10-Q 1 a10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 COMMISSION FILE NUMBER: 0-23159 Vari-Lite International, Inc. ----------------------------- (Exact name of registrant as specified in its charter) Delaware 75-2239444 -------- ---------- (State or other jurisdiction of ( I.R.S. Employer incorporation or organization) Identification No.) 201 Regal Row, Dallas, Texas 75247 ---------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (214) 630-1963 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date: As of August 9, 2000, there were 7,800,003 shares of Common Stock outstanding. VARI-LITE INTERNATIONAL, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
Page PART I. - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 1999 and June 30, 2000.......................................... 3 Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended June 30, 1999 and 2000...................... 4 Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended June 30, 1999 and 2000....................... 5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 1999 and 2000.................................. 6 Notes to Condensed Consolidated Financial Statements........................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 17 PART II. - OTHER INFORMATION Item 1. Legal Proceedings............................................................... 18 Item 6. Exhibits and Reports on Form 8-K................................................ 18 SIGNATURES.............................................................................. 19
2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, JUNE 30, 1999 2000 ----------- --------------- ASSETS CURRENT ASSETS: Cash............................................................................ $ 1,969 $ 3,474 Receivables, less allowance for doubtful accounts of $720 and $790.............. 13,056 11,842 Inventory....................................................................... 6,586 12,803 Prepaid expense and other current assets........................................ 1,715 2,143 ----------- --------------- TOTAL CURRENT ASSETS......................................................... 23,326 30,262 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment.................................................... 135,220 131,188 Machinery and tools............................................................. 6,044 5,798 Furniture and fixtures.......................................................... 5,009 5,454 Office and computer equipment................................................... 11,060 10,518 Work in progress and raw materials inventory.................................... 3,040 676 ----------- ------------- 160,373 153,634 Less accumulated depreciation and amortization............................... 83,323 86,893 ----------- --------------- 77,050 66,741 OTHER ASSETS....................................................................... 7,324 7,428 ----------- --------------- TOTAL ASSETS................................................................. $ 107,700 $ 104,431 =========== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses........................................... $ 11,855 $ 13,869 Unearned revenue................................................................ 2,606 3,593 Income taxes payable............................................................ 440 40 Current portion of long-term obligations........................................ 8,591 40,137 ----------- -------------- TOTAL CURRENT LIABILITIES.................................................... 23,492 57,639 LONG-TERM OBLIGATIONS.............................................................. 39,459 3,815 DEFERRED INCOME TAXES.............................................................. 1,514 923 ----------- -------------- TOTAL LIABILITIES............................................................ 64,465 62,377 COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY: Preferred Stock, $0.10 par value (10,000,000 shares authorized; no shares outstanding)................................................................. - - Common Stock, $0.10 par value (40,000,000 shares authorized; 7,845,167 shares issued; 7,800,003 shares outstanding)........................................ 785 785 Treasury Stock.................................................................. (186) (186) Additional paid-in capital...................................................... 25,026 25,026 Stockholder notes receivable.................................................... (30) (21) Stock purchase warrants......................................................... - - Accumulated other comprehensive income - foreign currency translation adjustment................................................................. 892 63 Retained earnings............................................................... 16,748 16,387 ----------- -------------- TOTAL STOCKHOLDERS' EQUITY................................................... 43,235 42,054 ----------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 107,700 $ 104,431 =========== ==============
