<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, 2000
or
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to_____________
Commission File Number: 0-27202
ADVANCED LIGHTING TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(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 20,449,898 shares of the Registrant's Common Stock, $.001 par value
per share, outstanding as of April 30, 2000.
<PAGE> 2
INDEX
ADVANCED LIGHTING TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
March 31, 2000 and June 30, 1999 ............................... 2
Condensed Consolidated Statements of Operations --
Three months and nine months
ended March 31, 2000 and 1999 .................................. 3
Condensed Statement of Consolidated Shareholders' Equity --
Nine months ended March 31, 2000................................ 4
Condensed Consolidated Statements of Cash Flows --
Nine months ended March 31, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................ 33
Item 2. Changes in Securities and Use of Proceeds................................ 33
Item 4. Submission of Matters to a Vote of Security Holders...................... 34
Item 6. Exhibits and Reports on Form 8-K......................................... 35
SIGNATURES................................................................................. 36
EXHIBIT INDEX.............................................................................. 37
</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,
2000 1999
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,744 $ 3,830
Short-term investments -- 350
Trade receivables, less allowances of $970 and $1,257 34,819 25,485
Receivables from related parties 74 48
Inventories:
Finished goods 25,446 24,275
Raw materials and work-in-process 21,592 16,501
--------- ----------
47,038 40,776
Prepaid expenses 2,410 2,354
--------- ----------
Total current assets 88,085 72,843
Property, plant and equipment:
Land and buildings 44,015 42,646
Production machinery and equipment 61,533 49,226
Other equipment 4,796 6,413
Furniture and fixtures 20,651 20,426
--------- ----------
130,995 118,711
Less accumulated depreciation 21,533 16,263
--------- ----------
109,462 102,448
Receivables from related parties 2,810 5,048
Investments in affiliates 15,150 13,475
Other assets 6,176 6,586
Intangible assets 31,998 32,695
Excess of cost over net assets of businesses acquired, net 52,456 51,411
--------- ----------
$ 306,137 $ 284,506
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt $ 6,459 $ 8,543
Accounts payable 20,810 23,310
Payables to related parties 4,339 1,126
Employee-related liabilities 3,786 3,781
Accrued income and other taxes 1,170 904
Other accrued expenses 11,421 16,905
--------- ----------
Total current liabilities 47,985 54,569
Long-term debt 157,770 152,496
Minority interest 297 --
Preferred stock, $.001 par value, per share; 1,000 shares authorized; 761 Series A
convertible redeemable shares issued and outstanding at March 31, 2000
(redemption value -- $21,356 at March 31, 2000) 16,411 --
Common shareholders' equity:
Common stock, $.001 par value, per share; 80,000 shares authorized; 20,446
shares issued and outstanding as of March 31, 2000 and
20,278 shares issued and outstanding as of June 30, 1999 20 20
Paid-in-capital 195,995 190,654
Accumulated other comprehensive income (loss) (1,471) (949)
Loan receivable from officer (9,349) (9,520)
Retained earnings (deficit) (101,521) (102,764)
--------- ----------
83,674 77,441
--------- ----------
$ 306,137 $ 284,506
========= ==========
</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,
------------------ -----------------
2000 1999 2000 1999
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 54,945 $ 51,358 $ 171,010 $ 142,349
Costs and expenses:
Cost of sales 32,270 34,281 103,966 96,633
Marketing and selling 10,367 11,276 31,159 32,828
Research and development 3,665 4,195 10,643 13,757
General and administrative 3,669 4,465 11,790 14,308
Special charges (234) 2,291 (234) 18,564
Amortization of intangible assets 706 714 2,053 2,057
------- ------- -------- --------
Income (loss) from operations 4,502 (5,864) 11,633 (35,798)
Other income (expense):
Interest expense (3,580) (3,809) (10,693) (9,990)
Interest income 242 310 676 876
Income (loss) from equity investments 104 19 189 (442)
------- ------- -------- --------
Income (loss) from continuing operations before
income taxes, minority interest and accounting change 1,268 (9,344) 1,805 (45,354)
Income taxes 210 88 549 3,181
------- ------- -------- --------
Income (loss) from continuing operations before
minority interest and accounting change 1,058 (9,432) 1,256 (48,535)
Minority interest in income of consolidated subsidiary (13) -- (13) --
Recontinuance of previously discontinued operations -- 1,710 -- 1,023
Cumulative effect of accounting change -- -- -- (2,443)
------- ------- -------- --------
Net income (loss) $ 1,045 $ (7,722) $ 1,243 $ (49,955)
======= ======= ======== ========
Earnings (loss) per share -- basic:
Income (loss) from continuing operations $ .02 $ (.47) $ .00 $ (2.40)
Recontinuance of previously discontinued operations -- .09 -- .05
Cumulative effect of accounting change -- -- -- (.12)
------- ------- -------- --------
Earnings (loss) per share -- basic $ .02 $ (.38) $ .00 $ (2.47)
======= ======= ======== ========
Earnings (loss) per share -- diluted:
Income (loss) from continuing operations $ .02 $ (.47) $ .00 $ (2.40)
Recontinuance of previously discontinued operations -- .09 -- .05
Cumulative effect of accounting change -- -- -- (.12)
======= ======= ======== ========
Earnings (loss) per share -- diluted $ .02 $ (.38) $ .00 $ (2.47)
======= ======= ======== ========
Weighted average shares outstanding:
Basic 20,394 20,237 20,343 20,222
======= ======= ======== ========
Diluted 21,693 20,237 21,086 20,222
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 5
ADVANCED LIGHTING TECHNOLOGIES, INC.
CONDENSED STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2000
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED LOAN
COMMON STOCK COMPREHENSIVE OTHER RECEIVABLE RETAINED
PREFERRED ------------ PAID-IN INCOME COMPREHENSIVE FROM EARNINGS
STOCK SHARES PAR VALUE CAPITAL (LOSS) INCOME (LOSS) OFFICER (DEFICIT) TOTAL
--------- ------ ---------- ------- ------------- ------------- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1999 -- 20,278 $ 20 $ 190,654 -- $ (949) $ (9,520) $(102,764) $77,441
Net income -- -- -- -- $ 1,243 -- -- 1,243 1,243
Net proceeds from
issuance of preferred
shares and warrant $ 15,203 -- -- 5,000 -- -- -- -- 20,203
Preferred shares accretion 1,208 -- -- (1,208) -- -- -- -- --
Interest on loan to officer -- -- -- -- -- -- (549) -- (549)
Interest payment received -- -- -- -- -- -- 720 -- 720
Issuance of shares in
connection with the
purchase of a business -- 40 -- 535 -- -- -- -- 535
Stock options exercised -- 51 -- 517 -- -- -- -- 517
Stock issued pursuant to
employee benefit plan -- 52 -- 347 -- -- -- -- 347
Stock purchases
by employees -- 25 -- 150 -- -- -- -- 150
Other comprehensive
income (loss):
Foreign currency
translation adjustment (522)
---------
Other comprehensive
income (loss) (522) (522) (522)
--------- ------ --------- --------- ---------- --------- --------- --------- --------
Comprehensive
income (loss) $ 721
=========
BALANCE AT
MARCH 31, 2000 $ 16,411 20,446 $ 20 $ 195,995 $ (1,471) $ (9,349) $(101,521) $100,085
========= ====== ========= ========= ========== ========== ========== ========
</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,
---------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,243 $ (49,955)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 5,461 4,877
Amortization 2,053 2,057
Provision for doubtful accounts 132 136
(Income) loss from equity investments (189) 442
Deferred income taxes -- 3,505
Special charges (234) 26,803
Cumulative effect of accounting change -- 2,443
Changes in operating assets and liabilities:
Trade receivables (7,858) (6,668)
Inventories (3,753) (479)
Prepaids and other assets (308) (2,050)
Accounts payable and accrued expenses (6,404) 5,031
Payments related to special charge accruals (2,534) (3,372)
Other (267) (2,494)
-------- --------
Net cash used in operating activities (12,658) (19,724)
INVESTING ACTIVITIES
Capital expenditures (4,357) (20,781)
Sale of short-term investments 350 --
Purchases of businesses (3,274) (5,024)
Investments in affiliates (853) (3,244)
-------- --------
Net cash used in investing activities (8,134) (29,049)
FINANCING ACTIVITIES
Proceeds from revolving credit facility 153,202 172,884
Payments of revolving credit facility (146,145) (123,872)
Proceeds from long-term debt -- 1,122
Payments of long-term debt and capital leases (7,568) (2,950)
Issuance of preferred stock and stock purchase warrant 20,203 --
Loan to officer -- (9,000)
Issuance of common stock 1,014 581
-------- --------
Net cash provided by financing activities 20,706 38,765
-------- --------
Decrease in cash and cash equivalents (86) (10,008)
Cash and cash equivalents, beginning of period 3,830 22,167
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,744 $ 12,159
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 10,937 $ 10,758
Income taxes paid (refunds received), net 55 (1,676)
Capitalized interest 290 548
Detail of acquisitions:
Assets acquired $ 14,274 $ 9,688
Liabilities assumed (10,375) (4,570)
Stock issued (535) (29)
-------- --------
Cash paid 3,364 5,089
Less cash acquired (90) (65)
-------- --------
Net cash paid for acquisition $ 3,274 $ 5,024
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 7
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(Dollar amounts in thousands)
A. ORGANIZATION
Advanced Lighting Technologies, Inc. (the "Company" or "ADLT") is an
innovation-driven designer, manufacturer and marketer of metal halide lighting
products, including materials, system components, systems, and production
equipment.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the financial statements
include all material adjustments necessary for a fair presentation, consisting
of normal recurring accruals. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K/A No.3 for the year ended June 30, 1999. Operating results for the
three months and nine months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the full-year ending June 30, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts and related disclosures. Actual results could differ
from those estimates.
Accounting Change - Cost of Start-Up Activities
During the fourth quarter of fiscal 1999, the Company adopted Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities,"
effective July 1, 1998. The first nine months of fiscal 1999 have been restated
to reflect the cumulative effect of accounting change.
New Accounting Standard
The Company has not yet adopted Statement of Financial Accounting Standards
("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities."
FAS No. 133 requires that all derivatives, such as interest rate exchange
agreements (swaps), be recognized on the balance sheet at fair value.
Derivatives which are not hedges must be adjusted to fair value through the
results of operations. Derivatives determined to be hedges will be adjusted to
fair value through either the results of operations or other comprehensive
income, depending on the nature of the hedge. The Company is required to adopt
FAS No. 133, as subsequently amended by FAS No. 137, on July 1, 2000. The
impact, if any, on net income, comprehensive income and financial position will
depend on the amount, timing and nature of any agreements entered into by the
Company.
6
<PAGE> 8
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
B. BASIS OF PRESENTATION (CONTINUED)
Financial Statement Presentation Changes
Certain amounts for prior periods have been reclassified to conform to the
current period reporting presentation.
C. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income," requires disclosure of comprehensive income and its
components. FAS No. 130 requires companies to report, in addition to net income,
other components of comprehensive income, which for the Company includes foreign
currency translation adjustments.
For the three- and nine-months ended March 31, 2000, the Company's comprehensive
income was $37 and $721, respectively. For the three- and nine-months ended
March 31, 1999, the Company's comprehensive loss was $7,886 and $50,065,
respectively.
D. ADDITIONAL INVESTMENT IN ASIAN LIGHTING RESOURCES, INC.
During the third quarter of fiscal 2000, the Company increased to approximately
90% its ownership in Asian Lighting Resources, Ltd., its lamp manufacturing
joint venture in India. The increased investment consisted of $2,993 cash. The
excess of the investment over the net tangible assets acquired of $2,081 is
being amortized over 25 years. Beginning with the third quarter, the Company
began consolidating the results of this subsidiary into its financial statements
and deducting the minority interest share in arriving at net income. The
Company's investment in the joint venture prior to the third quarter was
previously accounted for by the cost method.
E. TRANSACTIONS WITH UNISON AND FIBERSTARS, INC.
In February 2000, the Company acquired Rohm and Haas Company's interest in
Unison, the fiber optic lighting joint venture with Rohm and Haas Company.
Simultaneously, Unison transferred a substantial portion of its personal
property (including intellectual property) to Fiberstars, Inc., a marketer and
distributor of fiber optic lighting products and an equity-method investee of
the Company. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3,000, of which $2,300 is represented by a
note payable in January 2002, to obtain the remaining interest in Unison. As
consideration for the transferred assets to Fiberstars, the Company received
four warrants to purchase a total of 1,000,000 shares of Fiberstars, Inc. common
stock for nominal consideration. These warrants are exercisable based on stock
price and sales of products using Unison technology, but may be converted into
at least 445,000 shares of Fiberstars, Inc. common stock at any time.
