<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended: Commission File No.
June 30, 1994 33-27289
ADIENCE, INC.
Delaware 14-1671486
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1305 Grandview Avenue
Pittsburgh, Pennsylvania 15211
(Address of registrant's principal executive offices)
412-381-2600
(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 and (2) has been subject to such filing
requirements for at least the past 90 days. Yes /X/ No
10,100,000 shares of common stock, par value $.01 per share, are
outstanding as of June 30, 1994.
<PAGE>
ADIENCE, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--
June 30, 1994 and December 31, 1993......................... 2
Consolidated Statements of Operations--
Post-Emergence Six Months Ended June 30, 1994;
Pre-Emergence Six Months Ended June 30, 1993;
Post-Emergence Three Months Ended June 30, 1994;
Pre-Emergence Three Months Ended June 30, 1993.............. 4
Consolidated Statements of Cash Flows--
Post-Emergence Six Months Ended June 30, 1994;
Pre-Emergence Six Months Ended June 30, 1993................ 5
Notes to Consolidated Financial Statements--June 30, 1994...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 18
PART II - OTHER INFORMATION
- - ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Item 6. Exhibits and Reports on Form 8-K.............................. 27
SIGNATURES................................................................ 28
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADIENCE, INC.
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
June 30, December 31,
1994 1993
(In thousands of dollars, except share data) (Unaudited) (Audited)
- - ------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 343 $ 2,200
Accounts receivable, less allowance
(1994 - $1,430; 1993 - $1,287) 25,651 27,046
Inventories 18,275 18,650
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,589 1,924
Prepaid expenses, deposits and other 745 2,231
- - ------------------------------------------------------------------------------
Total current assets 47,603 52,051
- - ------------------------------------------------------------------------------
Deferred income taxes 3,609 3,609
Property, plant and equipment:
Land 2,760 2,763
Buildings 12,725 12,328
Machinery and equipment 25,784 24,877
- - ------------------------------------------------------------------------------
41,269 39,968
Less allowances for depreciation 9,019 7,151
- - ------------------------------------------------------------------------------
32,250 32,817
Other assets 4,450 4,720
Reorganization value in excess of
amounts allocable to identifiable assets, net 8,643 9,190
- - ------------------------------------------------------------------------------
Total assets $96,555 $102,387
==============================================================================
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ADIENCE, INC.
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
June 30, December 31,
1994 1993
(In thousands of dollars, except share data) (Unaudited) (Audited)
- - ------------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities:
Revolving lines of credit $12,699 $ 9,185
Current portion of long-term obligations 700 759
Accounts payable 11,375 11,424
Salaries, wages and withholdings 1,274 953
Payable to principal shareholder 536 569
Accrued expenses 2,791 3,727
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,348 619
Accrued insurance 6,095 6,466
Accrued income taxes 1,075 1,569
Environmental liability 618 783
Deferred income taxes 66 66
- - ------------------------------------------------------------------------------
Total current liabilities 38,577 36,120
- - ------------------------------------------------------------------------------
Payable to principal shareholder 1,770 3,189
Long-term obligations 46,299 46,211
Deferred income taxes 3,930 3,930
Minority interest in subsidiary 3,387 3,428
Shareholders' equity:
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued and outstanding 10,000,000 shares
in 1993 and 10,100,000 in 1994 101 100
Additional paid-in capital 23,974 23,900
Retained deficit (21,047) (14,367)
Foreign currency translation (361) (124)
Unamortized stock compensation (75) --
- - ------------------------------------------------------------------------------
Total shareholders' equity 2,592 9,509
- - ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $96,555 $102,387
==============================================================================
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
ADIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Post-emergence | Pre-emergence Post-emergence | Pre-emergence
Three | Three Six | Six
Months Ended | Months Ended Months Ended | Months Ended
(In thousands of dollars, except per share data) June 30, 1994 | June 30, 1993 June 30, 1994 | June 30, 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $32,410 | $35,608 $60,620 | $68,171
Costs and expenses: | |
Cost of revenues 26,688 | 29,638 51,001 | 55,474
Selling, general and administrative 6,488 | 7,827 12,590 | 14,624
Amortization of intangible asset 277 | -- 547 | --
- - -----------------------------------------------------------------------------------------------------------------------------------
33,453 | 37,465 64,138 | 70,098
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating loss (1,043) | (1,857) (3,518) | (1,927)
- - -----------------------------------------------------------------------------------------------------------------------------------
Other income (expense): | |
Interest and other income 271 | 1,193 461 | 258
Interest expense (1,858) | (465) (3,721) | (2,360)
- - -----------------------------------------------------------------------------------------------------------------------------------
(1,587) | 728 (3,260) | (2,102)
- - -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before reorganization | |
items, income taxes, minority interest in subsidiary | |
and extraordinary item (2,630) | (1,129) (6,778) | (4,029)
- - -----------------------------------------------------------------------------------------------------------------------------------
Reorganization items: | |
Professional fees -- | (102) -- | (102)
Write-off of unamortized debt discount -- | (455) -- | (455)
Write-off of unamortized loan origination fees -- | (2,065) -- | (2,065)
Adjust accounts to fair value -- | 23,165 -- | 23,165
- - -----------------------------------------------------------------------------------------------------------------------------------
-- | 20,543 -- | 20,543
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
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<TABLE>
ADIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) - (Continued)
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Post-emergence | Pre-emergence Post-emergence | Pre-emergence
Three | Three Six | Six
Months Ended | Months Ended Months Ended | Months Ended
(In thousands of dollars, except per share data) June 30, 1994 | June 30, 1993 June 30, 1994 | June 30, 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Loss) income from continuing operations before | |
income taxes, minority interest in subsidiary | |
and extraordinary item (2,630) | 19,414 (6,778) | 16,514
- - -----------------------------------------------------------------------------------------------------------------------------------
Income taxes (benefit) 143 | 1,233 (57) | 261
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations before minority | |
interest in subsidiary and extraordinary item (2,773) | 18,181 (6,721) | 16,253
- - -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in subsidiary 22 | (1) (41) | 1
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations | |
before extraordinary item (2,795) | 18,182 (6,680) | 16,252
- - -----------------------------------------------------------------------------------------------------------------------------------
Discontinued operations: | |
Loss on disposal of discontinued operations | |
(net of tax benefits of $0 and $0) -- | (400) -- | (400)
- - -----------------------------------------------------------------------------------------------------------------------------------
Loss (income) before extraordinary item (2,795) | 17,782 (6,680) | 15,852
- - -----------------------------------------------------------------------------------------------------------------------------------
Extraordinary item- | |
gain on discharge of debt -- | 17,480 -- | 17,480
- - -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(2,795) | $35,262 $(6,680) | $33,332
===================================================================================================================================
Earnings per common share: | |
Loss from continuing operations $ (0.28) | * $ (0.67) | *
Loss from discontinued operations -- | * -- | *
Extraordinary item -- | * -- | *
- - -----------------------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (0.28) | * $ (0.67) | *
===================================================================================================================================
Average common shares outstanding 10,019 | * 10,009 | *
===================================================================================================================================
* Earnings per share are not meaningful prior to June 30, 1993 due to the reorganization--see Note 1.
