##### Table of Contents



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, 2003

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

(State or other jurisdiction of incorporation or organization)
    
    34-1803229

(I.R.S. Employer Identification No.) 32000 Aurora Road, Solon, Ohio

(Address of principal executive offices)
    
    44139
(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 ü No [  ] Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes [  ] No ü There were 23,807,347 shares of the Registrants Common Stock, $.001 par value
per share, outstanding as of March 31, 2003.    TABLE OF CONTENTS  Condensed Consolidated Balance SheetsCondensed Consolidated Statements of Operations (Unaudited)Condensed Consolidated Statement of Shareholders EquityCondensed Consolidated Statements of Cash FlowsNotes to Condensed Consolidated Financial Statements (Unaudited)Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 3. Defaults Upon Senior SecuritiesItem 6. Exhibits and Reports on Form 8-KSIGNATURESExhibit 10.1Exhibit 10.2Exhibit 12Exhibit 99.1Exhibit 99.2    Table of Contents  INDEX Advanced Lighting Technologies, Inc. PageNo.Part I
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets 
March 31, 2003 and June 30, 2002
    
    2Condensed Consolidated Statements of Operations 
Three months and nine months ended
March 31, 2003 and 2002
    
    3Condensed Consolidated Statement of Shareholders Equity 
Nine months ended March 31, 2003
    
    4Condensed Consolidated Statements of Cash Flows 
Nine months ended March 31, 2003 and 2002
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    42Item 4.
    
    Controls and Procedures
    
    42Part II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    42Item 3.
    
    Defaults Upon Senior Securities
    
    42Item 6.
    
    Exhibits and Reports on Form 8-K
    
    43Signatures
    
    
    
    45 1    Table of Contents  
 Advanced Lighting Technologies, Inc.
Condensed Consolidated Balance Sheets(in thousands, except per share amounts) (Unaudited)
    
    (Audited)March 31,
    
    June 30,2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,352
    
    
    $
    2,874Trade receivables, less allowances of $961 and $1,874
    
    
    30,968
    
    
    
    29,124Inventories:Finished goods
    
    
    16,722
    
    
    
    17,873Raw materials and work-in-process
    
    
    8,933
    
    
    
    8,81825,655
    
    
    
    26,691Prepaid expenses
    
    
    1,804
    
    
    
    1,975Total current assets
    
    
    61,779
    
    
    
    60,664Property, plant and equipment:Land and buildings
    
    
    33,364
    
    
    
    32,839Machinery and equipment
    
    
    74,848
    
    
    
    76,929Furniture and fixtures
    
    
    17,592
    
    
    
    16,709Assets held for sale
    
    
    2,171
    
    
    
    4,557127,975
    
    
    
    131,034Less accumulated depreciation
    
    
    33,993
    
    
    
    29,53593,982
    
    
    
    101,499Receivables from related parties
    
    
    7,319
    
    
    
    7,982Investments in affiliates
    
    
    9,508
    
    
    
    10,264Other assets
    
    
    2,408
    
    
    
    5,842Intangible assets
    
    
    2,582
    
    
    
    3,191Excess of cost over net assets of businesses acquired, net
    
    
    4,411
    
    
    
    4,258$
    181,989
    
    
    $
    193,700Liabilities and shareholders equityLiabilities not subject to compromise:Current liabilities:Short-term debt and current portion of long-term debt
    
    $
    1,520
    
    
    $
    4,113Accounts payable
    
    
    10,380
    
    
    
    15,485Payables to related parties
    
    
    676
    
    
    
    452Employee-related liabilities
    
    
    2,891
    
    
    
    2,788Accrued income and other taxes
    
    
    954
    
    
    
    180Other accrued expenses
    
    
    7,233
    
    
    
    8,901Senior unsecured 8% notes, due March 2008, in default
    
    
    
    
    
    
    100,000Debtor-in-Possession Facility
    
    
    12,841
    
    
    
    Bank Credit Facility, in default
    
    
    12,037
    
    
    
    28,218Total current liabilities
    
    
    48,532
    
    
    
    160,137Long-term debt
    
    
    5,983
    
    
    
    7,356Total liabilities not subject to compromise
    
    
    54,515
    
    
    
    167,493Liabilities subject to compromise
    
    
    114,557
    
    
    
    Total liabilities
    
    
    169,072
    
    
    
    167,493Minority interest
    
    
    902
    
    
    
    635Preferred stock, $.001 par value, per share; 1,000 shares
authorized;
761 Series A convertible redeemable shares issued and
outstanding (redemption value  $26,902 at March 31, 2003)
    
    
    24,475
    
    
    
    22,290Common shareholders equity (deficit)Common stock, $.001 par value, 80,000 shares authorized,
23,807 shares issued and outstanding as of March 31, 2003
and 23,588 shares issued and outstanding as of June 30, 2002
    
    
    24
    
    
    
    24Paid-in-capital
    
    
    212,726
    
    
    
    214,804Accumulated other comprehensive income (loss)
    
    
    (2,135
    )
    
    
    (2,940
    )Loan and interest receivable from officer, less reserve of $9,800
    
    
    (4,344
    )
    
    
    (7,044
    )Retained earnings (deficit)
    
    
    (218,731
    )
    
    
    (201,562
    )(12,460
    )
    
    
    3,282$
    181,989
    
    
    $
    193,700 See notes to condensed consolidated
financial statements 2    Table of Contents  
 Advanced Lighting Technologies, Inc.
Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share
dollar amounts) Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2003
    
    2002
    
    2003
    
    2002Net sales
    
    $
    37,469
    
    
    $
    33,565
    
    
    $
    109,624
    
    
    $
    134,025Costs and expenses:Cost of sales
    
    
    23,252
    
    
    
    22,706
    
    
    
    68,774
    
    
    
    87,859Marketing and selling
    
    
    5,457
    
    
    
    5,592
    
    
    
    16,808
    
    
    
    24,812Research and development
    
    
    2,055
    
    
    
    1,529
    
    
    
    6,321
    
    
    
    6,863General and administrative
    
    
    2,628
    
    
    
    3,602
    
    
    
    8,934
    
    
    
    11,857Provision for loan impairment
    
    
    
    
    
    
    900
    
    
    
    2,700
    
    
    
    5,500Refinancing and non-recurring items
    
    
    84
    
    
    
    
    
    
    
    2,387
    
    
    
    Gain on settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (554
    )Gain on sale of property
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    Special charges and asset impairment
    
    
    
    
    
    
    
    
    
    
    6,714
    
    
    
    9,009Amortization of intangible assets
    
    
    86
    
    
    
    83
    
    
    
    256
    
    
    
    253Income (loss) from operations
    
    
    3,907
    
    
    
    (847
    )
    
    
    (3,208
    )
    
    
    (11,574
    )Other income (expense):Interest expense
    
    
    (2,722
    )
    
    
    (2,559
    )
    
    
    (8,732
    )
    
    
    (8,616
    )Interest income
    
    
    140
    
    
    
    82
    
    
    
    415
    
    
    
    144Income (loss) from investments
    
    
    (104
    )
    
    
    (2,121
    )
    
    
    (756
    )
    
    
    (2,332
    )Reorganization expenses
    
    
    (3,963
    )
    
    
    
    
    
    
    (3,963
    )
    
    
    Gain from sale of fixture subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227Income (loss) before income taxes, minority
interest
and cumulative effect of accounting change
    
    
    (2,742
    )
    
    
    (5,445
    )
    
    
    (16,244
    )
    
    
    (22,151
    )Income tax expense
    
    
    224
    
    
    
    152
    
    
    
    658
    
    
    
    386Income (loss) before minority interest
and cumulative effect of accounting change
    
    
    (2,966
    )
    
    
    (5,597
    )
    
    
    (16,902
    )
    
    
    (22,537
    )Minority interest in income of consolidated
subsidiary
    
    
    (108
    )
    
    
    (63
    )
    
    
    (267
    )
    
    
    (145
    )Income (loss) before cumulative
effect of accounting change
    
    
    (3,074
    )
    
    
    (5,660
    )
    
    
    (17,169
    )
    
    
    (22,682
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,171
    )Net income (loss)
    
    $
    (3,074
    )
    
    $
    (5,660
    )
    
    $
    (17,169
    )
    
    $
    (93,853
    )Earnings (loss) per share  basic and diluted:Income (loss) before cumulative
effect of accounting change
    
    $
    (.16
    )
    
    $
    (.27
    )
    
    $
    (.90
    )
    
    $
    (1.06
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.04
    )Earnings (loss) per share  basic and diluted:
    
    $
    (.16
    )
    
    $
    (.27
    )
    
    $
    (.90
    )
    
    $
    (4.10
    )Weighted average shares outstanding:Basic and diluted
    
    
    23,807
    
    
    
    23,462
    
    
    
    23,733
    
    
    
    23,383 See notes to condensed consolidated
financial statements 3    Table of Contents  
 Advanced Lighting Technologies, Inc.
Condensed Consolidated Statement of Shareholders Equity (Unaudited)
Nine Months Ended March 31, 2003(in thousands)  AccumulatedCommon Stock
    
    
    
    
    
    OtherPreferred
    
    
    
    Paid-In
    
    ComprehensiveStock
    
    Shares
    
    Par Value
    
    Capital
    
    Income (Loss)Balance at July 1, 2002
    
    $
    22,290
    
    
    
    23,588
    
    
    $
    24
    
    
    $
    214,804
    
    
    $
    (2,940
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred shares accretion
    
    
    2,185
    
    
    
    
    
    
    
    
    
    
    
    (2,185
    )
    
    
    Warrants to be issued to
General Electric Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reserve for loan impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock purchases
by employees
    
    
    
    
    
    
    61
    
    
    
    
    
    
    
    20
    
    
    
    Stock issued pursuant to
employee benefit plan
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    87
    
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    805Balance at
March 31, 2003
    
    $
    24,475
    
    
    
    23,807
    
    
    $
    24
    
    
    $
    212,726
    
    
    $
    (2,135
    )  [Additional columns below] [Continued from above table, first column(s) repeated] Loan andInterest
    
    
    
    
    
    CommonReceivable
    
    Retained
    
    Shareholders'From
    
    Earnings
    
    EquityOfficer
    
    (Deficit)
    
    (Deficit)
    
    TotalBalance at July 1, 2002
    
    $
    (7,044
    )
    
    $
    (201,562
    )
    
    $
    3,282
    
    
    $
    25,572Net income (loss)
    
    
    
    
    
    
    (17,169
    )
    
    
    (17,169
    )
    
    
    (17,169
    )Preferred shares accretion
    
    
    
    
    
    
    
    
    
    
    (2,185
    )
    
    
    Warrants to be issued to
General Electric Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reserve for loan impairment
    
    
    2,700
    
    
    
    
    
    
    
    2,700
    
    
    
    2,700Stock purchases
by employees
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    20Stock issued pursuant to
employee benefit plan
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    87Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    805
    
    
    
    805Balance at
March 31, 2003
    
    $
    (4,344
    )
    
    $
    (218,731
    )
    
    $
    (12,460
    )
    
    $
    12,015  See notes to condensed consolidated
financial statements 4    Table of Contents  
 Advanced Lighting Technologies, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)(in thousands) Nine Months EndedMarch 31,2003
    
    2002Operating
activitiesNet income (loss)
    
    $
    (17,169
    )
    
    $
    (93,853
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation
    
    
    4,789
    
    
    
    5,458Amortization
    
    
    256
    
    
    
    253Provision for doubtful accounts
    
    
    (771
    )
    
    
    1,215Loss from investments
    
    
    756
    
    
    
    2,443Gain on sale of property
    
    
    (62
    )
    
    
    Gain on sale of subsidiaries
    
    
    
    
    
    
    (227
    )Cumulative effect of accounting change
    
    
    
    
    
    
    71,171Special charges and asset impairment
    
    
    6,714
    
    
    
    4,337Provision for loan impairment
    
    
    2,700
    
    
    
    5,500Reorganization expenses, less cash payments of $1,207
    
    
    2,756
    
    
    
    Changes in current assets and liabilities and other
    
    
    7,589
    
    
    
    2,714Net cash provided by (used in) operating activities
    
    
    7,558
    
    
    
    (989
    )Investing activitiesCapital expenditures
    
    
    (3,703
    )
    
    
    (11,330
    )Net proceeds from sale of subsidiaries
    
    
    
    
    
    
    24,166Proceeds from sale of preferred stock investment
    
    
    300
    
    
    
    1,000Proceeds from sale of real estate
    
    
    1,326
    
    
    
    Investment in affiliate
    
    
    
    
    
    
    (88
    )Net cash provided by (used in) investing activities
    
    
    (2,077
    )
    
    
    13,748Financing activitiesProceeds from revolving credit facility
    
    
    65,079
    
    
    
    125,457Proceeds from debtor-in-possession facility
    
    
    13,347
    
    
    
    Payments of revolving credit facility
    
    
    (77,023
    )
    
    
    (124,385
    )Payments of debtor-in-possession facility
    
    
    (506
    )
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    132Payments of long-term debt and capital leases
    
    
    (6,007
    )
    
    
    (14,687
    )Loan to officer
    
    
    
    
    
    
    (1,004
    )Issuance of common stock
    
    
    107
    
    
    
    436Net cash (used in) financing activities
    
    
    (5,003
    )
    
    
    (14,051
    )Increase (decrease) in cash and cash equivalents
    
    
    478
    
    
    
    (1,292
    )Cash and cash equivalents, beginning of period
    
    
    2,874
    
    
    
    3,652Cash and cash equivalents, end of period
    
    $
    3,352
    
    
    $
    2,360Supplemental cash flow informationInterest paid
    
    $
    2,414
    
    
    $
    11,201Income taxes paid
    
    
    109
    
    
    
    129Capitalized interest
    
    
    339
    
    
    