7
<PAGE> 9
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
F. BANK CREDIT FACILITY
In May 1999, the Company replaced its existing Credit Facility with a $50,000
revolving credit loan and $25,000 term loan provided by several financial
institutions. Subsequent to June 30, 1999 the Company reduced its commitment to
a $60,000 facility. Proceeds from the facility were used to repay the Company's
existing credit facility and certain other long-term debt. The revolving credit
loan has a three-year term expiring in May 2002. Interest rates on revolving
credit loans outstanding are based, at the Company's option, on LIBOR plus 2.75%
or the agent bank's prime rate. Availability of borrowings is determined by the
Company's eligible accounts receivable and inventories. The term loan has a
five-year term expiring in May 2004. The Company pays monthly principal payments
that total $3,576 annually, with the unpaid balance due at maturity. Interest
rates on the term loan are based, at the Company's option, on LIBOR plus 3.25%
or the agent bank's prime rate.
The Bank Credit Facility contains certain affirmative and negative covenants
customary for this type of agreement, prohibits cash dividends, and includes
financial covenants with respect to the coverage of certain fixed charges. The
principal security for the revolving credit loan is substantially all of the
personal property of the Company and each of its North American and United
Kingdom subsidiaries. The term loan is secured by substantially all of the
Company's machinery and equipment and is cross-collateralized and secured with
the revolving credit loan.
G. SENIOR NOTES OFFERING
On March 13, 1998, the Company sold $100,000 of Senior Notes due March 15, 2008,
resulting in net proceeds of approximately $96,150. The Notes have an annual
coupon rate of 8% and are redeemable at the Company's option, in whole or in
part, on or after March 15, 2003 at certain preset redemption prices. In
addition, at any time prior to March 15, 2001, the Company may redeem up to 35%
of the aggregate principal amount of the Notes at 108% of par with the proceeds
of one or more public equity offerings. Interest on the Senior Notes is payable
semiannually on March 15 and September 15 of each year beginning on September
15, 1998. There are no sinking fund requirements.
From September 14, 1998, until the completion of a registered exchange offer to
existing noteholders, the Senior Notes bear interest at 8.5%. The offer is
expected to be completed within 45 days following the effectiveness of the
Company's related registration statement.
The Notes Indenture contains covenants that, among other things, limit the
ability of the Company and its Restricted Subsidiaries (as defined therein) to
incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, create liens, engage in transactions with
stockholders and affiliates, sell assets and, with respect to the Company,
engage in mergers and consolidations.
8
<PAGE> 10
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
H. GENERAL ELECTRIC COMPANY INVESTMENT
In October 1999, General Electric Company ("GE") completed an investment in the
Company of $20,554. In exchange for the investment, GE received 761,250 shares
of the Company's newly-created Series A Preferred Stock convertible at any time
into 3,045,000 shares of Company Common Stock (subject to adjustment). GE also
received a Warrant (the "Initial Warrant") to purchase an additional 1,000,000
shares of Company Common Stock (subject to adjustment), which is immediately
exercisable at $.01 per share. GE has been a holder of 535,887 shares of Company
Common Stock since the Company's initial public offering in 1995. The Series A
Stock, Common Stock issuable on exercise of the Initial Warrant, and the Common
Stock held by GE represent (after giving effect to the shares issued on exercise
of the Initial Warrant) approximately 18.8% of the voting power and equity
ownership of the Company. The proceeds of the transaction were applied
principally to the reduction of short-term liabilities and outstanding amounts
under the Company's Bank Credit Facility.
The Series A Stock has a liquidation preference of $27 per share, plus an amount
equal to 8% per annum compounded annually from the date of issuance to the date
of payment. The Company is required to redeem any shares of Series A Stock which
have not been converted or retired on September 30, 2010. In addition, GE may,
by notice, require the Company to redeem the outstanding Series A Stock, within
one year following either September 30, 2004, or the occurrence of certain
corporate events.
If the Company fails to maintain certain financial ratios over certain
measurement periods, GE will have the right to acquire a combination of
subscription rights to additional shares and proxies with respect to shares
voted by certain officers of the Company, giving GE the ability to obtain the
majority of the voting power of the Company. The first measurement period was
the six months ended December 31, 1999. Thereafter, the measurement periods are
the six months ending on the last day of each successive fiscal quarter until
September 30, 2010.
The basis for GE's additional rights will be the failure of the Company to
maintain a 2.0 to 1.0 ratio of EBITDA to Interest Expense over the applicable
measurement periods. Under the terms of the transaction, EBITDA consists of net
earnings, plus interest expense, plus depreciation and amortization, plus income
taxes, less extraordinary gains and gains from asset sales plus extraordinary
losses and losses from asset sales. Interest Expense consists of interest
expense (net of interest income) calculated in accordance with generally
accepted accounting principles, but excludes amortization of deferred financing
costs up to a maximum of $125 in any fiscal quarter. The ratio for the six
months ended March 31, 2000, was 2.23 to 1.0 (2.23 to 1.0 for the quarter ended
December 31, 1999 and 2.22 to 1.0 for the quarter ended March 31, 2000).
A measuring period for which the Company fails to maintain the required ratio is
referred to as an "Occurrence," however, if the Company maintains a 2.0 to 1.0
ratio in the three fiscal quarters immediately prior to the measurement period
in which a failure occurs, a "Second Occurrence" or "Third Occurrence," as the
case may be, would not be effective. The "First Occurrence" was effective in the
measurement period ended December 31, 1999.
9
<PAGE> 11
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
H. GENERAL ELECTRIC COMPANY INVESTMENT (CONTINUED)
A Second Occurrence would: (i) give GE the ability to vote the number of shares
currently voted by the Chief Executive Officer ("CEO") of the Company,
approximately 3.9 million shares, (ii) give GE the option to purchase shares
from the CEO and the President of the Company which, together with the shares
owned by GE, would represent 25% of the voting power of the Company, and (iii)
require the Company to grant GE an additional warrant to purchase shares, at the
then current market price, presently approximating 270,405 shares. The ability
to vote the shares, purchase shares or obtain the warrant would be dependent
upon compliance with antitrust laws. GE is not required to purchase additional
shares of the Company. If GE obtains approval and obtains in excess of 35% of
the voting power of the Company, the terms of the Indenture relating to the
Company's Senior Notes would require that the Company offer to repurchase the
$100,000 principal amount of outstanding Senior Notes due 2008 at a price of
101% of the principal amount thereof, plus accrued interest, and the Company's
banks will have the ability to demand payment of the Bank Credit Facility. Upon
a Third Occurrence, GE would have the right to vote shares currently voted by
the President and be granted a warrant to purchase (at the then current market
price) additional shares of Common Stock sufficient in number to give GE 50%
plus one vote of the voting power of the Company.
I. RELATED PARTY TRANSACTION
Pursuant to a loan agreement dated October 8, 1998, between the Company and its
Chairman and Chief Executive Officer (the "CEO"), the Company loaned $9,000 to
its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the loan
were used by the Company's CEO to reduce the outstanding principal balance of a
margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
The CEO has paid accrued interest of $720 on the loan through October 6, 1999.
The principal on the loan was due on October 6, 1999. On January 25, 2000, the
Board agreed that the CEO would not be required to repay the loan until October
6, 2000. However, after recent discussions between the Board and the CEO, the
Board has encouraged the CEO, if market conditions permit, to refinance the
CEO's existing margin loan to effect earlier repayment of all or a portion of
the loan. The directors have informed the CEO that the Company may require
immediate payment of the loan if the Company requires the payment to prevent an
unacceptable strain on cash resources.
10
<PAGE> 12
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
J. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS
At March 31, 2000, the Company had a special charges accrual principally related
to the execution of the Company's fiscal 1999 plans related to its shift in
strategic direction intended to accelerate and intensify the Company's focus on
its metal halide products. The fiscal 1999 special charges related to: limiting
Pacific Rim expansion; changing global lamp manufacturing strategy;
restructuring marketing operations in North America and Europe; accelerating an
exit from noncore product lines; reducing excess overhead including staffing
reductions; consolidating an equipment manufacturing operation into the
Company's Solon, Ohio facility and significantly reducing the size of the
operation; and reducing capital expenditures. All actions required by the plans
were substantially completed by March 31, 2000.
Details of the activity in the remaining accrual related to the fiscal 1999
special charges for the nine months ended March 31, 2000 are summarized as
follows:
<TABLE>
<CAPTION>
RECLASSIFICATIONS
BALANCE AS OF AND (CREDITS) TO CHARGES BALANCE AS OF
DESCRIPTION CASH/NONCASH JUNE 30, 1999 OPERATIONS UTILIZED MARCH 31, 2000
----------- ------------ ------------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Lease/contract cancelations Cash/Noncash $3,689 $ (505) $2,389 $ 795
Staffing reductions Cash/Noncash 681 (47) 500 134
Program cancelation Cash 128 107 21
Terminate management benefit program Cash/Noncash 86 86 --
Shut-down costs of facilities Cash 78 10 88 --
Asset write-downs Cash/Noncash 49 308 357 --
Other Cash 143 -- 94 49
------ ------- ------ ------
$4,854 $ (234) $3,621 $ 999
====== ======= ====== ======
</TABLE>
The special charges for fiscal 1999 included costs related to the actions
described above and also included $3,527 related to the wind-down of portable
fixture manufacturing operations, which are described in Note I "Discontinued
Operations Subsequently Retained." Total special charges for the nine-months
ended March 31, 1999 of $19,372 are classified in the consolidated statement of
operations as cost of sales ($808) and special charges ($18,564).
At March 31, 2000, all actions required by the plans were substantially
completed and the Company expects future cash outlays of approximately $999 to
be paid by December 31, 2000. During the third quarter of fiscal 2000, the
Company revised certain estimates related to its plans and reversed $234 of
previously recorded special charges which were no longer deemed necessary. The
reversal results from the settlement of a lease cancelation for less than the
estimated amount and a revised estimate for severance and related costs.
11
<PAGE> 13
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
J. SPECIAL CHARGES AND TERMINATED EQUIPMENT CONTRACTS (CONTINUED)
In conjunction with limiting its Pacific Rim expansion, the Company terminated
production equipment contracts related to the completion of four lamp
manufacturing equipment groups. Accordingly, in the second quarter of fiscal
1999, the Company reversed previously recognized sales of $14,961 and cost of
sales of $6,413 related to these contracts, which were accounted for under the
percentage-of-completion method.
K. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to ADLT shareholders all of the
ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing ADLT businesses.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing ADLT businesses utilizing existing
facilities and operations. The Company utilizes the customer service systems and
personnel of an existing ADLT business, as well as the Internet, to receive,
process and fill orders. Therefore, the Microsun business has been retained but
without the use of the manufacturing processes or assets used in the previous
operations.
12
<PAGE> 14
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
K. DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED (CONTINUED)
In accordance with the accounting requirements for recontinuance, the
accompanying financial statements have been reclassified to present Microsun
within continuing operations. The net amount charged to the income statement
consisted of the following:
<TABLE>
<CAPTION>
Periods Ended March 31, 1999
----------------------------
Three Months Nine Months
------------ -----------
<S> <C> <C>
Reclassification of discontinued
operations to continuing operations $ 1,710 $ 7,189
Discontinued operations provision - (6,166)
---------- ---------
Recontinuance of previously discontinued operations $ 1,710 $ 1,023
========== =========
</TABLE>
The $1,710 reclassified to continuing operations for the three months ended
March 31, 1999 consisted of a loss from operations of $1,164; write-downs of
fixed assets to net realizable value of $240 in connection with the decision in
November 1998 to wind-down the Microsun business; and costs related to severance
and lease/contract cancelations of $306. These costs and write-downs are
classified in special charges. The $7,189 reclassified to continuing operations
for the nine months ended March 31, 1999, consisted of a loss from operations of
$3,662; write-downs to net realizable value of $3,084 in connection with the
decision to wind-down the Microsun business related to fixed assets ($1,689) and
other assets ($1,395); and costs related to severance and lease/contract
cancelations of $443.