The accompanying notes are an integral part of these financial statements.
</TABLE>
4A
<PAGE>
<TABLE>
ADIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Post-emergence | Pre-emergence
Six Months Ended | Six Months Ended
(In thousands of dollars) June 30, 1994 | June 30, 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities |
Net (loss) income $(6,680) | $33,332
Non-cash expenses and revenues included in (loss) income: |
Depreciation and amortization 3,163 | 2,000
Provisions for doubtful accounts 273 | 413
Loss on disposal of discontinued operations -- | 400
(Gain) loss on disposal of property, plant and equipment (72) | 23
Minority interest (41) | 1
Changes in operating assets and liabilities: |
Short-term investments -- | (4)
Accounts receivable 1,252 | (3,781)
Inventories, prepaid expenses, deposits and other 1,861 | 201
Costs and estimated earnings in excess of billings on uncompleted contracts (665) | (1,050)
Income tax receivable -- | 2,742
Accounts payable, salaries, wages and withholdings, accrued |
expenses, accrued insurance and payable to principal shareholder (2,487) | 2,469
Billings in excess of costs and estimated earnings on uncompleted contracts 729 | 614
Accrued income taxes (494) | 1,549
Environmental liability (165) | (82)
Other 162 | 470
Operating cash flows form reorganization items: |
Write-off of unamortized debt discount and loan origination fees -- | 2,520
Adjust accounts to fair value -- | (23,165)
Extraordinary gain on discharge of debt -- | (17,480)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (3,164) | 1,172
- - -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities |
Purchase of property, plant and equipment (1,637) | (697)
Other (349) | (305)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,986) | (1,002)
- - -----------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities |
Net borrowings (payments) on revolving lines of credit 3,514 | (1,849)
Principal payments on long-term obligations (221) | (369)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,293 | (2,218)
- - -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,857) | (2,048)
Cash and cash equivalents at beginning of period 2,200 | 2,048
- - -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 343 | $ 0
===================================================================================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1994
(Dollar amounts in thousands, except share data, unless otherwise noted)
Note 1 - BASIS OF PRESENTATION AND COMPANY REORGANIZATION
- - ---------------------------------------------------------
Adience, Inc. ("Adience" or "Company") has experienced continued losses from
continuing operations (before reorganization items) both pre- and post-
emergence under Chapter 11. In addition, a write down of reorganization value
in excess of amounts allocable to identifiable assets was recorded at December
31, 1993, based on management's belief that a permanent impairment of this
asset existed.
The continued viability of the Company is dependent upon, among other factors,
the ability to generate sufficient cash from operations, financing, or other
sources that will meet ongoing obligations over a sustained period.
Management has prepared detailed operating and financial plans which combine
multifunctional resources as teams to respond better to customer needs, make
an investment in product and service opportunities expected to produce a
greater return on investment, and continue a cost control program begun in
1993. Management believes that the successful implementation of this plan
will enable the Company to continue as a going concern for a reasonable
period.
There can be no assurance however, that such activities will achieve the
intended improvement in results of operations or financial position.
A Prepackaged Plan of Reorganization under Chapter 11 of the Bankruptcy Code
(the "Prepackaged Plan") was filed by Adience and the Unofficial Committee of
Noteholders of Adience on February 22, 1993. The Prepackaged Plan was
confirmed by the United States Bankruptcy Court for the Western District of
Pennsylvania on May 4, 1993 and consummated on June 30, 1993.
The Prepackaged Plan provided for a restructuring of Adience's capital
structure and allowed the holders of $66 million aggregate principal amount of
Adience's 15% Senior Subordinated Notes ("Old Reset Notes") to exchange them
for $49 million aggregate principal amount of new 11% Senior Secured Notes
("New Secured Notes") due June 15, 2002, plus common stock representing 55% of
the outstanding common stock of Adience. The Prepackaged Plan also included
forgiveness of accrued interest totaling approximately $8.8 million. The
value of the cash and securities distributed was $17.5 million less than the
allowed claims; the resultant gain was recorded as an extraordinary gain.
6
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
Neither Adience Canada, a wholly-owned subsidiary, or Information Display
Technology, Inc. ("IDT"), a majority-owned subsidiary of Adience, guarantee
the new 11% Notes issued by Adience under the Prepackaged Plan. The new Notes
are secured by a lien on all the assets of Adience, including the stock of
IDT.
Adience Canada and IDT did not file plans of reorganization.
The sum of allowed claims plus post petition liabilities exceeded the
reorganization value of the assets of Adience immediately before the date of
consummation. Also, the Company experienced a change in control as pre-
reorganization holders of common stock received less than 50% of the new
common stock issued pursuant to the Prepackaged Plan. AICPA SOP 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code
("SOP 90-7"), requires that under these circumstances, a new reporting entity
is created and assets and liabilities should be recorded at their fair values.
This accounting treatment is referred to in these statements as "fresh start
reporting". The Company's basis of accounting for financial reporting
purposes changed on June 30, 1993 as a result of applying SOP 90-7.
Specifically, application of SOP 90-7 required the adjustment of the Company's
assets and liabilities to reflect a reorganization value generally
approximating the fair value of the Company as a going concern on an
unleveraged basis, the elimination of its retained deficit, and adjustments to
its capital structure to reflect consummation of the Prepackaged Plan. Fresh
start reporting has not been adopted by Adience Canada and IDT.