    892 See notes to condensed consolidated
financial statements 5    Table of Contents  
 Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) 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 equipment. The
Company also develops, manufactures and markets passive optical
telecommunications devices, components and equipment based on the optical
coating technologies of its wholly-owned subsidiary, Deposition Sciences, Inc.
(DSI). B.     Voluntary Bankruptcy Filing On February 5, 2003, Advanced Lighting Technologies, Inc. (the Company or
ADLT) and six of its United States subsidiaries, (collectively, the
Debtors), filed voluntary petitions for reorganization (the Filing) under
Chapter 11 of the United States Bankruptcy Code (Chapter 11 or the
Bankruptcy Code) in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (the Bankruptcy Court). ADLTs
non-U.S. operating subsidiaries and DSI, a U.S. subsidiary, were not a part of
the Filing. Background of Filing In the fourth quarter of fiscal 2002, the Company
incurred a loss from operations and at June 30, 2002 was in default on its
fourth quarter fixed charge coverage ratio under its Bank Credit Facility. On
September 16, 2002 ADLT and its bank group entered into a Forbearance
Agreement. At the end of the second quarter of fiscal 2003 the Company was in
default under the Forbearance Agreement. In addition, the Company did not make
the September 16, 2002 semi-annual interest payment on its 8% Senior Notes
which resulted in an Event of Default under the Senior Notes Indenture. As a
result of the defaults, the trustee for the noteholders declared all principal
and interest due and payable immediately on the 8% Senior Notes. The Filing by
ADLT was made since it did not have the available funds to pay the noteholders
and because of the uncertainty of the willingness of the bank group to grant
continued forbearance under acceptable terms. These defaults are discussed in
more detail in Note F to the Condensed Consolidated Financial Statements.
Under Chapter 11, the Debtors have continued to operate their businesses as
debtors-in-possession under court protection from their creditors and
claimants, while using the Chapter 11 process to develop and implement a plan
for addressing the repayment of its Bank Credit Facility and 8% Senior Notes. Consequence of Filing As a consequence of the Filing, all pre-petition
liabilities of the Debtors are stayed and no party may take any action to
realize its pre-petition claims except pursuant to order of the Bankruptcy
Court. It is the Debtors intention to address all of their pre-petition
claims as well as the interests of their preferred and common shareholders and,
in that regard, filed a plan of reorganization with the Bankruptcy Court on
April 28, 2003. The hearing on the adequacy of the disclosure statement has
been continued from time-to-time at the request of the Debtors as they attempt
to negotiate the terms of a consensual plan. It is currently impossible to
predict with any degree of certainty whether the plan will be accepted by the
Companys creditors and preferred and common shareholders. Generally, under
the provisions of the Bankruptcy Code, holders of equity interests may not
participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan that permits holders of
equity interests to participate. A committee representing 6    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) B.     Voluntary Bankruptcy Filing (continued) unsecured creditors, including the noteholders, and a committee representing
equity security holders have been appointed by the United States Trustee. In
accordance with the provisions of the Bankruptcy Code, these committees have
the general right to be heard on all matters that come before the Bankruptcy
Court under or in connection with the Filing. The Debtors are also required to
bear certain of these committees costs and expenses, including those of their
legal counsel and financial advisors. Due to material uncertainties, it is not
possible to predict the length of time the Debtors will operate under Chapter
11 protection, the outcome of the reorganization in general, the effect on the
Debtors business or the recovery by creditors of the Debtors and equity
holders of ADLT. The accompanying Condensed Consolidated Financial Statements have been prepared
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Filing, such realization of certain
Debtors assets and liquidation of certain Debtors liabilities are subject to
significant uncertainty and raises substantial doubt about the Companys
ability to continue as a going concern. Further, a plan of reorganization
could materially change the amounts and classifications reported in the
Condensed Consolidated Financial Statements, which do not give effect to any
adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a specific plan or reorganization. A substantial portion of the Debtors pre-petition debt, excluding debt secured
by mortgages, is now in default as a result of, among other things, the Filing.
Accordingly, the accompanying Condensed Consolidated Balance Sheet as of March
31, 2003 reflects the classification of the Debtors secured bank debt as a
current liability and all of the Debtors pre-petition unsecured debt as
liabilities subject to compromise. The Debtors have negotiated a debtor-in-possession credit facility with several
financial institutions (the DIP Facility). The DIP Facility has a maturity
of July 30, 2003 and bears interest at the prime rate plus 3%. The Bankruptcy
Court issued a final order approving the DIP Facility on March 13, 2003, which
allows the Debtors to draw on the DIP Facility in an amount not to exceed
$26,096 (See Note F). As part of the bankruptcy process, the Company hopes to refinance its DIP
Facility and pursue restructuring with its noteholders, other creditors and
equity holders. If the DIP Facility is not repaid by June 30, 2003, the DIP
Facility requires the Debtors enter into agreements to sell assets sufficient
to satisfy indebtedness to the Banks. See Note L Subsequent Events. While the Company has continued to manage its business as a
debtor-in-possession, it has received approval from the Bankruptcy Court to,
among other things, pay or otherwise honor certain of its pre-petition
obligations, including claims of critical trade creditors, customer warranty
and rebate programs, and employee wages and benefits in the ordinary course of
business. 7    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) B.     Voluntary Bankruptcy Filing (continued) Plan of Reorganization The Company has had ongoing negotiations with the
Official Committee of Unsecured Creditors (the Creditors Committee). In the
absence of an agreement with the Creditors Committee, on April 28, 2003 the
Company filed a Disclosure Statement with respect to a Joint Chapter 11 Plan of
Reorganization (the Original Plan) with the Bankruptcy Court based
substantially on one of its last restructuring proposals to the Creditors
Committee. Under the proposed terms of the Original Plan, unclassified claims,
including administrative claims, priority tax claims and the DIP Facility
claim, would be paid in cash on the effective date of the Original Plan. In
addition, the existing pre-petition Revolving Credit Facilities claim, other
secured claims and classified priority claims would be paid in cash (except to
the extent that the Company seeks to reinstate secured claims), either on the
effective date of the Original Plan or in installment payments, as provided in
the Original Plan. Further, the Original Plan proposed exchanging for existing
unsecured debt and preferred and common stock, a new debt issue and new
preferred and common stock issues. Unsecured creditors of ADLT would be
provided with an option on form of payment; unsecured creditors of the other
Debtors would be paid in installment payments. Holders of the Companys Common
Stock would receive common stock which would be diluted to 2% if the Company
failed to redeem the new preferred stock within three years. See Note L
Subsequent Events. Upon the confirmation of a plan of reorganization the Companys
investment banker will receive, in addition to monthly fees and reimbursement
of expenses, fees based on formulas contained in the Companys agreement, which
will aggregate between $1,000 and $3,000. All such fees are subject to
Bankruptcy Court approval. The Company recorded $1,000 of fees as
reorganization expenses as of March 31, 2003. Accounting Impact Beginning the third quarter of fiscal 2003, ADLT was
required to follow Statement of Position 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code(SOP 90-7). Pursuant to SOP
90-7, ADLTs pre-petition liabilities that are subject to compromise are
reported separately on the balance sheet at an estimate of the amount that is
expected to be allowed by the Bankruptcy Court. Obligations of ADLT
subsidiaries not covered by the Filing are classified on the consolidated
balance sheet based upon maturity dates or the expected dates of payment.
Liabilities subject to compromise at March 31, 2003 were as follows: 8% Senior Notes, less issuance costs
    
    $
    97,262Accounts payable
    
    
    6,610Accrued liabilities
    
    
    8,575Employee related liabilities
    
    
    140Promissory note payable
    
    
    1,970$
    114,557 Under SOP 90-7 the Company is separately reporting certain expenses, and any
realized gains and losses, and provisions for losses related to the Filing as
reorganization expenses, which consist primarily of legal and investment and
financial advisory fees. Due to material uncertainties, it is not possible to
determine 8    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) B.     Voluntary Bankruptcy Filing (continued) the additional amount of claims that may arise or ultimately be
filed, or to predict the length of time the Company will operate under the
protection of Chapter 11. Further, uncertainties exist regarding the outcome
of the Chapter 11 proceedings in general, whether the Company will continue to
operate under its current organizational structure, the effect of the
proceedings on the business of ADLT and its subsidiaries or on the interests of
the various creditors and security holders. Condensed Consolidated Financial Statements of Debtors-in-Possession
(Unaudited) The following condensed consolidated financial statements of the
Debtors at March 31, 2003 and for the period February 6, 2003 (the date
subsequent to the Filing) to March 31, 2003 have been prepared on the same
basis as the financial statements for ADLT and presented in accordance with SOP
90-7: Condensed Consolidated Balance Sheet of Debtors-in-Possession (Unaudited)
          March 31, 2003 Current assets:Cash and cash equivalents
    
    $
    316Trade receivables, net
    
    
    12,331Receivables from subsidiaries not in bankruptcy
    
    
    17,716Inventories
    
    
    9,866Other
    
    
    740Total current assets
    
    
    40,969Property, plant and equipment, net
    
    
    44,573Receivables from related parties
    
    
    7,747Investments in affiliates
    
    
    9,578Investments in and loans to subsidiaries not in bankruptcy
    
    
    72,151Long-term receivables from subsidiaries not in bankruptcy
    
    
    38,088Other assets
    
    
    2,224Total assets
    
    $
    215,330Liabilities:Liabilities not subject to compromiseDebt
    
    $
    19,789Payables to subsidiaries not in bankruptcy
    
    
    13,804Other
    
    
    11,255Total liabilities not subject to compromise
    
    
    44,848Liabilities subject to compromise:Debt
    
    
    99,232Other
    
    
    15,325Liabilities subject to compromise
    
    
    114,557Total liabilities
    
    
    159,405Preferred stock
    
    
    24,476Shareholders equity
    
    
    31,449Total liabilities and equity
    
    $
    215,330 9    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) B.     Voluntary Bankruptcy Filing (continued) Condensed Consolidated Statement of Operations of Debtors-in-Possession (Unaudited)
          For the Period of February 6, 2003 (date subsequent to Bankruptcy Filing) to March 31, 2003 Net sales
    
    $
    14,710Costs and expenses:Cost of sales
    
    
    9,380Marketing and selling
    
    
    1,960Research and development
    
    
    655General and administrative
    
    
    1,002Amortization of intangible assets
    
    
    16Income (loss) from operations
    
    
    1,697Other income (expense):Interest expense
    
    
    (1,501
    )Interest income
    
    
    552Income (loss) from investments
    
    
    (104
    )Reorganization expenses
    
    
    (2,756
    )Income (loss) before income taxes
    
    
    (2,112
    )Income tax expense
    
    
    Net Income(loss)
    
    
    (2,112
    ) Condensed Consolidated Statement of Cash Flows of Debtors-in-Possession (Unaudited)
          For the Period of February 6, 2003 (date subsequent to Bankruptcy Filing) to March 31, 2003 Operating activitiesNet income (loss)
    
    $
    (2,112
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    613Loss from investments
    
    
    104Reorganization expenses, less cash payments of $0
    
    
    2,756Changes in current assets and liabilities and other
    
    
    158Net cash provided by operating activities
    
    
    1,519Investing activitiesCapital expenditures
    
    
    (183
    )Net cash (used in) investing activities
    
    
    (183
    )Financing activitiesProceeds from revolving credit facility
    
    
    103Proceeds from debtor-in-possession facility
    
    
    13,347Payments of revolving credit facility
    
    
    (12,659
    )Payments of debtor-in-possession facility
    
    
    (506
    )Payments of long-term debt and capital leases
    
    
    (1,862
    )Net cash (used in) financing activities
    
    
    (1,577
    )Increase (decrease) in cash and cash equivalents
    
    
    (241
    )Cash and cash equivalents, beginning of period
    
    
    557Cash and cash equivalents, end of period
    
    $
    316 10    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) C.     Basis of Presentation and Accounting Change Basis of Presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in
the United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the financial statements include all material
adjustments necessary for a fair presentation, including adjustments of a
normal and recurring nature as well as the impact of the Companys Chapter 11
Filing, the special charges and asset impairment described in Note I, the
reserve for loan impairment described in Note H, and the cumulative effect of
accounting change described below. For further information, refer to the
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended June 30, 2002. Operating results
for the three months and nine months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the full-year ending June
30, 2003. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts and
related disclosures. Actual results could differ from those estimates. Accounting Changes In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS
No. 142, Goodwill and Intangible Assets. FAS No. 141 is effective for all
business combinations completed after June 30, 2001 and requires using the
purchase method of accounting. Major provisions of FAS No. 142 require intangible assets acquired in a
business combination to be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability. In addition, goodwill, as
well as intangible assets with indefinite lives, are no longer subject to
amortization effective July 1, 2001. Finally, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and whenever there
is an impairment indicator. Previously, the Company measured goodwill and
intangibles (to be held and used) with indefinite lives for impairment using
undiscounted cash flows under the guidance of FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted FAS No. 142 as of July 1, 2001. The Company evaluated
goodwill of $66,172 and intangible assets with indefinite lives of $11,874,
which represents tradenames. The Company used third party appraisals and
expected future discounted cash flows to determine the fair value of the
reporting units and whether any impairment of goodwill or indefinite lived
intangible assets existed as of the above date. As a result of this
evaluation, a cumulative effect of accounting change for the estimated 11    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) C.     Basis of Presentation and Accounting Change (continued) impairment of goodwill and other indefinite lived intangible assets of $71,171,
or $(3.04) per share was recorded, as of the beginning of fiscal 2002. The Company adopted Emerging Issues Task Force (EITF) Issue 01-9, Accounting
for Consideration Given by a Vendor to a Customerin the quarter ended March
31, 2002. EITF Issue 01-9 requires that expense associated with a free product
or service delivered at the time of sale of another product or service should
be classified as cost of sales. The Companys fixture subsidiaries that were
sold in the second quarter of fiscal 2002 had incurred and included such costs
in marketing and selling expense. Accordingly, the Company has reclassified
such amounts to cost of sales within these financial statements. The amount
reclassified for the three months and nine months ended March 31, 2002 is $0
and $1,836, respectively. In August 2001, the Financial Accounting Standards Board issued FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
addresses financial accounting for the impairment and disposal of long-lived
assets, and supersedes FAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. The Company adopted FAS
No. 144 as of July 1, 2002. In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Recognition and measurement provisions
of FIN No. 45 become effective for guarantees issued or modified on or after
January 1, 2003. The Companys warranty policy generally provides for one to two year coverage
for lighting systems and components sold world-wide. The Companys policy is
to accrue the estimated cost of warranty coverage and returns at the time the
sale is recorded. The policy with respect to sales returns generally provides
that a customer may not return inventory, except at the Companys option.
Expenses related to warranties are generally not material to the Companys
operations. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements.The provisions of FIN No. 46 are
effective immediately for interests acquired in Variable Interest Entities
(VIE) after January 31, 2003. The Company must account for interests in VIEs
existing on January 31, 2003, under the provisions of FIN No. 46 as of July 1,
2003, the beginning of the Companys fiscal 2004 first quarter. The FIN
addresses the consolidation of business enterprises of variable interest
entities and certain required disclosures related to such relationships. The
Company is evaluating the impact of this FIN as to whether certain of its
investments would meet the requirement for consolidation or disclosure under
this FIN. 12    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) C.     Basis of Presentation and Accounting Change (continued) Income Taxes Actual income taxes (benefit) for the three and nine month interim periods
differ from the amounts computed by applying the U.S. Federal income tax rate
of 35% to the income (loss) before income taxes (benefit) because under FAS No.
109, Accounting for Income Taxes, the tax benefit related to the loss for these
interim periods was required to be reserved for due to the uncertainty
regarding the ultimate
realization of the tax benefit of such losses in the future. The income tax
expense recognized for the interim periods relates to income taxes on certain
foreign subsidiaries income. Financial Statement Presentation Changes Certain amounts for prior periods have been reclassified to conform to the
current year reporting presentation for customer rebates. Customer rebates
have been reclassified from marketing and selling expense to sales. The
customer rebate amounts reclassified totaled $1,774 and $510 for the nine
months ended March 31, 2003 and 2002, respectively, including $551 and $276 for
the three months ended March 31, 2003 and 2002, respectively. Stock Options At March 31, 2003 the Company had four stock option plans. The Company
accounts for these plans under the recognition and measurement principles (the
intrinsic value method) of APB Opinion No. 25 Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the grant
date. The following table sets forth the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions of
FAS No. 123, Accounting for Stock-Based Compensation, to its stock options. Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2003
    