13
<PAGE> 15
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
L. EARNINGS PER SHARE
The following table summarizes the basic and diluted per share computations for
income (loss) from continuing operations and net income (loss) for the three and
nine month periods ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before minority interest and accounting change $ 1,058 $ (9,432) $ 1,256 $(48,535)
Less: Minority interest in income of consolidated subsidiary (13) -- (13) --
Preferred shares accretion (605) -- (1,208) --
--------- --------- --------- ---------
Income (loss) from continuing operations before
accounting change attributable to common shareholders $ 440 $ (9,432) $ 35 $(48,535)
========= ========= ========= =========
Net income (loss) $ 1,045 $ (7,722) $ 1,243 $(49,955)
Less: Preferred shares accretion (605) -- (1,208) --
--------- --------- --------- ---------
Net income (loss) attributable to common shareholders $ 440 $ (7,722) $ 35 $(49,955)
========= ========= ========= =========
Weighted average shares -- Basic:
Outstanding at beginning of period 20,369 20,230 20,278 20,190
Issued in acquisitions -- -- 26 1
Issued for exercise of stock options 15 -- 5 17
Issued pursuant to employee stock purchase plan 3 4 12 13
Issued pursuant to 401(k) plan 7 3 22 1
--------- --------- --------- ---------
Weighted average shares -- Basic 20,394 20,237 20,343 20,222
========= ========= ========= =========
Weighted average shares -- Diluted:
Basic from above 20,394 20,237 20,343 20,222
Effect of warrant issued 1,000 -- 647 --
Effect of stock options 299 -- 96 --
--------- --------- --------- ---------
Weighted average shares -- Diluted 21,693 20,237 21,086 20,222
========= ========= ========= =========
Earnings (loss) per share attributed to common shareholders -- Basic Income
(loss) from continuing operations
attributable to common shareholders $ .02 $ (.47) $ .00 $ (2.40)
Recontinuance of previously discontinued operations -- .09 -- .05
Cumulative effect of accounting change -- -- -- (.12)
--------- --------- --------- ---------
Net income (loss) attributable to common shareholders -- basic $ .02 $ (.38) $ .00 $ (2.47)
========= ========= ========= =========
Earnings (loss) per share attributed to common shareholders -- Diluted Income
(loss) from continuing operations
attributable to common shareholders $ .02 $ (.47) $ .00 $ (2.40)
Recontinuance of previously discontinued operations -- .09 -- .05
Cumulative effect of accounting change -- -- -- (.12)
--------- --------- --------- ---------
Net income (loss) attributable to common shareholders -- diluted $ .02 $ (.38) $ .00 $ (2.47)
========= ========= ========= =========
</TABLE>
14
<PAGE> 16
ADVANCED LIGHTING TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
MARCH 31, 2000
(Dollar amounts in thousands)
M. CONTINGENCY
In April and May 1999, three class action suits were filed in the United States
District Court, Northern District of Ohio, by certain alleged shareholders of
the Company on behalf of themselves and purported classes consisting of Company
shareholders, other than the defendants and their affiliates, who purchased
stock during the period from December 30, 1997 through September 30, 1998 or
various portions thereof. A First Amended Class Action Complaint, consolidating
the three lawsuits, was filed on September 30, 1999, and the action is now
pending before a single judge. The named defendants in the case - styled In re
Advanced Lighting Technologies, Inc. Securities Litigation, Master File No.
1:99CV836, pending before the United States District Court, Northern District of
Ohio - are the Company and its Chairman and Chief Executive Officer.
The First Amended Class Action Complaint alleges generally that certain
disclosures attributed to the Company contained misstatements and omissions
alleged to be violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5, including claims for "fraud on the market" arising from alleged
misrepresentations and omissions with respect to the Company's financial
performance and prospects and alleged violations of generally accepted
accounting principles by, among other things, improperly recognizing revenue and
improper inventory accounting. The Complaint seeks certification of the
purported class, unspecified compensatory and punitive damages, pre- and
post-judgment interest and attorneys' fees and costs.
The Company and the CEO believe that these claims lack merit and on November 15,
1999, the Company and CEO filed a Motion to Dismiss the Complaint. Oral argument
on the Motion to Dismiss was held on April 6, 2000 and the Court has not issued
a ruling. The Company and the CEO intend to continue to vigorously defend
against these actions.
15
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(Dollar amounts in thousands)
This report on Form 10-Q may contain forward-looking statements that involve
risks and uncertainties, including the timely development and market acceptance
of new products, the timely and successful implementation of cost reduction and
cash flow initiatives, the impact of the initiatives on relationships with
customers, suppliers and employees, the ability to provide adequate incentives
to retain and attract key employees, the integration of acquired operations, the
impact of competitive products and pricing, and other risks which are detailed
in the Company's Form 10-K/A No.3 for the fiscal year ended June 30, 1999, in
particular, see "Risk Factors." 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. The Company's actual results may differ materially
from those indicated by such forward-looking statements based on the factors
outlined above.
The following is management's discussion and analysis of certain significant
factors which have affected the results of operations and should be read in
conjunction with the accompanying unaudited Condensed Consolidated Financial
Statements and notes thereto.
GENERAL
The Company designs, manufactures and markets metal halide lighting products,
including materials, systems and components. Metal halide lighting is currently
used primarily in commercial and industrial applications such as factories and
warehouses, outdoor site and landscape lighting, sports facilities and large
retail spaces such as superstores. With the January 1998 acquisition of
Deposition Sciences, Inc.("DSI"), the Company also manufactures and markets
turnkey deposition equipment to produce thin film coatings for a variety of
applications. Systems, components and materials revenue is recognized when
products are shipped, and deposition equipment revenue is recognized under the
percentage of completion method.
Consistent with the Company's strategy for new product introductions, the
Company invests substantial resources in research and development to engineer
materials and system components to be included in customers' specialized
lighting systems. Over the last three fiscal years, the Company has spent an
aggregate of $34,327 on research and development, representing 7.7% of aggregate
net sales from continuing operations over that period. Such expenditures have
enabled the Company to develop new applications for metal halide lighting,
improve the quality of its materials, and introduce new specialized products,
such as the Uni-Form(R) pulse start products. Uni-Form(R) pulse start products
are a new generation of metal halide components and systems which permit (a)
increased light output with lower power utilization, (b) faster starting, (c) a
quicker restart of lamps which have been recently turned off, and (d) better
color uniformity. The Company has spent additional amounts for manufacturing
process and efficiency enhancements, which were charged to cost of goods sold
when incurred. The Company expects to continue to make substantial expenditures
on research and development to enhance its position as the leading innovator in
the metal halide lighting industry.
The Company also has invested substantial resources in acquisitions and
strategic investments. In January 1998, the Company acquired Ruud Lighting, Inc.
and DSI, which enabled the Company to complete the assembly of the necessary
operations to take a leadership role in the development, manufacturing and
marketing of new and better systems in the growing metal halide lighting
industry.
16
<PAGE> 18
RECENT DEVELOPMENTS
GENERAL ELECTRIC COMPANY INVESTMENT
On October 6, 1999, General Electric Company ("GE") completed an investment in
the Company of $20,554. The Company's Form 10-Q for the quarter ended December
31, 1999, contains a detailed description of the transaction. The terms of the
transaction are outlined in Note H to the condensed consolidated financial
statements included in this Form 10-Q. At the Company's annual meeting held
February 17, 2000, the Company's shareholders gave all shareholder approvals
necessary to permit GE to exercise its rights under the terms of the GE
investment.
TRANSACTIONS WITH UNISON AND FIBERSTARS, INC.
In February 2000, the Company acquired Rohm and Haas Company's interest in
Unison, the fiber optic lighting joint venture with Rohm and Haas Company.
Simultaneously, Unison transferred a substantial portion of its personal
property (including intellectual property) to Fiberstars, Inc., a marketer and
distributor of fiber optic lighting products and an equity-method investee of
the Company. The transaction included cross-licensing of technology and a
commitment by the Company to continue support of fiber optic lighting research
and development. The Company paid $3,000, of which $2,300 is represented by a
note payable in January 2002, to obtain the remaining interest in Unison. As
consideration for the transferred assets to Fiberstars, the Company received
four warrants to purchase a total of 1,000,000 shares of Fiberstars, Inc. common
stock for nominal consideration. These warrants are exercisable based on stock
price and sales of products using Unison technology, but may be converted into
at least 445,000 shares of Fiberstars, Inc. common stock at any time.
EXPANSION OF OPERATIONS IN INDIA
Effective January 2000, the Company obtained controlling, majority interest in
its lamp manufacturing joint venture in India. By acquiring its joint venture
partners' investment interests, the Company effectively increased its combined
ownership to approximately 90%. In conjunction with this increased investment,
the Company transferred new metal halide lamp-making equipment, available as a
result of the fiscal 1999 termination of joint venture equipment contracts, and
is expanding its facility in Chennai (Madras), India.
The Indian joint venture was created in March 1998 and began operations in
January 1999. The Tamilnadu Industrial Development Corporation Limited (TIDCO, a
governmental enterprise) in Chennai will remain as the Company's
minority-interest partner.
The Chennai factory offers a beneficial cost structure while meeting the
Company's product quality standards. The Company believes that in the fourth
quarter of fiscal 2000, the Chennai operation should be producing at an annual
rate of approximately one million metal halide units. By the end of the calendar
year 2000, the Company projects an annual production rate of over 1.4 million
units, or approximately $18,000 worth of potential product sales. The products
produced in the Indian facility will be used around the world and will consist
of both the Company's new Uni-Form(R) pulse start products as well as
more-mature metal halide lamp types.
17
<PAGE> 19
TELECOMMUNICATIONS BUSINESS UNIT
In February 2000, the Company announced the creation of its Fiber Optic
Telecommunications Business Unit, which develops and manufactures passive
optical telecommunications devices and components based on its optical coating
technology. The telecommunications operations are located in Santa Rosa,
California, at the Deposition Sciences Incorporated (DSI) business campus. The
Telecommunications Unit exploits the proprietary coating equipment, advanced
thin film technologies, and measurement capabilities developed by DSI over the
last fourteen years for a wide variety of demanding products in both military
and commercial applications.
A portion of the in-process research and development which was acquired when the
Company acquired DSI was for research and development projects directed at
telecommunications applications (the "Fiber Optics Project"). These projects
involved the development of processes for the application of optical coatings to
products for telecommunications applications. At the time of the acquisition the
future importance of these technologies and optical products to telecommunica-
tions infrastructure was not clear. (For more information, see "- Update on
In-Process Research and Development.")
The Fiber Optics Project was directed at development of (i) optical coatings
that reduce insertion losses in fiber optic communications systems, including
wavelength division multiplexing (WDM) and dense wavelength division
multiplexing (DWDM) systems; (ii) collimating micro-optics for use in WDM and
DWDM systems; (iii) filter elements for use in WDM systems; (iv) secondary
filter elements for use in DWDM systems; (v) narrow bandpass filter elements
for use in the multiplex/demultiplex function of DWDM systems. WDM and DWDM are
technologies that allow multiple wavelengths of light to be simultaneously
transmitted through a single fiber optic cable. The first four projects have
resulted in commercial products, and sales of these products reached $940 in the
first nine months of fiscal 2000, approximately 33% more than the $707 in sales
for the comparable period of the preceding year. Although the Company has not
yet completed development of its technology for production of narrow bandpass
filter elements, the Company believes that it will develop commercial narrow
bandpass filter products which take advantage of the Company's patented
MicroDyn(R) sputtering technology.
While the Company does apply optical coatings to elements supplied by its
customers, an increasing portion of its business is the supply of entire
assemblies and components. The Company expects that this trend to forward
integration will continue and accelerate. The Company has existing manufacturing
capacity to support sales of up to $10,000 per year of existing products. If
narrow bandpass DWDM filter elements are successfully developed, following
additional capital investments, the Company anticipates achieving additional
manufacturing capability and revenue for these products. The Company believes
that it can increase its production capacity for its telecommunications products
beyond existing levels with additional capital expenditures, on which this
growing business depends.
DSI believes that the current demand exceeds supply for these thin film coating
products for the telecommunications industry. The principal competitors for the
Company's products are certain large OEMs, such as JDS Uniphase Corporation,
Corning Incorporated, Nortel Networks Corporation, and Lucent Technologies,
Inc., which have significant internal capability to manufacture thin film filter
products, and a variety of smaller companies which specialize in optical
coatings, such as Precision Optics Corp., Inc., Barr Associates, Inc., Iridian
Spectral Technologies, Ltd., Thin Film Technologies, Inc., and Evaporated
Coatings, Inc. The Company also believes that these large OEMs also represent
substantial opportunities for sales of its products.