The consolidated statements of operations and cash flows after June 30, 1993
are not comparable to the respective financial statements prior to such date,
accordingly a solid black line has been shown to separate it from prior year
information since it is not prepared on a comparable basis.
Reorganization value at the June 30, 1993 consummation date was determined by
management with the assistance of independent advisors. The methodology
employed involved estimation of enterprise value (i.e., the market value of
the Company's debt and shareholders' equity), taking into account a discounted
cash flow analysis, as well as the capitalization of earnings and cash flow
approaches. The discounted cash flow analysis was based on five-year cash
flow projections prepared by management.
7
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
The five-year cash flow projections were based on estimates and assumptions
about circumstances and events that have not yet taken place. Such estimates
and assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of the corporation,
including, but not limited to, those with respect to the future courses of the
Company's business activity. Accordingly, there will usually be differences
between projections and actual results because events and circumstances
frequently do not occur as expected; and those differences may be material.
The assumptions included: a rate of sales growth of approximately 2.5% per
annum in excess of the anticipated rate of inflation; selling, general and
administrative expenses, after adjustment for non-recurring items, increase in
line with the rate of sales growth; operating profit margins for each of the
five years are approximately equal to one half of the average annual operating
profit margins achieved during the most recent profitable period of 1988-1990;
and effective tax rates of 33%.
At June 30, 1993, the adjustment to record confirmation of the plan of $23
million was allocated to assets and liabilities as follows:
Inventories $ 1,287
Property, plant and equipment 19,448
Reorganization value in excess of amounts
allocable to identifiable assets 18,329
Intangible assets (3,032)
Deferred income taxes (1,108)
Additional paid-in capital (10,896)
Prepaid contribution to employee stock ownership plan (863)
---------
$ 23,165
=========
Current assets and liabilities were recorded at fair value. Property, plant
and equipment was recorded at reorganization value, which approximated fair
value in continued use, based on an independent appraisal. In addition, under
SOP 90-7, the long-term debt was recorded at present values on June 30, 1993.
The resulting unamortized discount is being accreted to interest expense over
the term of the New Secured Notes.
8
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
Based on the allocation of equity value in conformity with SOP 90-7, the
portion of the equity value which was not attributed to specific tangible or
identifiable intangible assets of the reorganized Company of $18,329 was
reported as "reorganization value in excess of amounts allocable to
identifiable assets". This value was initially being amortized on a straight
line basis in equal annual amounts over 9 years. On a quarterly basis,
management will continue to evaluate the recoverability of the unamortized
portion of the reorganization value in excess of amounts allocable to
identifiable assets by comparing actual cash flows with the projected cash
flows used to arrive at the reorganization value. Should a material
difference exist, management will then consider whether the assumptions made
in the preparation of the projected cash flows are still reasonable. If
management is of the opinion that new projected cash flows are required and
that a permanent impairment of the remaining reorganization value has
occurred, a reduction of some or all of the unamortized value will be
immediately recognized.
In the fourth quarter of 1993, the Company recorded a charge of $8 million to
reduce the recorded reorganization value in excess of amounts allocable to
identifiable assets based on management's comparison of actual cash flows
post-emergence through December 31, 1993, with the projected cash flows used
to arrive at the reorganization value. This comparison resulted in the
preparation of new cash flow projections, which in turn led the Company to the
conclusion that permanent impairment of the reorganization value has occurred
and that an immediate reduction of approximately 50% of the remaining
unamortized value needs to be recognized.
The Company has adopted "fresh start reporting" in accordance with SOP 90-7 in
preparing its consolidated balance sheet as of June 30, 1993. The balance
sheet became the opening balance sheet for Adience, Inc., as reorganized, on
July 1, 1993.
The accompanying unaudited consolidated financial statements of Adience have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
The consolidated results of operations for the three and six month periods
ended June 30, 1994, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1994.
9
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 1 - CONTINUED
- - ------------------
The accompanying unaudited financial statements should be read in conjunction
with Adience's audited financial statements included in Adience's annual
report on Form 10-K for the six month periods ended December 31 and June 30,
1993.
Certain items in the June 30, 1993 financial statements have been reclassified
and restated to conform with changes in classification adopted and required in
1994.
Earnings per common share is computed by dividing net loss by the weighted
average number of shares outstanding.
Note 2 - Pro Forma Results of Operations
- - ----------------------------------------
The following consolidating pro forma statement of operations reflects the
financial results of the Company as if the reorganization had been effective
January 1, 1993:
10
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<TABLE>
ADIENCE, INC.
CONSOLIDATING PRO FORMA STATEMENT OF OPERATIONS
UNAUDITED
<CAPTION>
F o r t h e S i x M o n t h s E n d e d J u n e 3 0, 1 9 9 3
- - -----------------------------------------------------------------------------------------------------------------------------------
Pro Forma Unconsolidated
Unconsolidated Adjustments Adience ADIENCE ADIENCE, INC.
ADIENCE Debit Credit Pro Forma IDT CANADA CONSOLIDATED
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues $39,798 $39,798 $23,740 $ 4,633 $68,171
Costs and expenses:
Cost of revenues 32,350 $ 1,858(1) 34,208 19,984 3,140 57,332
Selling, general and administrative 10,071 $ 615(1) 9,456 3,677 876 14,009
Amortization of intangible asset 540(1) 540 540
- - -----------------------------------------------------------------------------------------------------------------------------------
42,421 2,398 615 44,204 23,661 4,016 71,881
- - -----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (2,623) (4,406) 79 617 (3,710)
Other income (expense):
Interest and other income 215 215 14 29 258
Interest expense (2,271) 1,297(2) (3,568) (89) (3,657)
- - -----------------------------------------------------------------------------------------------------------------------------------
(2,056) 1,297 (3,353) (75) 29 (3,399)
- - -----------------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations
before reorganization items, income taxes
and minority interest in subsidiary (4,679) (7,759) 4 646 (7,109)
Reorganization items:
Professional fees (102) 102(3) 0 0
Write-off of unamortized debt discount (455) 455(3) 0 0
Write-off of unamortized loan fees (2,065) 2,065(3) 0 0
Adjust accounts to fair value 23,165 23,165(3) 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
20,543 23,165 2,622 0 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and minority interest
in subsidiary 15,864 (7,759) 4 646 (7,109)
Income taxes (benefit) (1) (1) 1 261 (261)
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before minority interest in subsidiary 15,865 (7,758) 3 385 (7,370)
Minority interest in subsidiary 1 1 1
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $15,864 $26,860 $3,237 $(7,759) $ 3 $ 385 $(7,371)
===================================================================================================================================
</TABLE>
11
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 2 - CONTINUED
- - ------------------
(1) Reflects a six month impact of additional depreciation expense resulting
from the write-up of property, plant and equipment, the amortization of
the write-up in inventory values, the amortization of reorganization
value in excess of fair value, and the reduction of ESOP expense and
goodwill amortization which was written off in conjunction with fresh
start reporting.
