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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
___X___ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
or
________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 0-27202
ADVANCED LIGHTING TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
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OHIO 34-1803229
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
32000 AURORA ROAD, SOLON, OHIO 44139
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(Address of principal executive offices) (Zip Code)
440 / 519-0500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value
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Indicate by check (X) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of September 15, 2000 was $203,217,428.
There were 22,199,015 shares of the Registrant's Common Stock, $.001 par value
per share, outstanding as of September 15, 2000.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for use at the 2000 Annual
Shareholders Meeting are incorporated by reference into Part III of this Form
10-K to the extent stated herein.
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INDEX
ADVANCED LIGHTING TECHNOLOGIES, INC.
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PAGE
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Cautionary Statement Regarding Forward Looking Statements............................. 2
Risk Factors.......................................................................... 2
PART I
Item 1. Business................................................................ 14
Item 2. Properties.............................................................. 35
Item 3. Legal Proceedings....................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders..................... 36
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters................................................................. 37
Item 6. Selected Financial Data................................................. 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 40
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............. 68
Item 8. Financial Statements and Supplementary Data............................. 69
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................ 70
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 70
Item 11. Executive Compensation.................................................. 70
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 70
Item 13. Certain Relationships and Related Transactions.......................... 70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 71
SIGNATURES............................................................................ 78
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Report contains statements which constitute forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include statements regarding the intent, belief or
current expectations of Advanced Lighting Technologies, Inc. and its
subsidiaries (the "Company"or "ADLT"), its directors or its officers with
respect to, among other things: (i) the Company's financing plans; (ii) trends
affecting the Company's financial condition or results of operations; (iii)
continued growth of the metal halide lighting market; (iv) the Company's
operating strategy and growth strategy; (v) potential acquisitions or joint
ventures by the Company; (vi) the declaration and payment of dividends; (vii)
litigation affecting the Company; (viii) the timely development and market
acceptance of new products; (ix) the possibility that any success at Deposition
Sciences, Inc. (an ADLT subsidiary) will not be reflected in the value of the
ADLT common stock; (x) the ability to provide adequate incentives to retain and
attract key employees; and (xi) the impact of competitive products and pricing.
Prospective investors are cautioned that any such forward looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the forward
looking statements as a result of various factors. The accompanying information
contained in this Report, including without limitation the information set forth
under the headings "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," identifies
important factors that could cause such differences.
RISK FACTORS
You should consider carefully the following factors, as well as the other
information that we include or incorporate by reference in this report, in
evaluating an investment in our securities. To make the discussion of these
factors easier to read, when we discuss the Company we refer to it as "we."
IF METAL HALIDE LIGHTING DOES NOT GAIN WIDER MARKET ACCEPTANCE, OUR BUSINESS AND
FINANCIAL PERFORMANCE MAY SUFFER
We derive a substantial portion of our net sales and income from selling metal
halide materials, systems and components, and production equipment. Revenues
from metal halide products represented between approximately 72% of net sales in
fiscal 2000 and 74% of net sales in fiscal 1999. Our current operations and
growth strategy are focused on the metal halide lighting and telecommunications
industries. 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
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lighting market or competitors may introduce better lighting technologies,
displacing metal halide lighting in the market. As a growth company, either of
these occurrences could have a material adverse effect on our business and our
results of operations and the value of our securities.
GENERAL ELECTRIC COMPANY'S RELATIONSHIP WITH US COULD LIMIT OUR ABILITY TO GROW
On October 6, 1999, GE made an investment of $20.6 million for 761,250 shares of
our convertible preferred stock and a warrant for 1,000,000 shares of our common
stock. Pursuant to the terms of the GE investment agreement, GE has the right,
by converting its preferred shares and exercising warrants, to acquire
approximately 4,000,000 of our common shares. GE may get additional rights in
the future if we are unable to maintain a 2 to 1 ratio of earnings before
interest, taxes, depreciation and amortization to interest charges for a
six-month measurement period. Measurement periods are the six months ending on
the last day of each fiscal quarter until September 30, 2010. We did not
maintain this ratio for the six months ended December 31, 1999, but we did for
the six-month periods ended March 31, 2000 and June 30, 2000. If we fail to
maintain the ratio in future measurement periods and we do not maintain the
ratio in the three calendar quarters immediately prior to the failure, GE would
obtain the right to purchase and vote additional shares of our stock and acquire
voting control of our company. On the first future failure, if it happens, GE
would obtain rights to purchase and/or vote a number of shares determined by a
formula at the time of the failure. The number of shares owned or available to
GE at that time would be greater than 35% but less than a majority of our stock.
At the time of the second future failure, if it happens, GE would own or have
the right to purchase and/or vote the number of shares which would be a majority
of our stock. 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.
We intend to devote substantial resources to developing the telecommunications
business of our subsidiary, Deposition Sciences, Inc.(DSI). This will adversely
affect our ability to meet the GE ratio until such time, if any, that we achieve
positive earnings before interest, taxes, depreciation and amortization at DSI.
As a result, the investment in telecommunications may negatively affect our
ability to maintain the required ratio under our agreement with GE. Although we
believe we will be able to manage our business to maintain the required ratio
notwithstanding our investment in the telecommunications business, we can make
no assurance that we will succeed in doing so for future measurement periods. If
we fail to maintain the required ratio, in the circumstances described in the
preceding paragraph, GE would obtain the additional rights to purchase and/or
vote our common shares as described above.
GENERAL ELECTRIC COMPANY'S RIGHTS COULD STRAIN OUR FINANCIAL RESOURCES
In October 2004, GE has a one-time right to make us redeem their preferred
stock, although we have up to one year to arrange financing. GE also has the
right to make us redeem their preferred stock if GE does not get the necessary
governmental approvals of their rights to acquire more of our shares in the
future, if we issue additional common shares, if any of our subsidiaries issue
additional common shares or if we borrow more than a total of $210 million. The
existence of these limits may reduce our ability to obtain financing in the
future. If we have to redeem the
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preferred stock, our financial resources will be reduced, and could cause us to
default under the indenture governing our 8% Senior Notes Due 2008. We are
required to redeem shares of this preferred stock which have not been converted
to common stock by October 2010. Although GE cannot make us redeem their
preferred stock if a default results, the failure to redeem GE's preferred stock
after GE makes a request for redemption could adversely affect our relationship
with GE.
GENERAL ELECTRIC COMPANY'S RELATIONSHIP WITH US COULD HARM OUR RELATIONSHIP WITH
OTHER LIGHTING COMPANIES
GE's investment is expected to increase our operating flexibility. In addition,
we anticipate that this will strengthen our supplier-customer relationship with
GE. However, some of our significant suppliers and customers are also lighting
companies. We have not experienced any adverse impact from these other companies
since the March 1999 public announcement of the agreement in principle regarding
the investment. 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.
WE WILL REQUIRE SUBSTANTIAL EXPENDITURES TO EXPLOIT OUR TECHNOLOGY FOR
TELECOMMUNICATIONS PRODUCTS
DSI has technology which can be used in telecommunications applications.
However, the effort to exploit this technology for production of additional
telecommunications products and the expansion of production capabilities for
current products, will require us to make substantial expenditures for
facilities and machinery and research and development. We are devoting
substantial resources for new facilities and equipment to the production of thin
film coatings, assemblies and components used in telecommunications. Although we
believe existing cash balances, cash flow from operations and availability under
our bank credit facility will be sufficient to meet DSI's funding requirements
at least for the next eighteen months, we may be required to seek additional
equity or debt financing to compete effectively in these markets. We cannot
precisely determine the timing and amount of funding requirements and each will
depend on several factors, including our acquisitions and the demand for our
products and products under development. Such additional financing may not be
available when needed, or, if available, may not be on terms satisfactory to us.
OUR DEGREE OF INDEBTEDNESS COULD LIMIT OUR ABILITY TO GROW AND REACT TO CHANGES
IN MARKET CONDITIONS
At June 30, 2000, we had approximately $165.2 million of total indebtedness
outstanding and $99.8 million of preferred and common shareholders' equity. At
June 30, 2000, we also had $11.2 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
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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 LIMIT 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 four fiscal years, and have spent
more money on operations and investing in our business than our operations have
generated in each of our last five fiscal years. While we believe we will
generate more cash in our operations than we are spending on operations, we
can't assure investors that the cost-saving measures will generate positive cash
flow from our operations in the future. In addition, we are not currently
generating sufficient cash in our business to make the investments in our future
growth which we would like. Our ability to borrow additional money under our $60
million 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.
ALLOCATION OF ADLT RESOURCES TO DSI MAY NOT BE IN THE BEST INTEREST OF ADLT
SHAREHOLDERS
The success of DSI's telecommunications business unit will depend not only on
access to external sources of capital but also the internal resources of ADLT's
consolidated business. Although we are allocating financial and human resources
to DSI because we believe the investment will ultimately return enhanced value
to ADLT and our shareholders, there can be no assurance of such success. In
addition, the allocation of resources to the telecommunications business unit
may result in us allocating fewer resources to our core lighting business. As a
result, until such time, if any, that we achieve a positive return on our
investment in DSI's telecommunications business unit, our future liquidity may
be adversely affected and our operating results will be adversely affected.
OUR LOAN TO MR. HELLMAN MAY IMPAIR OUR CAPITAL RESOURCES
On October 8, 1998, we made a $9 million loan to Wayne R. Hellman, our Chairman
and CEO. The loan was originally 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 to October 6, 2001. 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.
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IF WE ARE UNABLE TO DEVELOP AND BROADEN PRODUCT LINES OUR BUSINESS MAY SUFFER
We have 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. These differences are based on the need
to focus efforts on sales to the user of the products rather than lighting
fixture original equipment manufacturers. 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 future growth and financial
results.
OUR BUSINESS SUCCESS HAS BEEN BASED ON NEW PRODUCTS, AND IF WE DO NOT INTRODUCE
NEW PRODUCTS, OUR BUSINESS MAY SUFFER
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 metal halide lighting and telecommunications products. Even
though we spent significant amounts on research and development in fiscal 2000
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 use,
the product may not be commercially successful. In addition, competitors
occasionally have followed our introduction of successful metal halide lighting
products with similar product offerings. As a result of these and other factors,
we may not continue to be successful in introducing new products. Since we are
viewed as a growth company, if we are unable to successfully introduce new
products, this inability could adversely affect our financial results and the
value of our securities.
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.
Also, we have made and may continue to extend our product lines 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.
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WE MAY BE UNABLE 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 potential candidates. We cannot be
certain that any agreement will result from these 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 double our revenues. There can
be no assurance that we will be able to integrate these acquisitions or to
manage our expanded operations effectively. In addition, since 1997 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 these
investments, or to liquidate these 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 35% of our net sales for fiscal
2000. 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 27% of our net sales in fiscal 2000 were denominated in currencies
other than U.S. dollars, principally pounds sterling, Australian dollars and
Canadian dollars. A weakening of these 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.
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IF WE ARE UNABLE TO PROTECT OUR IMPORTANT PATENTS AND TRADE SECRETS OR IF OTHERS
ENFORCE RIGHTS AGAINST US, OUR BUSINESS MAY SUFFER
We rely primarily on trade secret, trademark and patent laws to protect some of
our rights to our products, like 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. Any of these
developments could adversely affect the way we currently conduct our business.
The patent positions of companies such as ADLT and its subsidiaries can be
highly uncertain and involve complex legal and factual questions, and therefore
the breadth of claims allowed in such patents and their enforcability cannot be
predicted. Therefore, we cannot assure you that the claims in any existing or
subsequently issued patent will be sufficient to protect ADLT's or its
subsidiaries intellectual property or that such patent will not be challenged,
invalidated, held unenforceable or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages.
Any litigation 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 related aspects
of our products, or could subject us to substantial liability. Because we are a
company which relies on advanced technology and innovation, 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.
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CONTROL OF OUR STOCK BY PRINCIPAL SHAREHOLDERS MAY ALLOW THEM TO SIGNIFICANTLY
INFLUENCE SHAREHOLDER DECISIONS, WHICH COULD ADVERSELY AFFECT INTERESTS OF OTHER
HOLDERS OF OUR SECURITIES
Mr. Hellman individually owns approximately 8.7% of the outstanding shares of
our common stock and, individually and in other capacities, has the power to
vote a total of 17.7% of the outstanding shares of common stock (or
approximately 15.5% of the shareholder voting power). Mr. Ruud individually owns
approximately 9.7% of the outstanding shares of common stock and, individually
and as a voting trustee, has the power to vote a total of approximately 16.4% of
the outstanding shares of common stock (or approximately 14.4% of the
shareholder voting power). GE owns shares of our preferred stock with voting
power equivalent to approximately 12.1% of our common stock and GE owns
approximately 1.9% of our common stock. This gives GE approximately 13.8% of
total shareholder voting power, subject to increase upon exercise of its
warrants to purchase one million shares of our common stock. In addition to GE's
ownership, in the future, GE may 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 (which could control 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. Accordingly, the decisions of our principal
shareholders could have a material adverse effect on the market price of our
common stock or the value of our other securities.
IF GE OR ANOTHER INVESTOR CAN VOTE MORE THAN 35% OF OUR STOCK, WE MAY HAVE TO
REPAY LOANS
If GE, or any investor or group of investors, other than Mr. Hellman or his
family, get the right to vote more than 35% of our stock, our credit facility
banks will have the right to demand payment under our revolving and term loans
and we will have to offer to repurchase our 8% Notes at a purchase price of 101%
of the face amount, 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 our 8%
Notes if an investor gains a 35% voting interest. Even if we can meet these
obligations, if we have to repay the credit facility banks and repurchase our 8%
Notes, it could hurt our ability to finance operations and future growth.
OUR STOCK PRICE HAS VARIED WIDELY AND MAY VARY WIDELY IN THE FUTURE. WIDE
VARIATION MAY MAKE IT DIFFICULT FOR US TO SELL OUR STOCK AND STRAIN OUR
FINANCIAL RESOURCES
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. During fiscal 2000, the price for our common stock ranged from $4.75 to
$23.75 per share. In addition, we cannot predict the ultimate success of our
telecommunications business unit, which may cause substantial fluctuations in
the market
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price of our common stock. Our net revenues and operating results, and the net
revenues of our telecommunications business unit, in future quarters may be
below the expectations of public market securities analysts and investors. In
such event, the price of our common stock would likely decline, perhaps
substantially. This wide variation and the possibility of wide variation in the
future may make it difficult for us to sell shares of our common stock at prices
which we believe reflect the value of our stock or make it difficult to sell our
common stock at all. If we can't sell our common stock to obtain the money we
need, it may be difficult to operate and grow.
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.
BECAUSE OUR PRIMARY COMPETITORS ARE MORE ESTABLISHED AND HAVE MORE RESOURCES
THAN WE DO, WE MAY LACK THE RESOURCES TO CAPTURE INCREASED MARKET SHARE
We compete with respect to our major lighting 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. and Siemens A.G.'s OSRAM/Sylvania, Inc. subsidiary 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, Advanced Transformer Co. (a division of Philips)
and Magnetek, Inc., 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. This type of increase
or expansion could make it more difficult for us to maintain sales or grow.
DSI competes with respect to its major telecommunications products with numerous
producers of components and systems, many of which possess greater financial,
manufacturing, marketing and distribution resources than DSI. The principal
competitors for DSI's products are certain large
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OEMs, such as JDS Uniphase Corporation, Corning Incorporated, Nortel Networks
Corporation, and Lucent Technologies, Inc., which have significant internal
capability to manufacture thin film filter products, and a variety of smaller
companies which specialize in optical coatings, such as DiCon Fiberoptics, Inc.,
Precision Optics Corp., Inc., Barr Associates, Inc., Iridian Spectral
Technologies, Ltd., Thin Film Technologies, Inc., and Evaporated Coatings, Inc.
DSI's failure to effectively compete in the telecommunications market could
adversely affect the trading price of our common stock.
WE SELL PRODUCTS TO OUR COMPETITORS AND PURCHASE COMPONENTS FROM OUR
COMPETITORS, AND THESE RELATIONSHIPS COULD CHANGE BASED ON OUR COMPETITORS'
INTERESTS. THIS CREATES A RISK OF POTENTIAL DECLINES IN SALES AND REDUCED ACCESS
TO COMPONENTS.
Notwithstanding the fact that we compete with GE, Philips and Sylvania in the
sale of our lighting products, we purchase a significant quantity of raw
materials and private label lamps from these three companies (aggregating $17.4
million in fiscal 2000, of which $13.9 million was from GE) and derive
significant revenue from sales of our materials, components, and systems to each
of these three companies (aggregating $24.7 million in fiscal 2000, of which
$7.9 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, in turn, holders of our
securities.
IF THE TELECOMMUNICATIONS BUSINESS UNIT DOES NOT ACHIEVE ACCEPTABLE
MANUFACTURING VOLUMES, YIELDS OR SUFFICIENT PRODUCT RELIABILITY, OUR OPERATING
RESULTS COULD SUFFER
The manufacture of DSI's products involves highly complex and precise processes,
requiring production in highly controlled and clean environments. Changes in
DSI's manufacturing processes, or those of its suppliers, or inadvertent use of
defective or contaminated materials, could significantly reduce DSI's
manufacturing yields and product reliability. To the extent that the
telecommunications business unit does not achieve acceptable manufacturing
yields or experiences product shipment delays, our business, operating results
and financial condition could be materially and adversely affected.
If we are successful in expanding the market for DSI's telecommunications
products, we must increase our manufacturing volumes to meet customers' needs
and satisfy customer demand. Failure to do so may materially harm our business,
operating results and financial condition. In some cases, existing manufacturing
techniques, which involve substantial manual labor, may be insufficient to
achieve the volume or cost targets of our customers. As such, we will need to
develop new manufacturing processes and techniques, which are anticipated to
involve higher levels of automation, to achieve the targeted volume and cost
levels. In addition, it may be difficult to hire qualified manufacturing
personnel in a timely fashion, if at all, when customer demands increase over
shortened time periods. While we continue to devote research and development
efforts to improvement of our manufacturing techniques and processes, we may not
achieve manufacturing volumes and cost levels that will fully satisfy customer
demands.
