<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999
or
________ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number: 0-27202
ADVANCED LIGHTING TECHNOLOGIES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1803229
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
32000 AURORA ROAD, SOLON, OHIO 44139
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
440 / 519-0500
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ -----
There were 20,251,952 shares of the Registrant's Common Stock, $.001 par value
per share, outstanding as of April 30, 1999.
<PAGE> 2
<TABLE>
<CAPTION>
INDEX
ADVANCED LIGHTING TECHNOLOGIES, INC.
PAGE NO.
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 1999
and June 30, 1998.......................................... 2
Condensed Consolidated Statements of Operations -- Three Months
and Nine Months Ended March 31, 1999 and 1998 ............ 3
Condensed Statement of Consolidated Shareholders' Equity --
Nine Months Ended March 31, 1999.......................... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1999 and 1998................. 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 29
Item 3. Defaults Upon Senior Securities..................................... 29
Item 6. Exhibits and Reports on Form 8-K.................................... 29
SIGNATURES................................................................... 31
EXHIBIT INDEX................................................................ 32
</TABLE>
<PAGE> 3
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, June 30,
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,626 $ 21,917
Short-term investments 350 350
Trade receivables, less allowances of $831 and $397 32,594 40,779
Receivables from related parties 1,595 1,034
Inventories:
Finished goods 26,756 29,556
Raw materials and work-in-process 17,606 15,184
--------- ---------
44,362 44,740
Prepaid expenses 3,466 3,200
Deferred taxes -- 2,192
--------- ---------
Total current assets 93,993 114,212
Property, plant and equipment:
Land and buildings 38,524 31,429
Production machinery and equipment 61,225 52,235
Other equipment 6,413 --
Furniture and fixtures 19,490 18,316
--------- ---------
125,652 101,980
Less accumulated depreciation 16,142 11,952
--------- ---------
109,510 90,028
Deferred taxes 3,167 2,892
Receivables from related parties 4,889 3,157
Net assets associated with discontinued operations 3,286 5,193
Investments in affiliates 22,074 20,591
Other assets 7,663 8,878
Intangible assets 33,344 34,377
Excess of cost over net assets of businesses acquired, net 52,426 49,241
--------- ---------
$ 330,352 $ 328,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 4,540 $ 1,960
Accounts payable 23,590 14,967
Payables to related parties 2,126 618
Employee-related liabilities 3,968 3,259
Accrued income and other taxes 2,378 2,729
Other accrued expenses 11,665 13,042
Revolving credit facility, in default 54,280 --
--------- ---------
Total current liabilities 102,547 36,575
Long-term debt 109,794 117,332
Other liabilities 362 766
Deferred taxes 3,167 3,059
Shareholders' equity
Preferred stock, $.001 par value, 1,000 shares authorized, no shares issued -- --
Common stock, $.001 par value, 80,000 shares authorized, 20,249 shares
issued and outstanding as of March 31, 1999 and 20,189 shares issued
and outstanding as of June 30, 1998 20 20
Paid-in-capital 190,438 189,828
Accumulated other comprehensive income (loss) (110) --
Loan receivable from officer (9,343) --
Retained earnings (deficit) (66,523) (19,011)
--------- ---------
114,482 170,837
--------- ---------
$ 330,352 $ 328,569
========= =========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 4
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share dollar amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 50,022 $ 49,075 $ 138,324 $ 110,891
Costs and expenses:
Cost of sales 32,676 30,448 92,385 66,241
Marketing and selling 10,771 7,523 29,913 16,854
Research and development 4,073 2,848 13,226 6,069
General and administrative 4,214 3,087 13,664 7,307
Fiber optic joint venture formation costs -- -- -- 212
Purchased in-process research & development -- 18,220 -- 18,220
Special charges 1,745 15,700 15,037 15,700
Amortization of intangible assets 706 611 2,049 1,036
--------- --------- --------- ---------
Loss from operations (4,163) (29,362) (27,950) (20,748)
Other income (expense):
Interest expense (3,800) (1,325) (9,958) (1,649)
Interest income 310 274 876 1,079
Income (loss) from equity investments 19 (2) (442) (2)
--------- --------- --------- ---------
Loss from continuing operations
before income taxes and extraordinary charge (7,634) (30,415) (37,474) (21,320)
Income taxes 88 (2,356) 3,872 918
--------- --------- --------- ---------
Loss from continuing operations
before extraordinary charge (7,722) (28,059) (41,346) (22,238)
Discontinued operations
Loss from operations of discontinued business
(net of income tax benefits of $416 and $719 for the
three month and nine month periods, respectively) -- (739) -- (1,278)
Loss on disposal of discontinued business, including
provision for operating losses during phase-out
period of $9,100 (net of income tax benefits of $3,086)
for the periods ended March 31, 1998 and of $1,066
for the periods ended March 31, 1999 -- (6,014) (6,166) (6,014)
--------- --------- --------- ---------
Loss before extraordinary charge (7,722) (34,812) (47,512) (29,530)
Extraordinary charge from early extinguishment
of debt, net of income tax benefits -- (604) -- (604)
--------- --------- --------- ---------
Net loss $ (7,722) $ (35,416) $ (47,512) $ (30,134)
========= ========= ========= =========
Loss per share -- Basic and diluted:
Loss from continuing operations $ (.38) $ (1.41) $ (2.04) $ (1.27)
Loss from discontinued operations -- (.34) (.31) (.42)
Extraordinary charge -- (.03) -- (.03)
========= ========= ========= =========
Loss per share -- Basic and diluted $ (.38) $ (1.78) $ (2.35) $ (1.72)
========= ========= ========= =========
Weighted average shares outstanding:
Basic and diluted 20,237 19,917 20,222 17,540
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated statements.
3
<PAGE> 5
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------------------------
ACCUMULATED LOAN
COMMON STOCK OTHER RECEIVABLE RETAINED
------------------------ PAID-IN COMPREHENSIVE FROM EARNINGS
SHARES PAR VALUE CAPITAL INCOME OFFICER (DEFICIT) TOTAL
---------- ------------ ------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1998 20,189 $ 20 $189,828 $ - $ - $(19,011) $170,837
Net loss (47,512) (47,512)
Foreign currency
translation adjustment (110) (110)
Loan to officer (9,343) (9,343)
Issuance of shares in
connection with the
purchase of a business 2 - 29 29
Stock options exercised 17 - 279 279
Stock issued pursuant to
employee benefit plan 11 - 80 80
Stock purchases
by employees 30 - 222 222
------- ----- --------- ------ --------- --------- --------
BALANCE AT
MARCH 31, 1999 20,249 $ 20 $190,438 $ (110) $ (9,343) $ (66,523) $114,482
======= ==== ======== ======= ========= ========= ========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 6
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (41,346) $ (22,238)
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
Depreciation 4,882 2,405
Amortization 2,049 1,036
Deferred income taxes 3,505 (2,665)
Special charges and terminated equipment contracts 21,589 18,500
Purchased in-process research and development - 18,220
Changes in operating assets and liabilities, excluding effects of
acquisitions and discontinued operations:
Trade receivables (6,977) (8,391)
Inventories 1,108 (7,159)
Prepaids and other assets (1,164) (3,823)
Accounts payable and accrued expenses 4,305 (2,411)
Other (711) 84
------------- --------------
Net cash used in operating activities (12,760) (6,442)
INVESTING ACTIVITIES
Capital expenditures (20,785) (8,861)
Purchases of businesses (5,024) (50,441)
Investments in affiliates (2,803) (4,343)
Use of net proceeds from public offering:
Capital expenditures - (14,507)
Investments in affiliates - (6,780)
------------- --------------
Net cash used in investing activities (28,612) (84,932)
FINANCING ACTIVITIES
Proceeds from revolving credit facility 172,884 313,196
Payments of revolving credit facility (124,688) (305,237)
Net proceeds from long-term debt 1,122 100,503
Payments of long-term debt and capital leases (2,120) (21,848)
Issuance of common stock 581 830
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 38,779 123,764
Net cash used in discontinued operations (7,698) (5,997)
------------- --------------
Increase (Decrease) in cash and cash equivalents (10,291) 26,393
Cash and cash equivalents, beginning of period 21,917 4,198
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,626 $ 30,591
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 10,758 $ 1,673
Income taxes paid (refunds received), net (1,676) 2,280
Capitalized interest 548 680
Noncash transactions
Equipment acquired through capital leases 58 376
Property acquired by assuming mortgage - 4,807
Extraordinary loss on early extinguishment of debt - 604
Stock issued for purchases of businesses 29 59,551
Detail of acquisitions:
Assets acquired $ 9,688 $ 137,900
Liabilities assumed (4,570) (26,149)
Stock issued for purchase of business (29) (59,551)
------------- --------------
Cash paid 5,089 52,200
Less cash acquired (65) (1,759)
------------- --------------
Net cash paid for acquisitions $ 5,024 $ 50,441
============= ==============
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 7
Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1999
(Dollar amounts in thousands)
A. ORGANIZATION
Advanced Lighting Technologies, Inc. (the "Company" or "ADLT") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, including materials, system components, systems and production
equipment.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
include all material adjustments necessary for a fair presentation, including
adjustments of a normal and recurring nature as well as the special charges
described in Note G. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K/A No. 2 for the year ended June 30, 1998. Operating results for
the three months and nine months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the full-year ending June
30, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and related disclosures. Actual results could differ
from those estimates.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs. The Company is
required to adopt the SOP on July 1, 1999 and, upon adoption, expense all
previously capitalized start-up costs and organization costs as a cumulative
effect of a change in accounting principle. Management is reviewing its
capitalization policies and determining the impact that the adoption of this SOP
is expected to have on its consolidated results of operations and financial
position. At March 31, 1999, the Company estimates that it had approximately
$2,650 of start-up costs included in its condensed consolidated balance sheet.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that all
derivatives, such as interest rate exchange agreements (swaps), be recognized on
the balance sheet at fair value. Derivatives which are not hedges must be
adjusted to fair value through the results of operations. Derivatives determined
to be hedges will be adjusted to fair value through either the results of
operations or comprehensive income, depending on the nature of the hedge. The
Company is required to adopt FAS No. 133 on July 1, 1999. Management is
currently studying the potential effect of adopting this statement.