(2) Interest expense on reorganized long-term debt.
(3) Elimination of the effect of non-recurring reorganization items on
operations.
NOTE 3 - INVENTORIES
- - --------------------
Inventories consist primarily of raw materials of $8,181 and $7,512, work-in-
process of $2,033 and $2,374 and finished goods of $8,061 and $8,764 at June
30, 1994 and December 31, 1993, respectively.
NOTE 4 - CONTRACTS IN PROGRESS
- - ------------------------------
The status of contract costs on uncompleted construction contracts was as
follows:
- - -----------------------------------------------------------------------------
Costs and estimated Billings in excess
earnings in of costs and
excess of billings estimated earnings Net
- - -----------------------------------------------------------------------------
June 30, 1994:
Costs and estimated
earnings of $1,567 $24,136 $7,541
Billings 21,547 8,889
- - -----------------------------------------------------------------------------
$ 2,589 $1,348 $1,241
=============================================================================
December 31, 1993:
Costs and estimated
earnings of $1,649 $20,113 $6,218
Billings 18,189 6,837
- - -----------------------------------------------------------------------------
$ 1,924 $ 619 $1,305
=============================================================================
12
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 4 - CONTINUED
- - ------------------
Accounts receivable at June 30, 1994 and December 31, 1993 include amounts
billed but not yet paid by customers under retainage provisions of
approximately $2,648 and $2,989, respectively. Such amounts are generally due
within one year.
NOTE 5 - INCOME TAX PAYMENTS
- - ----------------------------
For the six month periods ended June 30, 1994 and 1993 the Company made income
tax payments totaling $502 and $32, respectively.
NOTE 6 - LINES OF CREDIT
- - ------------------------
On the consummation date of the plan of reorganization, June 30, 1993, Adience
entered into a financing agreement with Congress that had a renewal date of
June 30, 1994 (the "Renewal Date"). The facility remains in effect year to
year thereafter, unless terminated upon sixty days written notice by either
party on the anniversary of the Renewal Date in any year. Under this
agreement, Adience may request loan advances not to exceed the lesser of $12
million or available collateral (80% of eligible accounts receivable less than
90 days plus 30% of raw material and finished goods inventory). The Company
is negotiating an increase in its credit line through its current lender. The
loan is collateralized by accounts receivable, inventory, fixed assets,
intangible assets and Adience's shares of IDT. In addition, IDT has
guaranteed the Adience line of credit and has pledged as collateral its own
accounts receivable, inventory and equipment. The interest rate on the loan
is 2.5% over the prime rate (effective rate of 9.75% at June 30, 1994). At
June 30, 1994 Adience had borrowed $11,621 under the credit facility including
checks in transit of $1,911.
In addition, IDT entered into a financing agreement with Congress, which is
also renewed under the same terms described above. Under this agreement, IDT
may request loan advances not to exceed the lesser of $3 million or available
collateral (80% of eligible accounts receivable less than 90 days plus 30% of
raw material and finished goods inventory). The loan is collateralized by
accounts receivable, inventory and fixed assets. Adience guarantees IDT's
debt to Congress. The interest rate on the loan is 2.5% over the prime rate.
At June 30, 1994, IDT had borrowed $1,078 under the credit facility including
checks in transit of $604.
13
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 6 - CONTINUED
- - ------------------
Both Adience and IDT pay commitment fees on the unused portion of their credit
facility of 0.5%. Under the terms of the financing agreements, both companies
are required to maintain certain financial ratios and meet other financial
conditions. The agreements do not allow the companies to incur additional
indebtedness, pay cash dividends, make certain investments, advances or loans,
and limits annual capital expenditures. IDT is in compliance with all
financial requirements of its agreement. During the three months ended June
30, 1994, Adience was not in compliance at all times with the working capital
covenant in its financing agreement. The Company received appropriate waivers
for those periods of noncompliance. Inability to achieve compliance in the
future could affect Adience's access to further borrowings or require it to
secure additional capital by other means. Adience is currently negotiating
with Congress for permanent amendments to the minimum working capital and net
worth covenants in its financing agreement.
NOTE 7 - LONG-TERM OBLIGATIONS
- - ------------------------------
- - -----------------------------------------------------------------------------
June 30, December 31,
1994 1993
- - -----------------------------------------------------------------------------
Long-term obligations consisted of the following:
New Senior Secured Notes due in 2002,
interest at 11% $49,079 $49,079
Notes payable with monthly installments of
principal and interest of $22
through December 1997, interest at 10% 747 836
Capital lease obligations 693 745
Other (interest ranges from 10% to 13%) 480 560
- - -----------------------------------------------------------------------------
50,999 51,220
Less current portion 700 759
- - -----------------------------------------------------------------------------
50,299 50,461
Discount on New Senior Secured Notes 4,000 4,250
- - -----------------------------------------------------------------------------
$46,299 $46,211
=============================================================================
14
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 7 - CONTINUED
- - ------------------
In connection with the Plan of Reorganization, $49,079 of New Senior Secured
Notes with an annual interest rate of 11% were issued under an indenture
agreement dated as of June 30, 1993. The New Senior Secured Notes are
redeemable at the option of Adience after December 15, 1997. The New Senior
Secured Notes are not guaranteed by subsidiaries of Adience. The New Notes
are secured by a lien on all the assets of Adience, including the stock of
IDT.