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<PAGE> 13
IF DSI'S CUSTOMERS DO NOT QUALIFY DSI'S MANUFACTURING LINES FOR VOLUME
SHIPMENTS, OUR OPERATING RESULTS COULD SUFFER
Customers will not purchase any of DSI's products (other than limited numbers of
evaluation units) prior to qualification of the manufacturing line for the
product. Each new manufacturing line must go through varying levels of
qualification with our customers. This qualification process determines whether
the manufacturing line achieves the customers' quality, performance and
reliability standards. Delays in qualification can result in significant lost
revenue opportunity over the term of that program. DSI may experience delays in
obtaining customer qualification of new facilities. If DSI fails in the timely
qualification of these or other new manufacturing lines, our operating results
and customer relationships would be adversely affected.
FIBER OPTIC COMPONENT AVERAGE SELLING PRICES ARE DECLINING
Prices for telecommunications fiber optic components are generally declining
because of, among other things, increased competition and greater unit volumes
as telecommunications service providers continue to deploy fiber optic networks.
We anticipate that average selling prices will decrease in the future in
response to product introductions by competitors and DSI or to other factors,
including price pressures from significant customers. Therefore, DSI must (1)
timely develop and introduce new products that incorporate features that can be
sold at higher selling prices and (2) reduce its manufacturing costs. Failure to
achieve any or all of the foregoing may have a material adverse effect on our
business, financial condition and operating results.
OUR AGREEMENTS WITH CREDITORS IMPOSE RESTRICTIONS THAT COULD IMPEDE OUR GROWTH
The bank credit facility and the 8% Notes indenture contain restrictive
covenants, including
- covenants limiting our ability and our subsidiaries' ability
to incur additional indebtedness, pay dividends, make
investments, consummate asset sales, enter into transactions
with affiliates and incur liens; and
- covenants imposing restrictions on the ability of our
subsidiaries to pay dividends or make payments to us, merge or
consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all
of our assets.
Although the covenants are subject to exceptions which were designed to allow us
and our subsidiaries to operate without undue restraint, these covenants 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 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 these 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. This would adversely affect us and holders of our securities. We
replaced our earlier credit facility in 1999 and
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<PAGE> 14
we have amended our bank credit facility since it was put into place, in part to
amend these covenants. These amendments were necessary to allow us to borrow
cash necessary to maintain our operations and to finance purchases of machinery
and equipment to improve our operations. As a growth company, we may need to
amend or replace our bank credit facility prior to its maturity on May 21, 2002.
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<PAGE> 15
PART I
ITEM 1. BUSINESS
BACKGROUND
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 Report with
respect to the lighting industry is reported on a calendar year basis and
includes the industrial, commercial and residential sectors, but not the
automotive sector. Unless otherwise stated herein, such industry data is derived
from selected reports published by the National Electrical Manufacturers
Association ("NEMA").
THE COMPANY
Advanced Lighting Technologies, Inc. is an innovation-driven designer,
manufacturer and marketer of metal halide lighting products. Metal halide
lighting combines superior energy efficient illumination with long lamp (i.e.,
light bulb) life, excellent color rendition and compact lamp size. The Company
believes that it is the only designer and manufacturer in the world focused
primarily on metal halide lighting. As a result of this unique focus, the
Company has developed substantial expertise in all aspects of metal halide
lighting. The Company believes that this focus enhances its responsiveness to
customer demand and has contributed to its technologically advanced product
development and manufacturing capabilities.
The metal halide market is the fastest growing segment of the domestic lighting
market, demonstrated by metal halide lamp sales having grown at a compound
annual rate of approximately 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 38% to $225.0 million in fiscal
2000 from $86.5 million in fiscal 1997. The Company has experienced growth in
net sales in each of the past seven years, and the Company's sales increased 16%
to $225.0 million in fiscal 2000 from $193.2 million in fiscal 1999.
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
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<PAGE> 16
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 Products
Vertical Integration from Materials through Systems
<TABLE>
<CAPTION>
<S> <C> <C>
Products for Manufacturers Products for End Users Innovative Products
for End Users
----------------------
| | ---------------------
| MATERIALS | | Metal Halide |
| |_____________| Systems |____________
| | | Produced by the | |
| LAMPS | | Company | | -------------------
| | --------------------- | | New |
| |..............................................|.............| Applications |
| POWER SUPPLIES | | | |
| | ---------------- | -Fiber Optics |
| |......................................| Commercial/ | | -Residential |
| | | Industrial/ | | -Headlights |
| CONTROLS | Replacement Parts | Outdoor | | -Projection TV |
| | Sold to End Users | Applications | -------------------
| | ----------------
| | ------------------------- |
| OPTICS/COATINGS | | Metal Halide Systems | |
| |_____________| Produced by |________|
---------------------- | Third Parties |
-------------------------
</TABLE>
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 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.
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<PAGE> 17
RECENT DEVELOPMENTS
On August 31, 2000, the Company completed a public offering of 1,700,000 shares
of its common stock at a price of $15.00 per share under a $300.0 million shelf
registration filed with the Securities and Exchange Commission which became
effective in July 2000.
The public offering reduced the amount available for the issuance of various
debt and equity securities under the shelf registration statement to
approximately $274.5 million. The Company used the net proceeds from the public
offering of approximately $22.9 million to repay revolving credit loan
borrowings. The Company intends to subsequently borrow under its revolving
credit loan facility to fund capital improvements, including optical coating
production equipment, filter testing and measurement equipment and production
facilities, and on research and development in its telecommunications business
unit at Deposition Sciences, Inc.
In addition to the $300.0 million shelf registration discussed above, in July
2000 a $100.0 million shelf registration became effective under which the
Company may from time-to-time issue various debt and equity securities to
acquire assets, businesses or securities. At the date of filing this Report, the
Company had no outstanding securities issued under this registration statement.
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 interest, 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 manufactured 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 "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments - Expansion
of Operations in India."
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<PAGE> 18
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 also holds 430,887 shares of Company Common Stock
which it has held 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - 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 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, Inc.(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.
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<PAGE> 19
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 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.
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<PAGE> 20
International Demand for Metal Halide. 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 -- LIGHTING
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 for lighting 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,
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. To the extent its
capital resources allow, the Company may consider other possible acquisition and
strategic investment opportunities.
OPERATING STRATEGY -- LIGHTING
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.
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<PAGE> 21
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 acquisition of Ruud Lighting), and magnetic and
electronic power supplies. 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, 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. Through Ruud Lighting, which is a leading
direct marketer of HID systems, the Company expects to continue to enhance its
ability to directly market HID systems for commercial, industrial, outdoor and
retail lighting applications, as well as replacement lamps.
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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 -- LIGHTING
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. The Company now manufactures and
markets 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
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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 or 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
China, Korea and Japan.
Penetrate the Residential Lighting Market
The Company believes that residential and consumer applications will represent a
promising market for metal halide lighting within the next five years. Over the
longer term, the Company intends to lead metal halide's penetration of the
residential lighting market by: (i) expanding the marketing of its products,
especially contractor-installed fixtures used in the construction of new and
remodeled housing, building on Ruud Lighting's expertise in direct marketing to
contractors; and (ii) developing the use of metal halide fiber optic systems
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).
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>
<CAPTION>
<S> <C> <C>
- floodlighting - sports arena lighting - general lighting
- architectural area lighting - commercial downlighting - industrial highbays
- general industrial lighting - airport and railway station - tunnel lighting
- billboard and sign lighting lighting - indirect indoor sports
- site lighting - gas station canopy lighting and office lighting
- soffit lighting - interior downlighting - parking garage lighting
- hazardous location lighting - decorative lighting - security lighting
- accent lighting - retail store downlighting - landscape lighting
and track lighting
</TABLE>
The Company also designs, manufactures and sells thin film deposition equipment
for the lighting, telecommunications, 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.
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<PAGE> 24
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.
Through 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 coatings for
telecommunications products, 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. See also "Telecommunication Applications of Company
Technology."
Systems and Components
The Company's component products include specialty and standard lamps, magnetic
and electronic power supplies, system controls and switches and fiber optic
cable. Specialty lamps are lamps designed and manufactured for particular OEM
applications. Standard lamps are high-volume lamps which the Company typically
buys for resale under arrangements with GE and Sylvania. Power supplies are
devices which regulate power and are necessary for operation of HID and
fluorescent lamps. System controls and switches are auxiliary electrical
controls included in fixtures and systems.
The Company believes it differentiates itself from other metal halide lamp
manufacturers by offering a wider variety of lamps, many of which have been
customized to offer a specific solution to a lighting problem. Since 1985, the
Company believes that it has introduced 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
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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 (formerly Ballastronix),
the Company's Canadian subsidiary which manufactures magnetic power supplies,
and Venture Lighting Europe (formerly Parry), 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 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, has 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.
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A metal halide lamp production equipment group consists of up to 50 different
production machines. The Company has also begun to manufacture and sell
photometric measuring equipment, which is used to measure quantity and quality
of light for design and testing of lighting products and systems.
Each lamp production equipment group sold for between $1.0 million to $6.0
million. In order to maintain manufacturing flexibility, the Company must
continually update its own component production equipment, through the internal
design and fabrication of production equipment. The Company had leveraged its
manufacturing expertise by selling lamp production equipment groups in
international markets to independent companies or to joint ventures with local
lamp manufacturers. In connection with each lamp production equipment group
sale, the Company provided lamp designs and specifications, trained the
purchaser in production and created a customer for its materials products.
Through 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. See also "Telecommunication
Applications of Company Technology."
International Sales
International sales aggregated $79.1 million (35% of net sales) for fiscal 2000,
$68.9 million (33% of net sales) for fiscal 1999 and $78.8 million (47% of net
sales) for fiscal 1998. For information regarding the Company's international
operations, see Note Q 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 $43.3 million or 7.4% of net sales
into research and development over the last three full fiscal years. In fiscal
2000 the Company invested $14.8 million (6.6% of net sales) in research and
development; in fiscal 1999, $17.7 million (9.2% of net sales); and in fiscal
1998, $10.8 million (6.4% 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
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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. See also "Telecommunication Applications of Company Technology."
Systems and Components. The Company's product design and development has focused
on developing innovative components to meet the specialized needs of various
customers, including lighting fixture OEMs. The Company's product design teams
work together with OEMs on the design, development and commercialization of new
system components. Such collaborative development efforts have resulted in the
design of improved metal halide lamps with reduced wattage, better energy
efficiency, smaller size and increased life expectancy.
Since 1996, the Company has increased its focus on design and development of
integrated systems. The Company expects efforts in this area to become
increasingly important as the Company seeks to develop new fiber optic
applications and utilizes the capability of Ruud Lighting to manufacture and
directly market HID lighting systems.
MARKETING AND DISTRIBUTION
Commercial Products
The marketing and distribution of the Company's diverse range of commercial
products varies by individual product and by product category, as described
below. All sales data are exclusive of intercompany sales.
Materials
The Company markets materials (metal halide and other salts) directly to all
high intensity discharge lamp manufacturers, primarily GE, Philips and Sylvania
for use in their manufacture of lamps. The Company also markets lamp materials
to its joint venture partners. In addition, the Company works very closely with
its customers to manufacture materials according to their specifications.
Certain customer-developed materials are considered proprietary to the Company's
customers. The other lamp components manufactured by the Company are used
primarily in the manufacture of its own lamps; however, some outside sales are
made to other lamp manufacturers. The principal customers for the thin-film
coating products of the Company include major lamp manufacturers. In addition,
the Company markets its thin-film coatings to government suppliers for use in
aerospace applications and to fiber optic telecommunications systems
manufacturers. See also "Telecommunication Applications of Company Technology."
Sales of materials accounted for approximately 13.3% of the Company's revenues
in fiscal 2000, 12.1% in 1999 and 11.1% in 1998.
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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.
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 44.9% of the Company's revenues in
fiscal 2000, 46.7% in fiscal 1999 and 57.4% in fiscal 1998.
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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.
The Company is also 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). Systems accounted for approximately 39.3% of the Company's
revenues in fiscal 2000, 37.1% in fiscal 1999 and 22.2% in fiscal 1998.
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
2.5% of the Company's revenues in fiscal 2000, 4.1% in fiscal 1999 and 9.3% in
fiscal 1998.
MANUFACTURING AND OPERATIONS
The Company's lamp manufacturing facilities in Solon, Ohio and Chennai (Madras),
India operate 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 research and development operations and lamp
production equipment operations.
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
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magnetic and electronic power supplies at its facility in Draycott, England,
which operates five days a week with one full shift. The manufacture of magnetic
power supplies is a combination of batch and production line processes. The
production line process starts with a coil winding department, progresses to an
in-line coil and core operation and then to final assembly. Subassemblies for
ignitors and capacitors are located off-line in a batch operation for inclusion
in final assembly.
The Company produces all of the metal halide salts it uses and sells at its
facility in Urbana, Illinois. The Urbana facility, with approximately 80
employees working a single shift, also produces precision metal pieces,
precision metal electrode leads and high speed dose dispensers which are used by
the Company and sold to other metal halide lamp manufacturers.
The Ruud Lighting manufacturing facility in Racine, Wisconsin operates five days
per week, with two eight-hour shifts per day. The manufacturing process is
primarily assembly-to-order based on customer needs. Ruud Lighting's facility is
ISO 9001-registered. The paint finishing facility is 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. See also "Telecommunication
Applications of Company Technology."
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.
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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. See also "Telecommunication Applications of Company
Technology."
COMPETITION
General
Metal halide systems compete with other types of lighting technology for many
applications. The Company's metal halide lamps compete with lamps produced by
other metal halide lamp manufacturers, primarily GE, Philips and Osram-Sylvania.
Metal halide technology is the newest of all lighting technologies and although
the market awareness and the uses of metal halide lamps continue to grow,
competition exists from older technologies in each metal halide application.
Materials
The Company produces materials which are used by the Company and virtually all
other manufacturers of metal halide lamps. In metal halide salts, where the
Company has successfully used its technology focus and manufacturing capability
to develop superior products, the Company believes it has no competitors in the
United States. In overseas markets, one lamp manufacturer produces metal halide
salts, principally for its own use. The competition in salts is based on the
technological ability to develop salt formulation for customers and product
uniformity and purity. The Company believes it is the leading producer of salts
because it is the leader in uniformity and purity. In other materials
categories, the Company's chief competition is internal production by GE,
Philips and Sylvania. The competition in these products is based primarily on
price and delivery, with some competition based on technological ability to
create solutions for unique applications. The Company's products compete most
effectively for external sales where they are created for unique applications.
DSI has one or two principal competitors in each of its traditional 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. See also
"Telecommunication Applications of Company Technology."
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.
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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 Transformer, a subsidiary
of Philips, and MagneTek, both headquartered in the United States. Both these
companies have focused on the large fluorescent power supply market whereas the
focus of the Company's acquisitions, Ballastronix and Parry, has been in HID
magnetic power supplies for use primarily in metal halide applications.
Competition in power supplies has traditionally depended on price and delivery,
which has resulted in the failure to develop power supplies to optimize metal
halide lighting systems. The Company's power supply operations intend to compete
on the ability to deliver power supplies which are designed to enhance
performance of metal halide lighting systems.
Systems
Lighting systems compete on the basis of system cost, operating cost, quality of
light and service. The Company feels that metal halide systems compete
effectively against other technologies in each of these areas in many
application. Although the lighting systems market is highly fragmented, Ruud
Lighting is the only metal halide systems manufacturer which uses direct
marketing to contractors. Ruud Lighting has over 10,000 customers for this
direct marketing effort. Competitors generally market these systems through
distributors and lighting agents.
DSI has one or two principal competitors in each of its traditional markets
(lighting, coating equipment and government/aerospace). While competition is
strenuous with these existing competitors, management believes that the high
technical content of the products and services in these markets make entry by
new thin film coating manufacturers relatively difficult.
DSI competes with respect to its major telecommunications products with numerous
producers of components and systems, many of which possess greater financial,
manufacturing, marketing and distribution resources than DSI. The principal
competitors for DSI's products are certain large OEMs, such as JDS Uniphase
Corporation, Corning Incorporated, Nortel Networks Corporation, and Lucent
Technologies, Inc., which have significant internal capability to manufacture
thin film filter products, and a variety of smaller companies which specialize
in optical coatings, such as DiCon Fiberoptics, Inc., Precision Optics Corp.,
Inc., Barr Associates, Inc., Iridian Spectral Technologies, Ltd., Thin Film
Technologies, Inc., and Evaporated Coatings, Inc.
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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 the past, the Company has
successfully taken legal action to enjoin misappropriation of trade secrets by
other parties. Any litigation 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. The patent positions of companies
such as ADLT and its subsidiaries can be highly uncertain and involve complex
legal and factual questions, and therefore the breadth of claims allowed in such
patents and their enforcability cannot be predicted. Therefore, we cannot assure
you that the claims in any existing or subsequently issued patent will be
sufficient to protect ADLT's or its subsidiaries intellectual property or that
such patent will not be challenged, invalidated, held unenforceable or
circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages. See also "Item 3. Legal Proceedings."
TELECOMMUNICATION APPLICATIONS OF COMPANY TECHNOLOGY
Telecommunications Business Unit
A portion of the in-process research and development which was acquired when the
Company acquired DSI was for research and development projects directed at
telecommunications applications (the "Fiber Optics Project"). These projects
involved the development of processes for the application of optical coatings to
products for telecommunications applications. At the time of the acquisition the
future importance of these technologies and optical products to
telecommunications infrastructure was not clear. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Update on In-Process Research and Development."
