring charge for the settlement noted above, income
from operations for fiscal 1998 increased to $13,774, a 22.5% increase over the
income from operations of $11,240 for fiscal 1997. As a percentage of net sales,
income from operations excluding these items decreased to 8.2% in fiscal 1998
from 13.0% in fiscal 1997.
Interest Expense. Interest expense increased to $3,818 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 $1,430 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.
46
<PAGE> 49
Income (Loss) from Continuing Operations before Income Taxes and
Extraordinary Charge. The Company incurred a loss from continuing operations
before income taxes and extraordinary charge of $25,319 during fiscal 1998 as
compared to income from continuing operations before income taxes and
extraordinary charge of $9,801 during fiscal 1997. Excluding the special
charges, purchased in-process research and development, and nonrecurring charge
for the settlement noted above, income from continuing operations before income
taxes and extraordinary charge for fiscal 1998 increased to $10,885, a 3.0%
increase over the income from continuing operations before income taxes and
extraordinary charge of $10,572 for fiscal 1997. As a percentage of net sales,
income from continuing operations before income taxes and extraordinary charge
excluding these items decreased to 6.5% in fiscal 1998 from 12.2% in fiscal
1997.
Income Taxes. The Company recorded a credit of $1,311 related to income
taxes for fiscal 1998 as compared to income taxes of $2,697 for fiscal 1997. As
a percentage of income (loss) from continuing operations before income taxes and
extraordinary items, the effective income tax rate was (5.2)% 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" for further information.
At June 30, 1998, the Company had United States net operating loss
carryforwards ("NOLs") for tax purposes of approximately $1,960 to offset future
taxable income. The domestic NOLs expire in fiscal years 2008 through 2011. In
addition, the Company had foreign tax loss carryforwards of $579 with various
expiration dates.
Recontinuance of Previously Discontinued Operations. See discussion under
"Discontinued Operations Subsequently Retained" and Note L to "Notes to
Consolidated Financial Statements" for further discussion.
Extraordinary Charge. The Company recorded a $604 extraordinary charge (net
of applicable income tax benefits of $311) in fiscal 1998, representing costs
associated with the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for market development
activities, research and development efforts, investments in business
acquisitions, joint ventures and working capital. These requirements have been,
and the Company expects they will continue to be, financed through a combination
of cash flow from operations, borrowings under various credit facilities and the
sale of stock.
Cash decreased $1,766 during the first six months of fiscal 2000. Uses of
cash consisted of $3,670 used in operating activities and $4,478 used in
investing activities. These uses of cash were offset by net financing activities
of $6,382.
Cash decreased $18,337 during the year ended June 30, 1999. Uses of cash
consisted of $19,312 used in operating activities and $28,914 used in investing
activities. These uses of cash were offset by net financing activities of
$29,889.
Net cash used in operating activities. Net cash used in operating
activities totaled $3,670 during the first six months of fiscal 2000 as compared
to $17,819 in the first six months of fiscal 1999. The increase in trade
receivables of $7,835 was the most significant usage, and was primarily a result
of the increase in sales. Net cash used in operating activities totaled $19,312
in fiscal 1999 as compared to $13,528 in fiscal 1998. Inventory levels decreased
$4,138 in fiscal 1999, excluding the effect of noncash special charges and
terminated equipment contracts, as a result of the Company's efforts to manage
its inventory levels more effectively. In spite of these usages of cash the
Company intends to manage its cash resources to generate positive cash flow from
operating activities for the full fiscal year 2000 and beyond. In the second
quarter of fiscal 2000, the Company generated net cash from operating activities
of $1,299.
47
<PAGE> 50
Net cash used in investment activities. During the first six months of
fiscal 2000, investing activities used $4,478 of cash, which was primarily
represented by a $2,878 usage for capital expenditures and a $1,920 investment
in affiliates, offset by a $350 source of funds from the sale of a short-term
investment. During fiscal 1999, investing activities used $28,914 of cash
including $22,130 for capital expenditures, $4,390 related to the purchases of
businesses and $2,394 related to investments in affiliates.
Capital expenditures, primarily for production equipment and leasehold and
facility improvements, totaled $2,878 during the first six months of fiscal 2000
as compared to $17,956 during the first six months of fiscal 1999. Capital
expenditures in fiscal 2000 related to additional machinery and equipment to
improve production processes, which should result in increased productivity and
capacity in the production of lamps, power supplies and other lighting system
products.
Capital expenditures, primarily for production equipment and leasehold and
facility improvements, totaled $22,130 in fiscal 1999 as compared to $32,579 in
fiscal 1998. Capital expenditures in fiscal 1999 related to facilities
enhancements, primarily at the Company's headquarters in Solon, Ohio, and at
several of its subsidiaries, and additional machinery and equipment to improve
production processes, which should result in increased productivity and capacity
in the production of lamps, power supplies and other lighting system products.
The Company has modified its growth and capital expansion plans due to the
present limited availability of cash resources. Specifically, the Company will
limit its capital expenditures for at least the next twelve months and, as a
result, the Company has postponed the acquisition of certain capital equipment
and, for all practical purposes, facilities expenditures have been completed.
As a result of the Company's decision to terminate joint venture equipment
contracts in the quarter ended December 31, 1998, approximately $6,500 of new
production equipment is available for installation at the Company's Solon, Ohio
lamp manufacturing facility. The Company estimates its maintenance level for
capital expenditures will approximate $6,000 to $8,000 over the next twelve
months. Future capital expenditures beyond this level will be discretionary, as
the Company presently has sufficient operating capacities to support several
years of sales growth at its historical rates.
To expand the Company's ability to develop and market new metal halide
products and systems, the Company has made a number of acquisitions and
strategic investments, the most notable of which, completed in January 1998, are
described below.
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is a leader in the
development of sophisticated thin film deposition systems and coatings for
lighting applications, with particular emphasis on coatings for metal halide
lighting systems, and other applications, including aerospace, defense and
automotive applications. The stock of DSI was acquired in a privately-negotiated
transaction. The purchase price consisted of 599,717 shares of the Company's
Common Stock and approximately $14,500 in cash. DSI has subsequently achieved
technological feasibility on certain telecommunications products under
development at the time of the acquisition.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets HID lighting systems,
principally focusing on metal halide installations for commercial, industrial
and outdoor lighting applications. The Ruud Stock was acquired from the five
shareholders of Ruud Lighting in a privately negotiated purchase transaction.
The purchase price for the Ruud Stock consisted of three million shares of the
Company's Common Stock and approximately $35,500 in cash.
Net cash provided by financing activities. During the first six months of
fiscal 2000, net financing activities provided cash of $6,382, which included
$20,203 of cash provided from the investment from GE, offset by net repayments
of borrowings under the Company's revolving credit facilities of $7,936 and net
repayments of long-term debt and capital leases of $6,205.
48
<PAGE> 51
During fiscal 1999, net financing activities provided cash of $29,889,
which included $5,456 of cash provided from net borrowings under the Company's
revolving credit facilities, net borrowings of long-term debt and capital leases
of $32,636 and a loan to an officer of $9,000.
On March 13, 1998, the Company sold $100,000 of Old Notes, resulting in net
proceeds of $96,150. Approximately $76,300 of the net proceeds of the Old Notes
were used to repay amounts outstanding under the Company's existing 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 the Exchange Offer, the Old Notes
bear interest at 8.5%.
Pursuant to a loan agreement dated October 8, 1998, between the Company and
its Chairman and Chief Executive Officer (the "CEO"), the Company loaned $9,000
to its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the loan
were used by the Company's CEO to reduce the principal balance outstanding of a
margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
The CEO paid accrued interest of $720 on the loan through October 6, 1999.
The principal on the loan was due on October 6, 1999. On January 25, 2000, the
Board agreed that Mr. Hellman would not be required to repay the loan until
October 6, 2000. However, if the price of the Company's Common Stock reaches $12
per share (a level which the directors believe would permit repayment of the
CEO's margin loan and refinancing with another lender), the Board and the CEO
will discuss earlier repayment of all or a portion of the loan. The directors
have informed the CEO that the Company may require immediate payment of the loan
if the Company requires the payment to prevent an unacceptable strain on cash
resources.
Ability to advance future operations. The Company has begun to implement,
and will continue to implement, changes in its operations and investment
activities intended to reduce the use of its cash resources to a level at or
below the cash flow generated by its operations and investments.
The Company's working capital (current assets less current liabilities) at
December 31, 1999 was $23,974, resulting in a working capital ratio of current
assets to current liabilities of 1.4 to 1.0, as compared to $18,274 or 1.3 to
1.0 at June 30, 1999. As of December 31, 1999, the Company had $2,064 in cash
and cash equivalents.
The interest-bearing obligations of the Company totaled $147,367 as of
December 31, 1999, and consisted of: $24,235 of borrowings under the Bank Credit
Facility; $100,000 of Notes; mortgages of $17,046; a promissory note due to an
affiliate of $3,000; borrowings of a foreign subsidiary of $2,009; and capital
leases of $1,077.
In May 1999, the Company replaced its existing credit facility with a
$75,000 Bank Credit Facility consisting of a $50,000 revolving credit loan and
$25,000 term loan provided by several financial institutions. Subsequent to June
30, 1999 the Company reduced the Bank Credit Facility to $60,000 from $75,000.
Proceeds from the facility were used to repay the Company's existing credit
facility and certain other long-term debt. The revolving credit loan has a
three-year term expiring in May 2002. Interest rates on loans outstanding are
based, at the Company's option, on LIBOR plus 2.75% or the agent bank's prime
rate. Availability of borrowings is determined by the Company's eligible
accounts receivable and inventories. Following the GE investment on October 6,
1999, the proceeds were applied to reduce the term loan to $20,000 and the
remainder of the proceeds were applied to the $40,000 revolving credit facility.
The term loan has a five-year term expiring in May 2004. The Company pays
monthly principal payments of $298, with the unpaid balance due at maturity.
Interest rates on the term loan are based, at the Company's option, on LIBOR
plus 3.25% or the agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by
49
<PAGE> 52
substantially all of the Company's machinery and equipment and is
cross-collateralized and secured with the revolving credit loan.
The new Bank Credit Facility replaced the Company's existing credit
facility, which was in default as of March 31, 1999, due to the inability to
meet financial covenants related to maintaining certain levels of net worth and
earnings. The existing credit facility lenders provided the Company with a
waiver of default in anticipation of the refinancing. The Company accomplished
the refinancing of the existing credit facility on May 21, 1999 and was able to
obtain sufficient borrowing capacity and liquidity to meet its operating
requirements and make necessary capital expenditures.
The Company's implementation of the cost reduction and cash flow
enhancement initiatives including consolidation of equipment and lamp-making
operations, reductions in capital expenditures, consolidation of international
operations, reduction of corporate expenses, and overall workforce reductions
should favorably impact the future cash flow of the Company. The Company intends
to manage its expenditures to generate positive cash flow in fiscal 2000 and
beyond.
The Company believes that the available cash, cash flow from operations,
and the initiatives outlined above, along with availability under its existing
Bank Credit Facility, will enable the Company to fund its operations for at
least the next 12 months. Beyond this time, the Company believes a return to
profitability and positive cash flow from operations, its strategic relationship
with GE, and the growth in the popularity and applications for metal halide
products and systems should enable the Company to access additional capital
resources, as needed.
FOREIGN CURRENCY
Approximately 34% of the Company's net sales in fiscal 1999, were
denominated in currencies other than U.S. dollars, principally Pounds Sterling,
Australian dollars and Canadian dollars. A weakening of such currencies versus
the U.S. dollar could have a material adverse effect on the Company. The Company
currently does not hedge its foreign currency exposure.
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. Weighted-average variable rates are based on implied forward rates as
derived from published spot rates. For interest rate swaps, the table presents
notional amounts and weighted-average interest rates by contractual maturity
dates.
<TABLE>
<CAPTION>
JUNE 30, FAIR VALUE
------------------------------------- JUNE 30,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
(DOLLARS IN MILLIONS) ----- ----- ----- ----- ----- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt, including
Current Portion
Fixed Rate...................... $ 0.9 $ 0.9 $ 0.7 $ 0.4 $ 0.4 $105.7 $109.0 $106.2
Average Interest Rate........... 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%
Variable Rate................... $ 7.4 $ 4.4 $17.2 $ 4.3 $18.0 $ 0.5 $ 51.8 $ 51.8
Average Interest Rate........... 8.1% 8.6% 8.8% 8.8% 8.9% 10.0%
Interest Rate Derivative
Financial Instruments Related to
Debt
Interest Rate Swaps
Pay fixed, notional amount...... -- -- -- -- $10.0 -- $ 10.0 $ (0.2)
Average Pay Rate................ 6.6% 6.6% 6.6% 6.6% 6.6%
Average Receive Rate............ 5.7% 6.2% 6.4% 6.5% 6.6%
</TABLE>
50
<PAGE> 53
The Company is obligated under its Bank Credit Facility to limit its
exposure to fluctuating interest rates for a minimum of $10,000. During fiscal
1999, the Company terminated two interest rate swaps with notional amounts of
$25,000 each, and entered into an interest rate swap with a notional amount of
$10,000, as set forth in the table above. The notional amount is used to
calculate the contractual cash flow to be exchanged and does not represent
exposure to credit loss. If this agreement had been settled at June 30, 1999,
the Company would have paid approximately $200.
Liabilities at June 30, 1998, included $111,000 of fixed-rate debt and
$7,700 of variable-rate debt. Interest rates on the fixed-rate debt to maturity
ranged from 7.9% to 8.1%, while interest rates on the variable-rate debt to
maturity was LIBOR plus 1% to 2%. The Company terminated during fiscal 1999 two
interest rate swaps that were in place at June 30, 1998.
Foreign Currency Exchange Risk. The Company currently does not hedge its
foreign currency exposure and, therefore, has not entered into any forward
foreign exchange contracts to hedge foreign currency transactions.
The Company has operations outside the United States with foreign-currency
denominated assets and liabilities, primarily denominated in pounds sterling,
Australian dollars, and Canadian dollars. Because the Company has
foreign-currency denominated assets and liabilities, financial exposure may
result, primarily from the timing of transactions and the movement of exchange
rates. The unhedged foreign currency balance sheet exposures as of June 30, 1999
are not expected to result in a significant impact on earnings or cash flows.
Revenues from customers outside the United States represented approximately
33% of net sales during fiscal 1999. As the Company has expanded its
international operations, its sales and expenses denominated in foreign
currencies have expanded and that trend is expected to continue. Thus, certain
sales and expenses have been, and are expected to be subject to the effect of
foreign currency fluctuations and these fluctuations may have an impact on
margins.
There have been no material changes in the above market risk disclosures
for the period from June 30, 1999 to December 31, 1999.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has not yet adopted FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires that all derivatives, such
as interest rate exchange agreements (swaps), be recognized on the balance sheet
at fair value. Derivatives which are not hedges must be adjusted to fair value
through the results of operations. Derivatives determined to be hedges will be
adjusted to fair value through either the results of operations or other
comprehensive income, depending on the nature of the hedge. The Company is
required to adopt FAS No. 133, as subsequently amended by FAS No. 137, on July
1, 2000. The impact, if any, on net income, comprehensive income and financial
position will depend on the amount, timing and nature of any agreements entered
into by the Company.
IMPACT OF INFLATION
Although inflation has slowed in recent years, it continues to be a factor
in our economy. However, management does not believe that inflation has or will
have a significant impact on its operations. Although the Company has not raised
prices significantly in recent years, it has been able to lower overall costs
sufficiently to offset inflation.
51
<PAGE> 54
BUSINESS
The Company is an innovation-driven designer, manufacturer and marketer of
metal halide lighting products. Metal halide lighting combines superior energy
efficient illumination with long life, excellent color rendition and compact
lamp size. The Company has integrated vertically to design, manufacture and
market a broad range of metal halide products, including materials used in the
production of lamps and lamps and other components for lighting systems, as well
as complete metal halide lighting systems. The Company's materials and
components are used in the manufacture of its own lighting systems for sale to
end-users and are sold to third party manufacturers for use 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]
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. 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. Metal halide lighting is currently used in
commercial and industrial applications such as factories and warehouses, outdoor
site and landscape lighting, sports facilities and large retail spaces such as
superstores. Due to metal halide's superior lighting characteristics, the
Company believes many opportunities exist to "metal halidize" applications
currently dominated by older technologies, incandescent and fluorescent. For
example, metal halide lighting has recently been introduced in fiber optic,
projection television and automotive headlamp applications and the Company has
introduced a line of portable metal halide fixtures. The Company believes that
applications for metal halide lamps will continue to increase as metal halide
systems become more widely known and available.
Management believes the Company 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 this
industry. The Company believes that this focus enhances its responsiveness to
customer demand and has contributed to its technologically advanced metal halide
product development and manufacturing capabilities. The Company believes it
supplies 100% of the metal halide salts used in domestic metal halide lamp
production and in excess of 80% of those used worldwide. It is also a leading
domestic producer of other metal halide materials. The Company also develops and
manufactures thin film coatings for metal halide and other applications. The
Company currently markets over 460 different types of metal halide lamps (76
specialty, 258 "second-generation" Uni-Form(R) pulse start and 132
standard-type), giving it the most diverse product line of any metal halide lamp
manufacturer. In addition, the Company offers components such as more than 450
magnetic and electric power supply products for metal halide and other HID lamp
systems and produces and markets complete metal halide systems, which consist of
a lamp, power supply, related electronic controls, optical systems, housings,
support systems and other necessary components. Since the Company's initial
public offering in December 1995, the Company has expanded into additional metal
halide system components products, primarily through acquisitions, and now
offers more than 450 magnetic and electronic power supply products. In addition,
through the Ruud Lighting acquisition, the Company has become a leading
manufacturer and marketer of metal halide fixtures for commercial and industrial
markets.
52
<PAGE> 55
As part of the Company's cash flow management, the Company temporarily
ceased the manufacture and sale of turnkey lamp production equipment groups in
fiscal 1999. The Company's Lighting Resources International unit formerly
manufactured and sold these equipment groups into international markets. Such
equipment groups have been sold to existing lamp manufacturers or to joint
ventures formed by the Company in developing markets. Through the sale of lamp
production equipment, the Company generated revenue from the initial sale of its
production equipment and recurring sales of the materials used in lamp
production. The Company plans to consolidate equipment and personnel necessary
to support the technical needs of the Company and its equipment customers. The
Company's DSI subsidiary designs, manufactures and markets equipment capable of
depositing thin film and coatings on glass and other surfaces. The Company also
manufactures and sells photometric measuring equipment.
The Company has begun to leverage this broad knowledge base and ability to
supply additional system components to design and produce metal halide lighting
systems for new applications.
RECENT DEVELOPMENTS
General Electric Company Investment
On October 6, 1999, GE completed an investment in the Company of $20.6
million. The additional capital resources provided by the GE investment are
expected to provide additional flexibility to pursue opportunities in the metal
halide business. In addition, GE and the Company have entered into a five year,
renewable agreement for the supply of metal halide salts to GE. The Company and
GE are in discussions with respect to other supply arrangements. The Company
anticipates that the GE investment and the expansion which it will permit will
result in an expanded supplier-customer relationship with GE, enhancing the
Company's earnings and competitive position in the metal halide marketplace.
The GE investment includes 761,250 shares of the Company's newly-created
Series A Stock convertible at any time into 3,045,000 shares of Company Common
Stock (subject to adjustment). GE also received a Warrant (the "Initial
Warrant") to purchase an additional 1,000,000 shares of Common Stock of the
Company (subject to adjustment), which is immediately exercisable. GE has been a
holder of 535,887 shares of Company Common Stock since the Company's initial
public offering in 1995. The Series A Stock, Common Stock issuable on exercise
of the Initial Warrant and the Common Stock held by GE represent (after giving
effect to the shares issued on exercise of the Initial Warrant) approximately
18.8% of the voting power and equity ownership of the Company. See "Terms of the
Series A Stock" and "Terms of the Initial Warrant." Pursuant to the terms of the
Stock Purchase Agreement, GE provided the Company with candidates for the
Company's Board of Directors who are not directors, officers, employees or 10%
shareholders of GE. The Company is required to cause the number of such
candidates serving on the Board to be equal to the greater of 20% of the number
of members of the Board or the number of members which most nearly corresponds
to GE's percentage ownership interest in the Company. In December 1999, the
Company appointed two GE candidates to the Board of Directors.
The proceeds of the GE transaction have been applied principally to the
reduction of short-term liabilities and outstanding amounts under the Company's
Bank Credit Facility, and have the effect of increasing available borrowings
under the Company's Bank Credit Facility.
The following summaries of the terms of the Series A Stock, the Terms of
the Initial Warrant and Additional Terms of the GE Transaction are summaries of
the definitive documents in connection with the GE investment.
Terms of the Series A Stock
The Series A Stock is a newly authorized series of preferred stock of the
Company created for issuance in the GE transaction. 761,250 shares of Series A
Stock have been authorized and issued to GE. The Series A Stock has a
liquidation preference of $27 per share, plus an amount equal to 8% per annum
compounded annually from the date of issuance to the date of payment
("Liquidation Preference Amount").
Each outstanding share of Series A Stock is convertible at any time into
four shares (subject to adjustment as described below) of Common Stock of the
Company. Prior to conversion, holders of Series A Stock are entitled to vote in
all shareholder matters together with the holders of Company Common Stock as a
single class. In any
53
<PAGE> 56
such vote, the holders of Series A Stock are entitled to four votes (equal to
the number of shares of Common Stock into which the Series A Stock held may
initially be converted).
The Company is required to redeem any shares of Series A Stock which have
not been converted or retired on September 30, 2010. Any such redemption would
be made at the Liquidation Preference Amount. In addition, holders of the Series
A Stock may require the Company to redeem their shares of Series A Stock by
giving notice to the Company on or before September 30, 2004. If such notice is
given, the Company will be required to make such redemption on or prior to
September 30, 2005. In addition, holders of Series A Stock will be entitled to
require the Company to redeem the Series A Stock following the occurrence of any
of the following events (each a "Triggering Event"): any action by the Company
to give effect to certain major corporate actions, including actions to merge,
sell all or a substantial portion of its assets (other than in the ordinary
course of business), issue capital stock, incur or have outstanding indebtedness
for borrowed money in excess of $210 million. Upon the occurrence of a
Triggering Event, the holders of the Series A Stock may require the Company to
redeem their shares of Series A Stock by giving notice to the Company within 90
days following the Triggering Event. If such notice is given, the Company will
be required to make such redemption within one year following such notice. Any
such redemption would be made at the Liquidation Preference Amount. Under the
terms of the Company's Bank Credit Facility and the Indenture, the redemption of
the Series A Stock would currently constitute an event of default, permitting
acceleration of the related indebtedness. If prior consent of the banks is
obtained, the redemption is permitted under the Bank Credit Facility. Payments
for the redemption of equity securities are "Restricted Payments" under the
Indenture. The total of all "Restricted Payments" under the Indenture (with
exceptions not applicable to stock redemption) cannot exceed one-half of the
total of consolidated net earnings of the Company (excluding consideration of
certain unusual items) from April 1, 1998 (taken as a single period) plus the
amount of proceeds received from sales of non-redeemable stock. As of December
31, 1999, the Company had a net loss, excluding extraordinary items, of $80.2
million for the period. Until this deficit has been cured, and sufficient
proceeds are received and/or earnings are achieved, the Company cannot redeem
the Series A Stock without causing an event of default with respect to the
Notes. In addition, the Indenture prohibits Restricted Payments (with exceptions
not applicable to stock redemptions) at any time where the ratio of EBITDA to
Interest Expense for the preceding four fiscal quarters does not exceed 2.5 to
1. See "Description of the New Notes -- Covenants."
If the Company fails to make any redemption as required (subject to
permitted deferrals in the event that such redemption would cause an event of
default with respect to certain indebtedness of the Company), the conversion
ratio of the Series A Stock would be increased from four shares of Common Stock
to eight shares of Common Stock per share of Series A Stock. In addition, the
conversion ratio is subject to adjustment to prevent dilution of the interest of
GE by the issuance of Common Stock after October 6, 1999. Except for issuance of
shares under existing employee benefit plans, and certain other enumerated
exceptions, any shares of Common Stock issued at a price below $6.75 per share,
or, if higher, below the then current market price, would result in adjustment
of the conversion ratio. Any adjustment in the conversion ratio would not affect
the voting power represented by shares of Series A Stock prior to conversion.
Upon liquidation, each share of Series A Stock will be entitled to be paid
the Liquidation Preference Amount prior to any payment or distribution to the
holders of Company Common Stock. Following such payment, holders of Series A
Stock will be entitled to a proportional share of any distribution to holders of
Company Common Stock based on the number of shares of Common Stock into which
the Series A Stock could have been converted at the time of the liquidation.
Terms of the Initial Warrant
The Initial Warrant entitles the holder to purchase shares of Company
Common Stock at $.01 per share. The Initial Warrant is immediately exercisable
for 1,000,000 shares (subject to adjustment) of Common Stock. The number of
shares subject to the Initial Warrant will be subject to adjustment at any time
prior to exercise if the Company issues Common Stock at a price below $6.75 per
share or, if higher, below the then current market price.
54
<PAGE> 57
Additional Terms of the GE Transaction
In addition to GE's initial investment, under certain circumstances, GE
will be entitled to make additional investments in the Company and receive the
right to vote additional shares of Company Common Stock. The exercise of certain
of these rights is subject to applicable law, including the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 ("HSR Approval"). GE and the Company entered
into a Contingent Warrant Agreement ("Contingent Warrant Agreement"). The
Contingent Warrant Agreement identifies certain occurrences which will entitle
GE to exercise these rights.
Upon the Second Occurrence (defined below), if it occurs, GE would be
required to exercise in full the Initial Warrant. In addition, GE would receive
the right to vote the number of shares then owned by Wayne R. Hellman and
Hellman, LTD. pursuant to proxies granted by Messrs. Hellman and Ruud. GE would
receive the right to vote the number of shares as to which Mr. Hellman then has
voting power pursuant to the Hellman Voting Trust or Irrevocable Proxies granted
with respect to shares removed from the Hellman Voting Trust (all shares voted
by Mr. Hellman, currently approximately 3.9 million shares, are referred to
collectively as the "Hellman Shares"). GE would also have an option, at the then
current market price, to purchase from Messrs. Hellman and Ruud, the number of
shares of Common Stock which, together with the shares owned by GE, would
represent 25% of the voting power of the Company. The Company would also be
required to grant to GE an additional warrant (the "First Contingent Warrant")
to purchase shares of Company Common Stock at the then current market price. The
number of shares subject to the First Contingent Warrant would be equal to the
number of shares required to allow GE to have a majority of the voting power of
the Company, assuming GE had effective proxies with respect to all shares as to
which Messrs. Hellman and Ruud then have voting power.
The exercise of the First Contingent Warrant, the options on shares held by
Messrs. Hellman and Ruud, and effectiveness of GE's proxy with respect to any
such shares is subject to HSR Approval (which requires the Company and GE to
provide information to the federal government to allow it to determine whether
to contest an increase by GE to an interest in the Company in excess of 25%
pursuant to antitrust law). If the proxies become effective after the Second
Occurrence, GE will have the proxies to vote the number of Hellman Shares and
will be entitled to exercise approximately 35% of the then outstanding voting
power of the Company (assuming that none of the Hellman Shares have been
transferred by the beneficial owners and no issuance of additional shares by the
Company other than pursuant to the GE transaction) or approximately 34% of the
voting power of the Company on a fully diluted basis. GE has not indicated that
it will acquire additional shares of Company Common Stock. However, if GE were
to acquire additional shares of Common Stock (other than shares subject to
effective proxies as described above or shares obtained on the exercise of the
First Contingent Warrant), or if the number of outstanding shares on a fully
diluted basis were reduced, GE could obtain in excess of 35% of the voting power
of the Company on a fully diluted basis. In addition, if a substantial number
(currently approximately 300,000 shares) of Hellman Shares were transferred
(other than to GE) prior to the Second Occurrence, and if GE exercised the First
Contingent Warrant, GE would acquire in excess of 35% of the voting power of the
Company on a fully diluted basis. If GE were to acquire in excess of 35% of the
voting power of the Company on a fully diluted basis, the terms of the Indenture
require that the Company offer to repurchase the Notes at a price of 101% of the
principal amount thereof, plus accrued interest ("Offer to Repurchase Notes"),
and the Company's banks will have the ability to demand payment of the Bank
Credit Facility.
Upon the Third Occurrence (defined below), GE would receive the right to
vote the number of shares then owned by Mr. Ruud, and the right to vote the
number of shares as to which Mr. Ruud then has voting power pursuant to the Ruud
Voting Trust or Irrevocable Proxies granted with respect to shares removed from
the Ruud Voting Trust, currently approximately 3.6 million shares (the "Ruud
Shares"). The effectiveness of this right requires that the conditions for the
effectiveness of the proxies following the Second Occurrence have been
satisfied. If the proxies on the Ruud Shares become effective after the Third
Occurrence, GE will have the right to vote the Ruud Shares and will be entitled
to exercise approximately 48.4% of the then outstanding voting power of the
Company (assuming that none of the Hellman Shares or the Ruud Shares have been
sold by the beneficial owners, no exercise by GE of the Contingent Warrants and
no issuance of additional shares by the Company other than pursuant to the GE
transaction). If the Company has not already made an Offer to Repurchase Notes,
it will be required to make the offer upon effectiveness of the proxy on the
Ruud Shares and the Company's banks will have the ability to demand payment of
the Bank Credit Facility. In addition, GE will receive an additional warrant
55
<PAGE> 58
(the "Second Contingent Warrant") which will entitle GE to purchase additional
shares of Common Stock at the then current market price. The number of shares
subject to the Second Contingent Warrant will be the number of shares necessary
to give GE 50% plus one vote of the voting power of the Company (including the
exercise of all outstanding Warrants, shares subject to irrevocable proxies, the
shares subject to the Second Contingent Warrant and all proxies held with
respect to Hellman Shares and Ruud Shares). After the Third Occurrence, if the
Company issues additional shares of Common Stock to anyone other than GE, GE
will be entitled to purchase, on the same terms given to the third party, the
number of shares required to maintain GE's voting power.
The basis for GE's additional rights will be the failure of the Company to
maintain a 2.0 to 1.0 ratio of EBITDA (as defined) to Interest Expense (as
defined) over the applicable measurement periods. The first measurement period
was the six months ended December 31, 1999. Thereafter, the measurement periods
are the six months ending on the last day of each successive fiscal quarter
until September 30, 2010. The first failure to maintain the required ratio would
be the "First Occurrence," the second such failure would be the "Second
Occurrence" and the third such failure would be the "Third Occurrence." The
ratio for the six months ended December 31, 1999, was 1.9 to 1.0 and, therefore,
the First Occurrence has taken place. However, after the First Occurrence, if
the Company maintains the required ratio in the three fiscal quarters
immediately prior to the measurement period in which a failure occurs, a Second
Occurrence or Third Occurrence, as the case may be, would not be effective.
Under the terms of the transaction, EBITDA consists of net earnings, plus
interest expense, plus depreciation and amortization, plus income taxes, less
extraordinary gains and gains from asset sales plus extraordinary losses and
losses from asset sales. Interest Expense consists of interest expense (net of
interest income) calculated in accordance with generally accepted accounting
principles, but excludes amortization of deferred financing costs up to a
maximum of $125,000 in any fiscal quarter.
The Company also entered into a number of other agreements with GE in
connection with the transaction. The Company has entered into a standard
registration rights agreement which will require the Company, upon GE's request,
to register the sale of the shares of Company Common Stock issued in connection
with the investment. If GE were to require such registration and sell a
substantial number of shares, it could adversely affect the market price of
Company shares and the ability of the Company to sell equity securities.
In addition to the proxies granted to GE by Messrs. Hellman and Ruud,
Messrs. Hellman and Ruud have granted to GE a first refusal right on the sale of
their shares. This agreement requires that if Messrs. Hellman and Ruud, or
Hellman Ltd., wish to sell shares of Company stock, they must first offer the
shares to GE on the same terms. The effect of sales of Company stock by Messrs.
Hellman and Ruud and Hellman Ltd. to third parties would be to increase the
number of shares which GE would have to buy from the Company pursuant to the
Contingent Warrants to obtain voting control of the Company. After issuance of
the Second Contingent Warrant, such sales would eliminate GE's contractual right
to achieve complete voting control. In addition, upon a Second Occurrence, GE
will have an option to purchase shares from Messrs. Hellman and Ruud which would
permit GE to raise its ownership to 25% of the outstanding shares of Company
Common Stock.
Expansion of Operations in India
Effective January 2000, the Company obtained controlling, majority interest
in its lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its combined
ownership to approximately 90%. In conjunction with this increased investment,
the Company has shipped new metal halide lamp-making equipment, available as a
result of the fiscal 1999 termination of joint venture equipment contracts, and
is expanding its facility in Chennai (Madras), India.
The Indian joint venture was created in March 1998 and began operations in
January 1999. The Tamilnadu Industrial Development Corporation Limited (TIDCO, a
governmental enterprise) in Chennai will remain as the Company's minority
partner.