    2002
    
    2003
    
    2002Net income (loss), as reported
    
    $
    (3,074
    )
    
    $
    (5,660
    )
    
    $
    (17,169
    )
    
    $
    (93,853
    )Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax benefits
    
    
    351
    
    
    
    488
    
    
    
    1,244
    
    
    
    1,038Pro forma net income (loss)
    
    $
    (3,425
    )
    
    $
    (6,148
    )
    
    $
    (18,413
    )
    
    $
    (94,891
    )Earnings (loss) per share(basic and diluted):As reported
    
    $
    (.16
    )
    
    $
    (.27
    )
    
    $
    (.90
    )
    
    $
    (4.10
    )Pro forma
    
    $
    (.18
    )
    
    $
    (.29
    )
    
    $
    (.96
    )
    
    $
    (4.15
    ) 13    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) D.     Comprehensive Income (Loss) For the quarters ended March 31, 2003 and 2002, the Companys comprehensive
income (loss) was $(2,479) and $(5,438), respectively. For the nine months
ended March 31, 2003 and 2002, the Companys comprehensive income (loss) was
$(16,364) and $(92,898), respectively. These amounts include net income (loss)
and the Companys other component of comprehensive income, foreign currency
translation adjustments. E.     Sale of Fixture Subsidiaries On December 12, 2001 the Company completed the sale of a significant portion of
its lamp fixture business (its Ruud Lighting, Inc., Kramer Lighting, Inc. and
Ruud Lighting Europe subsidiaries) to an investor group led by Alan J. Ruud.
From January 1998 until the time of the transaction, Mr. Ruud was a director of
the Company and served as Vice Chairman and Chief Operating Officer of the
Company and holds in excess of 5% of the Companys outstanding common stock.
The fixture subsidiaries assets consisted primarily of manufacturing
equipment, inventory and accounts receivable and the Ruud Lighting
manufacturing facility located in Racine, Wisconsin. The consideration received by the Company consisted of a cash payment of
$28,000 (adjusted dollar for dollar to reflect the amount of any changes in
working capital and funded indebtedness between September 2, 2001 and December
3, 2001) and promissory notes totaling $6,000. Preliminary estimates of the
adjustment in the cash consideration resulted in a net reduction of $2,458 in
the cash received at
closing. The preliminary estimates are subject to a review process under the
purchase agreement. The notes are payable December 1, 2006 and bear interest
at 8% compounded semi-annually. As part of this transaction, funded
indebtedness of $9,005 continued to be the obligation of Ruud Lighting and the
Company retained title to the Rhode Island manufacturing facility of Kramer
Lighting. The Company sold this facility for $1,326 in September 2002. The
Company remitted $428 to Ruud Lighting in October 2002 in accordance with the
terms of the purchase agreement. The sale of the subsidiaries resulted in a gain of $227 in the quarter ended
December 31, 2001. The final amount of proceeds to be received and gain or
loss realized will be based upon a review process as set forth under the
purchase agreement and final negotiations with the buyers. F.     Financing Facilities In fiscal 2002, the Company incurred a loss from operations of ($15,458) and,
at June 30, 2002 was in default on its fourth quarter fixed charge coverage
ratio under it Bank Credit Facility. On September 16, 2002, the Company and
its bank group entered into a Forbearance Agreement, pursuant to which the bank
group agreed to forbear from exercising their remedies under the Bank Credit
Facility. The Forbearance Agreement was subsequently amended and extended
allowing the Company access to its existing revolving credit facility and
precluding the acceleration of the Bank Credit Facility maturity 14    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) F.     Financing Facilities (continued) until at least March 31, 2003. The Forbearance Agreement, as amended,
contained various requirements and milestones that the Company was required to
meet, including not making the semi-annual interest payment on its $100,000 8%
Senior Notes, which was due on September 16, 2002. ADLT did not meet the
covenant under the Forbearance Agreement to pursue an orderly sales process to
sell its assets and repay the bank group with the proceeds from the sale. The
non-payment of the semi-annual interest payment resulted in an Event of Default
under the Senior Note Indenture. The Indenture Trustee was instructed by the
holders of more than 25% of the Senior Notes to declare the entire principal
amount of the Senior Notes to be due and payable immediately. As a result of
the actions by the bank group and Indenture Trustee, the Company on February 5,
2003 filed a petition for reorganization under Chapter 11 (see Note B) and has
classified both the Bank Credit Facility as a current liability and the 8%
Senior Notes as a liability subject to compromise in the March 31, 2003 balance
sheet. Accrued and unpaid interest on the Senior Notes was $8,467 as of March
31, 2003. On February 6, 2003, the Bankruptcy Court approved a new debtor-in-possession
financing facility (DIP Facility) with the existing bank group for working
capital purposes for the debtors and DSI. The maximum commitment under the DIP
Facility is $26,096 less any outstanding domestic Pre-Petition borrowings
($6,422 at March 31, 2003) by the entities in Chapter 11 bankruptcy and DSI.
In addition, the bank group limited borrowing under certain non-Debtor loans
under its Bank Credit Facility to the Companys subsidiaries in Canada and the
United Kingdom to the then-outstanding aggregate amount of $5,587, plus accrued
interest. Further, borrowings under the DIP Facility are limited based upon
weekly budgeted amounts of cash collections and cash disbursements submitted to
the Bankruptcy Court. Borrowings under the DIP Facility will be required to be
repaid in full and the commitment will terminate on the earlier of July 30,
2003; the substantial consummation of a plan of reorganization that is
confirmed by the Bankruptcy Court; or a material non-compliance by the Debtor
with any of the terms, provisions or covenants of the DIP Facility. The DIP
Facility contains certain affirmative and negative covenants customary for this
type of agreement, including providing timely periodic budget and financial
reports and maintaining certain collateral levels. Also, the Company is
required to provide timely financial information and projections to the
financial institutions. Borrowings under the DIP Facility bear interest at 3%
above the prime rate (4.25% at March 31, 2003) through April 30, 2003 and 3.5%
above the prime rate thereafter through July 30, 2003 and is payable monthly.
The DIP Facility is secured by substantially all of the personal and real
assets of the Company, except for assets of its Indian and Australian
subsidiaries. See Note L Subsequent Events. The above noted $100,000 8% Senior Notes contain 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. 15    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) G.     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 GE has fully
exercised to acquire 998,703 shares of Common Stock of the Company. GE now
holds 1,429,590 shares of Company Common Stock. The Series A Stock and the
Common Stock held by GE represent approximately 16.7% of the voting power and
equity ownership of the Company at March 31, 2003. 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. The terms of the GE investment provide that the Company maintain an interest
coverage ratio over certain measurement periods. The Company failed to
maintain the required interest coverage ratio over three measurement periods.
As a result of the failure to maintain the interest coverage ratio: (i) GE has
the ability to vote the number of shares currently voted by the CEO of the
Company and Alan J. Ruud, totaling approximately 5.6 million shares at March
31, 2003, (ii) GE has the option to purchase shares from the CEO of the Company
and Alan J. Ruud which, together with the shares owned by GE, would represent
25% of the voting power of the Company, (iii) GE has the right to receive from
the Company an additional warrant to purchase approximately 6.75 million shares
at $.63055 per share (the average of
the closing prices for the 20 trading days ended September 30, 2002), and (iv)
GE has the right to receive from the Company an additional warrant to purchase
approximately 18,000 shares at $.298 per share (the average of the closing
prices for the 20 trading days ended December 31, 2002. The Company intends to
file a motion seeking authority from the Bankruptcy Court to issue the
warrants. GE is not required to purchase additional shares of the Company.
The number of shares that GE owns or has the right to acquire and/or vote
exceeds 35% of the voting power of the Company. Consequently, the terms of the
Indenture relating to the Companys Senior Notes 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.
The Company elected not to offer to repurchase the Senior Notes and therefore
was in default under the Trust Indenture. The fair value of the warrants to be issued to General Electric Company is
estimated to be $2,098 based on the Black-Scholes option pricing model and
using an expected volatility of 78%, risk-free interest rate of 4.00%, and an
expected life of 10 years with no dividend yield. The estimated value of the
warrant is reflected in the calculation of earnings per share (see Note J). 16    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) H.     Related Party Transaction Pursuant to an agreement dated October 8, 1998, as amended, between the Company
and its Chairman and Chief Executive Officer (the CEO), the Company,
following approval by the Companys Board of Directors, has a loan recorded for
$14,144 to its CEO, including principal of $12,789 and accrued interest. The
proceeds of the loan were used by the Companys CEO to reduce the principal
balance outstanding of margin loan accounts. In connection with the loan, the
Companys Board of Directors obtained the CEOs agreement to an extension of
his employment agreement to December 31, 2003. The margin loans have been
fully repaid and the loan agreement prohibits the CEO from encumbering his ADLT
shares in any manner without the consent of the Companys Board of Directors. On July 26, 2002, the Company and CEO executed an amendment to the loan
documents, implementing the agreement in principle, reached in January 2002, to
extend the maturity of the loan to July 31, 2007. Under the terms of the
amendment, the CEO will sell certain assets in an orderly manner to maximize
the net proceeds, which will be used to pay a portion of the loan. The CEO
will continue his 10b5-1 plan to sell shares he now owns pursuant to Rule 144
should the stock price exceed $15 per share. In addition, the CEO has agreed
to apply any after-tax cash bonuses earned from the Company toward repayment of
the loan. Interest on the loan accrues at the same rate that the Company pays on its
credit facility. Interest due in fiscal 2002 of $674 and for the nine months
ended March 31, 2003 of $588 has not been paid or recognized as interest
income. The loan may be accelerated if the CEO ceases to be employed by the
Company as a result of his voluntary resignation or termination for cause. The Companys ability to collect amounts due according to the contractual terms
of the loan agreement is largely dependent on the ultimate realization of
proceeds from the sale of assets owned by the CEO, including the CEOs
investment in common stock of the Company. When determining the fair value of
investments in common stock, the Company considers both the current market
price and also volatility in the stock price over the period in which the
Company estimates it would take to sell those shares into the market. In accordance with the provisions of FAS Statement No. 5, Accounting for
Contingencies, and FAS Statement No. 114, Accounting by Creditors for
Impairment of a Loan, the Company determined the above loan was impaired and
recorded a valuation reserve against the loan. The Company recorded an
impairment loss of $5,500 in the first nine months of fiscal 2002 ($7,100 total
in fiscal 2002) and $2,700 in the first nine months of fiscal 2003 reflecting
the amount by which the carrying value of the loan exceeded the underlying
estimated fair value of the assets available to repay the loan. The Company
will recognize any recoveries of amounts previously reserved after considering
both the fair value of the underlying assets and cash repayments on the loan. 17    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) I.     Special Charges and Asset Impairment In fiscal 2001 and 2002 the Companys subsidiary Deposition Sciences, Inc.
(DSI) made significant investments in building telecommunication product
manufacturing equipment and related facilities to apply its thin-film coating
technology to telecom products. With the continuing decline in the global
telecommunication business and uncertainty regarding the recovery of the
telecom market, the Company recognized a $5,551 charge in the second quarter of
fiscal 2003 related to the abandonment of certain long-lived assets and write
down of certain assets held for sale to fair value. Additionally, as a result
of the delisting of the Companys common shares from the Nasdaq National
Market, the Company recorded an asset impairment charge of $1,163 for the
write-off of deferred costs associated with its shelf offerings in the second
quarter of fiscal 2003. During the year ended June 30, 2002, the Company recorded special charges
related to changes in its operations, which are intended to improve
efficiencies and reduce costs world-wide. The special charges principally
related to consolidating the Companys power supply manufacturing operations
into its high-efficiency facility in Chennai (Madras), India; reducing staffing
levels at most locations and evaluating certain equipment and investments for
impairment in light of its long-term strategies. The special charges were determined in accordance with formal plans developed
by the Companys management, approved by the CEO and subsequently reviewed with
the Companys Board of Directors using the best information available to it at
the time. A total of approximately 250 employees were terminated
enterprise-wide from almost all units of the Company. Assets related to the
above actions are no longer in use or are held for sale and were written-down
to their estimated fair values. As of June 30, 2002, all actions required by
the plans were completed and the remaining liabilities relate primarily to a
long-term lease obligation that terminates in August 2006. Details of the actions and related charges and payments recorded during fiscal
2002 and the first nine months of fiscal 2003 are summarized as follows: Cash/
    