The Fiber Optics Project was directed at development of (i) optical coatings
that reduce insertion losses in fiber optic communications systems, including
wavelength division multiplexing (WDM) and dense wavelength division
multiplexing (DWDM) systems; (ii) collimating micro-optics for use in WDM and
DWDM systems; (iii) filter elements for use in WDM systems; (iv) secondary
filter elements for use in DWDM systems; and (v) narrow bandpass filter elements
for use in the multiplex/demultiplex function of DWDM systems. WDM and DWDM are
technologies that allow multiple wavelengths of light to be simultaneously
transmitted through a single fiber optic cable. The first four projects have
resulted in commercial products, and sales of these products reached $1,453,000
in fiscal 2000, an increase of 46% over the $993,000 recognized in fiscal 1999.
Although the Company has not yet completed development of its technology for
production
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of narrow bandpass filter elements, the Company believes that it will develop
commercial narrow bandpass filter products which take advantage of the Company's
patented MicroDyn(R) sputtering technology.
While the Company does apply optical coatings to elements supplied by its
customers, an increasing portion of its business is the supply of entire
assemblies and components. The Company expects that this trend to forward
integration will continue and accelerate. The Company has existing manufacturing
capacity to support sales of up to $10 million per year of existing products. If
narrow bandpass DWDM filter elements are successfully developed, following
additional capital investments, the Company anticipates achieving additional
manufacturing capability and revenue for these products. The Company believes
that it can increase its production capacity for its telecommunications products
beyond existing levels with additional capital expenditures, on which this
growing business depends.
DSI believes that the current demand exceeds supply for these thin film coating
products for the telecommunications industry. The principal competitors for the
Company's products are certain large OEMs, such as JDS Uniphase Corporation,
Corning Incorporated, Nortel Networks Corporation, and Lucent Technologies,
Inc., which have significant internal capability to manufacture thin film filter
products, and a variety of smaller companies which specialize in optical
coatings, such as Precision Optics Corp., Inc., Barr Associates, Inc., Iridian
Spectral Technologies, Ltd., Thin Film Technologies, Inc., and Evaporated
Coatings, Inc. The Company also believes that these large OEMs also represent
substantial opportunities for sales of its products.
The Company recognizes that the successful, full-scale development of its
telecommunications business unit requires a level of focus and resources that
the Company may not be able to provide while this unit resides within a
subsidiary of the Company. In pursuit of maximizing shareholder value, the
Company is exploring several strategic alternatives that would enable the
telecommunications business unit to pursue an aggressive, focused strategy with
sufficient assets and cash to compete in this market.
No final decisions have been made about the future courses of action to be
pursued. However, the Company is actively pursuing the engagement of one or more
investment banking firms to assist in identifying and implementing the best
strategic alternative for the telecommunications unit.
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.
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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 2000, fiscal 1999 and fiscal 1998 attributable to
compliance with such legislation were not material.
EMPLOYEES
As of June 30, 2000, the Company had approximately 2,020 full-time employees,
consisting of employees engaged in the designing, manufacturing and marketing of
materials (174 employees), system components (1,135 employees), systems (657
employees) and production equipment (14 employees) and 40 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.
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<PAGE> 36
ITEM 2. PROPERTIES
The Company's headquarters are located in Solon, Ohio, and the Company maintains
manufacturing facilities in California, Ohio, Illinois, Wisconsin, Rhode Island,
Chennai (Madras), India, Nova Scotia, Canada and Draycott, England. Set forth
below is certain information with respect to the Company's principal facilities
as of June 30, 2000:
<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 manufacturing, 330,000 Owned
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, warehouse 45,000 Owned
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, warehouse 125,000 Owned
Chennai (Madras) India System components manufacturing 40,000 Owned
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 June 30, 2000: Racine -- $9.6 million; Solon -- $4.7
million; Santa Rosa -- $1.2 million; and Urbana -- $553,000. The aggregate
annual rental cost of leased facilities is approximately $1.2 million, and the
average remaining lease term is 3.8 years.
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<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS
In April and May 1999, three class action suits were filed in the United States
District Court, Northern District of Ohio, by certain alleged shareholders of
the Company on behalf of themselves and purported classes consisting of Company
shareholders, other than the defendants and their affiliates, who purchased
stock during the period from December 30, 1997 through September 30, 1998 or
various portions thereof. 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.
1:00CV836, pending before the United States District Court, Northern District of
Ohio - are the Company and its Chairman and Chief Executive Officer (CEO).
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. The Company and
the CEO filed a Motion to Dismiss the Complaint, which was denied. The case will
now proceed. 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
questioned whether certain of DSI's equipment infringes on the competitor's
patented process. DSI responded to this inquiry and has not received any further
communication concerning this question as to infringement since April 1999. In
the event any claim of infringement is made, DSI's management intends to
vigorously defend any such claim. Separately, the same competitor has filed an
opposition to DSI's European MicroDyn(R) patent. DSI has defended and intends to
continue to vigorously defend such opposition. The Company does not expect such
patent opposition to be successful and, even if it were successful, the Company
does not believe that it would have a material adverse effect of DSI's or ADLT's
business, business prospects or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 38
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
"ADLT." The following table sets forth for the periods indicated the range of
high and low sale prices for the Common Stock, as reported on the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ending June 30, 2000
First Quarter.................................................. $ 9.00 $ 6.88
Second Quarter................................................. 8.50 4.75
Third Quarter.................................................. 23.75 5.56
Fourth Quarter................................................. 22.00 9.13
Fiscal Year Ended June 30, 1999
First Quarter.................................................. $ 27.75 $ 8.31
Second Quarter................................................. 10.88 4.38
Third Quarter.................................................. 13.94 6.00
Fourth Quarter................................................. 9.00 5.63
</TABLE>
As of August 31, 2000 there were approximately 300 holders of record of the
Company's Common Stock. The Company has never declared or paid a cash dividend.
The terms of the Company's $60 million Bank Credit Facility prohibit the payment
of dividends, other than dividends consisting of Company stock, without the
consent of the lending banks. The Company's Indenture relating to its 8% Senior
Notes limits the payment of cash dividends by the Company to certain amounts
determined by the Company's earnings and equity investment in the Company after
March 31, 1998. In addition, financial covenants, including ratios, contained in
the Bank Credit Facility, may limit payment of dividends indirectly.
The Company does not intend to declare or pay any cash dividends for the
foreseeable future and intends to retain earnings, if any, for the future
operation and expansion of the Company's business.
37
<PAGE> 39
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected financial data and is qualified by
the more detailed Consolidated Financial Statements and Notes thereto of the
Company. The selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Items
7 and 8 below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net sales $ 225,036 $ 193,203 $ 168,349 $ 86,490 $ 54,636
Costs and expenses:
Cost of sales 135,478 135,773 101,697 45,738 29,164
Marketing and selling 41,208 45,035 29,990 15,832 8,755
Research and development 14,763 17,680 10,843 5,804 3,000
General and administrative 15,385 21,192 12,208 7,184 6,152
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) (475) 31,107 15,918 -- --
Amortization of intangible assets 2,766 2,789 1,691 406 90
--------- --------- --------- --------- ---------
Income (loss) from operations 15,911 (60,373) (22,430) 10,469 4,743
Interest income (expense), net (13,393) (12,767) (2,388) (668) (1,316)
Gain (loss) from equity investment (4) 70 (6,318) (501) -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary
charge and accounting change 2,588 (79,458) (25,319) 9,801 3,427
Income taxes 635 2,281 (1,311) 2,697 910
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary charge and accounting change 1,953 (81,739) (24,008) 7,104 2,517
Minority interest (25) -- -- -- --
Recontinuance of previously discontinued operations (5) -- 1,331 (1,331) -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary
charge and accounting change 1,928 (80,408) (25,339) 7,104 2,517
Extraordinary charge, net of
applicable income tax benefits (6) -- (902) (604) -- (135)
Cumulative effect for change in accounting (7) -- (2,443) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 1,928 $ (83,753) $ (25,943) $ 7,104 $ 2,382
========= ========= ========= ========= =========
Earnings (loss) per share - diluted (8):
Income (loss) from continuing operations $ .01 $ (4.04) $ (1.32) $ .52 $ .12
Recontinuance of previously discontinued operations -- .07 (.07) -- --
Extraordinary charge -- (.05) (.04) -- (.01)
Cumulative effect for change in accounting -- (.12) -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per share - diluted $ .01 $ (4.14) $ (1.43) $ .52 $ .11
========= ========= ========= ========= =========
Shares used for computing per share amounts - diluted 21,331 20,232 18,195 13,558 9,479
========= ========= ========= ========= =========
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,890 $ 3,830 $ 21,917 $ 4,198 $ 1,682
Working capital 40,004 18,629 79,852 42,380 17,341
Total assets 304,475 284,506 329,434 134,838 56,297
Long-term debt 158,110 152,496 117,756 35,908 11,034
Preferred stock 16,999 -- -- -- --
Common shareholders' equity 82,783 77,441 170,837 66,032 26,594
</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.
Fiscal 1998 results include special charges related to the purchase price
allocation for Deposition Sciences, Inc. ("DSI") of $18,220 for purchased
in-process research and development. The special charges also include
$17,984 principally relating to the rationalization of the Company's global
power supply operations, principally: (a) the discontinuance of certain
power supply products at the Company's power supply facilities, (b) the
write-down of certain intangible and fixed assets and (c) charges related
to the consolidation and rationalization cost of distribution activities
and of new information systems and a reassessment of investments. The
amounts are classified in the fiscal 1998 statement of operations as: cost
of sales -- $2,066; purchased in-process research and development --
$18,220; and, special charges -- $15,918.
(4) In fiscal 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.
(5) 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. 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.
(6) In fiscal 1999, the Company incurred an extraordinary loss on the early
extinguishment of debt of $902. In fiscal 1998, the Company incurred an
extraordinary loss on the early extinguishment of debt of $604. In fiscal
1996, the Company incurred an extraordinary loss on the early
extinguishment of debt of $135.
(7) In fiscal 1999, the Company recorded $2,443 as a cumulative change in
accounting principle relating to the write-off of start-up costs in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs, and required
that the Company expense all previously capitalized start-up costs and
organization costs as a cumulative effect of a change in accounting
principle.
(8) Net earnings per share is based upon the income attributable to holders of
Common Stock. Such income has been decreased by preferred share accretion
of $1,796 ($.08 per share) in fiscal 2000 and increases in the value of
warrants aggregating $1,350 ($.14 per share) in fiscal 1996.
39
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(Dollars in thousands, except per share data amounts)
The following discussion should be read in connection with the Company's
Consolidated Financial Statements and Notes thereto included in Item 8 -
Financial Statements and Supplementary Data.
GENERAL
The Company designs, manufactures and markets metal halide lighting products,
including materials, systems and components. Metal halide lighting is currently
used primarily in commercial and industrial applications such as factories and
warehouses, outdoor site and landscape lighting, sports facilities and large
retail spaces such as superstores. With the January 1998 acquisition of
Deposition Sciences, Inc.("DSI"), the Company also manufactures and markets
turnkey deposition equipment to produce thin film coatings for a variety of
applications. Systems, components and materials revenue is recognized when
products are shipped, and deposition equipment revenue is recognized under the
percentage of completion method.
Consistent with the Company's strategy for new product introductions, the
Company invests substantial resources in research and development to engineer
materials and system components to be included in customers' specialized
lighting systems. Over the last three fiscal years, the Company has spent an
aggregate of $43,286 on research and development, representing 7.4% of aggregate
net sales over that period. Such expenditures have enabled the Company to
develop new applications for metal halide lighting, improve the quality of its
materials, and introduce new specialized products, such as the Uni-Form(R) pulse
start products. Uni-Form(R) pulse start products are a new generation of metal
halide components and systems which permit (a) increased light output with lower
power utilization, (b) faster starting, (c) a quicker restart of lamps which
have been recently turned off, and (d) better color uniformity. The Company has
spent additional amounts for manufacturing process and efficiency enhancements,
which were charged to cost of goods sold when incurred. The Company expects to
continue to make substantial expenditures on research and development to enhance
its position as the leading innovator in the metal halide lighting industry.
The Company also has invested substantial resources in acquisitions and
strategic investments. In January 1998, the Company acquired Ruud Lighting, Inc.
and DSI. These acquisitions enabled the Company to complete the assembly of the
necessary operations to take a leadership role in the development, manufacturing
and marketing of new and better systems in the growing metal halide lighting
industry. See also Item 1. "Business - Recent Developments" above and "Liquidity
and Capital Resources" below.
RECENT DEVELOPMENTS
ISSUANCE OF COMMON STOCK
On August 31, 2000, the Company completed a public offering of 1,700,000 shares
of its common stock at a price of $15.00 per share under a $300,000 shelf
registration filed with the Securities and Exchange Commission which became
effective in July 2000.
40
<PAGE> 42
The public offering reduced the amount available for the issuance of various
debt and equity securities under the shelf registration statement to
approximately $274,500. The Company used the net proceeds from the public
offering of approximately $22,900 to repay revolving credit loan borrowings. The
Company intends to subsequently borrow under its revolving credit loan facility
to fund capital improvements, including optical coating production equipment,
filter testing and measurement equipment and production facilities, and on
research and development in its telecommunications business unit at Deposition
Sciences, Inc.
In addition to the $300,000 shelf registration discussed above, in July 2000 a
$100,000 shelf registration became effective under which the Company may from
time-to-time issue various debt and equity securities to acquire assets,
businesses or securities. At June 30, 2000, the Company had no outstanding
securities issued under this registration statement.
GENERAL ELECTRIC COMPANY INVESTMENT
On October 6, 1999, General Electric Company ("GE") completed an investment in
the Company of $20,554. 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 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 also holds 430,887 shares
of Company Common Stock which it has held 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 17.1% of
the voting power and equity ownership of the Company. See "Terms of the Series A
Stock" and "Terms of the Initial Warrant" below. 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 were applied principally to the reduction of
short-term liabilities and outstanding amounts under the Company's Bank Credit
Facility, and had 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.
41
<PAGE> 43
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 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 $210,000. 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 Company's
Bank Credit Facility and the indenture (the "Indenture") relating to the
Company's Senior Notes due 2008, the redemption of the Series A Stock would
currently constitute an event of default, permitting acceleration of the related
indebtedness. If prior consent of the banks is obtained, the redemption is
permitted under the 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 June 30, 2000, the Company had a net
loss, excluding extraordinary items, of $73,371 for the period. Proceeds of
qualifying stock sales for the period have been approximately $25,224 (including
the proceeds of the Company's public offering of Common Stock completed in
August 2000). 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 Senior 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.
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<PAGE> 44
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.
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
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<PAGE> 45
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. Currently, the number of
shares subject to the First Contingent Warrant would be approximately 2.3
million shares. The number of shares subject to the First Contingent Warrant
increases on a one-for-one basis for each share newly issued by the Company and
increases on a two-for-one basis for each share sold as to which Messrs. Hellman
or Ruud 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 37.2% 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 35.3% of the
voting power of the Company on a fully diluted basis. Therefore, upon a Second
Occurrence and the ability to exercise the First Contingent Warrant, GE could
obtain in excess of 35% of the voting power of the Company on a fully diluted
basis. If GE were to acquire in excess of 35% of the voting power of the Company
on a fully diluted basis, the terms of the Indenture relating to the Senior
Notes would require that the Company offer to repurchase the $100,000 principal
amount of outstanding Senior Notes due 2008 at a price of 101% of the principal
amount thereof, plus accrued interest ("Offer to Repurchase Notes"), 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
(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
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<PAGE> 46
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 failure, a Second Occurrence or Third Occurrence, as
the case may be, would not be effective as a result of such failure. In August
2000 in connection with the Company's public offering and sale of 1.7 million
shares of its Common Stock, GE agreed that there would be no measurement periods
for the six-month periods ended June 30, 2000 or September 30, 2000; therefore,
the next measurement period will be the six months ended December 31, 2000. The
Company maintained at least a 2.0 to 1 ratio of EBITDA to Interest Expense in
each of the last three quarters of fiscal 2000. 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 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.
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<PAGE> 47
TRANSACTIONS WITH UNISON AND FIBERSTARS, INC.
In February 2000, the Company acquired Rohm and Haas Company's interest 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., a marketer and
distributor of fiber optic lighting products and an equity-method investee of
the Company. 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 payable in January 2002, to obtain the remaining interest in Unison. As
consideration for the transferred assets to Fiberstars, 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 transferred 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-interest partner.
The Chennai factory offers a beneficial cost structure while meeting the
Company's product quality standards. By the second half of fiscal 2001, the
Company projects an annual production rate of two million units, or
approximately $25,000 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.
TELECOMMUNICATIONS BUSINESS UNIT
In February 2000, the Company announced the creation of its Fiber Optic
Telecommunications Business Unit, which develops and manufactures passive
optical telecommunications devices and components based on its optical coating
technology. The telecommunications operations are located in Santa Rosa,
California, at the DSI business campus. The Telecommunications Unit exploits the
proprietary coating equipment, advanced thin film technologies, and measurement
capabilities developed by DSI over the last fourteen years for a wide variety of
demanding products in both military and commercial applications.
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<PAGE> 48
Prior to the formation of the telecommunication unit the development and coating
of telecommunications products was performed by DSI's R&D Engineering unit. With
the formation of the telecommunication unit, two employees were transferred from
the R&D Engineering unit to the telecommunications unit with additional
engineering and sales personnel being hired for the unit. Also, DSI assigned
several thin film coating machines from other areas of the company as well as
purchasing and constructing additional equipment to be used in the
telecommunication business.
A portion of the in-process research and development which was acquired when the
Company acquired DSI was for research and development projects directed at
telecommunications applications (the "Fiber Optics Project"). These projects
involved the development of processes for the application of optical coatings to
products for telecommunications applications. At the time of the acquisition the
future importance of these technologies and optical products to
telecommunications infrastructure was not clear. (For more information, see
"Update on In-Process Research and Development.")