Adience, on a consolidated basis, has agreed to certain restrictive covenants
which are ordinary to such financings including, among other things,
limitations on asset sales, limitations on additional indebtedness and
restrictions on the payment of dividends.
NOTE 8 - STOCK PLANS
- - --------------------
On May 24, 1994, the Board of Directors of Adience adopted the 1994 Stock
Option Plan ("Stock Option Plan") and 1994 Directors Stock Grant Plan ("Stock
Grant Plan"). Under the Stock Option Plan, 1,250,000 shares have been
reserved for issuance upon the exercise of stock options, which may be granted
to employees by the Compensation Committee of the Company's Board of
Directors. Under the Stock Option Plan, options generally become exercisable
six months following the date of grant or over a period determined by the
Board of Directors and expire ten years from the date of grant. The Stock
Option Plan provides for the option price to be paid in cash, shares of
Adience's common stock owned by the option holder, or a combination of such
shares and cash. As of June 30, 1994 225,000 options have been granted under
the Stock Option Plan. Each option granted entitles the holder to acquire one
share of Adience common stock at an exercise price not to be less that the
fair market value of the underlying shares on the date of grant. There is
currently no public market for the common stock.
Compensation resulting from stock options is initially measured at the grant
date based on the market value of the common stock, with adjustments to be
made quarterly for market price fluctuations. The Company recognized no Stock
Option Plan compensation expense for the six months ended June 30, 1994.
The Stock Grant Plan provides that up to 300,000 shares of common stock may be
granted to the members of the Board of Directors, at no cost to the directors.
The Stock Grant Plan authorized the automatic grant of 10,000 shares of common
stock to each director on June 13, 1994, and 10,000 shares of common stock to
each director on the date of each of the next two successive annual meetings
of shareholders of the Company provided the director is then re-elected to the
board, up to an aggregate of not more than 30,000 shares for each director.
These grants have been made in lieu of a cash retainer which would have been
paid to each director.
15
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 8 - CONTINUED
The aggregate fair market value of the shares granted under the Stock Grant
Plan is considered unearned compensation at the time of grant and compensation
is earned ratably over the year. The unamortized unearned compensation value
is shown as a reduction of shareholders' equity in the accompanying
consolidated balance sheet.
Additionally, Steib & Company, a New York general partnership, was granted
options to purchase 1,275,000 shares of Company common stock as partial
compensation for services to be performed under an advisory agreement with the
Company. Steven S. Elbaum, a member of the Company's Board of Directors, is a
general partner of Steib & Company.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
- - --------------------------------------
At June 30, 1994, Adience had $1,661 in irrevocable standby letters of credit
outstanding, not reflected in the accompanying consolidated financial
statements, as guarantees in force for various insurance policies, performance
and bid bonds. These instruments are usually for a period of one year or the
duration of the contract. The letters of credit reduce Adience's availability
under the Congress credit facility.
In February 1992, IDT was cited by the Ohio Environmental Protection Agency
(the "Ohio EPA") for violations of Ohio's hazardous waste regulations,
including speculative accumulation of waste and illegal disposal of hazardous
waste on the site of its Alliance, Ohio facility. IDT had $783 accrued at
December 31, 1993 for the clean up of this site.
In December 1993, IDT and Adience signed a consent order with the Ohio EPA and
Ohio Attorney General which required IDT and Adience to pay to the State of
Ohio a civil penalty of $200 (of which IDT paid $175 and Adience paid $25).
In addition, the consent order requires the payment of stipulated penalties of
up to $1 per day for failure to satisfy certain requirements of the consent
order including milestones in the closure plan. IDT expects that the work to
be conducted under the closure plan will be substantially completed in 1994,
subject to IDT receiving all necessary approvals from the Ohio EPA. At June
30, 1994, environmental accruals amounted to $618 which represents
management's reasonable estimate of the amounts remaining to be incurred in
this matter, including the costs of effecting the closure plan, bonding and
insurance costs, penalties and legal and consultants' fees. Since 1991,
Adience and IDT have together paid $518 (excluding the civil penalty) for the
environmental clean-up related to the Alliance facility.
16
<PAGE>
ADIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) - Continued
NOTE 9 - CONTINUED
- - ------------------
Under the acquisition agreement pursuant to which IDT acquired the property
from Adience, Adience represented and warranted that, except as otherwise
disclosed to IDT, no hazardous material has been stored or disposed of on the
property. No disclosure of storage or disposal of hazardous material on the
site was made. Accordingly, Adience is required to indemnify IDT for any
losses in excess of $250. IDT has notified Adience that it is claiming the
right to indemnification for all costs in excess of $250 incurred by IDT in
this matter, and has received assurance that Adience will honor such claim.
Adience has reimbursed IDT $346; if Adience is financially unable to honor its
remaining obligation, such costs would be borne by IDT.
Adience is engaged in various other legal actions arising in the ordinary
course of business. Management believes, after discussions with internal and
external counsel, that the ultimate outcome of the proceedings will not have a
material adverse effect on Adience's consolidated financial position.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reorganization and Fresh-Start Reporting
- - ----------------------------------------
Adience, Inc. has experienced continued losses from continuing operations
(before reorganization items) both pre- and post-emergence under Chapter 11.
In addition, a write down of reorganization value in excess of amounts
allocable to identifiable assets was recorded at December 31, 1993, based on
management's belief that a permanent impairment of this asset existed.
The continued viability of the Company is dependent upon, among other factors,
the ability to generate sufficient funds from operations, financing, or other
sources that will meet ongoing obligations over a sustained period.
Management has prepared detailed operating and financial plans which combine
multifunctional resources as teams to respond better to customer needs and
make an investment in product and service opportunities expected to produce a
significantly greater return on investment. Management believes that the
successful implementation of these plans will enable the Company to continue
as a going concern for a reasonable period. There can be no assurance,
however, that such activities will achieve the intended improvement in results
of operations or financial position.
On February 22, 1993, Adience and the unofficial committee of noteholders of
Adience filed a "prepackaged" plan of reorganization (the "Prepackaged Plan")
under Chapter 11 of the United States Bankruptcy Code (the "Reorganization").