    Charged to
    
    Reclassi-
    
    Charges
    
    Liabilities at
    
    Charges
    
    Liabilities atDescription
    
    Noncash
    
    Operations
    
    fications
    
    Utilized
    
    June 30, 2002
    
    Utilized
    
    Mar. 31, 2003Consolidate power supply operationsSeverance
    
    Cash
    
    $
    1,243
    
    
    $
    168
    
    
    $
    1,411
    
    
    $
    
    
    
    $
    
    
    
    $
    Lease cancellations
    
    Cash
    
    
    1,835
    
    
    
    
    
    
    
    225
    
    
    
    1,610
    
    
    
    (237
    )
    
    
    1,373Write-down of assets
    
    Noncash
    
    
    2,579
    
    
    
    
    
    
    
    2,579
    
    
    
    
    
    
    
    
    
    
    
    Shut-down costs of facilities
    
    Cash
    
    
    265
    
    
    
    (8
    )
    
    
    240
    
    
    
    17
    
    
    
    
    
    
    
    17Reduce staffing requirements
    
    Cash
    
    
    2,017
    
    
    
    (160
    )
    
    
    1,857
    
    
    
    
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    Noncash
    
    
    2,977
    
    
    
    
    
    
    
    2,977
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    Noncash
    
    
    333
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    $
    11,249
    
    
    $
    
    
    
    $
    9,622
    
    
    $
    1,627
    
    
    $
    (237
    )
    
    $
    1,390 Total special charges for the fiscal year ended June 30, 2002 of $9,697 are
classified in the consolidated statement of operations as cost of sales ($688)
and special charges ($9,009). During the fourth quarter of fiscal 2002, the
Company evaluated for impairment certain telecommunication equipment being held
for sale. As a result, a charge of $1,552 was recorded for the difference
between the carrying amount and the fair value of the equipment. 18    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) J.     Earnings Per Share Earnings (loss) per share is computed as follows: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2003
    
    2002
    
    2003
    
    2002Income available to common shareholders:Income (loss) before cumulative
effect of accounting change
    
    $
    (3,074
    )
    
    $
    (5,660
    )
    
    $
    (17,169
    )
    

    $
    (22,682
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71,171
    )Net income (loss)
    
    
    (3,074
    )
    
    
    (5,660
    )
    
    
    (17,169
    )
    
    
    (93,853
    )Preferred shares accretion
    
    
    (742
    )
    
    
    (693
    )
    
    
    (2,185
    )
    
    
    (2,040
    )Warrants to be issued to General Electric Company
    
    
    
    
    
    
    
    
    
    
    (2,098
    )
    
    
    Net income (loss) attributable to common shareholders
    
    $
    (3,816
    )
    
    $
    (6,353
    )
    
    $
    (21,452
    )
    
    $
    (95,893
    )Weighted average shares  basic and dilutedOutstanding at beginning of period
    
    
    23,807
    
    
    
    23,437
    
    
    
    23,588
    
    
    
    23,288Issued pursuant to employee stock purchase plan
    
    
    
    
    
    
    8
    
    
    
    36
    
    
    
    27Issued pursuant to 401(k) plan
    
    
    
    
    
    
    17
    
    
    
    109
    
    
    
    68Weighted average shares  basic and diluted
    
    
    23,807
    
    
    
    23,462
    
    
    
    23,733
    
    
    
    23,383Earnings (loss) per share  basic and dilutedIncome (loss) before cumulative
effect of accounting change
    
    $
    (.16
    )
    
    $
    (.27
    )
    
    $
    (.90
    )
    
    $
    (1.06
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.04
    )Earnings (loss) per share attributable tocommon shareholders  basic and diluted
    
    $
    (.16
    )
    
    $
    (.27
    )
    
    $
    (.90
    )
    