See notes to condensed consolidated financial statements. 3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA)
1999 2000 ---------- ---------- Rental revenues................................................................. $ 18,461 $ 17,690 Product sales and services revenues............................................. 1,605 3,819 ---------- ---------- TOTAL REVENUES............................................................... 20,066 21,509 Rental cost..................................................................... 9,331 8,083 Product sales and services cost................................................. 1,067 2,407 ---------- ---------- TOTAL COST OF SALES.......................................................... 10,398 10,490 ---------- ---------- GROSS PROFIT................................................................. 9,668 11,019 Selling, general and administrative expense..................................... 9,162 8,580 Research and development expense................................................ 1,205 1,287 Impairment of assets............................................................ - 650 ---------- ---------- TOTAL OPERATING EXPENSES..................................................... 10,367 10,517 ---------- ---------- OPERATING INCOME (LOSS)......................................................... (699) 502 Interest expense (net).......................................................... 1,119 1,149 ---------- ---------- LOSS BEFORE INCOME TAX.......................................................... (1,818) (647) Income tax benefit.............................................................. (718) (255) ---------- ---------- NET LOSS........................................................................ (1,100) (392) Other comprehensive loss - foreign currency translation adjustments............. (23) (329) ---------- ---------- COMPREHENSIVE LOSS.............................................................. $ (1,123) $ (721) ========== ========== WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING........................... 7,800,003 7,800,003 ========== ========== PER SHARE INFORMATION BASIC AND DILUTED: Net loss ................................................................... $ (0.14) $ (0.05) Dividends declared.............................................................. $ - $ -
See notes to condensed consolidated financial statements. 4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA)
1999 2000 ---- ---- Rental revenues................................................................. $ 61,976 $ 59,612 Product sales and services revenues............................................. 6,508 10,295 ---------- ---------- TOTAL REVENUES............................................................... 68,484 69,907 Rental cost ................................................................... 31,297 27,886 Product sales and services cost................................................. 4,718 6,329 ---------- ---------- TOTAL COST OF SALES.......................................................... 36,015 34,215 ---------- ---------- GROSS PROFIT................................................................. 32,469 35,692 Selling, general and administrative expense..................................... 27,725 28,309 Research and development expense................................................ 3,687 3,754 Impairment of assets............................................................ - 650 ---------- ---------- TOTAL OPERATING EXPENSES..................................................... 31,412 32,713 ---------- ---------- OPERATING INCOME .............................................................. 1,057 2,979 Interest expense (net).......................................................... 3,151 3,575 ---------- ---------- LOSS BEFORE INCOME TAX.......................................................... (2,094) (596) Income tax benefit ............................................................ (827) (235) ---------- ---------- NET LOSS........................................................................ (1,267) (361) Other comprehensive loss - foreign currency translation adjustments............. (252) (829) ---------- ---------- COMPREHENSIVE LOSS.............................................................. $ (1,519) $ (1,190) ========== ========== WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING........................... 7,800,003 7,800,003 ========== ========== PER SHARE INFORMATION BASIC AND DILUTED: Net loss.................................................................... $ (0.16) $ (0.05) Dividends declared.............................................................. $ - $ -
See notes to condensed consolidated financial statements. 5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 (UNAUDITED) (IN THOUSANDS)