The Chennai factory offers a very beneficial cost structure while meeting
the Company's product quality standards. The Company believes that in the fourth
quarter of fiscal 2000, the Chennai operation should be producing at an annual
rate of approximately one million metal halide units. By the end of the calendar
year 2000, the Company projects an annual production rate of over 1.4 million
units, or approximately $18 million worth of potential product sales. The
products produced in the Indian facility will be used around the world and
56
<PAGE> 59
will consist of both the Company's new Uni-Form(R) pulse start products as well
as more-mature metal halide lamp types.
Fiberstars/Unison Transaction
In February 2000, the Company acquired the interest of Rohm and Haas
Company in Unison, the fiber optic lighting joint venture with Rohm and Haas
Company. Simultaneously, Unison transferred a substantial portion of its
personal property (including intellectual property) to Fiberstars, Inc. The
Company believes that Fiberstars, Inc. is in the best position to develop
Unison's fiber optic lighting technology into commercially accepted lighting
products. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3.0 million, of which $2.3 million is
represented by a note, to obtain the remaining interest in Unison.
In exchange for the Unison assets, the Company received four warrants to
purchase up to an aggregate of 1,000,000 shares ($.01 par value per share) of
Fiberstars common stock (or 250,000 shares per warrant). The warrants will
expire on January 31, 2007. None of the warrants will be exercisable until
Fiberstars's achievement of sales of at least 1,000 compound parabolic collector
(CPC) units. The exercisability of each warrant is further contingent on the
average closing price of Fiberstars common stock (over any 30 calendar day
period) and Fiberstars's achievement of sales of a minimum quantity of solid
core fiber cable: Warrant No. 1 -- $6 and 1,000 feet; Warrant No. 2 -- $8 and
10,000 feet; Warrant No. 3 -- $10 and 50,000 feet; and Warrant No. 4 -- $12 and
100,000 feet. In the alternative, the Company may elect at any time to cancel
and exchange any or all of the outstanding warrants for a fixed number of shares
of Fiberstars common stock (even if the warrant is not yet exercisable): Warrant
No. 1 -- 151,250 shares; Warrant No. 2 -- 119,375 shares; Warrant No.
3 -- 95,625 shares; and Warrant No. 4 -- 78,750 shares. In the event of a change
of control of Fiberstars (as defined in the purchase agreement), any outstanding
warrants will be immediately exercisable. Through previous investments in
Fiberstars, Inc., the Company already owns 1,023,011 shares of Fiberstars, Inc.
(approximately 26%). If the warrants were fully exercised, the Company would own
approximately 40% of the outstanding common shares of Fiberstars, Inc.
Discontinued Operations Subsequently Retained
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to the Company's shareholders all of
the ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing Company businesses.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing Company businesses utilizing
existing facilities and operations. The Company utilizes the customer service
systems and personnel of an existing Company business, as well as the Internet
at http://www.microsun.com, to receive, process and fill orders. Therefore, the
Microsun business has been retained but without the use of the manufacturing
processes or assets used in the previous operations.
57
<PAGE> 60
Bank Credit Facility
In May 1999, the Company replaced its existing credit facility with a $50
million revolving credit loan and $25 million term loan provided by several
financial institutions. Subsequent to June 30, 1999 the Company reduced its
commitment to a $60 million facility. Proceeds from the facility were used to
repay the Company's existing credit facility and certain other long-term debt.
The revolving credit loan has a three-year term expiring in May 2002. Interest
rates on revolving credit loans outstanding are based, at the Company's option,
on LIBOR plus 2.75% or the agent bank's prime rate. Availability of borrowings
is determined by the Company's eligible accounts receivable and inventories. The
term loan has a five-year term expiring in May 2004. The Company pays monthly
principal payments that total $3.6 million annually, with the unpaid balance due
at maturity. Interest rates on the term loan are based, at the Company's option,
on LIBOR plus 3.25% or the agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
Acquisitions
To expand the Company's ability to develop and market new metal halide
products and systems and exploit other business opportunities, the Company has
made a number of acquisitions and strategic investments, the most notable of
which were completed in fiscal 1998 and are described below.
In February 2000, the Company acquired the interest of Rohm and Haas
Company in Unison, the fiber optic lighting joint venture with Rohm and Haas
Company. Simultaneously, Unison transferred a substantial portion of its
personal property (including intellectual property) to Fiberstars, Inc. The
Company believes that Fiberstars, Inc. is in the best position to develop
Unison's fiber optic lighting technology into commercially accepted lighting
products. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3.0 million, of which $2.3 million is
represented by a note, to obtain the remaining interest in Unison. As
consideration for the transferred assets, the Company received four warrants to
purchase a total of 1,000,000 shares of Fiberstars, Inc. common stock for
nominal consideration. These warrants are exercisable based on stock price and
sales of products using Unison technology, but may be converted into at least
445,000 shares of Fiberstars, Inc. common stock at any time.
Effective January 2000, the Company obtained a controlling interest in its
lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its total
ownership to approximately 90%. In conjunction with this increased investment,
the Company has shipped approximately $3.0 million worth of new metal halide
lamp-making equipment as part of an expansion of its facility in Chennai
(Madras), India. The Chennai factory offers a very beneficial cost structure
while meeting the Company's product quality standards. The products produced in
the Indian facility are intended for use around the world and are expected to
consist of both the Company's new Uni-Form(R) pulse start products as well as
more-mature metal halide lamp types.
On January 28, 1998, the Company completed the acquisition of 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. DSI has subsequently achieved certain technological feasibility on certain
telecommunications products under development at the time of the acquisition.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin.
Ruud Lighting manufactures and directly markets high-intensity discharge ("HID")
lighting systems, principally focusing on metal halide installations for
commercial, industrial and
58
<PAGE> 61
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 $35.5 million in cash.
LIGHTING TECHNOLOGY
Background
Light is radiant energy that provides the ability to see detail and color
and can be used to highlight form, color and texture, provide atmosphere and
enhance safety and security. The quantity of light, measured in lumens,
generated by a light source can differ significantly from the quantity that
reaches the intended area. Lighting quality is determined by characteristics
such as color of light and color rendition. Color rendition is a qualitative
measure of how accurately a light source allows an object's actual color to be
viewed.
The lifetime cost of a lighting system is composed of the cost of the
original lamp and fixture, replacement lamps, related labor costs, and the cost
of energy to power the system. Energy costs typically represent more than 80% of
a lighting system's total lifetime cost. The Company believes that the principal
lighting design considerations for industrial and commercial buildings, outdoor
space and residences are total system costs, up front costs and the quality of
light produced.
There are three primary types of lighting technology: incandescent,
fluorescent and HID, which includes metal halide. Each of these lighting
technologies offers certain characteristics (such as energy efficiency, color
rendition, range of color, average life, lamp size and ability to deliver
substantial amounts of light to a focused area) that makes it suited for
particular applications.
The Older Lighting Technologies -- Incandescent and Fluorescent
Incandescent. The oldest and most common lighting technology,
incandescent, was first introduced approximately 110 years ago. Incandescent
lamps have the largest installed base, primarily residential and retail, and,
due to their design versatility, over 1,000 different types of incandescent
lamps are presently available. As a result of the continued introduction of new
incandescent products, such as halogen, and the increase in the number of new
residences, domestic sales of incandescent lamps grew approximately 3% in 1999.
Incandescent lamps represented approximately 49% of the domestic lamp market in
1999.
Incandescent light is produced by the flow of electric current through a
wire or filament. Incandescent lamps produce a yellowish light. Incandescent
lamps offer the advantages of low initial cost, good color rendition,
versatility and the ability to deliver substantial amounts of light to a focused
area. Incandescent lamps have the shortest life (750 to 2,000 hours), are the
least energy efficient (15 to 30 lumens per watt) and generally have the highest
lifetime system cost of any lighting technology.
Developed in 1959, halogen incandescent lighting was first broadly
introduced in automotive headlights in Europe. As a result of its aggressive
introduction into the residential market in the early 1980's, halogen lighting
has been the fastest growing technology in the incandescent lighting segment for
more than a decade. Halogen's wide acceptance is primarily a result of its
"whiter" light, small size and greater light levels (through increased
wattages). These advantages, however, are accompanied by a number of
disadvantages. Halogen lamps, as with all incandescent lamps, are extremely
inefficient and convert most of the energy they consume into heat.
Fluorescent. Fluorescent lamps were first introduced in 1935, and have
become the standard interior light source for office buildings, retail stores
and certain industrial applications. Today, over 400 different fluorescent lamp
types are available. In 1999, domestic sales of fluorescent lamps declined
approximately 5%. Fluorescent lamps represented approximately 36% of the
domestic lamp market in 1999.
Fluorescent lamps produce light when the discharge from an electrically
excited low pressure mercury vapor interacts with a phosphor powder coating on
the inside surface of the lamp. Unlike incandescent lamps, fluorescent lamps
require a power supply device used to regulate electrical current. Fluorescent
lamps produce a white light, but one that is often described as flat or
unnatural. Fluorescent lamps offer instant light, good color rendition, improved
life and efficiency as compared to incandescent lamps (10,000 to 20,000 hours
life and 80 to
59
<PAGE> 62
90 lumens per watt) and moderate initial cost. Light output decreases if the
ambient temperature in the area in which a fluorescent lamp is installed
declines, making fluorescent lighting impractical for many outdoor uses.
Traditional fluorescent lamps are much larger than incandescent lamps, making it
difficult to deliver substantial amounts of light to a focused area.
The most recent fluorescent technology is compact fluorescent lamps
("CFLs"). CFLs are available in much smaller bulb sizes than traditional
fluorescent lamps, increasing the number of applications for fluorescent lamps.
CFLs were first introduced to the commercial market approximately ten years ago
and, as energy awareness has increased, they have penetrated the residential
market. CFLs have light outputs equivalent to incandescent lamps ranging from 15
to 100 watts. Although CFLs cost more than standard incandescent lamps, this
initial cost is offset in most applications by energy savings and longer life.
The Newer Lighting Technology -- High-Intensity Discharge
General. An HID lamp produces light from a gaseous arc discharge, caused
by electrical excitation of certain chemicals (or "doses") in the lamp. The
gases and doses in an HID lamp are contained in an arc tube under high pressure.
A wide array of lighting effects can be obtained by varying the doses. HID lamps
are not affected by ambient temperatures. HID lamps require a power supply to
regulate electrical current, a warm-up period to reach full brightness and a
cool-down period before restart. HID light sources include mercury, high
pressure sodium ("HPS") and metal halide.
Mercury was the first HID lamp developed, but is used infrequently today
because it is the least efficient HID lamp. The primary use of mercury lamps
today is outdoor lighting in areas where there is a preference for white light
over the yellow light produced by HPS lamps. In 1999, domestic sales of mercury
lamps decreased approximately 5%. Mercury HID lamps have an energy efficiency
ranging from 40 to 60 lumens per watt and have a life of approximately 16,000 to
24,000 hours. In 1999, mercury lamps represented approximately 1% of the
domestic lamp market. HPS lamps produce a yellow light that provides poor color
rendition, making HPS lamps a less desirable choice than metal halide lamps for
most applications. As a result, HPS lamps are primarily used in roadway lighting
and, to a lesser extent, outdoor flood lighting, warehouses and factories.
Domestic sales of HPS lamps remained unchanged in 1999 as compared to 1998. HPS
lamps have the longest life (24,000 hours) and the highest energy efficiency
(100 to 140 lumens per watt) of any lighting technology. In 1999, HPS lamps
represented approximately 5% of the domestic lamp market.
Metal Halide Lamps. Metal halide products were first developed
approximately 35 years ago and are used most commonly in commercial and
industrial applications such as factories and warehouses, large public spaces
such as convention centers and airports, outdoor site and landscape lighting,
sports facilities and large retail spaces such as superstores. As a result of
technological improvements in wattage, life and color consistency and the
subsequent introduction of new products, metal halide lamps have become
available for a wide range of applications. The primary factor in increasing
applications for metal halide lighting has been the development of new lamps in
a wide variety of sizes and wattages. Metal halide lighting has recently been
introduced in fiber optic, projection television and automotive headlamp
applications. Since 1993, domestic sales of metal halide lamps have grown at a
compound annual growth rate of approximately 15%, and sales increased
approximately 12% in 1998 and 21% in 1999, making metal halide the fastest
growing lighting technology available. In 1999, metal halide lamp sales
accounted for approximately 10% of the domestic lamp market.
Metal halide lamps provide excellent color rendition, long life (10,000 to
20,000 hours) and very high efficiency (70 to 110 lumens per watt) making them
the best choice for many applications. Metal halide lamps typically have higher
initial costs than either incandescent or fluorescents, but these costs are more
than offset in most applications by energy savings and long life as well as by
the need to install fewer fixtures to achieve the same illumination as competing
technologies. Metal halide lamps, like all HID and fluorescent lamps, require a
power supply to regulate electric current. However, metal halide systems require
a more technologically advanced power supply than fluorescent systems.
Metal halide lighting can produce the closest simulation to sunlight of all
available light sources, enhancing the sense of user comfort and well being and
improving productivity. A single metal halide lamp produces
60
<PAGE> 63
approximately five times as much light as an incandescent lamp of the same
wattage. The compact size of metal halide lamps allows delivery of substantial
amounts of light to a focused area. These characteristics offer greater options
in illumination levels, lighting design and system cost as well as significant
energy savings. While the Company believes that incandescent and fluorescent
technologies will continue to be used in most of their current applications, the
characteristics of metal halide lighting make it more effective for a variety of
such applications.
Metal halide lamps are capable of producing a wide variety of lighting
effects. The color of light produced by a metal halide lamp is dependent on the
metal halide salts contained in the arc tube. By varying the metal halide salts,
different effects may be achieved. Similarly, varying the size, shape and
wattage of the lamp make it possible to change the lighting effect and the
applications for which the lamp is used. Although these changes result in lamps
very similar in appearance, many of these lamps are very difficult to engineer.
For instance, scaling down a 400 watt lamp in size and wattage requires
significant technological changes to maintain the same level of energy
efficiency. Primarily as a result of these technological difficulties, the
Company believes that only approximately 60 companies worldwide manufacture
metal halide lamps as compared to thousands that manufacture incandescent lamps
and hundreds that manufacture fluorescent lamps.
LIGHTING INDUSTRY
Opportunities in Metal Halide
The Company currently produces metal halide lighting products for
commercial, industrial and residential applications. Until recently, metal
halide technology served primarily the industrial and outdoor sectors, which the
Company estimates represents approximately 32% of U.S. lighting fixture sales.
However, with the miniaturization of metal halide lamps and fixtures and the
recognition of the benefits of metal halide technology, including improved light
color, energy efficiency, lower operating temperature and safety of metal halide
products relative to other technologies, significant opportunities for growth
exist. Key factors driving growth in the metal halide industry include:
Demand for Specialized Lamps. The demand for specialized metal halide lamps
has increased as the Company's original equipment manufacturer ("OEM") and
lighting agent customers have recognized the benefits associated with using
specialized metal halide products. While the lighting industry is dominated by
GE, Philips and Sylvania, each of these companies has traditionally focused on
the larger incandescent and fluorescent market and has generally limited its
production of metal halide lamps to those found in the most common commercial
and industrial applications. Although these standard-type metal halide lamps
represent a substantial majority of total metal halide lamp sales, they do not
afford the OEM or lighting agent complete flexibility in designing lighting
contract bids. For example, a lighting agent may attempt to differentiate its
bid by designing a lighting solution which incorporates a specialized metal
halide lamp to reduce energy costs while still achieving desired lighting
levels.
Development of New and Advanced Metal Halide Power Supplies. Historically,
the introduction of new metal halide lamps and systems has been constrained by
the lack of complementary metal halide power supplies. Significant engineering
expertise is required to adapt existing power supplies for new metal halide
products. The Company believes that while domestic sales of metal halide power
supplies approximated $210 million in 1999, 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
61
<PAGE> 64
residential applications will represent a substantial market for metal halide
lighting within the next five years. Other potential applications for metal
halide systems include fiber optic systems, projection television displays and
automotive headlamps.
International Demand for Metal Halide. Despite the recent financial crisis
in the Pacific Rim, international markets represent long-term attractive
opportunities for metal halide products as developing nations continue to build
infrastructure to support their growing economies. Facilities such as train
stations, airports, government buildings, highways and factories all require
substantial lighting for which metal halide products are well suited. In
addition, given the high energy efficiency of metal halide and the high cost of
energy in developing nations (including the high cost of power plant
construction), the Company believes that the international metal halide market
will grow faster than the United States market in the long term.
STRATEGY
The Company believes that metal halide technology represents the best
lighting technology for a wide variety of applications, many of which are not
yet served by an appropriate metal halide product. As the principal supplier of
metal halide materials to the metal halide lamp industry, the Company expects to
benefit from continued growth in metal halide markets. The Company also expects
to lead metal halide's continued market expansion, by providing innovative metal
halide system components and integrated systems through the operating and growth
strategies highlighted below.
The Company's strategic objective is to remain focused on the metal halide
market and expand its leadership position in the metal halide lighting industry
by: (i) continuing to use its vertical integration to introduce new products and
applications; (ii) using its experience and technology to continually reduce
cost and improve quality to improve cash flow from operations; (iii)
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 (iv) seeking to
demonstrate the superiority of metal halide lighting solutions, thereby
stimulating domestic and international demand for the Company's products.
The Company seeks to achieve its strategic objective through internal
growth and, in recent years, acquisitions and strategic investments and focus on
cost and quality. The Company's acquisitions and investments have been made in
businesses that, when combined with the Company's existing capabilities and
metal halide focus, are intended to provide technological, product or
distribution synergies and offer the potential to enhance the Company's
competitive position or accelerate development of additional metal halide market
opportunities. The Company has completed a number of actions since 1997, as
described under "-- Recent Developments" above. To the extent its capital
resources allow, the Company may consider other possible acquisition and
strategic investment opportunities.
OPERATING STRATEGY
The Company focuses its resources primarily on designing, manufacturing and
marketing metal halide materials, system components, and systems. By focusing on
metal halide, the Company believes it has developed unique design, manufacturing
and marketing expertise. Such expertise provides the Company with significant
competitive advantages, which enable the Company to deliver highly customized
products to meet customer needs. The Company's experienced workforce is
dedicated to improving metal halide lighting products, production processes and
developing new applications for this technology. The Company has retained key
personnel in the consolidation of equipment operations at its Solon facility.
In addition, in order to increase the number of metal halide applications
and the penetration of the Company's products, the Company pursues the following
operating strategies:
Continue to Use Vertical Integration
The Company began operations as a manufacturer of metal halide salts and
expanded into production of system components, initially lamps. The Company has
expanded its focus on systems and components to include commercial and
industrial systems (through the Ruud Lighting acquisition), and magnetic and
electronic power
62
<PAGE> 65
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 1998. Through this
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. The
Company will continue to use these vertically integrated operations to provide
innovative lighting solutions.
Improve Operating Cash Flow
The Company has historically depended on outside capital sources to fund
growth. In order to reduce this dependence and to improve its operating results,
the Company continues to focus primarily on its metal halide products and to use
its experience in the design and manufacture of metal halide materials,
components and systems and focused metal halide technology to reduce operating
costs by improving production processes and product quality without substantial
capital investment. Management believes that achieving cost and quality goals
will enhance operating cash flow to allow for profitable growth in a tight
capital environment. The anticipated improvements should also improve overall
financial performance, which will improve the Company's access to capital for
future investments in its business.
Strengthen OEM and Lighting Agent Relationships
The Company concentrates on developing strong relationships with lighting
fixture OEMs by providing the key system components for a lighting fixture,
either alone or packaged as a unit, tailored to meet their needs. Historically,
the Company provided specialized lamps tailored to meet OEM needs. With its
ability to design and manufacture power supplies, achieved through the
acquisition of Ballastronix and Parry, the Company expects to better meet OEM
needs by packaging the principal system components (lamps, power supplies,
switches and controls) for a lighting fixture. Frequent interaction with OEMs
serves dual purposes, providing the Company with valuable ideas for new
component products and providing OEMs with the information necessary to market
the Company's new products. Lamps and power supplies designed for a specific
fixture are included with the fixture when sold by the OEM, increasing
distribution of the Company's products. The Company has also entered into
agreements with lighting agents to pay commissions for selling the Company's
lamps. Such commissions, unique among lamp manufacturers, provide the agent an
incentive to include the Company's metal halide lamps in its bids on a
construction or renovation project. With its January 1998 acquisition of Ruud
Lighting, which is a leading direct marketer of HID systems, the Company expects
to significantly enhance its ability to directly market HID systems for
commercial, industrial, outdoor and retail lighting applications, as well as
replacement lamps.
Seek to Demonstrate Superiority of Metal Halide Lighting Solutions
The Company seeks to demonstrate the superiority of metal halide lighting
solutions to its customer base, including OEMs, lighting agents and contractors,
thereby stimulating domestic and international demand for the Company's
products. The Company believes that metal halide lighting systems have
significant potential to displace older lighting technologies in traditional
applications, as well as potential applications such as fiber optic systems,
projection television displays and automotive headlamps.
LONG-TERM GROWTH STRATEGY
The Company is continuing to introduce more products for new applications
and to expand the distribution channels for its products. The key elements of
the Company's long-term growth strategy include:
Introduce New Products and Systems
The Company believes it has introduced a majority of the new lamps in the
domestic metal halide lamp industry since 1985. As applications become
increasingly complex, the advantage of simultaneous design of components as an
integrated system is becoming more significant. To further the Company's
integrated systems strategy, the Company completed the Ruud Lighting,
Ballastronix and Parry transactions. As a result, the
63
<PAGE> 66
Company can now manufacture and market complete metal halide lighting systems
for end-users, as well as complementary component packages for OEMs. The Company
intends to develop, manufacture and market additional types of high performance
and technologically advanced metal halide materials, components and systems.
Capitalizing on its expanding production capability, design capability and
unique metal halide focus, the Company expects to develop additional specialty
systems, such as fiber optic lighting systems and projection television optical
systems.
Increase Sales of Existing Products
By expanding existing relationships and developing new relationships with
lighting agents and OEMs, the Company expects to increase sales of existing
specialty lamps and power supplies. The Company is utilizing 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 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
and e-commerce web site address 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.
Participate in International Markets
The Company intends to capitalize on opportunities in international markets
in three ways. First, the Company directly exports its products to countries
that do not impose restrictive tariffs, local content laws and other trade
barriers. The primary countries and regions in which the Company directly
markets products are the United Kingdom, Western Europe, Australia, Canada and
Japan. Since July 1995, the Company has strengthened its distribution
capabilities by acquiring or investing in its distributors in these countries.
Second, the Company has pursued and may pursue strategic acquisitions and has
built and may build manufacturing facilities in international markets. Third, in
countries that impose trade restrictions, the Company has sold production
equipment or has entered into joint ventures with local lamp manufacturers.
Purchasers of production equipment have become customers for the Company's metal
halide salts and other materials. The Company has existing joint ventures in
India, China, Korea and Japan.
Penetrate the Residential Lighting Market
The Company believes that residential and consumer applications will
represent a promising market for metal halide lighting within the next five
years. Over the longer term, the Company intends to lead metal halide's
penetration of the residential lighting market by: (i) expanding the marketing
of its products, especially contractor-installed fixtures used in the
construction of new and remodeled housing, building on Ruud Lighting's expertise
in direct marketing to contractors; (ii) developing the use of metal halide
fiber optic systems primarily through its relationship with Fiberstars, Inc. and
(iii) marketing metal halide portable lighting fixtures (e.g., table and floor
lamps) in an e-commerce format (Microsun.com).
64
<PAGE> 67
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 lighting -- indirect indoor sports
lighting -- gas station canopy and office lighting
- -- billboard and sign lighting -- parking garage lighting
lighting -- interior downlighting -- security lighting
- -- site lighting -- decorative lighting -- landscape lighting
- -- soffit lighting -- retail store
- -- hazardous location downlighting and track
lighting lighting
- -- accent lighting
</TABLE>
The Company also designs, manufactures and sells thin film deposition
equipment for the lighting, ophthalmics and optics industries. The Company also
designs, manufactures and sells photometric measurement instruments.
Materials
The Company produces and sells metal halide salts, electrodes, amalgams and
getters. Metal halide salts are the primary ingredient within the arc tube of
metal halide lamps, which determine the lighting characteristics of the lamp.
Electrodes form the electrical connections within the lamp. Amalgams are
chemicals which are used in the arc tubes of high pressure sodium ("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 1998 acquisition of DSI, the Company also now produces optical
thin film coatings, including coatings for lighting applications with particular
emphasis on coatings for metal halide arc tubes, as well as antireflection
coatings, and electrochromic coatings for glass and plastic ophthalmic lenses,
multilayer magnetic films and emissivity modification films for classified
government applications, and infrared multilayer optical films on flexible
polymeric substrates. Through a reactive sputtering process, these coatings are
electrostatically attached to a product surface. When used in lighting
applications, these coatings can significantly improve the optical performance
of the light source, protect the system and its components from harmful
ultra-violet and infra-red radiation, and increase the energy efficiency of the
entire system.
Systems and Components
The Company's component products include specialty and standard lamps,
magnetic and electronic power supplies, system controls and switches and fiber
optic cable. Specialty lamps are lamps designed and manufactured for particular
OEM applications. Standard lamps are high-volume lamps which the Company
typically buys for resale under arrangements with GE and Sylvania. Power
supplies are devices which regulate power and are necessary for operation of HID
and fluorescent lamps. System controls and switches are auxiliary electrical
controls included in fixtures and systems.
65
<PAGE> 68
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 a majority of the new lamps in the
domestic metal halide lamp industry. Currently, the Company offers 76 specialty,
258 "second-generation" Uni-Form(R) pulse start and 132 standard-type lamps in
20 different watt variations ranging from 32 watts to 2,000 watts for over 30
different applications. In certain instances, the Company produces these
products for its competitors on a private label basis in order to capture sales
through competitors' distribution channels. The Company also sells standard-type
lamps which it sources from other manufacturers.
In fiscal 1999, the Company introduced its new line of Uni-Form(R)pulse
start products. Uni-Form(R) pulse start products are a new generation of metal
halide components and systems which permit (a) increased light output with lower
power utilization, (b) faster starting, (c) a quicker restart of lamps which
have been recently turned off, and (d) better color uniformity.
Through Venture Lighting Power Systems, North America (f/k/a Ballastronix),
the Company's Canadian subsidiary which manufactures magnetic power supplies,
and Venture Lighting Europe (f/k/a Parry Power Systems), the Company's United
Kingdom subsidiary which manufactures magnetic and electronic power supplies for
HID lighting systems, the Company currently offers over 450 power supply
products. The Company also offers electronic controls for metal halide lighting
systems.
A metal halide lighting system consists of a fixture, lamp, power supply,
related electronic controls, optical systems, housing, support systems and any
other necessary components assembled into a product for an end user. The Company
believes it will be able to combine its metal halide expertise and system
component manufacturing capabilities to design, develop, produce and market
metal halide systems for innovative applications. Through its acquisition of
Ruud Lighting, the Company has expanded its capability to manufacture and direct
market HID lighting systems, particularly metal halide installations for
commercial, industrial and outdoor lighting applications.
The Company is in the early stages of development of an optical light
system for use in projection systems, including televisions. Recent innovations
in projection display have made it possible for a compact light unit to generate
substantially larger and clearer imaging than that available in existing
projection systems. Currently, television manufacturers are limited by the high
cost of existing lighting units for projection systems. The Company is working
with projection system manufacturers to develop a low-cost system using a metal
halide lamp, electronic power supply and optical controls.
The Company also believes that it has a significant opportunity to
introduce metal halide technology to fiber optic lighting systems. Because of
metal halide lighting's ability to produce varied lighting effects, it is
particularly well-suited to be adapted as the light source for fiber optic
lighting systems. Fiber optic lighting systems are currently used in accent
applications, such as swimming pool lighting or as replacement lighting for neon
lighting. In applications such as these, it is important that electricity and
heat be located separately from the desired point of light emission.
Production Equipment
In fiscal 1999, due to economic conditions in general, especially outside
the United States, and as a result of the Company's cash preservation strategy,
the Company's equipment manufacturing operation in Bellevue, Ohio was closed.
Machinery, equipment and research and development facilities necessary to allow
the Company to continue manufacturing and support of lamp production equipment,
at reduced levels, have been moved to the Company's Solon, Ohio facility. The
Company temporarily ceased the manufacture and sale of turnkey lamp production
manufacturing groups in fiscal 1999. Although the Company may resume the sale of
turnkey groups to third parties at any time, the Company believes that currently
the best opportunity lies in manufacturing lamp production manufacturing groups
for use by the Company and its joint venture operations.
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.
66
<PAGE> 69
Each lamp production equipment group sold for between $1.0 million to $6.0
million. In order to maintain manufacturing flexibility, the Company must
continually update its own component production equipment, through the internal
design and fabrication of production equipment. The Company had leveraged its
manufacturing expertise by selling lamp production equipment groups in
international markets to independent companies or to joint ventures with local
lamp manufacturers. In connection with each lamp production equipment group
sale, the Company provided lamp designs and specifications, trained the
purchaser in production and created a customer for its materials products.
With its 1998 acquisition of DSI, a leader in the development of
sophisticated thin film deposition equipment and measurement instrumentation and
thin film products, the Company also has the capability to manufacture and
market turnkey deposition equipment to produce thin film coatings for a variety
of applications. These systems employ sputtering technology to place optically
precise thin coatings on lighting components and other materials. When DSI sells
a system to a customer, DSI will either operate the system for the customer at
DSI's facility or transfer the system to the customer's facility.
International Sales
For information regarding the Company's international operations, see Note
R to "Notes to Consolidated Financial Statements."
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 $34.3 million or 7.7% of net sales
into research and development over the last three full fiscal years. In fiscal
1999 the Company invested $17.7 million (9.1% of net sales) in research and
development; in fiscal 1998, $10.8 million (6.4% of net sales); in fiscal 1997,
$5.8 million (6.7% of net sales) and in the six months ended December 31, 1999,
$7.0 million (6.0% of net sales). Such expenditures have enabled the Company to
develop new applications for metal halide lighting, improve the quality of its
materials, and introduce new specialized products, such as the Uni-Form(R) pulse
start products. Uni-Form(R) pulse start products are a new generation of metal
halide components and systems which permit (a) increased light output with lower
power utilization, (b) faster starting, (c) a quicker restart of lamps which
have been recently turned off, and (d) better color uniformity. Historically,
the Company's efforts primarily have been focused on the development of
materials and system components.
Materials. The Company is focused on improving the purity of, and
production processes for, metal halide salts. The Company pursues these efforts
proactively as well as in response to customer requests for specific metal
halide salts. The Company also focuses on designing and developing improved
electrodes, amalgams and getters used in lamp manufacturing. Through DSI, the
Company expects to continue producing thin film coatings primarily for lighting
applications with particular emphasis on coatings for metal halide lighting
systems, as well as develop related software, measurement and test
instrumentation and reliable, cost-effective application processes.
Systems and Components. The Company's product design and development has
focused on developing innovative components to meet the specialized needs of
various customers, including lighting fixture OEMs. The Company's product design
teams work together with OEMs on the design, development and commercialization
of new system components. Such collaborative development efforts have resulted
in the design of improved metal halide lamps with reduced wattage, better energy
efficiency, smaller size and increased life expectancy.
Since 1996, the Company has increased its focus on design and development
of integrated systems. The Company expects efforts in this area to become
increasingly important as the Company seeks to develop new fiber optic
applications and utilizes the capability of Ruud Lighting to manufacture and
directly market HID lighting systems.
67
<PAGE> 70
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 fiber optic telecommunications systems
manufacturers. Sales of materials accounted for approximately 12.1% of the
Company's revenues in fiscal 1999, 11.1% in 1998 and 13.9% in 1997 and 13.6% in
the first six months of fiscal 2000.
System Components
Electrical distributors typically market only standard-type lamps, and the
Company believes that its specialty lamp products do not lend themselves to the
traditional marketing channels associated with standard-type lamp products.
Accordingly, the Company has adopted innovative marketing techniques for its
lamps. As a result, in initial distribution, the Company markets its metal
halide system components through OEMs, which generally have been involved in the
design of the lamp, and commissioned lighting agents, who package the Company's
lamps and power supplies in their bids on construction or renovation projects.
Due to the fact that the Company's lamps are produced to the specifications
required to match a particular fixture or use by an OEM, the Company's lamp will
generally be included with the fixture each time the fixture is sold. The
Company intends to market complementary lamps and power supplies as a package to
provide better service to its OEM customers and lighting agents, as well as to
increase sales.
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.
68
<PAGE> 71
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 46.7% of the Company's
revenues in fiscal 1999, 57.4% in fiscal 1998 and 73.6% in fiscal 1997 and 43.8%
in the first six months of fiscal 2000.
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 37.1% of the Company's revenues
in fiscal 1999 and 22.2% in 1998 and 39.9% in the first six months of fiscal
2000. Prior to the Ruud Lighting acquisition in 1998, the Company had no
significant sales of commercial lighting systems.
Production Equipment
The Company's production equipment is manufactured for internal use and is
marketed to existing companies for turnkey production of thin-film coatings.