18
<PAGE> 20
The Company believes that the competitive environment for its products is based
primarily on technical performance, delivery and service, rather than price. The
Company believes that DSI's fourteen year history of high volume, efficient
production of high quality optical components provides it with significant
advantages in this regard. Furthermore, the Company believes that its core
competencies in optical coating and coating equipment development and
manufacture, its experienced workforce and its ability to develop
telecommunications solutions, backed by the required measurement technology,
will permit it to continue to compete successfully in this product area.
The Company recognizes that the successful, full-scale development of its
telecommunications business unit requires a level of focus and resources that
the Company may not be able to provide while this unit resides within a
subsidiary of the Company. In pursuit of maximizing shareholder value, the
Company is exploring several strategic alternatives that would enable the
telecommunications business unit to pursue an aggressive, focused strategy with
sufficient assets and cash to compete in this market.
No final decisions have been made about the future courses of action to be
pursued. However, the Company is actively pursuing the engagement of one or more
investment banking firms to assist in identifying and implementing the best
strategic alternative for the telecommunications unit.
DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
Microsun Technologies, Inc. ("Microsun") was identified in March 1998 for
disposition through a plan to distribute to ADLT shareholders all of the
ownership of Microsun in a tax-free spin-off transaction estimated to be
completed by December 1998. Because of the deterioration of the capital markets
and the inability to raise capital necessary to spin-off the Microsun business,
the Company concluded that it would wind-down the operations, close the
manufacturing facilities and liquidate the assets of Microsun. At June 30, 1999,
the plan of wind-down had been accomplished, the manufacturing facilities closed
and substantially all assets had been disposed. Accordingly, there were no
remaining discontinued operations accrued losses associated with Microsun at
June 30, 1999.
In October 1999, management decided, with the approval of the Board of
Directors, to retain the Microsun business -- the portable lighting fixture
products business that uses metal halide lighting technology -- as part of the
Company's continuing operation. The decision to retain the business was based on
management's belief that, among other reasons, the market demand for Microsun
products remains substantial; the market potential will be expanded as the
Microsun portable lighting fixtures will be marketed and sold along with other
existing lines of products for residential use in an e-commerce format
("Microsun.com"); and the Microsun business will use the fulfillment
capabilities and infrastructure of existing ADLT businesses.
In April 2000, the Company announced the formation of its Microsun e-commerce
business unit and the expansion of the Microsun.com web site to include
nonportable products that utilize Microsun technology. The Company plans to
offer a larger range of metal halide products for residential purposes.
In retaining the Microsun business, the Company concentrates on assembling
fixtures produced by subcontractors, thereby eliminating the need for the
machinery, equipment and facilities that were used in the previous operation.
The assembly process is performed at existing ADLT businesses utilizing existing
facilities and operations. The Company utilizes the customer service systems and
personnel of an existing ADLT business, as well as the Internet , to receive,
process and fill orders. Therefore, the Microsun business has been retained but
without the use of the manufacturing processes or assets used in the previous
operations.
19
<PAGE> 21
In accordance with the accounting requirements for recontinuance, the
accompanying financial statements have been reclassified to present Microsun
within continuing operations. The net amount charged to the income statement
consisted of the following:
<TABLE>
<CAPTION>
Periods Ended March 31, 1999
----------------------------
Three months Nine months
------------ -----------
<S> <C> <C>
Reclassification of discontinued
operations to continuing operations $ 1,710 $ 7,189
Discontinued operations provision -- (6,166)
------- -------
Recontinuance of previously discontinued operations $ 1,710 $ 1,023
======= =======
</TABLE>
The $1,710 reclassified to continuing operations for the three months ended
March 31, 1999 consisted of a loss from operations of $1,164; write-downs of
fixed assets to net realizable value of $240 in connection with the decision in
November 1998 to wind-down the Microsun business; and costs related to severance
and lease/contract cancelations of $306. These costs and write-downs are
classified in special charges. The $7,189 reclassified to continuing operations
for the nine months ended March 31, 1999, consisted of a loss from operations of
$3,662; write-downs to net realizable value of $3,084 in connection with the
decision to wind-down the Microsun business related to fixed assets ($1,689) and
other assets ($1,395); and costs related to severance and lease/contract
cancelations of $443.
UPDATE ON IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the January 1998 purchase of Deposition Sciences, Inc.
("DSI"), the Company allocated $18,220 of the $24,100 purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
research and development projects. At the date of acquisition, the development
of these projects had not yet reached technological feasibility and had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date. DSI's in-process research and development value is comprised
of five primary research and development programs, which were in-process at the
time of the acquisition.
The MicroDyn/Automation Project is intended to improve the coating process of
optical thin-films to both rigid and flexible surfaces so that the process can
be used in a wider array of applications. The Plastics (Acrylic) Coating Project
is designed to produce a method for applying thin-film coatings to plastics or
other similar materials that cannot withstand the heat and pressure generated
during the standard coating process. The goal of the Deposition Material
Development Project is to develop new thin-film materials that can be used in
coatings and to improve existing coating materials. The Lighting Projects are
intended to develop improvements to existing lighting technologies by using
coatings to improve efficiency and increase the longevity of lamp life;
including ultra-violet blockers, color enhancement/correction and lumen
maintenance. The Fiber Optic Project is intended to improve telecommunications
by providing optical thin-film coatings that are used in conjunction with
optical fibers to increase the transmission capacity of the fiber. Two segments
of the Fiber Optic Project, directed at the development of filters to reduce
insertion loss in fiber optic communication systems and filters for wavelength
division multiplexing (WDM), have reached commercial feasibility. The third
segment of the project related to the development of filters for dense
wavelength division multiplexing (DWDM) has not achieved technical and
commercial feasibility as of March 31, 2000.
20
<PAGE> 22
Remaining development efforts for these projects are highly complex and include
the development and advancement of the necessary physics and chemistry, various
stages of academic and computer simulation, prototype design and testing,
refinement, initial small-scale deployment, further refinement and eventually
full-scale market introduction. As such, the projects are generally considered
to have effective lives of three-to-five years during which time the science,
technology, and processes are researched, designed, developed, and tested.
Certain projects within the in-process research and development programs, if
successful, will not be fully complete for two to three years after attaining
technical feasibility. Annual Company expenditures to complete these projects
included $800 in fiscal 1998, $1,800 in fiscal 1999, and are estimated at $2,100
and $2,200 in fiscal 2000 and fiscal 2001, respectively. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.
Additionally, even if successfully completed, these projects will require
maintenance research and development after they have reached a state of
technological and commercial feasibility. In addition to usage of DSI's internal
cash flows, the Company will likely provide a substantial amount of funding to
complete the DSI programs.
Management believes the Company has a reasonable chance of successfully
completing each of the major research and development programs. However, there
is substantial risk associated with the completion of the projects and there is
no steadfast assurance that each will meet with either technological or
commercial success. The delay or outright failure of the DSI in-process research
and development may materially impact the Company's financial condition.
At March 31, 2000, significant progress had been achieved on each of the primary
in-process research and development efforts that were underway at DSI as of the
acquisition date. In general, the Company believes that DSI's research and
development efforts are on track with management's plans at the time the
transaction occurred. DSI is continuing to invest heavily in the development of
new technologies and projects that were underway at the consummation of the
transaction. Through March 31, 2000, no significant adjustments have been made
in the economic assumptions or expectations which underlie the Company's
acquisition decision and related purchase accounting. All of the cited
in-process research and development projects are active, and DSI is advancing
the science and technology at a rate consistent with both DSI and Company
expectations. At March 31, 2000, incompleted programs ranged from 63 to 71
percent complete and the Company estimates the costs to complete these projects
to be approximately $2,700.
21
<PAGE> 23
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,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Costs and expenses:
Cost of sales 58.7 66.7 60.8 67.9
Marketing and selling 18.8 21.9 18.2 23.1
Research and development 6.7 8.2 6.2 9.7
General and administrative 6.7 8.7 6.9 10.1
Special charges (0.4) 4.5 (0.1) 13.0
Amortization of intangible assets 1.3 1.4 1.2 1.4
------ ------ ----- -------
Income (loss) from operations 8.2 (11.4) 6.8 (25.2)
Other income (expense):
Interest expense (6.5) (7.4) (6.3) (7.0)
Interest income 0.4 0.6 0.4 0.6
Income (loss) from equity investments 0.2 0.0 0.1 (0.3)
------ ------ ----- -------
Income (loss) from continuing operations before
income taxes, minority interest and accounting change 2.3 (18.2) 1.0 (31.9)
Income taxes 0.4 0.2 0.3 2.2
------ ------ ----- -------
Income (loss) from continuing operations before
minority interest and accounting change 1.9 (18.4) 0.7 (34.1)
Minority interest in income of consolidated subsidiary 0.0 -- 0.0 --
Recontinuance of previously discontinued operations -- 3.4 -- 0.7
Cumulative effect of accounting change -- -- -- (1.7)
------ ------ ----- -------
Net income (loss) 1.9% (15.0%) 0.7% (35.1%)
====== ====== ===== =======
</TABLE>
Factors which have affected the results of operations for the third quarter and
first nine months of fiscal 2000 as compared to the third quarter and first nine
months of fiscal 1999 are discussed below.
OVERVIEW OF THE RESULTS OF OPERATIONS - THIRD QUARTER FISCAL 2000 COMPARED TO
THIRD QUARTER FISCAL 1999
The Company's operations for the third quarter of fiscal 2000 resulted in income
from continuing operations of $1,058 compared to a loss from continuing
operations of $9,432 for the third quarter of fiscal 1999.
During the third quarter of fiscal 1999, the Company recorded special charges of
$1,745 related to significant changes in its operations, which were intended to
accelerate and intensify the Company's focus on its metal halide products. The
special charges principally related to the execution of the Company's shift in
strategic direction and included: limiting Pacific Rim expansion; changing
global lamp manufacturing strategy; restructuring marketing operations in North
America and Europe;
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accelerating an exit from noncore product lines; reducing excess overhead
including staffing reductions; consolidating an equipment manufacturing
operation into the Company's Solon, Ohio facility and significantly reducing the
size of its operation; and, reducing capital expenditures. In addition, the
Company incurred special charges of $546 related to the wind-down of portable
fixture manufacturing operations, which are described in the section
"Discontinued Operations Subsequently Retained."
During the third quarter of fiscal 2000, the Company revised certain estimates
related to its plans and reversed $234 of previously recorded special charges
which were no longer deemed necessary. The reversal results from the settlement
of a lease cancelation for less than the estimated amount and a revised estimate
for severance and related costs.
QUARTER ENDED MARCH 31, 2000 COMPARED WITH QUARTER ENDED MARCH 31, 1999
Net sales. Net sales increased 7.0% to $54,945 in the third quarter of fiscal
2000 from $51,358 in the third quarter of fiscal 1999. Commercial and industrial
sales increased 9% to $54,454 in the third quarter of fiscal 2000 as compared to
$50,022 in the third quarter of fiscal 1999. Sales of Microsun residential
product decreased to $491 in the third quarter of fiscal 2000 from $1,336 in the
third quarter of fiscal 1999 due to the decision to wind-down the portable
residential fixture manufacturing operations in the second quarter of fiscal
1999. The relatively high level of Microsun sales in the third quarter of fiscal
1999 was a result of advertisements in major metropolitan newspapers, which were
discontinued in the second quarter of fiscal 1999, but which generated a high
level of sales in the third quarter of fiscal 1999.
Fiscal 2000 third quarter commercial and industrial sales (which exclude the
residential amounts discussed above) reflect continued growth in the sales of
the Company's core U.S. metal halide operations, in non-metal halide products,
and in overseas sales. The Company's commercial and industrial metal halide
sales increased 7% (8% increase in the United States) from the year ago period.
The Company's core metal halide materials business, a key indicator of industry
trends, was up 20% from fiscal 1999. Geographically, these sales of materials
were down 12% in the U.S. and grew 67% outside the U.S. The Company believes
materials sales will continue to show strong growth.
Commercial and industrial sales outside the U.S. increased 12%. The Company
attributes the increase in international sales primarily to increased sales of
its materials and optical coatings, especially in the Pacific Rim. Sales of
non-metal halide products grew 15%.
Sales increases were driven by increased volume in the Company's materials,
components and systems. Pricing in the metal halide lighting business is
competitive, and prices for the Company's products have remained flat or
declined slightly. The introduction of new products has helped to stabilize the
Company's product pricing.