1999 2000 ----------- ---------- Cash flows from operating activities: Net loss $ (1,267) $ (361) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................................. 11,577 10,536 Amortization of note discount and deferred loan fees...................... 95 141 Provision for doubtful accounts........................................... 92 83 Impairment of assets...................................................... - 650 Deferred income taxes..................................................... (1,144) (591) Gain on sale of Brilliant Stages assets and cancellation of land lease.... (599) - Gain on sale of equipment................................................. (103) (1,882) Provisions for ESOP and ESEP contributions................................ 187 188 Net change in assets and liabilities: Accounts receivable..................................................... 1,696 1,131 Prepaid expenses........................................................ (598) (428) Inventory............................................................... (1,900) (5,923) Other assets............................................................ 549 (469) Accounts payable, accrued liabilities and income taxes payable.......... (3,017) 777 Unearned revenue........................................................ (43) 987 ----------- ---------- Net cash provided by operating activities............................... 5,525 4,839 Cash flows from investing activities: Capital expenditures, including rental equipment............................. (10,499) (2,470) Acquisition of European company.............................................. (1,192) - Proceeds from sale of Irideon and Brilliant Stages assets and cancellation of land lease.............................................................. 2,892 - Proceeds from sale of equipment.............................................. 275 3,687 ----------- ---------- Net cash provided by (used in) investing activities..................... (8,524) 1,217 Cash flows from financing activities: Proceeds from issuance of debt............................................... 24,041 27,805 Principal payments on debt................................................... (22,121) (31,795) Principal payments on distributor advances................................... (552) (263) Proceeds from payments on stockholder notes receivable....................... 31 8 ----------- ---------- Net cash provided by (used in) financing activities..................... 1,399 (4,245) Effect from foreign currency translation adjustment............................. (127) (306) ----------- ---------- Net increase (decrease) during the period....................................... (1,727) 1,505 Cash, beginning of period ...................................................... 3,838 1,969 ----------- ---------- Cash, end of period............................................................. $ 2,111 $ 3,474 =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense............................................... $ 3,192 $ 4,160 Cash paid for income taxes................................................... $ 1,812 $ 614
See notes to condensed consolidated financial statements. 6 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) 1. Interim Financial Information The accompanying unaudited condensed consolidated financial statements of Vari-Lite International, Inc. (the "Company") have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company. The results of operations for the three-month and nine-month periods ended June 30, 2000 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the fiscal year ending September 30, 2000. For further information, refer to the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. 2. Inventory Inventory consists of the following:
September 30, June 30, 1999 2000 ---- ---- Raw materials.............................................. $5,854 $10,689 Work in progress........................................... 587 1,477 Finished goods............................................. 145 637 ------ ------- $6,586 $12,803 ====== =======
3. Segment Reporting In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial 7 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) performance. The Company has three reportable segments: North America, Europe and Pacific Rim, which are organized, managed and analyzed geographically and operate in a single industry segment. Information about the Company's operations for the three and nine months ended June 30, 1999 and 2000 is presented below:
THREE MONTHS ENDED ---------------------------------------------------------------------- PACIFIC NORTH AMERICA RIM EUROPE INTERCOMPANY TOTAL ------------- --- ------ ------------ ----- JUNE 30, 1999: -------------- Net Revenues from unaffiliated customers............................. $10,072 $2,495 $7,499 $ - $20,066 Intersegment sales...................... 3,932 - 960 (4,892) - ------- ------ ------ ---------- -------- Total net revenues.................... 14,004 2,495 8,459 (4,892) 20,066 Operating income (loss)................. 937 307 (215) (1,728) (699) Depreciation and amortization........... 3,143 35 556 - 3,734 Total segment assets.................... 95,123 6,008 18,275 (9,744) 109,662 JUNE 30, 2000: -------------- Net Revenues from unaffiliated customers............................. $ 13,709 $2,061 $5,739 $ - $21,509 Intersegment sales...................... 4,311 232 894 (5,437) - ------- ------ ------ ---------- -------- Total net revenues.................... 18,020 2,293 6,633 (5,437) 21,509 Operating income (loss)................. 1,497 (24) 822 (1,793) 502 Depreciation and amortization........... 2,902 42 558 - 3,502 Total segment assets.................... 89,765 7,351 18,541 (11,226) 104,431