Certain amounts for the prior year have been reclassified to conform to the
current year reporting presentation.
6
<PAGE> 8
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
C. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income," which requires disclosure of comprehensive income and its components.
FAS No. 130 requires companies to report, in addition to net income, other
components of comprehensive income, which for the Company includes foreign
currency translation adjustments.
The Company had comprehensive losses of $7,886 for the three months ended March
31, 1999 and $35,416 for the three months ended March 31, 1998. The Company had
comprehensive losses of $47,622 for the nine months ended March 31, 1999 and
$30,134 for the nine months ended March 31, 1998. The Company's adoption of FAS
No. 130 had no effect on the Company's reported results of operations or
financial position.
D. REVOLVING BANK CREDIT FACILITY
On October 19, 1998, the Company voluntarily reduced the maximum committed
availability under its revolving credit facility ("Credit Facility") provided by
several North American financial institutions (the "Lenders") to $65,000 from
$85,000. In February 1999, the Company and the Lenders amended the Credit
Facility. If the Company and the Lenders had not entered into the amendment, the
Company would have been in default under the Credit Facility. The Credit
Facility, as amended, provides for future borrowing under an arrangement
pursuant to which the availability of borrowing is determined by the Company's
eligible accounts receivable, eligible inventories and certain other assets.
Borrowings under the Credit Facility are limited to $55,000 with additional
borrowings subject to the approval of all Lenders. Interest rates on loans
outstanding are based on the agent bank's prime rate plus 1% to May 31, 1999
and plus 2% thereafter. As of March 31, 1999, the balance outstanding under the
Credit Facility was $54,280.
The Company is in default of certain financial covenants under the Credit
Facility, however, the Lenders have provided the Company with a waiver of such
defaults until May 21, 1999, in anticipation of refinancing, as described below.
During the period of default, the loans under the Credit Facility bear interest
at 4% over the agent bank's prime rate. The Company is also obligated to pay
facility fees of .375% on the amount of the facility. Pursuant to the Credit
Facility terms, lenders holding 66 2/3% of the outstanding loans may accelerate
the loans. Consequently, the Company has classified the outstanding balance
under the Credit Facility as a current liability in the condensed consolidated
balance sheet.
The Credit Facility has a term expiring April 1, 2000. The Company is actively
seeking alternative financing sources and intends to replace the existing
Credit Facility. If the Company is unable to obtain alternative financing and
replace the Credit Facility prior to July 1, 1999, the Company is required to
pay the Lenders a $750 fee.
The facility contains certain affirmative and negative covenants customary for
this type of agreement, prohibits cash dividends, and includes financial
covenants with respect to income levels, cash availability and net worth. The
principal security for the facility is substantially all of the personal
property of the Company and each of its North American and United Kingdom
subsidiaries, certain real estate and a pledge of stock of each of the Company's
principal subsidiaries.
The Company has substantially concluded negotiations of the financial terms of a
proposed loan document with PNC Bank that the Company anticipates will be used
to effect a complete refinancing and prepayment of the Credit Facility. While no
assurances can be given, the Company believes that the refinancing will be
completed and the Lenders have not indicated a desire to accelerate payment of
the Credit Facility.
7
<PAGE> 9
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
E. SENIOR NOTES OFFERING
On March 13, 1998, the Company sold $100,000 of Senior Notes due March 15, 2008,
resulting in net proceeds of approximately $96,150. The Notes have an annual
coupon rate of 8% and interest is payable semiannually on March 15 and September
15. There are no sinking fund requirements.
Until completion of a registered exchange offer to existing noteholders, the
Senior Notes bear interest at 8.5%. The offer is expected to be completed within
45 days following the effectiveness of the Company's related registration
statement.
The 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.
If the Lenders under the Credit Facility accelerate the loans, and the loans are
not repaid, or the acceleration is not rescinded, within 30 days following
acceleration, the Notes may be accelerated.
F. RELATED PARTY TRANSACTIONS
Pursuant to a loan agreement dated October 8, 1998, between the Company and its
Chairman and Chief Executive Officer (the "CEO"), the Company has loaned $9,000
to its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the loan
were used by the Company's CEO to reduce the principal balance outstanding of a
margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
As of March 31, 1999, $343 of interest was accrued on the loan.
In connection with the actions described in Note G, the Company recognized $374
in cost of sales for the write-down of specialty inventory and $764 in research
and development expenses related to transactions with affiliates.
G. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS
During the three month periods ended March 31, 1999 and December 31, 1998, the
Company recorded special charges related to significant changes in its
operations, which are intended to accelerate and intensify the Company's focus
on its metal halide products and significantly reduce its use of cash resources.
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
8
<PAGE> 10
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
G. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
product lines; reducing excess overhead including staffing reductions;
consolidating an equipment manufacturing operation into the Company's Solon,
Ohio facility and significantly reducing the size of the operation; and,
reducing capital expenditures.
The special charges were determined in accordance with formal plans developed by
the Company's management and approved by the Company's Board of Directors using
the best information available to it at the time. Actions associated with
closing facilities began in the second quarter and were substantially completed
in the third quarter of fiscal 1999. Employees were terminated enterprise-wide
from almost all areas and units of the Company. All of the 241 terminated
employees have left the Company. Assets related to the above actions no longer
in use have been sold or were written-down to their estimated fair values. The
amounts the Company will ultimately incur may change as the Company's plans are
executed.
The results of operations for the three-month and nine-month periods ended March
31, 1999 include special charges of $1,745 and $15,845, respectively. Details of
the actions and related special charges recorded during the nine months ended
March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
CHARGED TO CHARGES BALANCE AS OF
DESCRIPTION CASH/NONCASH OPERATIONS UTILIZED MARCH 31, 1999
- ------------------------------------ ------------------ -------------- ------------ -----------------
Limit Pacific Rim Expansion
<S> <C> <C> <C> <C>
Severance Cash $ 489 $ 489 $ -
Lease/contract cancelations Cash/Noncash 1,555 321 1,234
Write-down of assets Noncash 1,706 1,706 -
Shut-down costs of facilities Cash 430 422 8
Change in Global Manufacturing Strategy
Severance Cash 328 328 -
Write-down of assets Noncash 3,237 3,237 -
Shut-down costs of facilities Cash 380 380 -
Restructure Marketing Operations in North America and Europe
Severance Cash 264 246 18
Lease/contract cancelations Cash 293 66 227
Write-down of assets Noncash 1,723 1,723 -
Shut-down costs of facilities Cash 432 256 176
Reduce Staffing Requirements Cash/Noncash 2,121 1,260 861
Exit Noncore Inventory Products Noncash 261 261 -
Write-off Long-Lived Assets Cash/Noncash 2,307 2,307 -
Other Cash 319 248 71
------------ ------------ -------------
$ 15,845 $ 13,250 $ 2,595
============ ============ =============
</TABLE>
9
<PAGE> 11
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
G. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
The special charges for the nine months ended March 31, 1999 of $15,845 are
classified in the condensed consolidated statement of operations as cost of
goods sold ($808) and special charges ($15,037). The Company incurred additional
costs of $374 and $764, as described in Note F, related to the above actions.
In addition to the special charges recorded during the three month periods ended
March 31, 1999 and December 31, 1998, the Company anticipates that, in
completing the actions required by the plans, additional pretax charges
approximating $2,000 will be incurred during the fourth quarter of fiscal 1999.
All actions required by the plans are expected to be completed by September 30,
1999.
In conjunction with limiting its Pacific Rim expansion, the Company terminated
production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the quarter ended December 31,
1998, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
During the fiscal year ended June 30, 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 related to the Company's decision to
refocus and restructure its recently acquired global power supply operations to
concentrate exclusively on opportunities in metal halide. With the January 1998
acquisition of Ruud Lighting, Inc., the Company accelerated the 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 the discontinuance of certain power supply products
at the Company's power supply facilities and the write-down of certain
intangible, fixed and other assets. The actions required by the plans related to
the global power supply operations were substantially completed by March 31,
1999.
Details of the activity related to the fiscal 1998 special charges for the nine
months ended March 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
BALANCE AS OF CHARGES BALANCE AS OF
DESCRIPTION CASH/NONCASH JUNE 30, 1998 UTILIZED MARCH 31, 1999
- ----------------------------- ------------- ---------------- --------- -----------------
<S> <C> <C> <C> <C>
Severance Cash $460 $417 $ 43
Lease/contract cancelations Cash 253 139 114
---- ---- ----
$713 $556 $157
==== ==== ====
</TABLE>
The balances of the accruals related to all special charges as of March 31,
1999, were classified in the condensed consolidated balance sheet as other
accrued expenses.
10
<PAGE> 12
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
H. INCOME TAXES
At June 30, 1998, the Company had net operating loss carryforwards ("NOLs") of
$1,960 available to reduce future United States federal taxable income, which
expire 2008 through 2011.