Until the temporary cessation in fiscal 1999, the Company also marketed turnkey
lamp production equipment groups to existing companies and its joint venture
partners. The Company also markets production equipment to its joint venture
partners. External sales of production equipment accounted for approximately
4.1% of the Company's revenues in fiscal 1999, 9.3% in fiscal 1998 and 11.2% in
fiscal 1997 and 2.7% in the first six months of fiscal 2000.
Residential Products
The Company is seeking to lead metal halide's penetration of the
residential lighting market by: (i) expanding the marketing of its products,
especially contractor-installed fixtures used in the construction of new and
remodeled housing, building on Ruud Lighting's expertise in direct marketing to
contractors; (ii) developing the use of metal halide fiber optic systems through
its relationship with Fiberstars, Inc. and (iii) marketing metal halide portable
lighting fixtures (e.g., table and floor lamps) in an e-commerce format
(Microsun.com).
MANUFACTURING AND OPERATIONS
The Company's lamp manufacturing facility in Solon, Ohio operates five days
a week, 16 hours a day, with the Company's lamp manufacturing employees working
in two eight-hour shifts each day. The manufacturing of metal halide lamps
consists of three primary processes. First, the quartz arc tube is shaped,
electrodes for carrying the current are installed, the metal halide salt dose is
introduced and the arc tube is sealed. The process is performed at high
temperatures in carefully controlled conditions to ensure that the arc tube is
properly sealed and that no impurities enter the arc tube. Second, the arc tube
is mounted inside a pyrex bulb container and sealed. Finally, the lamp is
finished by adding a contact for the electrical outlet. Although light output of
metal halide lamps is not affected by ambient temperatures, an outer bulb is
used to prevent contact with the arc tube, which operates at extremely high
temperatures. Quartz and pyrex(R) are used in the production of metal halide
lamps because of their durability and ability to retain shape and function at
extremely high temperatures. Finished lamps are inspected, tested and then
shipped in accordance with customer instructions. The Solon facility also houses
the remaining production equipment research and development operations and
reduced production capability.
The Company produces magnetic power supplies at its facility in Amherst,
Nova Scotia, which operates five days a week with one full shift and a partial
second shift. The Company produces magnetic and electronic power supplies at its
facility in Draycott, England, which operates five days a week with one full
shift. The manufacture of magnetic power supplies is a combination of batch and
production line processes. The production line process
69
<PAGE> 72
starts with a coil winding department, progresses to an in-line coil and core
operation and then to final assembly. Subassemblies for ignitors and capacitors
are located off-line in a batch operation for inclusion in final assembly.
The Company produces all of the metal halide salts it uses and sells at its
facility in Urbana, Illinois. The Urbana facility, with approximately 80
employees working a single shift, also produces precision metal pieces,
precision metal electrode leads and high speed dose dispensers which are used by
the Company and sold to other metal halide lamp manufacturers.
The Ruud Lighting manufacturing facility in Racine, Wisconsin operates five
days per week, with two eight-hour shifts per day. The manufacturing process is
primarily assembly-to-order based on customer needs. Ruud Lighting's facility is
ISO 9001-registered. The paint finishing facility is seven years old and is
capable of providing the combination of E-Coat primer and acrylic powder topcoat
finishing style typically required by the automotive industry.
At the Company's DSI facility in Santa Rosa, California, the Company
produces optical thin film coatings for a variety of applications, as well as
measurement and test instrumentation and equipment for deposition of thin film
coatings. The facility operates five days per week with three eight-hour shifts
per day. Coatings and systems are produced in accordance with exacting customer
specifications. Management believes that DSI has expertise over a broad range of
thin film deposition technologies allowing application of the coating technology
most suitable for a particular client need.
RAW MATERIALS AND SUPPLIERS
The Company sources its raw materials from a variety of suppliers.
Presently, it sources most of its quartz tubing and pyrex(R) bulbs for lamps
from GE. Although an interruption in these supplies could disrupt the Company's
operations, the Company believes that alternative sources of supply exist and
could be arranged prior to the interruption having a material adverse effect on
the Company's operations or sales. The materials for the Company's power supply
products are readily available on the open market. The Company also purchases
certain of its industrial standard-type lamps from GE and Sylvania. This enables
the Company to devote its production equipment to higher margin specialty lamps.
Most of the raw materials used in the production of metal halide salts can
be sourced from several suppliers. The Company has been the dominant supplier of
metal halide salts to the metal halide lamp industry for many years. Therefore,
the Company has focused on addressing any circumstance which could jeopardize
the continued production of these vital materials. Since the Company is the
primary supplier of metal halide salts to the metal halide lamp industry, any
disruption in supply would also affect each producer of the affected lamp type.
Components for Ruud Lighting's systems are sourced from the Company as well
as outside suppliers. The great majority of components are readily available
from multiple suppliers.
Raw materials and components for DSI coatings and equipment are sourced
from outside suppliers. The Company has multiple qualified sources for critical
materials and components.
COMPETITION
General
Metal halide systems compete with other types of lighting technology for
many applications. The Company's metal halide lamps compete with lamps produced
by other metal halide lamp manufacturers, primarily GE, Philips and
Osram-Sylvania. Metal halide technology is the newest of all lighting
technologies and although the market awareness and the uses of metal halide
lamps continue to grow, competition exists from older technologies in each metal
halide application.
Materials
The Company produces materials which are used by the Company and virtually
all other manufacturers of metal halide lamps. In metal halide salts, where the
Company has successfully used its technology focus and manufacturing capability
to develop superior products, the Company believes it has no competitors in the
United
70
<PAGE> 73
States. In overseas markets, one lamp manufacturer produces metal halide salts,
principally for its own use. The competition in salts is based on the
technological ability to develop salt formulation for customers and product
uniformity and purity. The Company believes it is the leading producer of salts
because it is the leader in uniformity and purity. In other materials
categories, the Company's chief competition is internal production by GE,
Philips and Sylvania. The competition in these products is based primarily on
price and delivery, with some competition based on technological ability to
create solutions for unique applications. The Company's products compete most
effectively for external sales where they are created for unique applications.
DSI has one or two principal competitors in each of its markets (lighting,
coating equipment and government/aerospace). The Company believes that
competition in thin film coatings is generally based on quality of coatings,
technological expertise to design and deliver customized coating solutions and
customer service. The Company believes that it competes successfully on the
basis of all three of these measures. While competition is strenuous with these
existing competitors, management believes that the high technical content of the
products and services in these markets make entry by new thin film coating
manufacturers relatively difficult.
System Components
GE, Philips and Sylvania are the Company's principal competitors in the
production of metal halide lamps. Although GE, Philips and Sylvania have focused
their efforts on the larger incandescent and fluorescent markets, all three
companies produce metal halide lamps. These three companies have emphasized
sales of a relatively small variety of standard-type metal halide lamps, such as
those found in the most common commercial and industrial applications, which the
Company believes represents approximately 75% of the total metal halide lamp
segment. Although the Company believes its technical and engineering expertise
in the production of specialty metal halide lamps and its unique marketing
approach give it a competitive advantage in this market, the Company's three
primary competitors have significantly longer operating histories, substantially
greater financial, technical and other resources and larger marketing and
distribution organizations than the Company and could expand their focus into
specialty lamps.
The Company does not believe that the foreign lamp manufacturers to whom
the Company has sold lamp production equipment compete with the Company's
specialty products. Due to the technical and engineering expertise required to
produce a new type of metal halide lamp, these purchasers have typically only
produced the standard-type lamps in which they have been trained by the Company.
Although these purchasers could potentially produce specialty lamp types to
compete with the Company, these purchasers would need to develop or acquire the
expertise required to produce specialty metal halide lamps.
The Company's North American and European power supply products compete
primarily with products of two manufacturers, Advance Transformers, a subsidiary
of Philips, and MagneTek, both headquartered in the United States. Both these
companies have focused on the large fluorescent power supply market whereas the
focus of the Company's acquisitions, Ballastronix and Parry, has been in HID
magnetic power supplies for use primarily in metal halide applications.
Competition in power supplies has traditionally depended on price and delivery,
which has resulted in the failure to develop power supplies to optimize metal
halide lighting systems. The Company's power supply operations intend to compete
on the ability to deliver power supplies which are designed to enhance
performance of metal halide lighting systems.
Systems
Lighting systems compete on the basis of system cost, operating cost,
quality of light and service. The Company feels that metal halide systems
compete effectively against other technologies in each of these areas in many
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. Competitors generally market these systems through
distributors and lighting agents.
DSI has one or two principal competitors in each of its markets (lighting,
coating equipment and government/aerospace). While competition is strenuous with
these existing competitors, management believes
71
<PAGE> 74
that the high technical content of the products and services in these markets
make entry by new thin film coating manufacturers relatively difficult.
INTELLECTUAL PROPERTY
The Company relies primarily on trade secret, trademark and patent laws to
protect its rights to certain aspects of its products, including proprietary
manufacturing processes and technologies, product research and concepts and
trademarks, all of which the Company believes are important to the success of
its products and its competitive position. In recent years, the Company has
successfully taken legal action to enjoin misappropriation of trade secrets by
other parties. Any increase in the level of activities involving
misappropriation of the Company's trade secrets or other intellectual property
rights could require the Company to increase significantly the resources devoted
to such efforts. In addition, an adverse determination in litigation could
subject the Company to the loss of its rights to a particular trade secret,
trademark or patent, could require the Company to grant licenses to third
parties, could prevent the Company from manufacturing, selling or using certain
aspects of its products or could subject the Company to substantial liability,
any of which could have a material adverse effect on the Company's results of
operations. See also "Legal Proceedings."
NON-METAL HALIDE APPLICATION OF COMPANY TECHNOLOGY
Telecommunications Business Unit
A portion of the in-process research and development which was acquired
when the Company acquired DSI was research and development projects directed at
telecommunications applications (the "Fiber Optics Project"). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Update on In-Process Research and Development." These projects
involved the development of processes for the application of thin film coatings
designed to act as filters for telecommunications applications. These filters,
including wavelength division multiplexing ("WDM") and dense wavelength division
multiplexing ("DWDM"), are intended to increase the number of signals that can
be sent through a fiber simultaneously, while increasing efficiency and
reliability.
The projects were directed at development of (i) filters to reduce
insertion loss in fiber optic communication systems; (ii) filters for WDM
systems and (iii) filters for DWDM systems. The first two projects have resulted
in commercial products, and sales of these products reached approximately
$600,000 in the first six months of fiscal 2000, approximately 40% more than the
$413,000 in sales for the year-earlier period. Although the Company has not yet
achieved technological feasibility for its DWDM filter products, the Company
believes that it will develop commercial DWDM filter products which will take
advantage of the Company's patented MicroDyn(R) sputtering deposition
technology.
While the Company does apply thin film filters to parts supplied by its
customers, an increasing portion of its business is to forward integrate and
supply entire assemblies or parts. The Company has existing capacity for sales
of up to $10 million per year of existing products. If DWDM products are
successfully developed, following related capital investments of approximately
$2.5 million, the Company anticipates that its DWDM capacity will reach
approximately $6 million in sales per year. The Company believes that it can
increase its production capacity beyond existing levels with modest additional
capital expenditures.
DSI believes that current demand for these thin film coating products for
the telecommunications industry exceeds supply. The principal competitors for
the Company's products are internal thin film coating capabilities of fiber
optic OEMs, such as JDS Uniphase Corporation and Corning Incorporated, and
smaller companies which specialize in coatings. The Company believes that
competition for these products currently is based principally on technological
performance of the products and on delivery and service. Further, the Company
believes that its core competencies in coating and coating equipment
technologies, its experienced workforce and its ability to develop
telecommunications solutions, backed by the required measurement technology,
will permit it to continue to compete successfully in this product area.
72
<PAGE> 75
ENVIRONMENTAL REGULATION
The Company's operations are subject to federal, state, local and foreign
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials as well as laws relating to occupational
health and safety. The Company believes that its business, operations and
facilities are being operated in compliance in all material respects with
applicable environmental and health and safety laws and regulations, many of
which provide for substantial fines and criminal sanctions for violations.
However, the operations of manufacturing plants entail risks in these areas,
which could potentially result in significant expenditures in order to comply
with evolving environmental and health and safety laws, regulations or
requirements that may be adopted or imposed in the future.
In 1993, the Company entered into a consent decree with the City of Solon
Sewer District ("Solon") with respect to the discharge of mercury into the sewer
system from its Solon, Ohio plant operations. The Company instituted procedures
to comply with this consent decree, and the consent decree expired by its terms
due to the Company's operation within required discharge limits for the period
required by the decree. Routine monthly sampling of the effluent by City of
Solon between September 1995 and September 1996 revealed instances of mercury
discharge in excess of the limits imposed by Solon. Subsequent tests conducted
by Solon showed mercury discharges within required limits. In March 1999, there
was a single instance which showed mercury discharges above the required limits.
The Company has reviewed and updated its plan intended to prevent intermittently
exceeding Solon's mercury standards. The Company believes the cost of continued
compliance will not have a material effect on its financial position or results
of operations.
The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its future financial position or results of operations. Capital expenditures and
operating expenses in fiscal 1999, fiscal 1998 and fiscal 1997 and the six
months ended December 31, 1999 attributable to compliance with such legislation
were not material.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,764 full-time
employees, consisting of employees engaged in the designing, manufacturing and
marketing of materials (92 employees), system components (1,025 employees),
systems (589 employees) and production equipment (14 employees) and 44 employees
in corporate/administrative services. The Company believes that its employee
relations are good. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a work
stoppage.
73
<PAGE> 76
PROPERTIES
The Company's headquarters are located in Solon, Ohio, and the Company
maintains manufacturing facilities in California, Ohio, Illinois, Wisconsin,
Rhode Island, Nova Scotia, Canada and Draycott, England. Set forth below is
certain information with respect to the Company's principal facilities as of
December 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE OWNED/
FACILITY LOCATION ACTIVITIES FOOTAGE LEASED
----------------- ---------- ----------- ------
<S> <C> <C> <C>
NORTH AMERICA
Racine, Wisconsin.................... Office, manufacturing, finishing, 440,000 Owned
distribution warehouse
Solon, Ohio.......................... Office, systems components 330,000 Owned
manufacturing, distribution warehouse
Urbana, Illinois..................... Materials manufacturing 62,000 Owned
Santa Rosa, California............... Office, manufacturing 23,000 Owned
20,000 Leased
Amherst, Nova Scotia, Canada......... Office, power supply manufacturing, 45,000 Owned
warehouse
Middletown, Rhode Island............. Office, fixture manufacturing 37,000 Owned
Mississauga, Ontario, Canada......... Distribution warehouse, office 13,000 Leased
OTHER
Draycott, England.................... Office, power supply manufacturing, 125,000 Owned
warehouse
Wantirna South, Victoria,
Australia.......................... Distribution warehouse, office 33,000 Owned
Mitcham, Victoria, Australia......... Distribution warehouse, office 15,000 Leased
Florence, Italy...................... Office, fixture assembly, warehouse 10,000 Leased
</TABLE>
The owned facilities are subject to mortgages in the following approximate
outstanding amounts as of December 31, 1999: Racine -- $10.0 million;
Solon -- $4.7 million; Santa Rosa -- $1.2 million; and, Urbana -- $587,000. The
aggregate annual rental cost of the leased facilities is approximately $728,000,
and the average remaining lease term is 2.7 years.
The Company has vacated its equipment manufacturing facility in Bellevue,
Ohio. The Company currently leases approximately 77,000 square feet at a cost of
$42,000 per month under a lease which extends to November 2005. The Company is
seeking ways to mitigate this liability including termination, buyout or
sublease. An accrual has been made as part of special charges to provide for the
estimated cost of exiting this lease agreement.
LEGAL PROCEEDINGS
In April and May 1999, three class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
shareholders of the Company on behalf of themselves and purported classes
consisting of Company shareholders, other than the defendants and their
affiliates, who purchased stock during the period from December 30, 1997 through
September 30, 1998 or various portions thereof. A First Amended Class Action
Complaint, consolidating the three lawsuits, was filed on September 30, 1999,
and the action is now pending before a single judge. The named defendants in the
case -- styled In re Advanced Lighting Technologies, Inc. Securities Litigation,
Master File No. 1:99CV836, pending before the United States District Court,
Northern District of Ohio -- are the Company and its Chairman and Chief
Executive Officer.
The First Amended Class Action Complaint alleges generally that certain
disclosures attributed to the Company contained misstatements and omissions
alleged to be violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, including claims for "fraud on the market" arising from alleged
misrepresentations and omissions with respect to the Company's financial
performance and prospects and alleged violations of generally accepted
accounting principles by, among other things, improperly recognizing revenue
74
<PAGE> 77
and improper inventory accounting. The Complaint seeks certification of the
purported class, unspecified compensatory and punitive damages, pre- and
post-judgment interest and attorneys' fees and costs.
The Company and the CEO believe that these claims lack merit and on
November 15, 1999, the Company and CEO filed a Motion to Dismiss the Complaint.
The Company and the CEO intend to continue to vigorously defend against these
actions.
Excluding the case noted above, the Company does not have pending any
litigation which, separately or in the aggregate, if adversely determined, could
reasonably be expected to have a material adverse effect on the Company. The
Company and its subsidiaries may, from time to time, be a party to litigation or
administrative proceedings which arise in the normal course of their business.
The Company's DSI subsidiary has received notice from a competitor, which
manufactures and markets equipment for the application of thin-films and
provides thin-film coatings for lighting and other markets. The competitor
believes certain of DSI's equipment may infringe on the competitor's patented
process. Dialogue between the parties indicates that a mutually amicable
resolution may be reached. Further, the competitor has taken no further action
at the date of this Prospectus. In the event formal patent infringement claims
are made, DSI's management believes that it has valid defenses to such patent
infringement claims, and the Company intends to vigorously defend any claims
which may actually be filed by the competitor. In light of the foregoing,
however, the liability, if any, of the Company in relation to such possible
claims cannot be quantified.
75
<PAGE> 78
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information, as of March 8, 2000,
with respect to each person who is currently a director, an executive officer or
key employee of the Company.
<TABLE>
<CAPTION>
DIRECTORS
TERM
NAME AGE POSITION EXPIRES
---- --- -------- ---------
<S> <C> <C> <C>
Wayne R. Hellman 53 Chief Executive Officer and Chairman 2001
Alan J. Ruud 52 Chief Operating Officer, President, Vice Chairman
and Director 2000
Louis S. Fisi 65 Director 2000
Francis H. Beam 64 Director 2000
John E. Breen 55 Director 2002
John R. Buerkle 51 Director 2002
Theodore A. Filson 64 Director 2001
Susumu Harada 48 Director 2002
Thomas K. Lime 61 Director 2001
A Gordon Tunstall 56 Director 2002
Nicholas R. Sucic 53 Chief Financial Officer, Vice President and
Treasurer
Key Employees
Leroy A. Bartolomei 60 President -- Deposition Sciences, Inc. (Thin Film
Deposition Systems/Coatings)
Glenn Garbowicz 36 President -- Venture Lighting Power Systems North
America (Power Supplies)
Wayne L. Platt 58 President -- Venture Lighting International (Lamps)
Robert S. Roller 54 Vice President -- Marketing
James L. Schoolenberg 57 President -- APL Engineered Materials, Inc.
(Materials)
Theodore O. Sokoly 53 Chief Information Officer
Juris Sulcs 53 Chief Technology Officer
Donald Wandler 64 President -- Ruud Lighting, Inc. (Systems)
</TABLE>
Wayne R. Hellman has served as the chief executive and a director of the
Company since 1995 and as chief executive or other senior officer of each of the
Company's predecessor companies since 1983. From 1968 to 1983 he was employed by
the lighting division ("GE Lighting") of General Electric Company. While at
General Electric, Mr. Hellman served as Manager of Strategy Analysis for the
Lighting Business Group; Manager of Engineering for the Photo Lamp Department;
Halarc Project Venture Manager; Manager of Quartz Halogen Engineering and
Manager of Metal Halide Engineering. As the Halarc Project Venture Capital
Manager, he was given the responsibility of developing metal halide technology.
Mr. Hellman is also currently a director of Fiberstars, Inc., a manufacturer and
marketer of fiber optic lighting systems. The Company owns approximately 26% of
the issued and outstanding shares of Fiberstars, Inc. In 1998, Mr. Hellman
married Diane Mazzola who is Mr. Fisi's step-daughter.
Alan J. Ruud founded Ruud Lighting, Inc. in December of 1982 and has served
as its chairman of the board and chief executive officer since that time. The
Company acquired Ruud Lighting on January 2, 1998. At that time, Mr. Ruud was
appointed to the Company's board. He currently serves as vice-chairman and a
member of the Executive Committee. In June 1999, Mr. Ruud was appointed to the
additional positions of President and Chief Operating Officer of the Company.
Mr. Ruud founded SPI Lighting, an HID lighting manufacturer, in 1973, which was
sold to McGraw Edison in 1978. Mr. Ruud managed SPI Lighting until 1982. From
1969 through 1979, Mr. Ruud also ran a consulting and lighting engineering group
in Milwaukee, Wisconsin. Mr. Ruud is also currently a director of Fiberstars,
Inc.
76
<PAGE> 79
Louis S. Fisi served as the executive vice president of the Company from
1995 until his retirement in 1999, and has served as a director of the Company
since 1995. He also served as chief financial officer of the Company from 1995
to November 1996 and chief financial officer of one or more of the Company's
predecessors from 1985 to November 1996, and assisted Mr. Hellman in the
founding of the predecessors. From 1976 to 1985, Mr. Fisi was employed in
executive and financial capacities by the Smithers Company, an international
industrial company. From 1967 to 1976, he was employed as a certified public
accountant by an international accounting and consulting firm currently known as
Ernst & Young LLP.
Francis H. Beam has served as a director of the Company since 1995. From
1988 to 1999, Mr. Beam served as President of Pepper Capital Corp., a venture
capital firm which he formed. Mr. Beam retired from Pepper Capital effective at
the end of 1999. Mr. Beam is also a director of The Lamson & Sessions Co., a
manufacturer of thermoplastic conduit and pipe, enclosures, wiring devices and
accessories. From 1959 to 1988 he was employed by Ernst &Young LLP (and its
predecessors). Beginning in 1967 he held various partnership positions with that
firm until his retirement in 1988 as Vice Chairman and Regional Managing
Partner.
John E. Breen was appointed to the Company's board in December 1999. Dr.
Breen served as Vice President of Technology for GE Lighting from 1990 until his
retirement in 1998. Dr. Breen spent 26 years at GE Lighting focused on
technology for all lighting applications and on new product introductions.
John R. Buerkle was appointed as a director of the Company in January 1998.
Mr. Buerkle was named President -- Asia-Pacific of S.C. Johnson & Son, Inc., a
worldwide manufacturer and marketer of consumer household products, in April
1995. From 1982 to 1995, Mr. Buerkle held positions for business and product
development in Latin America and held other managerial positions with S.C.
Johnson from 1972. Mr. Buerkle is also currently a director of Alloyd Company,
Inc., a privately-held leading manufacturer of plastic packaging and packaging
equipment.
Theodore A. Filson has been a director of the Company since 1995. Mr.
Filson has served as an independent consultant to the lighting industry since
1994. From 1986 to 1994 he was employed as president and chief executive officer
of Advance Transformer, Inc., the largest manufacturer of lighting system power
supplies in the world.
Susumu Harada has served as a director of the Company since January 1996.
Mr. Harada is the chief executive officer of the following Japanese companies:
Koto Electric, Koto Bunkogen, Iwaki Cristal and Wakoh Corporation. Mr. Harada is
also the chief executive of Venture Lighting, Japan ("Venture Japan"), formerly,
Koto Luminous, which is a Japanese distribution and manufacturing joint venture
in which the Company owns an equity interest consisting of preferred stock. The
product lines of these companies include specialty lamps, hermetic seals for
quartz crystal and optical semiconductors, and digital display lamps. In 1981,
Mr. Harada joined Koto as the Overseas and Domestic Sales and Planning Manager.
He held a number of positions with Koto before he assumed his current position
as chief executive officer in 1992.
Thomas K. Lime was appointed to the Company's board in December 1999. Mr.
Lime retired from GE Lighting in 1998 after 37 years in sales and marketing
positions at GE Lighting. From 1995 to 1998, Mr. Lime served as General
Manager-World Wide Strategic Accounts Sales and from 1984 to 1994 as General
Manager-Consumer Sales US/Canada.
A Gordon Tunstall has served as a director of the Company since June 1996.
He is the founder of, and for more than 20 years has served as President of
Tunstall Consulting, Inc., a provider of strategic consulting and financial
planning services. Mr. Tunstall is also currently a director of kforce.com
(Romac International, Inc.), a professional and technical placement firm;
Orthodontic Centers of America, Inc., a manager of orthodontic practices; and
Horizon Medical Products, a medical device manufacturer and distributor.
Nicholas R. Sucic joined the Company in 1996 as Special Assistant to the
Chairman. He was appointed chief financial officer and treasurer in November
1996 and became Vice President in April 1997. He is a certified public
accountant. From 1989 to 1996, he was employed by The Prudential Investment
Corporation ("The Prudential") having served as chief financial officer and
comptroller for various institutional investment units. Prior to joining The
Prudential, Mr. Sucic was a partner with Ernst & Young LLP, having been
associated with that firm since 1970.
77
<PAGE> 80
Leroy A. Bartolomei has been the President of Deposition Sciences, Inc.
since its formation in 1985. From 1976 to 1985, he was employed by Optical
Coating Laboratory, Inc., where his last position was Senior Vice President of
Operations. Mr. Bartolomei holds several patents for thin film components and
processing.
Glenn Garbowicz joined Venture Lighting Power Systems as Vice President of
Engineering in 1997 and in that year founded the Company's power systems
research facility. In February 2000, he was appointed President of the Venture
Lighting Power Systems operation. From 1986 to 1997, he served in a number of
engineering and management positions with Advance Transformer Company. Mr.
Garbowicz holds ten lighting-related patents and has authored a number of
technical papers for the Illuminating Engineering Society of North America.
Wayne L. Platt joined Venture Lighting International as President in 1998.
From 1996 to 1998, he was Vice President of Manufacturing and Engineering of
Sylvania Lighting International in Geneva, Switzerland. For the prior two years,
he served as Plant Manager of the High Intensity Discharge division of GTE
Sylvania in New Hampshire. Prior to that, Mr. Platt held plant management
positions with Philips and the lamp division of Westinghouse Electric Company.
Robert S. Roller has been with the Company and its predecessors from their
inception in 1983 and has served as the senior manager responsible for product
marketing. Since February 2000, he has been Vice President of Marketing for the
Company's Microsun e-commerce business unit. From 1966 to 1983, he was employed
in a managerial capacity by GE Lighting with responsibilities for the marketing
and engineering of metal halide and other lighting products.
James L. Schoolenberg joined APL Engineered Materials, Inc. in 1975 and has
served APL as President and Chief Executive Officer since 1994. From 1984 to
1994, Mr. Schoolenberg held positions with increasing executive and management
responsibilities. Prior to that, Mr. Schoolenberg played a principal role in
enhancing the production efficiency and the quality of APL's metal halide
products.
Theodore O. Sokoly joined Ruud Lighting, Inc. in 1982 and has served as the
senior manager responsible for technology development. He has acted as chief
information officer for the Company since January 1998.
Juris Sulcs has been with the Company and its predecessors since their
inception in 1983 and has served as the senior manager responsible for
technology development. From 1966 to 1983, he was employed in a managerial
capacity by GE Lighting, with responsibilities for the technological development
and quality control of metal halide and other lighting products.
Donald Wandler joined Ruud Lighting, Inc. in 1982 and served as Executive
Vice President with responsibilities including product engineering, production
and production control. In March 1999, he was named President of Ruud Lighting,
Inc. Previously, Mr. Wandler served in operating management positions with the
McGraw-Edison Area Lighting Division and SPI Lighting.
78
<PAGE> 81
CERTAIN TRANSACTIONS
THE COMBINATION
The Company was formed on May 19, 1995, and acquired ownership, primarily
by merger (the "Combination") of 17 affiliated operating corporations that were
previously under common ownership and management (the "Predecessors").
In connection with the Combination, the following executive officers and
directors of the Company or their immediate family members received Common Stock
in the merger of the Predecessors into the Company in exchange for the shares of
common stock of the Predecessors which they had held. The following table sets
forth the number of shares of Common Stock received by these individuals in the
Combination.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMPANY
EXECUTIVE OFFICER, COMMON STOCK
DIRECTOR OR IMMEDIATE RECEIVED
FAMILY MEMBER IN COMBINATION
--------------------- ----------------
<S> <C>
Wayne R. Hellman............................................ 3,125,153
Louis S. Fisi............................................... 657,112
Theodore A. Filson(1)....................................... 15,021
Francis H. Beam............................................. 34,685
Brian A. Hellman(2)......................................... 177,523
Lisa B. Hellman(2).......................................... 167,206
</TABLE>
- ---------------
(1) Mr. Filson no longer beneficially owns these shares.
(2) Brian Hellman and Lisa Hellman are Mr. Hellman's children.
The Combination was principally effected through a series of nonmonetary
mergers or stock exchanges in which the Predecessors' shareholders received
shares of the Company, except that certain former employees received, in the
aggregate, an insignificant amount of cash for their shares.
OTHER TRANSACTIONS WITH DIRECTORS AND OFFICERS
On September 15, 1995, one of the Predecessors transferred its nonlamp
assets to H&F Five, Inc., a company owned by Messrs. Hellman, Fisi and certain
other employees of the Company, for a demand promissory note from H&F Five, Inc.
in the amount of $200,000 bearing interest at 8.5% per annum. Total principal
and accrued interest at June 30, 1999 was $220,000, which was the largest amount
outstanding at any time during fiscal 1999.
In fiscal 1999, Mr. Filson provided consulting services to the Company and
received fees in the amount of $99,996. Mr. Filson's consulting services
included taking an active role in sales/marketing through the development of key
customer relationships, obtaining commitments from customer companies to
introduce new lighting products that include Company components and the
establishment of major sales agreements. Mr. Filson's services during fiscal
1999 also encompassed other activities, including joint venture activities and
recruitment of key personnel. In calendar 2000, Mr. Filson has agreed to provide
consulting services to the Company.
Mr. Harada, a director of the Company, is an executive officer, director,
and a shareholder of Venture Lighting, Japan ("Venture Japan"), formerly known
as Koto Luminous Ltd., a Japanese manufacturer and marketer of lighting
products. Venture Japan owns 142,268 shares of the Company, which were acquired
in the Combination as a result of its investment in a Predecessor. In April
1997, the Company purchased a 30% common stock interest in Venture Japan. In
November 1998, this common stock interest was exchanged for nonvoting
convertible preferred stock which Company management determined had fair value
not less than the fair value of the original common stock interest. The exchange
for this preferred stock enhanced the security of the Company's investment by
providing preferential treatment upon liquidation of Venture Japan, while the
convertibility of the preferred stock allows the Company to participate in the
future potential of Venture Japan.
79
<PAGE> 82
Additionally, Mr. Harada and members of his family control Wakoh Corporation, a
Japanese corporation. Wakoh Corporation and the Company are each 50% joint
venture partners in Pacific Lighting, Inc., a British Virgin Islands holding
company. The Company uses Pacific Lighting to own and hold a number of the
Company's joint venture investments. Venture Japan is the Company's sole trading
partner in Japan and, as a result, the Company supplies Venture Japan with
materials, lamps and equipment. The Company had sales of approximately $625,000
and $434,000 in fiscal 1999 and the six months ended December 31, 1999,
respectively, to Venture Japan.
On January 22, 1996, two subsidiaries of the Company each entered into a
six-year Aircraft Operating Agreement with Levetz Investments, Inc. ("Levetz"),
an unrelated Ohio corporation, for the purpose of chartering a 1986 Beechcraft
King Air 300 airplane (the "King Air Aircraft"), which Levetz leased from
LightAir Ltd. ("LightAir"), an Ohio limited liability company owned by Mr.
Hellman (80%) and Mr. Fisi (20%). On May 27, 1997, the Company entered into a
ten-year Aircraft Dry Lease Agreement with LightAir for the purpose of leasing a
1993 Lear Jet 60 airplane (the "Lear Aircraft"). In each case, the leased
airplanes enabled the Company to have air service into locations which are not
adequately served by commercial carriers. On May 6, 1998, LightAir sold the 1986
King Air Aircraft. On April 13, 1998, LightAir purchased a 1991 Beechcraft King
Air 350 airplane (the "Replacement King Air Aircraft") which Levetz leased from
LightAir on the same terms as the original King Air Aircraft; however, there was
no commitment by the Company or any subsidiary for a minimum number of flight
hours for the Replacement King Air Aircraft (one of the subsidiaries had
committed to a minimum of 200 flight hours per year on the King Air Aircraft,
and another subsidiary had committed to a minimum of 75 flight hours per year on
the King Air Aircraft). The Company and its subsidiaries were required to pay
$950 per flight hour on the Replacement King Air Aircraft for the first 275
hours, and $550 per flight hour thereafter, plus operating and maintenance
expenses. The Company had committed to a minimum of 260 flight hours per year on
the Lear Aircraft. The lease rate for the Lear Aircraft was $2,500 per flight
hour, plus operating costs and maintenance expenses. Levetz entered into a
separate Aircraft Dry Lease Agreement with LightAir for use of the Lear Aircraft
when not in use by the Company. In addition, the Company has utilized a Saab 340
Aircraft (the"Saab Aircraft") on an hourly rental basis. The Saab Aircraft was
originally owned by LightAir and was subsequently transferred to LightAir II
Ltd. Messrs. Hellman and Fisi guaranteed the repayment of $2.8 million of
indebtedness incurred to purchase the Replacement King Air aircraft; the
repayment of $8.4 million of indebtedness incurred to purchase the Lear
Aircraft; and $3.0 million of indebtedness to purchase the Saab aircraft.