8 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA)
NINE MONTHS ENDED ------------------------------------------------------------------------ PACIFIC NORTH AMERICA RIM EUROPE INTERCOMPANY TOTAL ------------- --- ------ ------------ ----- JUNE 30, 1999: -------------- Net Revenues from unaffiliated customers............................. $35,461 $8,223 $24,800 $ - $68,484 Intersegment sales...................... 13,674 - 961 (14,635) - ------- ------ ------- -------- ------- Total net revenues.................... 49,135 8,223 25,761 (14,635) 68,484 Operating income........................ 4,621 665 664 (4,893) 1,057 Depreciation and amortization........... 9,289 96 2,287 - 11,672 Total segment assets.................... 95,123 6,008 18,275 (9,744) 109,662 JUNE 30, 2000: -------------- Net Revenues from unaffiliated customers............................. $40,968 $7,869 $21,070 $ - $69,907 Intersegment sales...................... 15,244 232 894 (16,370) - ------- ------ ------- -------- ------- Total net revenues.................... 56,212 8,101 21,964 (16,370) 69,907 Operating income (loss)................. 5,519 (66) 3,248 (5,722) 2,979 Depreciation and amortization........... 9,041 134 1,502 - 10,677 Total segment assets.................... 89,765 7,351 18,541 (11,226) 104,431
4. Debt On December 19, 1997, the Company entered into its current credit facility (the "New Credit Facility") and canceled its existing credit facility. As of September 30, 1999, the commitment under the New Credit Facility, as amended on August 25, 1999, was $49,000. At June 30, 2000, the commitment under the New Credit Facility was $38,000. Borrowings under the New Credit Facility were $38,000 at June 30, 2000 and bear interest at the lender's base rate plus a margin ranging from 1.00% to 3.50% (10.75% as of June 30, 2000) based upon the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility) and are secured by substantially all of the assets owned by the Company and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee is charged on the average daily unused portion of the New Credit Facility at a rate ranging from 0.20% to 0.50% per annum based upon the ratio of Adjusted Funded Debt to EBITDA. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. 9 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) The commitment under the New Credit Facility decreased to $38,000 on April 30, 2000 and all borrowings under the New Credit Facility are due and payable on January 1, 2001 and, as a result, the debt has been classified as current. The Company met its obligation on April 30, 2000 through funds from operations, third party asset financing and the sale of automated rental assets. There can be no assurance that the Company will be able to make the final payment of $38,000 on or before January 1, 2001. If the Company does not pay the remaining balance of the debt by January 1, 2001, the lenders will be entitled to pursue all rights available under the New Credit Facility. In April 2000, the Company's wholly owned subsidiary Vari-Lite Productions Services, N.V. obtained an 80,000 Belgium Franc (or approximately $1,808) corporate loan from Fortis Bank in Brussels, Belgium which is secured by all of the assets of Vari-Lite Production Services, N.V. and a guarantee by the Company. Principal plus interest at 5.58% will be repaid over the three year term of the loan with equal quarterly payments of 7,295 Belgium Francs. The Company has borrowed money to purchase computer equipment and office furniture and fixtures and conventional lighting equipment. These loans are typically amortized over three years and bear interest at various rates ranging from 2.0% to 10.35%. Proceeds received under this type of financing were approximately $1,400 and $2,562 for the nine-month periods ending June 30, 1999 and 2000, respectively, and borrowings outstanding under this type of financing at June 30, 1999 and 2000 were approximately $3,840 and $4,040, respectively. At September 30, 1998, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $24,200, which effectively changed the Company's variable LIBOR interest rate exposure on a substantial portion of its U.S. dollar borrowings to a fixed weighted average interest rate of 7.79%. In August 1999, the Company terminated the interest rate swap agreements for $300 in cash, which was recorded as a gain and was included in selling, general and administrative expense. 