The Company also had research and development credit carryforwards for tax
purposes of approximately $850, which expire 2005 through 2013. Additionally, in
conjunction with the Alternative Minimum Tax ("AMT") rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $1,000,
which may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 1998, the Company had foreign net operating loss carryforwards
for tax purposes totaling $2,000 that expire in 2006 and $403 that have no
expiration dates.
For the nine months ended March 31, 1999, the Company reported a pretax loss
from continuing operations, including special charges, of $37,474 and a pretax
loss on the discontinued operations of the Microsun business of $6,166, which
created $43,640 of operating losses and future tax deductions for financial
reporting purposes. Accordingly, at March 31, 1999, the Company has recorded a
valuation allowance for deferred tax assets of $18,175 related to all NOLs, tax
credits and net deductible tax differences.
I. DISCONTINUED OPERATIONS, MICROSUN BUSINESS
In March 1998, the Company approved a plan to distribute to its shareholders, as
a tax-free spin-off transaction estimated to be completed by December 31, 1998,
all of the ownership of Microsun Technologies, Inc., the subsidiary primarily
responsible for development, design, assembly and marketing of metal halide
portable fixtures for hospitality and residential uses. As a result, the
consolidated financial statements of ADLT were reclassified to reflect the
results of operations of Microsun as a discontinued operation in accordance with
generally accepted accounting principles.
Because of deterioration of the capital markets subsequent to June 30, 1998 and
the inability to raise capital necessary to spin-off the Microsun business, the
Company revised its plan for the disposition of Microsun. During December 1998,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun.
During the three months ended March 31, 1999, the manufacturing activities of
Microsun ceased and the Company initiated efforts to dispose of the noninventory
assets, consisting of the manufacturing facility and the machinery and
equipment. Presently, wind-down activities consist of building-out and
assembling the inventory components and selling the metal halide portable
fixtures.
11
<PAGE> 13
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(Dollar amounts in thousands)
I. DISCONTINUED OPERATIONS, MICROSUN BUSINESS (CONTINUED)
Summary operating information for Microsun for the three-month and nine-month
periods ended March 31, 1999 and 1998, is presented below for informational
purposes only and does not necessarily reflect what the results of operations
would have been had Microsun operated as a stand-alone entity.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales $ 1,336 $ 1,610 $ 4,025 $ 2,764
Costs and expenses 2,500 2,765 8,378 4,761
------- ------- ------- -------
Loss before income taxes 1,164 1,155 4,353 1,997
Income tax:
Benefit 396 416 1,481 719
Valuation allowance (396) -- (792) --
------- ------- ------- -------
Net loss $ 1,164 $ 739 $ 3,664 $ 1,278
======= ======= ======= =======
</TABLE>
Operating losses from the measurement date (March 31, 1998) through March 31,
1999 were $11,430 ($7,552, net of income tax benefits of $3,878). During the
second quarter of fiscal 1999, a loss on disposal of $6,166 was recorded, which
included $1,166 for operating losses during the phase-out period and $5,000
related to the write-down of assets to net realizable value and costs related to
shut-down and severance.
At March 31, 1999, the net assets of the disposed business of $3,286, consisted
of approximately $4,376 of current assets (including $3,873 of inventory),
$1,098 of current liabilities, $433 of noncurrent assets and $425 of noncurrent
liabilities.
J. CONTINGENCY
On April 9, 1999, a complaint was filed in the federal court for the Northern
District of Ohio against the Company and its Chairman and Chief Executive
Officer (the "CEO"). The case alleges that certain disclosures attributed to the
Company between December 30, 1997 and September 30, 1998 contained misstatements
and omissions in violation of the Securities Exchange Act of 1934, which
resulted in an inflated market price for the Company's common stock. The suit
was brought by an alleged holder of 800 shares who seeks unspecified damages on
behalf of a purported class of persons who purchased shares of the Company. The
Company and the CEO believe the lawsuit is without merit and intend to
vigorously defend this action.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(In thousands, except per share amounts)
This report on Form 10-Q may contain forward-looking statements. For this
purpose, any statement contained herein that is not a statement of historical
fact may be deemed to be a forward-looking statement. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. The failure
of the Company to replace its existing Credit Facility, or to reach an
accomodation with the Lenders thereunder to avoid acceleration and other
remedial actions, would materially affect the Company. Other factors which could
cause such differences include the risk factors detailed in the Company's Annual
Report on Form 10-K/A No. 2 for the fiscal year ended June 30, 1998 filed with
the Securities and Exchange Commission.
The following is management's discussion and analysis of certain significant
factors which have affected the results of operations and should be read in
conjunction with the accompanying unaudited Condensed Consolidated Financial
Statements and notes thereto.
GENERAL
The Company designs, manufactures and markets metal halide lighting products,
including materials, systems and components. Metal halide lighting is currently
used primarily in commercial and industrial applications such as factories and
warehouses, outdoor site and landscape lighting, sports facilities and large
retail spaces such as superstores. With the January 1998 acquisition of
Deposition Sciences, Inc., 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 production equipment revenue is recognized under the
percentage of completion method.
Consistent with the Company's strategy for new product introductions, the
Company invests substantial resources in research and development to engineer
materials and system components to be included in customers' specialized
lighting systems. Over the last three fiscal years, the Company has spent an
aggregate of $17,310 on research and development, representing 5.7% of aggregate
net sales from continuing operations over that period. During the nine months
ended March 31, 1999, the Company spent $13,226 on research and development,
representing 9.5% of net sales for that period. Such expenditures have enabled
the Company to develop new applications for metal halide lighting, improve the
quality of its materials, and introduce new specialized products, such as the
Uni-Form(R) pulse start products. Uni-Form(R) pulse start products are a new
generation of metal halide components and systems which permit (a) increased
light output with lower power utilization, (b) faster starting, (c) a quicker
restart of lamps which have been recently turned off, and (d) better color
uniformity. The Company 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 Deposition Sciences, Inc. ("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 products in the
growing metal halide lighting industry.
13
<PAGE> 15
RECENT DEVELOPMENTS
REVOLVING BANK CREDIT FACILITY. On October 19, 1998, the Company voluntarily
reduced the maximum committed availability under its revolving credit facility
("Credit Facility") provided by several North American financial institutions
(the "Lenders") to $65,000 from $85,000. In February 1999, the Company and the
Lenders amended the Credit Facility. If the Company and the Lenders had not
entered into the amendment, the Company would have been in default under the
Credit Facility. The Credit Facility, as amended, provides for future borrowing
under an arrangement pursuant to which the availability of borrowing is
determined by the Company's eligible accounts receivable, eligible inventories
and certain other assets. Borrowings under the Credit Facility are limited to
$55,000 with additional borrowings subject to the approval of all Lenders.
Interest rates on loans outstanding are based on the agent bank's prime rate
plus 1% to May 31, 1999 and plus 2% thereafter. As of March 31, 1999, the
balance outstanding under the Credit Facility was $54,280.
The Company is in default of certain financial covenants under the Credit
Facility, however, the Lenders have provided the Company with a waiver of such
defaults until May 21, 1999, in anticipation of refinancing, as described below.
During the period of default, the loans under the Credit Facility bear interest
at 4% over the agent bank's prime rate. The Company is also obligated to pay
facility fees of .375% on the amount of the facility. Pursuant to the Credit
Facility terms, lenders holding 66 2/3% of the outstanding loans may accelerate
the loans. Consequently, the Company has classified the outstanding balance
under the Credit Facility as a current liability in the condensed consolidated
balance sheet.
The Credit Facility has a term expiring April 1, 2000. The Company is actively
seeking alternative financing sources and intends to replace the existing Credit
Facility. If the Company is unable to obtain alternative financing and replace
the Credit Facility prior to July 1, 1999, the Company is required to pay the
Lenders a $750 fee.
The facility contains certain affirmative and negative covenants customary for
this type of agreement, prohibits cash dividends, and includes financial
covenants with respect to income levels, cash availability and net worth. The
principal security for the facility is substantially all of the personal
property of the Company and each of its North American and United Kingdom
subsidiaries, certain real estate and a pledge of stock of each of the Company's
principal subsidiaries.
In April 1999, the Company announced that it has accepted a commitment from PNC
Bank, N.A. to provide senior secured financing to replace the Credit Facility.
Under the terms of the commitment, PNC Bank would fully underwrite a new senior
secured credit facility of up to $75,000.
The Company has substantially concluded negotiations of the financial terms of a
proposed loan document with PNC Bank that the Company anticipates will be used
to effect a complete refinancing and prepayment of the Credit Facility. While no
assurances can be given, the Company believes that the refinancing will be
completed and the Lenders have not indicated a desire to accelerate payment of
the Credit Facility.
PLANS ANNOUNCED IN THE SECOND QUARTER, FISCAL 1999. 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 international markets and the anticipated decline of noncore
products, integrate fully its core and acquired U.S. operations to produce
profitable growth, and reduce and redirect its use of cash resources. This came
in response to a reduction in the Company's revenues in the first quarter of
fiscal 1999 as compared to the fourth quarter of fiscal 1998 and due to economic
conditions in general, especially outside the United States. To implement this
strategy, the Company has taken or is taking the following actions:
- Limiting Pacific Rim Expansion. In recognition of the
near-term effects of the crisis in Asian capital markets, the
Company modified its expansion plans in the Pacific Rim and is
acting to limit its exposure by limiting further investment in
Pacific Rim ventures. The Company has retained several lamp
manufacturing equipment groups, which were originally expected
to be shipped to Asia pursuant to equipment contracts with
Pacific Rim companies, and has moved the equipment to its
Solon, Ohio facility.