The Fiber Optics Project was directed at development of (i) optical coatings
that reduce insertion losses in fiber optic communications systems, including
wavelength division multiplexing (WDM) and dense wavelength division
multiplexing (DWDM) systems; (ii) collimating micro-optics for use in WDM and
DWDM systems; (iii) filter elements for use in WDM systems; (iv) secondary
filter elements for use in DWDM systems; (v) narrow bandpass filter elements for
use in the multiplex/demultiplex function of DWDM systems. WDM and DWDM are
technologies that allow multiple wavelengths of light to be simultaneously
transmitted through a single fiber optic cable. The first four projects have
resulted in commercial products, and sales of these products reached $1,453 in
fiscal 2000, an increase of 46% over the $993 recognized in fiscal 1999.
Telecommunication product sales for the fourth quarter of fiscal 2000
approximated $517, up 78% from $290 in the fourth quarter of fiscal 1999.
Although the Company has not yet completed development of its technology for
production of narrow bandpass filter elements, the Company believes that it will
develop commercial narrow bandpass filter products which take advantage of the
Company's patented MicroDyn(R) sputtering technology.
While the Company does apply optical coatings to elements supplied by its
customers, an increasing portion of its business is the supply of entire
assemblies and components. The Company expects that this trend to forward
integration will continue and accelerate. The Company has existing manufacturing
capacity to support sales of up to $10,000 per year of existing products. If
narrow bandpass DWDM filter elements are successfully developed, following
additional capital investments, the Company anticipates achieving additional
manufacturing capability and revenue for these products. The Company believes
that it can increase its production capacity for its telecommuncations products
beyond existing levels with additional capital expenditures, on which this
growing business depends.
DSI believes that the current demand exceeds supply for these thin film coating
products for the telecommunications industry. The principal competitors for the
Company's products are certain large OEMs, such as JDS Uniphase Corporation,
Corning Incorporated, Nortel Networks Corporation, and Lucent Technologies,
Inc., which have significant internal capability to
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<PAGE> 49
manufacture thin film filter products, and a variety of smaller companies which
specialize in optical coatings, such as Precision Optics Corp., Inc., Barr
Associates, Inc., Iridian Spectral Technologies, Ltd., Thin Film Technologies,
Inc., and Evaporated Coatings, Inc. The Company also believes that these large
OEMs also represent substantial opportunities for sales of its products.
The Company believes that the competitive environment for its products is based
primarily on technical performance, delivery and service, rather than price. The
Company believes that DSI's fourteen year history of high volume, efficient
production of high quality optical components provides it with significant
advantages in this regard. Furthermore, the Company believes that its core
competencies in optical coating and coating equipment development and
manufacture, 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.
The Company recognizes that the successful, full-scale development of its
telecommunications business unit requires a level of focus and resources that
the Company may not be able to provide while this unit resides within a
subsidiary of the Company. In pursuit of maximizing shareholder value, the
Company is exploring several strategic alternatives that would enable the
telecommunications business unit to pursue an aggressive, focused strategy with
sufficient assets and cash to compete in this market.
No final decisions have been made about the future courses of action to be
pursued. However, the Company is actively pursuing the engagement of one or more
investment banking firms to assist in identifying and implementing the best
strategic alternative for the telecommunications unit.
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.
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<PAGE> 50
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 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. 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:
YEAR ENDED JUNE 30,
--------------------
1999 1998
-------- --------
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)
======== ========
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 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
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<PAGE> 51
limit its exposure by limiting further investment in Pacific Rim ventures. The
Company evaluated its existing foreign investments and joint ventures in the
Pacific Rim region and wrote-off investments of $475. In addition, future
contract commitments totaling $1,160 were accrued in connection with the
Company's decision to limit its exposure in the Pacific Rim area.
The Company has retained several lamp manufacturing equipment groups, which were
originally expected to be shipped to Asia pursuant to equipment contracts with
Pacific Rim companies. The decision to terminate the foreign equipment contracts
resulted in a reversal of sales of $14,961 and cost of sales of $6,413 in the
second quarter, which were previously recorded under the percentage of
completion method. This reversal reduced operating income by $8,548 ($.42 per
share). Had the sales related to the terminated equipment contracts not been
reversed, reported sales and cost of sales would have been as follows:
YEAR ENDED JUNE 30, 1999
------------------------------
SALES COST OF SALES
------------ -------------
As reported $ 193,203 $ 135,773
Pro forma 208,164 142,186
Changing Global Lamp Manufacturing Strategy. The Company revised its 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
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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.
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 have been paid.
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.
At June 30, 2000, all actions required by the plans were completed and the
Company expects future cash outlays of $96 to be paid by December 31, 2000.
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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. 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 write-down of inventory which is
classified in cost of sales.
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In addition, the charges cover the cost of consolidating distribution activities
and facilities, the write-down of assets in connection with the implementation
of new information systems and a reassessment of investments resulting from a
change in expansion strategy arising from the Ruud Lighting acquisition.
The special charges were determined in accordance with formal plans developed by
the Company's management using the best information available to it at the time
and, subsequently approved by the Company's Board of Directors.
After an income tax benefit of $5,015, these charges reduced net income by
$31,189, or $1.71 diluted earnings per share for fiscal 1998.
See "Notes to Consolidated Financial Statements," included in Item 8.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the January 1998 purchase of 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 was comprised of five primary research
and development programs, which were in-process at the time of the acquisition.
The MicroDyn/Automation Project was 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
was designed to produce a method for applying thin-film coatings to plastics or
other similar materials that cannot withstand the heat generated during the
standard coating process. The goal of the Deposition Material Development
Project was to develop new thin-film materials that can be used in coatings and
to improve existing coating materials. The Lighting Projects were 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 was 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 the Fiber Optic
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 commercial feasibility as of
June 30, 2000.
Development efforts for these projects, both to-date and remaining, have been
and 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.
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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 $2,100 in fiscal 2000.
Future expenditures related to the projects originally envisioned for fiscal
years 2001, 2002 and thereafter are estimated at $500, $400 and $400,
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 provide a substantial
amount of funding to complete and expand upon the DSI programs. Through June 30,
2000, no significant adjustments have been made in the economic assumptions or
expectations which underlie the Company's acquisition decision and related
purchase accounting, except as described below.
Management believes the Company has a reasonable chance of successfully
completing each of the major research and development programs, except for the
Plastics (Acrylic) Coating Project which has been abandoned in light of DSI's
focus on the telecommunications business. However, there is substantial risk
associated with the completion of the active 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 programs may materially impact the
Company's financial condition.
At June 30, 2000, significant progress had been achieved on 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, especially in the telecommunications area.
As of June 30, 2000 the focus of the Company's efforts was on the
MicroDyn/Application Project (estimated at 43% complete) and the Fiber Optics
Project (estimated at 96% complete), and the other two active programs,
Deposition Material Development and Lighting Focused, were estimated as 73% and
99% complete, respectively. Because of the growth of the telecommunications
market and the rate of advancement in telecommunications products, the Company
has focused its efforts to the production process (MicroDyn/Application Project)
and the development of telecommunications products (Fiber Optic Projects) and
the expenditures related to these two projects will be greater than described
above. See also "Telecommunications Business Unit."
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RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, the components of
the Company's Consolidated Statements of Operations for the indicated periods:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 60.2 70.3 60.4
Marketing and selling 18.3 23.3 17.8
Research and development 6.6 9.1 6.4
General and administrative 6.8 11.0 7.3
Fiber optic joint venture formation costs -- -- 0.1
Purchased research and development -- -- 10.8
Special charges (0.2) 16.1 9.5
Amortization of intangible assets 1.2 1.4 1.0
------ ------ ------
Income (loss) from operations 7.1 (31.2) (13.3)
Other income (expense):
Interest expense (6.3) (7.2) (2.3)
Interest income 0.4 0.6 0.9
Income (loss) from equity investments 0.0 (3.3) (0.3)
------ ------ ------
Income (loss) from continuing operations before income taxes,
minority interest, extraordinary charge and accounting change 1.2 (41.1) (15.0)
Income taxes 0.3 1.2 (0.7)
------ ------ ------
Income (loss) from continuing operations before minority
interest, extraordinary charge and accounting change 0.9 (42.3) (14.3)
Minority interest in income of consolidated subsidiary -- -- --
Recontinuance of previously discontinued operations -- 0.7 (0.8)
------ ------ ------
Income (loss) before extraordinary charge and accounting change 0.9 (41.6) (15.1)
Extraordinary charge from early extinguishment
of debt, net of income tax benefits -- (0.5) (0.3)
Cumulative effect of change in accounting for start-up costs -- (1.2) --
------ ------ ------
Net income (loss) 0.9% (43.3%) (15.4%)
====== ====== ======
</TABLE>
Factors which have affected the results of operations and net income during
fiscal 2000 as compared to fiscal 1999 and during fiscal 1999 as compared to
fiscal 1998 are discussed below.
OVERVIEW OF THE RESULTS OF OPERATIONS -- FISCAL 2000 COMPARED TO FISCAL 1999
The Company's operations for fiscal 2000 resulted in income from continuing
operations before minority interest, extraordinary charge and accounting change
of $1,953 compared to a loss from
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continuing operations before extraordinary charge of $81,739 for fiscal 1999.
The Company realized net income of $1,928 for fiscal 2000, compared to a net
loss of $83,753 for fiscal 1999.
The following factors should be considered in comparing the Company's continuing
operations for fiscal 2000 and fiscal 1999:
- Results for fiscal 2000 include a special charges reversal of $475
($0.02 per share).
- 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).
After excluding the above charges and reversals, the Company's operating
activities would have resulted in income from continuing operations before
minority interest, extraordinary charge and accounting change of $1,478 for
fiscal 2000, as compared to a loss from continuing operations before minority
interest, extraordinary charge and accounting change of $38,128 for fiscal 1999.
FISCAL 2000 COMPARED WITH FISCAL 1999
Net sales. Net sales increased 16.5% to $225,036 in fiscal 2000 from $193,203 in
fiscal 1999. Commercial and industrial sales increased 11.2% to $221,801 in
fiscal 2000 as compared to $199,481 in fiscal 1999. Sales of Microsun
residential product decreased to $1,782 in fiscal 2000 from $4,719 in fiscal
1999 due to the decision to wind-down the portable residential fixture
manufacturing operations in the second quarter of fiscal 1999. In addition,
Microsun sales were lower in fiscal 2000 due to the absence of the advertising
in major metropolitan newspapers which occurred in fiscal 1999. No lamp
equipment sales were recorded in fiscal 2000 due to the cessation of these sales
in the second quarter of fiscal 1999. Fiscal 1999 includes the reversal of
$14,961 in lamp equipment sales due to the termination of equipment contracts
noted above, offset by $2,971 of lamp equipment sales recorded prior to the
termination. Telecommunication product sales for fiscal 2000 were $1,453, up 46%
from $993 in fiscal 1999. Government-related business at DSI decreased by almost
$3,000 for fiscal 2000 from fiscal 1999 due to the refocusing of DSI to the
rapidly expanding telecommunications component market.
Fiscal 2000 commercial and industrial sales (which exclude the residential,
telecommunications 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 11% (8% 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 29% from fiscal 1999. Geographically,
these sales of materials were up 12% in the U.S. and grew 56% outside the U.S.
Commercial and industrial sales outside the U.S. increased 25%. 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 12% primarily due to the increase in sales of
zinc mercury materials for fluorescent lighting and thin-film coating equipment.
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.
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The Company expects to see continued sales growth throughout fiscal 2001.
However, the Company expects to manage its operating expense ratios with the
goal of generating profits irrespective of its revenue growth. The Company
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 decreased 0.2% to $135,478 in fiscal 2000 from
$135,773 in fiscal 1999. As a percentage of net sales, cost of sales decreased
to 60.2% in fiscal 2000 from 70.3% in fiscal 1999. 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 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 extensive, new information systems. Largely as a
result of these initiatives, the Company incurred significantly higher costs
related to quality, rework and productivity issues. Additionally, the Company
has continued to reduce its manufacturing costs through cost-cutting and
productivity gains, especially in its lighting systems operations.
Cost of sales in fiscal 1999 include a credit of $6,413 related to the
termination of equipment contracts and $3,956 of inventory write-downs related
to the exit of nonfocus product lines and wind-down of the Microsun business.
Excluding these items, cost of sales decreased 1.9% to $135,478 in fiscal 2000
from $138,230 in fiscal 1999. The abnormally high level of cost of sales in
fiscal 1999 was primarily a result of the production problems noted above in
fiscal 1999 as compared to a more normalized cost of sales amount in 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 60.2%
in fiscal 2000 from 66.4% in fiscal 1999.
Marketing and Selling Expenses. Marketing and selling expenses decreased 8.5% to
$41,208 in fiscal 2000 from $45,035 in fiscal 1999. As a percentage of net
sales, marketing and selling expenses decreased to 18.3% in fiscal 2000 from
23.3% in fiscal 1999. This decrease is primarily due to 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 ADLT
business, as well as the Internet, to receive, process and fill orders, which
has resulted in a reduction in marketing and selling expenses. The reduction in
marketing and selling expenses, as a percent of sales, is also a result of the
Company's efforts to better manage its expenditures including salaries and
benefits and travel costs. As a percentage of net sales, excluding the effect of
the terminated equipment contracts in fiscal 1999, marketing and selling
expenses decreased to 18.3% in fiscal 2000 from 21.6% in fiscal 1999.
Research and Development Expenses. Research and development expenses decreased
16.5% to $14,763 in fiscal 2000 from $17,680 in 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
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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 6.6% in fiscal 2000 from 8.5% in fiscal 1999.
General and Administrative Expenses. General and administrative expenses
decreased 27.4% to $15,385 in fiscal 2000 from $21,192 in fiscal 1999. The
decrease reflects the Company's efforts to control general and administrative
costs and was primarily related to reductions in professional services (audit,
tax, legal, information systems and other) of $1,557, travel costs of $1,232,
and compensation costs of $605. The reduction in travel costs related in part to
the Company's decision to reduce enterprise-wide travel in favor of less costly
video-conference communication. As a percentage of net sales, excluding the
effect of the terminated equipment contracts in fiscal 1999, general and
administrative expenses decreased to 6.8% in fiscal 2000 from 10.2% in fiscal
1999.
Special Charges. See discussion of special charges above.
Amortization of Intangible Assets. Amortization expense remained relatively
constant at $2,766 in fiscal 2000 as compared to $2,789 in 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.
Income (Loss) from Operations. As a result of the items noted above, income from
operations in fiscal 2000 was $15,911 as compared to a loss from operations in
fiscal 1999 of $60,373. Income from operations represented 7.1% of sales in
fiscal 2000.
Interest Expense. Interest expense increased to $14,314 in fiscal 2000 from
$13,889 in fiscal 1999. This increase resulted primarily from the higher average
debt outstanding during fiscal 2000 as compared to fiscal 1999.
Interest Income. Interest income decreased to $921 in fiscal 2000 from $1,122 in
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
fiscal 2000 represents $70 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
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<PAGE> 60
represents $109 of earnings from the Company's investment in Fiberstars, Inc.,
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.
Income (Loss) from Continuing Operations before Income Taxes. The Company had
income from continuing operations before income taxes of $2,588 in fiscal 2000
as compared to a loss from continuing operations before income taxes of $79,458
in fiscal 1999.
Income Taxes. Income tax expense was $635 in fiscal 2000 as compared to $2,281
in fiscal 1999. The income tax expense in fiscal 2000 relates primarily to
certain of the Company's foreign operations. The income tax expense in fiscal
1999 relates primarily to the establishment of a valuation allowance related to
the net deferred tax assets of the Company.
At June 30, 2000, the Company had net operating loss carryforwards ("NOLs") of
$77,205 available to reduce future United States federal taxable income, which
expire in varying amounts from 2008 to 2020.
The Company also has research and development credit carryforwards for tax
purposes of approximately $3,196, which expire in varying amounts from 2008 to
2015. Additionally, in conjunction with the Alternative Minimum Tax ("AMT")
rules, the Company had available AMT credit carryforwards for tax purposes of
approximately $259, which may be used indefinitely to reduce regular federal
income taxes.
Also at June 30, 2000, the Company had foreign net operating loss carryforwards
for tax purposes totaling $3,693 that expire in varying amounts from 2001 to
2006 and $9,303 that have no expiration dates.
Recontinuance of Previously Discontinued Operations. See "Discontinued
Operations Subsequently Retained" above.
Cumulative Effect of Accounting Change. The Company adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities,"
effective July 1, 1998, which resulted in the cumulative effect of the
accounting change of $2,443 in fiscal 1999.
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 accounting change of $81,739 compared
to a loss from continuing operations before extraordinary charge and accounting
change 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.
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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 extraordinary charge and
accounting change of $38,128 for fiscal 1999, as compared to income from
continuing operations before extraordinary charge and accounting change of
$12,196 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 also 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.
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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 contracts and inventory write-downs, cost
of sales increased to 66.4% from 59.2%).
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.
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.
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.
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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. See "Transactions with Unison and Fiberstars, Inc." above.
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 was recorded as an expense in fiscal 1998. See "Update on In-Process
Research and Development" above.
Special Charges. See discussion of special charges under "Recent Developments"
and Note K of "Notes to Consolidated Financial Statements" for further
discussion.
Amortization of Intangible Assets. Amortization expense increased to $2,789 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 Deposition Sciences.
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.
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 the fiscal 1999 as compared to fiscal 1998,
partially offset by $520 in interest earnings from the $9,000 loan to an
officer.
Income (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.