    $
    (4.10
    ) At March 31, 2003, options and warrants to purchase 9,936,325 shares of common
stock were outstanding, but were not included in the calculations of diluted
earnings per share because their
inclusion would have been antidilutive. Options and warrants to purchase
2,311,947 shares of common stock were outstanding at March 31, 2002, but were
not included in the calculations of diluted earnings per share because their
inclusion would have been antidilutive. 19    Table of Contents  Advanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data) K.     Contingencies On January 17, 2003, the Federal Court judge presiding over all pending
shareholder litigation, described below, entered a final order approving
settlement of the litigation and dismissing all of the plaintiffs claims with
prejudice. The settlement included a payment of $8.4 million in cash, all of
which was paid by the Companys insurance carriers. The settlement does not
constitute any admission of wrongdoing on the part of the Company or the
individual defendants. 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. The named defendants in the case  styled In re
Advanced Lighting Technologies, Inc. Securities Litigation, Master File No.
1:99CV836,were the Company and its Chairman and Chief Executive Officer (CEO). The First Amended Class Action Complaint alleged 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 sought certification
of the purported class, unspecified compensatory and punitive damages, pre- and
post-judgment interest and attorneys fees and costs. On December 4 and December 12, 2001 and January 10, 2002, separate lawsuits
were filed by separate shareholders of the Company allegedly on behalf of the
Company, derivatively, against officers and directors of the Company. The
allegations in the three cases were substantially similar, and the two cases
filed in Ohio court, Gobble v Hellman, et al. 1:02CV0076-AAand Miller v
Hellman, et al. 1:02CV342, were removed to the United States District Court,
Northern District of Ohio. The suit originally filed in Federal Court, Tanigawa
v Ruud, et al. 1:01CV2807, was previously voluntarily dismissed by the
plaintiff. The Company was a nominal defendant in these actions. The individual
defendants in the Tanigawacase included, among others, Wayne R. Hellman, the
Chief Executive Officer and Chairman of the Board, who is also beneficial owner
of more than 5% of the outstanding common stock of the Company, Alan J. Ruud,
former Chief Operating Officer and Vice Chairman of the Board, who is also
beneficial owner of more than 5% of the outstanding common stock of the
Company, and Messrs. Francis H. Beam, John E. Breen, John R. Buerkle, Theodore
A. Filson, Louis S. Fisi, Thomas K. Lime and A Gordon Tunstall, directors of
the Company. The Gobbleand Millercomplaints named the same defendants, but
also named Steven C. Potts, who is Chief Financial Officer and is a former
director. The suits alleged breaches of duties by the defendants relating to the matters
which are the subject of The Advanced Lighting Technologies, Inc Securities
Litigation, to alleged insider trading by certain directors, to a loan made to
Mr. Hellman and to the sale of certain fixture facilities to an investment
group led by
20Table of ContentsAdvanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data)K.     Contingencies (continued)Mr. Ruud. The Complaints primarily sought unspecified money or compensatory and
punitive damages and attorneys fees and costs.On May 9, 2003, a complaint was filed in the Cuyahoga County, Ohio Court of
Common Pleas by the widow of a former employee of Venture Lighting
International, Inc., who died following an industrial accident at Venture
Lightings Solon facility. The suit, styled Karnosh, etc. v ADLT Realty Corp
I, Inc., et al (CV 03 500755),alleges that Venture Lighting knowingly exposed
the employee to an unreasonably dangerous risk. In addition, the suit names
ADLT Realty Corp I, Inc., the owner of the facility, and certain named and
unnamed defendants involved in the installation and repair of an industrial
garage door involved in the accident, alleging liability on various theories
involving the failure to maintain the door safely. The suit seeks compensatory
damages from all defendants in an amount of approximately $3,200, together with
unspecified damages for loss of consortium, pain and suffering and punitive
damages. The damages sought are in addition to the employees prior recoveries
under workers compensation laws. The Company believes the lawsuit is without
merit and intends to vigorously defend this action.Ruud Lighting, Inc. has incorporated certain of the Companys power supply
components into an innovative metal halide fixture. Although the rate of
failure of the Companys power supply components is consistent with historical
and industry failure rates, Ruud Lighting, Inc. has advised the Company that it
has received some complaints from customers due to a particular mode of failure.
Certain customers have requested replacements to prevent any additional such
failures. On May 29, 2003, Ruud Lighting, Inc., filed a
contingent warranty claim with the Bankruptcy Court
relating to replacements for all such fixtures and estimated
the total cost of these replacements to be approximately $50,000. The
Company believes the claim is without merit and intends to vigorously contest any liability for the replacement of these
products.The Company, from time to time, is subject to routine litigation incidental to
its business. Although there can be no assurance as to the ultimate disposition
of routine litigation, management of the Company believes, based upon
information available at this time, that the ultimate outcome of these matters
will not have a material adverse effect on the operations and financial
condition of the Company.21Table of ContentsAdvanced Lighting Technologies, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
(Dollars in thousands, except per share data)L.     Subsequent EventsOn May 27, 2003, the Debtors filed a motion seeking Bankruptcy Court
authorization for the Debtors to obtain a replacement debtor-in-possession
facility and the repayment of the pre-petition and post-petition secured debt
owed to the existing bank group. The replacement debtor-in-possession
facility, with an anticipated closing fee of $550, will provide for an
amount of total availability that is similar to the existing bank facilities at
interest costs that are similar in total to those charged under the current
facilities. The replacement debtor-in-possession facility will extend to
October 31, 2003 and does not
require the Debtors to sell assets. This facility must be replaced at the time
of emergence from bankruptcy proceedings or October 31, 2003, whichever occurs
first.Based on negotiations with the official Creditors Committee and General
Electric Company subsequent to the filing of the Original Plan, the Debtors
determined that a consensual restructuring was more probable than the Original
Plan. On May 28, 2003, the Companys Board of Directors approved a revised
Plan of Reorganization (the Amended Plan) and an agreement in principle on
the Amended Plan was reached with the Creditors Committee and General Electric
Company. The Amended Plan provides substantially the same treatment for
creditors of the Company as under the Original Plan except as otherwise noted herein. In particular, the
Amended Plan provides that the $100,000 8% Senior Notes and unpaid interest due
on such Notes will be exchanged for new notes having a principal amount of
$40,000. In addition, the holders of the Notes will receive common stock
representing in aggregate approximately 79.2% of the common stock. The
preferred shareholder will receive approximately 11.6% of the common stock and
incentives for certain incremental business and cost savings initiatives. The
Company will establish a new management incentive plan which would have shares
available equal to approximately 9.2% of the common stock. The holders of the
Companys Common Stock, including holders of existing warrants and options who
acquire shares pursuant to the terms of such instruments, will receive in
aggregate $2,850, less the professional fees (up to $350) incurred by the
committee representing the common shareholders. The Amended Plan also provides
for incentives to General Electric Company for incremental purchases from the
Company (other than APL Engineered Materials, Inc.) and management fees to certain noteholders,
and, if management services are requested by the Company,
compensation to General Electric
Company. The Company expects to file the
Amended Plan after completion of the related documentation. The description of
the Amended Plan is subject to revision and completion by the Debtors. The
Amended Plan and related disclosure statement, when filed, are subject to
review and approval by the court. The Debtors can give no assurance that the
Amended Plan will be approved by the Bankruptcy Court, that the Amended Plan
will receive the required approvals of the creditors and, if necessary, equity
securityholders of the Debtors, or that the Debtors will be able to implement
the Amended Plan.22Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations(Dollar amounts in thousands, except per share amounts)This report on Form 10-Q may contain forward-looking statements that involve
risks and uncertainties. On February 5, 2003, the Company and six of its
United States subsidiaries, filed voluntary petitions for reorganization under
Chapter 11 of the Untied States Bankruptcy Code. The operation of the Company
and its subsidiaries under the protection of the bankruptcy court involves
risks and uncertainties, including uncertainties associated with the
restructuring process, the ability of the Company to successfully emerge from
bankruptcy, the ability of the Company to operate successfully during the
reorganization proceedings, and disruptions to the Companys business
relationships during the restructuring process. The Company currently has an
agreement with its existing bank group under a debtor-in-possession financing
facility (DIP Facility) to continue to provide financing until July 30, 2003
despite existing Events of Default under the Companys prepetition credit
facility with the banks. The DIP Facility will remain in place so long as
there are no further defaults. The Company is currently seeking alternative
financing sources to replace the DIP Facility. If the Company is unable to
obtain alternative financing, it may be required to sell assets sufficient to
repay the obligations to the banks by July 30, 2003. The sale process, and the
consummation of the sale of such assets, may have an adverse effect on the
Companys ability to operate successfully and to successfully emerge from
bankruptcy. Other risks and uncertainties include the strength of the recovery
of the U.S. economy, the Companys financing plans, trends affecting the
Companys financial condition or results of operations, continued growth of the
metal halide lighting market, the Companys operating strategy and growth
strategy, potential acquisitions or joint ventures by the Company, the
declaration and payment of dividends, litigation affecting the Company, the
timely development and market acceptance of new products, the possibility that
any success at Deposition Sciences, Inc. (an ADLT subsidiary) will not be
reflected in the value of the ADLT common stock, the ability to provide
adequate incentives to retain and attract key employees, the impact of
competitive products and pricing, and other risks which are detailed in the
Companys Form 10-K for the fiscal year ended June 30, 2002, 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.GeneralThe Company designs, manufactures and markets metal halide lighting products,
including materials, system components, systems and equipment. 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. The Company also
develops, manufactures, and markets passive optical telecommunications devices,
components and equipment based on the optical coating technologies of its
wholly owned subsidiary, Deposition Sciences, Inc. (DSI). Systems,
components and materials revenue is recognized when products are shipped, and
equipment revenue is recognized under the percentage of completion method.23Table of ContentsConsistent 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
systems. 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® pulse start products.
Uni-Form® 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. While research and
development expenditures have declined over the last three fiscal years in
connection with the Companys commitment to generate positive operating cash
flow, 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.Recent DevelopmentsVoluntary Bankruptcy FilingOn February 5, 2003, Advanced Lighting Technologies, Inc. (the Company or
ADLT) and six of its United States subsidiaries, (collectively, the
Debtors), filed voluntary petitions for reorganization (the Filing) under
Chapter 11 of the United States Bankruptcy Code (Chapter 11 or the
Bankruptcy Code) in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (the Bankruptcy Court). ADLTs
non-U.S. operating subsidiaries and Deposition Sciences, Inc., a U.S.
subsidiary, were not a part of the Filing.At the end of the second quarter of fiscal 2003 the Company was in default
under a Forbearance Agreement with its bank group. In addition, the Company
did not make the September 16, 2002 semi-annual interest payment on its 8%
Senior Notes which resulted in an Event of Default under the Senior Notes
Indenture. As a result of the defaults, the Indenture Trustee for the
noteholders declared all principal and interest on the 8% Senior Notes due and
payable immediately. The Filing by ADLT was made since it did not have the
available funds to pay the noteholders and because of the uncertainty of the
willingness of the bank group to grant continued forbearance under acceptable
terms. These defaults are discussed in more detail in Note F to the Condensed
Consolidated Financial Statements. Under Chapter 11, the Debtors have
continued to operate their businesses as debtors-in-possession under court
protection from their creditors and claimants, while using the Chapter 11
process to develop and implement a plan for addressing the repayment of its
Bank Credit Facility and 8% Senior Notes.As a consequence of the Filing, all pre-petition liabilities of the Debtors are
stayed and no party may take any action to realize its pre-petition claims
except pursuant to order of the Bankruptcy Court. It is the Debtors intention
to address all of their pre-petition claims and a Plan of Reorganization (the
Original Plan) has been filed with the Bankruptcy Court on April 28, 2003.
The Original Plan as filed is discussed in more detail in Note B to the
Condensed Consolidated Financial Statements.Based on negotiations with the official Creditors Committee and General
Electric Company subsequent to the filing of the Original Plan, the Debtors
determined that a consensual restructuring was more probable than the Original
Plan. On May 28, 2003, the Companys Board of Directors approved a revised
Plan of Reorganization (the Amended Plan) and an agreement in principle on
the Amended Plan was reached with the Creditors Committee and General Electric
Company. The Amended Plan provides substantially
the same treatment for creditors of the Company except as otherwise noted herein.24Table of ContentsIn particular, the Amended Plan provides that the $100,000 8% Senior
Notes and unpaid interest due on such Notes will be exchanged for new notes
having a principal amount of $40,000. In addition, the holders of the Notes
will receive common stock representing in aggregate approximately 79.2% of the
common stock. The preferred shareholder will receive approximately 11.6% of
the common stock and incentives for certain incremental business and cost
savings initiatives. The Company will establish a new management incentive plan
which would have shares available equal to approximately 9.2% of the common
stock. The holders of the Companys Common Stock, including holders of
existing warrants and options who acquire shares pursuant to the terms of such
instruments, will receive in aggregate $2,850, less the professional fees (up
to $350) incurred by the committee representing the common shareholders. The
Amended Plan also provides for incentives to General Electric Company for
incremental purchases from the Company (other than APL Engineered
Materials, Inc.) and management fees to
certain noteholders, and, if management services are requested by the Company,
compensation to General Electric Company. Upon the confirmation of a plan of reorganization
the Companys investment banker will receive, in addition to monthly fees and
reimbursement of expenses, fees based on formulas contained in the Companys
agreement, which will aggregate between $1,000 and $3,000. All such fees are
subject to Bankruptcy Court approval. The Company recorded $1,000 of fees as
reorganization expenses as of March 31, 2003. The Company expects to file the
Amended Plan after completion of the related documentation. The description of
the Amended Plan is subject to revision and completion by the Debtors. The
Amended Plan and related disclosure statement, when filed, are subject to
review and approval by the court. The Debtors can give no assurance that the
Amended Plan will be approved by the Bankruptcy Court, that the Amended Plan
will receive the required approvals of the creditors and, if necessary, equity
securityholders of the Debtors, or that the Debtors will be able to implement
the Amended Plan.Due to material uncertainties, it is not possible to predict the length of time
the Debtors will operate under Chapter 11 protection, the ultimate outcome of
the reorganization in general, the effect on the Debtors business or the
recovery by creditors of the Debtors and equityholders of ADLT.The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of its pre-petition obligations, including claims of
critical trade creditors, customer warranty and rebate programs, and employee
wages and benefits in the ordinary course of business. As part of the
bankruptcy process, the Company hopes to refinance its DIP Facility and pursue
restructuring with its noteholders and equityholders. In addition, under the
terms of the DIP Facility, the Debtors are required to begin the sale process
of their assets and use the net proceeds to repay the DIP lenders.The Debtors have negotiated a debtor-in-possession credit facility with several
financial institutions (the DIP Facility). The DIP Facility has a maturity
of July 30, 2003 and bears interest at 3% above the prime rate (4.25% at March
31, 2003) through April 30, 2003 and 3.5% above the prime rate thereafter
through July 30, 2003. The Bankruptcy Court issued a final order approving the
DIP Facility, which allows the Debtors to draw on the DIP Facility in an amount
not to exceed $26,096.On May 27, 2003, the Debtors filed a motion seeking Bankruptcy Court
authorization for the Debtors to obtain a replacement debtor-in-possession
facility and the repayment of the pre-petition and post-petition secured debt
owed to the existing bank group. The replacement debtor-in-possession
facility, with an anticipated closing fee of $550,000, will provide for an
amount of total availability that is similar to the existing bank facilities at
interest costs that are similar in total to those charged under the current
facilities. The replacement debtor-in-possession facility will extend to
October 31, 2003 and does not
require the Debtors to sell assets. This facility must be replaced at the time
of emergence from bankruptcy proceedings or October 31, 2003, whichever occurs
first. The Debtors expect that the lenders25Table of Contentsunder the
replacement debtor-in-possession facility will make replacement financing
available at the time of the Debtors emergence from bankruptcy proceedings.Delisting from the Nasdaq National MarketPursuant to a determination by the Nasdaq Listing Qualifications Panel, the
Companys Common Shares were delisted by the Nasdaq National Market effective
January 10, 2003. Subsequently, the Companys Common Shares have been quoted
on the National Association of Securities Dealers OTC Bulletin Board, which
was established for securities that do not meet the Nasdaq listing
requirements. This alternative trading market is generally considered less
efficient than the Nasdaq National Market or Nasdaq SmallCap Market.
Consequently, selling the Companys common shares could be more difficult
because smaller volumes of shares would likely be bought and sold, transactions
could be delayed, and securities analysts and news media coverage of the
Company may be reduced. These factors could result in lower prices and larger
spreads in the bid and ask prices for common shares of the Company.As a result of the delisting, the Company wrote-off $1,163 in the second
quarter of fiscal 2003 for the impairment of the deferred costs related to its
shelf offerings.Changes Pursuant to General Electric Company InvestmentIn 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 GE has fully
exercised to acquire 998,703 shares of Common Stock of the Company. GE now
holds 1,429,590 shares of Company Common Stock. The Series A Stock and the
Common Stock held by GE represent 16.7% of the voting power and equity
ownership of the Company at March 31, 2003.The terms of the GE investment provide that the Company maintain a specific
financial ratio over certain measurement periods. The Company failed to
maintain the required interest coverage ratio over three measurement periods.
As a result of the failure to maintain the interest coverage ratio: (i) GE has
the ability to vote the number of shares currently voted by the CEO of the
Company and Alan J. Ruud, totaling approximately 5.6 million shares at March
31, 2003, (ii) GE has the option to purchase shares from the CEO of the Company
and Alan J. Ruud which, together with the shares owned by GE, would represent
25% of the voting power of the Company, (iii) GE has the right to receive from
the Company an additional warrant to purchase approximately 6.75 million shares
at $.63055 per share, and (iv) GE has the right to receive from the Company an
additional warrant to purchase approximately 18,000 shares at $.298 per share
(the average of the closing prices for the 20 trading days ended December 31,
2002). The Company intends to file a motion seeking authority from the
Bankruptcy Court to issue the warrants. GE is not required to purchase
additional shares of the Company. The number of shares that GE owns or has the
right to acquire and/or vote exceeds 35% of the voting power of the Company.
Consequently, the terms of the Indenture relating to the Companys Senior Notes
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. The Company elected not to offer to repurchase
the Senior Notes and therefore was in default under the Trust Indenture.26Table of ContentsSale of Fixture SubsidiariesOn December 12, 2001 the Company completed the sale of a significant portion of
its lamp fixture business (its Ruud Lighting, Inc., Kramer Lighting, Inc. and
Ruud Lighting Europe subsidiaries) to an investor group led by Alan J. Ruud.
From January 1998 until the time of the transaction, Mr. Ruud was a director of
the Company and served as Vice Chairman and Chief Operating Officer of the
Company and holds in excess of 5% of the Companys outstanding common stock.
The fixture subsidiaries assets consisted primarily of manufacturing
equipment, inventory and accounts receivable and the Ruud Lighting
manufacturing facility located in Racine, Wisconsin.The consideration received by the Company consisted of a cash payment of
$28,000 (adjusted dollar for dollar to reflect the amount of any changes in
working capital and funded indebtedness between September 2, 2001 and December
3, 2001) and promissory notes totaling $6,000. Preliminary estimates of the
adjustment in the cash consideration resulted in a net reduction of $2,458 in
the cash received at closing. The preliminary estimates are subject to a
review process under the purchase agreement. The notes are payable December 1,
2006 and bear interest at 8% compounded semi-annually. As part of this
transaction, funded indebtedness of $9,005 continued to be the obligation of
Ruud Lighting and the Company retained title to the Rhode Island manufacturing
facility of Kramer Lighting. The Company sold this facility for $1,326 in
September 2002. The Company remitted $428 to Ruud Lighting in October 2002 in
accordance with the terms of the purchase agreement.The sale of the subsidiaries resulted in a gain of $227 in the quarter ended
December 31, 2001. The final amount of proceeds to be received and gain or
loss realized will be based upon a review process as set forth under the
purchase agreement and final negotiations with the buyers.Consolidation of Power Supply Production Operations and Restructuring of
Worldwide OperationsThe Company implemented plans in fiscal 2002 to improve efficiencies in its
power supply business, reduce costs worldwide and assess certain equipment and
investments in light of its long-term strategies.The following paragraphs provide information related to special charges and
asset impairment recorded as a result of certain actions taken by the Company: Centralize Certain Power Supply Manufacturing Operations into India
Operations. A charge of $6,082 was recorded in fiscal 2002 relating to
the first quarter restructuring and centralizing certain power supply
manufacturing operations into the Companys high-efficiency and low-cost
manufacturing plant in Chennai (Madras), India. Of this charge, costs of
$2,293 were recorded for the closing of the Companys manufacturing
facilities in the United Kingdom, Australia and U.S., including costs of
$2,036 associated with a non-cancelable lease. Amounts related to the
lease will be paid over the term of the lease, which expires in 2006.
Severance and benefits to approximately 160 terminated employees at the
above locations totaled $1,411 and were paid by the end of fiscal 2002.
Property, primarily consisting of building, equipment and intangibles,
was disposed of or written down to net realizable value resulting in a
charge of $2,041. In addition, certain power supply product lines were
exited which resulted in a write-down of inventory of $337. This amount
is included in cost of goods sold.Staffing Reductions. During the first quarter of fiscal 2002, a program
was completed to reduce the number of employees across all business
units. Approximately 90 employees, exclusive of 27    Table of Contents  the above-noted employees, were terminated and total severance and benefits
costs for this program were $1,857. All employees were paid by the end
of fiscal 2002.Write-off of Long-lived Assets and Other Charges. Due to the decline in
current business conditions, certain long-lived assets and product lines
were evaluated for impairment in light of future growth areas of the
business and a focus on profit margins and core opportunities. As a
result, charges of $1,425 and $1,552 were recorded in the first and
fourth quarter of fiscal 2002, respectively, to recognize write-downs in
investments and equipment. In addition, a $333 charge was taken for the
abandonment of certain projects and several existing product lines. In the first quarter of fiscal 2003 the Company announced that it would
relocate some of its power supply production from Nova Scotia, Canada into the
Chennai (Madras), India production facility in order to further reduce its
costs. The relocation will result in the elimination of approximately 100
positions at the Canadian facility during the last nine months of fiscal 2003.
Severance and other costs related to this relocation are expected to be
minimal. 28    Table of Contents  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: Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2003
    
    2002
    
    2003
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    62.1
    
    
    
    67.6
    
    
    
    62.7
    
    
    
    65.6Marketing and selling
    
    
    14.6
    
    
    
    16.7
    
    
    
    15.3
    
    
    
    18.5Research and development
    
    
    5.5
    
    
    
    4.6
    
    
    
    5.8
    
    
    
    5.1General and administrative
    
    
    7.0
    
    
    
    10.7
    
    
    
    8.1
    
    
    
    8.8Provision for loan impairment
    
    
    
    
    
    
    2.7
    
    
    
    2.5
    
    
    
    4.1Refinancing and non-recurring items
    
    
    0.2
    
    
    
    
    
    
    
    2.2
    
    
    
    Gain on settlement of lawsuit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Gain on sale of property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special charges and asset impairment
    
    
    
    
    
    
    
    
    
    
    6.1
    
    
    
    6.7Amortization of intangible assets
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2Income (loss) from operations
    
    
    10.4
    
    
    
    (2.5
    )
    
    
    (2.9
    )
    
    
    (8.6
    )Other income (expense):Interest expense
    
    
    (7.2
    )
    
    
    (7.6
    )
    
    
    (8.0
    )
    
    
    (6.4
    )Interest income
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.1Income (loss) from investments
    
    
    (0.3
    )
    
    
    (6.3
    )
    
    
    (0.7
    )
    
    
    (1.8
    )Reorganization expenses
    
    
    (10.6
    )
    
    
    
    
    
    
    (3.6
    )
    
    
    Gain from sale of fixture subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Income (loss) before income taxes, minority interest
and cumulative effect of accounting change
    
    
    (7.3
    )
    
    
    (16.2
    )
    
    
    (14.8
    )
    
    
    (16.5
    )Income tax expense
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    0.3Income (loss) before minority interest
and cumulative effect of accounting change
    
    
    (7.9
    )
    
    
    (16.7
    )
    
    
    (15.4
    )
    