- Changing Global Lamp Manufacturing Strategy. The Company is
revising its current global lamp manufacturing strategy to
reduce the overall cost of its lamps, including moving some
production to the manufacturing facilities of foreign joint
ventures. 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.
- Restructuring Marketing Operations in North America and
Europe. The Company has restructured its marketing operations
in Canada to eliminate certain distribution channels and
centers. Warehouses in Toronto and Vancouver have been closed.
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.
14
<PAGE> 16
The Company is also restructuring its marketing operations in
Europe and the U.K. to make them more cost efficient. Sales
offices in France and Germany are being sold and future sales
in those locations will be handled by commissioned sales
agents. Actions in the U.K. include consolidation of locations
and other related cost reduction activities.
- 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 the nine
months ended March 31, 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.
- 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 has reduced its corporate and
administrative overhead, including a significant reduction in
staff levels.
- 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 have been substantially reduced.
Capital expenditures for the third quarter of fiscal 1999
totaled $2,982, and capital expenditures for the fourth
quarter of fiscal 1999 are estimated to be $2,000.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
---------------------------- -----------------------------
SALES COST OF SALES SALES COST OF SALES
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
As reported $ 37,944 $ 30,073 $ 138,324 $ 92,385
Pro forma 52,905 36,486 153,285 98,798
</TABLE>
The other actions noted above resulted in a total of $15,845 in special charges
($.78 per share) during the second and third quarters. The charges are
classified in the condensed consolidated statement of operations as cost of
sales ($808) and special charges ($15,037). In connection with the above
actions, the Company incurred additional costs of $374 and $764 related to cost
of sales and research and development expense for transactions with affiliates.
The Company anticipates that an additional $2,000, related to these actions,
will be incurred during the fourth quarter of fiscal 1999.
15
<PAGE> 17
DISCONTINUED OPERATIONS, MICROSUN BUSINESS
In March 1998, the Company approved a plan to distribute to its shareholders, as
a tax-free spin-off transaction estimated to be completed by December 31, 1998,
all of the ownership of Microsun Technologies, Inc., the subsidiary primarily
responsible for development, design, assembly and marketing of metal halide
portable fixtures for hospitality and residential uses. As a result, the
consolidated financial statements of ADLT were reclassified to reflect the
results of operations of Microsun as a discontinued operation in accordance with
generally accepted accounting principles.
Because of deterioration of the capital markets subsequent to June 30, 1998 and
the inability to raise capital necessary to spin-off the Microsun business, the
Company revised its plan for the disposition of Microsun. During December 1998,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun.
During the second quarter of fiscal 1999, a loss on disposal of $6,166 was
recorded, which included $1,166 for operating losses during the phase-out period
and $5,000 related to the write-down of assets to net realizable value and costs
related to shut-down and severance.
During the three months ended March 31, 1999, the manufacturing activities of
Microsun ceased and the Company initiated efforts to dispose of the noninventory
assets, consisting of the manufacturing facility and the machinery and
equipment. Presently, wind-down activities consist of building-out and
assembling the inventory components and selling the metal halide portable
fixtures.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the January 1998 purchase of Deposition Sciences, Inc.
("DSI"), the Company allocated $18,220 of the $25,400 purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
DSI's in-process research and development value is comprised of five primary
research and development programs, which were in-process at the time of the
acquisition. At March 31, 1999, significant progress had been achieved on each
of the primary in-process research and development efforts that were underway at
DSI as of the acquisition date (January 28, 1998). In general, the Company
believes that DSI's research and development efforts are on track with
management's plans at the time the transaction occurred. DSI is continuing to
invest heavily in the development of new technologies and projects that were
underway at the consummation of the transaction. Through March 31, 1999, no
significant adjustments have been made in the economic assumptions or
expectations which underlie the Company's acquisition decision and related
purchase accounting. All of the cited in-process research and development
projects are active, and DSI is advancing the science and technology at a rate
consistent with both DSI and ADLT expectations.
16
<PAGE> 18
RESULTS OF OPERATIONS - SELECTED ITEMS AS A PERCENTAGE OF NET SALES
The following table sets forth, as a percentage of net sales, certain items in
the Company's Condensed Consolidated Statements of Operations for the indicated
periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 65.3 62.0 66.8 59.7
Marketing and selling 21.5 15.3 21.6 15.2
Research and development 8.2 5.8 9.5 5.5
General and administrative 8.4 6.3 9.9 6.6
Fiber optic joint venture formation costs -- -- -- 0.2
Purchased in-process research & development -- 37.1 -- 16.4
Special charges 3.5 32.0 10.9 14.2
Amortization of intangible assets 1.4 1.3 1.5 0.9
----- ----- ----- -----
Loss from operations (8.3) (59.8) (20.2) (18.7)
Other income (expense):
Interest expense (7.6) (2.7) (7.2) (1.5)
Interest income 0.6 0.5 0.6 1.0
Loss from equity investments 0.0 (0.0) (0.3) (0.0)
----- ----- ----- -----
Loss from continuing operations
before income taxes and extraordinary charge (15.3) (62.0) (27.1) (19.2)
Income taxes 0.1 (4.8) 2.8 0.8
----- ----- ----- -----
Loss from continuing operations
before extraordinary charge (15.4) (57.2) (29.9) (20.0)
Loss from discontinued operations,
net of income tax benefits -- (13.7) (4.4) (6.6)
----- ----- ----- -----
Loss before extraordinary charge (15.4) (70.9) (34.3) (26.6)
Extraordinary charge from early extinguishment
of debt, net of income tax benefits -- (1.3) -- (0.6)
----- ----- ----- -----
Net loss (15.4)% (72.2)% (34.3)% (27.2)%
===== ===== ===== =====
</TABLE>
Factors which have affected the results of operations for the third quarter and
first nine months of fiscal 1999 as compared to the third quarter and first nine
months of fiscal 1998 are discussed below.
QUARTER ENDED MARCH 31, 1999 COMPARED WITH QUARTER ENDED MARCH 31, 1998
Net sales. Net sales increased 1.9% to $50,022 for the third quarter of fiscal
1999 from $49,075 for the third quarter of fiscal 1998. Net sales, excluding
lamp equipment sales, rose $4,492 or 9.9% to $50,022 for the third quarter of
fiscal 1999 from $45,530 for the third quarter of fiscal 1998.
17
<PAGE> 19
Fiscal 1999 third quarter sales reflect continued growth in the sales of the
Company's core U.S. metal halide operations, which was offset by reductions in
overseas non-metal halide sales. The Company's metal halide sales increased 13%
(19% increase in the United States) from the year ago period, excluding lamp
equipment sales. Metal halide sales grew to 73% of total sales from 71% a year
earlier, excluding lamp equipment sales. The Company's core metal halide
materials business, a key indicator of industry trends, was up 9% from the
prior year's quarter. Geographically, these sales of materials remained flat in
the U.S. and grew 25% outside the U.S. Sales of Uni-Form(R) pulse start
products are accelerating, to an estimated 4% share of new metal halide
installations.
Sales outside the United States declined 2%, excluding lamp equipment sales. The
Company attributes the soft overseas market to the current international
economic environment. Sales of non-metal halide products increased 4% (15%
increase in the U.S.). Excluding acquisitions, sales of non-metal halide
products declined 13% due to the Company's plan of strategically reducing its
presence in certain non-metal halide products and markets.
Sales increases, excluding lamp equipment sales, 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 have
helped to stablize the Company's product pricing.
Costs and Expenses. The Company's restructuring efforts in the second and third
quarters 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 for the third quarter are
estimated to be $4,700, but which are not classified as special charges.
The Company believes that quality, rework and productivity challenges will
likely be encountered during the fourth quarter as the Company seeks to
fully-integrate its operations and continues the aggressive launch of the
Uni-Form(R) pulse start line. It estimates that its higher than normal expenses
in this regard will approximate $3,000 in the fourth quarter.
Cost of Sales. Cost of sales increased 18.2% to $32,676 in the third quarter of
fiscal 1999 from $27,648 in the third quarter of fiscal 1998, excluding the
$2,800 in inventory write-downs related to special charges recorded in the third
quarter of fiscal 1998. The increase was primarily attributable to the
disruption caused by the Company's restructuring activities noted above. As a
percentage of net sales, excluding the inventory write-down, cost of sales
increased to 65.3% in the third quarter of fiscal 1999 from 56.3% in the third
quarter of fiscal 1998. The Company believes that the benefit of its
restructuring actions, together with its ongoing efforts to cut costs, should
begin to gradually reduce the Company's cost of sales as a percentage of sales
to 60% or less within the next twelve months.
Marketing and Selling Expenses. Marketing and selling expenses increased 43.2%
to $10,771 in the third quarter of fiscal 1999 from $7,523 in the third quarter
of fiscal 1998. As a percentage of net sales, marketing and selling expenses
increased to 21.5% in the third quarter of fiscal 1999 from 15.3% in the third
quarter of fiscal 1998. This increase is primarily 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
18
<PAGE> 20
personnel and product promotional costs. The Company anticipates the sales of
Uni-Form(R) pulse start products and sales into new markets to increase and that
the level of marketing and selling expenses will decline gradually over the next
several quarters approximating 17% to 18% of sales.