Income (Loss) from Continuing Operations before Income Taxes, Extraordinary
Charge and Cumulative Effect of Change in Accounting Principle. As a result of
the aforementioned factors, during the fiscal 1999, the Company incurred a loss
from continuing operations before income taxes, extraordinary charge and
cumulative effect of change in accounting principle of $79,458, as compared to a
loss from continuing operations before income taxes and extraordinary charges of
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$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. For fiscal 1999, the Company reported a pretax loss from
continuing operations; an extraordinary charge; and, an accounting change, all
of which created $82,803 of operating losses and future tax deductions for
financial reporting purposes. Accordingly, at June 30, 1999, the Company
recorded a valuation allowance for deferred tax assets 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 Accouting Principle. The Company recorded a
cumulative effect of a change in accounting principle of $2,443 ($.12 per
diluted common share) in fiscal 1999 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."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for market development
activities, research and development efforts, acquisitions and strategic
investments, 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 credit facilities and the sale of stock and
debt under two shelf registration statements for $300,000 and $100,000.
Cash increased $60 during fiscal 2000. Uses of cash consisted of $13,274 used in
operating activities and $8,632 used in investing activities. These uses of cash
were offset by net financing activities of $21,966.
Net cash used in operating activities. Net cash used in operating activities
totaled $13,274 in fiscal 2000 as compared to $19,312 in fiscal 1999. Cash of
$7,786 was used to reduce the Company's level of payables and accruals, and
payments related to fiscal 1999 special charge accruals totaled $3,196. The
increase in trade receivables of $5,275 was primarily a result of an increase of
$3,445 related to thin-film deposition equipment contracts, which are recorded
on the percentage of completion method.
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Net cash used in investment activities. During fiscal 2000, investing activities
used $8,632 of cash including $5,636 for capital expenditures, $3,274 related to
purchases of businesses and $72 related to investments in affiliates.
Capital expenditures, primarily for production equipment and facility
improvements, totaled $5,636 in fiscal 2000 as compared to $22,130 in 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.
The Company has modified its future growth and capital expansion plans to be in
line with fiscal 2000. Specifically, the Company will limit its capital
expenditures for the next twelve months, except for its telecommunications
business. Under its $300,000 shelf registration, in September 2000, the Company
sold 1,700,000 shares of common stock for $15.00 per share to fund the future
expansion of its telecommunications business unit over the next twelve to
eighteen months. The net proceeds from the stock offering of approximately
$23,000 were used to repay outstanding indebtedness under the Bank Credit
Facility. The Company expects to use $23,000 of borrowings under the Bank Credit
Facility for expenditures on capital improvements, including optical coating
production equipment, filter testing and measuring testing and measuring
equipment and production facilities, and on research and development, in the
telecommunications business.
As a result of the Company's fiscal 1999 decision to terminate joint venture
equipment contracts, approximately $6,500 of new production equipment was made
available for installation at the Company's lamp manufacturing facilities. The
Company transferred approximately $1,600 of this equipment to its
recently-acquired manufacturing facility in Chennai (Madras) India, leaving
approximately $5,000 of equipment available for future manufacturing
requirements. The Company estimates its maintenance level for capital
expenditures in the lighting business will approximate $6,000 to $8,000 over the
next twelve months. Future capital expenditures (excluding the
telecommunications business) 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.
Net cash provided by financing activities. During fiscal 2000, net financing
activities provided cash of $21,966, which included $20,203 in proceeds from the
issuance of preferred stock and stock purchase warrant and $9,071 of cash
provided from net borrowings under the Company's revolving credit facilities,
offset by payments of long-term debt and capital leases of $8,822.
On March 13, 1998, the Company sold $100,000 of 8% Senior Notes due March 15,
2008, resulting in net proceeds of $96,150. Approximately $76,300 of the net
proceeds of the Senior Notes were used to repay amounts outstanding under the
Company's former bank 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, Inc. and Deposition Sciences, Inc. From September 1998 until
August 2000, interest on these notes was calculated at 8.5%. During August 2000,
the Company completed a registered exchange offer to existing noteholders, which
resulted in reducing the interest rate on the Senior Notes to 8.0% from 8.5%.
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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 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 the CEO would not be required to repay the loan until October
6, 2000. The term of the loan has now been extended by the Board to October 6,
2001. 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 June
30, 2000 was $40,004, resulting in a working capital ratio of current assets to
current liabilities of 1.9 to 1.0, as compared to $18,274 or 1.3 to 1.0 at June
30, 1999. As of June 30, 2000, the Company had $3,890 in cash and cash
equivalents and short-term investments.
The interest-bearing obligations of the Company totaled $165,207 as of June 30,
2000, and consisted of: $39,455 of borrowings under the Bank Credit Facility;
$100,000 of 8% Senior Notes; mortgages of $16,546; a promissory note of $2,300;
capital leases of $670; and, other obligations of foreign subsidiaries of
$1,668.
The Company has a $60,000 Bank Credit Facility consisting of a $40,000 revolving
credit loan and $20,000 term loan provided by several financial institutions.
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
2.25% or the agent bank's prime rate. Availability of borrowings is determined
by the Company's eligible accounts receivable and inventories. The Company had
unused availability of $11,193 as of June 30, 2000. 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 2.75% 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
65
<PAGE> 67
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.
As discussed above, the Company is actively pursuing the engagement of one or
more investment banking firms to assist in identifying and implementing the best
strategic alternative for the telecommunications business unit.
On August 31, 2000, the Company completed a public offering of 1,700,000 shares
of its common stock at a price of $15.00 per share under a $300,000 shelf
registration filed with the Securities and Exchange Commission which became
effective in July 2000.
The public offering reduced the amount available for the issuance of various
debt and equity securities under the shelf registration statement to
approximately $274,500. The Company used the net proceeds from the public
offering of approximately $22,900 to repay revolving credit loan borrowings. The
Company intends to subsequently borrow under its revolving credit loan facility
to fund capital improvements, including optical coating production equipment,
filter testing and measurement equipment and production facilities, and on
research and development in its telecommunications business unit at Deposition
Sciences, Inc.
In addition to the $300,000 shelf registration discussed above, in July 2000 a
$100,000 shelf registration became effective under which the Company may from
time-to-time issue various debt and equity securities to acquire assets,
businesses or securities. The Company has no outstanding securities issued under
this registration statement.
The Company believes that the available cash, cash flow from operations, and the
initiatives outlined above, along with the 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, 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.
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.
66
<PAGE> 68
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.
<TABLE>
<CAPTION>
June 30, Fair Value
-------------------------------------------------- June 30,
(dollars in millions) 2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-term Debt, including
Current Portion
Fixed Rate $ 0.8 $ 3.0 $ 0.4 $ 0.4 $ 0.4 $ 105.5 $ 110.5 $ 106.9
Average Interest Rate 8.1% 8.1% 8.1% 8.1% 8.1% 8.1%
Variable Rate $ 5.7 $ 27.2 $ 5.4 $ 15.5 $ 0.1 $ 0.3 $ 54.2 $ 54.2
Average Interest Rate 9.5% 9.4% 9.2% 9.2% 9.0% 9.0%
</TABLE>
Liabilities at June 30, 1999, included $108,995 of fixed-rate debt and $51,831
of variable-rate debt. Interest rates on the fixed-rate debt to maturity ranged
from 6.00% to 16.05%, while interest rates on the variable-rate debt to maturity
ranged from 7.86% to 9.76% as of June 30, 1999. In fiscal 1999, the Company
entered into an interest rate swap with a notional amount of $10,000. During the
fourth quarter of fiscal 2000, the Company early-terminated the interest rate
swap, resulting in a realized gain of $120.
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, Canadian dollars, and Indian rupees. 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, 2000
are not expected to result in a significant impact on earnings or cash flows.
Sales and expenses denominated in foreign currencies are subject to the effect
of foreign currency fluctuations and these fluctuations may have an impact on
margins and on common shareholders' equity.
67
<PAGE> 69
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("FAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" as of July 1,
2000. FAS 133 requires that all derivatives, such as interest rate exchange
agreements (swaps), be recognized on the balance sheet at fair value. The
Company had no derivatives as at July 1, 2000, and therefore, no resulting
transition adjustments.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the subcaption "Market Risk Disclosures"
contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is incorporated herein by reference.
68
<PAGE> 70
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JUNE 30, 2000
ADVANCED LIGHTING TECHNOLOGIES, INC.
SOLON, OHIO
69
<PAGE> 71
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
Form 10-K--Item 14(a)(1) and (2), (c) and (d)
ADVANCED LIGHTING TECHNOLOGIES, INC.
The following consolidated financial statements of Advanced Lighting
Technologies, Inc. are included in Item 8:
Audited Consolidated Financial Statements: Page
Report of Grant Thornton LLP, Independent Auditors F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Balance Sheets as of June 30, 2000 and 1999 F-4
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998 F-5
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
None
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have
been omitted.
F-1
<PAGE> 72
Report of Grant Thornton LLP, Independent Auditors
Board of Directors and Shareholders
Advanced Lighting Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Advanced
Lighting Technologies, Inc. as of June 30, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows, for
each of the two years in the period ended June 30, 2000. 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 of America. 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, 2000 and 1999, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/ S / GRANT THORNTON LLP
Cleveland, Ohio
September 11, 2000 (except for the fourth
sentence of the second paragraph of Note N,
as to which the date is September 25, 2000)
F-2
<PAGE> 73
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Shareholders
Advanced Lighting Technologies, Inc.
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Advanced Lighting Technologies, Inc., for
the year 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 audit.
We conducted our audit 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 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 results of operations and
cash flows of Advanced Lighting Technologies, Inc., for the year 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 tenth
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> 74
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,890 $ 3,830
Short-term investments -- 350
Trade receivables, less allowances of $1,129 and $1,257 31,983 25,485
Receivables from related parties 55 48
Inventories:
Finished goods 26,532 24,275
Raw materials and work-in-process 21,930 16,501
--------- ---------
48,462 40,776
Prepaid expenses 1,881 2,354
--------- ---------
Total current assets 86,271 72,843
Property, plant and equipment:
Land and buildings 44,187 42,646
Production machinery and equipment 62,323 49,226
Other equipment 5,077 6,413
Furniture and fixtures 20,893 20,426
--------- ---------
132,480 118,711
Less accumulated depreciation 23,317 16,263
--------- ---------
109,163 102,448
Receivables from related parties 3,700 5,048
Investments in affiliates 14,251 13,475
Other assets 7,037 6,586
Intangible assets 31,791 32,695
Excess of cost over net assets of businesses acquired, net 52,262 51,411
--------- ---------
$ 304,475 $ 284,506
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 7,097 $ 8,543
Accounts payable 20,389 23,310
Payables to related parties 2,639 1,126
Employee-related liabilities 3,913 3,781
Accrued income and other taxes 1,436 904
Other accrued expenses 10,793 16,905
--------- ---------
Total current liabilities 46,267 54,569
Long-term debt 158,110 152,496
Minority interest 316 --
Preferred stock, $.001 par value, per share; 1,000 shares authorized;
761 Series A convertible redeemable shares issued and outstanding
at June 30, 2000 (redemption value -- $21,766 at June 30, 2000) 16,999 --
Common shareholders' equity:
Common stock, $.001 par value, per share; 80,000 shares authorized; 20,482
shares issued and outstanding as of June 30, 2000 and
20,278 shares issued and outstanding as of June 30, 1999 20 20
Paid-in-capital 195,786 190,654
Accumulated other comprehensive income (loss) (2,659) (949)
Loan receivable from officer (9,528) (9,520)
Retained earnings (deficit) (100,836) (102,764)
--------- ---------
82,783 77,441
--------- ---------
$ 304,475 $ 284,506
========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 75
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share dollar amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales $225,036 $193,203 $168,349
Costs and expenses:
Cost of sales 135,478 135,773 101,697
Marketing and selling 41,208 45,035 29,990
Research and development 14,763 17,680 10,843
General and administrative 15,385 21,192 12,208
Fiber optic joint venture formation costs - - 212
Purchased research and development - - 18,220
Special charges (475) 31,107 15,918
Amortization of intangible assets 2,766 2,789 1,691
-------- -------- --------
Income (loss) from operations 15,911 (60,373) (22,430)
Other income (expense):
Interest expense (14,314) (13,889) (3,818)
Interest income 921 1,122 1,430
Income (loss) from equity investments 70 (6,318) (501)
-------- -------- --------
Income (loss) from continuing operations before income taxes,
minority interest, extraordinary charge and accounting change 2,588 (79,458) (25,319)
Income taxes 635 2,281 (1,311)
-------- -------- --------
Income (loss) from continuing operations before minority
interest, extraordinary charge and accounting change 1,953 (81,739) (24,008)
Minority interest in income of consolidated subsidiary (25) - -
Recontinuance of previously discontinued operations - 1,331 (1,331)
-------- -------- --------
Income (loss) before extraordinary charge and accounting change 1,928 (80,408) (25,339)
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) $ 1,928 $(83,753) $(25,943)
======== ======== =========
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations $ .01 $ (4.04) $ (1.32)
Recontinuance of previously discontinued operations - .07 (.07)
Extraordinary charge - (.05) (.04)
Cumulative effect of accounting change - (.12) -
-------- -------- --------
Earnings (loss) per share -- Basic $ .01 $ (4.14) $ (1.43)
======== ======== ========
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations $ .01 $ (4.04) $ (1.32)
Recontinuance of previously discontinued operations - .07 (.07)
Extraordinary charge - (.05) (.04)
Cumulative effect of accounting change - (.12) -
-------- -------- --------
Earnings (loss) per share -- Diluted $ .01 $ (4.14) $ (1.43)
======== ======== ========
Weighted average shares outstanding:
Basic 20,372 20,232 18,195
======== ======== ========
Diluted 21,331 20,232 18,195
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 76
ADVANCED LIGHTING TECHNOLOGIES, INC.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 2000
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK COMPREHENSIVE
PREFERRED -------------------- PAID-IN INCOME
STOCK SHARES PAR VALUE CAPITAL (LOSS)
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 -- 13,435 $ 13 $ 59,087 --
Net loss -- -- -- --
Net proceeds from
public offering of
common shares -- 3,000 3 69,317 --
Issuance of shares in
connection with
purchases of businesses -- 3,646 4 59,655 --
Stock options exercised -- 98 -- 1,570 --
Stock purchases
by employees -- 10 -- 199 --
--------- --------- --------- --------- ----------
Balance at June 30, 1998 -- 20,189 20 189,828 --
Net loss -- -- -- $(83,753)
Loan to officer -- -- -- -- --
Issuance of shares in
connection with the
purchase of a business -- 2 -- 29 --
Stock options exercised -- 18 -- 279 --
Stock purchases
by employees -- 41 -- 312 --
Stock issued pursuant to
employee benefit plan -- 28 -- 206 --
Other comprehensive
income (loss):
Foreign currency
translation adjustment -- -- -- (949)
----------
Other comprehensive
income (loss) (949)
--------- --------- --------- --------- ----------
Comprehensive
income (loss) $ (84,702)
==========
Balance at June 30, 1999 -- 20,278 20 190,654
Net income -- -- -- $ 1,928
Net proceeds from
issuance of preferred
shares and warrant $ 15,203 -- 5,000 --
Preferred shares accretion 1,796 (1,796)
Interest on loan to officer -- -- -- -- --
Interest payment received -- -- -- -- --
Issuance of shares in
connection with the
purchase of a business -- 40 -- 535 --
Stock options exercised -- 71 -- 718 --
Stock purchases
by employees -- 29 -- 195 --
Stock issued pursuant to
employee benefit plan -- 64 -- 480 --
Other comprehensive
income (loss):
Foreign currency
translation adjustment -- -- -- (1,710)
----------
Other comprehensive
income (loss) (1,710)
--------- --------- --------- --------- ----------
Comprehensive
income (loss) $ 218
==========
BALANCE AT JUNE 30, 2000 $ 16,999 20,482 $ 20 $ 195,786
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED LOAN
OTHER RECEIVABLE RETAINED
COMPREHENSIVE FROM EARNINGS
INCOME (LOSS) OFFICER (DEFICIT) TOTAL
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 -- -- $ 6,932 $ 66,032
Net loss -- -- (25,943) (25,943)
Net proceeds from
public offering of
common shares -- -- -- 69,320
Issuance of shares in
connection with
purchases of businesses -- -- -- 59,659
Stock options exercised -- -- -- 1,570
Stock purchases
by employees -- -- -- 199
-------- --------- --------- --------
Balance at June 30, 1998 -- -- (19,011) 170,837
Net loss -- -- (83,753) (83,753)
Loan to officer $ (9,520) -- (9,520)
Issuance of shares in
connection with the
purchase of a business -- -- -- 29
Stock options exercised -- -- -- 279
Stock purchases
by employees -- -- -- 312
Stock issued pursuant to
employee benefit plan -- -- -- 206
Other comprehensive
income (loss):
Foreign currency
translation adjustment -- -- -- (949)
Other comprehensive
income (loss) $(949)
-------- --------- --------- --------
Comprehensive
income (loss)
Balance at June 30, 1999 (949) (9,520) (102,764) 77,441
Net income -- 1,928 1,928
Net proceeds from
issuance of preferred
shares and warrant -- -- 20,203
Preferred shares accretion --
Interest on loan to officer (728) -- (728)
Interest payment received 720 -- 720
Issuance of shares in
connection with the
purchase of a business -- -- -- 535
Stock options exercised -- -- -- 718
Stock purchases
by employees -- -- -- 195
Stock issued pursuant to
employee benefit plan -- -- -- 480
Other comprehensive
income (loss):
Foreign currency
translation adjustment -- -- -- (1,710)
Other comprehensive
income (loss) (1,710)
-------- --------- --------- --------
Comprehensive
income (loss)
BALANCE AT JUNE 30, 2000 $(2,659) $(9,528) $(100,836) $ 99,782
======== ========= ========= ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 77
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 1,928 $ (83,753) $ (25,943)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 7,245 6,387 3,623
Amortization 2,766 2,789 1,691
Provision for doubtful accounts 288 882 165
Special charges and terminated equipment contracts (475) 43,611 17,984
Deferred income taxes -- 2,836 (2,294)
Loss (income) from equity investments (70) 6,318 501
Purchased research and development -- -- 18,220
Extraordinary item -- 902 604
Cumulative effect of change in accounting principle, -- 2443 --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Trade receivables (5,275) 255 (10,694)
Inventories (5,178) 4,138 (9,769)
Prepaids and other assets (1,826) (1,841) (6,783)
Accounts payable and accrued expenses (7,786) 2,641 (1,136)
Payments related to special charge accruals (3,196) (5,183) --
Other (1,695) (1,737) 303
--------- --------- ---------
Net cash used in operating activities (13,274) (19,312) (13,528)
INVESTING ACTIVITIES
Capital expenditures (5,636) (22,130) (18,072)
Sale of short-term investments, net 350 -- 3,725
Purchases of businesses (3,274) (4,390) (50,706)
Investments in affiliates (72) (2,394) (5,777)
Use of net proceeds from public offering:
Capital expenditures -- -- (14,507)
Investments in affiliates -- -- (6,780)
--------- --------- ---------
Net cash used in investing activities (8,632) (28,914) (92,117)
FINANCING ACTIVITIES
Proceeds from revolving credit facility 201,534 216,977 319,786
Payments of revolving credit facility (192,463) (211,521) (312,213)
Net proceeds from long-term debt 121 36,622 96,790
Payments of long-term debt and capital lease (8,822) (3,986) (18,838)
Issuance of preferred stock and stock purchase warrant 20,203 -- --
Issuance of common stock 1,393 797 1,769
Loan to officer -- (9,000) --
Net proceeds from public offering -- -- 69,320
Use of net proceeds from public offering:
Payment of long-term debt and revolving credit-facility -- -- (33,000)
--------- --------- ---------
Net cash provided by financing activities 21,966 29,889 123,614
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 60 (18,337) 17,969
Cash and cash equivalents, beginning of year 3,830 22,167 4,198
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,890 $ 3,830 $ 22,167
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 78
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Supplemental cash flow information
Interest paid $14,887 $ 12,241 $ 2,128
Income taxes paid (refunds received), net (23) (1,660) 2,829
Capitalized interest 458 645 1,118
Noncash transactions
Equipment acquired through capital leases -- 77 376
Property acquired by assuming mortgage -- -- 4,807
Stock issued for purchases of businesses 535 29 59,659
Detail of acquisitions:
Assets acquired $14,428 $ 10,143 $138,799
Liabilities assumed 10,529 5,659 26,295
Stock issued for purchase of business 535 29 59,659
------- -------- --------
Cash paid 3,364 4,455 52,845
Less cash acquired 90 65 2,139
------- -------- --------
Net cash paid for acquisitions $ 3,274 $ 4,390 $ 50,706
======= ======== ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE> 79
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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 and other lighting products,
which include materials, system components, and systems. The Company also
develops, manufactures and markets passive optical telecommunications devices,
components and equipment based on the optical coating technologies of its
wholly-owned subsidiary, Deposition Sciences Inc.