    
    (16.8
    )Minority interest in income of consolidated subsidiary
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Income (loss) before cumulative
effect of accounting change
    
    
    (8.2
    )
    
    
    (16.9
    )
    
    
    (15.7
    )
    
    
    (16.9
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53.1
    )Net income (loss)
    
    
    (8.2
    %)
    
    
    (16.9
    %)
    
    
    (15.7
    %)
    
    
    (70.0
    %) Factors that have affected the results of operations for the third quarter of
fiscal 2003 as compared to the third quarter of fiscal 2002 are discussed
below. Quarter Ended March 31, 2003 Compared with Quarter Ended March 31, 2002 Net Sales. Net sales increased 11.6% to $37,469 in the third quarter of fiscal
2003 from $33,565 in the third quarter of fiscal 2002. Third quarter metal
halide sales increased 15% to $29,755 compared with 29    Table of Contents  $25,964 in the same period
last year. This increase in metal halide sales is the result of increases in
sales outside the U.S. including the sale of metal halide lamp production
equipment into China totaling $1,177.
Fiscal 2003 third quarter sales of the Companys second-generation metal halide
lighting product line, Uni-Form® pulse start, grew 21% to $8,410 from $6,934 in
the comparable quarter a year ago. Sales of APL materials increased 26% over
the same quarter a year ago. Geographically, these materials sales increased 9%
in the U.S. and 38% outside the U.S. Non-metal halide lighting sales increased
10%, due primarily to a 37% increase in non-metal halide material sales. Lighting sales inside the U.S. decreased 2% in the third quarter of fiscal 2003
as compared to the same period a year ago. Lighting sales outside the U.S.
increased 33% in total and 25% excluding the production equipment sales into
China. 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. DSIs telecommunication product sales for the third quarter of fiscal 2003 were
$195, a decrease of 10% from $216 in the third quarter of fiscal 2002. The
decrease is attributed to the overall decline in the telecommunications
industry. Sales of DSIs non-telecom materials and equipment declined 3% to
$2,732 in the third quarter of fiscal 2003 from $2,826 in the third quarter of
fiscal 2002. In spite of this slight decline, the Company is expecting DSI to
experience moderate growth in the fourth quarter and in fiscal 2004. Cost of Sales.Cost of sales increased 2.4% to $23,252 in the third quarter
of fiscal 2003 from $22,706 in the third quarter of fiscal 2002. As a
percentage of net sales, cost of sales decreased to 62.1% in the third quarter
of fiscal 2003 from 67.6% in the third quarter of fiscal 2002. Cost of sales,
in fiscal 2002, were negatively impacted by several unusual items including
inventory write-downs, additional costs related to the move of the European
power supply production to India, and unfavorable overhead variances resulting
from the decrease in production due to the Companys commitment to significant
reductions in inventory levels. The benefits of the transfer of power supply
production are beginning to be realized in fiscal 2003 resulting in an
improving gross margin. Marketing and Selling Expenses.Marketing and selling expenses decreased 2.4%
to $5,457 in the third quarter of fiscal 2003 from $5,592 in the third quarter
of fiscal 2002. As a percentage of net sales, marketing and selling expenses
declined to 14.6% in the third quarter of fiscal 2003 from 16.7% in the third
quarter of fiscal 2002. Research and Development Expenses. Research and development expenses
increased 34.4% in the third quarter of fiscal 2003 to $2,055 from $1,529 in
the third quarter of fiscal 2002. Research and development expenses incurred
related to: (i) expansion and continued improvement of the line of Uni-Form®
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) 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; (iii) continual development of new materials
for the worlds major lighting manufacturers; and, (iv) development and testing
of electronic and electromagnetic power supply systems. As a percentage of net
sales, research and development expenses increased to 5.5% in the third quarter
of fiscal 2003 from 4.6% in the third quarter of fiscal 2002. In spite of the
Companys commitment to generate positive operating cash flow,
30Table of Contentsthe 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.General and Administrative Expenses.General and administrative expenses of
$2,628 were 27.0% lower in the third quarter of fiscal 2003 compared to $3,602
in the third quarter of fiscal 2002. The reduction was primarily due to a
reduction in corporate costs including salaries, professional services and
directors and officers insurance.Provision for Loan Impairment.In the quarter ended March 31, 2002, the
Company increased the valuation reserve for an impaired loan by $900 related to
the amount by which the carrying value of the loan receivable from officer
exceeded the underlying fair value of the assets available to repay the loan.
No interest income was recorded or paid on the loan in fiscal 2003 and 2002.Refinancing and Non-Recurring Expenses.These expenses, totaling $84 in the
quarter ended March 31, 2003, reflect the cost of consultants, investment
bankers and attorneys related to the Companys efforts to refinance its Bank
Credit Facility and address its capital structure.Amortization of Intangible Assets.Amortization expense of $86 in the third
quarter of fiscal 2003 was comparable to amortization expense of $83 in the
third quarter of fiscal 2002.Income (Loss) from Operations.As a result of the items noted above, the
Company realized income from operations in the third quarter of fiscal 2003 of
$3,907 as compared to a loss from operations of $(847) in the third quarter of
fiscal 2002. The income from operations in the third quarter of fiscal 2003
includes refinancing and non-recurring items of $84. The loss from operations
in the third quarter of fiscal 2002 includes the provision for loan impairment
of $900.Interest Expense.Interest expense increased to $2,722 in the third quarter of
fiscal 2003 from $2,559 in the third quarter of fiscal 2002. The Company
accrued interest on its $100,000 of 8% Senior Notes through the end of the
quarter, however the semi-annual interest payments due September 16, 2002 and
March 15, 2003 were not made. The increase in interest expense was due to a
slight increase in interest rates offset by a slight reduction in debt
outstanding.Interest Income.Interest income increased to $140 in the third quarter of
fiscal 2003 from $82 in the third quarter of fiscal 2002.Income (Loss) from Investments.The income (loss) from investments in the
third quarter of fiscal 2003 of $(104) represents the equity loss from the
Companys investment in Fiberstars, Inc., a marketer and distributor of fiber
optic lighting products. The income (loss) from investments in the third
quarter of fiscal 2002 of $(2,121) consists of a loss on the sale of a
preferred stock investment in Venture Lighting Japan of ($2,007) and an equity
loss of $(114) from the Companys investment in Fiberstars.Reorganization Expenses.Reorganization expenses, totaling $3,963 in the third
quarter, reflect the cost of consultants, investment bankers and attorneys
related to the Companys efforts to reorganize under Chapter 11 Bankruptcy.
The Company will continue to incur similar costs for the next several quarters.Income (Loss) before Income Taxes, Minority Interest and Cumulative Effect of
Accounting Change.The Company had a loss before income taxes, minority
interest and cumulative effect of accounting change of $(2,742) in the third
quarter of fiscal 2003 as compared to a loss before income taxes, minority
interest and cumulative effect of $(5,445) in the third quarter of fiscal 2002.
The loss in the third quarter of fiscal 2003 includes refinancing and
non-recurring items of $84 and reorganization expenses of $3,963.
The31Table of Contents loss in third of fiscal 2002 includes the provision for loan impairment of $900 and a
loss on the sale of the preferred stock investment of $2,007. Income Tax Expense.Income tax expense was $224 for the third quarter of
fiscal 2003 as compared to $152 in the third quarter of fiscal 2002. The
income tax expense in the third quarters of fiscal 2003 and 2002 related to
certain of the Companys foreign operations. At June 30, 2002, the Company had net operating loss carryforwards of $96,923
available to reduce future United States federal taxable income, which expire
in varying amounts from 2008 to 2022. The Company also had a capital loss
carryforward of approximately $35,000 available to reduce future capital gains.
This carryforward expires in 2007. The Company also has research and development credit carryforwards for tax
purposes of approximately $3,818, which expire 2008 to 2015. Additionally, in
conjunction with the Alternative Minimum Tax (AMT) rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $98, which
may be used indefinitely to reduce regular federal income taxes. Also at June 30, 2002, the Company had foreign net operating loss carryforwards
for tax purposes totaling $1,375 that expire in varying amounts from 2003 to
2007 and $7,268 that have no expiration dates. Nine Months Ended March 31, 2003 Compared with Nine Months Ended March 31, 2002 Net Sales. Net sales decreased 18.2% to $109,624 in the nine months of fiscal
2003 from $134,025 in the nine months of fiscal 2002. The decrease in sales is
primarily due to the sale of the fixture subsidiaries in December 2001.
Excluding the fixture subsidiaries, sales for the nine months of fiscal 2003
were $109,624 compared with $98,941 for the nine months of fiscal 2002. Metal
halide sales, excluding the fixture subsidiaries, increased 14% to $85,907 for
the nine months of fiscal 2003 compared with $76,352 in the same period last
year. This increase in metal halide sales is the primarily the result of the
sale of metal halide lamp production equipment into China for $3,319 and lamp
and ballast sales to the former fixture subsidiaries that are now external
sales. Excluding these two items, metal halide sales increased 3% in the nine
months of fiscal 2003 compared to the year-ago period. Excluding the fixture subsidiaries, fiscal 2003 nine month sales of the
Companys second-generation metal halide lighting product line, Uni-Form® pulse
start, grew 15% to $25,552 from $22,167 in the comparable year ago period.
This increase is due in part to sales to the former fixture subsidiaries that
are now external sales. Sales of APL materials increased 18% over the same
period a year ago. Geographically, these sales of materials increased 21% in
the U.S. and 16% outside the U.S. Excluding the fixture subsidiaries,
non-metal halide lighting sales declined 1%, due to the managed decline of some
non-metal halide product sales offset by increases in sales of more profitable
non-metal halide materials. Excluding the fixture subsidiaries, lighting sales inside the U.S. increased 7%
in the nine months of fiscal 2003 as compared to the same period a year ago.
Excluding sales to the former fixture subsidiaries that are now external sales,
lighting sales inside the U.S. decreased 1% in the nine months of fiscal 2003
compared with the nine months of fiscal 2002. Lighting sales outside the U.S.
increased 14% in total, 6% excluding the equipment sales. 32    Table of Contents  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. DSIs telecommunication product sales for the nine months of fiscal 2003 were
$506, a decrease of 42% from $866 in the nine months of fiscal 2002. The
decrease is attributed to the overall decline in the telecommunications
industry. However, sales of DSIs non-telecom materials and equipment
increased 28% to $9,559 in the nine months of fiscal 2003 from $7,484 in the
nine months of fiscal 2002 as the Company capitalized on DSIs expertise in
thin-film optical coatings and optical coating equipment manufacturing
opportunities. Cost of Sales.Cost of sales decreased 21.7% to $68,774 in the nine months of
fiscal 2003 from $87,859 in the nine months of fiscal 2002. The decrease is
primarily attributable to the sale of the fixture subsidiaries. As a
percentage of net sales, cost of sales decreased to 62.7% in the nine months of
fiscal 2003 from 65.6% in the nine months of fiscal 2002. Cost of sales, in
fiscal 2002, were negatively impacted by several unusual items including
inventory write-downs, additional costs related to the move of the European
power supply production to India, and unfavorable overhead variances resulting
from the decrease in production due to the Companys commitment to significant
reductions in inventory levels. The benefits of the transfer of power supply
production are beginning to be realized in fiscal 2003 resulting in an
improving gross margin. Marketing and Selling Expenses.Marketing and selling expenses decreased
32.3% to $16,808 in the nine months of fiscal 2003 from $24,812 in the nine
months of fiscal 2002. As a percentage of net sales, marketing and selling
expenses declined to 15.3% in the nine months of fiscal 2003 from 18.5% in the
nine months of fiscal 2002. The decrease in both amount and percentage of net
sales is primarily attributable to the sale of the fixture subsidiaries, as
marketing and selling expenses were higher as a percentage of net sales for
these subsidiaries. Research and Development Expenses. Research and development expenses declined
7.9% in the nine months of fiscal 2003 to $6,321 from $6,863 in the nine months
of fiscal 2002. The decrease is primarily attributable to the sale of the
fixture subsidiaries. Research and development expenses incurred related to:
(i) expansion and continued improvement of the line of Uni-Form® 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 and fixtures in
industrial and commercial applications; (ii) 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; (iii) continual development of new materials
for the worlds major lighting manufacturers; and, (iv) development and testing
of electronic and electromagnetic power supply systems. As a percentage of net
sales, research and development expenses increased to 5.8% in the nine months
of fiscal 2003 from 5.1% in the nine months of fiscal 2002. In spite of the
Companys commitment to generate positive operating cash flow, 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. General and Administrative Expenses.General and administrative expenses of
$8,934 were 24.7% lower in the nine months of fiscal 2003 compared to $11,857
in the nine months of fiscal 2002. The decrease is primarily attributable to
the sale of the fixture subsidiaries and a reduction of corporate costs,
including salaries and professional services. 33    Table of Contents  Provision for Loan Impairment.In the quarter ended December 31, 2002, the
Company increased its valuation reserve for an impaired officer loan by $2,700
related to the amount by which the carrying value of the loan receivable from
officer exceeded the underlying fair value of the assets available to repay the
loan. In the first nine months of fiscal 2002, the Company increased the
valuation reserve related to this loan by $5,500. No interest income was
recorded or paid on the loan in fiscal 2003 and 2002. Refinancing and Non-Recurring Expenses.These expenses, totaling $2,387 for
the nine months of fiscal 2003, reflect the cost of consultants, investment
bankers and attorneys related to the Companys efforts to refinance its Bank
Credit Facility and address its capital structure. Gain on Settlement of Lawsuit.In fiscal 2002, the Company recorded a gain on
the settlement of lawsuit totaling $554, net of legal fees, as a result of the
enforcement of a non-compete agreement with several former employees of a
subsidiary of the Company. Gain on Sale of Property.The Company recorded a gain on the sale of property
in the first quarter of fiscal 2003 of $62 related to the sale of a building in
Middletown, Rhode Island that formerly served as a fixture manufacturing
facility. Special Charges and Asset Impairment.For a discussion of special charges and
asset impairment in fiscal 2002, see Consolidation of Power Supply Production
Operations and Restructuring of Worldwide Operations above. In fiscal 2001 and 2002 the Companys subsidiary Deposition Sciences, Inc.
(DSI) made significant investments in building telecommunication product
manufacturing equipment and related facilities to apply its thin-film coating
technology to telecom products. With the continuing decline in the global
telecommunication business and uncertainty regarding the recovery of the
telecom market, the Company recognized a $5,551 charge in the second quarter of
fiscal 2003 related to the abandonment of certain long-lived assets and the
write down of certain equipment held for sale to fair value. Additionally, as a
result of the delisting of the Companys common shares from the Nasdaq National
Market, the Company recorded an asset impairment charge of $1,163 for the
write-off of deferred costs related to its shelf offerings. Amortization of Intangible Assets.Amortization expense in the nine months
fiscal 2003 and the nine months of fiscal 2002 was comparable. Income (Loss) from Operations.As a result of the items noted above, the
Company realized a loss from operations in the nine months of fiscal 2003 of
$(3,208) as compared to a loss from operations of $(11,574) in the nine months
of fiscal 2002. The loss from operations in the nine months of fiscal 2003
includes the provision for loan impairment of $2,700, refinancing and
non-recurring items of $2,387, special charges and asset impairment of $6,714,
and a gain on sale of property of $62. The loss from operations in the nine
months of fiscal 2002 includes the provision for loan impairment of $5,500,
special charges and asset impairment of $9,697, and the gain on settlement of
lawsuit of $554. Interest Expense.Interest expense increased to $8,732 in the nine months of
fiscal 2003 from $8,616 in the nine months of fiscal 2002. The Company accrued
interest on its $100,000 of 8% Senior Notes through the end of the nine-month
period, however the semi-annual interest payment due September 16, 2002 and
March 15, 2003 were not made. The increase in interest expense is attributable
to a slight increase in interest rates and an increase of $499 in bank and
legal costs related to the Companys Bank
34Table of ContentsCredit Facility, Forbearance Agreement and related amendments and DIP Facility, offset by a reduction in
debt outstanding from the sale of the fixture subsidiaries.Interest Income. Interest income increased to $415 in the nine months of
fiscal 2003 from $144 in the nine months of fiscal 2002. The increase is
attributable to interest earned on the $6,000 of notes receivable created by
the sale of the fixture subsidiaries in December 2001.Income (Loss) from Investments.The income (loss) from investments in the
nine months of fiscal 2003 of $(756) consists of an equity loss from the
Companys investment in Fiberstars, Inc., a marketer and distributor of fiber
optic lighting products. The Fiberstars loss was primarily due to a provision
related to a valuation allowance recorded against the Companys deferred tax
assets. The income (loss) from investments in the nine months of fiscal 2002
of $(2,332) consists of a loss on the sale of a preferred stock investment in
Venture Lighting Japan of $(2,007) and an equity loss of $(325) from the
Companys investment in Fiberstars.Reorganization Expenses.Reorganization expenses, totaling $3,963 in the nine
months of fiscal 2003, reflect the cost of consultants, investment bankers and
attorneys related to the Companys efforts to reorganize under Chapter 11
Bankruptcy. The Company will continue to incur similar costs for the next
several quarters.Income (Loss) before Income Taxes, Minority Interest and Cumulative Effect of
Accounting Change.The Company had a loss before income taxes, minority
interest and cumulative effect of accounting change of $(16,244) in the nine
months of fiscal 2003 as compared to a loss before income taxes, minority
interest and cumulative effect of accounting change of $(22,151) in the nine
months of fiscal 2002. The loss in the nine months of fiscal 2003 includes a
provision for loan impairment of $2,700, refinancing and non-recurring items of
$2,387, special charges and asset impairment of $6,714, a gain on sale of
property of $62, and reorganization expenses of $3,963. The loss in the nine
months of fiscal 2002 includes the provision for loan impairment of $5,500,
special charges and asset impairment of $9,697, a gain on settlement of lawsuit
of $554, a loss on the sale of the preferred stock investment of $2,007, and a
gain from sale of fixture subsidiaries of $227.Income Tax Expense.Income tax expense was $658 for the nine months of fiscal
2003 as compared to $386 in the nine months of fiscal 2002. The income tax
expense in the nine months of fiscal 2003 and 2002 related primarily to certain
of the Companys foreign operations.At June 30, 2002, the Company had net operating loss carryforwards of $96,923
available to reduce future United States federal taxable income, which expire
in varying amounts from 2008 to 2022. The Company also had a capital loss
carryforward of approximately $35,000 available to reduce future capital gains.
This carryforward expires in 2007.The Company also has research and development credit carryforwards for tax
purposes of approximately $3,818, which expire 2008 to 2015. Additionally, in
conjunction with the Alternative Minimum Tax (AMT) rules, the Company had
available AMT credit carryforwards for tax purposes of approximately $98, which
may be used indefinitely to reduce regular federal income taxes.Also at June 30, 2002, the Company had foreign net operating loss carryforwards
for tax purposes totaling $1,375 that expire in varying amounts from 2003 to
2007 and $7,268 that have no expiration dates.35Table of ContentsCumulative Effect of Accounting Change.The Company adopted FAS 142 in the
first quarter of fiscal 2002 and recorded a cumulative effect of change in
accounting principle for the impairment of goodwill and
other indefinite lived intangible assets of $71,171, or $(3.04) per share, as
of the beginning of fiscal 2002 (July 1, 2001).Liquidity and Capital ResourcesThe Companys sources of liquidity include cash and cash equivalents from