The Company expects to see continued strong sales performance throughout fiscal
2000. It also believes that its expanded relationship with GE Lighting, along
with its own e-commerce initiatives, could add a significant amount of revenues.
However, the Company expects to reduce and manage its operating expense ratios
with the goal of generating profits irrespective of its revenue growth. The
Company returned to profitability in the second quarter of fiscal 2000 and
believes its prospects for continued profitability are good.
23
<PAGE> 25
Cost of Sales. Cost of sales decreased 5.9% to $32,270 in the third quarter of
fiscal 2000 from $34,281 in the third quarter of fiscal 1999. As a percentage of
net sales, cost of sales decreased to 58.7% from 66.7%. The Company's
restructuring efforts in fiscal 1999 resulted in a significant disruption of the
ongoing business of the Company and, as a result, a significant increase in its
costs of sales. The biggest single area of increased costs occurred as a result
of the consolidation of the lamp and equipment operations. Three manufacturing
sites were consolidated into one, which together with employee terminations,
resulted in severe workforce disruption. Simultaneously, the Company attempted
to accelerate production of new products such as Uni-Form(R) pulse start and
began the implementation of new information systems. Largely as a result of
these initiatives, the Company incurred significantly higher costs related to
quality, rework and productivity issues. Additionally, the Company has continued
to reduce its manufacturing costs through cost-cutting and productivity gains,
especially in its lighting components and systems operations. The reduction in
lighting component costs is due in part to the sourcing of product from the
Company's manufacturing plant in Chennai (Madras), India.
Marketing and Selling Expenses. Marketing and selling expenses decreased 8.1% to
$10,367 in the third quarter of fiscal 2000 from $11,276 in the third quarter of
fiscal 1999. The reduction in marketing and selling expenses is primarily due to
the Company's efforts to better manage its marketing expenses including salaries
and benefits and travel costs. As a percentage of net sales, marketing and
selling expenses decreased to 18.9% in the third quarter of fiscal 2000 from
21.9% in the third quarter of fiscal 1999.
Research and Development Expenses. Research and development expenses decreased
12.6% to $3,665 in the third quarter of fiscal 2000 from $4,195 in the third
quarter of fiscal 1999. Research and development expenses are incurred related
to: (i) expansion of the new line of Uni-Form (R) pulse start lamps (with
improved energy efficiency, quicker starting and restarting and a more compact
arc source, which improves the light and reduces material costs) intended to
replace many first generation metal halide lamps in industrial and commercial
applications; (ii) development and testing of electronic power supply systems;
(iii) development of new materials for the world's major lighting manufacturers;
and, (iv) research and development efforts aimed at improving the coating
process of optical thin-films to broaden the applications, developing new
thin-film materials, and using coatings to develop improvements to lighting and
telecommunications technologies. The decrease in research and development was
primarily a result of a reduction in spending related to the development of
Uni-Form(R) pulse start lamps and the Company's efforts to control the level of
its research and development spending. As a percentage of net sales, research
and development expenses decreased to 6.7% in the third quarter of fiscal 2000
from 8.2% in the third quarter of fiscal 1999.
General and Administrative Expenses. General and administrative expenses
decreased 17.8% to $3,669 in the third quarter of fiscal 2000 from $4,465 in the
third quarter of fiscal 1999. The decrease reflects the Company's efforts to
control general and administrative costs and was primarily related to reductions
in salaries and benefits, professional services and travel costs. As a
percentage of net sales, general and administrative expenses decreased to 6.7%
in the third quarter of fiscal 2000 from 8.7% in the third quarter of fiscal
1999.
Special Charges. See discussion of special charges above.
Amortization of Intangible Assets. Amortization expense remained relatively
constant at $706 in the third quarter of fiscal 2000 compared to $714 in the
third quarter of fiscal 1999. Amortization expense
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<PAGE> 26
relates primarily to the amortization of goodwill and other intangible assets
related to the January 1998 acquisitions of Ruud Lighting, Inc. and Deposition
Sciences, Inc.
Income (Loss) from Operations. As a result of the items noted above, income from
operations in the third quarter of fiscal 2000 was $4,502 as compared to a loss
from operations in the third quarter of fiscal 1999 of $5,864. Income from
operations represented 8.2% of sales in fiscal 2000.
Interest Expense. Interest expense decreased to $3,580 in the third quarter of
fiscal 2000 from $3,809 in the third quarter of fiscal 1999. This decrease
resulted primarily from the lower average debt outstanding during the third
quarter of fiscal 2000 as compared to the third quarter of fiscal 1999,
resulting from the bank loan repayments made possible by the receipt of the GE
investment proceeds.
Interest Income. Interest income decreased to $242 in the third quarter of
fiscal 2000 from $310 in the third quarter of fiscal 1999. This decrease is
attributable to lower average cash equivalents and short-term investments in the
third quarter of fiscal 2000 as compared to the third quarter of fiscal 1999.
Income (Loss) from Equity Investments. The income from equity investments
represents earnings from the Company's investment in Fiberstars, Inc., a
marketer and distributor of fiber optic lighting products.
Income (Loss) from Continuing Operations before Income Taxes. The Company had
income from continuing operations before income taxes of $1,268 during the third
quarter of fiscal 2000 as compared to a loss from continuing operations before
income taxes of $9,344 during the third quarter of fiscal 1999.
Income Taxes. Income tax expense was $210 for the third quarter of fiscal 2000
as compared to $88 in the third quarter of fiscal 1999. The income tax expense
in the third quarter of fiscal 2000 relates primarily to certain of the
Company's foreign operations.
Recontinuance of Previously Discontinued Operations. See "Discontinued
Operations Subsequently Retained" above.
OVERVIEW OF THE RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2000
COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
The Company's operations for the first nine months of fiscal 2000 resulted in
income from continuing operations of $1,256 compared to a loss from continuing
operations of $48,535 for the first nine months of fiscal 1999.
During the second and third quarters of fiscal 1999, the Company recorded
special charges of $15,845 related to significant changes in its operations,
which were intended to accelerate and intensify the Company's focus on its metal
halide products. The special charges principally related to the execution of the
Company's shift in strategic direction and included: limiting Pacific Rim
expansion; changing global lamp manufacturing strategy; restructuring marketing
operations in North America and Europe; accelerating an exit from noncore
product lines; reducing excess overhead including staffing reductions;
consolidating an equipment manufacturing operation into the Company's Solon,
Ohio facility and significantly reducing the size of its operation; and,
reducing capital expenditures. In addition, the Company incurred special charges
of $3,527 related to the wind-down of portable fixture manufacturing
25
<PAGE> 27
operations, which are described in the section "Discontinued Operations
Subsequently Retained." The special charges for the second and third quarters of
fiscal 1999 of $19,372 are classified in the consolidated statement of
operations as cost of sales ($808) and special charges ($18,564).
NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH NINE MONTHS ENDED MARCH 31, 1999
Net sales. Net sales increased 20.1% to $171,010 in the first nine months of
fiscal 2000 from $142,349 in the first nine months of fiscal 1999. Commercial
and industrial sales increased 13% to $169,551 in the first nine months of
fiscal 2000 as compared to $150,374 in the first nine months of fiscal 1999.
Sales of Microsun residential product decreased to $1,459 in the first nine
months of fiscal 2000 from $4,025 in the first nine months of fiscal 1999 due to
the decision to wind-down the portable residential fixture manufacturing
operations in the second quarter of fiscal 1999. The relatively high level of
Microsun sales in the first nine months of fiscal 1999 was a result of
advertisements in major metropolitan newspapers, which were discontinued in the
second quarter of fiscal 1999, but which generated a high level of sales in the
first nine months of fiscal 1999. No lamp equipment sales were recorded in the
first nine months of fiscal 2000 due to the cessation of these sales in the
second quarter of fiscal 1999. The first nine months of fiscal 1999 includes the
reversal of $14,961 in lamp equipment sales due to the termination of equipment
contracts noted above, offset by $2,911 of lamp equipment sales.
Fiscal 2000 nine months' commercial and industrial sales (which exclude the
residential and lamp equipment amounts discussed above) reflect continued growth
in the sales of the Company's core U.S. metal halide operations, in non-metal
halide products, and in overseas sales. The Company's commercial and industrial
metal halide sales increased 11% (11% increase in the United States) from the
year ago period. The Company's core metal halide materials business, a key
indicator of industry trends, was up 36% from fiscal 1999. Geographically, these
sales of materials were up 13% in the U.S. and grew 73% outside the U.S. The
Company believes materials sales should continue to show strong growth.
Commercial and industrial sales outside the U.S. increased 18%. The Company
attributes the increase in international sales to increased sales of its
materials and optical coatings, especially in the Pacific Rim. Sales of
non-metal halide products grew 18%.
Sales increases were driven by increased volume in the Company's materials,
components and systems. Pricing in the metal halide lighting business is
competitive, and prices for the Company's products have remained flat or
declined slightly. The introduction of new products has helped to stabilize the
Company's product pricing.
The Company expects to see continued strong sales performance throughout fiscal
2000. It also believes that its expanded relationship with GE Lighting, along
with its own e-commerce initiatives, could add a significant amount of revenues.
However, the Company expects to reduce and manage its operating expense ratios
with the goal of generating profits irrespective of its revenue growth. The
Company has returned to profitability in the second quarter of fiscal 2000 and
believes it prospects for continued profitability are good.
Cost of Sales. Cost of sales increased 7.6% to $103,966 in the first nine months
of fiscal 2000 from $96,633 in the first nine months of fiscal 1999. As a
percentage of net sales, cost of sales decreased to 60.8% in the first nine
months of fiscal 2000 from 67.9% in the first nine months of fiscal 1999. The
Company's restructuring efforts in fiscal 1999 resulted in a significant
disruption of the ongoing business
26
<PAGE> 28
of the Company and, as a result, a significant increase in its costs and
expenses. The biggest single area of increased costs occurred as a result of the
consolidation of the lamp and equipment operations. Three manufacturing sites
were consolidated into one, which together with employee terminations, resulted
in severe workforce disruption. Simultaneously, the Company attempted to
accelerate production of new products such as Uni-Form(R) pulse start and began
the implementation of extensive, new information systems. Largely as a result of
these initiatives, the Company incurred significantly higher costs related to
quality, rework and productivity issues. Additionally, the Company has continued
to reduce its manufacturing costs through cost-cutting and productivity gains,
especially in its lighting systems operations.
Cost of sales in the first nine months of fiscal 1999 include a credit of $6,413
related to the termination of equipment contracts and $808 of inventory
write-downs related to the exit of nonfocus product lines. Excluding these
items, cost of sales increased 1.7% to $103,966 in the first nine months of
fiscal 2000 from $102,238 in the first nine months of fiscal 1999. The
abnormally high level of cost of sales in fiscal 1999 was primarily a result of
the production problems noted above in the second and third quarters of fiscal
1999 as compared to a more normalized cost of sales amount in the same periods
of fiscal 2000. As a percentage of net sales, excluding the effect of the
terminated equipment contracts and inventory write-downs, cost of sales
decreased to 60.8% in the first nine months of fiscal 2000 from 65.0% in the
first nine months of fiscal 1999.
Marketing and Selling Expenses. Marketing and selling expenses decreased 5.1% to
$31,159 in the first nine months of fiscal 2000 from $32,828 in the first nine
months of fiscal 1999. As a percentage of net sales, marketing and selling
expenses decreased to 18.2% in the first nine months of fiscal 2000 from 23.1%
in the first nine months of fiscal 1999. This decrease is primarily due to the
manner in which the Company is selling its residential portable lighting
fixtures. In the first six months of fiscal 1999, the Company was utilizing
newspaper ads in major metropolitan newspapers and catalogues to sell these
fixtures. As described in the section "Discontinued Operations Subsequently
Retained," the Company is now utilizing the customer service systems and
personnel of an existing ADLT business, as well as the Internet, to receive,
process and fill orders, which has resulted in a reduction in marketing and
selling expenses. The reduction in marketing and selling expenses, as a percent
of sales, is also a result of the Company's efforts to better manage its
expenditures including salaries and benefits and travel costs. As a percentage
of net sales, excluding the effect of the terminated equipment contracts in
fiscal 1999, marketing and selling expenses decreased to 18.2% in the first nine
months of fiscal 2000 from 20.9% in the first nine months of fiscal 1999.