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
All assets and liabilities of foreign subsidiaries are translated into United
States dollars at year-end exchange rates while revenues and expenses are
translated at weighted-average exchange rates in effect during the year. The net
effect of these translation adjustments is shown in the accompanying financial
statements as a component of shareholders' equity.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
F-9
<PAGE> 80
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
B. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-10
<PAGE> 81
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
B. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following lives:
Excess of cost over net assets acquired 8 - 40 years
Patents, trademarks and tradenames 17 - 40 years
Other intangibles 10 - 40 years
The Company examines the carrying value of its intangible assets when indicators
of impairment are present. When the undiscounted cash flows are not sufficient
to recover the assets' carrying amount, an impairment loss would be charged to
expense in the period identified. During the fiscal year ended June 30, 1998, an
impairment loss of $9,354 was charged to expense and classified as "Special
Charges", which are further discussed at Note K. Accumulated amortization was
$6,906 and $4,135 at June 30, 2000 and 1999, 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.
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.
F-11
<PAGE> 82
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
B. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 Standard
The Company adopted Statement of Financial Accounting Standards ("FAS") No. 133
"Accounting for Derivative Instruments and Hedging Activities" as of July 1,
2000. FAS 133 requires that all derivatives, such as interest rate exchange
agreements (swaps), be recognized on the balance sheet at fair value. The
Company had no derivatives as at July 1, 2000 and, therefore, no resulting
transition adjustments.
Financial Statement Presentation Changes
Certain amounts for prior years have been reclassified to conform to the current
year reporting presentation.
C. ACQUISITIONS
During fiscal 2000, 1999 and 1998, 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.
During the third quarter of fiscal 2000, the Company increased to approximately
90% its ownership of Asian Lighting Resources, Ltd., its lamp manufacturing
joint venture in Chennai (Madras), India. The total purchase price for this
additional ownership interest consisted of $2,993 in cash. The excess of the
investment over the net tangible assets acquired of $2,018 is
F-12
<PAGE> 83
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
C. ACQUISITIONS (CONTINUED)
being amortized over 25 years. Beginning with the third quarter, the Company
began consolidating the results of this subsidiary into its financial statements
and deducting the minority interest share in arriving at net income. The
Company's investment in the joint venture was previously accounted for by the
cost method.
On October 1, 1999, the Company acquired the remaining 50% ownership interest in
Lighting Sciences, Inc. (LSI), its joint venture in Scottsdale, Arizona, which
specializes in the testing and development of lighting products and technology.
The total purchase price consisted of 40,000 shares of the Company's Common
Stock (valued at $535). The purchase price resulted in an excess of cost over
net assets acquired of $323, which is being amortized over 8 years.
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 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 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.
F-13
<PAGE> 84
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
C. ACQUISITIONS (CONTINUED)
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 ($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 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 statement of operations for the year ended June
30, 1998 follows:
As Restated As Previously Reported
----------- ----------------------
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
F-14
<PAGE> 85
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
D. 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 (24% as of June 30, 2000). Accordingly, the Company changed
its method of carrying the investment to equity from cost in the quarter ended
March 31, 1998.
E. FIBER OPTICS JOINT VENTURE AND TRANSACTIONS WITH UNISON AND FIBERSTARS, INC.
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 focused 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 obligated itself 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. 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.
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.
In February 2000, the Company acquired Rohm and Haas Company's interest in
Unison and, simultaneously, Unison transferred a substantial portion of its
personal property (including intellectual property) to Fiberstars, Inc. 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 payable in
January 2002, to obtain the remaining interest in Unison. As consideration for
the transferred assets to Fiberstars, 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.
F-15
<PAGE> 86
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
F. INVESTMENT IN JOINT VENTURE
On April 2, 1997, the Company invested approximately $3,800 of cash in exchange
for a 30% common stock interest in Koto Luminous Co., Ltd. ("Koto"), the
Company's sole agent in Japan. Subsequent to the date of investment, Koto, a
marketer and distributor of metal halide lamps, began doing business under the
name Venture Lighting Japan. Using the proceeds of the investment and an
additional investment by an affiliate, Venture Lighting Japan has equipped and
is operating a metal halide lamp manufacturing facility in Japan. During the
fourth quarter of fiscal 1998, the Company changed its method of accounting for
the investment to equity from cost, with the results of operations of this
investment being insignificant in prior quarters. During the second quarter of
fiscal 1999, the Company exchanged its common stock interest for nonvoting
preferred stock and also purchased additional nonvoting preferred stock in Koto.
As a result, the Company changed its method of accounting for its investment in
Koto to the lower of cost or net realizable value.
G. FINANCING ARRANGEMENTS
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Trade facility $ 538 $ 221
Current portion of long-term debt 6,559 8,322
-------- --------
$ 7,097 $ 8,543
======== ========
</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 $656 as of June 30, 2000. The trade facility, along with
other borrowings with a 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 7.13% to 9.37%
in fiscal 2000. The weighted average interest rate on the trade facility was
approximately 8.25% and 7.80% during fiscal 2000 and fiscal 1999, respectively.
F-16
<PAGE> 87
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
G. FINANCING ARRANGEMENTS (CONTINUED)
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Senior unsecured 8% notes, due March 2008 $100,000 $100,000
Bank Credit Facility -- revolving credit loan 21,836 12,766
Bank Credit Facility -- term loan 17,619 24,702
Mortgage notes payable 16,546 18,443
Term loan 4,030 --
Promissory note, due January 2002 2,300 --
Promissory note, due January 2000 -- 3,000
Obligations under capital leases 670 1,401
Other 1,668 506
-------- --------
164,669 160,818
Less current portion 6,559 8,322
-------- --------
$158,110 $152,496
======== ========
</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"). In fiscal 2000 the Company
reduced the Bank Credit Facility to a $40,000 revolving credit loan and $20,000
term loan. Proceeds from the Bank Credit Facility were used to repay the
Company's prior Credit Facility and 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
2.25% 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 2.75% 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 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.
F-17
<PAGE> 88
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
G. FINANCING ARRANGEMENTS (CONTINUED)
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. During August 2000, the Company
completed an exchange offer to existing noteholders, which resulted in reducing
the interest rate on the Senior Notes to 8.0% from 8.5%. 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.
Mortgage notes payable consisted of nine separate notes at various rates of
interest, ranging from 7.75% to 10.5%, and at June 30, 2000 were collateralized
by land and buildings with a net carrying value of $21,738.
In connection with the Company's investment in Asian Lighting Resources Ltd.,
the Company assumed a $4,030 term loan with a foreign bank that bears interest
at LIBOR plus 3% and matures January 10, 2004. The loan is secured by the
subsidiary's facility, machinery and equipment and inventory.
As part of the purchase price for Rohm and Haas Company's 50% interest in Unison
Fiber Optic Systems LLC ("Unison"), the Company entered into a $2,300 promissory
note during February 2000 to Rohm and Haas that bears interest at 6.65%
compounded quarterly. The note matures January 31, 2002. In partial
consideration for the Company's initial purchase of a 50% interest in Unison,
the Company executed an 8% promissory note in the amount of $3,000, that was
paid in January 2000.
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 $1,374 at June 30, 2000, are included in the
consolidated balance sheet as machinery and equipment and furniture and
fixtures.
F-18
<PAGE> 89
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
G. FINANCING ARRANGEMENTS (CONTINUED)
Aggregate maturities of long-term debt (including capital lease obligations) for
the five fiscal years subsequent to June 30, 2000, were as follows: 2001 --
$6,559; 2002 -- $30,187; 2003 -- $5,765; 2004 -- $15,887; and 2005 -- $461.
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.
During fiscal 1999, the Company entered into an interest rate swap agreement for
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.
During the fourth quarter of fiscal 2000, the Company early-terminated the
interest rate swap agreement resulting in a realized gain of $120.
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, 2000 were $462.
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
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 Preferred 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 also holds 430,887 shares of Company Common
Stock which it has held since the Company's initial public offering in 1995. The
Series
F-19
<PAGE> 90
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
H. SHAREHOLDERS' EQUITY (CONTINUED)
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 18.2% of the voting power and
equity ownership of the Company at June 30, 2000. 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 (excluding the six month periods ending on June 30, 2000 and
September 30, 2000).
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 June 30, 2000, was 2.13 to 1.0 (2.04 to 1.0 for the quarter ended
June 30, 2000 and 2.22 to 1.0 for the quarter ended March 31, 2000).
A measurement period for which the Company fails to maintain the required ratio
is referred to as an "Occurrence," however, if the Company maintains a 2.0 to
1.0 ratio in the three fiscal quarters immediately prior to a failure, a "Second
Occurrence" or "Third Occurrence," as the case may be, would not be effective.
The "First Occurrence" was effective in the six-month measurement period ended
December 31, 1999. However, for each of the three fiscal quarters in the
nine-month period ended June 30, 2000, the 2.0 to 1.0 ratio was met.
F-20
<PAGE> 91
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
I. SHAREHOLDERS' EQUITY (CONTINUED)
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, approximating 605,189 at June 30, 2000 (and
approximately 2,305,189 following the completion of a registered public offering
on August 31, 2000 of 1,700,000 shares of Common Stock). 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.
Issuance of Common Stock
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 and the remainder was used for working capital
purposes.
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
F-21
<PAGE> 92
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
J. SHAREHOLDERS' EQUITY (CONTINUED)
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,
2000, the Company had 3,813,175 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>
2000 1999 1998
----------------------- ----------------------- -----------------------
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 2,751,866 $ 16.36 2,601,347 $ 18.24 914,214 $ 14.38
Granted 1,038,000 9.71 682,600 10.18 1,939,689 19.56
Exercised (70,365) 10.56 (18,590) 15.13 (97,209) 11.57
Forfeited (274,364) 15.09 (513,491) 17.68 (155,347) 16.16
--------- --------- ---------
Outstanding end of year 3,445,137 14.58 2,751,866 16.36 2,601,347 18.24
========= ========= =========
Weighted-average fair value
of options granted during
the year $ 5.14 -- $ 4.69 -- $8.69 --
</TABLE>
The following table summarizes additional information concerning outstanding and
exercisable options at June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
OPTIONS PRICE PRICE OPTIONS PRICE
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 6.94 to 9.99 1,046,325 9.2 years $ 7.05 63,065 $ 7.38
10.00 to 15.99 593,187 8.7 years 12.48 156,187 10.07
16.00 to 22.99 1,539,602 7.3 years 18.88 707,486 18.95
23.00 to 26.00 266,023 7.8 years 23.96 137,593 23.98
--------- ---------
3,445,137 1,064,331
========= =========
</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
F-22
<PAGE> 93
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
K. SHAREHOLDERS' EQUITY (CONTINUED)
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation", net income and earnings per share would be as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999 1998
------- --------- --------
<S> <C> <C> <C>
Net income (loss) as reported $ 1,928 $ (83,753) $(25,943)
Pro forma (321) (85,763) (27,595)
Earnings (loss) per share as reported $ 0.01 $ (4.14) $ (1.43)
Pro forma (0.10) (4.24) (1.52)
</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 2000, 1999 and 1998, respectively: expected volatility of 61%, 54%, and
38%; risk-free interest rates of 6.54%, 5.61%, and 5.78%; and expected lives of
4 years, 4 years, and 5 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 28,967 shares in fiscal 2000,
41,233 shares in fiscal 1999 and 9,577 shares of stock in fiscal 1998. At June
30, 2000, there were 20,223 shares 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 Stock, and contributed 64,318 shares in fiscal 2000 and 28,107 shares in
fiscal 1999. At June 30, 2000, there were 7,575 shares available for future
contributions.
F-23
<PAGE> 94
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
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 $1,215 in fiscal 2000, $1,218 in fiscal 1999 and $465 in fiscal 1998.
J. INCOME TAXES
Income (loss) from continuing operations before income taxes, minority interest,
extraordinary charges and accounting change were attributable to the following
sources:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
United States $ 2,372 $(73,795) $(18,364)
Foreign 216 (5,663) (6,955)
-------- -------- --------
Totals $ 2,588 $(79,458) $(25,319)
======== ======== ========
</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,
---------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current
Federal $ 19 $ 669 $ (196)
State and local (172) 219 372
Foreign 305 (253) 807
-------- -------- --------
152 635 983
Deferred
Federal -- (352) (176)
State and local -- (94) (228)
Foreign 483 2,092 (1,890)
-------- -------- --------
483 1,646 (2,294)
-------- -------- --------
$ 635 $ 2,281 $ (1,311)
======== ======== ========
</TABLE>
F-24
<PAGE> 95
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
J. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets and liabilities
at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 24,295 $ 21,317
Research and development tax credits 3,196 3,006
Tax under financial reporting special charges
and equity write-down 7,402 8,454
Other 1,040 2,266
-------- --------
35,933 35,043
Deferred tax liabilities:
Tax over financial reporting depreciation 6,090 4,721
-------- --------
6,090 4,721
-------- --------
Net deferred tax assets (liabilities) before valuation allowance 29,843 30,322
Valuation allowance (29,843) (30,322)
-------- --------
Net deferred tax assets (liabilities) $ -- $ --
======== ========
</TABLE>
The statutory federal income tax rate and the effective income tax rate are
reconciled as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Statutory tax rate 35.0% (35.0)% (35.0)%
State and local income taxes, net of federal benefit (4.4) 0.2 0.4
Nondeductible purchased research and development -- -- 25.5
Research and development tax credit (7.3) (0.9) (2.6)
Effect of foreign taxes 6.9 2.7 (0.9)
Nondeductible foreign special charges -- 0.3 6.3
Nondeductible permanent items 8.1 -- --
Valuation allowance (reversal) (18.5) 38.2 --
Other 4.8 (2.6) 1.1
---- ---- ----
Effective tax rate 24.6% 2.9% (5.2)%
==== ==== ====
</TABLE>
F-25
<PAGE> 96
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
J. INCOME TAXES (CONTINUED)
Income taxes paid (net of refunds) were $(23) in fiscal 2000, $(1,660) in fiscal
1999 and $3,129 in fiscal 1998.
At June 30, 2000, the Company had net operating loss carryforwards ("NOLs") of
$77,205 available to reduce future United States federal taxable income, which
expire 2008 through 2020.
The Company also had research and development credit carryforwards for tax
purposes of approximately $3,196, which expire 2008 through 2015. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $259, which
may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 2000, the Company had foreign net operating loss carryforwards
for tax purposes totaling $3,693 that expire in 2001 to 2006 and $9,303 that
have no expiration dates.
For fiscal 1999, the Company reported a pretax loss from continuing operations;
an extraordinary charge; and, an accounting change, all of which created $82,803
of operating losses and future tax deductions for financial reporting purposes.
Accordingly, at June 30, 2000 and June 30, 1999, the Company has recorded a
valuation allowance for deferred tax assets related to all domestic 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 accelerated and
intensified 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. All actions required by the
plans were substantially
F-26
<PAGE> 97
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
K. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
completed by the end of fiscal 2000. 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.