Payments to LightAir totalled approximately $554,000 in fiscal 1997; $2,071,000
in fiscal 1998, and $588,000 in fiscal 1999. In addition, at June 30, 1999, the
Company had a $59,000 payment due to LightAir, which was subsequently paid.
LightAir paid certain rebates and reimbursements of amounts paid by the Company.
Unpaid portions of these amounts were recorded as non interest bearing
receivables of the Company. Rebates paid in fiscal 1998 totalled $211,000 and no
subsequent rebates have been made or are expected. The largest amount
outstanding with respect to receivables relating to reimbursements during fiscal
1999 was $137,000. There were no such receivables at June 30, 1999.
On May 20, 1998, LightAir II Ltd. ("LightAir II"), an Ohio limited
liability company owned by Mr. Hellman (50%) and Mr. Ruud (50%), acquired a 1988
Cessna Citation III aircraft. The Citation III was chartered to the Company at
an average of $2,000 per hour prior to January 1999 and $2,400 per hour
thereafter. Scott Air Charter of Milwaukee, Wisconsin is the charter broker for
the plane. Messrs. Hellman and Ruud guaranteed the repayment of $6.4 million of
indebtedness incurred to purchase the Citation III. Following transfer to
LightAir II of the Saab aircraft, LightAir II made the Saab aircraft available
to the Company on the same terms as were made available by LightAir. Commencing
in January 1999 the arrangements with LightAir II were changed to provide for
minimum payments of $55,000 per month for the Saab aircraft. The hourly usage
rates for the plane were reduced from $2,000 per hour to $1,100 per hour for the
Saab Aircraft. LightAir II has entered into arrangements to sell both of its
aircraft and the minimum payment was reduced to $33,500 with respect to the Saab
aircraft. The planes are not expected to be used for charter by the Company
pending sale. Payments to LightAir II during fiscal 1998 totalled $90,000,
approximately $1,030,000 in fiscal 1999 and approximately $265,000 for the six
months ended December 31, 1999. In addition, at June 30, 1999, the Company had a
$102,000 payment due to LightAir II.
On January 2, 1998, the Company acquired all of the capital stock of Ruud
Lighting, Inc. Mr. Ruud received approximately $17.8 million and 1,502,857
shares of Common Stock in the transaction. Mr. Ruud's adult
80
<PAGE> 83
children received, in the aggregate, approximately $9.3 million and 782,857
shares of Common Stock in connection with the Company's acquisition of Ruud
Lighting. In November 1997, certain shareholders of Ruud Lighting, including Mr.
Ruud, purchased from Ruud Lighting undeveloped real estate contiguous to its
existing facility, for $345,000. The terms of the transactions were determined
by arm's-length negotiation among the parties.
Pursuant to a loan agreement dated October 8, 1998 between the Company and
Mr. Hellman, its Chairman and Chief Executive Officer (the "Hellman Loan
Agreement"), the Company has loaned $9,000,000 to Mr. Hellman for a one-year
term at the rate of 8%. The loan was made following approval by the Company's
Board of Directors (Messrs. Hellman and Fisi did not participate in the
deliberations). The proceeds of the loan were used to reduce the outstanding
principal balance of a loan from Prudential Securities Incorporated ("PSI"),
which is secured by 2,053,070 shares of Company Common Stock owned by Mr.
Hellman and Hellman Ltd. (the "Hellman Personal Shares"). In connection with the
loan, the Board asked for and received Mr. Hellman's agreement to extend the
term of his employment agreement to December 31, 2003. The Hellman Loan
Agreement prohibits Mr. Hellman from encumbering the Hellman Personal Shares in
any manner except pursuant to existing agreements governing Mr. Hellman's margin
account at PSI, without consent of the Board's representative. Mr. Hellman has
paid accrued interest of $720,000 on the loan through October 6, 1999. The
principal on the loan was due on October 6, 1999. On January 25, 2000, the Board
agreed that Mr. Hellman would not be required to repay the loan until October 6,
2000. However, if the price of the Company's Common Stock reaches $12 per share
(a level which the directors believe would permit repayment of Mr. Hellman's
margin loan and refinancing with another lender), the Board and Mr. Hellman will
discuss earlier repayment of all or a portion of the loan. The Directors have
informed Mr. Hellman that the Company may require immediate payment of the loan
if the Company requires the payment to prevent an unacceptable strain on cash
resources.
Diane Hellman, Mr. Hellman's wife, has served the Company in various
marketing positions since 1985, and currently serves as Vice President of Sales
of Venture Lighting International, Inc. In fiscal 1999, Mrs. Hellman's salary,
benefits and perquisites (including the normal vesting and a one-time charge for
accelerated vesting resulting from the termination of the split dollar life
insurance program) were $126,731. Brian Hellman, Mr. Hellman's son, has served
the Company in various positions since 1992, and currently serves as Senior
Business Analyst of Venture Lighting International, Inc. In fiscal 1999, Brian
Hellman's salary, benefits and perquisites (including the normal vesting and a
one-time charge for accelerated vesting resulting from the termination of the
split dollar life insurance program) were $92,163. Deborah Rogers, Mr. Hellman's
sister-in-law, has served the Company in various positions since 1994, and
currently serves as Regional Sales Manager of Venture Lighting International,
Inc. In fiscal 1999, Ms. Rogers' salary, benefits and perquisites were $69,857.
Susan Ruud, Mr. Ruud's wife, has served the Company since 1998, and served Ruud
Lighting in various positions since 1982, and currently serves as Vice President
of Human Resources of the Company. In fiscal 1999, Mrs. Ruud's salary and
benefits were $66,846. Christopher Ruud, Mr. Ruud's son, has served the Company
since 1998, and served Ruud Lighting in various positions since 1986, and
currently serves as Vice President of Continuous Improvement/Human Resources of
Ruud Lighting. In fiscal 1999, Christopher Ruud's salary and benefits were
$91,447.
Mr. Fisi retired as an officer and employee of the Company effective
December 31, 1999. Effective upon Mr. Fisi's retirement, the Company and Mr.
Fisi entered into a consulting agreement pursuant to which Mr. Fisi has been
retained as a consultant until June 30, 2000 for a fixed consulting fee of
$93,000 (it is anticipated that the consulting arrangement during this period
would involve the direction and completion of Mr. Fisi's current projects);
after June 30, 2000, Mr. Fisi will be available to consult with Company
management for an additional period of four years on special projects, where Mr.
Fisi's extensive industry experience, special knowledge regarding the Company
and availability to supervise substantial projects would assist the Company's
completion of these projects, with compensation for the four-year period set at
$93,000 per year. In addition, Mr. Fisi will continue serving his existing term
as a director of the Company and given a 5,000 share option grant under the
Company's 1995 Incentive Award Plan or 1998 Incentive Award Plan.
The Company does not intend to enter into any material transaction with
officers or directors, or their family members, without the approval of a
majority of the disinterested directors in the future. All above-described
81
<PAGE> 84
transactions since March 1997 were approved by a majority of disinterested
directors except Mr. Filson's consulting service fees and the employment and
compensation of the Hellman and Ruud family members.
GE TRANSACTION
On October 6, 1999, GE made an investment in the Company of $20,554,000.
The additional capital resources provided by the agreed investment by GE are
expected to provide additional flexibility to pursue opportunities in the metal
halide business. In addition, GE and the Company have entered into a five year,
renewable agreement for the supply of metal halide salts to GE. This agreement
is similar to a supply agreement with GE which expired in 1998, including a
non-exclusive technology license to protect GE in the event of an inability of
the Company to supply these products. The Company and GE are in discussions with
respect to other supply arrangements. The Company anticipates that the GE
investment and the expansion which it will permit will result in an expanded
supplier-customer relationship with GE, enhancing the Company's earnings and
competitive position in the metal halide, marketplace. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments -- General Electric Company Investment."
The GE investment includes 761,250 shares of the Company's newly-created
Series A Stock convertible at any time into 3,045,000 shares of Company Common
Stock (subject to adjustment). GE also received a Warrant (the "Initial
Warrant") to purchase an additional 1,000,000 shares of Common Stock of the
Company, which is immediately exercisable. GE has been a holder of 535,887
shares of Company Common Stock since the Company's initial public offering in
1995. The Series A stock, Common Stock issuable on exercise of the Initial
Warrant and the Common Stock held by GE represent (after giving effect to the
shares issued on exercise of the Initial Warrant) approximately 18.9% of the
voting power and equity ownership of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments -- General Electric Company Investment -- Terms of the Series A
Stock and -- Terms of the Initial Warrant." Pursuant to the terms of the Stock
Purchase Agreement, GE is to provide the Company with five nominees as potential
Company's Board of Directors who are not directors, officers, employees or 10%
shareholders of GE. The Company is required to cause the number of such nominees
serving on the Board to be equal to the greater of 20% of the number of members
of the Board or the number of members which most nearly corresponds to GE's
percentage ownership interest in the Company.
The proceeds of the GE transaction have been applied principally to the
reduction of short-term liabilities and outstanding amounts under the Company's
principal bank credit facility.
GE supplies the Company with quartz tubing, glass bases and other
components for the metal halide lamps, manufactured by the Company. Although a
significant supplier of such items, GE is not the only available source for
these items. In addition, GE supplies the Company with finished lamps for resale
as a part of the Company's product line and for inclusion in the Company's
lighting systems. These lamps include both commodity-type metal halide lamps
which supplement the Company's line of specialty lamps, as well as incandescent
and fluorescent lamps, which are distributed to the Company's customers. The
Company supplies GE with both components for lamps and private label specialty
metal halide lamps. GE provides unsecured trade credit terms to the Company to
finance the purchase of products from GE by the Company. The Company paid GE a
total of $13.5 million and $6.4 million for components and finished lamps
purchased from GE during fiscal 1999 and the first six months of fiscal 2000,
respectively, and GE paid the Company a total of $4.6 million and $4.0 million
for components and finished lamps purchased from the Company during fiscal 1999
and the first six months of fiscal 2000, respectively. GE is also a manufacturer
and marketer of metal halide lamps and fixtures and a competitor of the Company.
82
<PAGE> 85
CERTAIN HOLDERS OF VOTING SECURITIES
The following table sets forth information regarding the ownership of the
Company's Common Stock as of January 31, 2000, by each of the directors and
executive officers of the Company, by each person or group known by the Company
to be the beneficial owner of more than five percent of the Company's
outstanding Common Stock, and by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(2)
----------------------------------
PERCENT
PERCENT OF VOTING
NAME AND ADDRESS(1) NUMBER OF CLASS POWER
------------------- ------ -------- ---------
<S> <C> <C> <C>
Wayne R. Hellman(3).................................. 3,968,922(7) 19.5% 16.3%
Alan J. Ruud(4)...................................... 3,647,329(7) 18.0% 15.0%
Louis S. Fisi(5)..................................... 297,169(7) 1.5% 1.2%
Nicholas R. Sucic.................................... 18,433(7) * *
Francis H. Beam...................................... 42,554 * *
John E. Breen........................................ 0 * *
John R. Buerkle...................................... 22,000 * *
Theodore A. Filson................................... 43,000 * *
Susumu Harada(6)..................................... 157,368 * *
Thomas K. Lime....................................... 0 * *
A Gordon Tunstall.................................... 15,000 * *
All Directors and Executive Officers as a Group
(3)(4)(5)
(11 Persons)....................................... 7,914,858(7) 38.9% 32.5%
General Electric Company (8)......................... 4,580,887 18.8% 18.8%
Brown Investment Advisory & Trust Company/ Brown
Advisory Incorporated (9).......................... 1,367,579 6.7% 5.8%
Wellington Management Company (10)................... 1,170,300 5.7% 5.0%
</TABLE>
- ---------------
* Less than one percent
(1) The business address of each of Messrs. Hellman, Fisi, Sucic, Beam,
Buerkle, Filson and Lime and Dr. Breen is 32000 Aurora Road, Solon, Ohio
44139. The business addresses of Messrs. Ruud, Harada, and Tunstall are:
Mr. Ruud -- Ruud Lighting, Inc., 9201 Washington Avenue, Racine, Wisconsin
53406; Mr. Harada -- Koto Electric Co., Ltd., Bunmeido Bldg., 7th Floor,
3-16-5, Taito, Taito-Ku, Tokyo 110, Japan; and Mr. Tunstall -- Tunstall
Consulting, Inc., 13153 North Dale Mabry, Suite 200, Tampa, Florida, 33618.
The business address of General Electric Company is 3135 Easton Turnpike,
Fairfield, CT 06431. The business address of Wellington Management Company
is 75 State Street, Boston, MA 02109. The business address of Brown
Investment Advisory & Trust Company/Brown Advisory Incorporated is 19 South
Street, Baltimore, MD 21202.
(2) Shares beneficially owned include the following shares which may be
acquired within 60 days after January 31, 2000 by exercise of options
granted pursuant to the incentive award plans: Mr. Beam -- 15,000 shares;
Mr. Filson -- 33,000 shares; Mr. Buerkle -- 9,000 shares; Mr.
Harada -- 9,600 shares; Mr. Tunstall -- 15,000 shares; Mr. Sucic -- 14,250
shares. Shares beneficially owned by General Electric Company include
3,045,000 shares of Common Stock which may be acquired by General Electric
Company at any time upon conversion of the Series A Stock and 1,000,000
shares of Common Stock subject to a warrant which is exercisable at any
time. Percentage ownership is calculated on the basis of shares
outstanding, plus shares which may be acquired within 60 days of the date
of the proxy upon exercise or conversion by the named holder of options,
warrants and Series A Stock. Percentage voting power is calculated on the
same basis as percentage ownership, except the calculation includes for all
holders the voting power of the Series A Stock and the shares issuable upon
exercise by GE of the warrant.
(3) Includes 1,928,372 shares owned by Mr. Hellman individually; 125,000 shares
owned by a limited liability company ("Hellman Ltd.") of which Mr. Hellman
is the manager and as to which Mr. Hellman has sole voting and investment
power; 50,000 shares owned by a private charitable foundation established
by Mr. Hellman and as to which Mr. Hellman has sole voting and investment
power; 70,414 shares beneficially
83
<PAGE> 86
owned by certain shareholders of the Company held under a voting trust
which expires in 2005 (the "Trust") and 1,758,984 shares formerly subject
to the Trust as to which Mr. Hellman holds an irrevocable proxy under
similar terms. These shares, totaling 1,829,398, are referred to herein as
the "Trust Shares." The Trust Shares include all shares individually owned
by Mr. Louis S. Fisi, Mr. Robert S. Roller, and Mr. Juris Sulcs, Ms.
Christine Hellman and Ms. Lisa Hellman, the estate of James Sarver, and
trusts for the benefit of Mr. Roller's children. The Trust Shares also
include shares owned by Mr. Brian Hellman. Pursuant to the terms of the
Trust and the irrevocable proxies, Mr. Wayne Hellman is empowered to vote
the Trust Shares for all purposes at his sole discretion, but is not
provided with investment power with respect to the Trust Shares. Beneficial
owners of the Trust Shares may remove the shares from the Trust or release
the shares from the irrevocable proxy, as the case may be, to effect a bona
fide sale free of the restrictions of the Trust. All share distributions on
account of the Trust Shares become subject to the Trust, and all cash and
other nonshare distributions on account of the Trust Shares are to be paid
over to the grantors of the Trust. The expiration of the Trust may be
accelerated under certain circumstances. Mr. Hellman does not receive any
compensation for serving as voting trustee of the Trust. Mr. Hellman has
granted to GE irrevocable proxies with respect to shares owned by him
individually and by Hellman, Ltd. and with respect to the Trust Shares. The
proxies will be effective only under certain circumstances. See
"Business -- Recent Developments -- General Electric Company Investment."
Also includes shares beneficially owned by Mr. Hellman's wife as to which
Mr. Hellman disclaims beneficial ownership, consisting of 26,152 shares
owned and 10,000 shares subject to options exercisable within 60 days of
the date of this Prospectus.
(4) Mr. Ruud has the sole power to vote 3,647,329 shares of Common Stock of
which 1,497,143 shares of Common Stock are subject to the terms of a voting
trust agreement dated January 2, 1998 (the "Voting Trust") or an
irrevocable proxy similar to the irrevocable proxies held by Mr. Hellman,
discussed above (collectively, the "Voting Trust Shares"), and the sole
power to dispose of 2,150,186 shares of Common Stock. The purpose of the
Voting Trust Agreement and proxies is to provide Mr. Ruud with the power to
vote all of the 1,497,143 shares of Common Stock held by the signatories to
the Voting Trust Agreement. The Voting Trust Shares include all shares
individually owned by Messrs. Donald Wandler, Theodore O. Sokoly,
Christopher A. Ruud, and Ms. Cynthia A. Johnson. Mr. Ruud has granted to GE
proxies with respect to shares owned by him individually and with respect
to the Voting Trust Shares. These proxies will be effective only under
certain circumstances. See "Business -- Recent Developments -- General
Electric Company Investment."
(5) All individually owned shares (other than 401(k) plan shares) are Trust
Shares subject to voting control by Mr. Hellman.
(6) Includes 142,268 shares owned by Venture Lighting, Japan, of which Mr.
Harada is chief executive officer. Mr. Harada disclaims beneficial
ownership of these shares.
(7) Includes 2,513 shares purchased via the Employee Stock Purchase Plan by Mr.
Sucic and 302, 252, 329 and 170 shares purchased via the Company 401(k)
plan for Messrs. Hellman, Fisi, Ruud and Sucic respectively.
(8) Includes 535,887 shares of Common Stock held by General Electric Company,
3,045,000 shares issuable upon conversion of the Series A Stock held by
General Electric and 1,000,000 shares issuable upon exercise of a currently
exercisable warrant held by General Electric. General Electric owns 100% of
the issued and outstanding shares of Series A Stock.
(9) Information obtained from Schedule 13G filed by the shareholder. Includes
560,340 shares as to which BIATC has sole voting power and 772,039 shares
as to which BIA has sole voting power and 595,540 shares as to which BIATC
has sole dispositive power and 772,039 shares as to which BIA has sole
dispositive power.
(10) Information obtained from Schedule 13G/A filed by the shareholder. Includes
703,900 shares as to which Wellington has shared voting power and 1,170,300
shares as to which Wellington has shared dispositive power.
84
<PAGE> 87
DESCRIPTION OF CERTAIN INDEBTEDNESS
In May 1999, the Company replaced its existing credit facility with the
Bank Credit Facility consisting of a $50.0 million revolving credit loan and
$25.0 million term loan provided by several financial institutions. Subsequent
to June 30, 1999 the Company reduced its commitment to a $60.0 million facility.
Proceeds from the facility were used to repay the Company's existing credit
facility and certain other long-term debt. The revolving credit loan has a
three-year term expiring in May 2002. Interest rates on revolving credit loans
outstanding are based, at the Company's option, on LIBOR plus 2.75% or the agent
bank's prime rate. Availability of borrowings is determined by the Company's
eligible accounts receivable and inventories. The term loan has a five-year term
expiring in May 2004. The Company pays monthly principal payments that total
$3.6 million annually, with the unpaid balance due at maturity. Interest rates
on the term loan are based, at the Company's option, on LIBOR plus 3.25% or the
agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Registration Rights Agreement with the Placement Agent, pursuant to which the
Company agreed to use its reasonable best efforts to consummate an exchange
offer with respect to the exchange of the Old Notes pursuant to an effective
registration statement for debt securities with terms identical in all material
respects to the terms of the Old Notes, except that (i) the New Notes will have
been registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes and will not be
entitled to registration and other rights under the Registration Rights
Agreement, and (ii) the New Notes will not provide for any increase in the
interest rate thereon. In that regard, the Old Notes provide, among other
things, that, if the Exchange Offer is not consummated on or prior to September
14, 1998, the interest rate borne by the Old Notes following September 14, 1998
will increase by 0.50% per annum until the Exchange Offer is consummated. Upon
consummation of the Exchange Offer, Holders of Old Notes will not be entitled to
any increased rate of interest thereon or any further registration rights under
the Registration Rights Agreement, except that the Placement Agent may have
certain registration rights under limited circumstances. See "Risk
Factors -- Certain Consequences of a Failure to Exchange Old Notes" and
"Description of the Old Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $100,000,000 aggregate principal amount of New Notes for a like
aggregate principal amount of Old Notes properly tendered on or prior to the
Expiration Date (as defined below) and not properly withdrawn in accordance with
the procedures described below. The Company will issue, promptly after the
Expiration Date, an aggregate principal amount of up to $100,000,000 of New
Notes in exchange for a like principal amount of outstanding Old Notes tendered
and accepted in connection with the Exchange Offer. Holders may tender their Old
Notes in whole or in part in a principal amount of $1,000 and integral multiples
thereof.
85
<PAGE> 88
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered. As of the date of this Prospectus $100,000,000 aggregate
principal amount of the Old Notes is outstanding.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for
exchange or are tendered but not accepted in connection with the Exchange Offer
will remain outstanding and be entitled to the benefits of the Indenture, but
will not be entitled to any further registration rights under the Registration
Rights Agreement, except that the Placement Agent may have certain registration
rights under limited circumstances.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See " -- Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on
, 2000 unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i) to
delay the acceptance of the Old Notes for exchange, (ii) to terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted for
exchange) if the Company determines, in its sole and absolute discretion, that
any of the events or conditions referred to under "-- Certain Conditions to the
Exchange Offer" have occurred or exist or have not been satisfied, (iii) to
extend the Expiration Date of the Exchange Offer and retain all Old Notes
tendered pursuant to the Exchange Offer, subject, however, to the right of
holders of Old Notes to withdraw their tendered Old Notes as described under "--
Withdrawal Rights," and (iv) to waive any condition or otherwise amend the terms
of the Exchange Offer in any respect. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, or if the
Company waives a material condition of the Exchange Offer, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders of the Old Notes, and the Company will
extend the Exchange Offer to the extent required by Rule 14e-1 under the
Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which the Company may choose to make any public announcement and
subject to applicable law, the Company shall have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
issuing a release to the Dow Jones News Service.
86
<PAGE> 89
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, New Notes for Old
Notes validly tendered and not withdrawn (pursuant to the withdrawal rights
described under "-- Withdrawal Rights") promptly after the Expiration Date.
In all cases, delivery of New Notes in exchange for Old Notes tendered and
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) Old Notes or a book-entry
confirmation of a book-entry transfer of Old Notes into the Exchange Agent's
account at The Depository Trust Company ("DTC"), (ii) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and (iii) any other documents required by the Letter of
Transmittal.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Old Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent of the Company's acceptance of such Old
Notes for exchange pursuant to the Exchange Offer. The Exchange Agent will act
as agent for the Company for the purpose of receiving tenders of Old Notes,
Letters of Transmittal and related documents, and as agent for tendering holders
for the purpose of receiving Old Notes, Letters of Transmittal and related
documents and transmitting New Notes to validly tendering holders. Such exchange
will be made promptly after the Expiration Date. If, for any reason whatsoever,
acceptance for exchange or the exchange of any Old Notes tendered pursuant to
the Exchange Offer is delayed (whether before or after the Company's acceptance
for exchange of Old Notes) or the Company extends the Exchange Offer or is
unable to accept for exchange or exchange Old Notes tendered pursuant to the
Exchange Offer, then, without prejudice to the Company's rights set forth
herein, the Exchange Agent may, nevertheless, on behalf of the Company and
subject to Rule 14e-1(c) under the Exchange Act, retain tendered Old Notes and
such Old Notes may not be withdrawn except to the extent tendering holders are
entitled to withdrawal rights as described under "-- Withdrawal Rights."
Pursuant to the Letter of Transmittal, a holder of Old Notes will warrant
and agree in the Letter of Transmittal that it has full power and authority to
tender, exchange, sell, assign and transfer Old Notes, that the Company will
acquire good, marketable and unencumbered title to the tendered Old Notes, free
and clear of all liens, restrictions, charges and encumbrances, and the Old
Notes tendered for exchange are not subject to any adverse claims or proxies.
The holder also will warrant and agree that it will, upon request, execute and
deliver any additional documents deemed by the Company or the Exchange Agent to
be necessary or desirable to complete the exchange, sale, assignment, and
transfer of the Old Notes tendered pursuant to the Exchange Offer.
PROCEDURES FOR TENDERING OLD NOTES
VALID TENDER. Except as set forth below, in order for Old Notes to be
validly tendered pursuant to the Exchange Offer, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, must be received by the
Exchange Agent at one of its addresses set forth under "-- Exchange Agent," and
either (i) tendered Old Notes must be received by the Exchange Agent, or (ii)
such Old Notes must be tendered pursuant to the procedures for book-entry
transfer set forth below and a book-entry confirmation must be received by the
Exchange Agent, in each case on or prior to the Expiration Date, or (iii) the
guaranteed delivery procedures set forth below must be complied with.
If less than all of the Old Notes are tendered, a tendering holder should
fill in the amount of Old Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Old Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT RE-
87
<PAGE> 90
QUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
BOOK-ENTRY TRANSFER. The Exchange Agent will establish an account with
respect to the Old Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution that
is a participant in DTC's book-entry transfer facility system may make a
book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account at DTC in accordance with DTC's procedures for
transfers. However, although delivery of Old Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in any
case be delivered to and received by the Exchange Agent at its address set forth
under "-- Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
SIGNATURE GUARANTEES. Certificates for the Old Notes need not be endorsed
and signature guarantees on the Letter of Transmittal are unnecessary unless (a)
a certificate for the Old Notes is registered in a name other than that of the
person surrendering the certificate or (b) such registered holder completes the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
in the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Old Notes must be duly endorsed or accompanied by a properly executed bond
power, with the endorsement or signature on the bond power and on the Letter of
Transmittal guaranteed by a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as an "eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association (an "Eligible Institution"),
unless surrendered on behalf of such Eligible Institution. See Instruction 1 to
the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender Old Notes pursuant to
the Exchange Offer and the certificates for such Old Notes are not immediately
available or time will not permit all required documents to reach the Exchange
Agent on or before the Expiration Date, or the procedures for book-entry
transfer cannot be completed on a timely basis, such Old Notes may nevertheless
be tendered, provided that all of the following guaranteed delivery procedures
are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of Transmittal,
is received by the Exchange Agent, as provided below, on or prior to the
Expiration Date; and
(iii) the certificates (or a book-entry confirmation) representing all
tendered Old Notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof),
with any required signature guarantees and any other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three
New York Stock Exchange trading days after the date of execution of such
Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of New Notes in
exchange for Old Notes tendered and accepted for exchange pursuant to the
Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of Old Notes, or of a book-entry confirmation with respect to
such Old Notes, and a properly completed and duly executed Letter of Transmittal
(or facsimile thereof), together with any required signature guarantees and any
other documents required by the Letter of Transmittal. Accordingly, the delivery
of New
88
<PAGE> 91
Notes might not be made to all tendering holders at the same time, and will
depend upon when Old Notes, book-entry confirmations with respect to Old Notes
and other required documents are received by the Exchange Agent.
The Company's acceptance for exchange of Old Notes tendered pursuant to any
of the procedures described above will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions of the Exchange Offer.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange of
any tendered Old Notes will be determined by the Company, in its sole
discretion, whose determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "-- Certain Conditions to the Exchange Offer" or any condition or
irregularity in any tender of Old Notes of any particular holder whether or not
similar conditions or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will be
final and binding. No tender of Old Notes will be deemed to have been validly
made until all irregularities with respect to such tender have been cured or
waived. Neither the Company, any affiliates or assigns of the Company, the
Exchange Agent nor any other person shall be under any duty to give any
notification of any irregularities in tenders or incur any liability for failure
to give any such notification.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing and, unless waived by the Company,
proper evidence satisfactory to the Company, in its sole discretion, of such
person's authority to so act must be submitted.
A beneficial owner of Old Notes that are held by or registered in the name
of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
RESALES OF NEW NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance of the Commission as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the two immediately following sentences, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than a
holder who is a broker-dealer) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and that
such holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. However, any holder of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing New Notes, or any broker-dealer who purchased
Old Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Notes in the Exchange Offer and (c)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Notes
unless such sale is made pursuant to an exemption from such requirements. In
addition, as described below, if any broker-dealer holds Old Notes acquired for
its
89
<PAGE> 92
own account as a result of market-making or other trading activities and
exchanges such Old Notes for New Notes, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of such New Notes.
Each holder of Old Notes who wishes to exchange Old Notes for New Notes in
the Exchange Offer will be required to represent that (i) it is not an
"affiliate" of the Company, (ii) any New Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes, and (iv) if such holder is not
a broker-dealer, such holder is not engaged in, and does not intend to engage
in, a distribution (within the meaning of the Securities Act) of such New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company believes that broker-dealers who acquired Old
Notes for their own accounts as a result of market-making activities or other
trading activities ("Participating Broker-Dealers") may fulfill their prospectus
delivery requirements with respect to the New Notes received upon exchange of
such Old Notes (other than Old Notes which represent an unsold allotment from
the original sale of the Old Notes) with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
by such Participating Broker-Dealer for its own account as a result of
market-making or other trading activities. Subject to certain provisions set
forth in the Registration Rights Agreement, the Company has agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such New Notes
for a period ending 90 days after the Expiration Date (subject to extension
under certain limited circumstances described below) or, if earlier, when all
such New Notes have been disposed of by such Participating Broker-Dealer. See
"Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of
the Company may not rely on such interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
In that regard, each Participating Broker-Dealer who surrenders Old Notes
pursuant to the Exchange Offer will be deemed to have agreed, by execution of
the Letter of Transmittal, that, upon receipt of notice from the Company of the
occurrence of any event or the discovery of any fact which makes any statement
contained or incorporated by reference in this Prospectus untrue in any material
respect or which causes this Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
herein, in light of the circumstances under which they were made, not misleading
or of the occurrence of certain other events specified in the Registration
Rights Agreement, such Participating Broker-Dealer will suspend the sale of New
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the New Notes may
be resumed, as the case may be. If the Company gives such notice to suspend the
sale of the New Notes, it shall extend the 90-day period referred to above
during which Participating Broker-Dealers are entitled to use this Prospectus in
connection with the resale of New Notes by the number of days during the period
from and including the date of the giving of such notice to and including the
date when Participating Broker-Dealers shall have received copies of the amended
or supplemented Prospectus necessary to permit resales of the New Notes or to
and including the date on which the Company has given notice that the sale of
New Notes may be resumed, as the case may be.
90
<PAGE> 93
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "--Exchange Agent" on
or prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Old Notes to be withdrawn, the aggregate
principal amount of Old Notes to be withdrawn, and (if certificates for such Old
Notes have been tendered) the name of the registered holder of the Old Notes as
set forth on the Old Notes, if different from that of the person who tendered
such Old Notes. If Old Notes have been delivered or otherwise identified to the
Exchange Agent, then prior to the physical release of such Old Notes, the
tendering holder must submit the serial numbers shown on the particular Old
Notes to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Old Notes tendered
for the account of an Eligible Institution. If Old Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "-- Procedures
for Tendering Old Notes," the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of Old Notes, in
which case a notice of withdrawal will be effective if delivered to the Exchange
Agent by written, telegraphic, telex or facsimile transmission. Withdrawals of
tenders of Old Notes may not be rescinded. Old Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer, but may be
retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under "-- Procedures for
Tendering Old Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Old Notes which have been tendered
but which are withdrawn will be returned to the holder thereof promptly after
withdrawal.