Research and Development Expenses. Research and development expenses decreased
22.6% to $10,643 in the first nine months of fiscal 2000 from $13,757 in the
first nine months of fiscal 1999. Research and development expenses are incurred
related to: (i) expansion of the new line of Uni-Form(R) pulse start lamps (with
improved energy efficiency, quicker starting and restarting and a more compact
arc source, which improves the light and reduces material costs) intended to
replace many first generation metal halide lamps in industrial and commercial
applications; (ii) development and testing of electronic power supply systems;
(iii) development of new materials for the world's major lighting manufacturers;
and, (iv) research and development efforts aimed at improving the coating
process of optical thin-films to broaden the applications, developing new
thin-film materials, and using coatings to develop improvements to lighting and
telecommunications technologies. The decrease in research and development was
primarily a result of a reduction in spending related to the development of
Uni-Form(R) pulse start lamps and the Company's efforts to control the level of
its research and development
27
<PAGE> 29
spending. As a percentage of net sales, excluding the effect of the terminated
equipment contracts in fiscal 1999, research and development expenses decreased
to 6.2% in the first nine of fiscal 2000 from 8.7% in the first nine months of
fiscal 1999.
General and Administrative Expenses. General and administrative expenses
decreased 17.6% to $11,790 in the first nine months of fiscal 2000 from $14,308
in the first nine months of fiscal 1999. The decrease reflects the Company's
efforts to control general and administrative costs and was primarily related to
reductions in salaries and benefits, professional services and travel costs. As
a percentage of net sales, excluding the effect of the terminated equipment
contracts in fiscal 1999, general and administrative expenses decreased to 6.9%
in the first nine months of fiscal 2000 from 9.1% in the first nine months of
fiscal 1999.
Special Charges. See discussion of special charges above.
Amortization of Intangible Assets. Amortization expense remained relatively
constant at $2,053 in the first nine months of fiscal 2000 as compared to $2,057
in the first nine months of fiscal 1999. Amortization expense relates primarily
to the amortization of goodwill and other intangible assets related to the
January 1998 acquisitions of Ruud Lighting, Inc. and Deposition Sciences, Inc.
Income (Loss) from Operations. As a result of the items noted above, income from
operations in the first nine months of fiscal 2000 was $11,633 as compared to a
loss from operations in the first nine months of fiscal 1999 of $35,798. Income
from operations represented 6.8% of sales in fiscal 2000.
Interest Expense. Interest expense increased to $10,693 in the first nine months
of fiscal 2000 from $9,990 in the first nine months of fiscal 1999. This
increase resulted primarily from the higher average debt outstanding during the
first nine months of fiscal 2000 as compared to the first nine months of fiscal
1999.
Interest Income. Interest income decreased to $676 in the first nine months of
fiscal 2000 from $876 in the first nine months of fiscal 1999. This decrease is
attributable to lower average cash equivalents and short-term investments in
fiscal 2000 as compared to fiscal 1999, offset by an increase of approximately
$200 in interest income from the loan to officer.
Income (Loss) from Equity Investments. The income from equity investments in the
first nine months of fiscal 2000 represents $189 of earnings from the Company's
investment in Fiberstars, Inc., a marketer and distributor of fiber optic
lighting products. The loss from equity investments in fiscal 1999 represents
$102 of earnings from the Company's investment in Fiberstars, Inc., offset by a
$544 loss from the Company's investment in Venture Lighting Japan, a
manufacturer and marketer of metal halide lamps in Japan.
Income (Loss) from Continuing Operations before Income Taxes. The Company had
income from continuing operations before income taxes of $1,805 during the first
nine months of fiscal 2000 as compared to a loss from continuing operations
before income taxes of $45,354 during the first nine months of fiscal 1999.
Income Taxes. Income tax expense was $549 for the first nine months of fiscal
2000 as compared to $3,181 in the first nine months of fiscal 1999. The income
tax expense in the first nine months of fiscal
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<PAGE> 30
2000 relates primarily to certain of the Company's foreign operations. The
income tax expense in the first nine months of fiscal 1999 relates primarily to
the establishment of a valuation allowance related to the net deferred tax
assets of the Company.
At June 30, 1999, the Company had net operating loss carryforwards ("NOLs") of
$57,309 available to reduce future United States federal taxable income, which
expire in varying amounts from 2008 to 2019.
The Company also has research and development credit carryforwards for tax
purposes of approximately $3,006, which expire in varying amounts from 2005 to
2019. Additionally, in conjunction with the Alternative Minimum Tax ("AMT")
rules, the Company had available AMT credit carryforwards for tax purposes of
approximately $162, which may be used indefinitely to reduce regular federal
income taxes.
Also at June 30, 1999, the Company had foreign net operating loss carryforwards
for tax purposes totaling $5,209 that expire in varying amounts from 2000 to
2005 and $10,587 that have no expiration dates.
Recontinuance of Previously Discontinued Operations. See "Discontinued
Operations Subsequently Retained" above.
Cumulative Effect of Accounting Change. During the fourth quarter of fiscal
1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities," effective July 1, 1998. The first nine months of
fiscal 1999 have been restated to reflect the cumulative effect of the
accounting change of $2,443.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financial requirements are for market development
activities, research and development efforts, investments in business
acquisitions, joint ventures and working capital. These requirements have been,
and the Company expects they will continue to be, financed through a combination
of cash flow from operations, borrowings under various credit facilities and the
sale of stock.
Cash decreased $86 during the first nine months of fiscal 2000. Uses of cash
consisted of $12,658 used in operating activities and $8,134 used in investing
activities. These uses of cash were offset by net financing activities of
$20,706.
Net cash used in operating activities. Net cash used in operating activities
totaled $12,658 during the first nine months of fiscal 2000 as compared to
$19,724 in the first nine months of fiscal 1999. The increase in trade
receivables of $7,858 was a significant usage, and was primarily a result of the
increase in sales. Additional cash of $6,404 was used to reduce the Company's
level of payables and accruals, and payments related to special charge accruals
totalled $2,534.
Net cash used in investment activities. During the first nine months of fiscal
2000, investing activities used $8,134 of cash, which was primarily represented
by a $4,357 usage for capital expenditures, a $4,127 usage for purchases of
businesses and investments in affiliates, offset by a $350 source of funds from
the sale of a short-term investment.
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<PAGE> 31
Capital expenditures, primarily for production equipment and leasehold and
facility improvements, totaled $4,357 during the first nine months of fiscal
2000 as compared to $20,781 during the first nine months of fiscal 1999. Capital
expenditures in fiscal 2000 related to additional machinery and equipment to
improve production processes, which should result in increased productivity and
capacity in the production of lamps, power supplies and other lighting system
products.
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 the acquisition of certain capital equipment
and, for all practical purposes, facilities expenditures have been completed.
As a result of the Company's decision to terminate joint venture equipment
contracts in the quarter ended December 31, 1998, approximately $6,500 of new
production equipment was available for installation at the Company's Solon, Ohio
lamp manufacturing facility. The Company transferred approximately $1,600 of
this equipment to its recently-acquired manufacturing facility in Chennai
(Madras) India, leaving approximately $5,000 of equipment available for future
manufacturing requirements. The Company estimates its maintenance level for
capital expenditures will approximate $6,000 to $8,000 over the next twelve
months. Future capital expenditures beyond this level will be discretionary, as
the Company presently has sufficient operating capacities to support several
years of sales growth at its historical rates.
To expand the Company's ability to develop and market new metal halide products
and systems, the Company has made a number of acquisitions and strategic
investments, the most notable of which, completed in January 1998, are described
below.
On January 28, 1998, the Company completed the acquisition of Deposition
Sciences, Inc. ("DSI"), of Santa Rosa, California. DSI is a leader in the
development of sophisticated thin film deposition systems and coatings for
lighting applications, with particular emphasis on coatings for metal halide
lighting systems, and other applications, including aerospace, defense and
automotive applications. The stock of DSI was acquired in a privately-negotiated
transaction. The purchase price consisted of 599,717 shares of the Company's
Common Stock and approximately $14,500 in cash.
On January 2, 1998, the Company acquired all of the capital stock outstanding of
Ruud Lighting (the "Ruud Stock"), located in Racine, Wisconsin. Ruud Lighting
manufactures and directly markets HID lighting systems, principally focusing on
metal halide installations for commercial, industrial and outdoor lighting
applications. The Ruud Stock was acquired from the five shareholders of Ruud
Lighting in a privately-negotiated purchase transaction. The purchase price for
the Ruud Stock consisted of three million shares of the Company's Common Stock
and approximately $35,500 in cash.
Net cash provided by financing activities. During the first nine months of
fiscal 2000, net financing activities provided cash of $20,706, which included
$20,203 of cash provided from the investment from GE, $7,057 of borrowings under
the Company's revolving credit facilities, offset by net repayments of long-term
debt and capital leases of $7,568.
On March 13, 1998, the Company sold $100,000 of 8% Senior Notes due March 15,
2008, resulting in net proceeds of $96,150. Approximately $76,300 of the net
proceeds of the Senior Notes were used to repay amounts outstanding under the
Company's existing credit facility, thereby lengthening the average term of the
Company's debt, most of which had been incurred to finance the acquisitions of
Ruud
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<PAGE> 32
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 loaned $9,000 to
its CEO for a one-year term at an interest rate of 8%. The loan was made
following approval by the Company's Board of Directors. The proceeds of the loan
were used by the Company's CEO to reduce the principal balance outstanding of a
margin account loan, which is secured by 2,053,070 shares of the Company's
Common Stock owned by the CEO and a related entity. In connection with the loan,
the Company's Board of Directors asked for and received the CEO's agreement to
extend the term of his employment agreement to December 31, 2003. The loan
agreement prohibits the CEO from encumbering his shares of the Company's Common
Stock in any manner except pursuant to the existing agreements governing the
CEO's margin account, without the consent of the Company's Board of Directors.
The CEO has paid accrued interest of $720 on the loan through October 6, 1999.
The principal on the loan was due on October 6, 1999. On January 25, 2000, the
Board agreed that the CEO would not be required to repay the loan until October
6, 2000. However, after recent discussions between the Board and the CEO, the
Board has encouraged the CEO, if market conditions permit, to refinance the
CEO's existing margin loan to effect earlier repayment of all or a portion of
the loan. The directors have informed the CEO that the Company may require
immediate payment of the loan if the Company requires the payment to prevent an
unacceptable strain on cash resources.
Ability to advance future operations. The Company has begun to implement, and
will continue to implement, changes in its operations and investment activities
intended to reduce the use of its cash resources to a level at or below the cash
flow generated by its operations and investments.
The Company's working capital (current assets less current liabilities) at March
31, 2000 was $40,100, resulting in a working capital ratio of current assets to
current liabilities of 1.8 to 1.0, as compared to $16,274 or 1.3 to 1.0 at June
30, 1999. As of March 31, 2000, the Company had $3,744 in cash and cash
equivalents.
The interest-bearing obligations of the Company totaled $164,229 as of March 31,
2000, and consisted of: $38,334 of borrowings under the Bank Credit Facility;
$100,000 of 8% Senior Notes; mortgages of $16,768; a promissory note of $2,300;
borrowings of foreign subsidiaries of $5,894; and, capital leases of $933.
In May 1999, the Company replaced its existing Credit Facility with a $75,000
Bank Credit Facility consisting of a $50,000 revolving credit loan and $25,000
term loan provided by several financial institutions. Subsequent to June 30,
1999 the Company reduced the Bank Credit Facility to $60,000 from $75,000.
Proceeds from the facility were used to repay the Company's existing credit
facility and certain other long-term debt. The revolving credit loan has a
three-year term expiring in May 2002. Interest rates on loans outstanding are
based, at the Company's option, on LIBOR plus 2.75% or the agent bank's prime
rate. Availability of borrowings is determined by the Company's eligible
accounts receivable and inventories. Following the GE investment on October 6,
1999, the proceeds were applied to reduce the term loan to $20,000 and the
remainder of the proceeds were applied to the $40,000 revolving credit facility.
The term loan has a five-year term expiring in May 2004. The Company pays
monthly principal payments of $298, with the unpaid balance due at maturity.
Interest rates on the term loan are based, at the Company's option, on LIBOR
plus 3.25% or the agent bank's prime rate.