Research and Development Expenses. Research and development expenses increased
43% to $4,073 in the third quarter of fiscal 1999 from $2,848 in the third
quarter of 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 8.2% in the third quarter of fiscal 1999 from
5.8% in the third quarter of fiscal 1998. The Company anticipates this level of
expense to decline gradually over the next several quarters to approximately
7%.
General and Administrative Expenses. General and administrative expenses
increased 36.5% to $4,214 in the third quarter of fiscal 1999 from $3,087 in
the third quarter of fiscal 1998. The increase in general and administrative
expenses of $1,127 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; relocation costs;
travel; personnel and related costs; and equipment depreciation and rent. As a
percentage of net sales, general and administrative expenses increased to 8.4%
in the third quarter of fiscal 1999 from 6.3% in the third quarter of fiscal
1998.
Special Charges. See discussion of special charges under "Recent Developments"
and Note G of "Notes to Condensed Consolidated Financial Statements (Unaudited)"
for further discussion.
Amortization of Intangible Assets. Amortization expense remained relatively the
same at $706 in the third quarter of fiscal 1999 as compared to $611 in the
third quarter of fiscal 1998. Most of this expense relates to goodwill and other
intangible assets resulting from the acquisitions of Ruud Lighting and
Deposition Sciences which were completed in January 1998.
Loss from Operations. As a result of the aforementioned factors, during the
third quarter of fiscal 1999, the Company incurred a loss from operations of
$4,163, as compared to a loss from operations of $29,362 during the third
quarter of fiscal 1998. Excluding the special charges of $1,745 mentioned above,
the loss from operations in the third quarter of fiscal 1999 was $2,418. In the
third quarter of fiscal 1998, income from operations was $7,358, excluding
purchased in-process research and development of $18,220 and special charges of
$18,500.
Interest Expense. Interest expense amounted to $3,800 in the third quarter of
fiscal 1999, as compared to $1,325 in the third quarter of fiscal 1998. This
increase was primarily the result of the higher average debt outstanding during
the third quarter of fiscal 1999 as compared to the third quarter of fiscal
1998.
Interest Income. Interest income increased to $310 in the third quarter of
fiscal 1999 from $274 in the third quarter of fiscal 1998. This increase is
attributable to lower average cash equivalents and short-term investments in the
third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998,
offset by $175 in interest income in the third quarter of fiscal 1999 from the
loan to the CEO.
19
<PAGE> 21
Income (loss) from Equity Investment. The income from equity investments
represents $19 of earnings from the Company's investment in Fiberstars, Inc., a
marketer and distributor of fiber optic lighting products, as compared to a loss
of $2 from the same investment in the third quarter of fiscal 1998.
Loss from Continuing Operations before Income Taxes and Extraordinary Charges.
As a result of the aforementioned factors, during the third quarter of fiscal
1999, the Company incurred a loss from continuing operations before income taxes
and extraordinary charges of $7,634, as compared to a loss from continuing
operations before income taxes and extraordinary charges of $30,415 during the
third quarter of fiscal 1998. Excluding the special charges of $1,745 mentioned
above, the loss from continuing operations before income taxes and extraordinary
charges in the third quarter of fiscal 1999 was $5,889. In the third quarter of
fiscal 1998, income from continuing operations before income taxes and
extraordinary charges was $6,305, excluding purchased in-process research and
development of $18,220 and special charges of $18,500.
Income Taxes. At June 30, 1998, the Company had net operating loss carryforwards
("NOLs") of $1,960 available to reduce future United States federal taxable
income, which expire in 2008 through 2011.
The Company also has research and development credit carryforwards for tax
purposes of approximately $850, which expire in 2005 through 2013. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $1,000,
which may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 1998, the Company had foreign net operating loss carryforwards
for tax purposes totaling $2,000 that expire in 2006 and $403 that have no
expiration dates.
For the nine months ended March 31, 1999, the Company reported a pretax loss
from continuing operations, including special charges, of $37,474 and a pretax
loss on the discontinued operations of the Microsun business of $6,166, which
created $43,640 of operating losses and future tax deductions for financial
reporting purposes. Accordingly, at March 31, 1999, the Company has recorded a
valuation allowance for deferred tax assets related to all NOLs, tax credits and
net deductible tax differences at March 31, 1999 in the amount of $18,175.
Loss from Discontinued Operations. See discussion of loss from discontinued
operations under "Discontinued Operations, Microsun Business" and Note I of
"Notes to Condensed Consolidated Financial Statements (Unaudited)" for further
discussion.
Extraordinary Charge. The Company recorded a $604 extraordinary charge (net of
applicable income taxes of $311) during the third quarter of fiscal 1998,
representing costs associated with the early extinguishment of debt.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1998
Net sales. Net sales increased 38.2% to $153,285 for the first nine months of
fiscal 1999 from $110,891 for the first nine months of fiscal 1998, excluding
the terminated equipment contracts noted above. Net sales, excluding lamp
equipment sales and terminated equipment contracts, rose 49.9% to $150,314 for
the first nine months of fiscal 1999 from $100,299 for the first nine months of
fiscal 1998.
20
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Results for the first nine months of fiscal 1999 reflect continued growth in the
sales of the Company's core U.S. metal halide operations, which was offset by
reductions in overseas sales and in non-metal halide products. The Company's
metal halide sales increased 18% (27% increase in the United States) from the
year ago period, excluding acquisitions, lamp equipment sales and terminated
equipment contracts. Metal halide sales grew to 74% of total sales from 71% a
year earlier, excluding lamp equipment sales and terminated equipment
contracts. The Company's core metal halide materials business, a key indicator
of industry trends, was up 7% from the year ago period. Geographically, these
sales of materials were up 9% in the U.S. and grew 5% outside the U.S.
Sales outside the U.S. declined 4%, excluding acquisitions, lamp equipment
sales and terminated equipment contracts. The Company attributes the soft
overseas market to the current international economic environment. Sales of
non-metal halide products, an area where the Company has been strategically
reducing its presence, declined 27% excluding acquisitions and equipment sales.
Sales increases, excluding acquisitions, equipment sales and terminated
equipment contracts, were driven by increased volume in the Company's
materials, components and systems. Pricing in the metal halide lighting
business is competitive, and prices for the Company's products have remained
flat or declined slightly. The introduction of new products have helped to
stablize the Company's product pricing.
Costs and Expenses. The Company's restructuring efforts in the second and third
quarters 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 estimated to be in the range
of $10,200 for the first nine months of fiscal 1999, but which are not included
within the special charges classification.
The Company believes that quality, rework and productivity challenges will
likely be encountered during the fourth quarter as the Company seeks to
fully-integrate its operations and continues the aggressive launch of the
Uni-Form(R) pulse start line. It estimates that its higher than normal expenses
in this regard will approximate $3,000 in the fourth quarter.
Cost of Sales. Cost of sales increased 54.5% to $97,990 in the first nine months
of fiscal 1999 from $63,441 in the first nine months of fiscal 1998, excluding
the $6,413 reduction in cost of sales in fiscal 1999 related to the terminated
equipment contracts discussed above and inventory write-downs related to special
charges of $808 in fiscal 1999 and $2,800 in fiscal 1998. The increase was
primarily attributable to higher sales levels and to the disruption caused by
the Company's restructuring activities noted above. As a percentage of net
sales, excluding the terminated equipment contracts and inventory write-downs,
cost of sales increased to 63.9% in the first nine months of fiscal 1999 from
57.2% in the first nine months of fiscal 1998. The Company believes that the
benefit of its restructuring actions, together with its ongoing efforts to cut
costs, should begin to gradually reduce the Company's cost of sales as a
percentage of sales to 60% or less within the next twelve months.
Marketing and Selling Expenses. Marketing and selling expenses increased 77.5%
to $29,913 in the first nine months of fiscal 1999 from $16,854 in the first
nine months of fiscal 1998. As a percentage of net sales, excluding the
terminated equipment contracts, marketing and selling expenses increased to
19.5% in the first nine months of fiscal 1999 from 15.2% in the first nine
months of fiscal 1998. This increase is a result of increased expenses incurred
in connection with
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<PAGE> 23
the launch of the Company's Uni-Form(R) pulse start products, increased expenses
involved in opening new markets to the Company's products, and increased product
promotional costs. The Company anticipates the sales of Uni-Form(R) pulse start
products and sales into new markets to increase and that the level of marketing
and selling expenses will decline gradually over the next several quarters to
approximating 17% to 18% of sales.
Research and Development Expenses. Research and development expenses increased
117.9% to $13,226 in the first nine months of fiscal 1999 from $6,069 in the
first nine months of fiscal 1998. This increase arose from increased spending
for the: (i) expansion of the new line of Uni-Form(R) pulse start products (with
improved energy efficiency, quicker starting and restarting and a more compact
arc source, which improves the light and reduces material costs) intended to
replace many first generation metal halide lamps in industrial and commercial
applications; (ii) development and testing of electronic power supply systems;
(iii) development of new materials for the world's major lighting manufacturers;
and, (iv) research and development efforts aimed at improving the coating
process of optical thin-films to broaden the applications, developing new
thin-film materials, and using coatings to develop improvements to lighting and
telecommunications technologies. As a percentage of net sales, excluding the
terminated equipment contracts, research and development expenses increased to
8.6% in the first nine months of fiscal 1999 from 5.5% in the first nine months
of fiscal 1998. The Company anticipates this level of expense to decline
gradually over the next several quarters to approximately 7%.
General and Administrative Expenses. General and administrative expenses
increased 87.0% to $13,664 in the first nine months of fiscal 1999 from $7,307
in the first nine months of fiscal 1998. The increase in general and
administrative expenses of $6,357 relates to an overall increase in the size
and complexity of the Company and relates in part to fully-integrating its core
and acquired U.S. operations and the implementation of new information systems.