operations and amounts primarily available under its DIP Facility. See Note F
to the Notes to Condensed Consolidated Financial Statements for a description
of the DIP Facility. The payment of interest on the $100,000 8% Senior Notes
($8,467 accrued at March 31, 2003) has been suspended by the Chapter 11
bankruptcy filing on February 5, 2003. While the Company did not make the
semi-annual interest payments due September 16, 2002 and March 15, 2003, its
liquidity will continue to be impacted by the uncertainty of the bankruptcy
proceedings, including restructuring and settlement of prepetition obligations,
the restructuring of the Senior Notes, the payment of professional fees related
to the bankruptcy, the terms of the DIP Facility and the ability to obtain
other financing. Also, liquidity will be affected by, among other things, the
demand for the Companys products, the availability and amount of trade credit
and other business and operational issues. As a result of these uncertainties,
there can be no assurance that existing or future sources of liquidity will be
adequate. However, management believes that the Companys reorganization and
refinancing matters can be resolved in the Chapter 11 bankruptcy filing and
based on its current estimates, the Company should have adequate liquidity
pending the acceptance of a Plan of Reorganization by its creditors.On May 27, 2003, the Debtors filed a motion seeking Bankruptcy Court
authorization for the Debtors to obtain a replacement debtor-in-possession
facility and the repayment of the pre-petition and post-petition secured debt
owed to the existing bank group. The replacement debtor-in-possession
facility, with an anticipated closing fee of $550,000, will provide for an
amount of total availability that is similar to the existing bank facilities at
interest costs that are similar in total to those charged under the current
facilities. The replacement debtor-in-possession facility will extend to
October 31, 2003 and does not
require the Debtors to sell assets. This facility must be replaced at the time
of emergence from bankruptcy proceedings or October 31, 2003, whichever occurs
first. The Debtors expect that the lenders under the replacement
debtor-in-possession facility will make replacement financing available at the
time of the Debtors emergence from bankruptcy proceedings.Cash increased $478 during the nine months of fiscal 2003. Cash provided by
operating activities totaled $7,558, cash used in investing activities totaled
$2,077, and cash used in financing activities totaled $5,003.Net Cash Provided by (Used In) Operating Activities.Net cash provided by
operating activities totaled $7,558 during the nine months of fiscal 2003 as
compared to cash used in operating activities of $989 in the nine months of
fiscal 2002. The primary reason for this change was the non-payment of the
$8,000 in interest payments due on the Companys 8% Senior Notes. Net cash
provided by operating activities was reduced by cash payments of $3,595 related
to the refinancing and reorganization costs.Net Cash Provided by (Used in) Investing Activities.During the nine months of
fiscal 2003, net cash used in investing activities totaled $2,077. Capital
expenditures of $3,703 in fiscal 2003 related primarily to machinery and
equipment to improve production processes, which should result in increased
productivity and capacity. The Company plans to limit its capital expenditure
program for the next twelve months and estimates its capital expenditures will
approximate $4,000 over the next twelve months. Future
36Table of Contentscapital 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.
The outflow for capital expenditures during the first six months was partially
offset by the sale of the building in Middletown, Rhode Island that formerly
served as a fixture manufacturing facility.Net Cash Provided by (Used in) Financing Activities.During the nine months of
fiscal 2003, net cash used in financing activities was $5,003. This primarily
represents repayments of bank debt under the Companys Bank Credit Facility and
DIP Facility.The interest-bearing obligations of the Company totaled $134,351 as of March
31, 2003, and consisted of: $24,878 of borrowings under the Bank Credit
Facility and DIP Facility; $100,000 of 8% Senior Notes; mortgages of $4,966; a
promissory note of $1,970; and, obligations of foreign subsidiaries of $2,537.Pursuant to an agreement dated October 8, 1998, as amended, between the Company
and its Chairman and Chief Executive Officer (the CEO), the Company,
following approval by the Companys Board of Directors, has a loan recorded for
$14,144 to its CEO, including principal of $12,789 and accrued interest. The
proceeds of the loan were used by the Companys CEO to reduce the principal
balance outstanding of his margin loan accounts. In connection with the loan,
the Companys Board of Directors obtained the CEOs agreement to an extension
of his employment agreement to December 31, 2003. The margin loans have been
fully repaid and the loan agreement prohibits the CEO from encumbering his ADLT
shares in any manner without the consent of the Companys Board of Directors.On July 26, 2002, the Company and CEO executed an amendment to the loan
documents, implementing the agreement in principle, reached in January 2002, to
extend the maturity of the loan to July 31, 2007. Under the terms of the
amendment, the CEO will sell certain assets in an orderly manner in order to
maximize the net proceeds, which will be used to pay a portion of the loan.
The CEO will continue his 10b5-1 plan to sell shares he now owns pursuant to
Rule 144 should the stock price exceed $15 per share. In addition, the CEO has
agreed to apply any after-tax cash bonuses earned from the Company toward
repayment of the loan.Interest on the loan now accrues at the lowest rate that the Company pays on
its revolving credit loan and totaled $674 in fiscal 2002 and $588 in the nine
months of fiscal 2003. During fiscal 2002 and 2003, no interest income was
recorded or paid on the loan. Further, the Company recorded a valuation
reserve for this impaired loan of $2,700 in the second quarter of fiscal 2003
($9,800 total at March 31, 2003) related to the amount by which the carrying
value of the loan exceeded the underlying estimated fair value of the assets
available to repay the loan. The loan may be accelerated if the CEO ceases to
be employed by the Company as a result of his voluntary resignation or
termination for cause. The Board reserved the right to demand payment to
prevent an unacceptable strain on cash resources. The Companys ability to
collect amounts due according to the contractual terms of the loan agreement is
largely dependent on the ultimate realization of proceeds from the sale of
assets owned by the CEO, including the CEOs investment in common stock of the
Company.Critical Accounting PoliciesThe discussion and analysis of our financial condition and results of
operations is based upon our unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. The preparation of these financial statements requires us to make
estimates and judgments that effect the reported amounts of our assets,
liabilities, revenues and costs and expenses, and related
37Table of Contentsdisclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to: valuation of accounts and notes
receivable and loan receivable from officer, valuation of investments,
valuation of long-lived assets, valuation of inventory valuation reserves,
revenue recognition, and deferred tax assets. We base our estimates on
historical experience and on various other assumptions that we believe
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.We have identified the following policies as critical to our business
operations and the understanding of our results of operations. For a detailed
discussion on the application of these and other accounting policies, see Note
C of the Notes to Consolidated Financial Statements in the Companys Annual
Report on Form 10-K for the year ended June 30, 2002.Valuation of Accounts and Notes Receivable and Loan Receivable from OfficerManagement evaluates and makes estimates of the collectibility of the Companys
accounts and notes receivable, including unbilled accounts receivable related
to long-term equipment contracts, based on a combination of factors.
Management analyzes historical bad debts, customer credit-worthiness, and
current economic trends in evaluating the adequacy of the allowance for
doubtful accounts and whether there is any impairment in its notes receivable.
In circumstances where the Company is aware of a certain customers inability
to meet its financial obligation, a specific reserve is recorded to reduce the
receivable to the amount the Company believes will be collected. Material
changes in the allowance for doubtful accounts may occur if the results of
managements evaluation change or if a different method is used to estimate
possible losses. The accounts receivable balance was $31,929, net of an
allowance of $961 as of March 31, 2003. Notes receivable at March 31, 2003 of
$6,978 (including interest of $778) are from related parties and are considered
collectible.The Company has a loan receivable from an officer. Management periodically
evaluates the adequacy of the underlying assets to repay this loan and when it
estimates the proceeds from the sale of such assets are not adequate records a
reserve. Based on its estimates, Management recorded an impairment charge of
$2,700 on the loan receivable for the nine months ended March 31, 2003. No
interest related to the loan has been recorded in fiscal 2002 and 2003. The
loan receivable from officer balance was $4,344, net of a valuation reserve of
$9,800 at March 31, 2003.Valuation of InvestmentsThe Company has certain investments in both privately-held and publicly-held
companies that are primarily in lighting-related businesses. The investments
in privately-held companies, which are accounted for under the cost method, are
inherently risky since there is no readily available market for these
investments, and some of the companies are in foreign countries. The value of
these investments is influenced by many factors, including the operating
effectiveness of these companies, the overall health of the respective
companys industry, the strength of the private equity markets, the foreign
currency markets and overall general market conditions. Although the market
value of these investments is not readily determinable, management believes
their current fair values approximate or exceed their carrying values as of
March 31, 2003. However, in light of the circumstances noted above, it is
possible that the fair value of these investments could decline in future
periods. The market price for publicly-held Fiberstars, Inc., a marketer and
distributor of fiber optic lighting products, can fluctuate significantly
because the companys stock is thinly traded and, thus the current market price
may not necessarily reflect the value of the Companys investment. The
Companys carrying value of this investment, which is accounted for under the
equity
method, is evaluated whenever there is an impairment indicator based
38Table of Contentson the market price of the common stock. Any future negative changes in the market
price of the common stock of this company could result in a significant
reduction in the carrying value of the Companys investment.Valuation of Long-Lived AssetsEffective July 1, 2001 the Company adopted Statement of Financial Accounting
Standards (FAS) No. 142, Goodwill and Other Intangible Assets, and accordingly,
ceased its amortization of any remaining goodwill. The Company evaluates
goodwill for impairment at least annually and whenever there is an impairment
indicator using the fair value guidelines of FAS No. 142. As of March 31, 2003
the Company had approximately $4,411 of goodwill, net of amortization.The Company evaluates the carrying value of its investment in other long-lived
assets for impairment such as property, plant and equipment whenever there is
an impairment indicator, generally using an undiscounted cash flow methodology.
During the nine months ended March 31, 2003 the Company recognized a $5,551
charge related to the abandonment of certain of its telecommunication fixed
assets due to the uncertainty of the recovery of the global telecom industry,
and the write down of certain assets held for sale.Inventory Valuation ReservesThe Company values its inventory for accounting purposes at the lower of cost
(first-in, first-out method) or market. In circumstances where the Company is
aware of a problem in the valuation of a certain item, a specific reserve is
recorded to reduce the item to its net realizable value. For all other
inventory, the Company records a reserve based on a combination of factors,
including actual usage in recent history and projected usage in the future. If
expected circumstances should change due to general economic or product
obsolescence issues resulting in lower-than-expected usage, managements
estimate of the net realizable value could be reduced by a material amount.Revenue RecognitionThe Company has entered into certain contracts with customers for the
construction of lighting and thin-film coating equipment. Revenue is
recognized on these contracts as work on the contract progresses using the
percentage of completion method of accounting, which relies on estimates of
total expected contract revenues and costs. Under this method reasonable
estimates of the costs applicable to the various stages of a contract are made,
thus, impacting the level of recognized revenue. Since the financial reporting
of these contracts depends on estimates, which are assessed continually during
the term of the contract, recognized revenues and profit are subject to
revisions as the contract progresses toward completion. Revisions in profit
estimates are reflected in the period in which the facts that give rise to the
revision become known. Should estimates indicate a loss is expected to be
incurred under a contract, cost of sales is charged with a provision for such
loss.Deferred Tax AssetsThe Company had approximately $57,600 of net deferred tax assets related
principally to certain unused tax credits and loss carryforwards as of June 30,
2002. The realization of these assets is based upon the Company generating
future taxable income. Due to the Companys historical results it is uncertain
as to when it will realize taxable income that will allow it to utilize its tax
credits and loss carryforwards and, accordingly, has recorded a valuation
allowance of approximately $57,600. Management will continue to
evaluate the realization of these deferred tax assets that are subject to the
Companys future operations39Table of Contentswhich are influenced by the overall business environment, which is
difficult to predict and beyond the control of the Company. To the extent that
the Company generates taxable income in the future, a decrease in the valuation
allowance would be required to recognize the deferred tax assets.Impact of Recently Issued Accounting StandardsIn July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations, and FAS
142, Goodwill and Intangible Assets. FAS 141 is effective for all business
combinations completed after June 30, 2001 and requires using the purchase
method of accounting.Major provisions of FAS 142 require intangible assets acquired in a business
combination to be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability. In addition, goodwill, as
well as intangible assets with indefinite lives, will no longer be subject to
amortization effective July 1, 2001. Finally, goodwill and intangible assets
with indefinite lives will be tested for impairment annually and whenever there
is an impairment indicator. Previously, the Company measured goodwill and
intangibles (to be held and used) with indefinite lives for impairment using
undiscounted cash flows under the guidance of FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.The Company adopted FAS 142 as of July 1, 2001. The Company evaluated goodwill
of $66,172 and intangible assets with indefinite lives of $11,874, which
represents tradenames. The Company used third party appraisals and expected
future discounted cash flows to determine the fair value of the reporting units
and whether any impairment of goodwill or indefinite lived intangible assets
existed as of the above date. As a result of this evaluation, the Company
recorded a cumulative effect of change in accounting principle for the
estimated impairment of goodwill and other indefinite lived intangible assets
of $71,171, or $(3.04) per share, as of the beginning of fiscal 2002.The Company adopted Emerging Issues Task Force (EITF) Issue 01-9 Accounting
for Consideration Given by a Vendor to a Customer in the quarter ended March
31, 2002. EITF Issue 01-9 requires that expense associated with a free product
or service delivered at the time of sale of another product or service should
be classified as cost of sales. The Companys fixture subsidiaries that were
sold in the second quarter of fiscal 2002 had incurred and included such costs
in marketing and selling expense. Accordingly, the Company has reclassified
such amounts to cost of sales within these financial statements. The amount
reclassified for the three months and six months ended December 31, 2001 is
$749 and $1,836, respectively.In August 2001, the Financial Accounting Standards Board issued FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.This statement
addresses financial accounting for the impairment and disposal of long-lived
assets, and supersedes FAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.The Company adopted FAS
No. 144 on July 1, 2002.In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Recognition and measurement provisions
of FIN No. 45 become effective for guarantees issued or modified on or after
January 1, 2003.40Table of ContentsThe Companys warranty policy generally provides for one to two year coverage
for lighting systems and components sold world-wide. The Companys policy is
to accrue the estimated cost of warranty coverage and returns at the time the
sale is recorded. The policy with respect to sales returns generally provides
that a customer may not return inventory, except at the Companys option.
Expenses related to warranties are generally not material to the Companys
operations.In January 2003, the FASB issued FIN No. 46 Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements.The provisions of FIN No. 46 are effective
immediately for interests acquired in Variable Interest Entities (VIE) after
January 31, 2003. The Company must account for interests in VIEs existing on
January 31, 2003, under the provisions of FIN No. 46 as of July 1, 2003, the
beginning of the Companys fiscal 2004 first quarter. The FIN addresses the
consolidation of business enterprises of variable interest entities and certain
required disclosures related to such relationships. The Company is evaluating
the impact of this FIN as to whether certain of its investments would meet the
requirement for consolidation or disclosure under this FIN.Foreign CurrencyApproximately 29% of the Companys net sales in fiscal 2002 were denominated in
currencies other than U.S. dollars, principally pounds sterling, Australian
dollars, Canadian dollars, and Japanese yen (36% excluding the fixture
subsidiaries sold in fiscal 2002). A weakening of such currencies versus the
U.S. dollar could have a material adverse effect on the Company. The Company
started a program in fiscal 2002 to hedge a portion of its foreign currency
balance sheet exposures which is intended to reduce any significant impact on
earnings and cash flow.41Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market RiskDuring the nine months ended March 31, 2003, there have been no material
changes in the reported market risks presented in the Companys Annual Report
on Form 10-K for the year ended June 30, 2002. The only change to this
information would be to reflect the acceleration of the Bank Credit Facility
and 8% Senior Notes to fiscal year 2003 in the interest rate sensitivity table.The Company enters into forward exchange contracts to reduce its exposure to
fluctuations in related foreign currencies. These contracts are with a major
financial institution and the risk of loss is considered remote. The Company
does not hold or issue derivative financial instruments for trading purposes.
The total value of open contracts and any risk to the Company as a result of
these arrangements is not material to the Companys financial position,
liquidity or results of operations.
Item 4. Controls and ProceduresThe Company evaluated the design and operation of its disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including the Companys principal executive officer and principal
financial officer within the 90-day period prior to the filing of this
Quarterly Report on Form 10-Q. The principal executive officer and principal
financial officer have concluded, based on their review, that the Companys
disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c)
and 15d-14(c), are effective to ensure that information required to be
disclosed by the Company in reports that it files under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. No significant changes
were made to the Companys internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
Part II. Other InformationExcept 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 ProceedingsThe information included in Note K of the Notes to Condensed Consolidated
Financial Statements (Unaudited) included in this Report on Form 10-Q is
hereby incorporated by reference.
Item 3. Defaults Upon Senior SecuritiesThe Company did not make the September 16, 2002 interest payment on its Senior
Notes due 2008. As a result, the Trustee under the Senior Notes has declared
all principal and interest to be immediately due and payable. As of June 3,
2003, the accrued and unpaid interest on the Senior Notes was $9,733. The
information included in Note F of the Notes to Condensed Consolidated
Financial Statements (Unaudited) included in this Report on Form 10-Q is
hereby incorporated by reference.42Table of Contents
Item 6. Exhibits and Reports on Form 8-K(a) Exhibits Exhibit
    