Details of the actions and related special charges recorded during fiscal 1999
and 2000 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1999 RECLASSI-
--------------------- FICATIONS
CHARGED TO CHARGES BALANCE AS OF AND (CREDITS) CHARGES BALANCE AS OF
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED JUNE 30, 1999 TO OPERATIONS UTILIZED JUNE 30, 2000
--------------------------------- ------------ ---------- -------- ------------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lease/contract cancelations Cash/Noncash $ 4,324 $ 635 $ 3,689 $(641) $3,018 $30
Staffing reductions Cash/Noncash 3,549 2,868 681 (131) 533 17
Program cancelation Cash 128 0 128 (21) 107 --
Terminate management
benefit program Cash/Noncash 1,516 1,430 86 -- 86 --
Shut-down costs of facilities Cash 1,615 1,537 78 10 88 --
Asset write-downs Cash/Noncash 17,051 17,002 49 308 357 --
Exit non-core inventories Noncash 261 261 -- --
Other Cash 373 230 143 -- 94 49
------- ------- ------- ----- ------ ---
$28,817 $23,963 $ 4,854 $(475) $4,283 $96
======= ======= ======= ===== ====== ===
</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 N, related to the above
actions.
At June 30, 2000, all actions required by the plans were substantially completed
and the Company expects future cash outlays of approximately $96 to be paid by
December 31, 2000. During the year, the Company revised certain estimates
related to its plans and reversed $475 of previously recorded special charges
which were no longer deemed necessary. The reversal results primarily from the
settlement of a lease cancelation for less than the estimated amount and revised
estimates for severance and related costs.
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
F-27
<PAGE> 98
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
K. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
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 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
-------------------------
CHARGED TO CHARGES
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED
----------- ------------ ---------- --------
<S> <C> <C> <C>
Asset write-down:
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
Other Cash 115 115
-------- --------
$ 17,984 $ 17,271
======== ========
</TABLE>
F-28
<PAGE> 99
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
K. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
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, 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
F-29
<PAGE> 100
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
L. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED (CONTINUED)
and personnel of an existing ADLT business, as well as the Internet, 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. 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.
F-30
<PAGE> 101
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
M. EARNINGS PER SHARE
Earnings (loss) per share is computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Income available to common shareholders:
Income (loss) from continuing operations before minority
interest, extraordinary charge and accounting change $ 1,953 $(81,739) $(24,008)
Less: Minority interest in income of consolidated subsidiary (25) -- --
Preferred shares accretion (1,796) -- --
------- -------- --------
Income (loss) from continuing operations before minority
interest, extraordinary charge and accounting change
attributable to common shareholders $ 132 $(81,739) $(24,008)
======= ======== ========
Net income (loss) $ 1,928 $(83,753) $(25,943)
Less: Preferred shares accretion (1,796) -- --
------- -------- --------
Net income (loss) attributable to common shareholders $ 132 $(83,753) $(25,943)
======= ======== ========
Weighted average shares -- Basic:
Outstanding at beginning of period 20,278 20,189 13,435
Issued pursuant to public offering -- -- 2,942
Issued in acquisitions 30 2 1,768
Issued for exercise of stock options 18 17 47
Issued pursuant to employee stock purchase plan 16 19 3
Issued pursuant to 401(k) plan 30 5 --
------- -------- --------
Basic weighted average shares 20,372 20,232 18,195
======= ======== ========
Weighted average shares -- Diluted:
Basic from above 20,372 20,232 18,195
Effect of stock options and warrant 959 -- --
------- ------- --------
Diluted weighted average shares 21,331 20,232 18,195
======= ======== ========
Earnings (loss) per share -- Basic:
Income (loss) from continuing operations $ .01 $ (4.04) $ (1.32)
Recontinuance of previously discontinued operations -- .07 (.07)
Extraordinary charge -- (.05) (.04)
Cumulative effect of accounting change -- (.12) --
------- -------- --------
Earnings (loss) per share -- Basic $ .01 $ (4.14) $ (1.43)
======= ======== ========
Earnings (loss) per share -- Diluted:
Income (loss) from continuing operations $ .01 $ (4.04) $ (1.32)
Recontinuance of previously discontinued operations -- .07 (.07)
Extraordinary charge -- (.05) (.04)
Cumulative effect of accounting change -- (.12) --
------- -------- --------
Earnings (loss) per share -- Diluted $ .01 $ (4.14) $ (1.43)
======= ======== ========
</TABLE>
F-31
<PAGE> 102
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
N. 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 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 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 the CEO would not be required to repay the loan until October
6, 2000. The term of the loan has now been extended by the Board to October 6,
2001. 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.
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 leased the airplanes from an affiliate of the
Company owned by certain officers of the Company. These officers 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 were
$911. However, the only remaining aircraft under the Agreement was sold and the
leasing activities under the Agreement ceased in December 1998. During May 1998,
the Company began to charter airplanes from another unrelated company. This
unrelated company also leased the airplanes from an affiliate of the Company
owned by certain officers of the Company. These officers guaranteed the
repayment of $6,400 of indebtedness incurred by the affiliate to purchase an
airplane. One airplane was sold and the other remaining airplane is in the
process of being sold. Fees paid by the Company under these arrangements were
$474 in fiscal 2000, $1,616 in fiscal 1999 and $2,161 in fiscal 1998.
F-32
<PAGE> 103
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
N. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid a director of the Company $104 in fiscal 2000, $100 in fiscal
1999 and $129 in fiscal 1998 for consulting services. The Company also paid
another director of the Company $99 in fiscal 2000 for consulting services.
The Company sold lamps, lamp components, and lamp production equipment to an
overseas company aggregating $1,194 in fiscal 2000, $625 in fiscal 1999 and
$1,254 in fiscal 1998. The Company purchased lamps from this overseas company
aggregating $1,108 in fiscal 2000 and $366 in fiscal 1999. 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, 2000 and 1999, 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, 2000 was $302.
O. COMMITMENTS
The Company leases buildings and certain equipment under noncancelable operating
lease agreements. Total rent expense was $1,778 in 2000, $1,878 in 1999 and
$1,495 in 1998. Future minimum lease commitments, as of June 30, 2000, were as
follows:
Year:
Fiscal 2001 $1,943
Fiscal 2002 1,560
Fiscal 2003 1,361
Fiscal 2004 721
Fiscal 2005 519
Thereafter 550
------
Minimum lease payments $6,654
======
F-33
<PAGE> 104
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
P. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
FISCAL 2000, THREE MONTHS ENDED
----------------------------------------------------------
JUN 30 MAR 31 DEC 31 SEP 30
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $54,026 $54,945 $59,885 $56,180
Gross profit 22,514 22,675 23,033 21,336
Income from operations 4,278 4,502 4,175 2,956
Income (loss) from continuing operations before minority
interest, extraordinary charge and accounting change 697 1,058 980 (782)
Net income (loss) $ 685 $ 1,045 $ 980 $ (782)
======= ======= ======= =======
Earnings (loss) per share -- Basic $ .00 $ .02 $ .02 $ (.04)
======= ======= ======= =======
Earnings (loss) per share -- Diluted $ .00 $ .02 $ .02 $ (.04)
======= ======= ======= =======
Price Range of Common Stock:
High $ 22.00 $ 23.75 $ 8.50 $ 9.00
Low 9.13 5.56 4.75 6.88
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1999, THREE MONTHS ENDED
-----------------------------------------------------------
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 minority
interest, extraordinary charge and 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 $ 9.00 $ 13.94 $ 10.88 $ 27.75
Low 5.63 6.00 4.38 8.31
</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.
F-34
<PAGE> 105
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
Q. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has one reportable business segment: the design, manufacture and
sales of metal halide lighting products including materials, system components,
systems and production equipment. The Company's telecommunications business unit
does not meet reportable operating segment criteria and has been aggregated in
the following information.
Net sales by country, based on the location of the business unit, for fiscal
2000, 1999 and 1998 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
United States $ 167,327 $ 141,440 $ 111,743
Canada 22,624 20,524 29,427
United Kingdom 21,450 19,998 20,287
Australia 11,837 10,092 6,892
Other 1,798 1,149 --
--------- --------- ---------
$ 225,036 $ 193,203 $ 168,349
========= ========= =========
</TABLE>
Long-lived assets by country, based on the location of the asset, as of June 30,
2000 and 1999 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
United States $ 89,344 $ 90,769
Canada 2,604 2,845
United Kingdom 5,767 6,396
Australia 1,764 1,760
India 9,298 --
Other 386 678
--------- ---------
$ 109,163 $ 102,448
========= =========
</TABLE>
In fiscal 2000, 1999, and 1998, no single customer accounted for 10% or more of
the Company's net sales.
F-35
<PAGE> 106
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
R. PURCHASE OF CORPORATE HEADQUARTERS
During March 1998, the Company purchased land and building in Solon, Ohio for
$7,758, which included 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.
S. 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 (CEO).
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. The Company and
its CEO filed a Motion to Dismiss the Complaint, which was denied. The case will
now proceed. The Company and the CEO intend to continue to vigorously defend
against these actions.
F-36
<PAGE> 107
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
JUNE 30, 2000
(Dollars in thousands, except per share data)
T. ISSUANCE OF COMMON STOCK SUBSEQUENT TO JUNE 30, 2000
On August 31, 2000, the Company completed a public offering of 1,700,000 shares
of its common stock at a price of $15.00 per share under a $300,000 shelf
registration filed with the Securities and Exchange Commission which became
effective in July 2000.
The public offering reduced the amount available for the issuance of various
debt and equity securities under the shelf registration statement to
approximately $274,500. The Company used the net proceeds from the public
offering of approximately $22,900 to repay revolving credit loan borrowings. The
Company intends to subsequently borrow under its revolving credit loan facility
to fund capital improvements, including optical coating production equipment,
filter testing and measurement equipment and production facilities, and on
research and development in its telecommunications business unit at Deposition
Sciences, Inc.
In addition to the $300,000 shelf registration discussed above, in July 2000 a
$100,000 shelf registration became effective under which the Company may from
time-to-time issue various debt and equity securities to acquire assets,
businesses or securities. The Company has no outstanding securities issued under
this registration statement.
F-37
<PAGE> 108
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference to the
Registrant's definitive Proxy Statement relating to its 2000 Annual Shareholders
Meeting ("Proxy Statement"), under the captions "Nominees," "Continuing
Directors and Executive Officers," and "Section 16(a) Beneficial Ownership
Reporting Compliance." This Proxy Statement will be filed with the SEC prior to
October 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Compensation of Executive Officers"
in the Proxy Statement is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Certain Holders of Voting
Securities" in the Proxy Statement is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Transactions With Directors
And Officers" in the Proxy Statement is incorporated by reference.
70
<PAGE> 109
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2). The following consolidated financial statements of Advanced
Lighting Technologies, Inc. are included in Item 8:
Report of Grant Thornton LLP, Independent Auditors
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets as of June 30, 2000 and 1999
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998
Statements of Consolidated Shareholders' Equity for the
Years Ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Financial Statement Schedules:
(2) The following Financial Statement Schedules are included in Item 14(d):
None. All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3) List of Exhibits (Exhibits available upon request)
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
3.1 Second Amended and Restated Articles of Incorporation filed
September 26, 1995.......................................................................... (3)
3.2 Certificate of Adoption of Third Amendment to Second Amended and
Restated Articles of Incorporation filed October 6, 1999 (Form 10-Q/A
Exhibit 3.2)................................................................................ (11)
3.3 Certificate of Adoption of Fourth Amendment to Second Amended and
Restated Articles of Incorporation filed March 16, 2000 (Form 10-Q/A
Exhibit 3.3)................................................................................
3.4 Code of Regulations......................................................................... (1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Form of Stock Certificate of Common Stock of Advanced Lighting
Technologies, Inc...........................................................................
</TABLE>
71
<PAGE> 110
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EX HIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
4.3 Indenture between Advanced Lighting Technologies, Inc. and The Bank of
New York, as Trustee, dated as of March 18, 1998 (Form 10-Q/A
Exhibit 4.3)................................................................................ (6)
4.4 Registration Rights Agreement between Advanced Lighting Technologies,
Inc. and Morgan Stanley & Co., Incorporated dated as of March 18, 1998
(Form S-4 Exhibit 4.2)...................................................................... (5)
4.5 Form of Security for 8% Senior Notes due 2008 originally issued by
Advanced Lighting Technologies, Inc. on March 18, 1998 (Form S-4
Exhibit 4.3)................................................................................ (5)
4.6 Form of Security for 8% Senior Notes due 2008 issued by Advanced
Lighting Technologies, Inc. and registered under the Securities Act of
1933 (Form S-4 Exhibit 4.4)................................................................. (5)
4.7 First Supplemental Indenture dated September 25, 1998 between Advanced
Lighting Technologies, Inc. and The Bank of New York amending the
Indenture dated March 18, 1998 (Form 10-Q/A No. 2 Exhibit 4.1).............................. (8)
4.8 Registration Rights Agreement dated as of September 30, 1999 by and
between Advanced Lighting Technologies, Inc. and General Electric
Company (Form 10-Q/A Exhibit 4.2)........................................................... (11)
9.1 Form of Voting Trust Agreement dated as of October 10, 1995 by and
among Advanced Lighting Technologies, Inc., Wayne R. Hellman, Louis S.
Fisi, David L. Jennings, Robert S. Roller, Juris Sulcs, James F.
Sarver, Brian A. Hellman and Lisa Hellman, as amended December 20, 1995
("Hellman Voting Trust").................................................................... (2)
9.2 Form of Irrevocable Proxy relating to shares formerly held under the
Hellman Voting Trust........................................................................ (2)
9.3 Form of Amendment to Hellman Voting Trust dated as of October 1, 1999.......................
9.4 Form of Voting Trust Agreement dated as of January 2,1998 by and among
Advanced Lighting Technologies, Inc., Alan J. Ruud, Donald Wandler,
Theodore Sokoly, Christopher Ruud and Cynthia Johnson ("Ruud Voting
Trust") and Form of Irrevocable Proxy relating to shares formerly held
under the Ruud Voting Trust................................................................. (4)
9.5 Form of Amendment to Ruud Voting Trust dated as of October 1, 1999.......................... (13)
</TABLE>
72
<PAGE> 111
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
10.1 Employment Agreement dated as of January 2, 1998 among Ruud Lighting,
Inc., Advanced Lighting Technologies, Inc. and Alan J. Ruud................................. (7)
10.2 Employment Agreement dated as of February 12, 1998 between Advanced
Lighting Technologies, Inc. and Nicholas R. Sucic (Form 10-Q/A
Exhibit 10.5)............................................................................... (6)
10.3 Loan Agreement dated as of October 8, 1998 between Advanced Lighting
Technologies, Inc. and Wayne R. Hellman (Form 10-Q/A Exhibit 10.1).......................... (9)
10.4 Secured Promissory Note of Wayne R. Hellman dated as of October 8, 1998
in the amount of $9,000,000 to Advanced Lighting Technologies, Inc.
(Form 10-Q/A Exhibit 10.2).................................................................. (9)
10.5 Amended and Restated Employment Agreement between Wayne R. Hellman and
Advanced Lighting Technologies, Inc. dated as of October 8, 1998 (Form
10-Q/A Exhibit 10.4)........................................................................ (9)
10.6 Advanced Lighting Technologies, Inc. Amended and Restated 1995
Incentive Award Plan (Form S-1 Exhibit 10.1 and 10.1/A)..................................... (1)
10.7 Advanced Lighting Technologies, Inc. 1997 Billion Dollar Market
Capitalization Incentive Award Plan (Form 10-K/A No. 2 Exhibit 10.11)....................... (10)
10.8 Advanced Lighting Technologies, Inc. Amended and Restated 1998
Incentive Award Plan (Form 10-K/A No. 2 Exhibit 10.12)...................................... (10)
10.9 Credit Agreement by and among Advanced Lighting Technologies, Inc. and
certain of its subsidiaries and PNC Bank, National Association, as
agent for certain other banks dated as of May 21, 1999 (Form 10-K/A
No. 2 Exhibit 10.13)........................................................................ (10)
10.10 Market Clearance Side Letter dated May 21, 1999 by and among PNC Bank,
National Association, PNC Capital Markets, Inc., Advanced Lighting
Technologies, Inc., Ballastronix, Incorporated, Canadian Lighting
Systems Holding Incorporated, Parry Power Systems Limited and Venture
Lighting Europe Ltd. (Form 10-K/A No. 2 Exhibit 10.18)...................................... (10)
</TABLE>
73
<PAGE> 112
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
10.11 Side Letter Agreement dated August 5, 1999 by and among Advanced
Lighting Technologies, Inc. and certain of its subsidiaries, PNC Bank,
National Association and BankBoston, N.A. relating to the Credit
Agreement by and among Advanced Lighting Technologies, Inc. and certain
of its subsidiaries, PNC Bank and National Association, as agent for
certain other banks dated May 21, 1999 (Form 10-Q/A Exhibit 10.1)........................... (11)
10.12 Assignment of Acceptance Agreement by and among Advanced Lighting
Technologies, Inc. , PNC Bank, National Association and BankBoston,
N.A. dated as of August 5, 1999 (Form 10-Q/A Exhibit 10.2).................................. (11)
10.13 First Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of August 17,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form 10-Q/A Exhibit 10.3)......................................... (11)
10.14 Second Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of August 18,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form 10-Q/A Exhibit 10.4)......................................... (11)
10.15 Assignment and Acceptance Agreement by and among Advanced Lighting
Technologies, Inc., PNC Bank, National Association and National City
Commercial Finance, Inc. dated as of November 2, 1999 (Form 10-Q
Exhibit 10.1)............................................................................... (12)
10.16 Assignment and Acceptance Agreement by and among Advanced Lighting
Technologies, Inc., PNC Bank, National Association and Sovereign Bank
dated as of November 2, 1999 (Form 10-Q Exhibit 10.2)....................................... (12)
10.17 Third Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of November 2,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form10-Q Exhibit 10.3)............................................ (12)
</TABLE>
74
<PAGE> 113
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
10.18 Fourth Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of February 28,
2000, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form 10-Q/A Exhibit 10.1) ........................................ (14)
10.19 Fifth Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of May 8, 2000,
and amending the Credit Agreement by and among the same parties dated
as of May 21, 1999..........................................................................