Expense increases primarily reflect legal, accounting and consulting fees;
personnel and related costs; travel; communications costs; relocation costs;
and equipment depreciation and rent. As a percentage of net sales, excluding
the terminated equipment contracts, general and administrative expenses
increased to 8.9% in the first nine months of fiscal 1999 from 6.6% in the
first nine months of fiscal 1998.
Special Charges. See discussion of special charges under "Recent Developments"
and Note G of "Notes to Condensed Consolidated Financial Statements (Unaudited)"
for further discussion.
Amortization of Intangible Assets. Amortization expense increased to $2,049 in
the first nine months of fiscal 1999 from $1,036 in the first nine months of
fiscal 1998 due to the amortization of goodwill and other intangible assets
related to the acquisitions of Ruud Lighting and Deposition Sciences which were
completed in January 1998.
Loss from Operations. As a result of the aforementioned factors, during the
first nine months of fiscal 1999, the Company incurred a loss from operations of
$27,950, as compared to a loss from operations of $20,748 during the first nine
months of fiscal 1998. Excluding the special charges and terminated equipment
contracts mentioned above, the loss from operations in the first nine months of
fiscal 1999 was $3,557. In the first nine months of fiscal 1998, income from
operations was $15,972, excluding purchased in-process research and development
of $18,220 and special charges of $18,500.
Interest Expense. Interest expense increased to $9,958 in the first nine months
of fiscal 1999, as compared to $1,649 in the first nine months of fiscal 1998.
This increase was primarily the result of the higher average debt outstanding.
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<PAGE> 24
Interest Income. Interest income decreased to $876 in the first nine months of
fiscal 1999 from $1,079 in the first nine months of fiscal 1998. This decrease
is attributable to lower average cash equivalents and short-term investments in
the first nine months of fiscal 1999 as compared to the first nine months of
fiscal 1998, partially offset by $343 in interest earnings from the loan to an
officer in the second quarter of fiscal 1999.
Loss from Equity Investment. The loss from equity investments represents $102 of
earnings from the Company's investment in Fiberstars, Inc., a marketer and
distributor of fiber optic lighting products, offset by a $544 loss from the
Company's investment in Venture Lighting Japan, a manufacturer and marketer of
metal halide lamps in Japan.
Loss from Continuing Operations before Income Taxes and Extraordinary Charges.
As a result of the aforementioned factors, during the first nine months of
fiscal 1999, the Company incurred a loss from continuing operations before
income taxes and extraordinary charges of $37,474, as compared to a loss from
continuing operations before income taxes and extraordinary charges of $21,320
during the first nine months of fiscal 1998. Excluding the total special charges
and terminated equipment contracts mentioned above, the Company incurred a loss
from continuing operations before income taxes of $13,081 during the first nine
months of fiscal 1999. In the first nine months of fiscal 1998, income from
continuing operations before income taxes and extraordinary charges was $15,400,
excluding purchased in-process research and development of $18,220 and special
charges of $18,500.
Income Taxes. At June 30, 1998, the Company had net operating loss carryforwards
("NOLs") of $1,960 available to reduce future United States federal taxable
income, which expire in 2008 through 2011.
The Company also has research and development credit carryforwards for tax
purposes of approximately $850, which expire in 2005 through 2013. Additionally,
in conjunction with the Alternative Minimum Tax ("AMT") rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $1,000,
which may be used indefinitely to reduce regular federal income taxes.
Also, at June 30, 1998, the Company had foreign net operating loss carryforwards
for tax purposes totaling $2,000 that expire in 2006 and $403 that have no
expiration dates.
For the nine months ended March 31, 1999, the Company reported a pretax loss
from continuing operations, including special charges, of $37,474 and a pretax
loss on the discontinued operations of the Microsun business of $6,166, which
created $43,640 of operating losses and future tax deductions for financial
reporting purposes. Accordingly, at March 31, 1999, the Company has recorded a
valuation allowance for deferred tax assets of $18,175 related to all NOLs, tax
credits and net deductible tax differences.
Loss from Discontinued Operations. See discussion of loss from discontinued
operations under "Discontinued Operations, Microsun Business" and Note I of
"Notes to Condensed Consolidated Financial Statements (Unaudited)" for further
discussion.
Extraordinary Charge. The Company recorded a $604 extraordinary charge (net of
applicable income taxes of $311) during the first nine months of fiscal 1998,
representing costs associated with the early extinguishment of debt.
23
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $10,291 during the nine months ended March 31, 1999. Uses of cash
consisted of $12,760 used in operating activities, $28,612 used in investing
activities, and $7,698 used in discontinued operations. These uses of cash were
offset by net financing activities of $38,779.
Net cash used in operating activities. Net cash used in operating activities
totaled $12,760 in the first nine months of fiscal 1999 as compared to $6,442 in
the first nine months of fiscal 1998.
Trade receivables increased $6,977, excluding the effect of noncash special
charges and terminated equipment contracts. The increase in receivables
includes an increase of approximately $2,500 in accounts receivable related to
thin-film deposition equipment contracts. These contracts affect cash flow
because deposition equipment revenues are recognized under the percentage of
completion method of accounting while cash payments are received in accordance
with contract terms. The remaining increase in receivables primarily relates to
an increase in days sales outstanding as compared to fiscal 1998's fourth
quarter, resulting primarily from providing selected customers more generous
payment terms.
Inventory levels decreased $1,108, excluding the effect of noncash special
charges and terminated equipment contracts, as a result of the Company's
efforts to manage its inventory levels more effectively. Accounts payable and
accrued expenses increased $4,305, excluding the items noted above, as a result
of the Company's efforts to manage the timing of its cash disbursements.
Net cash provided by operating activities totaled $679 in the three months ended
March 31, 1999, and net cash provided by operating activities for the six months
ended March 31, 1999 totaled $857. The Company intends to manage its cash
resources to generate positive cash flow from operating activities in the
quarter ending June 30, 1999 and beyond.
Net cash used in investment activities. During the nine months ended March 31,
1999, investing activities used $28,612 of cash including $20,785 for capital
expenditures, $5,024 related to the purchases of businesses and $2,803 related
to investments in affiliates.
Capital expenditures, primarily for production equipment and leasehold and
facility improvements, totaled $20,785 in the first nine months of fiscal 1999
as compared to $23,368 in the first nine months of fiscal 1998. Capital
expenditures in fiscal 1999 related to facilities enhancements, primarily at the
Company's headquarters in Solon, Ohio, and at several of its subsidiaries, and
additional machinery and equipment to improve production processes, which should
result in increased productivity and capacity in the production of lamps, power
supplies and other lighting system products.
The Company has modified its current growth and capital expansion plans due to
the present limited availability of cash resources. Specifically, the Company
will limit its capital expenditures for at least the next twelve months and, as
a result, the Company has postponed certain capital equipment and, for all
practical purposes, facilities expenditures have been completed.
As a result of the Company's decision to terminate joint venture equipment
contracts, approximately $6,500 of new production equipment is available for use
at the Company's Solon, Ohio lamp manufacturing facility. Total capital
expenditures for the remainder of fiscal 1999 are estimated to be $2,000, and
the Company estimates its maintenance level for capital expenditures will
approximate $8,000 over the next twelve months. Future capital expenditures
beyond this level will be discretionary, as the Company presently has sufficient
operating capacities to support several years of sales growth at its historical
rates.
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<PAGE> 26
To expand the Company's ability to develop and market new metal halide products
and systems, the Company has made a number of acquisitions and strategic
investments, the most notable of which, completed in fiscal 1998, are described
below.
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is a leader in the
development of sophisticated thin film deposition systems and coatings for
lighting applications, with particular emphasis on coatings for metal halide
lighting systems, and other applications, including aerospace, defense and
automotive applications. The stock of DSI was acquired in a privately-negotiated
transaction. The purchase price consisted of 599,717 shares of the Company's
Common Stock and approximately $14,500 in cash.
On January 2, 1998, the Company acquired all of the capital stock outstanding of
Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin. Ruud Lighting
manufactures and directly markets HID lighting systems, principally focusing on
metal halide installations for commercial, industrial and outdoor lighting
applications. The Ruud Stock was acquired from the five shareholders of Ruud
Lighting in a privately negotiated purchase transaction. The purchase price for
the Ruud Stock consisted of three million shares of the Company's Common Stock
and approximately $35,500 in cash.
Net cash provided by financing activities. During the nine months ended March
31, 1999, net financing activities provided cash of $38,779, which included
$48,196 of cash provided from net borrowings under the Credit Facility, net
payments of long-term debt and capital leases of $998 and a loan to an officer
of $9,000.
On January 2, 1998, the Company replaced its then existing loan agreement and
other borrowings in North America with the Credit Facility described below.
Proceeds from this facility were used to finance the $35,500 cash portion of the
Ruud Lighting acquisition and the $14,500 cash portion of the Deposition
Sciences acquisition. Proceeds were also used to repay $19,200 of existing and
outstanding North American bank borrowings of ADLT, Ruud Lighting and DSI.
During the nine months ended March 31, 1999, the net proceeds borrowed under
the Credit Facility were $48,196. In February 1999, the Credit Facility was
amended as discussed below.