The Prepackaged Plan was confirmed by the United States Bankruptcy Court for
the Western District of Pennsylvania on May 4, 1993 and consummated on June
30, 1993.
The filing was precipitated by a combination of an overall decline in the
demand for refractory products and services during 1991 and 1992 caused by a
decrease in the production of refractory using industries in the United
States, particularly steel, and losses from discontinued operations. The
primary purposes of the Prepackaged Plan were to reduce Adience's debt service
requirements and overall indebtedness, to realign its capital structure and to
provide Adience with greater liquidity. Neither IDT nor Adience Canada, Inc.
filed a plan of reorganization.
The Prepackaged Plan provided for a restructuring of Adience's capital
structure and allowed the holders of $66 million aggregate principal amount of
Adience's Senior Subordinated Reset Notes ("Old Subordinated Notes") to
exchange them for $49 million aggregate principal amount of new 11% Senior
Secured Notes ("New Senior Notes") due June 15, 2002, plus common stock
representing 55% of the outstanding common stock of Adience. The Prepackaged
Plan also included forgiveness of outstanding interest totaling approximately
$8.8 million. The value of the cash and securities distributed was $17.5
million less than the allowed claims; the resultant gain was recorded as an
extraordinary gain.
18
<PAGE>
In connection with the Reorganization described above, Adience applied the
provisions of the American Institute of Certified Public Accountants'
Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") as of June 30, 1993.
The Company's basis of accounting for financial reporting purposes changed as
a result of applying SOP 90-7. Specifically, SOP 90-7 required the adjustment
of the Company's assets and liabilities to reflect a reorganization value
generally approximating the fair value of the Company as a going concern on an
unleveraged basis, the elimination of its accumulated deficit, and adjustments
to its capital structure to reflect consummation of the Prepackaged Plan.
Accordingly, the results of operations after June 30, 1993 are not comparable
to the results of operations prior to such date.
Results of Operations
- - ---------------------
Six Months Ended June 30, 1994 Compared with Six Months Ended June 30, 1993.
- - ----------------------------------------------------------------------------
The following table summarizes the Company's consolidated results of
operations for the post and pre-emergence periods ended June 30, 1994 and
1993, and provides a consistent basis for further discussion and analysis of
those results.
- - ------------------------------------------------------------------------------
Six Months Ended June 30,
Post-emergence Pre-emergence
1994 1993
- - ------------------------------------------------------------------------------
Net (loss) income $(6,680) $33,332
Reorganization items (1):
Reorganization items 20,543
Extraordinary gain on discharge of debt 17,480
Loss excluding the effect of
reorganization items $(6,680) $(4,691)
- - ------------------------------------------------------------------------------
(1) For further discussion, see Note 1 to Consolidated Financial Statements.
19
<PAGE>
Excluding the effects of reorganization items, the post-emergence loss of $6.7
million increased by $2 million from the pre-emergence period ended June 30,
1993. The increase is primarily due to an increase in depreciation and
amortization expense of $1.2 million resulting from the application of SOP 90-
7 and the amortization of the Company's reorganization value in excess of
amounts allocable to identifiable assets. During the fourth quarter of 1993,
the Company recorded a charge of $8 million to reduce the recorded
reorganization value in excess of amounts allocable to identifiable assets
based on management's comparison of actual cash flows post-emergence through
December 31, 1993, with the projected cash flows used to arrive at the
reorganization value. This comparison led the Company to the conclusion that
permanent impairment of the reorganization value had occurred and that an
immediate reduction of approximately 50% of the remaining unamortized value
was warranted. Management continues to evaluate the recoverability of the
unamortized portion of the reorganization value in excess of amounts allocable
to identifiable assets on a quarterly basis. Management is of the opinion
that no permanent impairment of the remaining reorganization value has
occurred during the six months ended June 30, 1994.
Net revenues by industry segment for the six months ended June 30, 1994 and
1993 were as follows:
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
Post-emergence Pre-emergence
NET REVENUES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $45,413 $44,431 2%
IDT 15,207 23,740 (36%)
- - -----------------------------------------------------------------------------
Total $60,620 $68,171 (11%)
=============================================================================
Net revenues for the Heat Technology division remained consistent with prior
period's net revenues.
Included in net revenues for IDT for the six months ended June 30, 1993 is one
large project with incremental revenues of $3.9 million. This project was
substantially completed in the fourth quarter 1993. Also included in the six
months ended June 30, 1993 were $1.5 million of revenues attributable to IDT's
Kensington division, which was sold during December 1993. The remaining
decline is attributable to the concentration of sales efforts towards IDT
manufactured products. IDT anticipates an increase in margins and a reduction
in working capital requirements as a result of management's decision to
redirect sales efforts so that IDT manufactured product is the primary market
focus.
20
<PAGE>
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
Post-emergence Pre-emergence
COST OF REVENUES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $38,778 $35,928 8%
IDT 12,223 19,546 (37%)
- - -----------------------------------------------------------------------------
Total $51,001 $55,474 (8%)
=============================================================================
Cost of revenues for the Heat Technology division increased by a higher
percentage than the net revenue increase for the six months ended June 30,
1994. Competitive pressures continue to prevent the Heat Technology division
from improving gross margins. Enhanced pricing pressures caused by the market
also resulted in reduced margins for certain product lines as compared to the
prior period. In addition, due to the application of SOP 90-7 as of June 30,
1993, buildings and machinery and equipment were written up by $13 million to
fair value, resulting in an increase in depreciation expense for the six
months ending June 30, 1994 of approximately $570.
During the first quarter of 1993, IDT won a decision by the order of the Board
of Finance and Revenue of Pennsylvania, relating to a reassessment of use tax
on casework sold during the period February 1988 through September 1990. As a
result, an adjustment to decrease cost of revenues by $438 was recorded during
the first quarter of 1993 resulting from the reversal of the provision
relating to this contingency. In addition, some raw material prices used in
the IDT manufacturing process have increased significantly over the same
period in 1993. Specifically, prices have increased for wood products used in
institutional casework and aluminum and steel products used in the
manufacturing of chalk and marker boards. IDT's gross margin for the six
months ended June 30, 1993 excluding the Kensington division, the 1993 use tax
adjustment and the one large project mentioned above, would have been
comparable to 1994.