INTEREST ON THE NEW NOTES
Each New Note will bear interest at the rate of 8.00% per annum from the
most recent date to which interest has been paid or duly provided for on the Old
Note surrendered in exchange for such New Note or, if no interest has been paid
or duly provided for on such Old Note, from March 18, 1998. Interest on the New
Notes will be payable semiannually on March 15 and September 15 of each year,
commencing on the first such date following the original issuance date of the
New Notes.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive accrued interest on such Old Notes for any period from and after the
last Interest Payment Date to which interest has been paid or duly provided for
on such Old Notes prior to the original issue date of the New Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Old Notes, and will be deemed to have waived the right to
receive any interest on such Old Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after March 18, 1998.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offer, if any of the following events or conditions have occurred
or exists or have not been satisfied:
(a) the Exchange Offer, or the making of any exchange by a holder,
violates any applicable law or any applicable interpretation of the staff
of the Commission;
91
<PAGE> 94
(b) any action or proceeding shall have been instituted or threatened
in any court or by or before any governmental agency or body with respect
to the Exchange Offer which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(d) a banking moratorium shall have been declared by United States
federal or Ohio or New York state authorities which, in the Company's
judgment, would reasonably be expected to impair the ability of the Company
to proceed with the Exchange Offer;
(e) trading on the New York Stock Exchange or generally in the United
States over-the-counter market shall have been suspended by order of the
Commission or any other governmental authority which, in the Company's
judgment, would reasonably be expected to impair the ability of the Company
to proceed with the Exchange Offer; or
(f) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Old Notes have theretofore been accepted for exchange)
or may waive any such condition or otherwise amend the terms of the Exchange
Offer in any respect. If such waiver or amendment constitutes a material change
to the Exchange Offer, the Company will promptly disclose such waiver by means
of a prospectus supplement that will be distributed to the registered holders of
the Old Notes, and the Company will extend the Exchange Offer to the extent
required by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Delivery of the Letters of Transmittal and any other required documents,
questions, requests for assistance, and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent as follows:
<TABLE>
<S> <C>
BY MAIL: BY OVERNIGHT DELIVERY OR HAND:
- --------------------------------------------- ---------------------------------------------
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attn: Reorganization Section, Ground Level
7E: Odell Romeo New York, New York 10286
(Registered or Certified Mail Recommended) Attn: Reorganization Section,
7E: Odell Romeo
</TABLE>
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 815-6337
FACSIMILE TRANSMISSIONS:
(212) 815-6339 (ELIGIBLE INSTITUTION ONLY)
Delivery to other than one of the above addresses or facsimile numbers will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for its reasonable out-of-pocket
expenses in connection therewith. The Company will also pay
92
<PAGE> 95
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus
and related documents to the beneficial owners of Old Notes, and in handling or
tendering for their customers.
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes in connection with the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering holder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
DESCRIPTION OF THE NEW NOTES
The Old Notes were issued and the New Notes are to be issued under an
Indenture, dated as of March 18, 1998, as amended, between the Company, as
issuer, and The Bank of New York, as trustee (the "Trustee"). Copies of the
Indenture and the forms of certificates evidencing the Old and New Notes have
been filed as an exhibit to the Registration Statement and are incorporated
herein by reference. The following summary of certain provisions of the
Indenture and the Notes does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part of the Indenture by the Trust Indenture Act of 1939, as amended. For
definitions of certain capitalized terms used in the following summary, see
" -- Certain Definitions."
The Old Notes and the New Notes will constitute a single series of debt
securities under the Indenture. If the Exchange Offer is consummated, Holders of
the Old Notes who do not exchange their Old Notes for New Notes will vote
together with the Holders of New Notes for all relevant purposes under the
Indenture. In that regard, the Indenture requires that certain actions by the
holders thereunder (including acceleration following an Event of Default) must
be taken, and certain rights must be exercised, by specified minimum percentages
of the aggregate principal amount of the outstanding Notes. In determining
whether Holders of the requisite percentage in principal amount have given any
notice, consent or waiver or taken any other action permitted under the
Indenture, any Old Notes which remain outstanding after the Exchange Offer will
be aggregated with the New Notes and the Holders of such Old Notes and New Notes
will vote together as a single series for all such purposes. Accordingly, all
references herein to specified percentages in aggregate principal amount of the
outstanding Notes shall be deemed to mean, at any time after the Exchange Offer
is consummated, such percentage in aggregate principal amount of the Old Notes
and New Notes then outstanding.
The New Notes and the Old Notes are sometimes referred to as, collectively,
the "Notes" and, individually, a "Note."
GENERAL
The Notes will be unsecured unsubordinated obligations of the Company,
initially limited to $100 million aggregate principal amount, and will mature on
March 15, 2008. Each Note will bear interest at 8.00% per annum from March 18,
1998 or from the most recent Interest Payment Date to which interest has been
paid or provided for, payable semiannually (to Holders of record at the close of
business on the March 1 or September 1 immediately preceding Interest Payment
Date) on March 15 and September 15 of each year, commencing with the first
Interest Payment Date occurring after the date of original issuance of such
Note.
Each Note will cease to bear interest from the maturity date or any
redemption date unless, upon due presentation, payment of principal is
improperly withheld or refused. In such event, the relevant Note shall continue
to bear interest at the rate per annum shown on the front cover page hereof
(both before and after judgment) until the day on which all sums due in respect
of such Note up to that day are received by or on behalf
93
<PAGE> 96
of the relevant Holder. Interest on the Notes will be calculated on the basis of
a 360-day year of twelve 30-day months and, in the case of an incomplete month,
the number of days elapsed.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, New York,
New York 10286); provided that, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses as they
appear in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The New Notes
offered hereby together with the Old Notes and any additional Notes subsequently
issued would be treated as a single class for all purposes under the Indenture.
Subject to applicable law, the Trustee and the paying agents shall pay to
the Company upon written request any monies held by them for the payment of
principal or interest that remains unclaimed for two years, and, thereafter,
Holders entitled to such monies must look to the Company for payment as general
creditors.
The Company may at any time purchase New Notes in the open market or
otherwise at any price.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after March 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing March
15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................................ 104.000%
2004........................................................ 102.667
2005........................................................ 101.333
2006 and thereafter......................................... 100.000
</TABLE>
In addition, at any time and from time to time prior to March 15, 2001, the
Company may redeem up to 35% of the principal amount of the Notes with the
proceeds to the Company from one or more Public Equity Offerings, at any time or
from time to time in part, at a Redemption Price (expressed as a percentage of
principal amount) of 108%, plus accrued and unpaid interest to the Redemption
Date (subject to the rights of Holders of record on the relevant Regular Record
Date that is prior to the Redemption Date to receive interest due on an Interest
Payment Date); provided that after any such redemption Notes representing at
least 65% of the Notes originally issued remain outstanding and that notice of
such redemption is mailed within 60 days of such Public Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange or automated quotation system, if
any, on which the Notes are listed or, if the Notes are not listed on a national
securities exchange or automated quotation system, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; provided that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be
94
<PAGE> 97
issued in the name of the Holder thereof upon cancellation of the original Note.
Such new Notes can be obtained at the offices of the paying agents and transfer
agents.
SINKING FUND
There will be no sinking fund payments for the Notes.
RANKING
The Notes will be unsecured senior indebtedness ranking pari passu with
existing and future unsubordinated unsecured indebtedness and senior in right of
payment to all subordinated indebtedness of the Company. The Notes will be
effectively subordinated to all secured indebtedness of the Company and its
subsidiaries with respect to the collateral securing such indebtedness, and the
New Notes will be effectively subordinated to all liabilities of the Company's
subsidiaries, including trade payables. At December 31, 1999, the Company had
approximately $147.4 million of indebtedness outstanding, including
approximately $23.0 million of indebtedness of the Company's subsidiaries, and
the Company's subsidiaries had approximately $37.3 million of additional
liabilities. At December 31, 1999, the Company and its subsidiaries also had
$35.2 million available (subject to borrowing base compliance and other
limitations) to be drawn under the Credit Facility, which is secured by
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. See "Risk Factors -- Our Secured Creditors and Creditors of Our
Subsidiaries Will Have Advantages in Right to Payment Upon Default" and "--Our
Degree of Indebtedness Could Limit Our Ability To Grow and React to Changes in
Market Conditions."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture and the Notes. Reference is made
to the Indenture and the Notes for the full definition of all terms as well as
any other capitalized term used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person that is not a Restricted Subsidiary, except to
the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries by such Person during such
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of its
Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses (on an after-tax basis).
95
<PAGE> 98
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
assets of the Company; provided that "Asset Sale" shall not include (a) sales or
other dispositions of inventory, receivables and other current assets, (b)
sales, transfers or other dispositions of assets constituting a Restricted
Payment permitted to be made under the "Limitation on Restricted Payments"
covenant, or (c) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would satisfy clause (B) of the
"Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
96
<PAGE> 99
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Company on a fully diluted basis and (b) such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than may then be voted by the Existing Stockholders on such
date; or (ii) individuals who on the Closing Date constitute the Board of
Directors (together with any new or successor directors whose election by the
Board of Directors or whose nomination by the Board of Directors for election by
the Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board of Directors on the date of their election or nomination)
cease for any reason to constitute a majority of the members of the Board of
Directors then in office.
"Closing Date" means the date on which the Old Notes were originally issued
under the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary gains or losses or Asset Sales or Asset
Dispositions), (iii) depreciation expense, (iv) amortization expense and (v) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
97
<PAGE> 100
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Facility" means the Credit Facility dated as of January 2, 1998, as
amended on February 26, 1998, among the Company and the lenders party thereto
and any other lenders or borrowers from time to time party thereto, collateral
documents, instruments and agreements executed in connection therewith and any
amendments, supplements, substitutions, modifications, extensions, renewals,
restatements, replacement, refinancings or refundings thereof.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or the passage of time
or both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Eligible Accounts Receivable" means at the time of reference thereto
accounts receivable as set forth on the most recent consolidated balance sheet
filed pursuant to the "Commission Reports and Reports to Holders" covenant, less
accounts receivable of Unrestricted Subsidiaries as of the date of such balance
sheet.
"Eligible Inventory" means at the time of reference thereto inventory as
set forth on the most recent consolidated balance sheet filed pursuant to the
"Commission Reports and Reports to Holders" covenant, less inventory of
Unrestricted Subsidiaries as of the date of such balance sheet.
"Existing Stockholders" means (i) Mr. Wayne R. Hellman, (ii) any trust to
the extent that any member of Wayne R. Hellman's family has "beneficial" (as
defined in Rule 13d-3 under the Exchange Act) ownership of the res thereof and
(iii) any "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act) that includes parties specified in clauses (i) or (ii) above if
such parties "beneficially own" (within the meaning of Rule 13d-3 under the
Exchange Act) Voting Stock representing a majority of the voting power of the
Voting Stock owned by such group.
"Fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"Foreign Subsidiaries" means Ballastronix Inc., Parry Power Systems, Ltd.
and any other Subsidiary of the Company incorporated or organized, as the case
may be, outside of the United States of America.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred
98
<PAGE> 101
to in the Indenture shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the offering of the Notes and (ii) except
as otherwise provided, the amortization of any amounts required or permitted to
be amortized by Accounting Principles Board Opinion Nos. 16 and 17, as
subsequently modified or amended, or the write-off of such amounts.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations, (vi) all Indebtedness of other Persons secured by a Lien on
any asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time as determined
in conformity with GAAP, (B) that money borrowed and set aside at the time of
the Incurrence of any Indebtedness in order to prefund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness" and (C)
that Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i)
the aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters prior to such Transaction Date for which reports have been filed with
the Commission pursuant to the "Commission Reports and Reports to Holders"
covenant (the "Four Quarter Period") to (ii) the aggregate Consolidated Interest
Expense during such Four Quarter Period. In making the foregoing calculation,
(A) pro forma effect shall be given to any Indebtedness
99
<PAGE> 102
Incurred or repaid during the period (the "Reference Period") commencing on the
first day of the Four Quarter Period and ending on the Transaction Date (other
than Indebtedness Incurred or repaid under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any predecessor
revolving credit or similar arrangement) in effect on the last day of such Four
Quarter Period unless any portion of such Indebtedness is projected, in the
reasonable judgment of the senior management of the Company, to remain
outstanding for a period in excess of 12 months from the date of the Incurrence
thereof), in each case as if such Indebtedness had been Incurred or repaid on
the first day of such Reference Period; (B) Consolidated Interest Expense
attributable to interest on any Indebtedness (whether existing or being
Incurred) computed on a pro forma basis and bearing a floating interest rate
shall be computed as if the rate in effect on the Transaction Date (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months or, if
shorter, at least equal to the remaining term of such Indebtedness) had been the
applicable rate for the entire period; (C) pro forma effect shall be given to
Asset Dispositions and Asset Acquisitions (including giving pro forma effect to
the application of proceeds of any Asset Disposition) that occur during such
Reference Period as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; and (D) pro forma effect shall be given
to asset dispositions and asset acquisitions (including giving pro forma effect
to the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (C) or (D) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business of
the Person, that is acquired or disposed for which financial information is
available, as determined by the Company.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall be deemed not to exceed the aggregate amount of
Investments previously made in such Person valued at the time such Investments
were made less the net reduction of such Investments. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the assets (net of liabilities (other
than liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
100
<PAGE> 103
"Investment Grade Securities" means debt securities or debt instruments
with (A) a final maturity no later than one year after date of acquisition
thereof and (B) a rating of BBB+ or higher by S&P or Baa1 or higher by Moody's
or the equivalent of such rating by such rating organization, or, if no rating
of S&P or Moody's then exists, the equivalent of such rating by any other
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) designated by the Company, but excluding any debt
securities or instruments constituting loans or advances among the Company and
its Subsidiaries.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"MicroSun" means Microsun Technologies, Inc., an Ohio corporation.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations have recourse to
the Company or any Restricted Subsidiary) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations have recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee for delivery to each
Holder stating: (i) the covenant pursuant to which the offer is being made and
that all Notes validly tendered will be accepted for payment on a pro rata
basis; (ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the purchase price, any Note accepted for payment
pursuant to the Offer to Purchase shall cease to accrue interest on and after
the Payment Date; (v) that Holders electing to have a Note purchased pursuant to
the Offer to Purchase will be required to surrender the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side of
the Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Payment Date; (vi) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, facsimile transmission or
letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
to the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples
101
<PAGE> 104
thereof. On the Payment Date, the Company shall (i) accept for payment on a pro
rata basis (with any rounding determined by the Company to be reasonable) Notes
or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount of $1,000
or integral multiples thereof (with any rounding determined by the Company to be
reasonable). The Company will publicly announce the results of an Offer to
Purchase as soon as practicable after the Payment Date. The Trustee shall act as
the Paying Agent for an Offer to Purchase. The Company will comply with Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable, in the event
that the Company is required to repurchase Notes pursuant to an Offer to
Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
satisfaction of judgments; (v) an Investment in any Person consisting solely of
the transfer to such Person of an Investment in another Person that is not a
Restricted Subsidiary; (vi) Investment Grade Securities; and (vii) Interest Rate
Agreements and Currency Agreements designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in interest rates or foreign
currency exchange rates; (viii) Investments, not to exceed $30 million at any
one time outstanding (and for purposes of this clause (viii) an Investment shall
be deemed to be outstanding in the amount of the excess (but not, in any event,
less than zero) of the amount of such Investment on the date or dates made, less
the return of capital to the Company and its Restricted Subsidiaries with
respect to such Investment); and (ix) Investments, to the extent the
consideration therefor consists of Capital Stock (other than Disqualified Stock)
of the Company or net cash proceeds from the sale of such Capital Stock, if such
Capital Stock was issued or sold within 90 days of the making of such
Investment.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of improvement or construction) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or to
refinance Indebtedness previously so secured, (b) the principal amount of the
Indebtedness
102
<PAGE> 105
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired; (xii) Liens in favor of the Company
or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business, in each case, securing Indebtedness
under Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or arrangements
designed solely to protect the Company or any of its Restricted Subsidiaries
from fluctuations in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business in accordance
with the past practices of the Company and its Restricted Subsidiaries prior to
the Closing Date; and (xviii) Liens on or sales of receivables.
"Public Equity Offering" means an underwritten public offering of Common
Stock by the Company pursuant to an effective registration statement under the
Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year, as determined by the Company.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as
103
<PAGE> 106
defined in Rule 436 under the Securities Act) or any money-market fund sponsored
by a registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than 270 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's or "A-
1" (or higher) according to S&P, and (v) securities with maturities of one year
or less from the date of acquisition issued or fully and unconditionally
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least BBB+ by S&P or Baa1 by Moody's and (vi) time deposit accounts,
certificates of deposits and money market deposits aggregating no more than $10
million at any one time outstanding, issued by one of the five largest (based on
assets on the most recent December 31 for which data is available) banks
organized under the laws of the country in which the Foreign Subsidiary marking
the deposit referred to above is organized, if such bank is not under material
government intervention.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services, in each case required to be paid within one year.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (x) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (y) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind having the power to vote for the election of directors, managers or
other voting members of the governing body of such Person (not including,
however, any Capital Stock having such right to vote only upon the happening of
certain events or under limited circumstances).
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
104
<PAGE> 107
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on March 18, 1998); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Interest Coverage Ratio would be
greater than 2.5:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company under the Credit Facility or any other agreement in
an aggregate principal amount outstanding at any time not to exceed $100
million, less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by an unsubordinated promissory
note or (B) to any Restricted Subsidiary; provided that any event which results
in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to the Company or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness (other than Indebtedness
Incurred under clause (i), (ii), (iv), (vi), (vii), (viii), (ix), (x) or (xii)
of this paragraph) and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the Notes shall only be permitted under
this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (x) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (y) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness
of the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness of the Company, not to exceed $15 million in any fiscal year
of the Company, Incurred to finance capital expenditures; (viii) Indebtedness of
the Company in an aggregate principal amount outstanding at any time not to
105
<PAGE> 108
exceed the sum of 80% of Eligible Accounts Receivable and 60% of Eligible
Inventory; (ix) Indebtedness of Foreign Subsidiaries in an aggregate principal
amount outstanding at any time not to exceed the greater of (A) $20 million and
(B) one-third of Consolidated EBITDA for the then most recent four fiscal
quarters covered by filings made pursuant to the "Commission Reports and Reports
to Holders" covenant; (x) Indebtedness of Restricted Subsidiaries, not to exceed
$10.5 million, secured by real property of such Restricted Subsidiaries; (xi)
Acquired Indebtedness, provided that, pro forma for the transactions in which
such Acquired Indebtedness is Incurred, the Interest Coverage Ratio would be no
less than 2.5:1; and (xi) Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (xi) above) in an aggregate
principal amount outstanding at any time not to exceed $70 million, less any
amount of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (i) Indebtedness Incurred under the
Credit Facility on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (ii) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (iii) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (i) of the preceding
sentence), the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) except in the case of an
Investment, the Company could not Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in cash,
to be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution; provided that
Restricted Payments, to the extent made solely in Capital Stock other than
Disqualified Stock, shall for purposes of this clause (C) be deemed to be in an
amount equal to zero) made after the Closing Date shall exceed the sum of (1)
50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of the amount of such
loss) (determined by excluding income resulting from transfers of assets by the
Company or a Restricted
106
<PAGE> 109
Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first day of the
fiscal quarter immediately following the Closing Date and ending on the last day
of the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus (2) the aggregate Net
Cash Proceeds received by the Company after the Closing Date from the issuance
and sale permitted by the Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of the
Company for cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes) plus (3) an amount equal to
the net reduction in outstanding Investments (other than reductions in
outstanding Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary. The amount of any Investment "outstanding" at
any time shall be deemed to be equal to the amount of such Investment on the
date made, less the return of capital to the Company and its Restricted
Subsidiaries with respect to such Investment (up to the amount of such
Investment on the date made). Notwithstanding anything herein to the contrary,
Investments made through the transfer of equipment shall be valued at the book
value at the time of Investment with respect to such equipment.
(b) The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof if,
at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment to
the Notes including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii)
the repurchase, redemption or other acquisition of Capital Stock of the Company
or an Unrestricted Subsidiary (or options, warrants or other rights to acquire
such Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Disqualified Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of, a substantially concurrent offering of, shares of the
Capital Stock (other than Disqualified Stock) of the Company (or options,
warrants or other rights to acquire such Capital Stock); (v) payments or
distributions, to dissenting stockholders pursuant to applicable law, pursuant
to or in connection with a consolidation, merger or transfer of assets that
complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; or (vi) dividends consisting of rights to purchase Common
Stock, or consisting of Common Stock, of MicroSun; provided that the balance
sheet value of MicroSun's assets, net of intangible assets, does not exceed $10
million as of the date of such dividend; provided that, except in the case of
clauses (i) and (iii), no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
therein.
(c) Each Restricted Payment permitted pursuant to paragraph (b) of this
"Limitation on Restricted Payments" covenant (other than the Restricted Payment
referred to in clause (ii) thereof, an exchange of Capital Stock for Capital
Stock or Indebtedness referred to in clause (iii) or (iv) thereof and an
Investment referred to in clause (vi) thereof), and the Net Cash Proceeds from
any issuance of Capital Stock referred to in clauses (iii) and (iv) thereof,
shall be included in calculating whether the conditions of clause (C) of the
first paragraph of this "Limitation on Restricted Payments" covenant have been
met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of the Company are used for the
redemption,
107
<PAGE> 110
repurchase or other acquisition of the Notes, or Indebtedness that is pari passu
with the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Facility, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any material respect to the
Holders than those encumbrances or restrictions that are then in effect and that
are being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted Subsidiary,
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person or
the property or assets of any Person other than such Person or the property or
assets of such Person so acquired; (iv) in the case of clause (iv) of the first
paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi)
encumbrances or restrictions relating solely to Foreign Subsidiaries that
support Indebtedness Incurred under clause (ix) of the second paragraph of
paragraph (a) of the "Limitation on Indebtedness" covenant. Nothing contained in
this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the "Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; or (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale (iv) the issuance or sale of Common Stock of any
Restricted Subsidiaries if the proceeds thereof are applied in accordance with
the "Limitation on Asset Sales" covenant.
108
<PAGE> 111
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary (x) that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of the Indebtedness Incurred under the Credit Facility. If the
Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
other Restricted Subsidiary's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder other than an entity that is an Affiliate solely by reason of being a
Subsidiary of the Company) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized firm having
expertise in the specific area which is the subject of such determination
stating that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
the Company and any of its Wholly Owned Restricted Subsidiaries or solely
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
and customary regular fees to directors of the Company who are not employees of
the Company; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; (v) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant; or (vi) any issuance of securities
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans or incentive plans approved by the Board of Directors.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (ii) through
(v) of this paragraph, the aggregate amount of which (until after the Stated
Maturity of the Notes) exceeds $1 million in value, must be approved or
determined to be fair in the manner provided for in clause (i)(A) or (B) above.
109
<PAGE> 112
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date, including Liens securing obligations under the Credit Facility;
(ii) Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to
secure Indebtedness owing to the Company or such other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under the second paragraph of the
"Limitation on Indebtedness" covenant; provided that such Liens do not extend to
or cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets securing the Indebtedness being refinanced;
(v) Liens on any property or assets of a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted under the "Limitation on
Indebtedness" covenant; (vi) Liens with respect to real property to secure
Indebtedness Incurred pursuant to clause (x) of the second paragraph under
clause (a) of the "Limitation on Indebtedness" covenant; or (vii) Permitted
Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net
Tangible Assets (determined as of the date closest to the commencement of such
12-month period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the Commission pursuant to the "Commission
Reports and Reports to Holders" covenant), then the Company shall or shall cause
the relevant Restricted Subsidiary to (i) within twelve months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of
110
<PAGE> 113
its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive agreement committing
to so invest within 12 months after the date of such agreement), in property or
assets (other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
Notwithstanding the foregoing, to the extent that any or all of the Net
Cash Proceeds of any Asset Sale of assets based outside the United States are
prohibited or delayed by applicable local law from being repatriated to the
United States and such Net Cash Proceeds are not actually applied in accordance
with the foregoing paragraphs, the Company shall not be required to apply the
portion of such Net Cash Proceeds so affected but may permit the applicable
Restricted Subsidiaries to retain such portion of the Net Cash Proceeds so long,
but only so long, as the applicable local law will not permit repatriation to
the United States (the Company hereby agreeing to cause the applicable
Restricted Subsidiary to promptly take all actions required by the applicable
local law to permit such repatriation) and once such repatriation of any such
affected Net Cash Proceeds is permitted under the applicable local law, such
repatriation will be immediately effected and such repatriated Net Cash Proceeds
will be applied in the manner set forth in this covenant as if the Asset Sale
had occurred on such date; provided that to the extent that the Company has
determined in good faith that repatriation of any or all of the Net Cash
Proceeds of such Asset Sale would have a material adverse tax cost consequence,
the Net Cash Proceeds so affective may be retained by the applicable Restricted
Subsidiary for so long as such material adverse tax cost event would continue.
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $20 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus, in
each case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the Commission,
the Company shall file with the Commission all such reports and other
information as it would be required to file with the Commission by Sections
13(a) or 15(d) under the Securities Exchange Act of 1934 if it were subject
thereto. The Company shall supply the Trustee and each Holder or shall supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information.
111
<PAGE> 114
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
default in the performance or breach of the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the assets of the Company or the failure to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of
Notes upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement in the Indenture or
under the Notes (other than a default specified in clause (a), (b) or (c) above)
and such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Notes; (e) there occurs with respect to any issue or
issues of Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $10 million or more in the aggregate for all
such issues of all such Persons, whether such Indebtedness exists on the Closing
Date or shall thereafter be created, (I) an event of default that has caused the
holder thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness shall not have been discharged in full or
such acceleration shall not have been rescinded or annulled within 30 days of
such acceleration and/or (II) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall not
have been made, waived or extended within 30 days of such payment default; (f)
any final judgment or order (not covered by insurance) for the payment of money
in excess of $10 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $10 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 60 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the
112
<PAGE> 115
outstanding Notes by written notice to the Company and to the Trustee, may waive
all past defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Notes that have become
due solely by such declaration of acceleration, have been cured or waived and
(ii) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 120 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the
113
<PAGE> 116
Indenture; and (v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clauses
(iii) and (iv)) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; provided, however, that clauses (iii)
and (iv) above do not apply if, in the good faith determination of the Board of
Directors of the Company, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company; and provided further that any such transaction
shall not have as one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound and (D) if at such time the Notes
are listed on a national securities exchange, the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Notes will not be delisted
as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and clauses (e) and (f) under
"Events of Default" shall be deemed not to be Events of Default upon, among
other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject
114
<PAGE> 117
to federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The New Notes will be represented by a permanent global Note in definitive,
fully registered form without interest coupons (the "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC. Except as set forth below, owners of beneficial interests in a
Global Note will not be entitled to receive physical delivery of Certificated
Notes (as defined below).
115
<PAGE> 118
Ownership of beneficial interests in the Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the New Notes represented by the Global Note for all
purposes under the Indenture and the New Notes. No beneficial owner of an
interest in the Global Note will be able to transfer that interest except in
accordance with DTC's applicable procedures, in addition to those provided for
under the Indenture.
Payments of the principal of, and interest on, the Global Note will be made
to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a holder of Notes (including the presentation of New Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the New Notes, DTC will exchange the Global Note
for Certificated Notes, which it will distribute to its participants and which
may be legended as set forth under the heading "Transfer Restrictions."
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of DTC,
it is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated New Notes.
116
<PAGE> 119
DESCRIPTION OF THE OLD NOTES
The terms of the Old Notes are identical in all material respects to the
New Notes, except that (i) the Old Notes have not been registered under the
Securities Act, are subject to certain restrictions on transfer and are entitled
to certain registration rights under the Registration Rights Agreement (which
rights will terminate upon consummation of the Exchange Offer, except to the
extent that the Initial Purchaser may have certain registration rights under
limited circumstances); and (ii) the New Notes will not provide for any increase
in the interest rate thereon. In that regard, the Old Notes provide that, in the
event that the Exchange Offer is not consummated or a shelf registration
statement (the "Shelf Registration Statement") with respect to the resale of the
Old Notes is not declared effective on or prior to September 14, 1998, the
interest rate on the Old Notes will increase by 0.50% per annum following
September 14, 1998; provided, however, that if the Company requests holders of
Old Notes to provide certain information called for by the Registration Rights
Agreement for inclusion in any such Shelf Registration Statement, then Old Notes
owned by holders who do not deliver such information to the Company or who do
not provide comments on the Shelf Registration Statement when required pursuant
to the Registration Rights Agreement will not be entitled to any such increase
in the interest rate. Upon the consummation of the Exchange Offer or the
effectiveness of a Shelf Registration Statement, as the case may be, after
September 14, 1998, the interest rate on any Old Notes which remain outstanding
will be reduced, from the date of such consummation or effectiveness, as the
case may be, to 8% per annum and the Old Notes will not thereafter be entitled
to any increase in the interest rate thereon. The New Notes are not entitled to
any such increase in the interest rate thereon. In addition, the Old Notes and
the New Notes will constitute a single series of debt securities under the
Indenture. See "Description of the New Notes -- General." Accordingly, holders
of Old Notes should review the information set forth under "Risk
Factors -- Certain Consequences of a Failure to Exchange Old Notes" and
"Description of the New Notes."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States Federal income tax
considerations to holders of the New Notes who are subject to U.S. net income
tax with respect to the New Notes ("U.S. persons") and who will hold the New
Notes as capital assets. There can be no assurance that the U.S. Internal
Revenue Service (the "IRS") will take a similar view of the purchase, ownership
or disposition of the New Notes. This discussion is based upon the provisions of
the Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions now in effect, all of which are subject to change. It does
not include any description of the tax laws of any state, local or foreign
governments or any estate or gift tax considerations that may be applicable to
the New Notes or holders thereof. It does not discuss all aspects of U.S.
Federal income taxation that may be relevant to a particular investor in light
of his particular investment circumstances or to certain types of investors
subject to special treatment under the U.S. Federal income tax laws (for
example, dealers in securities or currencies, S corporations, life insurance
companies, tax-exempt organizations, taxpayers subject to the alternative
minimum tax and non-U.S. persons) and also does not discuss New Notes held as a
hedge against currency risks or as part of a straddle with other investments or
as part of a "synthetic security" or other integrated investment (including a
"conversion transaction") comprised of a New Note and one or more other
investments, or situations in which the functional currency of the holders is
not the U.S. dollar.
Holders of Old Notes contemplating acceptance of the Exchange Offer should
consult their own tax advisors with respect to their particular circumstances
and with respect to the effects of state, local or foreign tax laws to which
they may be subject.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes should not be a taxable event to
holders for U.S. Federal income tax purposes. The exchange of Old Notes for the
New Notes pursuant to the Exchange Offer should not be treated as an "exchange"
for U.S. Federal income tax purposes because the terms of the New Notes should
not be considered to differ significantly from the terms of the Old Notes and
because the exchange is occurring pursuant to the terms of the Old Notes. If,
however, the exchange of the Old Notes for the New Notes were treated as an
exchange for U.S. Federal income tax purposes, such exchange should constitute a
tax-free recapitalization for
117
<PAGE> 120
U.S. Federal income tax purposes in which a holder would not recognize gain or
loss. Accordingly, a holder should have the same adjusted basis and holding
period in the New Notes as it had in the Old Notes immediately before the
exchange.
INTEREST ON THE NOTES
A holder of a Note will be required to report as ordinary interest income
for U.S. Federal income tax purposes interest earned on the Note in accordance
with the holder's regular method of tax accounting.
DISPOSITION OF NEW NOTES
A holder's tax basis for a New Note or an Old Note generally will be the
holder's purchase price for the Old Note. Upon the sale, exchange, redemption,
retirement or other disposition of a Note, a holder will recognize gain or loss
equal to the difference (if any) between the amount realized (except for amounts
attributable to accrued but unpaid interest) and the holder's tax basis in the
Note sold, exchanged, redeemed, retired or disposed of. Such gain or loss will
be long-term capital gain or loss if the Note has been held for more than one
year and otherwise will be short-term capital gain or loss (with certain
exceptions to the characterization as capital gain if the New Note was acquired
at a market discount).
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Note and proceeds from the sale, exchange,
redemption or retirement of the Note, unless such holder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
that fact or (b) provides a correct taxpayer identification number, certifies as
to no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. A holder of a Note who
does not provide the Company with his correct taxpayer identification number may
be subject to penalties imposed by the IRS.
A holder of a Note who is not a U.S. person will generally be exempt from
backup withholding and information reporting requirements, but may be required
to comply with certification and identification procedures in order to obtain an
exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's U.S. Federal income tax liability.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in
connection with the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by
Participating Broker-Dealers during the period referred to below in connection
with resales of New Notes received in exchange for Old Notes if such Old Notes
were acquired by such Participating Broker-Dealers for their own accounts as a
result of market-making activities or other trading activities. The Company has
agreed that this Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer in connection with resales of
such New Notes for a period ending 90 days after the Expiration Date (subject to
extension under certain limited circumstances described herein) or, if earlier,
when all such New Notes have been disposed of by such Participating
Broker-Dealer. See "The Exchange Offer -- Resales of New Notes."
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. New Notes received by broker-dealers for their own
accounts in connection with the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes. Any
118
<PAGE> 121
broker-dealer that resells New Notes that were received by it for its own
account in connection with the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the validity of the Notes offered
hereby will be passed upon for the Company by Cowden, Humphrey & Sarlson Co.,
L.P.A., Cleveland, Ohio, counsel to the Company, and Brown & Wood LLP, New York,
New York, special counsel to the Company. Brown & Wood LLP will rely as to
certain matters of Ohio law upon the opinion of Cowden, Humphrey & Sarlson Co.,
L.P.A.
EXPERTS
The consolidated financial statements of Advanced Lighting Technologies,
Inc. and subsidiaries as of June 30, 1999, and for the year ended June 30, 1999
included in this Prospectus have been audited by Grant Thornton LLP, independent
auditors as stated in their report appearing herein and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing. The consolidated financial statements of Advanced Lighting
Technologies, Inc. at June 30, 1998, and for each of the two years in the period
ended June 30, 1998 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
119
<PAGE> 122
[THIS PAGE INTENTIONALLY LEFT BLANK]
120
<PAGE> 123
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANCED LIGHTING TECHNOLOGIES, INC.