On March 13, 1998, the Company sold $100,000 of 8% Senior Notes due March 15,
2008, resulting in net proceeds of $96,150. Approximately $76,300 of the net
proceeds of the Senior Notes were used to repay amounts outstanding under the
Credit Facility, thereby lengthening the average term of the Company's debt,
most of which had been incurred to finance the acquisitions of Ruud Lighting and
DSI. From September 14, 1998 until completion of a registered exchange offer to
existing noteholders, the Senior Notes bear interest at 8.5%. The offer is
expected to be completed within 45 days following effectiveness of the Company's
related registration statement.
Pursuant to a loan agreement dated October 8, 1998, between the Company and its
Chairman and Chief Executive Officer (the "CEO"), the Company has loaned $9,000
to its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the
loan were used by the Company's CEO to reduce the principal balance outstanding
of a margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In 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.
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<PAGE> 27
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.
At March 31, 1999, the Company's current liabilities exceeded its current assets
by $8,554, due to the classification of its revolving credit facility payable,
in default, of $54,280 as a current liability in the Company's balance sheet.
Excluding this amount, which the Company is actively seeking to refinance, the
Company's working capital (current assets less current liabilities) at March 31,
1999 was $45,726, resulting in a working capital ratio of current assets to
current liabilities of 1.9 to 1.0, as compared to $77,637 or 3.1 to 1.0 at June
30, 1998. As of March 31, 1999, the Company had $11,976 in cash and cash
equivalents and short-term investments.
As of March 31, 1999, the interest-bearing obligations of the Company totaled
$168,614 and primarily consisted of: $54,280 of borrowings under the Credit
Facility; $100,000 of 8% Senior Notes; mortgages of $7,260; a promissory note
due to an affiliate of $3,000; borrowing of a foreign subsidiary of $2,182;
capital leases of $1,357; and, other obligations of $535.
On October 19, 1998, the Company voluntarily reduced the maximum committed
availability under its revolving credit facility ("Credit Facility") provided by
several North American financial institutions (the "Lenders") to $65,000 from
$85,000. In February 1999, the Company and the Lenders amended the Credit
Facility. If the Company and the Lenders had not entered into the amendment, the
Company would have been in default under the Credit Facility. The Credit
Facility, as amended, provides for future borrowing under an arrangement
pursuant to which the availability of borrowing is determined by the Company's
eligible accounts receivable, eligible inventories and certain other assets.
Borrowings under the Credit Facility are limited to $55,000 with additional
borrowings subject to the approval of all Lenders. Interest rates on loans
outstanding are based on the agent bank's prime rate plus 1% to May 31, 1999
and plus 2% thereafter. As of March 31, 1999, the balance outstanding under the
Credit Facility was $54,280.
The Company is in default of certain financial covenants under the Credit
Facility, however, the Lenders have provided the Company with a waiver of such
defaults until May 21, 1999, in anticipation of refinancing, as described below.
During the period of default, the loans under the Credit Facility bear interest
at 4% over the agent bank's prime rate. The Company is also obligated to pay
facility fees of .375% on the amount of the facility. Pursuant to the Credit
Facility terms, lenders holding 66 2/3% of the outstanding loans may accelerate
the loans. Consequently, the Company has classified the outstanding balance
under the Credit Facility as a current liability in the condensed consolidated
balance sheet.
The Credit Facility has a term expiring April 1, 2000. The Company is actively
seeking alternative financing sources and intends to replace the existing Credit
Facility. If the Company is unable to obtain alternative financing and replace
the Credit Facility prior to July 1, 1999, the Company is required to pay the
Lenders a $750 fee.
The facility contains certain affirmative and negative covenants customary for
this type of agreement, prohibits cash dividends, and includes financial
covenants with respect to income levels, cash availability and net worth. The
principal security for the facility is substantially all of the personal
property of the Company and each of its North American and United Kingdom
subsidiaries, certain real estate and a pledge of stock of each of the Company's
principal subsidiaries.
In April 1999, the Company announced that it has accepted a commitment from PNC
Bank, N.A. to provide senior secured financing to replace the Credit Facility.
Under the terms of the commitment, PNC Bank would fully underwrite a new senior
secured credit facility of up to $75,000.
The Company has substantially concluded negotiations of the financial terms of a
proposed loan document with PNC Bank that the Company anticipates will be used
to effect a complete refinancing and prepayment of the Credit Facility. While no
assurances can be given, the Company believes that the refinancing will be
completed and the Lenders have not indicated a desire to accelerate payment of
the Credit Facility.
In March 1999, the Company announced that it has reached an agreement in
principle with General Electric Company ("GE") involving a $20,550 equity
investment by GE in the Company. As a result of this agreement in principle, the
Company will enter into business agreements with GE for the purchase and sale of
metal halide lighting products and components.
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<PAGE> 28
The investment contemplates the purchase of preferred shares convertible into
approximately 3,000,000 shares of the Company's common stock at a $6.75
conversion rate based upon a previously determined market price. In addition,
in exchange for certain intangibles, GE would receive warrants exercisable for
nominal consideration to purchase 1,000,000 shares of common stock of the
Company. Exercise as to 600,000 of these shares would be based on market
appreciation of the Company's common stock or certain performance criteria.
Under the proposed terms of the transaction, GE would have certain antidilution
rights and rights to limit issuance of additional securities of the Company. In
addition, if the Company's financial performance does not meet certain financial
criteria over several measurement periods, GE could obtain the right, through a
combination of management proxies and newly issued common stock (purchased at
market price), to vote a majority of the outstanding shares of the Company.
Exercise of such right would be subject to applicable provisions of antitrust
law and Ohio corporate law. Under certain circumstances which the Company
believes are unlikely to occur, GE may require the Company to redeem the
preferred shares after five years or increase the number of shares into which
the preferred shares may be converted.
The agreement in principle is not legally binding on the parties and is subject
to closing conditions, including approval by the Company's Board of Directors,
completion of arrangements for the Company's bank financing, clearance of the
transaction under antitrust laws, and execution of definitive agreements
satisfactory to the parties.
The Company believes negotiations of definitive agreements connected with the
investment are progressing satisfactorily. The Hart-Scott-Rodino waiting period
commenced on April 30, 1999, as a result of both the Company and GE completing
their antitrust filings. While the Company expects that the GE investment will
be timely completed, no such assurance can be made.
The Company's implementation of the cost reduction and cash flow enhancement
initiatives including consolidation of equipment and lamp-making operations,
reductions in facilities expenditures, consolidation of international
operations, reduction of corporate expenses, and workforce reductions should
favorably impact the future cash flow of the Company. The Company intends to
manage its expenditures to generate positive cash flow in the quarter ending
June 30, 1999 and beyond.
The Company believes that the available cash, cash flow from operations, and the
initiatives outlined above, along with the GE investment and alternative
financing to replace its existing Credit Facility, will enable the Company to
fund its operations for at least the next 12 months. Nevertheless, the Company
can provide no assurance that the GE investment and alternative financing can be
completed.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
statement requires a "management" approach to reporting financial and
descriptive information about a Company's operating segments. The Company must
adopt this statement in the annual financial statements for fiscal 1999, however
FAS No. 131 need not be applied to interim financial statements in the initial
year of application. Management is currently studying the potential effect of
adopting this statement.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides authoritative guidance on accounting for and
financial reporting of start-up costs and organization costs. The Company is
required to adopt the SOP on July 1, 1999 and, upon adoption, expense all
previously capitalized start-up costs and organization costs as a cumulative
effect of a change in accounting principle. Management is reviewing its
capitalization policies and determining the impact that the adoption of this SOP
is expected to have on its consolidated results of operations and financial
position. At March 31, 1999, the Company estimates that it had approximately
$2,650 of start-up costs included in its consolidated balance sheet.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires that all
derivatives, such as interest rate exchange agreements (swaps), be recognized on
the balance sheet at fair value. Derivatives which are not hedges must be
adjusted to fair value through the results of operations. Derivatives determined
to be hedges will be adjusted to fair value through either the results of
operations or comprehensive income, depending on the nature of the hedge. The
Company is required to adopt FAS No. 133 on July 1, 1999. Management is
currently studying the potential effect of adopting this statement.
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<PAGE> 29
YEAR 2000 READINESS
State of Readiness. During the past two fiscal years, the Company has been
actively involved in finding and correcting Year 2000 problems within its
information technology structure. The information system correction process is
essentially complete. The Company maintains its critical information technology
systems in close cooperation with its suppliers. The Company is not currently
operating any legacy systems that are no longer being supported by the original
supplier.
The most critical noninformation technology systems, such as robots and other
numerically controlled equipment, are relatively new and are being upgraded and
maintained with the help of the Company's various suppliers. To date, the
Company's investigation of these systems has revealed only minor Year 2000
problems; however, investigation in this area continues.
Each operating unit's purchasing and production control departments are in the
process of analyzing the unit's key third-party dependencies and working with
each of these key suppliers to determine the suppliers' Year 2000 status. Since
the Company's key suppliers are in the process of conducting similar
investigations with their key suppliers, and so on, the Company has had limited
success in obtaining reliable Year 2000 compliance certifications.
Costs. The Company has had only limited expenditures related to Year 2000
issues, consisting principally of personnel costs incurred in the scope of
normal operations. In addition, software replacements and upgrades in the
ordinary course of business have enhanced the Company's Year 2000 readiness
without incremental costs. The Company does not anticipate that the future Year
2000 costs related to information technology that are beyond the scope of normal
operations will be significant.
The Company is in the process of developing contingency plans to protect it from
Year 2000 failures. These plans will likely result in some expenditures,
primarily increased inventory costs to assure adequate supplies, the exact
amount of which is not known at this time.