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The Bank Credit Facility contains certain affirmative and negative covenants
customary for this type of agreement, prohibits cash dividends, and includes
financial covenants with respect to the coverage of certain fixed charges. The
principal security for the revolving credit loan is substantially all of the
personal property of the Company and each of its North American and United
Kingdom subsidiaries. The term loan is secured by substantially all of the
Company's machinery and equipment and is cross-collateralized and secured with
the revolving credit loan. Availability under the Bank Credit Facility is
presently limited, based on borrowing base compliance and other limitations in
the Bank Credit Facility agreement, and the Company is presently working with
the bank lending group to provide an additional $10,000 of availability under
the existing Bank Credit Facility.
Also, as discussed above, the Company is actively pursuing the engagement of one
or more investment banking firms to assist in identifying and implementing the
best strategic alternative for the telecommunications unit.
The Company's implementation of the cost reduction and cash flow enhancement
initiatives including consolidation of equipment and lamp-making operations,
reductions in capital expenditures, consolidation of international operations,
reduction of corporate expenses, and overall workforce reductions should
continue to favorably impact the future cash flow of the Company.
The Company believes that the available cash, cash flow from operations, the
initiatives outlined above, along with additional availability under its
existing Bank Credit Facility and the ability to access additional capital
resources, will enable the Company to fund its operations for at least the next
12 months. Beyond this time, the Company believes a return to profitability
and positive cash flow from operations, its strategic relationship with GE,
and the growth in the popularity and applications for metal halide products and
systems should enable the Company to access additional capital resources, as
needed.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
The Company has not yet adopted FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires that all derivatives, such
as interest rate exchange agreements (swaps), be recognized on the balance sheet
at fair value. Derivatives which are not hedges must be adjusted to fair value
through the results of operations. Derivatives determined to be hedges will be
adjusted to fair value through either the results of operations or other
comprehensive income, depending on the nature of the hedge. The Company is
required to adopt FAS No. 133, as subsequently amended by FAS No. 137, on July
1, 2000. The impact, if any, on net income, comprehensive income and financial
position will depend on the amount, timing and nature of any agreements entered
into by the Company.
FOREIGN CURRENCY
Approximately 34% of the Company's net sales in fiscal 1999, were denominated in
currencies other than U.S. dollars, principally Pounds Sterling, Australian
dollars and Canadian dollars. A weakening of such currencies versus the U.S.
dollar could have a material adverse effect on the Company. The Company
currently does not hedge its foreign currency exposure.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended March 31, 2000, there have been no material changes
in the reported market risks presented in the Company's Annual Report on Form
10-K/A No.3 for the year ended June 30, 1999.
32
<PAGE> 34
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
The information included in Note M of the "Notes to Condensed Consolidated
Financial Statements (Unaudited)" included in this Report on Form 10-Q is hereby
incorporated by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In February 2000, the Company's shareholders approved an amendment to the
Company's Second Amended and Restated Articles of Incorporation to "opt out" of
the application of the Ohio Control Share Acquisition Act (the "Ohio Act") to
acquisitions of shares of Company stock. The amendment became effective in March
2000. A copy of the amendment is filed as Exhibit 3.3 to this Form 10-Q.
The amendment affects the rights of the holders of the Company's Common Stock,
par value $.001, by eliminating the right of holders to approve certain
acquisitions of shares of the Company. Unless a corporation "opts out" of the
application of the Ohio Act in its articles of incorporation, the Ohio Act
requires shareholder consent prior to the acquisition by any person of
beneficial ownership of shares with voting power in excess of 20%, 33% and 50%
thresholds. By "opting out" of the application of the Act, acquisition of
beneficial ownership of equity interests in the Company above these thresholds
will not require consent of the shareholders of the Company.
33
<PAGE> 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of shareholders was held on February 17, 2000. The following
sets forth the actions considered and the results of the voting with respect to
each action:
<TABLE>
<CAPTION>
Abstained/
Broker
For Against Nonvotes
--- ------- --------
<S> <C> <C> <C>
1. Nominees for director for the term
expiring in 2002 -- All elected
Susumu Harada 20,005,844 1,343,376 -0-
John R. Buerkle 20,694,588 654,669 -0-
A Gordon Tunstall 20,680,364 668,893 -0-
John E. Breen 20,717,149 632,108 -0-
2 Approve issuance of certain shares which
may be issued to the General Electric Company
in the future under circumstances described in
the proxy -- Passed 15,844,205 68,817 3,064,150
3 Approve an amendment to the Company's
amended and Restated Articles of Incorporation
to "opt out" of the application of Ohio Control
share Acquisition Act to acquisitions of
Company equity securities -- Passed 18,732,151 225,285 20,116
4 Approve and Amendment to the Company's
1998 Incentive Award Plan to increase the
number of shares available for grant from
1,500,000 to 2,000,000 -- Passed 18,009,056 2,889,951 450,150
5 Ratify appointment of Grant Thornton LLP
as independent auditors -- Passed 21,307,068 15,888 26,201
</TABLE>
34
<PAGE> 36
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 Second Amended and Restated Articles of Incorporation (1)
3.2 Certificate of Adoption of Amended and Restated Articles of
Incorporation of the Company filed as of October 6, 1999, with the
Ohio Secretary of State (2)
3.3 Certificate of Adoption of Fourth Amendment to Second Amended
And Restated Articles of Incorporation of the Company filed
March 16, 2000 with the Ohio Secretary of State
3.4 Code of Regulations (3)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Registration Rights Agreement dated as of September 30, 1999, by and (2)
between the Company and General Electric Company
10.1 Fourth Amendment Agreement by and among the Company and certain
of its subsidiaries and PNC Bank, National Association, as agent
for certain other banks dated as of February 28, 2000, and
amending the Credit Agreement by and among the same parties,
dated as of May 21, 1999
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
- --------------------------------
(1) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December 31,
1996.
(2) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q/A for the Quarterly Period ended September
30, 1999.
(3) Incorporated by reference to Exhibit 3.2 in Company's Registration
Statement on Form S-1, Registration No. 33-97902, effective December 11,
1995.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter ended March 31, 2000.
35
<PAGE> 37
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 hereunto duly authorized.
ADVANCED LIGHTING TECHNOLOGIES, INC.
Date: May 8, 2000 By: /s/ Wayne R. Hellman
--------------------
Wayne R. Hellman
Chief Executive Officer
Date: May 8, 2000 By: /s/ Nicholas R. Sucic
---------------------
Nicholas R. Sucic
Chief Financial Officer
36
<PAGE> 38
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- ------- ----------------------- --------
<S> <C> <C>
3.1 Second Amended and Restated Articles of Incorporation (1)
3.2 Certificate of Adoption of Amended and Restated Articles of
Incorporation of the Company filed as of October 6, 1999, with the
Ohio Secretary of State (2)
3.3 Certificate of Adoption of Fourth Amendment to Second Amended
And Restated Articles of Incorporation of the Company filed
March 16, 2000 with the Ohio Secretary of State
3.4 Code of Regulations (3)
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2 Registration Rights Agreement dated as of September 30, 1999, by and (2)
between the Company and General Electric Company
10.1 Fourth Amendment Agreement by and among the Company and certain
of its subsidiaries and PNC Bank, National Association, as agent
for certain other banks dated as of February 28, 2000, and
amending the Credit Agreement by and among the same parties,
dated as of May 21, 1999
12 Statement Re: Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
- --------------------------------
(1) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q for the Quarterly Period ended December 31,
1996.
(2) Incorporated by reference to Exhibit of the same number in Company's
Quarterly Report on Form 10-Q/A for the Quarterly Period ended September
30, 1999.
(3) Incorporated by reference to Exhibit 3.2 in Company's Registration
Statement on Form S-1, Registration No. 33-97902, effective December 11,
1995.
37
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF ADOPTION
OF
FOURTH AMENDMENT
TO
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ADVANCED LIGHTING TECHNOLOGIES, INC.
-----------------------------------------------------------------------------
Alan J. Ruud, President, of ADVANCED LIGHTING TECHNOLOGIES, INC., an
Ohio corporation, having its principal office in the City of Solon, Ohio, does
hereby certify that on the 17th day of February, 2000, pursuant to the authority
of Ohio Revised Code Section 1701.71(A) and Article Eleventh of the Second
Amended and Restated Articles of Incorporation, as amended, of said Corporation,
the holders of a majority of the issued and outstanding common shares and
preferred shares of said Corporation entitled to vote at a meeting of
shareholders, approved the following action and adopted the following resolution
amending the existing Second Amended and Restated Articles of Incorporation:
RESOLVED, that, pursuant to Section 1701.71(A) of the Ohio Revised
Code, Advanced Lighting Technologies, Inc. (the "Corporation")
effective on the date of filing of a certified copy of this resolution
with the Secretary of State of the State of Ohio, the Second Amended
and Restated Articles of Incorporation, as amended, of the Corporation
are hereby amended to add the following new Article TWELFTH:
"TWELFTH: Section 1701.831 of the Ohio Revised Code shall not
apply to control share acquisitions of shares of the
Corporation."
Such amendment shall, and does hereby, amend such Second Amended and Restated
Articles of Incorporation effective on such date.
IN WITNESS WHEREOF, Alan J. Ruud, President, acting for and on behalf
of said Corporation, has hereunto subscribed his name this 9th day of March,
2000.
/s/Alan J. Ruud
-----------------------------------
Alan J. Ruud, President
<PAGE> 1
Exhibit 10.1 CONFORMED COPY
FOURTH AMENDMENT AGREEMENT
This Fourth Amendment Agreement is effective as of the 29th day of
February, 2000, by and among ADVANCED LIGHTING TECHNOLOGIES, INC., an Ohio
corporation ("U.S. Borrower"), VENTURE LIGHTING POWER SYSTEMS, NORTH AMERICA
INC. (f.k.a. Ballastronix Incorporated), a corporation organized under the laws
of the Province of Nova Scotia, CANADIAN LIGHTING SYSTEMS HOLDING, INCORPORATED,
a corporation organized under the laws of the Province of Nova Scotia
(collectively, "Canadian Borrowers" and, individually, "Canadian Borrower"),
PARRY POWER SYSTEMS LIMITED (Company No. 2833448, f.k.a. Venture Lighting Europe
Ltd.), incorporated under the laws of England, VENTURE LIGHTING EUROPE LTD.
(Company No. 3341889, f.k.a. Parry Power Systems Limited), incorporated under
the laws of England (collectively, "UK Borrowers" and, individually, "UK
Borrower"; and together with U.S. Borrower and Canadian Borrowers, collectively,
"Borrowers" and, individually, "Borrower"), the banking institutions listed on
Schedule 1 to the Credit Agreement, as hereinafter defined ("Banks"), and PNC
BANK, NATIONAL ASSOCIATION, as agent for the Banks ("Agent"):
WHEREAS, Borrowers, Agent and the Banks are parties to a certain Credit
Agreement dated as of May 21, 1999, as amended, that provides, among other
things, for loans aggregating Sixty Million Dollars ($60,000,000), all upon
certain terms and conditions stated therein ("Credit Agreement");
WHEREAS, Borrowers, Agent and the Banks desire to amend the Credit
Agreement to modify certain provisions thereof; and
WHEREAS, each term used herein shall be defined in accordance with the
Credit Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other valuable considerations, Borrowers,
Agent and the Banks hereby agree as follows:
1. Article I of the Credit Agreement is hereby amended to delete the
definition of "Canadian Borrowing Base" therefrom and to insert in place thereof
the following:
"Canadian Borrowing Base" shall mean an amount not in excess
of the sum of the following: (a) eighty-five percent (85%) of the
Dollar Equivalent of the aggregate amount due and owing on the Eligible
Receivables of each Canadian Borrower, plus (b) the lesser of (i) (A)
fifty-five percent (55%) of the Dollar Equivalent of the aggregate of
the Eligible Raw Materials of each Canadian Borrower, plus (B)
sixty-five percent (65%) of the Dollar Equivalent of the aggregate of
the Eligible Inventory of each Canadian Borrower, or (ii) the CAD
Equivalent, at any time of determination, of Two Million Four Hundred
Eighty Thousand Dollars ($2,480,000); provided, however that the amount
of the Canadian Borrowing Base may be increased or decreased by Agent
and the Banks at any time and from time to time, in the exercise of
their sole discretion and each Canadian Borrower consents to any such
increases or decreases and acknowledges that decreasing the amount of
the
<PAGE> 2
Canadian Borrowing Base or increasing the reserves may limit or
restrict Canadian Revolving Loans requested by Canadian Borrowers.