Audited Consolidated Financial Statements:
Report of Grant Thorton LLP, Independent Auditors......... F-2
Report of Ernst & Young LLP, Independent Auditors......... F-3
Consolidated Balance Sheets as of June 30, 1999 and
1998................................................... F-4
Consolidated Statements of Operations for the Years Ended
June 30, 1999, 1998 and 1997........................... F-5
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 1999, 1998 and 1997............... F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997........................... F-7
Notes to Consolidated Financial Statements................ F-8
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31,
1999 (Unaudited) and June 30, 1999..................... F-30
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended December 31,
1999 and 1998 and the Six Months ended December 31,
1999 and 1998.......................................... F-31
Condensed Statement of Consolidated Shareholders' Equity
(Unaudited) for the Six Months Ended December 31,
1999................................................... F-32
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended December 31, 1999
and 1998............................................... F-33
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ F-34
</TABLE>
F-1
<PAGE> 124
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
ADVANCED LIGHTING TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of Advanced
Lighting Technologies, Inc. as of June 30, 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows, for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Lighting Technologies, Inc. as of June 30, 1999, and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
September 24, 1999 (except for Note U,
as to which the date is September 28, 1999
and Note L, as to which the date is
October 11, 1999)
F-2
<PAGE> 125
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
ADVANCED LIGHTING TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheet of Advanced
Lighting Technologies, Inc. as of June 30, 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows, for each of the
two years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Advanced Lighting Technologies, Inc. as of June 30, 1998 and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1998, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
September 28, 1998, except for the
sixth paragraph of Note C, as to
which the date is March 15, 1999 and
except for the information related to
the year ended June 30, 1998 included
in Note L, as to which the date is
April 24, 2000
F-3
<PAGE> 126
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,830 $ 22,167
Short-term investments.................................... 350 350
Trade receivables, less allowances of $1,257 and $475..... 25,485 41,188
Receivables from related parties.......................... 48 1,034
Inventories:
Finished goods......................................... 24,275 30,161
Raw materials and work-in-process...................... 16,501 16,491
-------- --------
40,776 46,652
Prepaid expenses.......................................... 2,354 3,285
Deferred taxes............................................ -- 2,192
-------- --------
Total current assets........................................ 72,843 116,868
Property, plant and equipment:
Land and buildings........................................ 38,364 32,090
Production machinery and equipment........................ 53,508 53,337
Other equipment........................................... 6,413 --
Furniture and fixtures.................................... 20,426 18,568
-------- --------
118,711 103,995
Less accumulated depreciation............................. 16,263 12,087
-------- --------
102,448 91,908
Deferred taxes.............................................. -- 3,584
Receivables from related parties............................ 5,048 3,157
Investments in affiliates................................... 13,475 20,591
Other assets................................................ 6,586 9,708
Intangible assets........................................... 32,695 34,377
Excess of cost over net assets of businesses acquired,
net....................................................... 51,411 49,241
-------- --------
$284,506 $329,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 8,543 $ 1,975
Accounts payable.......................................... 23,310 15,523
Payables to related parties............................... 1,126 618
Employee-related liabilities.............................. 3,781 3,454
Accrued income and other taxes............................ 904 277
Other accrued expenses.................................... 16,550 15,169
-------- --------
Total current liabilities................................... 54,214 37,016
Long-term debt.............................................. 152,496 117,756
Other liabilities........................................... 355 766
Deferred taxes.............................................. -- 3,059
Shareholders' equity
Preferred stock, $.001 par value, 1,000 shares authorized,
no shares issued....................................... -- --
Common stock, $.001 par value, 80,000 shares authorized,
20,278 shares issued and outstanding as of June 30,
1999 and 20,189 shares issued and outstanding as of
June 30, 1998.......................................... 20 20
Paid-in-capital........................................... 190,654 189,828
Accumulated other comprehensive income (loss)............. (949) --
Loan receivable from officer.............................. (9,520) --
Retained earnings (deficit)............................... (102,764) (19,011)
-------- --------
77,441 170,837
-------- --------
$284,506 $329,434
======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 127
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales................................................. $193,203 $168,349 $86,490
Costs and expenses:
Cost of sales........................................... 135,773 101,697 45,738
Marketing and selling................................... 45,035 29,990 15,832
Research and development................................ 17,680 10,843 5,804
General and administrative.............................. 21,192 12,208 7,184
Fiber optic joint venture formation costs............... -- 212 286
Purchased research and development...................... -- 18,220 --
Special charges......................................... 31,107 15,918 --
Settlement of claim..................................... -- -- 771
Amortization of intangible assets....................... 2,789 1,691 406
-------- -------- -------
Income (loss) from operations............................. (60,373) (22,430) 10,469
Other income (expense):
Interest expense........................................ (13,889) (3,818) (1,513)
Interest income......................................... 1,122 1,430 845
Loss from equity investments............................ (6,318) (501) --
-------- -------- -------
Income (loss) from continuing operations before income
taxes, extraordinary charge and cumulative effect of
accounting change....................................... (79,458) (25,319) 9,801
Income taxes.............................................. 2,281 (1,311) 2,697
-------- -------- -------
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of accounting
change.................................................. (81,739) (24,008) 7,104
Recontinuance of previously discontinued operations....... 1,331 (1,331) --
-------- -------- -------
Income (loss) before extraordinary charge and cumulative
effect of accounting change............................. (80,408) (25,339) 7,104
Extraordinary charge from early extinguishment of debt,
net of income tax benefits.............................. (902) (604) --
Cumulative effect of change in accounting for start-up
costs................................................... (2,443) -- --
-------- -------- -------
Net income (loss)......................................... $(83,753) $(25,943) $ 7,104
======== ======== =======
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations................ $ (4.04) $ (1.32) $ .54
Recontinuance of previously discontinued operations..... .07 (.07) --
Extraordinary charge.................................... (.05) (.04) --
Cumulative effect of accounting change.................. (.12) -- --
-------- -------- -------
Earnings (loss) per share -- Basic........................ $ (4.14) $ (1.43) $ .54
======== ======== =======
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations................ $ (4.04) $ (1.32) $ .52
Recontinuance of previously discontinued operations..... .07 (.07) --
Extraordinary charge.................................... (.05) (.04) --
Cumulative effect of accounting change.................. (.12) -- --
-------- -------- -------
Earnings (loss) per share -- Diluted...................... $ (4.14) $ (1.43) $ .52
======== ======== =======
Weighted average shares outstanding:
Basic................................................... 20,232 18,195 13,269
======== ======== =======
Diluted................................................. 20,232 18,195 13,558
======== ======== =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 128
ADVANCED LIGHTING TECHNOLOGIES, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED LOAN
COMMON STOCK COMPREHENSIVE OTHER RECEIVABLE RETAINED
------------------- PAID-IN INCOME COMPREHENSIVE FROM EARNINGS
SHARES PAR VALUE CAPITAL (LOSS) INCOME (LOSS) OFFICER (DEFICIT) TOTAL
------- --------- -------- ------------- ------------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1996... 10,845 $11 $ 26,755 $ -- $ -- $ -- $ (172) $26,594
Net income................ -- -- -- -- -- 7,104 7,104
Net proceeds from public
offering of common
shares.................. 2,452 2 30,089 30,091
Issuance of shares in
connection with
purchases of
businesses.............. 88 -- 1,537 -- -- -- -- 1,537
Stock options exercised... 50 -- 706 -- -- -- -- 706
------ --- -------- -------- ----- ------- --------- -------
BALANCE AT JUNE 30,
1997.................... 13,435 13 59,087 -- -- -- 6,932 66,032
Net loss.................. -- -- -- -- -- (25,943) (25,943)
Net proceeds from public
offering of common
shares.................. 3,000 3 69,317 -- -- -- -- 69,320
Issuance of shares in
connection with
purchases of
businesses.............. 3,646 4 59,655 -- -- -- -- 59,659
Stock options exercised... 98 -- 1,570 -- -- -- -- 1,570
Stock purchases by
employees............... 10 -- 199 -- -- -- -- 199
------ --- -------- -------- ----- ------- --------- -------
BALANCE AT JUNE 30,
1998.................... 20,189 20 189,828 -- -- -- (19,011) 170,837
Net loss.................. (83,753) (83,753) (83,753)
Loan to officer........... (9,520) (9,520)
Issuance of shares in
connection with the
purchase of a
business................ 2 -- 29 -- -- -- -- 29
Stock options exercised... 18 -- 279 -- -- -- -- 279
Stock issued pursuant to
employee benefit plan... 41 -- 312 -- -- -- -- 312
Stock purchases by
employees............... 28 -- 206 -- -- -- -- 206
Other comprehensive income
(loss):
Foreign currency
translation
adjustment............ (949) (949)
--------
Other comprehensive income
(loss).................. (949) (949)
------ --- -------- -------- ----- ------- --------- -------
Comprehensive income
(loss).................. $(84,702)
========
BALANCE AT JUNE 30,
1999.................... 20,278 $20 $190,654 $(949) $(9,520) $(102,764) $77,441
====== === ======== ===== ======= ========= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 129
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $(83,753) $(25,943) $ 7,104
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation.......................................... 6,387 3,623 2,182
Amortization.......................................... 2,789 1,691 397
Provision for doubtful accounts....................... 882 165 28
Special charges and terminated equipment contracts.... 40,365 17,984 --
Deferred income taxes................................. 2,836 (2,294) 419
Loss from equity investments.......................... 6,318 501 --
Purchased research and development.................... -- 18,220 --
Extraordinary item.................................... 902 604 --
Cumulative effect of change in accounting principle... 2,443 -- --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Trade receivables................................. 255 (10,694) (10,890)
Inventories....................................... 4,138 (9,769) (12,174)
Prepaids and other assets......................... (1,841) (6,783) (2,995)
Accounts payable and accrued expenses............. 704 (1,136) 10,373
Other............................................. (1,737) 303 1,373
-------- -------- -------
Net cash used in operating activities........... (19,312) (13,528) (4,183)
INVESTING ACTIVITIES
Capital expenditures...................................... (22,130) (18,072) (16,015)
(Purchase) sale of short-term investments, net............ -- 3,725 (4,075)
Purchases of businesses................................... (4,390) (50,706) (14,960)
Investments in affiliates................................. (2,394) (5,777) (2,827)
Use of net proceeds from public offering:
Capital expenditures.................................... -- (14,507) (2,080)
Investments in affiliates............................... -- (6,780) (4,101)
-------- -------- -------
Net cash used in investing activities........... (28,914) (92,117) (44,058)
FINANCING ACTIVITIES
Proceeds from revolving credit facility................... 216,977 319,786 92,001
Payments of revolving credit facility..................... (211,521) (312,213) (60,822)
Net proceeds from long-term debt.......................... 36,622 96,790 16,775
Payments of long-term debt and capital leases............. (3,986) (18,838) (8,159)
Issuance of common stock.................................. 797 1,769 706
Loan to officer........................................... (9,000) -- --
Net proceeds from public offering......................... -- 69,320 30,091
Use of net proceeds from public offering:
Payment of long-term debt and revolving credit
facility.............................................. -- (33,000) (16,800)
Payment of trade payables............................... -- -- (3,035)
-------- -------- -------
Net cash provided by financing activities....... 29,889 123,614 50,757
-------- -------- -------
Increase (Decrease) in cash and cash equivalents............ (18,337) 17,969 2,516
Cash and cash equivalents, beginning of year................ 22,167 4,198 1,682
-------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 3,830 $ 22,167 $ 4,198
======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 12,241 $ 2,128 $ 1,375
Income taxes paid (refunds received), net................. (1,660) 2,829 81
Capitalized interest...................................... 645 1,118 455
Noncash transactions:
Equipment acquired through capital leases............... 77 376 1,683
Property acquired by assuming mortgage.................. -- 4,807 --
Stock issued for purchases of businesses................ 29 59,659 1,537
Detail of acquisitions:
Assets acquired......................................... $ 10,143 $138,799 $23,033
Liabilities assumed..................................... 5,659 26,295 6,142
Stock issued for purchase of business................... 29 59,659 1,537
-------- -------- -------
Cash paid............................................... 4,455 52,845 15,354
Less cash acquired...................................... 65 2,139 394
-------- -------- -------
Net cash paid for acquisitions.......................... $ 4,390 $ 50,706 $14,960
======== ======== =======
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 130
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A. ORGANIZATION
Advanced Lighting Technologies, Inc. (the "Company") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, which include materials, system components, systems, and production
equipment.
The Company was formed on May 19, 1995 for the purpose of acquiring
ownership, primarily by merger (the "Combination"), of 17 affiliated operating
corporations that were previously under common ownership and management (the
"Predecessors"), each one of which is engaged in an aspect of the metal halide
lighting business. More specifically, the Combination was principally effected
through a series of nonmonetary mergers or stock exchanges in which the
shareholders of the former companies received shares of the Company. The
Combination has been accounted for as a reorganization of entities under common
control. Historical financial statements of each of the Predecessors for periods
prior to the Combination have been combined. Certain adjustments have been
recorded primarily to eliminate intercompany transactions that would have been
required had the Company been a consolidated entity during such periods.
B. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, after elimination of all significant
intercompany accounts and transactions and related revenues and expenses.
Investments in 50% or less owned companies and joint ventures over which the
Company has the ability to exercise significant influence are accounted for
under the equity method. All other investments and investments of less than 20%
are accounted for under the cost method.
Accounting Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
consolidated financial statements and notes. Actual results could differ from
those estimates.
Translation of Foreign Currency
The functional currency of consolidated subsidiaries outside of the United
States is the local currency. All assets and liabilities of foreign subsidiaries
are translated into United States dollars at year-end exchange rates while
revenues and expenses are translated at weighted-average exchange rates in
effect during the year.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Short-term Investments
Short-term investments are recorded at fair market value, which
approximates cost.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risks consist primarily of temporary cash and cash equivalents,
short-term investments and trade receivables. The Company invests its cash
primarily in a high quality institutional money-market portfolio and high
quality securities and limits the amount of credit exposure to any one financial
institution.
F-8
<PAGE> 131
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company provides credit in the normal course of business, primarily to
major manufacturers and distributors in the lighting industry and, generally,
collateral or other security is not required. The Company conducts ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses which, when realized, have been within the range of management's
expectations. Credit risk on trade receivables is minimized as a result of the
large and diverse nature of the Company's worldwide customer base.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The cost of
self-constructed assets include related materials, labor, overhead and interest.
Repair and maintenance costs are expensed as incurred.
Depreciation is computed for financial reporting purposes by the
straight-line method based on the estimated useful lives of the assets, both
those owned and under capital lease, as follows: buildings, 15 to 40 years;
machinery and equipment, 5 to 25 years; furniture and fixtures, 5 to 15 years;
and, leasehold improvements, the lease periods.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following lives:
<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 the undiscounted cash flows are not
sufficient to recover the assets' carrying amount, an impairment loss would be
charged to expense in the period identified. During the fiscal year ended June
30, 1998, an impairment loss of $9,354 was charged to expense and classified as
"Special Charges", which are further discussed at Note K. Accumulated
amortization was $4,135 and $2,524 at June 30, 1999 and 1998, respectively.
Revenue Recognition
Revenues from the sale of metal halide materials, system components (lamps,
power supplies, system controls, fiber optic cable) and systems are recognized
when products are shipped and revenues on production equipment contracts are
recognized under the percentage of completion method.
Advertising Expense
External costs incurred in providing media advertising and promoting
products are expensed the first time the advertising or promotion takes place.
Research and Development
Research and development costs, primarily the development of new products
and modifications of existing products, are charged to expense as incurred.
F-9
<PAGE> 132
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock Compensation Arrangements
In accordance with Statement of Financial Accounting Standards ("FAS") No.
123, "Accounting and Disclosure of Stock-Based Compensation," the Company
accounts for stock compensation arrangements using the intrinsic value based
method in APB Opinion No. 25 "Accounting for Stock Issued to Employees," and
discloses the effect on net income (loss) and earnings (loss) per share of the
fair value based method in FAS No. 123.
Accounting Change -- Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs. The SOP requires
that costs related to start-up activities (defined as those one-time activities
related to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing facility,
commencing some new operation and organizing a new entity) be expensed as
incurred and is effective for fiscal years beginning after December 31, 1998.
The Company has elected to adopt the provisions of this SOP in fiscal year 1999,
the effect of which ($2,443 or $.12 per diluted common share) is reflected as a
cumulative effect of change in accounting principle.
New Accounting Standards
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income" and FAS No. 131
"Disclosures about Segments of an Enterprise and Related Information."
The Company has not yet adopted FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires that all derivatives, such
as interest rate exchange agreements (swaps), be recognized on the balance sheet
at fair value. Derivatives which are not hedges must be adjusted to fair value
through the results of operations. Derivatives determined to be hedges will be
adjusted to fair value through either the results of operations or other
comprehensive income, depending on the nature of the hedge. The Company is
required to adopt FAS No. 133, as subsequently amended by FAS No. 137, on July
1, 2000. The impact, if any, on net income, comprehensive income and financial
position will depend on the amount, timing and nature of any agreements entered
into by the Company.
Financial Statement Presentation Changes
Certain amounts for prior years have been reclassified to conform to the
current year reporting presentation.
C. ACQUISITIONS
During fiscal 1999, 1998 and 1997, the Company completed the following
business combinations, all of which were accounted for by the purchase method
and, accordingly, results of operations for the acquired businesses have been
included in the consolidated statement of operations from their respective dates
of acquisition. Assets acquired and liabilities assumed have been recorded at
fair value based on appraisals and the best estimates available.
On September 15, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting Europe, Srl. ("RLE"), located in Florence, Italy.
RLE assembles and directly markets, in Europe and the Middle East,
high-intensity discharge ("HID") lighting systems, with a strong focus on metal
halide installations, for commercial, industrial, outdoor and related lighting
applications. The total purchase price consisted of $930 in
F-10
<PAGE> 133
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
cash. The purchase price resulted in an excess of cost over net assets acquired
of $1,329, which is being amortized over 20 years.
On August 31, 1998, the Company acquired all the assets and liabilities of
Venture Lighting New Zealand ("VLNZ"), located in Auckland, New Zealand. VLNZ
was the exclusive distributor of the Company's products in New Zealand. The
total purchase price of $254 consisted of $225 in cash and 2,000 shares of the
Company's Common Stock (valued at $29). The purchase price resulted in an excess
of cost over net assets acquired of $562, which is being amortized over 20
years.
On July 8, 1998, the Company acquired all of the capital stock outstanding
of Kramer Lighting, Inc. ("Kramer"), located in Middleton, Rhode Island, and
purchased the land and building of Kramer from an affiliate of Kramer. Kramer
manufactures and directly markets HID lighting systems, with a strong focus on
metal halide installations, for commercial, industrial, outdoor, and related
lighting applications. The total purchase price consisted of $2,612 in cash. The
purchase price resulted in an excess of cost over net assets acquired of $2,466,
which is being amortized over 25 years.
On January 2, 1998, the Company acquired all of the capital stock
outstanding of Ruud Lighting, Inc. ("Ruud"), located in Racine, Wisconsin. Ruud
manufactures and directly markets HID lighting systems, with a strong focus on
metal halide installations, for commercial, industrial, outdoor, and related
lighting applications. The purchase price of $85,450 consisted of $35,500 in
cash and three million shares of the Company's Common Stock (valued at $49,950).
The excess of the purchase price over the net tangible assets acquired was
allocated to various intangible assets such as trade name ($13,013), customer
service infrastructure ($16,915) and excess of cost over net assets acquired
($46,690), all of which are being amortized over 40 years.
During 1999, the Company received a comment letter from the staff of the
Securities and Exchange Commission ("SEC") related to the Company's Form 10-K
for the year ended June 30, 1998. In response to the view of the SEC staff
related to the valuation of the three million shares of restricted common stock
issued in connection with the acquisition of Ruud Lighting, Inc., the value of
the shares was restated and increased to $49,950, which resulted in an increase
in the excess of cost over net assets of businesses acquired of $16,928. The
effect of the restatement on the June 30, 1998 financial statements follows:
<TABLE>
<CAPTION>
AS RESTATED AS PREVIOUSLY REPORTED
----------- ----------------------
<S> <C> <C>
Balance Sheet
Excess of cost over net assets of business acquired,
net.................................................... $ 49,241 $ 32,524
Paid-in-capital........................................... 189,828 172,900
Retained earnings (deficit)............................... (19,011) (18,800)
Statement of Operations
Amortization of intangible assets......................... $ 1,665 $ 1,454
Loss before extraordinary charge.......................... 25,339 25,128
Net loss.................................................. 25,943 25,732
Per share loss -- basic and diluted
Before extraordinary charge............................ 1.39 1.38
Net loss............................................... 1.43 1.41
</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 of $24,100 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
F-11
<PAGE> 134
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
($3,840). Intangibles consist of trade names and assembled workforce, and are
amortized over 10 years. Purchased in-process R&D includes the value of products
in the development stage and not considered to have reached technological
feasibility and, in accordance with generally accepted accounting principles,
was capitalized but immediately written-off subsequent to the acquisition of
DSI. The in-process R&D write-off reduced earnings per share by $1.00 in fiscal
1998.
On January 31, 1998, the Company acquired the remaining 50% partnership
interest (the Company acquired the first 50% as part of its acquisition of Ruud
Lighting) in Ruud Lighting Australia Pty Ltd. ("RLA"), the exclusive distributor
of the Ruud Lighting's products in Australia, for a purchase price of $190 which
consisted of $82 in cash and 5,292 shares of the Company's Common Stock (valued
at $108). The purchase resulted in an excess of cost over net assets acquired of
$338, which is being amortized over 20 years.
On June 2, 1997, the Company purchased for approximately $8,500, the system
component manufacturing and operating assets of W. J. Parry & Co. (Nottingham)
Ltd. ("Parry"), a manufacturer and marketer of magnetic power supplies for HID
lighting systems, based in the United Kingdom. The purchase price resulted in an
excess of cost over net assets acquired of $1,121. The remaining unamortized
excess of cost over net assets acquired was written off due to their impairment
in fiscal 1998 and are recorded as part of the special charges discussed at Note
K.
On February 11, 1997, the Company acquired the outstanding shares of
Ballastronix, Inc., a company focused on designing, manufacturing and marketing
of electromagnetic power supplies for metal halide lighting systems. The
purchase price of $6,073 consisted of $5,511 in cash and 38,024 shares of the
Company's Common Stock (valued at $562). The purchase price resulted in an
excess of cost over net assets acquired of $2,018. In fiscal 1998, the
unamortized excess of cost over net assets acquired was determined to be
impaired and accordingly, was included as a component of the special charges
discussed in Note K.
On January 31, 1997, the Company completed the purchase of certain assets
of Web Design Associates, Inc., a company engaged in consumer product design and
development for approximately $600 in cash. The purchase price resulted in an
excess of cost over net assets acquired of $526, which is being amortized over
15 years.
During December 1996, the Company acquired all the assets (and assumed
certain liabilities) of Cable Lite Corporation in exchange for 50,000 shares of
the Company's Common Stock (valued at $975), with up to an additional 50,000
shares of Common Stock contingently issuable if the per share market price of
the Company's stock was less than $30.00 during the month of June 1998. Based on
the June 1998 stock price, an additional 5,933 shares were issued under the
terms of the purchase agreement. Advanced Cable Lite Corporation designs,
manufactures and sells fiber optic and fiber optic lighting systems. The Company
contributed Advanced Cable Lite Corporation to the Unison Fiber Optics Lighting
Systems LLC, a joint venture with Rohm and Haas Company which is described
further in Note D.
D. FIBER OPTICS JOINT VENTURE
On December 31, 1997, the Company and Rohm and Haas Company ("Rohm and
Haas") completed a series of agreements that resulted in the formation of Unison
Fiber Optics Lighting Systems LLC ("Unison"), a joint venture that focuses on
the manufacture and sale of fiber optic lighting systems to the worldwide
lighting market. In consideration for a 50% interest in Unison, the Company
contributed its subsidiary, Advanced Cable Lite Corporation, $2,000 in cash,
other fiber optic lighting system assets and is obligated to contribute an
additional $3,000 in cash under a note due January 1, 2000. The Company
accounted for its investment in Unison under the equity method.
F-12
<PAGE> 135
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The transaction had the following noncash impact of increasing (decreasing)
the Company's December 31, 1997 condensed consolidated balance sheet:
<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>
In connection with this joint venture, the Company incurred $212 of
formation and development costs which were charged to operations during the
first quarter of fiscal 1998 and $286 of such costs which were charged to
operations during the fourth quarter of fiscal 1997.
During the fourth quarter of fiscal 1999, the Company began an effort to
restructure its investment, considering the joint venture's financial condition,
and reviewed various strategic alternatives, including possible ownership
changes. In connection with the restructuring and review process, the Company
concluded that sufficient uncertainty existed regarding the ultimate recovery of
the investment. As a result, the Company revalued its investment to $569 and
recorded a pretax noncash write-down of $5,883, which is reflected in the
consolidated statement of operations as a loss from equity investments.
E. INVESTMENT IN FIBERSTARS, INC.
During July 1997, the Company purchased an equity interest in Fiberstars,
Inc., a marketer and distributor of fiber optic lighting products. At December
31, 1997, the Company owned approximately 669,000 common shares, or 19.6% of
Fiberstars' shares outstanding. On February 11, 1998, the Company increased its
equity ownership to approximately 1,023,000 common shares, or 29% of Fiberstars'
shares outstanding (26% as of June 30, 1999). Accordingly, the Company changed
its method of carrying the investment to equity from cost in the quarter ended
March 31, 1998.
Pursuant to its agreements with Rohm and Haas, Rohm and Haas has the right
to request that the Company divest its interest in Fiberstars. Upon such
request, the Company agrees to complete such divestiture within two years
subject to reasonable extension upon consent of Rohm and Haas.
F. INVESTMENT IN JOINT VENTURE
On April 2, 1997, the Company invested approximately $3,800 of cash in
exchange for a 30% interest in Koto Luminous Co., Ltd. ("Koto"), the Company's
sole agent in Japan. Subsequent to the date of investment, Koto, a marketer and
distributor of metal halide lamps, began doing business under the name Venture
Lighting Japan. Using the proceeds of the investment and an additional
investment by an affiliate, Venture Lighting Japan has equipped and is operating
a metal halide lamp manufacturing facility in Japan. During the fourth quarter
of fiscal 1998, the Company changed its method of accounting for the investment
to equity from cost, with the results of operations of this investment being
insignificant in prior quarters. During the second quarter of fiscal 1999, the
Company exchanged its common stock interest for nonvoting preferred stock and
also purchased additional nonvoting preferred stock in Koto. As a result, the
Company changed its method of accounting for its investment in Koto to the lower
of cost or net realizable value.
F-13
<PAGE> 136
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
G. FINANCING ARRANGEMENTS
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Trade facility........................................ $ 221 $ 506
Short-term credit facility............................ -- 483
Installment loan...................................... -- 62
-------- -------
221 1,051
Current portion of long-term debt..................... 8,322 924
-------- -------
$ 8,543 $ 1,975
======== =======
</TABLE>
The Company, on behalf of a foreign subsidiary, maintains a multioption
borrowing facility with a foreign bank that includes a trade facility with
borrowing capacity of $601 and a short-term credit facility that matured in
August 1998. The trade facility, along with other borrowings with the foreign
bank, are collateralized with substantially all the assets of the subsidiary.
This facility allows the foreign subsidiary to issue documentary letters of
credit for imports and term-trade finance for importing its inventory. The
interest rate of this facility varies, depending upon the denomination of the
currency advanced, and ranged from 5.25% to 8.26% in fiscal 1999. The weighted
average interest rate on the trade facility was approximately 7.80% and 7.75%
during fiscal 1999 and fiscal 1998. The weighted average interest rate on the
short-term credit facility was 7.27% and 7.63% during fiscal 1999 and 1998.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Senior unsecured 8% notes, due March 2008............ $100,000 $100,000
Bank Credit Facility -- term loan.................... 24,702 --
Bank Credit Facility -- revolving credit loan........ 12,766 --
Credit Facility...................................... -- 6,084
Mortgage notes payable............................... 18,443 7,762
Promissory note, due January 2000.................... 3,000 3,000
Obligations under capital leases..................... 1,401 1,608
Other................................................ 506 226
-------- --------
160,818 118,680
Less current portion............................... 8,322 924
-------- --------
$152,496 $117,756
======== ========
</TABLE>
On May 21, 1999, the Company replaced its existing Credit Facility with a
$50,000 revolving credit loan and a $25,000 term loan provided by several
financial institutions ("Bank Credit Facility"). Subsequent to June 30, 1999,
the Company reduced the Bank Credit Facility to a $60,000 facility. Proceeds
from the Bank Credit Facility were used to repay the Company's existing Credit
Facility and certain other long-term debt.
The revolving credit loan has a three-year term expiring in May 2002.
Interest rates on loans outstanding are based, at the Company's option, on LIBOR
plus 2.75% or the agent bank's prime rate. The Company is also obligated to pay
a commitment fee of .375% on the unused portion of the loan. Availability of
borrowings under the revolving credit loan is determined by the Company's
eligible accounts receivable and inventories. The term loan has a five-year term
expiring in May 2004. The Company pays monthly principal payments that total
$3,576 annually, with the unpaid balance due at maturity. Interest rates on the
term loan are based, at the Company's option, on LIBOR plus 3.25% or the agent
bank's prime rate. The Bank Credit Facility contains certain
F-14
<PAGE> 137
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
affirmative and negative covenants customary for this type of agreement,
prohibits cash dividends, and includes a financial covenant with respect to the
coverage of certain fixed charges. The principal security for the revolving
credit loan is substantially all of the personal property of the Company and
each of its North American and United Kingdom subsidiaries. The term loan is
secured by substantially all the Company's machinery and equipment and is cross
collateralized and secured with the revolving credit loan.
On March 13, 1998, the Company sold $100,000 of Senior Notes due March
2008, resulting in net proceeds of approximately $96,150. The Notes have an
annual coupon of 8% and are redeemable at the Company's option, in whole or in
part, on or after March 15, 2003 at certain preset redemption prices. In
addition, at any time prior to March 15, 2001, the Company may redeem up to 35%
of the aggregate principal amount of the Notes at 108% of par with the proceeds
of one or more public equity offerings. Interest on the Senior Notes is payable
semiannually on March 15 and September 15 of each year. Until the completion of
a registered exchange offer to existing noteholders, the Senior Notes bear
interest at 8.5%. The offer is expected to be completed within 45 days following
the effectiveness of the Company's related registration statement. There are no
sinking fund requirements. Approximately $76,300 of the net proceeds from the
senior notes were used to repay amounts outstanding under an existing credit
facility, thereby lengthening the term of the Company's debt, most of which had
been incurred to finance the acquisitions of Ruud Lighting and DSI. The Notes
Indenture contains covenants that, among other things, limit the ability of the
Company and its Restricted Subsidiaries (as defined therein) to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and, with respect to the Company,
engage in mergers and consolidations.
Mortgages payable consisted of ten separate notes at various rates of
interest, ranging from 7.3% to 9.5%, and at June 30, 1999 were collateralized by
land and buildings with a net carrying value of $23,525.
On December 31, 1997, the Company executed an 8% promissory note in the
amount of $3,000, due January 1, 2000, in partial consideration for a 50%
interest in Unison Fiber Optic Systems LLC, a joint venture with Rohm and Haas
Company that focuses on the manufacture and sale of fiber optic lighting systems
to the worldwide lighting market.
The Company leases certain equipment under agreements which are classified
as capital leases. The lease agreements have varying terms and the leased
assets, with a net carrying value of $2,045 at June 30, 1999, are included in
the consolidated balance sheet as machinery and equipment.
Aggregate maturities of long-term debt (including capital lease
obligations) for the five fiscal years subsequent to June 30, 1999, were as
follows: 2000 -- $8,322; 2001 -- $5,252; 2002 -- $17,879; 2003 -- $4,705; and
2004 -- $18,388.
The fair value of debt, based on market rates and maturity dates,
approximates carrying value. Debt issuance costs, classified with other assets,
are being amortized over the terms of the related debt.
The Company is obligated under its Bank Credit Facility to limit its
exposure to fluctuating interest rates for a minimum of $10,000. During fiscal
1999, the Company entered into an interest rate swap agreement that expires in
May 2004 and has a notional amount of $10,000 with a fixed pay rate of 6.63% and
a receive rate of LIBOR. The swap agreement is a contract to exchange floating
rate for fixed interest payments quarterly over the life of the agreement
without the exchange of the underlying notional amounts. The notional amount of
the interest rate agreement is used to measure interest to be paid or received
and does not represent the amount of exposure to credit loss. The net cash
amounts paid or received on the agreement are recognized as an adjustment to
interest expense. If these agreements were settled at June 30, 1999, the Company
would have paid approximately $200.