Risks. In the early weeks of 2000, the Company may experience some random supply
chain disruptions that may affect its ability to produce and distribute key
products. These disruptions will be material if the U.S. experiences significant
interruptions in basic services, such as the electric power grid, telephone
service or the banking system.
Contingency Plans. The Company, through its various purchasing and production
control departments, is in the process of developing contingency plans at each
of its worldwide operations. These plans will be particularly focused on
preparing the operation for the inability of key third-party suppliers to
perform their normal functions. Of critical importance will be the development
of alternative suppliers, the enhancements of on-hand materials and the
augmentation of the most critical finished goods.
Completion. Based on management's assessment of current progress, the Company
believes it will complete necessary Year 2000 modifications and contingency
plans by September 1999. The Company can give no assurance that the Company's
Year 2000 preparations will prevent disruptions in its business resulting from
Year 2000 problems of the Company, its suppliers or its customers, or that costs
to the Company of its preparations or any disruptions will not be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended March 31, 1999, there have been no material changes
in the reported market risks presented in the Company's Annual Report on Form
10-K/A No. 2 for the year ended June 30, 1998.
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PART II. OTHER INFORMATION
Except as noted below, the items in Part II are inapplicable or, if applicable,
would be answered in the negative. These items have been omitted and no other
reference is made thereto.
ITEM 1. LEGAL PROCEEDINGS
On April 9, 1999, a complaint was filed in the federal court for the Northern
District of Ohio against Advanced Lighting Technologies, Inc. ("ADLT") and Wayne
Hellman, its President and Chief Executive Officer. The case is styled as Donio
v. Advanced Lighting Technologies, Inc. and Wayne R.. Hellman and alleges that
certain disclosures attributed to ADLT between December 30, 1997 and September
30, 1998 contained misstatements and omissions in violation of the Securities
Exchange Act of 1934, which resulted in an inflated market price for the
Company's common stock. The suit was brought by an alleged holder of 800 shares
who seeks unspecified damages on behalf of a purported class of persons who
purchased shares of ADLT. The Company and Mr. Hellman believe the lawsuit is
without merit and intend to vigorously defend this action.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Reference is made to the discussion in Note D to the Condensed
Consolidated Financial Statements included in this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE NUMBER/
EXHIBIT INCORPORATED
NUMBER TITLE BY REFERENCE
- ------- ----- -------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation. *
3.2 Code of Regulations. **
10.1 Consolidated Amendment No. 2 to Credit Agreement, dated as of
February 12, 1999, amending the Credit Agreement dated
January 2, 1998, among Advanced Lighting Technologies, Inc.,
National City Bank, and other financial institutions ***
10.2 Fee Letter in connection with Consolidated Amendment No. 2
dated February 16, 1999 from Advanced Lighting Technologies, Inc.
to the Administrative Agent and the Lenders ***
11 Statement Re: Computation of Earnings Per Share ___
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges ___
27 Financial Data Schedule ___
* 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.
** Incorporated by reference to Company's Registration Statement on Form
S-1, Registration No. 33-97902, effective December 11, 1995.
*** Incorporated by reference to Company's Current Report on Form 8-K dated
February 16, 1999
</TABLE>
29
<PAGE> 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) Reports on Form 8-K.
During the quarter ended December 31, 1998, the Company filed three Reports on
Form 8-K.
On January 26, 1999, the Company filed a Current Report dated January 26, 1999,
reporting under Item 5 certain information regarding the background and
management of the Company. This information supplements information included in
a preliminary prospectus contained in Amendment No. 3 to the Registration
Statement of Form S-4 (Registration No. 333-58609), filed December 23, 1998,
relating to the registration of a proposed offer to exchange 8% Senior Notes due
2008 of the Company for outstanding 8% Senior Notes due 2008 of the Company and
the Company's proxy materials.
On February 23, 1999, the Company filed a Current Report dated February 16,
1999, reporting under Item 5 certain information related to the Company's Bank
Credit Facility and filed as exhibits thereto, Consolidated Amendment No. 2 to
the Credit Agreement and a fee letter in connection with Consolidated Amendment
No. 2.
On March 15, 1999, the Company filed a Current Report dated March 15, 1999,
reporting under Item 5 certain financial pro forma financial information. The
Form 8-K included the following financial statements:
Pro Forma Condensed Combined Statement of Operations for the Company
and Ruud Lighting, Inc. for the year ended June 30, 1998.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements 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: May 17, 1999 By: /s/ Wayne R. Hellman
--------------------
Wayne R. Hellman
Chief Executive Officer
Date: May 17, 1999 By: /s/ Nicholas R. Sucic
---------------------
Nicholas R. Sucic
Chief Financial Officer
31
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation. *
3.2 Code of Regulations. **
10.1 Consolidated Amendment No. 2 to Credit Agreement, dated as of
February 12, 1999, amending the Credit Agreement dated
January 2, 1998, among Advanced Lighting Technologies, Inc.,
National City Bank, and other financial institutions ***
10.2 Fee Letter in connection with Consolidated Amendment No. 2
dated February 16, 1999 from Advanced Lighting Technologies, Inc.
to the Administrative Agent and the Lenders ***
11 Statement Re: Computation of Earnings Per Share ___
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges ___
27 Financial Data Schedule ___
* 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.
** Incorporated by reference to Company's Registration Statement on Form
S-1, Registration No. 33-97902, effective December 11, 1995.
*** Incorporated by reference to Company's Current Report on Form 8-K dated
February 16, 1999
</TABLE>
32
<PAGE> 1
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Loss from continuing operations
before extraordinary charge attributable
to common shareholders $(7,722) $(28,059) $(41,346) $(22,238)
Loss from discontinued operations -- (6,753) (6,166) (7,292)
Extraordinary charge, net of tax benefits -- (604) -- (604)
------- ------- -------- --------
Net loss attributable
to common shareholders $(7,722) $(35,416) $(47,512) $(30,134)
======= ======= ======== ========
Weighted average shares -- Basic:
Outstanding at beginning of period 20,230 16,478 20,190 13,435
Issued pursuant to public offering -- -- -- 2,924
Issued in acquisitions -- 3,387 1 1,112
Issued for exercise of stock options -- 17 17 34
Issued pursuant to stock purchase plan 4 -- 13 --
Issued pursuant to employee benefit plan 3 -- 1 --
Issuable in connection with an acquisition -- 35 -- 35
------- ------- -------- --------
Weighted average shares -- Basic 20,237 19,917 20,222 17,540
======= ======= ======== ========
Weighted average shares -- Diluted:
Basic from above 20,237 19,917 20,222 17,540
Effect of stock options -- -- -- --
------- ------- -------- --------
Weighted average shares -- Diluted 20,237 19,917 20,222 17,540
======= ======= ======== ========
Loss per share -- Basic:
Loss from continuing operations $ (.38) $ (1.41) $ (2.04) $ (1.27)
Loss from discontinued operations -- (.34) (.30) (.42)
Extraordinary charge -- (.03) -- (.03)
------- ------- -------- --------
Loss per share -- Basic $ (.38) $ (1.78) $ (2.35) $ (1.72)
======= ======= ======== ========
Loss per share -- Diluted:
Loss from continuing operations $ (.38) $ (1.41) $ (2.04) $ (1.27)
Loss from discontinued operations -- (.34) (.30) (.42)
Extraordinary charge -- (.03) -- (.03)
------- ------- -------- --------
======== ========
Loss per share -- Diluted $ (.38) $ (1.78) $ (2.35) $ (1.72)
======= ======= ======== ========
</TABLE>
<PAGE> 1
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Consolidated pretax loss from continuing operations $(37,474) $(21,320)
Interest expense 9,958 1,649
Interest portion of rent expense 429 474
-------- --------
EARNINGS (LOSS) $(27,087) $(19,197)
======== ========
Interest expense $ 9,958 $ 1,649
Interest capitalized 548 680
Interest portion of rent expense 429 474
-------- --------
FIXED CHARGES $ 10,935 $ 2,803
======== ========
RATIO OF EARNINGS TO FIXED CHARGES -- --
======== ========
</TABLE>
For purposes of calculating the unaudited ratio of earnings to fixed charges,
earnings consist of loss from continuing operations before provision for income
taxes plus fixed charges. Fixed charges consist of interest charges and
amortization of debt issuance costs, whether expensed or capitalized, and that
portion of rental expense that is representative of interest. In the nine months
ended March 31, 1999, earnings were inadequate to cover fixed charge
requirements by $38,022. In the nine months ended March 31, 1998, earnings were
inadequate to cover fixed charge requirements by $22,000.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVANCED
LIGHTING TECHNOLOGIES, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
NINE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 11,626
<SECURITIES> 350
<RECEIVABLES> 39,909
<ALLOWANCES> 831
<INVENTORY> 44,362
<CURRENT-ASSETS> 93,992
<PP&E> 125,652
<DEPRECIATION> 16,142
<TOTAL-ASSETS> 330,352
<CURRENT-LIABILITIES> 102,547
<BONDS> 109,794
0
0
<COMMON> 20
<OTHER-SE> 114,462
<TOTAL-LIABILITY-AND-EQUITY> 330,352
<SALES> 138,324
<TOTAL-REVENUES> 138,324
<CGS> 92,385
<TOTAL-COSTS> 92,385
<OTHER-EXPENSES> 73,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,958
<INCOME-PRETAX> (37,474)
<INCOME-TAX> 3,872
<INCOME-CONTINUING> (41,346)
<DISCONTINUED> (6,166)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,512)
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