2. Article I of the Credit Agreement is hereby amended to delete the
definition of "UK Borrowing Base" therefrom and to insert in place thereof the
following:
"UK Borrowing Base" shall mean an amount not in excess of the
sum of the following: (a) eighty-five percent (85%) of the aggregate
amount due and owing on Eligible Receivables of each UK Borrower, plus
(b) the lesser of (i) (A) fifty-five percent (55%) of Eligible Raw
Materials of each UK Borrower, plus (B) sixty-five percent (65%) of the
aggregate of the Eligible Inventory of each UK Borrower, or (ii) Three
Million Seven Hundred Twenty Thousand Dollars ($3,720,000); provided,
however, that the amount of the UK Borrowing Base may be increased or
decreased by Agent and the Banks at any time and from time to time, in
the exercise of their sole discretion and each UK Borrower consents to
any such increases or decreases and acknowledges that decreasing the
amount of the UK Borrowing Base or increasing the reserves may limit or
restrict UK Revolving Loans requested by UK Borrowers.
3. Article I of the Credit Agreement is hereby amended to delete the
definition of "U.S. Borrowing Base" therefrom and to insert in place thereof the
following:
"U.S. Borrowing Base" shall mean an amount not in excess of
the sum of the following: (a) eighty-five percent (85%) of the
aggregate amount due and owing on Eligible Receivables of U.S. Borrower
and each U.S. Guarantor, plus (b) the lesser of (i) (A) fifty-five
percent (55%) of Eligible Raw Materials of U.S. Borrower and each U.S.
Guarantor, plus (B) sixty-five percent (65%) of the aggregate of the
cost or market value (whichever is lower) of the Eligible Inventory of
U.S. Borrower and each U.S. Guarantor, or (ii) Eighteen Million Six
Hundred Thousand Dollars ($18,600,000); provided, however that the
amount of the U.S. Borrowing Base may be increased or decreased by
Agent and the Banks at any time and from time to time, in the exercise
of their reasonable discretion and U.S. Borrower consents to any such
increases or decreases and acknowledges that decreasing the amount of
the U.S. Borrowing Base or increasing the reserves may limit or
restrict U.S. Revolving Loans requested by U.S. Borrower.
4. Section 5.7 of the Credit Agreement is hereby amended to delete
subsection (b) therefrom and to insert in place thereof the following:
(b) The Total Unused Credit Availability shall be at least (i)
Ten Million Dollars ($10,000,000) at all times from the Closing Date
through September 29, 1999, (ii) Fifteen Million Dollars ($15,000,000)
from September 30, 1999 through February 29, 2000, and (iii) Ten
Million Dollars ($10,000,000) on March 1, 2000 and thereafter;
provided, however, that the requirements of this Section 5.7(b) shall
terminate at such time as the Fixed Charge Coverage Ratio equals or
exceeds 1.00 to 1.00 for the most recently completed four (4) fiscal
quarters.
2
<PAGE> 3
5. Section 5.11 of the Credit Agreement is hereby amended to delete
subsections (ix) and (x) therefrom and to insert in place thereof the following:
(ix) at any time after the occurrence of the Equity Event,
other investments of the type referenced in (a), (b) or (c) referenced
in the lead in hereto in Affiliates or other Persons with whom a
Company participates in a joint venture or similar relationship as of
the date hereof not exceeding Six Million Dollars ($6,000,000) in the
aggregate for all Companies (but with no individual investment
exceeding Three Million Dollars ($3,000,000)); provided that,
immediately after giving effect thereto, the Total Unused Credit
Availability shall be at least (A) Fifteen Million Dollars
($15,000,000) during the period from the Equity Date through February
29, 2000 and (B) Ten Million Dollars ($10,000,000) during the period
from March 1, 2000 and thereafter; or
(x) at any time after the occurrence of the Equity Event,
other guarantees not exceeding Two Million Dollars ($2,000,000) in the
aggregate for all Companies at any time; provided that, immediately
after giving effect thereto, the Total Unused Credit Availability shall
be at least (A) Fifteen Million Dollars ($15,000,000) during the period
from the Equity Date through February 29, 2000 and (B) Ten Million
Dollars ($10,000,000) during the period from March 1, 2000 and
thereafter.
6. Concurrently with the execution of this Fourth Amendment Agreement,
Borrowers shall:
(a) cause each Guarantor of Payment to consent and agree to and
acknowledge the terms of this Fourth Amendment Agreement;
(b) deliver such other documents as may reasonably be required by Agent
in connection with this Fourth Amendment Agreement; and
(c) pay all legal fees and expenses of Agent in connection with this
Fourth Amendment Agreement.
7. Borrowers hereby represent and warrant to Agent and the Banks that
(a) each Borrower has the legal power and authority to execute and deliver this
Fourth Amendment Agreement; (b) the officers executing this Fourth Amendment
Agreement have been duly authorized to execute and deliver the same and bind
such Borrower with respect to the provisions hereof; (c) the execution and
delivery hereof by Borrowers and the performance and observance by Borrowers of
the provisions hereof do not violate or conflict with the organizational
agreements of any Borrower or any law applicable to any Borrower or result in a
breach of any provision of or constitute a default under any other agreement,
instrument or document binding upon or enforceable against any Borrower; (d) no
Unmatured Event of Default or Event of Default exists under the Credit
Agreement, nor will any occur immediately after the execution and delivery of
this Fourth Amendment Agreement or by the performance or observance of any
provision hereof; (e) neither Borrower nor any Guarantor of Payment is aware of
any claim or offset against, or defense or counterclaim to, any of Borrowers' or
any Guarantor of Payment's obligations or liabilities under
3
<PAGE> 4
the Credit Agreement or any Related Writing; and (f) this Fourth Amendment
Agreement constitutes a valid and binding obligation of each Borrower in every
respect, enforceable in accordance with its terms.
8. Each reference that is made in the Credit Agreement or any other
writing to the Credit Agreement shall hereafter be construed as a reference to
the Credit Agreement as amended hereby. Except as herein otherwise specifically
provided, all provisions of the Credit Agreement shall remain in full force and
effect and be unaffected hereby. This Fourth Amendment Agreement is a Related
Writing as defined in the Credit Agreement.
9. Each Borrower and each Guarantor of Payment, by signing below,
hereby waives and releases Agent and each of the Banks and their respective
directors, officers, employees, attorneys, affiliates and subsidiaries from any
and all claims, offsets, defenses and counterclaims of which any Borrower and
any Guarantor of Payment is aware, such waiver and release being with full
knowledge and understanding of the circumstances and effect thereof and after
having consulted legal counsel with respect thereto.
10. This Fourth Amendment Agreement may be executed in any number of
counterparts, by different parties hereto in separate counterparts and by
facsimile signature, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute but
one and the same agreement.
11. The rights and obligations of all parties hereto shall be governed
by the laws of the State of Ohio, without regard to principles of conflicts of
laws.
[Remainder of page intentionally left blank.]
4
<PAGE> 5
12. JURY TRIAL WAIVER. BORROWERS, AGENT AND EACH OF THE BANKS WAIVE ANY
RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, AMONG ANY BORROWER, AGENT AND THE BANKS, OR ANY
THEREOF, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY
NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. THIS WAIVER SHALL NOT
IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY AGENT'S OR ANY BANK'S ABILITY
TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION
CONTAINED IN ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT AMONG
BORROWERS, AGENT AND THE BANKS, OR ANY THEREOF.
ADVANCED LIGHTING TECHNOLOGIES,
INC.
By: /s/ NICHOLAS R. SUCIC
------------------------------------
Nicholas R. Sucic, Vice President
VENTURE LIGHTING POWER SYSTEMS, CANADIAN LIGHTING SYSTEMS
NORTH AMERICA INC. (f.k.a. Ballastronix HOLDING, INCORPORATED
Incorporated)
By: /s/ R. G. DOUGLAS OULTON By: /s/ R. G. DOUGLAS OULTON
------------------------------------ -----------------------
Title: V.P. FINANCE Title: V.P. FINANCE
--------------------------------- ---------------------
PARRY POWER SYSTEMS LIMITED VENTURE LIGHTING EUROPE LTD.
By: /s/ W. JAN WILKINSON By: /s/ E. YOUNG
----------------------------------- -----------------------
Title: DIRECTOR Title: DIRECTOR
--------------------------------- ---------------------
PNC BANK, NATIONAL ASSOCIATION, BANKBOSTON, N.A., as a Bank
as Agent and as a Bank
By: /s/ RICHARD MUSE, JR. By: /s/ ALAN R. VIESEN
------------------------------------ -----------------------
Richard Muse, Jr., Vice President Title: AUTHORIZED OFFICER
-----------------------
NATIONAL CITY COMMERCIAL
FINANCE, INC. SOVEREIGN BANK
By: /s/ PAUL WEYBRECHT By: /s/ MICHELE A. WALCOFF
------------------------------------ -----------------------
Title: VICE PRESIDENT Title: VICE PRESIDENT
-------------------------------- --------------------
5
<PAGE> 6
GUARANTOR ACKNOWLEDGMENT
------------------------
Each of the undersigned consents and agrees to and acknowledges the
terms of the foregoing Fourth Amendment Agreement. Each of the undersigned
further agrees that the obligations of each of the undersigned pursuant to the
Guaranty of Payment executed by each of the undersigned shall remain in full
force and effect and be unaffected hereby.
ADLT Realty Corp. I, Inc.
ADLT Services, Inc.
Advanced Lighting, Inc.
Advanced Lighting Systems, Inc.
APL Engineered Materials, Inc.
Ballastronix (Delaware), Inc.
Bio Light, Inc.
Bright Ideas Advertising and Design, Inc.
Energy Efficient Products, Inc.
HID Recycling, Inc.
Light Resources International, Inc.
Metal Halide Controls, Inc.
Metal Halide Technologies, Inc.
Microsun Technologies, Inc.
Specialty Discharge Lighting, Inc.
Venture Lighting International, Inc.
By: /s/ Nicholas R. Sucic
------------------------------------------
Nicholas R. Sucic, Vice President of
each of the companies listed above
Deposition Sciences, Inc.
Kramer Lighting, Inc.
Ruud Lighting, Inc.
By: /s/ Nicholas R. Sucic
------------------------------------------
Nicholas R. Sucic, signing for each
of companies listed above by Power
of Attorney
6
<PAGE> 1
ADVANCED LIGHTING TECHNOLOGIES, INC.
EXHIBIT 12 -- STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Consolidated pretax income
from continuing operations $ 1,268 $ (9,344) $ 1,805 $(45,354)
Interest expense 3,580 3,809 10,693 9,990
Interest portion of rent expense 126 126 405 429
-------- --------- -------- ---------
EARNINGS $ 4,974 $ (5,409) $ 12,903 $(34,935)
======== ========= ======== =========
Interest expense $ 3,580 $ 3,809 $ 10,693 $ 9,990
Interest capitalized 94 90 290 548
Interest portion of rent expense 126 126 405 429
Preferred shares accretion 605 -- 1,208 --
-------- --------- -------- ---------
FIXED CHARGES $ 4,405 $ 4,025 $ 12,596 $ 10,967
======== ========= ======== =========
RATIO OF EARNINGS TO FIXED CHARGES 1.1 -- 1.0 --
======== ========= ======== =========
For purposes of calculating the unaudited ratio of earnings to fixed charges,
earnings consist of income (loss) from continuing operations before provision
for income taxes plus fixed charges. Fixed charges consist of interest charges
and amortization of debt issuance costs, whether expensed or capitalized, that
portion of rental expense that is representative of interest, and preferred
shares accretion. In the three months ended March 31, 1999, earnings were
inadequate to cover fixed charge requirements by $9,434. In the nine months
ended March 31, 1999, earnings were inadequate to cover fixed charge
requirements by $45,902.
<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, 2000 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,744
<SECURITIES> 0
<RECEIVABLES> 38,673
<ALLOWANCES> 970
<INVENTORY> 47,038
<CURRENT-ASSETS> 88,085
<PP&E> 130,995
<DEPRECIATION> 21,533
<TOTAL-ASSETS> 306,137
<CURRENT-LIABILITIES> 47,985
<BONDS> 157,770
16,411
0
<COMMON> 20
<OTHER-SE> 83,654
<TOTAL-LIABILITY-AND-EQUITY> 306,137
<SALES> 171,010
<TOTAL-REVENUES> 171,010
<CGS> 103,966
<TOTAL-COSTS> 103,966
<OTHER-EXPENSES> 55,279
<LOSS-PROVISION> 132
<INTEREST-EXPENSE> 10,693
<INCOME-PRETAX> 1,805
<INCOME-TAX> 549
<INCOME-CONTINUING> 1,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,243
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