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
SELLING, GENERAL AND Post-emergence Pre-emergence
ADMINISTRATIVE EXPENSES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $9,141 $10,510 (13%)
IDT 3,449 4,114 (16%)
- - -----------------------------------------------------------------------------
Total $12,590 $14,624 (14%)
=============================================================================
Selling, general and administrative expenses decreased during the six months
ended June 30, 1994 primarily as a result of a reduction of insurance premiums
for workers' compensation and general liability coverage.
Selling, general and administrative expenses for IDT decreased $665 or 16.2%
compared with the six months ended June 30, 1993. This decline is primarily
attributable to lower commissions on reduced levels of sales and cost
reductions realized by organizational changes made in late 1993.
21
<PAGE>
Interest expense increased 54% for the six months ended June 30, 1994 to $3.7
million from $2.4 million for the six months ended June 30, 1993. During the
period of reorganization (February 22 to June 30, 1993), interest on Adience's
15% Senior Subordinated Notes was forgiven thereby reducing actual interest
expense during this period.
The Company remains in a net operating loss position. Therefore, the Company
does not anticipate that the new tax laws will have a significant effect on
its results of operations in fiscal 1994.
Three Months Ended June 30, 1994
Compared With Three Months Ended June 30, 1993.
- - -----------------------------------------------
Net revenues by industry segment for the three months ended June 30, 1994 and
1993 were as follows:
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
Post-emergence Pre-emergence
NET REVENUES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $23,287 $22,550 3%
IDT 9,123 13,058 (30%)
- - -----------------------------------------------------------------------------
Total $32,410 $35,608 (9%)
=============================================================================
Net revenues for the Heat Technology division remained consistent with prior
period's net revenues.
Included in net revenues for IDT for the three months ended June 30, 1993 is
one large project with incremental revenues of $1.7 million. Also included in
the three months ended June 30, 1993 were $600 of revenues attributable to
IDT's Kensington division. The remaining decline is attributable to
management's efforts to reduce the number of contracts which require the use
of purchased rather than manufactured product because the former generate
unsatisfactory gross margins.
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
Post-emergence Pre-emergence
COST OF REVENUES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $19,523 $18,605 5%
IDT 7,165 11,033 (35%)
- - -----------------------------------------------------------------------------
Total $26,688 $29,638 (10%)
=============================================================================
Cost of revenues for the Heat Technology division increased at a rate
comparable to the increase in net revenues. However, additional depreciation
expense on buildings, machinery and equipment under the provisions of SOP 90-
7, approximated $285 for the three month period ended June 30, 1994.
22
<PAGE>
Gross margins for IDT increased to 21.5% of net revenues for the three months
ended June 30, 1994 compared to 15.5% for the same period in 1993. The
improvement in gross margins results principally from a greater amount of
revenues from contracts using manufactured products. During the three months
ended June 30, 1993, there was a higher percentage of contracts using material
purchased from other suppliers and distributed by IDT.
- - -----------------------------------------------------------------------------
Six Months Ended June 30,
SELLING, GENERAL AND Post-emergence Pre-emergence
ADMINISTRATIVE EXPENSES 1994 1993 % Change
- - -----------------------------------------------------------------------------
Heat Technology Division $4,673 $5,868 (20%)
IDT 1,815 1,959 (7%)
- - -----------------------------------------------------------------------------
Total $6,488 $7,827 (17%)
=============================================================================
The reduction in selling, general and administrative expenses for the three
months ended June 30, 1994 is attributable to decreased insurance premiums for
workers' compensation and general liability coverage.
Liquidity and Sources of Capital
- - --------------------------------
The Company's principal sources of liquidity are cash from operations, cash on
hand and certain credit facilities available to the Company.
Management of the Company believes that cash on hand and funds from
operations, together with borrowings under credit facilities described below,
will be sufficient to cover its working capital, capital expenditure and debt
service requirements through the next twelve months. The Company is
negotiating an increase in its credit line through its current lender. The
Company expects average borrowings to increase over 1993 levels. The Company
intends to seek further to strengthen its financial position and increase its
financial flexibility and may from time to time consider possible additional
transactions, including other capital market transactions.
Net cash flows used by operating activities totaled $3.3 million for the six
months ended June 30, 1994. The decreased investment in working capital
(exclusive of cash and cash equivalents) of $5 million during 1994 relates
primarily to lower trade receivables arising from a decrease in sales for IDT
and an increase in short-term borrowings. Inventory levels for IDT at June
30, 1994 have increased by 39% from December 31, 1993 due to the seasonal
nature of the business and the anticipation of sales in the third quarter.
23
<PAGE>
Capital expenditures used approximately $1.6 million of funds through June 30,
1994. During 1993, Adience committed to purchase a new plant facility to
expand current production of a specific product line. The estimated total
cost of this facility and the necessary capital expenditures for machinery and
equipment is $1.8 million and is expected to be partially financed through the
Pennsylvania Industrial Development Authority. It is anticipated that
necessary capital expenditures in future years will not exceed depreciation
expense but will represent a material use of operating funds.
Adience and IDT together had $2.5 million in available credit as of June 30,
1994 under their short-term borrowing arrangements with Congress.
On the consummation date of the plan of reorganization, June 30, 1993, Adience
entered into a financing agreement with Congress that had a renewal date of
June 30, 1994 (the "Renewal Date"). The facility remains in effect from year
to year thereafter, unless terminated upon sixty days written notice by either
party on the anniversary of the Renewal Date in any year. Under this
agreement, Adience may request loan advances not to exceed the lesser of $12
million or available collateral (80% of eligible accounts receivable less than
90 days plus 30% of raw material and finished goods inventory). The loan is
collateralized by accounts receivable, inventory, fixed assets, intangible
assets and Adience's shares of IDT. In addition, IDT guaranteed the Adience
line of credit and has pledged its own accounts receivable, inventory and
equipment. The interest rate on the loan is 2.5% over the prime rate
(effective rate of 9.75% at June 30, 1994). At June 30, 1994, Adience had
borrowed $11,621 under the credit facility including checks in transit of
$1,911. Letters of credit issued under the facility totaled $961 at June 30,
1994, which reduced the availability under the financing arrangement in a like
amount.