    
    
    IncorporatedNumber
    
    Title
    
    by Reference3.1
    
    Second Amended and Restated Articles of Incorporation filed
September 26, 1995
    
    
    (1
    )3.2
    
    Certificate of Adoption of Amended Articles of Incorporation filed
February 12, 1997
    
    
    (1
    )3.3
    
    Certificate of Adoption of Third Amendment to Second Amended
and Restated Articles of Incorporation filed October 6, 1999
    
    
    (2
    )3.4
    
    Certificate of Adoption of Fourth Amendment to Second Amended
and Restated Articles of Incorporation filed March 16, 2000
    
    
    (3
    )3.5
    
    Code of Regulations
    
    
    (4
    )4.1
    
    Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.510.1
    
    Post-Petition Credit Agreement among Advanced Lighting
Technologies, Inc. and certain of its subsidiaries and
PNC Bank, National Association, as Agent and Certain
Financial Institutions
Dated as of February 6, 200310.2
    
    Agreement between Advanced Lighting Technologies, Inc. and its
Subsidiaries and Brown, Gibbons, Lang & Company Dated as of
February 5, 200312
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges99.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (1)
    
    Incorporated by reference to Exhibit of same number in Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2002.(2)
    
    Incorporated by reference to Exhibit 3.2 in Companys Quarterly Report on
Form 10-Q/A for the Quarterly Period ended September 30, 1999 filed
January 14, 2000.(3)
    
    Incorporated by reference to Exhibit of same number in Companys Annual
Report on
Form 10-K for the Annual Period ended June 30, 2000 filed September 27,
2000.(4)
    
    Incorporated by reference to Exhibit 3.2 in Companys Registration
Statement on Form S-1, Registration No. 33-97902, effective December 11,
1995. 43    Table of Contents   (b)
    
    Reports on Form 8-KTwo Reports on Form 8-K were filed during the quarter ended March 31, 2003.On January 9, 2003, the Company filed a Current Report dated January 8,
2003, reporting under Item 9 the receipt of a determination from a Nasdaq
Listing Qualifications Panel that its Common Shares would be delisted by the
Nasdaq National Market effective Friday, January 10, 2003.On February 5, 2003, the Company filed a Current Report dated February 5,
2003, reporting under Item 9 that all of its U.S. based operating
subsidiaries (with the exception of Deposition Sciences, Inc.) voluntarily
filed for protection under the provisions of Chapter 11 of the Federal
Bankruptcy Code. 44    Table of Contents  
 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: June 4, 2003
    
    
    
    By:
    
    /s/ Wayne R. HellmanWayne R. Hellman
Chief Executive OfficerDate: June 4, 2003
    
    
    
    By:
    
    /s/ Steven C. PottsSteven C. Potts
Chief Financial Officer 45    Table of Contents  CERTIFICATIONS I, Wayne R. Hellman, certify that:  1.
    
    I have reviewed this quarterly report on Form 10-Q of Advanced Lighting
Technologies, Inc.;2.
    
    Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;3.
    
    Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;4.
    
    The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:  a)
    
    designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;b)
    
    evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); andc)
    
    presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;  5.
    
    The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):  a)
    
    all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; andb)
    
    any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and  6.
    
    The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses. Date: June 4, 2003 /s/ Wayne R. Hellman

Wayne R. Hellman
Chief Executive Officer 46    Table of Contents  CERTIFICATIONS I, Steven C. Potts, certify that:  1.
    
    I have reviewed this quarterly report on Form 10-Q of Advanced Lighting
Technologies, Inc.;2.
    
    Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;3.
    
    Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;4.
    
    The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:  a)
    
    designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;b)
    
    evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); andc)
    
    presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;  5.
    
    The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):  a)
    
    all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; andb)
    
    any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and  6.
    
    The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses. Date: June 4, 2003 /s/ Steven C. Potts
Steven C. Potts
Chief Financial Officer 47    Table of Contents  EXHIBIT INDEX Exhibit
    
    
    
    IncorporatedNumber
    
    Title
    
    by Reference3.1
    
    Second Amended and Restated Articles of Incorporation filed
September 26, 1995
    
    
    (1
    )3.2
    
    Certificate of Adoption of Amended Articles of Incorporation filed
February 12, 1997
    
    
    (1
    )3.3
    
    Certificate of Adoption of Third Amendment to Second Amended
and Restated Articles of Incorporation filed October 6, 1999
    
    
    (2
    )3.4
    
    Certificate of Adoption of Fourth Amendment to Second Amended
and Restated Articles of Incorporation filed March 16, 2000
    
    
    (3
    )3.5
    
    Code of Regulations
    
    
    (4
    )4.1
    
    Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.510.1
    
    Post-Petition Credit Agreement among Advanced Lighting
Technologies, Inc. and certain of its subsidiaries and
PNC Bank, National Association, as Agent and Certain
Financial Institutions
Dated as of February 6, 200310.2
    
    Agreement between Advanced Lighting Technologies, Inc. and its
Subsidiaries and Brown, Gibbons, Lang & Company Dated as of
February 5, 200312
    
    Statement Re: Computation of Ratio of Earnings to Fixed Charges99.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (1)
    
    Incorporated by reference to Exhibit of same number in Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2002.(2)
    
    Incorporated by reference to Exhibit 3.2 in Companys Quarterly Report on
Form 10-Q/A for the Quarterly Period ended September 30, 1999 filed
January 14, 2000.(3)
    
    Incorporated by reference to Exhibit of same number in Companys Annual
Report on
Form 10-K for the Annual Period ended June 30, 2000 filed September 27,
2000.(4)
    
    Incorporated by reference to Exhibit 3.2 in Companys Registration
Statement on
Form S-1, Registration No. 33-97902, effective December 11, 1995. 48