F-15
<PAGE> 138
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company uses standby letters of credit to satisfy certain security
deposits with service providers, to make borrowings, and as security for a loan
to a foreign investee. These letters are irrevocable and expire within 12 months
of issuance. Standby letters of credit outstanding as of June 30, 1999 were
$464. Historically, the Company has not experienced any significant claims
against these financial instruments. Management does not expect any material
losses to result from these off-balance-sheet instruments because performance is
not expected to be required, and therefore, is of the opinion that the fair
value of these instruments is zero.
H. SHAREHOLDERS' EQUITY
Shareholders' Equity
In July 1997, the Company issued three million shares of its Common Stock
in a public offering, resulting in net proceeds of $69,320. Approximately
$33,000 of the net proceeds from this offering were used to repay substantially
all amounts outstanding under a loan agreement. Of the remaining net proceeds,
$14,507 was used for capital expenditures, primarily production equipment and
leasehold improvements, $4,780 was used to purchase 29% of Fiberstars, Inc., a
company specializing in the marketing and distribution of fiber optic lighting
products, $2,000 was contributed to Unison, the Company's joint venture with
Rohm and Haas, and the remainder was used for working capital purposes.
On July 16, 1996, the Company issued 2,452,000 shares of its Common Stock
in a public offering at $13.50 a share. Net proceeds, after offering costs,
amounted to $30,091.
Employee Stock Options
The Company's 1995 Incentive Award Plan and 1998 Incentive Award Plan
provide for the granting of "A" and "B" incentive stock options to purchase
common stock of the Company. The "A" options become exercisable based on stock
price or over one-to-five years from the date of grant depending on the
Company's operating performance. The "B" options become exercisable at the rate
of 25% after one year, 35% after two years, and 40% after three years. The
Company's 1997 Billion Dollar Market Capitalization Incentive Award Plan
provides for the granting of incentive stock options to purchase common stock of
the Company. The options become exercisable when the Company's market
capitalization, excluding the impact of stock issued in completing acquisitions,
reaches one billion dollars or after six years, whichever comes first. All
options have been granted at market value on the date of grant and expire ten
years from the date of grant. At June 30, 1999, the Company had 3,133,540 shares
reserved for future issuance upon exercise of stock options granted under the
option plans.
Information related to stock options for the years ended June 30 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- --------------------
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........ 2,601,347 $18.24 914,214 $14.38 791,850 $12.33
Granted............................... 682,600 10.18 1,939,689 19.56 228,150 19.73
Exercised............................. (18,590) 15.13 (97,209) 11.57 (50,661) 10.32
Forfeited............................. (513,491) 17.68 (155,347) 16.16 (55,125) 10.63
---------- ---------- --------
Outstanding, end of year.............. 2,751,866 16.36 2,601,347 18.24 914,214 14.38
========== ========== ========
Weighted-average fair value of options
granted during the year............. $ 4.69 -- $ 8.69 -- $ 6.62 --
</TABLE>
F-16
<PAGE> 139
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes additional information concerning
outstanding and exercisable options at June 30, 1999:
<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>
$ 6.94 to 9.99 524,700 9.9 years $ 7.04 -- --
10.00 to 15.99 257,642 6.8 years 10.06 190,267 $10.06
16.00 to 22.99 1,665,999 8.3 years 18.89 442,657 18.55
23.00 to 26.00 303,525 8.7 years 23.97 57,530 24.00
--------- -------
2,751,866 690,454
========= =======
</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,
----------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Net income (loss) as reported.................. $(83,753) $(25,943) $7,104
Pro forma...................................... (85,763) (27,595) 6,540
Earnings (loss) per share as reported.......... (4.14) (1.43) 0.52
Pro forma...................................... (4.24) (1.52) 0.48
</TABLE>
The fair values of the stock options used to calculate the pro forma net
income and pro forma earnings per share were estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in fiscal 1999, 1998 and 1997, respectively: expected volatility of 54%,
38% and 30%; risk-free interest rates of 5.61%, 5.78%, and 6.41%; and expected
lives of 4 years, 5 years, and 4 years with no dividend yield.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan authorized and made
available for sale to employees, at a discount of 15%, a total of 100,000 shares
of the Company's Common Stock. The Plan provides substantially all employees who
have completed six months of service an opportunity to purchase shares through
payroll deductions, up to 10% of eligible compensation.
The purchase price of each share is 85% of the month-end closing market
price of the Company's Common Stock. Employees purchased 41,233 shares in fiscal
1999 and 9,577 shares of stock in fiscal 1998. At June 30, 1999, 49,190 shares
were available for future purchases.
Shares Issued Pursuant to Defined Contribution Plan
Beginning in February 1999, pursuant to the terms of the Company's 401(k)
Retirement and Savings Plan, the Company partially matches, with its Common
Stock, the contributions made by employees to their plan accounts. The Company
has authorized and made available for contribution a total of 100,000 shares of
Common
F-17
<PAGE> 140
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock, and contributed 28,107 shares in fiscal 1999. At June 30, 1999, 71,893
shares were available for future contributions.
I. EMPLOYEE BENEFITS
The Company has defined contribution elective savings and retirement plans
that cover substantially all full-time employees in its domestic and foreign
subsidiaries. The Company matches the contributions of participating employees
on the basis of the percentages specified in the respective plans, ranging from
1% to 4% of eligible employee earnings. Contributions charged to income for the
defined contribution plans, including expense associated with the Common Stock
issuances related to the 401(k) Retirement and Savings Plan described in Note H,
were $1,218 in fiscal 1999, $465 in fiscal 1998 and $373 in fiscal 1997.
J. INCOME TAXES
Income (loss) from continuing operations before income taxes, extraordinary
charges and cumulative effect of change in accounting principle were
attributable to the following sources:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
United States....................................... $(73,795) $(18,364) $8,924
Foreign............................................. (5,663) (6,955) 877
-------- -------- ------
Totals.............................................. $(79,458) $(25,319) $9,801
======== ======== ======
</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>
YEAR ENDED JUNE 30,
---------------------------
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 669 $ (196) $1,373
State and local...................................... 219 372 550
Foreign.............................................. (253) 807 355
------ ------- ------
635 983 2,278
Deferred:
Federal.............................................. (352) (176) 313
State and local...................................... (94) (228) 149
Foreign.............................................. 2,092 (1,890) (43)
------ ------- ------
1,646 (2,294) 419
------ ------- ------
$2,281 $(1,311) $2,697
====== ======= ======
</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-18
<PAGE> 141
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Significant components of the Company's net deferred tax assets and
liabilities at June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $21,317 $ 892
Research and development tax credits...................... 3,006 --
Tax under financial reporting accruals.................... -- 1,904
Intangible amortization................................... -- 486
Tax under financial reporting special charges and equity
write-down............................................. 8,454 1,718
Tax under financial reporting inventory reserves.......... -- 252
Other..................................................... 2,266 524
------- ------
35,043 5,776
Deferred tax liabilities:
Tax over financial reporting depreciation................. 4,721 2,720
Other..................................................... -- 339
------- ------
4,721 3,059
------- ------
Net deferred tax assets (liabilities) before valuation
allowance................................................. 30,322 2,717
Valuation allowance......................................... (30,322) --
------- ------
Net deferred tax assets (liabilities)....................... $ -- $2,717
======= ======
</TABLE>
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Statutory tax rate........................................ (35.0)% (35.0)% 35.0%
State and local income taxes, net of federal benefit...... 0.2 0.4 3.6
Nondeductible purchased research and development.......... -- 25.5 --
Research and development tax credit....................... (0.9) (2.6) --
Effect of foreign taxes................................... 2.7 (0.9) (1.4)
Nondeductible foreign special charges..................... 0.3 6.3 --
Net operating loss carryforward........................... -- -- (2.8)
Valuation allowance....................................... 38.2 -- --
Adjustment of deferred tax liabilities.................... -- -- (10.9)
Other..................................................... (2.6) 1.1 4.0
----- ----- ------
Effective tax rate........................................ 2.9% (5.2)% 27.5%
===== ===== ======
</TABLE>
Income taxes paid (net of refunds) were $(1,660) in fiscal 1999, $3,129 in
fiscal 1998, and $81 in fiscal 1997.
At June 30, 1999, the Company had net operating loss carryforwards ("NOLs")
of $57,309 available to reduce future United States federal taxable income,
which expire 2008 through 2019.
The Company also had research and development credit carryforwards for tax
purposes of approximately $3,006, which expire 2005 through 2019. Additionally,
in conjunction with the Alternative Minimum Tax
F-19
<PAGE> 142
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
("AMT") rules, the Company had available AMT credit carryforwards for tax
purposes of approximately $162, which may be used indefinitely to reduce regular
federal income taxes.
Also, at June 30, 1999, the Company had foreign net operating loss
carryforwards for tax purposes totaling $5,209 that expire in 2000 to 2005 and
$10,587 that have no expiration dates.
For fiscal 1999, the Company reported a pretax loss from continuing
operations, including special charges, of $79,458; an extraordinary charge from
the early extinguishment of debt of $902; and, a cumulative effect of change in
accounting for start-up costs of $2,443, all of which created $82,803 of
operating losses and future tax deductions for financial reporting purposes.
Accordingly, at June 30, 1999, the Company has recorded a valuation allowance
for deferred tax assets of $30,322 related to all NOLs, tax credits and net
deductible tax differences.
K. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS
During the year ended June 30, 1999, the Company recorded special charges
related to significant changes in its operations, which are intended to
accelerate and intensify the Company's focus on its metal halide products.
The special charges principally relate to the execution of the Company's
shift in strategic direction and include: limiting Pacific Rim expansion;
changing global lamp manufacturing strategy; restructuring marketing operations
in North America and Europe; accelerating an exit from noncore product lines;
reducing excess overhead including staffing reductions; consolidating an
equipment manufacturing operation into the Company's Solon, Ohio facility and
significantly reducing the size of the operation; and, reducing capital
expenditures.
The special charges were determined in accordance with formal plans
developed by the Company's management and approved by the Company's Board of
Directors using the best information available to it at the time. Actions
associated with closing facilities began in the second quarter and were
substantially completed by the end of fiscal 1999. Employees were terminated
enterprise-wide from almost all areas and units of the Company. Assets related
to the above actions are no longer in use and have been sold or were
written-down to their estimated fair values. The amounts the Company will
ultimately incur may change as the Company's plans are executed and actions are
completed.
F-20
<PAGE> 143
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Details of the actions and related special charges recorded during fiscal
1999 are summarized as follows:
<TABLE>
<CAPTION>
BALANCE AS OF
CHARGED TO CHARGES JUNE 30,
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED 1999
----------- -------------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Limit Pacific Rim Expansion:
Severance............................... Cash $ 642 $ 492 $ 150
Lease/contract cancellations............ Cash/Noncash 3,841 488 3,353
Write-down of assets.................... Noncash 2,237 2,237 --
Shut-down costs of facilities........... Cash 497 493 4
Change in Global Manufacturing Strategy:
Severance............................... Cash 328 328 --
Write-down of assets.................... Noncash 8,502 8,502 --
Shut-down costs of facilities........... Cash 380 380 --
Program cancelation..................... Cash 128 -- 128
Restructure Marketing Operations in North
America and Europe:
Severance............................... Cash 317 287 30
Lease/contract cancellations............ Cash 436 110 326
Write-down of assets.................... Noncash 1,701 1,701 --
Shut-down costs of facilities........... Cash 738 664 74
Reduce Staffing Requirements.............. Cash/Noncash 2,262 1,761 501
Terminate Management Benefit Program...... Cash/Noncash 1,516 1,430 86
Exit Noncore Inventory Products........... Noncash 261 261 --
Write-off Long-Lived Assets............... Cash/Noncash 4,611 4,562 49
Other..................................... Cash 420 267 153
------- ------- ------
$28,817 $23,963 $4,854
======= ======= ======
</TABLE>
The special charges for fiscal 1999 included costs related to the actions
described above and also include $6,246 related to the wind-down of portable
fixture manufacturing operations, which are described in Note L "Discontinued
Operations Subsequently Retained." Total special charges for fiscal 1999 of
$35,063 are classified in the consolidated statement of operations as cost of
goods sold ($3,956) and special charges ($31,107). The Company incurred
additional costs of $596 and $764, as described in Note O, related to the above
actions. All actions required by the plans are expected to be completed by
December 31, 1999.
In conjunction with limiting its Pacific Rim expansion, the Company
terminated production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the quarter ended December 31,
1998, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
These special charges reduced net income by $43,611, or $2.16 diluted
earnings per share for fiscal 1999.
During fiscal 1998, the Company recorded special charges related to an
assessment of the Company's global power supply operations.
The special charges of $17,984 principally relate to the Company's decision
to refocus and restructure its recently acquired global power supply operations
to focus exclusively on opportunities in metal halide. With the January 1998
acquisition of Ruud Lighting, Inc., the Company accelerated this rationalization
of its existing power supply manufacturing operations and distribution
activities in order to capitalize on new opportunities not previously available.
This assessment resulted in (a) the discontinuance of certain power supply
products at the
F-21
<PAGE> 144
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 special charges for fiscal 1998 of $17,984 in the statement of
operations are classified as cost of sales ($2,066) and special charges
($15,918).
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1998
---------------------- BALANCE AS OF
CHARGED TO CHARGES JUNE 30,
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED 1998
----------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C>
Asset write-downs:
Inventories............................... Noncash $ 2,066 $ 2,066 $ --
Intangibles............................... Noncash 9,354 9,354 --
Fixed assets.............................. Noncash 3,056 3,056 --
Other assets.............................. Noncash 2,184 2,184 --
Contractual commitments and other
accruals.................................. Cash 1,209 496 713
Other....................................... Cash 115 115 --
------- ------- ------
$17,984 $17,271 $ 713
======= ======= ======
</TABLE>
The $713 balance, as of June 30, 1998, was utilized during 1999.
The write-down of intangible assets primarily represent the excess of the
purchase price over the fair value of the net assets acquired and costs
allocated to tradenames, know-how, and other specifically identifiable
intangibles arising from business combinations. Asset write-downs for the
impairment of long-lived intangibles and fixed assets were determined in
accordance with Statement of Financial Accounting Standards No. 121.
After an income tax benefit of $5,015, these special charges reduced net
income by $12,969, or $.71 diluted earnings per share for fiscal 1998.
L. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to ADLT shareholders all of the
ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that,
F-22
<PAGE> 145
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
among other reasons, the market demand for Microsun products remains
substantial; the market potential will be expanded as the Microsun portable
lighting fixtures will be marketed and sold along with other existing lines of
products for residential use in an e-commerce format ("Microsun.com"); and the
Microsun business will use the fulfillment capabilities and infrastructure of
existing ADLT businesses.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing ADLT businesses utilizing existing
facilities and operations. The Company utilizes the customer service systems and
personnel of an existing ADLT business, as well as the Internet at
http://www.microsun.com, to receive, process and fill orders. Therefore, the
Microsun business has been retained but without the use of the manufacturing
processes or assets used in the previous operations.
In accordance with the accounting requirements for recontinuance, the
accompanying financial statements have been reclassified to present Microsun
within continuing operations. At June 30, 1999, substantially all assets had
been disposed and no remaining accrued losses associated with discontinued
operations remained. At June 30, 1998, assets related to discontinued operations
totaled $8,510 and total liabilities were $3,317. The revenues and the net
amount charged to the income statement for each of the years the business was
reported as discontinued operations consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................... $ 4,719 $ 4,456
======= =======
Reclassification of discontinued operations to continuing
operations................................................ $10,374 $ 4,683
Discontinued operations provision........................... (9,043) (6,014)
------- -------
Recontinuance of previously discontinued operations......... $ 1,331 $(1,331)
======= =======
</TABLE>
The $10,374 reclassified to continuing operations for the year ended June
30, 1999 consisted of a loss from operations of $4,128; write-downs of assets to
net realizable value of $5,533 in connection with the decision in November 1998
to wind-down the Microsun business related to inventory ($2,448), fixed assets
($1,690), and other assets ($1,395); and costs related to severance,
lease/contract cancellations and facility shut-down costs of $713. These costs
and write-downs are classified in special charges ($3,798) and cost of sales
($2,448). The $4,683 reclassified to continuing operations for the year ended
June 30, 1998 represents loss from operations.
M. SETTLEMENT OF CLAIMS
On March 1, 1996, a former common shareholder of a Predecessor asserted a
claim in the United States District Court for the Northern District of Ohio
against the Chief Executive Officer and a director of the Company, and the
Executive Vice President and a director of the Company, and subsequently, a
claim against the Company. The claim alleged that certain misrepresentations
and/or omissions were made to the former common shareholder in connection with:
(i) the Company's purchase of his equity interest effected by a merger of a
Predecessor into the Company, as to which the former common shareholder waived
his statutory appraisal rights and (ii) the purchase by the Chief Executive
Officer of the former common shareholder's beneficial interest in a trust
controlled by the Chief Executive Officer. The former common shareholder alleged
that the misrepresentations and/or omissions caused direct damages which
exceeded $900. The suit also claimed punitive damages in an undetermined amount
believed by the former common shareholder to exceed $2,700. On August 23, 1996,
another former common shareholder filed similar claims against the Chief
Executive Officer and Executive Vice
F-23
<PAGE> 146
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
N. EARNINGS PER SHARE
Earnings (loss) per share is computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Income available to common shareholders:
Income (loss) from continuing operations................. $(81,739) $(24,008) $7,104
======== ======== ======
Net income (loss)........................................ $(83,753) $(25,943) $7,104
======== ======== ======
Weighted average shares -- Basic:
Outstanding at beginning of period....................... 20,189 13,435 10,844
Issued pursuant to public offering....................... -- 2,942 2,327
Issued in acquisitions................................... 2 1,768 41
Issued for exercise of stock options..................... 17 47 22
Issued pursuant to employee stock purchase plan.......... 19 3 --
Issued pursuant to 401(k) plan........................... 5 -- --
Issuable in connection with an acquisition............... -- -- 35
-------- -------- ------
Basic weighted average shares......................... 20,232 18,195 13,269
======== ======== ======
Weighted average shares -- Diluted:
Basic from above......................................... 20,232 18,195 13,269
Effect of stock options.................................. -- -- 289
-------- -------- ------
Diluted weighted average shares....................... 20,232 18,195 13,558
======== ======== ======
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations................. $ (4.04) $ (1.32) $ .54
Recontinuance of previously discontinued operations...... .07 (.07) --
Extraordinary charge..................................... (.05) (.04) --
Cumulative effect of change in accounting principle...... (.12) -- --
-------- -------- ------
Earnings (loss) per share -- Basic....................... $ (4.14) $ (1.43) $ .54
======== ======== ======
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations................. $ (4.04) $ (1.32) $ .52
Recontinuance of previously discontinued operations...... .07 (.07) --
Extraordinary charge..................................... (.05) (.04) --
Cumulative effect of change in accounting principle...... (.12) -- --
-------- -------- ------
Earnings (loss) per share -- Diluted..................... $ (4.14) $ (1.43) $ .52
======== ======== ======
</TABLE>
F-24
<PAGE> 147
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
O. RELATED PARTY TRANSACTIONS
Pursuant to a loan agreement dated October 8, 1998, between the Company and
its Chairman and Chief Executive Officer (the "CEO"), the Company has loaned
$9,000 to its CEO for a one-year term at an interest rate of 8%. The loan was
made following approval by the Company's Board of Directors. The proceeds of the
loan were used by the Company's CEO to reduce the principal balance outstanding
of a margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
As of June 30, 1999, $520 of interest was accrued on the loan.
In connection with the fiscal 1999 actions described in Note K, the Company
recognized $596 in cost of sales for the write-down of specialty inventory and
$764 in research and development expenses related to transactions with
affiliates. During fiscal 1999, the Company also recognized a $700 provision for
uncollectible advances and receivables related to transactions with affiliates.
During January 1996, the Company entered into a six-year Aircraft Operating
Agreement ("Agreement") with an unrelated company to charter certain airplanes
for service into locations which are not adequately served by commercial
carriers. The unrelated company leases the airplanes from an affiliate of the
Company owned by certain officers of the Company. These officers have guaranteed
the repayment of $11,200 of indebtedness incurred by the affiliate to purchase
the airplanes. The Company's minimum annual commitments under the Agreement are
$911. During May 1998, the Company began to charter another airplane from
another unrelated company. This unrelated company also leases the airplane from
an affiliate of the Company owned by certain officers of the Company. These
officers have guaranteed the repayment of $6,400 of indebtedness incurred by the
affiliate to purchase the airplane. Fees paid by the Company under these
arrangements were $1,616 in fiscal 1999, $2,161 in fiscal 1998, and $554 in
fiscal 1997.
The Company paid a director of the Company $100 in fiscal 1999, $129 in
fiscal 1998, and $79 in fiscal 1997 for consulting services.
The Company sold lamps, lamp components, and lamp production equipment to
an overseas company aggregating $625 in fiscal 1999, $1,254 in fiscal 1998, and
$3,853 in fiscal 1997. An executive officer and director of the overseas company
became a Director of the Company in January 1996.
During fiscal 1996, one of the Company's subsidiaries sold the assets of
its nonlamp product line to an affiliate of the Company owned principally by
certain officers of the Company for an amount equal to the carrying amount of
such assets as of June 30, 1995. As of June 30, 1999 and 1998, the Company had
an 8.5% note from the affiliate for $220 related to the sale of the assets of
the nonlamp product line which is recorded as a long-term receivable from
related parties in the consolidated balance sheet. Total principal and accrued
interest at June 30, 1999 was $284.
F-25
<PAGE> 148
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
P. COMMITMENTS
The Company leases buildings and certain equipment under noncancelable
operating lease agreements. Total rent expense was $1,878 in 1999, $1,495 in
1998, and $1,478 in 1997. Future minimum lease commitments, as of June 30, 1999,
were as follows:
<TABLE>
<S> <C>
YEAR:
Fiscal 2000................................................. $1,946
Fiscal 2001................................................. 1,837
Fiscal 2002................................................. 1,486
Fiscal 2003................................................. 1,319
Fiscal 2004................................................. 894
Thereafter.................................................. 756
------
Minimum lease payments...................................... $8,238
======
</TABLE>
Q. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL 1999
------------------------------------------------
JUN 30(a) MAR 31(b) DEC 31(c) SEP 30(d)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales....................................... $ 50,854 $ 51,358 $ 39,704 $ 51,287
Gross profit.................................... 11,714 17,077 8,256 20,383
Income (loss) from operations................... (24,575) (5,864) (31,781) 1,847
Income (loss) from continuing operations before
extraordinary charge and cumulative effect of
accounting change............................. (33,204) (9,432) (38,432) (671)
Recontinuance of previously discontinued
operations.................................... 308 1,710 (1,540) 853
Net income (loss)............................... $(33,798) $ (7,722) $(39,972) $ (2,261)
======== ======== ======== =========
Earnings (loss) per share -- Basic.............. $ (1.67) $ (.38) $ (1.98) $ (.11)
======== ======== ======== =========
Earnings (loss) per share -- Diluted............ $ (1.67) $ (.38) $ (1.98) $ (.11)
======== ======== ======== =========
Price Range of Common Stock:
High.......................................... $ 9.000 $ 10.313 $ 10.625 $ 27.250
Low........................................... $ 5.813 $ 6.750 $ 4.875 $ 8.500
</TABLE>
F-26
<PAGE> 149
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL 1998
----------------------------------------------
JUN 30 MAR 31(e) DEC 31 SEP 30
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Net sales........................................ $54,694 $ 50,685 $32,728 $30,242
Gross profit..................................... 20,164 19,824 13,968 12,696
Income (loss) from operations.................... 292 (30,513) 4,091 3,700
Income (loss) from continuing operations before
extraordinary charge........................... (492) (28,798) 2,792 2,490
Recontinuance of previously discontinued
operations..................................... 4,683 (6,014) -- --
Net income (loss)................................ $ 4,191 $(35,416) $ 2,792 $ 2,490
======= ======== ======= =======
Earnings (loss) per share -- Basic............... $ .21 $ (1.78) $ .17 $ .15
======= ======== ======= =======
Earnings (loss) per share -- Diluted............. $ .20 $ (1.78) $ .17 $ .15
======= ======== ======= =======
Price Range of Common Stock:
High........................................... $29.938 $ 27.000 $26.500 $27.000
Low............................................ $20.875 $ 18.250 $18.250 $22.875
</TABLE>
- ---------------
(a) Fourth Quarter 1999 -- Net income was reduced by: (a) charges of $15,691
consisting of $3,148 in cost of sales and special charges of $12,543; (b) a
$700 provision for uncollectible advances and receivables related to
transactions with affiliates; (c) a pretax noncash write-down of $5,883,
related to the Company's investment in Unison; and, (d) extraordinary
charge from the early extinguishment of debt of $902.
(b) Third Quarter 1999 -- Net income was reduced by $2,291 of special charges.
(c) Second Quarter 1999 -- Net income was reduced by: (a) $8,548 from the
reversal of $14,961 in sales and $6,413 in cost of sales related to the
termination of lamp equipment contracts; (b) charges of $18,219 consisting
of: $1,182 in cost of sales ($374 with an affiliate), $764 of research and
development with an affiliate, and $16,273 of special charges; and, (c)
establishment of deferred tax valuation allowance of $3,515.
(d) First Quarter 1999 -- Net income was reduced by a $2,443 cumulative effect
of a change in accounting principle.
(e) Third Quarter 1998 -- Net income was reduced by the write-off of purchased
research and development and special charges, net of income tax benefits,
of $32,056.
R. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single business segment: the design, manufacture
and sales of metal halide lighting products including materials, system
components, systems and production equipment.
Net sales by country, based on the location of the business unit, for
fiscal 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
United States....................................... $141,440 $111,743 $60,534
Canada.............................................. 20,524 29,427 14,406
United Kingdom...................................... 19,998 20,287 5,786
Australia........................................... 10,092 6,892 5,764
Other............................................... 1,149 -- --
-------- -------- -------
$193,203 $168,349 $86,490
======== ======== =======
</TABLE>
F-27
<PAGE> 150
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Long-lived assets by country, based on the location of the asset, as of
June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- -------
<S> <C> <C>
United States............................................... $ 90,769 $82,705
Canada...................................................... 2,845 2,709
United Kingdom.............................................. 6,396 6,120
Australia................................................... 1,760 300
Other....................................................... 678 74
-------- -------
$102,448 $91,908
======== =======
</TABLE>
In fiscal 1999, 1998 and 1997, no single customer accounted for 10% or more
of the Company's net sales.
S. PURCHASE OF CORPORATE HEADQUARTERS
During March 1998, the Company purchased land and building in Solon, Ohio
for $7,758, which includes the assumption of an existing mortgage of
approximately $4,800. The mortgage has a 9.39% interest rate, a prepayment
penalty that approximates $1,000, requires monthly amortizing payments and a
final payment of $4,100 due in June 2006. Prior to the purchase, a portion of
the property was leased and used by the Company for system components
manufacturing and office space. Subsequent to purchase, the Company relocated
its world headquarters to the facility.
T. CONTINGENCY
In April and May 1999, three class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
shareholders of the Company on behalf of themselves and purported classes
consisting of Company shareholders, other than the defendants and their
affiliates, who purchased stock during the period from December 30, 1997 through
September 30, 1998 or various portions thereof. The named defendants are the
Company and its Chairman and Chief Executive Officer ("CEO"). The lawsuits are
now pending before a single judge who has required the plaintiffs to file a
single consolidated complaint on or before September 30, 1999. The complaints
allege generally that certain disclosures attributed to the Company contained
misstatements and omissions alleged to be violations of Section 10(b) of the
Securities Act of 1934 and Rule 10b-5, including claims for "fraud on the
market" arising from alleged misrepresentations and omissions with respect to
the Company's financial performance and prospects and alleged violations of
generally accepted accounting principles by improperly recognizing revenues. The
complaints seek certification of their respective purported classes, unspecified
compensatory and punitive damages, pre- and post-judgment interest and
attorneys' fees and costs. The Company and its CEO believe that these claims
lack merit and they intend to vigorously defend these actions.
U. SUBSEQUENT EVENT
During September 1999, General Electric Company ("GE") executed a
definitive agreement to make an investment in the Company of $20,554. In
exchange for the investment, GE will receive 761,250 shares of the Company's
newly-created Series A Stock convertible at any time into 3,045,000 shares of
Company Common Stock (subject to adjustment as described below). GE also will
receive a Warrant (the "Initial Warrant") to purchase an additional 1,000,000
shares of Company Common Stock, which is immediately exercisable at $.01 per
share. GE has been a holder of 535,887 shares of Company Common Stock since the
Company's initial public offering in 1995. The Series A Stock, Common Stock
issuable on exercise of the Initial Warrant and the
F-28
<PAGE> 151
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Common Stock held by GE will represent (after giving effect to the shares issued
on exercise of the Initial Warrant) approximately 18.9% of the voting power and
equity ownership of the Company after the GE investment. The proceeds of the
transaction will be applied principally to the reduction of short-term
liabilities and outstanding amounts under the Company's Bank Credit Facility.
The Series A Stock will have a liquidation preference of $27 per share,
plus an amount equal to 8% per annum from the date of issuance to the date of
payment ("Liquidation Preference Amount"). The Company will be required to
redeem any shares of Series A Stock which have not been converted or retired on
September 30, 2010. In addition, GE may, by notice, require the Company to
redeem the outstanding Series A Stock, within one year following: September 30,
2004, failure of the transaction to get required approvals or the occurrence of
corporate events. If the Company fails to maintain certain financial ratios, GE
will have the right to a combination of subscription rights to additional shares
and proxies with respect to shares voted by certain officers of the Company
which would give GE the ability to obtain the majority of the voting power of
the Company.
The transaction will be completed only after termination of the
Hart-Scott-Rodino waiting period as required under antitrust laws.
F-29
<PAGE> 152
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ ---------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,064 $ 3,830
Short-term investments.................................... -- 350
Trade receivables, less allowances of $1,065 and $1,257... 33,461 25,485
Receivables from related parties.......................... 242 48
Inventories:
Finished goods......................................... 22,896 24,275
Raw materials and work-in-process...................... 18,795 16,501
-------- --------
41,691 40,776
Prepaid expenses.......................................... 2,436 2,354
-------- --------
Total current assets........................................ 79,894 72,843
Property, plant and equipment:
Land and buildings........................................ 43,301 42,646
Production machinery and equipment........................ 52,050 49,226
Other equipment........................................... 6,413 6,413
Furniture and fixtures.................................... 20,720 20,426
-------- --------
122,484 118,711
Less accumulated depreciation............................. 19,852 16,263
-------- --------
102,632 102,448
Receivables from related parties............................ 6,937 5,048
Investments in affiliates................................... 15,420 13,475
Other assets................................................ 6,499 6,586
Intangible assets........................................... 32,174 32,695
Excess of cost over net assets of businesses acquired,
net....................................................... 50,784 51,411
-------- --------
$294,340 $284,506
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt..... $ 8,480 $ 8,543
Accounts payable.......................................... 23,324 23,310
Payables to related parties............................... 4,291 1,126
Employee-related liabilities.............................. 3,779 3,781
Accrued income and other taxes............................ 942 904
Other accrued expenses.................................... 15,104 16,905
-------- --------
Total current liabilities................................... 55,920 54,569
Long-term debt.............................................. 138,887 152,496
Preferred stock, $.001 par value, per share; 1,000 shares
authorized; 761 Series A convertible redeemable shares
issued and outstanding at December 31, 1999
(redemption value -- $20,965 at December 31, 1999)........ 15,806 --
Common shareholders' equity:
Common stock, $.001 par value, per share; 80,000 shares
authorized; 20,368 shares issued and outstanding as of
December 31, 1999 and 20,278 shares issued and
outstanding as of June 30, 1999........................ 20 20
Paid-in-capital........................................... 195,906 190,654
Accumulated other comprehensive income (loss)............. (463) (949)
Loan receivable from officer.............................. (9,170) (9,520)
Retained earnings (deficit)............................... (102,566) (102,764)
-------- --------
83,727 77,441
-------- --------
$294,340 $284,506
======== ========
</TABLE>
See notes to condensed consolidated financial statements
F-30
<PAGE> 153
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- --------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales...................................... $59,885 $ 39,704 $116,065 $ 90,991
Costs and expenses:
Cost of sales................................ 36,852 31,448 71,696 62,352
Marketing and selling........................ 10,617 12,151 20,792 21,552
Research and development..................... 3,483 5,597 6,978 9,562
General and administrative................... 4,086 5,338 8,121 9,843
Special charges.............................. -- 16,273 -- 16,273
Amortization of intangible assets............ 672 678 1,347 1,343
------- -------- -------- --------
Income (loss) from operations.................. 4,175 (31,781) 7,131 (29,934)
Other income (expense):
Interest expense............................. (3,323) (3,440) (7,113) (6,181)
Interest income.............................. 214 328 434 566
Income (loss) from equity investments........ 35 (272) 85 (461)
------- -------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of
accounting change............................ 1,101 (35,165) 537 (36,010)
Income taxes................................... 121 3,267 339 3,093
------- -------- -------- --------
Income (loss) from continuing operations before
cumulative effect of accounting change....... 980 (38,432) 198 (39,103)
Recontinuance of previously discontinued
operations................................... -- (1,540) -- (687)
Cumulative effect of accounting change......... -- -- -- (2,443)
------- -------- -------- --------
Net income (loss).............................. $ 980 $(39,972) $ 198 $(42,233)
======= ======== ======== ========
Earnings (loss) per share -- basic:
Income (loss) from continuing operations..... $ .02 $ (1.90) $ (.02) $ (1.93)
Recontinuance of previously discontinued
operations................................ -- (.08) -- (.04)
Cumulative effect of accounting change....... -- -- -- (.12)
------- -------- -------- --------
Earnings (loss) per share -- basic............. $ .02 $ (1.98) $ (.02) $ (2.09)
======= ======== ======== ========
Earnings (loss) per share -- diluted:
Income (loss) from continuing operations..... $ .02 $ (1.90) $ (.02) $ (1.93)
Recontinuance of previously discontinued
operations................................ -- (.08) -- (.04)
Cumulative effect of accounting change....... -- -- -- (.12)
------- -------- -------- --------
Earnings (loss) per share -- diluted........... $ .02 $ (1.98) $ (.02) $ (2.09)
======= ======== ======== ========
Weighted average shares outstanding:
Basic........................................ 20,351 20,222 20,318 20,215
======= ======== ======== ========
Diluted...................................... 21,297 20,222 20,800 20,215
======= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
F-31
<PAGE> 154
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACCUMULATED LOAN
COMMON STOCK COMPREHENSIVE OTHER RECEIVABLE
PREFERRED ------------------ PAID-IN INCOME COMPREHENSIVE FROM
STOCK SHARES PAR VALUE CAPITAL (LOSS) INCOME (LOSS) OFFICER
--------- ------ --------- -------- ------------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1999...... -- 20,278 $20 $190,654 -- $(949) $(9,520)
Net income................... -- -- -- -- $ 198 -- --
Net proceeds from issuance of
preferred shares and
warrant.................... $15,203 -- -- 5,000 -- -- --
Preferred shares accretion... 603 -- -- (603) -- -- --
Interest on loan to
officer.................... -- -- -- -- -- -- (370)
Interest payment received.... -- -- -- -- -- -- 720
Issuance of shares in
connection with the
purchase of a business..... -- 40 -- 535 -- -- --
Stock issued pursuant to
employee benefit plan...... -- 32 -- 220 -- -- --
Stock purchases by
employees.................. -- 18 -- 100 -- -- --
Other comprehensive income
(loss):
Foreign currency
translation adjustment... 486
--------
Other comprehensive income
(loss)..................... 486 486
------- ------ --- -------- -------- ----- -------
Comprehensive income
(loss)..................... $ 684
========
BALANCE AT DECEMBER 31,
1999....................... $15,806 20,368 $20 $195,906 $(463) $(9,170)
======= ====== === ======== ===== =======
<CAPTION>
RETAINED
EARNINGS
(DEFICIT) TOTAL
--------- -------
(IN THOUSANDS)
<S> <C> <C>
BALANCE AT JULY 1, 1999...... $(102,764) $77,441
Net income................... 198 198
Net proceeds from issuance of
preferred shares and
warrant.................... -- 20,203
Preferred shares accretion... -- --
Interest on loan to
officer.................... -- (370)
Interest payment received.... -- 720
Issuance of shares in
connection with the
purchase of a business..... -- 535
Stock issued pursuant to
employee benefit plan...... -- 220
Stock purchases by
employees.................. -- 100
Other comprehensive income
(loss):
Foreign currency
translation adjustment...