5. Net Income Per Share Basic earnings per share are computed based upon the weighted average number of common shares outstanding. Diluted earnings per share reflects the dilutive effect, if any, of stock options and warrants. For the three-month and nine-month periods ended June 30, 2000, earnings per share excludes 686,900 stock options and 296,057 warrants which are anti-dilutive. For the three-month and nine-month periods ended June 30, 1999, earnings per share excludes 592,300 stock options and 242,233 warrants which were anti-dilutive. 10 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) 6. Accounting Standards Changes In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This standard, which establishes new accounting and reporting standards for derivative financial instruments, must be adopted no later than the first quarter of the Company's fiscal year 2001. The Company is currently analyzing the effect of this standard and does not expect it to have a material effect on the Company's consolidated financial position, results of operations or cash flows. 7. Acquisitions In October 1998, the Company acquired the VARI*LITE-Registered Trademark- distribution rights and related assets of its French distributor for approximately $1,200 in cash, virtually all of which has been recorded as goodwill. 8. Dispositions During fiscal 1998, the Company made a decision to dispose of its Irideon-Registered Trademark- architectural automated lighting product line. As a result of this decision, during 1998 the Irideon-Registered Trademark- assets were written down to their net realizable value in accordance with SFAS No. 121. On October 30, 1998, the Company sold substantially all of the Irideon-Registered Trademark- assets for its net book value, after writedown, of approximately $2,000. On December 31, 1998, the Company sold substantially all of the assets of Brilliant Stages, Ltd., one of the Company's European subsidiaries, for approximately $500, resulting in a gain of approximately $99. In June 2000, the Company made a decision to dispose of its Madrid, Spain based operations. As a result of this decision, the Madrid assets were written down to their adjusted net realizable value in accordance with SFAS No. 121. This resulted in a pre-tax charge of $650 (or $393 after taxes, $0.05 per basic and diluted share). In August 2000, the Company sold all of the Madrid assets for their net book value. 9. Lease Cancellation In December 1995, the Company entered into an operating lease with an unaffiliated land developer. In December 1998, the lease was canceled as a result of the sale of the land by the developer, resulting in a gain to the Company of approximately $500. 11 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) 10. Commitments, Contingencies and Legal Proceedings In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In August 1995, the Company brought suit asserting a number of claims of infringement of several of its patents by High End Systems, Inc. ("High End") in the Northern District of Texas seeking monetary damages and injunctive relief to prevent future patent infringement. In December 1998, the court approved a negotiated settlement between the Company and High End, the specific terms of which are confidential, but included a cash settlement paid to the Company, a cross license of certain patents and authorization for High End to continue to sell all of the products that were subject to the suit. In December 1998, the Company brought a similar suit against Martin Gruppen A/S and Martin Professional A/S (collectively, "Martin") in the Eastern District of Texas. In July 1999, the court entered a preliminary injunction which prohibits Martin from making, using, leasing or offering for sale or lease in the United States, or importing into the United States, certain Martin products. The injunction was upheld on appeal in June 2000. The Company will continue with the suit, which is expected to go to trial in late 2000. In November 1999, four automated lighting manufacturers, Coemar S.p.A., Clay Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each filed suit against the Company in the Southern District of New York. Each of the lawsuits seeks declaration from the court that one of the Company's patents, which was the subject of the litigation with High End and Martin, is invalid, unenforceable and/or not infringed by each of the lighting manufacturers. In July 2000, the New York court dismissed the suits by SGM Elettronica, s.r.l. and Studio Due s.r.l. for lack of subject matter jurisdiction and moved the suits by Coemar S.p.A. and Clay Paky S.p.A. to the Northern District of Texas, in Dallas. No trial date has been set. 11. Subsequent Events In July 2000, the Company entered into a letter of intent to sell its operations in Belgium, the Netherlands, France and Sweden to an investment company which owns Focus Showequipment B.V. in Amsterdam. The sale is subject to various conditions, but is scheduled to be completed in September 2000. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 REVENUES. Total revenues increased 7.2%, or $1.4 million, to $21.5 million in the three-month period ended June 30, 2000, compared to $20.1 million in the three-month period ended June 30, 1999. The revenue increase was attributable primarily to the factors set forth below. Rental revenues decreased 4.2%, or $0.8 million, to $17.7 million in the three-month period ended June 30, 2000, compared to $18.5 million in the three-month period ended June 30, 1999. This decrease was primarily due to a decrease in the revenues earned by the Company's European and Asian lighting rental operations. Product sales and services revenues increased 137.9%, or $2.2 million, to $3.8 million in the three-month period ended June 30, 2000, compared to $1.6 million in the three-month period ended June 30, 1999. This increase was primarily due to sales of new and used Vari*Lite automated lighting equipment. RENTAL COST. Rental cost decreased 13.4%, or $1.2 million, to $8.1 million in the three-month period ended June 30, 2000, compared to $9.3 million in the three-month period ended June 30, 1999. Rental cost as a percentage of rental revenues decreased to 45.7% in the three-month period ended June 30, 2000, from 50.5% in the three-month period ended June 30, 1999. The decrease in rental cost as a percentage of total rental revenues was primarily due to improvement in rental prices and general reductions in variable operating costs. PRODUCT SALES AND SERVICES COST. Product sales and services cost increased 125.6%, or $1.3 million, to $2.4 million in the three-month period ended June 30, 2000, compared to $1.1 million in the three-month period ended June 30, 1999. Product sales and services cost as a percentage of product sales and services revenues decreased to 63.0% in the three-month period ended June 30, 2000, from 66.5% in the three-month period ended June 30, 1999. This decrease was primarily due to the lower costs associated with the sale of automated lighting equipment which represented a higher portion of the product sales and services revenues during the three-month period ended June 30, 2000 compared to the three-month period ended June 30, 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense decreased 6.4%, or $0.6 million, to $8.6 million in the three-month period ended June 30, 2000, compared to $9.2 million in the three-month period ended June 30, 1999. This expense as a percentage of total revenues decreased to 39.9% in the three-month period ended June 30, 2000, from 45.7% in the three-month period ended June 30, 1999. The decrease was primarily due to lower overhead costs as a result of the Company's restructuring efforts. 13 RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 6.8%, or $0.1 million, to $1.3 million in the three-month period ended June 30, 2000, compared to $1.2 million in the three-month period ended June 30, 1999. IMPAIRMENT OF ASSETS. In the three-month period ended June 30, 2000, the Company made a decision to sell its Madrid, Spain based operations. As a result of this decision, the Madrid assets were written down to their adjusted net realizable value, resulting in a pre-tax charge of $0.7 million in the three-month period ended June 30, 2000. INTEREST EXPENSE. Interest expense in the three-month period ended June 30, 2000 was approximately the same as in the three-month period ended June 30, 1999. Despite a reduction in debt, interest expense remained approximately the same as a result of higher interest rates. INCOME TAXES. The effective tax rate in the three-month periods ended June 30, 2000 and 1999 were 39.4% and 39.5%, respectively. NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999 REVENUES. Total revenues increased 2.1%, or $1.4 million, to $69.9 million in the nine-month period ended June 30, 2000, compared to $68.5 million in the nine-month period ended June 30, 1999. The revenue increase was attributable primarily to the factors set forth below. Rental revenues decreased 3.8%, or $2.4 million, to $59.6 million in the nine-month period ended June 30, 2000, compared to $62.0 million in the nine-month period ended June 30, 1999. This decrease was primarily due to a decrease in the revenues earned by the Company's European and Asian lighting rental operations and a decrease in revenue from sales-type leases as a result of substantial revenue earned in the nine-month period ended June 30, 1999 which did not occur in the nine-month period ended June 30, 2000. Product sales and services revenues increased 58.2%, or $3.8 million, to $10.3 million in the nine-month period ended June 30, 2000, compared to $6.5 million in the nine-month period ended June 30, 1999. This increase was primarily due to revenue generated from the sale of automated lighting equipment to certain of the Company's independent distributors and to large theatrical productions. Offsetting these increases were decreases in revenues due to the disposal of the Company's Irideon-Registered Trademark- automated product line in October 1998 and the Company's Brilliant Stages, Ltd. subsidiary ("Brilliant Stages") in December 