10.20 Stock Purchase Agreement by and between Advanced Lighting Technologies,
Inc. and General Electric Company dated as of September 28, 1999 (Form
10-Q/A Exhibit 10.5)........................................................................ (11)
10.21 Contingent Warrant Agreement dated as of September 30, 1999 by and
among Advanced Lighting Technologies, Inc., General Electric Company,
Wayne R. Hellman, individually and as voting trustee under Voting Trust
Agreement dated October 10, 1995, Hellman Ltd. and Alan J. Ruud,
individually and as voting trustee under Voting Trust Agreement dated
January 2, 1998 (Form 10-Q/A Exhibit 10.6).................................................. (11)
10.22 Lamp Materials Purchase Agreement by and among Advanced Lighting
Technologies, Inc., General Electric Company, acting through its GE
Lighting business and APL Engineered Materials, Inc. dated as of
September 30, 1999 (Form 10-Q/A Exhibit 10.8)............................................... (11)
10.23 Patent and Technical Assistance Agreement by and among Advanced
Lighting Technologies, Inc., APL Engineered Materials, Inc. and General
Electric Company, acting through its GE Lighting business, dated as of
September 30, 1999 (Form 10-Q/A Exhibit 10.9).............................................. (11)
10.24 Series A1 Warrant to Purchase Common Shares of Advanced Lighting
Technologies, Inc. issued to General Electric Company dated as of
October 6, 1999 (Form 10-Q/A Exhibit 10.7).................................................. (11)
10.25 Mutual Release and Indemnification Agreement by and between Advanced
Lighting Technologies, Inc. and Louis S. Fisi dated as of December 31,
1999 (Form10-Q Exhibit 10.9)................................................................ (12)
</TABLE>
75
<PAGE> 114
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
10.26 Consulting Agreement by and between Advanced Lighting Technologies,
Inc. and Louis S. Fisi dated as of December 31, 1999 (Form10-Q
Exhibit 10.10).............................................................................. (12)
12 Statement re: Computation of Ratios.........................................................
21.0 Subsidiaries of the Registrant as of June 30, 2000..........................................
23.1 Consent of Grant Thornton LLP...............................................................
23.2 Consent of Ernst & Young LLP................................................................
24.1 Powers of Attorney..........................................................................
27 Financial Data Schedule.....................................................................
</TABLE>
----------------------------------------
(1) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-1, Registration No. 33-97902,
effective December 11, 1995.
(2) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report of Form 10-Q for the Quarterly Period ended March 31,
1996.
(3) Incorporated by reference to Exhibit of same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December
31, 1996.
(4) Incorporated by reference to Exhibit 1 to Schedule 13D filed by Alan
Ruud, et al., January 12, 1998.
(5) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-4 Registration No. 333-58609 filed
July 7, 1998.
(6) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 1998
filed on March 15, 1999
(7) Incorporated by reference to Exhibit of the same number in Company's
Annual Report on Form 10-K/A No. 2 for the Annual Period ended June 30,
1998 filed March 16, 1999.
(8) Incorporated by reference to referenced Exhibit in Company's
Quarterly Report on Form 10-Q/A No. 2 for the Quarterly Period ended
September 30, 1998 filed March 15, 1999.
76
<PAGE> 115
(9) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended December 31, 1998
filed March 15, 1999.
(10) Incorporated by reference to referenced Exhibit in Company's Annual
Report on Form 10-K/A No. 2 for the Annual Period ended June 30, 1999
filed April 25, 2000.
(11) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended September 30, 1999
filed January 14, 2000.
(12) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q for the Quarterly Period ended December 31, 1999
filed February 14, 2000.
(13) Incorporated by reference to Schedule 13D filed by Alan J. Ruud, et
al., March 15, 2000
(14) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 2000
filed July 11, 2000.
(b). Reports on Form 8-K.
During the quarter ended June 30, 2000, the Company filed two Reports on Form
8-K.
On June 6, 2000 the Company filed a Current Report dated June 1, 2000, reporting
under Item 5 an announcement that Deposition Sciences, Inc. had produced the
first 3200 Ghz optical bandpass filter using its MicroDyn(TM) reactive
sputtering coating technology; and an announcement that on June 5, 2000
Deposition Sciences, Inc. had appointed Kumar Khajurivala, former Vice President
of Operations for Precision Optics Corporation, Inc. of Boston, Massachusetts,
to Director of Product Development.
On June 21, 2000 the Company filed a Current Report dated June 6, 2000,
reporting under Item 5 that a First Amended Class Action Complaint,
consolidating three lawsuits, was filed September 30, 1999 and that the Company
and its CEO filed a Motion to Dismiss the Complaint, which was denied. The case
will now proceed.
(c). Exhibits.
The exhibits to this Form 10-K are submitted as a separate section of this
Report. See Exhibit Index.
(d). Financial Statement Schedules
None.
77
<PAGE> 116
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVANCED LIGHTING TECHNOLOGIES, INC.
Date: September 27, 2000 By: /s/ Alan J. Ruud
----------------
Alan J. Ruud
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Wayne R. Hellman Chief Executive Officer September 27, 2000
---------------------------- and Director
Wayne R. Hellman
/s/ Nicholas R. Sucic Chief Financial Officer, September 27, 2000
---------------------------- Vice President and Treasurer
Nicholas R. Sucic (Chief Accounting Officer)
---------------------------- Director September __, 2000
Francis H. Beam
/s/ John E. Breen Director September 27, 2000
----------------------------
John E. Breen
/s/ John R. Buerkle Director September 27, 2000
----------------------------
John R. Buerkle
/s/ Theodore A. Filson Director September 27, 2000
----------------------------
Theodore A. Filson
/s/ Louis S. Fisi Director September 27, 2000
----------------------------
Louis S. Fisi
/s/ Susuma Harada Director September 27, 2000
----------------------------
Susuma Harada
/s/ Thomas K. Lime Director September 27, 2000
----------------------------
Thomas K. Lime
/s/ Alan J. Ruud Director September 27, 2000
----------------------------
Alan J. Ruud
/s/ A Gordon Tunstall Director September 27, 2000
----------------------------
A Gordon Tunstall
</TABLE>
*The undersigned, by signing his name hereto, does hereby execute this Report on
behalf of the above indicated directors of Advanced Lighting Technologies, Inc.
pursuant to Powers of Attorney executed by each such director appointing the
undersigned as attorney-in-fact and filed with the Securities and Exchange
Commission.
By: /s/ Wayne R. Hellman
----------------------
Wayne R. Hellman
Attorney-in-Fact
78
<PAGE> 117
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ADVANCED LIGHTING TECHNOLOGIES, INC.
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
------ ----- ------------
<S> <C> <C>
3.1 Second Amended and Restated Articles of Incorporation filed
September 26, 1995.......................................................................... (3)
3.2 Certificate of Adoption of Third Amendment to Second Amended and
Restated Articles of Incorporation filed October 6, 1999 (Form 10-Q/A
Exhibit 3.2)................................................................................ (11)
3.3 Certificate of Adoption of Fourth Amendment to Second Amended and
Restated Articles of Incorporation filed March 16, 2000 (Form 10-Q/A
Exhibit 3.3)................................................................................
3.4 Code of Regulations......................................................................... (1)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Form of Stock Certificate of Common Stock of Advanced Lighting
Technologies, Inc...........................................................................
4.3 Indenture between Advanced Lighting Technologies, Inc. and The Bank of New York,
as Trustee, dated as of March 18, 1998 (Form 10-Q/A Exhibit 4.3)............................ (6)
4.4 Registration Rights Agreement between Advanced Lighting Technologies,
Inc. and Morgan Stanley & Co., Incorporated dated as of March 18, 1998
(Form S-4 Exhibit 4.2)...................................................................... (5)
4.5 Form of Security for 8% Senior Notes due 2008 originally issued by
Advanced Lighting Technologies, Inc. on March 18, 1998 (Form S-4
Exhibit 4.3)................................................................................ (5)
4.6 Form of Security for 8% Senior Notes due 2008 issued by Advanced
Lighting Technologies, Inc. and registered under the Securities Act of
1933 (Form S-4 Exhibit 4.4)................................................................. (5)
4.7 First Supplemental Indenture dated September 25, 1998 between Advanced
Lighting Technologies, Inc. and The Bank of New York amending the
Indenture dated March 18, 1998 (Form 10-Q/A No. 2 Exhibit 4.1).............................. (8)
4.8 Registration Rights Agreement dated as of September 30, 1999 by and
between Advanced Lighting Technologies, Inc. and General Electric
Company (Form 10-Q/A Exhibit 4.2)........................................................... (11)
9.1 Form of Voting Trust Agreement dated as of October 10, 1995 by and
among Advanced Lighting Technologies, Inc., Wayne R. Hellman, Louis S. Fisi,
David L. Jennings, Robert S. Roller, Juris Sulcs, James F. Sarver,
Brian A. Hellman and Lisa Hellman, as amended December 20, 1995
("Hellman Voting Trust").................................................................... (2)
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9.2 Form of Irrevocable Proxy relating to shares formerly held under the
Hellman Voting Trust........................................................................ (2)
9.3 Form of Amendment to Hellman Voting Trust dated as of October 1, 1999.......................
9.4 Form of Voting Trust Agreement dated as of January 2,1998 by and among
Advanced Lighting Technologies, Inc., Alan J. Ruud, Donald Wandler,
Theodore Sokoly, Christopher Ruud and Cynthia Johnson ("Ruud Voting Trust")
and Form of Irrevocable Proxy relating to shares formerly held
under the Ruud Voting Trust................................................................. (4)
9.5 Form of Amendment to Ruud Voting Trust dated as of October 1, 1999.......................... (13)
10.1 Employment Agreement dated as of January 2, 1998 among Ruud Lighting,
Inc., Advanced Lighting Technologies, Inc. and Alan J. Ruud................................. (7)
10.2 Employment Agreement dated as of February 12, 1998 between Advanced
Lighting Technologies, Inc. and Nicholas R. Sucic (Form 10-Q/A
Exhibit 10.5)............................................................................... (6)
10.3 Loan Agreement dated as of October 8, 1998 between Advanced Lighting
Technologies, Inc. and Wayne R. Hellman (Form 10-Q/A Exhibit 10.1).......................... (9)
10.4 Secured Promissory Note of Wayne R. Hellman dated as of October 8, 1998
in the amount of $9,000,000 to Advanced Lighting Technologies, Inc.
(Form 10-Q/A Exhibit 10.2).................................................................. (9)
10.5 Amended and Restated Employment Agreement between Wayne R. Hellman and
Advanced Lighting Technologies, Inc. dated as of October 8, 1998 (Form
10-Q/A Exhibit 10.4)........................................................................ (9)
10.6 Advanced Lighting Technologies, Inc. Amended and Restated 1995
Incentive Award Plan (Form S-1 Exhibit 10.1 and 10.1/A)..................................... (1)
10.7 Advanced Lighting Technologies, Inc. 1997 Billion Dollar Market
Capitalization Incentive Award Plan (Form 10-K/A No. 2 Exhibit 10.11)....................... (10)
10.8 Advanced Lighting Technologies, Inc. Amended and Restated 1998
Incentive Award Plan (Form 10-K/A No. 2 Exhibit 10.12)...................................... (10)
10.9 Credit Agreement by and among Advanced Lighting Technologies, Inc. and certain of
its subsidiaries and PNC Bank, National Association, as agent for certain other
banks dated as of May 21, 1999 (Form 10-K/A No. 2 Exhibit 10.13)............................ (10)
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10.10 Market Clearance Side Letter dated May 21, 1999 by and among PNC Bank,
National Association, PNC Capital Markets, Inc., Advanced Lighting
Technologies, Inc., Ballastronix, Incorporated, Canadian Lighting
Systems Holding Incorporated, Parry Power Systems Limited and Venture
Lighting Europe Ltd. (Form 10-K/A No. 2 Exhibit 10.18)...................................... (10)
10.11 Side Letter Agreement dated August 5, 1999 by and among Advanced
Lighting Technologies, Inc. and certain of its subsidiaries, PNC Bank,
National Association and BankBoston, N.A. relating to the Credit
Agreement by and among Advanced Lighting Technologies, Inc. and certain
of its subsidiaries, PNC Bank and National Association, as agent for
certain other banks dated May 21, 1999 (Form 10-Q/A Exhibit 10.1)........................... (11)
10.12 Assignment of Acceptance Agreement by and among Advanced Lighting
Technologies, Inc. , PNC Bank, National Association and BankBoston,
N.A. dated as of August 5, 1999 (Form 10-Q/A Exhibit 10.2).................................. (11)
10.13 First Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of August 17,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form 10-Q/A Exhibit 10.3)......................................... (11)
10.14 Second Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of August 18,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form 10-Q/A Exhibit 10.4)......................................... (11)
10.15 Assignment and Acceptance Agreement by and among Advanced Lighting
Technologies, Inc., PNC Bank, National Association and National City
Commercial Finance, Inc. dated as of November 2, 1999 (Form 10-Q
Exhibit 10.1)............................................................................... (12)
10.16 Assignment and Acceptance Agreement by and among Advanced Lighting
Technologies, Inc., PNC Bank, National Association and Sovereign Bank
dated as of November 2, 1999 (Form 10-Q Exhibit 10.2)....................................... (12)
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10.17 Third Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of November 2,
1999, and amending the Credit Agreement by and among the same parties
dated as of May 21, 1999 (Form10-Q Exhibit 10.3)............................................ (12)
10.18 Fourth Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National Association, as agent
for certain other banks dated as of February 28, 2000, and amending the
Credit Agreement by and among the same parties dated as of May 21, 1999
(Form 10-Q/A Exhibit 10.1) ................................................................. (14)
10.19 Fifth Amendment Agreement by and among Advanced Lighting Technologies,
Inc. and certain of its subsidiaries and PNC Bank, National
Association, as agent for certain other banks dated as of May 8, 2000,
and amending the Credit Agreement by and among the same parties dated
as of May 21, 1999..........................................................................
10.20 Stock Purchase Agreement by and between Advanced Lighting Technologies, Inc. and
General Electric Company dated as of September 28, 1999 (Form 10-Q/A Exhibit 10.5).......... (11)
10.21 Contingent Warrant Agreement dated as of September 30, 1999 by and
among Advanced Lighting Technologies, Inc., General Electric Company,
Wayne R. Hellman, individually and as voting trustee under Voting Trust
Agreement dated October 10, 1995, Hellman Ltd. and Alan J. Ruud,
individually and as voting trustee under Voting Trust Agreement dated
January 2, 1998 (Form 10-Q/A Exhibit 10.6).................................................. (11)
10.22 Lamp Materials Purchase Agreement by and among Advanced Lighting
Technologies, Inc., General Electric Company, acting through its GE
Lighting business and APL Engineered Materials, Inc. dated as of
September 30, 1999 (Form 10-Q/A Exhibit 10.8)............................................... (11)
10.23 Patent and Technical Assistance Agreement by and among Advanced
Lighting Technologies, Inc., APL Engineered Materials, Inc. and General
Electric Company, acting through its GE Lighting business, dated as of
September 30, 1999 (Form 10-Q/A Exhibit 10.9).............................................. (11)
10.24 Series A1 Warrant to Purchase Common Shares of Advanced Lighting
Technologies, Inc. issued to General Electric Company dated as of
October 6, 1999 (Form 10-Q/A Exhibit 10.7).................................................. (11)
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10.25 Mutual Release and Indemnification Agreement by and between Advanced
Lighting Technologies, Inc. and Louis S. Fisi dated as of December 31, 1999
(Form 10-Q Exhibit 10.9....)................................................................ (12)
10.26 Consulting Agreement by and between Advanced Lighting Technologies, Inc. and
Louis S. Fisi dated as of December 31, 1999 (Form10-Q Exhibit 10.10)....................... (12)
12 Statement re: Computation of Ratios.........................................................
21.0 Subsidiaries of the Registrant as of June 30, 2000..........................................
23.1 Consent of Grant Thornton LLP...............................................................
23.2 Consent of Ernst & Young LLP................................................................
24.1 Powers of Attorney..........................................................................
27 Financial Data Schedule.....................................................................
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(1) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-1, Registration No. 33-97902,
effective December 11, 1995.
(2) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report of Form 10-Q for the Quarterly Period ended March 31,
1996.
(3) Incorporated by reference to Exhibit of same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December
31, 1996.
(4) Incorporated by reference to Exhibit 1 to Schedule 13D filed by Alan
Ruud, et al., January 12, 1998.
(5) Incorporated by reference to referenced Exhibit in Company's
Registration Statement on Form S-4 Registration No. 333-58609 filed
July 7, 1998.
(6) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 1998
filed on March 15, 1999
(7) Incorporated by reference to Exhibit of the same number in Company's
Annual Report on Form 10-K/A No. 2 for the Annual Period ended June 30,
1998 filed March 16, 1999.
(8) Incorporated by reference to referenced Exhibit in Company's
Quarterly Report on Form 10-Q/A No. 2 for the Quarterly Period ended
September 30, 1998 filed March 15, 1999.
<PAGE> 123
(9) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended December 31, 1998
filed March 15, 1999.
(10) Incorporated by reference to referenced Exhibit in Company's Annual
Report on Form 10-K/A No. 2 for the Annual Period ended June 30, 1999
filed April 25, 2000.
(11) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended September 30, 1999
filed January 14, 2000.
(12) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q for the Quarterly Period ended December 31, 1999
filed February 14, 2000.
(13) Incorporated by reference to Schedule 13D filed by Alan J. Ruud, et
al., March 15, 2000
(14) Incorporated by reference to referenced Exhibit in Company's Quarterly
Report on Form 10-Q/A for the Quarterly Period ended March 31, 2000
filed July 11, 2000.