Other comprehensive income
(loss)..................... 486
--------- -------
Comprehensive income
(loss).....................
BALANCE AT DECEMBER 31,
1999....................... $(102,566) $99,533
========= =======
</TABLE>
See notes to condensed consolidated financial statements
F-32
<PAGE> 155
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
---------------------
1999 1998
--------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 198 $(42,233)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation......................................... 3,631 3,271
Amortization......................................... 1,347 1,343
Provision for doubtful accounts...................... 97 136
(Income) loss from equity investments................ (85) 461
Deferred income taxes................................ -- 3,429
Special charges...................................... -- 25,629
Cumulative effect of accounting change............... -- 2,443
Changes in operating assets and liabilities:
Trade receivables................................. (7,835) (3,979)
Inventories....................................... 190 (5,879)
Prepaids and other assets......................... (2,265) (2,309)
Accounts payable and accrued expenses............. 1,590 3,068
Payments related to special charge accruals....... (1,506) (1,670)
Other............................................. 968 (1,529)
--------- --------
Net cash used in operating activities........ (3,670) (17,819)
INVESTING ACTIVITIES
Capital expenditures...................................... (2,878) (17,956)
Sale of short-term investments............................ 350 --
Purchases of businesses................................... (30) (5,024)
Investments in affiliates................................. (1,920) (3,298)
--------- --------
Net cash used in investing activities........ (4,478) (26,278)
FINANCING ACTIVITIES
Proceeds from revolving credit facility................... 95,318 156,624
Payments of revolving credit facility..................... (103,254) (113,724)
Proceeds from long-term debt.............................. -- 868
Payments of long-term debt and capital leases............. (6,205) (2,685)
Issuance of preferred stock and stock purchase warrant.... 20,203 --
Loan to officer........................................... -- (9,000)
Issuance of common stock.................................. 320 438
--------- --------
Net cash provided by financing activities.... 6,382 32,521
--------- --------
Decrease in cash and cash equivalents....................... (1,766) (11,576)
Cash and cash equivalents, beginning of period.............. 3,830 22,167
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 2,064 $ 10,591
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 7,313 $ 5,070
Income taxes paid......................................... -- 211
Capitalized interest...................................... 196 458
Detail of acquisitions:
Assets acquired........................................ $ 868 $ 9,688
Liabilities assumed.................................... (262) (4,570)
Stock issued........................................... (535) (29)
--------- --------
Cash paid.............................................. 71 5,089
Less cash acquired................................... (41) (65)
--------- --------
Net cash paid for acquisition.......................... $ 30 $ 5,024
========= ========
</TABLE>
See notes to condensed consolidated financial statements
F-33
<PAGE> 156
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
A. ORGANIZATION
Advanced Lighting Technologies, Inc. (the "Company" or "ADLT") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, including materials, system components, systems, and production
equipment.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the financial
statements include all material adjustments necessary for a fair presentation,
consisting of normal recurring accruals. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended June 30, 1999. Operating results
for the three months and six months ended December 31, 1999 are not necessarily
indicative of the results that may be expected for the full-year ending June 30,
2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
Accounting Change -- Cost of Start-Up Activities
During the fourth quarter of fiscal 1999, the Company adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities,"
effective July 1, 1998. The first six months of fiscal 1999 have been restated
to reflect the cumulative effect of accounting change.
New Accounting Standards
The Company has not yet adopted Statement of Financial Accounting Standards
("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities."
FAS No. 133 requires that all derivatives, such as interest rate exchange
agreements (swaps), be recognized on the balance sheet at fair value.
Derivatives which are not hedges must be adjusted to fair value through the
results of operations. Derivatives determined to be hedges will be adjusted to
fair value through either the results of operations or other comprehensive
income, depending on the nature of the hedge. The Company is required to adopt
FAS No. 133, as subsequently amended by FAS No. 137, on July 1, 2000. The
impact, if any, on net income, comprehensive income and financial position will
depend on the amount, timing and nature of any agreements entered into by the
Company.
Financial Statement Presentation Changes
Certain amounts for prior periods have been reclassified to conform to the
current period reporting presentation.
C. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income," requires disclosure of comprehensive income and its
components. FAS No. 130 requires companies to report, in addition to net income,
other components of comprehensive income, which for the Company includes foreign
currency translation adjustments.
F-34
<PAGE> 157
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
For the three- and six-months ended December 31, 1999, the Company's
comprehensive income was $1,118 and $684, respectively. For the three- and
six-months ended December 31, 1998, the Company's comprehensive loss was
$(40,184) and $(42,179), respectively.
D. BANK CREDIT FACILITY
In May 1999, the Company replaced its existing credit facility with a
$50,000 revolving credit loan and $25,000 term loan provided by several
financial institutions (the "Bank Credit Facility"). Subsequent to June 30, 1999
the Company reduced its commitment to a $60,000 facility. Proceeds from the
facility were used to repay the Company's existing credit facility and certain
other long-term debt. The revolving credit loan has a three-year term expiring
in May 2002. Interest rates on revolving credit loans outstanding are based, at
the Company's option, on LIBOR plus 2.75% or the agent bank's prime rate.
Availability of borrowings is determined by the Company's eligible accounts
receivable and inventories. The term loan has a five-year term expiring in May
2004. The Company pays monthly principal payments that total $3,576 annually,
with the unpaid balance due at maturity. Interest rates on the term loan are
based, at the Company's option, on LIBOR plus 3.25% or the agent bank's prime
rate.
The Bank Credit Facility contains certain affirmative and negative
covenants customary for this type of agreement, prohibits cash dividends, and
includes financial covenants with respect to the coverage of certain fixed
charges. The principal security for the revolving credit loan is substantially
all of the personal property of the Company and each of its North American and
United Kingdom subsidiaries. The term loan is secured by substantially all of
the Company's machinery and equipment and is cross-collateralized and secured
with the revolving credit loan.
E. SENIOR NOTES OFFERING
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 rate 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.
From September 14, 1998, until the completion of a registered exchange
offer to existing noteholders, the Senior Notes bear interest at 8.5%. The offer
is expected to be completed within 45 days following the effectiveness of the
Company's related registration statement.
The Notes Indenture contains covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries (as defined therein) to
incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and, with respect to the Company,
engage in mergers and consolidations.
F. GENERAL ELECTRIC COMPANY INVESTMENT
In October 1999, General Electric Company ("GE") completed an investment in
the Company of $20,554. In exchange for the investment, GE received 761,250
shares of the Company's newly-created Series A Stock convertible at any time
into 3,045,000 shares of Company Common Stock (subject to adjustment). GE also
received a Warrant (the "Initial Warrant") to purchase an additional 1,000,000
shares of Company Common Stock (subject to adjustment), which is immediately
exercisable at $.01 per share. GE has been a holder of
F-35
<PAGE> 158
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
535,887 shares of Company Common Stock since the Company's initial public
offering in 1995. The Series A Stock, Common Stock issuable on exercise of the
Initial Warrant, and the Common Stock held by GE represent (after giving effect
to the shares issued on exercise of the Initial Warrant) approximately 18.8% of
the voting power and equity ownership of the Company. The proceeds of the
transaction were applied principally to the reduction of short-term liabilities
and outstanding amounts under the Company's Bank Credit Facility.
The Series A Stock has a liquidation preference of $27 per share, plus an
amount equal to 8% per annum compounded annually from the date of issuance to
the date of payment. The Company is required to redeem any shares of Series A
Stock which have not been converted or retired on September 30, 2010. In
addition, GE may, by notice, require the Company to redeem the outstanding
Series A Stock, within one year following either September 30, 2004, or the
occurrence of certain corporate events.
If the Company fails to maintain certain financial ratios over certain
measurement periods, GE will have the right to acquire a combination of
subscription rights to additional shares and proxies with respect to shares
voted by certain officers of the Company, giving GE the ability to obtain the
majority of the voting power of the Company. The first measurement period was
the six months ended December 31, 1999. Thereafter, the measurement periods are
the six months ending on the last day of each successive fiscal quarter until
September 30, 2010.
The basis for GE's additional rights will be the failure of the Company to
maintain a 2.0 to 1.0 ratio of EBITDA to Interest Expense over the applicable
measurement periods. Under the terms of the transaction, EBITDA consists of net
earnings, plus interest expense, plus depreciation and amortization, plus income
taxes, less extraordinary gains and gains from asset sales plus extraordinary
losses and losses from asset sales. Interest Expense consists of interest
expense (net of interest income) calculated in accordance with generally
accepted accounting principles, but excludes amortization of deferred financing
costs up to a maximum of $125 in any fiscal quarter. The ratio for the six
months ended December 31, 1999, was 1.9 to 1.0 (1.61 to 1.0 for the quarter
ended September 30, 1999 and 2.23 to 1.0 for the quarter ended December 31,
1999) and, therefore, the "First Occurrence" has taken place.
There is no contractual effect of the First Occurrence other than to make a
"Second Occurrence" possible in the following measurement periods. If the
Company maintains a 2.0 to 1.0 ratio in the three fiscal quarters immediately
prior to the measurement period in which a failure occurs, a Second Occurrence
or "Third Occurrence," as the case may be, would not be effective.
A Second Occurrence would: (i) give GE the ability to vote the number of
shares currently voted by the Chief Executive Officer ("CEO") of the Company,
approximately 3.9 million shares, (ii) give GE the option to purchase shares
from the CEO and the President of the Company which, together with the shares
owned by GE, would represent 25% of the voting power of the Company, and (iii)
require the Company to grant GE an additional warrant to purchase shares, at the
then current market price, presently approximating 197,762 shares. The ability
to vote the shares, purchase shares or obtain the warrant would be dependent
upon compliance with antitrust laws. GE is not required to purchase additional
shares of the Company. If GE obtains approval and obtains in excess of 35% of
the voting power of the Company, the terms of the Indenture relating to the
Company's Senior Notes would require that the Company offer to repurchase the
$100,000 principal amount of outstanding Senior Notes due 2008 at a price of
101% of the principal amount thereof, plus accrued interest, and the Company's
banks will have the ability to demand payment of the Bank Credit Facility. Upon
a Third Occurrence, GE would have the right to vote shares currently voted by
the President and be granted a warrant to purchase (at the then current market
price) additional shares of Common Stock sufficient in number to give GE 50%
plus one vote of the voting power of the Company.
F-36
<PAGE> 159
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
G. RELATED PARTY TRANSACTION
Pursuant to a loan agreement dated October 8, 1998, between the Company and
its Chairman and Chief Executive Officer (the "CEO"), the Company loaned $9,000
to its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the loan
were used by the Company's CEO to reduce the outstanding principal balance of a
margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
The CEO has paid accrued interest of $720 on the loan through October 6,
1999. The principal on the loan was due on October 6, 1999. On January 25, 2000,
the Board agreed that Mr. Hellman would not be required to repay the loan until
October 6, 2000. However, if the price of the Company's Common Stock reaches $12
per share (a level which the directors believe would permit repayment of the
CEO's margin loan and refinancing with another lender), the Board and the CEO
will discuss earlier repayment of all or a portion of the loan. The directors
have informed the CEO that the Company may require immediate payment of the loan
if the Company requires the payment to prevent an unacceptable strain on cash
resources.
H. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS
At December 31, 1999, the Company had a special charges accrual principally
related to the execution of the Company's fiscal 1999 plans related to its shift
in strategic direction intended to accelerate and intensify the Company's focus
on its metal halide products. The fiscal 1999 special charges related to:
limiting Pacific Rim expansion; changing global lamp manufacturing strategy;
restructuring marketing operations in North America and Europe; accelerating an
exit from noncore product lines; reducing excess overhead including staffing
reductions; consolidating an equipment manufacturing operation into the
Company's Solon, Ohio facility and significantly reducing the size of the
operation; and reducing capital expenditures. All actions required by the plans
are expected to be substantially completed by March 31, 2000. The amounts the
Company will ultimately incur may change as the Company's plans are executed and
actions are completed.
Details of the activity in the remaining accruals related to the fiscal
1999 special charges for the six months ended December 31, 1999 are summarized
as follows:
<TABLE>
<CAPTION>
BALANCE AS OF
JUNE 30, CHARGES BALANCE AS OF
DESCRIPTION CASH/NONCASH 1999 UTILIZED DEC. 31, 1999
----------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C>
Lease/contract cancellations Cash/Noncash $3,689 $1,418 $2,271
Staffing reductions Cash/Noncash 681 296 385
Program cancelation Cash 128 83 45
Terminate management benefit program Cash/Noncash 86 83 3
Shut-down costs of facilities Cash 78 73 5
Write-off long-lived assets Cash/Noncash 49 49 --
Other Cash 143 93 50
------ ------ ------
$4,854 $2,095 $2,759
====== ====== ======
</TABLE>
F-37
<PAGE> 160
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
The special charges for fiscal 1999 included costs related to the actions
described above and also include $2,981 related to the wind-down of portable
fixture manufacturing operations, which are described in Note I "Discontinued
Operations Subsequently Retained." Total special charges for the six-months
ended December 31, 1999 of $17,081 are classified in the consolidated statement
of operations as cost of sales ($808) and special charges ($16,273).
In conjunction with limiting its Pacific Rim expansion, the Company
terminated production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the second quarter of fiscal
1999, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
I. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to ADLT shareholders all of the
ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing ADLT businesses.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing ADLT businesses utilizing existing
facilities and operations. The Company utilizes the customer service systems and
personnel of an existing ADLT business, as well as the Internet at , to receive,
process and fill orders. Therefore, the Microsun business has been retained but
without the use of the manufacturing processes or assets used in the previous
operations.
In accordance with the accounting requirements for recontinuance, the
accompanying financial statements have been reclassified to present Microsun
within continuing operations. The net amount charged to the income statement
consisted of the following:
<TABLE>
<CAPTION>
PERIODS ENDED
DECEMBER 31, 1998
--------------------------
THREE MONTHS SIX MONTHS
------------ ----------
<S> <C> <C>
Reclassification of discontinued operations to continuing
operations................................................ $ 4,626 $5,479
Discontinued operations provision........................... (6,166) (6,166)
------- ------
Recontinuance of previously discontinued operations......... $(1,540) $ (687)
======= ======
</TABLE>
The $4,626 reclassified to continuing operations for the three months ended
December 31, 1998 consisted of a loss from operations of $1,645; write-downs to
net realizable value of $2,844 in connection with the decision in
F-38
<PAGE> 161
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
November 1998 to wind-down the Microsun business related to fixed assets
($1,449) and other assets ($1,395); and costs related to lease/contract
cancellations of $137. These costs and write-downs are classified in special
charges. The $5,479 reclassified to continuing operations for the six months
ended December 31, 1998, consisted of a loss from operations of $2,498 and
write-downs of $2,981.
J. CONTINGENCY
In April and May 1999, three class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
shareholders of the Company on behalf of themselves and purported classes
consisting of Company shareholders, other than the defendants and their
affiliates, who purchased stock during the period from December 30, 1997 through
September 30, 1998 or various portions thereof. A First Amended Class Action
Complaint, consolidating the three lawsuits, was filed on September 30, 1999,
and the action is now pending before a single judge. The named defendants in the
case - styled In re Advanced Lighting Technologies, Inc. Securities Litigation,
Master File No. 1:99CV836, pending before the United States District Court,
Northern District of Ohio - are the Company and its Chairman and Chief Executive
Officer.
The First Amended Class Action Complaint alleges generally that certain
disclosures attributed to the Company contained misstatements and omissions
alleged to be violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, including claims for "fraud on the market" arising from alleged
misrepresentations and omissions with respect to the Company's financial
performance and prospects and alleged violations of generally accepted
accounting principles by, among other things, improperly recognizing revenue and
improper inventory accounting. The Complaint seeks certification of the
purported class, unspecified compensatory and punitive damages, pre- and
post-judgment interest and attorneys' fees and costs.
The Company and the CEO believe that these claims lack merit and on
November 15, 1999, the Company and CEO filed a Motion to Dismiss the Complaint.
The Company and the CEO intend to continue to vigorously defend against these
actions.
K. EARNINGS PER SHARE
The following table summarizes the basic and diluted per share computations
for income (loss) from continuing operations and net income (loss) for the three
and six month periods ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations before
cumulative effect of accounting change.......... $ 980 $(38,432) $ 198 $(39,103)
Less: Preferred shares accretion.................. (603) -- (603) --
------- -------- ------- --------
Income (loss) from continuing operations before
cumulative effect of accounting change
attributable to common shareholders............. $ 377 $(38,432) $ (405) $(39,103)
======= ======== ======= ========
Net income (loss)................................. $ 980 $(39,972) $ 198 $(42,233)
Less: Preferred shares accretion.................. (603) -- (603) --
------- -------- ------- --------
Net income (loss) attributable to common
shareholders.................................... $ 377 $(39,972) $ (405) $(42,233)
======= ======== ======= ========
</TABLE>
F-39
<PAGE> 162
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
DECEMBER 31, 1999
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Weighted average shares -- Basic:
Outstanding at beginning of period.............. 20,302 20,215 20,278 20,190
Issued in acquisitions.......................... 40 2 20 1
Issued for exercise of stock options............ -- -- -- 17
Issued pursuant to employee stock purchase
plan......................................... 4 5 7 7
Issued pursuant to 401(k) plan.................. 5 -- 13 --
------- -------- ------- --------
Weighted average shares -- Basic........ 20,351 20,222 20,318 20,215
======= ======== ======= ========
Weighted average shares -- Diluted:
Basic from above................................ 20,351 20,222 20,318 20,215
Effect of warrant issued........................ 946 -- 473 --
Effect of stock options......................... -- -- 9 --
------- -------- ------- --------
Weighted average shares -- Diluted...... 21,297 20,222 20,800 20,215
======= ======== ======= ========
Earnings (loss) per share attributed to common
shareholders -- Basic
Income (loss) from continuing operations before
cumulative effect of accounting change
attributable to common shareholders.......... $ .02 $ (1.90) $ (.02) $ (1.93)
Recontinuance of previously discontinued
operations................................... -- (.08) -- (.04)
Cumulative effect of change in accounting for
start-up costs............................... -- -- -- (.12)
------- -------- ------- --------
Net income (loss) attributable to common
shareholders -- diluted...................... $ .02 $ (1.98) $ (.02) $ (2.09)
======= ======== ======= ========
Earnings (loss) per share attributed to common
shareholders -- Diluted
Income (loss) from continuing operations before
cumulative effect of accounting change
attributable to common shareholders.......... $ .02 $ (1.90) $ (.02) $ (1.93)
Recontinuance of previously discontinued
operations................................... -- (.08) -- (.04)
Cumulative effect of change in accounting for
start-up costs............................... -- -- -- (.12)
------- -------- ------- --------
Net income (loss) attributable to common
shareholders -- diluted...................... $ .02 $ (1.98) $ (.02) $ (2.09)
======= ======== ======= ========
</TABLE>
F-40
<PAGE> 163
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THIS EXCHANGE
OFFER AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 4
Incorporation of Certain Documents by
Reference........................... 4
Summary............................... 6
Risk Factors.......................... 16
Background of the Company............. 23
Use of Proceeds....................... 25
Capitalization........................ 26
Selected Financial Data............... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
Business.............................. 52
Management............................ 76
Certain Transactions.................. 79
Certain Holders of Voting
Securities.......................... 83
Description of Certain Indebtedness... 85
The Exchange Offer.................... 85
Description of the New Notes.......... 93
Description of the Old Notes.......... 117
Certain United States Federal Income
Tax Considerations.................. 117
Plan of Distribution.................. 118
Legal Matters......................... 119
Independent Auditors.................. 119
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
ADVANCED LIGHTING
TECHNOLOGIES, INC.
ADVANCED LOGO
OFFER TO EXCHANGE ITS
8.00% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
8.00% SENIOR NOTES DUE 2008
---------------------------
PROSPECTUS
---------------------------
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 1701.59 of the Ohio Revised Code, which
eliminates the personal liability in damages of a director for violations of the
director's fiduciary duty, except if it is proved by clear and convincing
evidence that his action or failure to act involved acts or omissions undertaken
with deliberate intent to cause injury to the corporation or with reckless
disregard for the best interests of the corporation. This statute does not
affect the liability of directors pursuant to Section 1701.95 of the Ohio
Revised Code (providing for liability of directors for unlawful payment of
dividends or unlawful distribution of assets).
Reference is made to Section 1701.13 of the Ohio Revised Code, which
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the name of the corporation (a
"derivative action") if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. A similar standard is applicable in the case
of derivative actions, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or settlement of
such action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's articles of
incorporation, code of regulations, disinterested director vote, shareholder
vote, agreement or otherwise.
Reference is made to Article Seven of the Code of Regulations (by-laws) of
the Company contained in Exhibit 3.2 hereto which provides for the
indemnification of directors and officers to the fullest extent permitted by
Ohio law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
4.1 Indenture dated as of March 18, 1998 between the Registrant
and The Bank of New York, as trustee (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the Quarterly Period ended March 31, 1998).
4.2 Registration Rights Agreement, dated as of March 18, 1998,
between the Registrant and Morgan Stanley & Co.
Incorporated.*
4.3 Form of Security for 8% Senior Notes due 2008 originally
issued by Advanced Lighting Technologies, Inc. on March 18,
1998.*
4.4 Form of Security for 8% Senior Notes due 2008 to be issued
by Advanced Lighting Technologies, Inc. and registered under
the Securities Act of 1933.*
4.5 First Supplemental Indenture dated September 25, 1998
between Advanced Lighting Technologies, Inc. and the Bank of
New York amending the Indenture dated March 18, 1998
(Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q/A for the Quarterly Period
ended December 31, 1998).
5.1 Opinion of Cowden, Humphrey & Sarlson Co., L.P.A.*
5.2 Opinion of Brown & Wood LLP.*
12 Statement re computation of ratio of earnings to fixed
charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cowden, Humphrey & Sarlson Co., L.P.A. (included
in Exhibit 5.1).
23.3 Consent of Brown & Wood LLP (included in Exhibit 5.2).
23.4 Consent of Grant Thornton LLP, Independent Auditors.
24 Powers of Attorney.*
24.1 Powers of Attorney of New Directors
25 Statement of eligibility of trustee.*
</TABLE>
II-1
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
</TABLE>
- ---------------
* Previously filed
(b) Financial Statement Schedules.
Schedules have been omitted since the information is not applicable, not
required or is included in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired or involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 166
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT (FORM S-4,
NO. 333-58609) TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO, ON APRIL 24, 2000.
ADVANCED LIGHTING TECHNOLOGIES, INC.
By: /s/ ALAN J. RUUD
-------------------------------------
Alan J. Ruud
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Wayne R. Hellman Chief Executive Officer and April 24, 2000
- ------------------------------------------------ Director
Wayne R. Hellman
/s/ Nicholas R. Sucic Chief Financial Officer, Vice April 24, 2000
- ------------------------------------------------ President and Treasurer (Chief
Nicholas R. Sucic Accounting Officer)
/s/ Francis H. Beam Director April 24, 2000
- ------------------------------------------------
Francis H. Beam*
/s/ John E. Breen Director April 24, 2000
- ------------------------------------------------
John E. Breen*
/s/ John R. Buerkle Director April 24, 2000
- ------------------------------------------------
John R. Buerkle*
/s/ Theodore A. Filson Director April 24, 2000
- ------------------------------------------------
Theodore A. Filson*
/s/ Louis S. Fisi Director April 24, 2000
- ------------------------------------------------
Louis S. Fisi*
/s/ Susuma Harada Director April 24, 2000
- ------------------------------------------------
Susuma Harada*
/s/ Thomas K. Lime Director April 24, 2000
- ------------------------------------------------
Thomas K. Lime*
/s/ Alan J. Ruud Director April 24, 2000
- ------------------------------------------------
Alan J. Ruud*
/s/ A Gordon Tunstall Director April 24, 2000
- ------------------------------------------------
A Gordon Tunstall*
* The undersigned, by signing his name hereto, does hereby execute this Amendment No. 4 to the
Registration Statement on behalf of the above indicated officers and directors of Advanced Lighting
Technologies, Inc., pursuant to Powers of Attorney executed by each such officer and director
appointing the undersigned as attorney-in-fact and filed with the Securities and Exchange
Commission.
</TABLE>
By: /s/ WAYNE R. HELLMAN
------------------------------------
Wayne R. Hellman
Attorney-in-Fact
II-3
<PAGE> 167
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
4.1 Indenture dated as of March 18, 1998 between the Registrant
and The Bank of New York, as trustee (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report
on Form 10-Q for the Quarterly Period ended March 31, 1998).
4.2 Registration Rights Agreement, dated as of March 18, 1998,
between the Registrant and Morgan Stanley & Co.
Incorporated.*
4.3 Form of Security for 8% Senior Notes due 2008 originally
issued by Advanced Lighting Technologies, Inc. on March 18,
1998.*
4.4 Form of Security for 8% Senior Notes due 2008 to be issued
by Advanced Lighting Technologies, Inc. and registered under
the Securities Act of 1933.*
4.5 First Supplemental Indenture dated September 25, 1998
between Advanced Lighting Technologies, Inc. and the Bank of
New York amending the Indenture dated March 18, 1998
(Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q/A for the Quarterly Period
ended December 31, 1998).
5.1 Opinion of Cowden, Humphrey & Sarlson Co., L.P.A.*
5.2 Opinion of Brown & Wood LLP.*
12 Statement re computation of ratio of earnings to fixed
charges.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cowden, Humphrey & Sarlson Co., L.P.A. (included
in Exhibit 5.1).
23.3 Consent of Brown & Wood LLP (included in Exhibit 5.2).
23.4 Consent of Grant Thornton LLP, Independent Auditors.
24 Powers of Attorney.*
24.1 Powers of Attorney of New Directors.
25 Statement of eligibility of trustee.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Exchange Agent Agreement.*
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 12
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consolidated pretax income
from continuing operations $ 1,101 $(35,165) $ 537 $(36,010)
Interest expense 3,323 3,440 7,113 6,181
Interest portion of rent expense 145 167 280 303
-------- -------- -------- --------
EARNINGS $ 4,569 $(31,558) $ 7,930 $(29,526)
======== ======== ======== ========
Interest expense $ 3,323 $ 3,440 $ 7,113 $ 6,181
Interest capitalized 180 249 196 458
Interest portion of rent expense 145 167 280 303
Preferred shares accretion 603 -- 603 --
-------- -------- -------- --------
FIXED CHARGES $ 4,251 $ 3,856 $ 8,192 $ 6,942
======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 1.1 -- -- --
======== ======== ======== ========
</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 costs, whether expensed or capitalized, that
portion of rental expense that is representative of interest, and preferred
shares accretion. In the six months ended December 31, 1999, earnings were
inadequate to cover fixed charge requirements by $262. In the three months ended
December 31, 1998, earnings were inadequate to cover fixed charge requirements
by $35,414. In the six months ended December 31, 1998, earnings were inadequate
to cover fixed charge requirements by $36,468.
<PAGE> 2
Exhibit 12
Page 2
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated pretax income (loss)
from continuing operations $ (79,458) $ (25,319) $ 9,801 $ 3,427 $ 3,354
Interest 13,889 3,818 1,513 1,548 2,107
Increase in value of warrants - - - 1,350 2,302
Interest portion of rent expense 626 498 492 297 204
Preferred stock dividend requirements
of majority-owned subsidiaries - - - - 62
------------- ------------ ------------ ------------- ------------
EARNINGS (LOSS) $ (64,943) $ (21,003) $ 11,806 $ 6,622 $ 8,029
============= ============ ============ ============= ============
Interest $ 13,889 $ 3,818 $ 1,513 $ 1,548 $ 2,107
Increase in value of warrants - - - 1,350 2,302
Interest capitalized 645 1,118 455 98 9
Interest portion of rent expense 626 498 492 297 204
Preferred stock dividend requirements
of majority-owned subsidiaries - - - - 62
------------- ------------ ------------ ------------- ------------
FIXED CHARGES $ 15,160 $ 5,434 $ 2,460 $ 3,293 $ 4,684
============= ============ ============ ============= ============
RATIO OF EARNINGS TO FIXED CHARGES - - 4.8 2.0 1.7
============= ============ ============ ============= ============
</TABLE>
For purposes of calculating the unaudited ratio of earnings to fixed charges,
earnings consists 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. Earnings were
inadequate to cover fixed charge requirements by $80,103 in fiscal 1999 and by
$26,437 in fiscal 1998.
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 28, 1998 (except for the sixth paragraph of
Note C, as to which the date is March 15, 1999 and except for the information
related to the year ended June 30, 1998 included in Note L, as to which the date
is April 24, 2000), with respect to the consolidated financial statements of
Advanced Lighting Technologies, Inc. in Amendment No. 4 to the Registration
Statement (Form S-4 No. 333-58609) and related Prospectus of Advanced Lighting
Technologies, Inc. for the registration of $100,000,000 of 8% Senior Notes due
2008.
/s/ Ernst & Young LLP
Cleveland, Ohio
April 24, 2000
<PAGE> 1
Exhibit 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 24, 1999, except for Note U, as to which the
date is September 28, 1999 and Note L, as to which the date is October 11, 1999,
with respect to the consolidated financial statements of Advanced Lighting
Technologies, Inc. as of June 30, 1999 and for the year then ended, included in
the Registration Statement (Form S-4 No. 333-58609) and the related Prospectus,
pertaining to the Company's 8% Senior Notes due 2008.
/s/ Grant Thornton LLP
Cleveland, Ohio
April 24, 2000
<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 any and all capacities, to sign the Form S-4
Registration Statement, any amendments thereto or any new registration statement
filed pursuant to Rule 464 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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/John E. Breen Director March 1, 2000
- ------------------------
John E. Breen
/s/ Thomas K. Lime Director March 3, 2000
- ------------------------
Thomas K. Lime