IDT entered into a financing agreement with Congress which is also renewed
under the same terms described above. Under this agreement, IDT may request
loan advances not to exceed the lesser of $3 million or available collateral
(80% of eligible accounts receivable less than 90 days plus 30% of raw
material and finished goods inventory). The loan is collateralized by
accounts receivable, inventory and fixed assets. Adience has guaranteed IDT's
debt to Congress. The interest rate on the loan is 2.5% over the prime rate.
At June 30, 1994, IDT had borrowed $1,078 under the credit facility including
checks in transit of $604. Letters of credit issued under the facility
totaled $700 at June 30, 1994, which reduced the availability under the
financing arrangement in a like amount.
Both Adience and IDT pay commitment fees on the unused portion of their credit
facilities. Under the terms of the financing agreements, Adience is required
to maintain minimum levels of net worth of $1,500 and working capital of
$12,000. The agreements additionally contain other restrictive covenants
applicable to Adience and its subsidiaries which, among other things, limit
(i) the incurrence of additional indebtedness, (ii) the granting of liens,
(iii) the making of loans, investments and guaranties, (iv) transactions with
affiliates, (v) the payment of dividends and other distributions, (vi) the
amount of annual capital expenditures, and (vii) the disposition of real
property.
24
<PAGE>
As of June 30, 1994, IDT is in compliance with all financial requirements of
its agreement. During the three months ended June 30, 1994, Adience was not
in compliance at all times with the working capital covenant in its financial
agreement. The Company received appropriate waivers for those periods of
noncompliance. Inability to achieve compliance in the future could affect
Adience's access to further borrowings or require it to secure additional
capital by other means. The Company is currently negotiating with Congress
for permanent amendments to the minimum working capital and net worth
covenants in its financing agreement.
Long-term liquidity is dependent upon the Company's ability to operate
profitably and generate cash flow. Adience's New Senior Notes are due in June
2002, and may not be redeemed at the option of Adience prior to December 15,
1997. Adience has not yet formulated plans to meet these long-term debt
requirements. The Indenture under which the New Senior Notes were issued
contains restrictive covenants similar to those included in the financing
agreements with Congress, and additionally limits the use of cash proceeds
from the sale of Adience's assets. The Indenture provides that Adience may
not make any asset sale outside of the ordinary course of business unless (i)
such asset sale is for fair value and (ii) at least 50% of the consideration
therefor received by Adience is in the form of cash and/or cash equivalents.
In the case of the sale by Adience of all or substantially all of the stock of
IDT or any other asset for which the gross cash proceeds exceed $2 million,
Adience is required, within 180 days after the receipt of the net cash
proceeds of such asset sale, to make an offer to repurchase the New Senior
Notes at a price equal to 100% of the principal amount of the New Senior Notes
plus accrued interest thereon. In addition, a default on the Congress
financing agreement will result in a default under the Indenture.
Both internal and external factors are material to the Company's long-term
liquidity. External factors include general economic conditions, the
performance of the steel industry and spending by public school systems.
Long-term liquidity is dependent upon the Company's ability to control costs
during periods of low demand so as to sustain positive cash flow from
operations. The Company, even after Reorganization, continues to operate with
a significant amount of interest-bearing debt. Should additional financing be
needed, the Company's access to new sources of capital or the amount of
available and unused lines of bank credit may be limited.
In February 1992, IDT was cited by the Ohio Environmental Protection Agency
(the "Ohio EPA") for violations of Ohio's hazardous waste regulations,
including speculative accumulation of waste and illegal disposal of hazardous
waste on the site of its Alliance, Ohio Facility. IDT had $783 accrued at
December 31, 1993 for the clean-up of this site.
25
<PAGE>
In December 1993, IDT and Adience signed a consent order with the Ohio EPA and
Ohio Attorney General which required IDT and Adience to pay to the State of
Ohio a civil penalty of $200 (of which IDT paid $175 and Adience paid $25).
In addition, the consent order requires the payment of stipulated penalties of
up to $1 per day for failure to satisfy certain requirements of the consent
order including milestones in the closure plan. IDT expects that the work to
be conducted under the closure plan will be substantially completed in 1994,
subject to IDT receiving all necessary approvals from the Ohio EPA. At June
30, 1994, environmental accruals amounted to $618 which represents
management's reasonable estimate of the amounts remaining to be incurred in
this matter, including the costs of effecting the closure plan, bonding and
insurance costs, penalties and legal and consultants' fees. Since 1991,
Adience and IDT have together paid $518 (excluding the civil penalty) for the
environmental clean-up related to the Alliance facility.
Under the acquisition agreement pursuant to which IDT acquired the property
from Adience, Adience represented and warranted that, except as otherwise
disclosed to IDT, no hazardous material has been stored or disposed of on the
property. No disclosure of storage or disposal of hazardous material on the
site was made, accordingly, Adience is required to indemnify IDT for any
losses in excess of $250. IDT has notified Adience that it is claiming the
right to indemnification for all costs in excess of $250 incurred by IDT in
this matter, and has received assurance that Adience will honor such claim.
Adience has reimbursed IDT $346; if Adience is financially unable to honor its
remaining obligation, such costs would be borne by IDT.
26
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 13, 1994 at the Company's Annual Meeting of Shareholders, the
following ten individuals were elected as directors:
Fletcher L. Byrom
Gregory D. Curtis
Steven S. Elbaum
Harry Holiday, Jr.
William B. Jackson
Herbert T. Kerr
Gene E. Lewis
James H. McConomy
James B. Upchurch
A. Stanley West
Additionally, the shareholders ratified the appointment of Price Waterhouse as
independent auditors for the Company and approved the 1994 Stock Option Plan
and the 1994 Directors Stock Grant Plan. Over 95% of the Company's Common
Stock was voted in favor of the election of each director and in favor of the
other items set forth above.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1994.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADIENCE, INC.
Date: August 12, 1994 By: /s/ Fletcher L. Byrom
------------------- ------------------------------
Fletcher L. Byrom
Chairman and
Chief Executive Officer
Date: August 12, 1994 By: /s/ Stephen M. Grimshaw
------------------- ------------------------------
Stephen M. Grimshaw
Vice President - Finance
and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
28