1998. RENTAL COST. Rental cost decreased 10.9%, or $3.4 million, to $27.9 million in the nine-month period ended June 30, 2000, compared to $31.3 million in the nine-month period ended June 30, 1999. Rental cost as a percentage of rental revenues decreased to 46.8% in the nine-month period ended June 30, 2000, from 50.5% in the nine-month period ended June 30, 1999, primarily due to improvement in rental prices and general reductions in variable operating costs. PRODUCT SALES AND SERVICES COST. Product sales and services cost increased 34.2%, or $1.6 million, to $6.3 million in the nine-month period ended June 30, 2000, compared to $4.7 million in the nine-month period ended June 30, 1999. Product sales and services cost as a percentage of product 14 sales and services revenues decreased to 61.5% in the nine-month period ended June 30, 2000, from 72.5% in the nine-month period ended June 30, 1999. This decrease was primarily due to the disposal of the Company's Irideon-Registered Trademark- automated product line and Brilliant Stages and the lower costs associated with the sale of automated lighting equipment which represented a higher portion of the product sales and service revenues during the nine-month period ended June 30, 2000 compared to the nine-month period ended June 30, 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 2.1%, or $0.6 million, to $28.3 million in the nine-month period ended June 30, 2000, compared to $27.7 million in the nine-month period ended June 30, 1999. This increase was primarily due to additional sales and marketing expenses associated with the introduction of the Company's new products that were sold beginning in May 2000 and due to a gain on the cancellation of a land lease in the nine-month period ended June 30, 1999. This increase was partially offset by lower overhead costs as a result of the Company's restructuring efforts. This expense as a percentage of total revenues in the nine-month period ended June 30, 2000 was unchanged from the nine-month period ended June 30, 1999. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 1.8%, or $0.1 million, to $3.8 million in the nine-month period ended June 30, 2000, compared to $3.7 million in the nine-month period ended June 30, 1999. This expense as a percentage of total revenues for the nine-month periods ended June 30, 2000 and 1999 was 5.4%. IMPAIRMENT OF ASSETS. In the nine-month period ended June 30, 2000, the Company made a decision to sell its Madrid, Spain based operations. As a result of this decision, the Madrid assets were written down to their adjusted net realizable value, resulting in a pre-tax charge of $0.7 million in the nine-month period ended June 30, 2000. INTEREST EXPENSE. Interest expense increased 13.5%, or $0.4 million, to $3.6 million in the nine-month period ended June 30, 2000, compared to $3.2 million in the nine-month period ended June 30, 1999. Despite a reduction in debt, interest expense slightly increased as a result of higher interest rates. INCOME TAXES. The effective tax rate in the nine-month periods ended June 30, 2000 and 1999 were 39.4% and 39.5%, respectively. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations and capital expenditures with cash flow from operations, bank borrowings and advances from distributors and customers. The Company's operating activities generated cash flow of $5.5 million and $4.8 million for the nine-month periods ended June 30, 1999 and 2000, respectively. As of September 30, 1999, the commitment under the New Credit Facility, as amended on August 25, 1999, was $49.0 million. At June 30, 2000, the commitment under the New Credit Facility was $38.0 million. 15 Borrowings under the New Credit Facility were $38.0 million at June 30, 2000 and bear interest at the lender's base rate plus a margin ranging from 1.00% to 3.50% (10.75% as of June 30, 2000) based upon the Company's ratio of Adjusted Funded Debt to EBITDA and are secured by substantially all of the assets owned by the Company and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee is charged on the average daily unused portion of the New Credit Facility at a rate ranging from 0.20% to 0.50% per annum based upon the ratio of Adjusted Funded Debt to EBITDA. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The commitment under the New Credit Facility decreased to $38.0 million on April 30, 2000 and all borrowings under the New Credit Facility are due and payable on January 1, 2001 and, as a result, the debt has been classified as current. The Company met its obligation on April 30, 2000 through funds from operations, third party asset financing and the sale of automated rental assets. There can be no assurance that the Company will be able to make the final payment of $38.0 million on January 1, 2001. If the Company does not pay the remaining balance of the debt by January 1, 2001, the lenders will be entitled to pursue all rights available under the New Credit Facility. In April 2000, the Company's wholly owned subsidiary Vari-Lite Productions Services, N.V. obtained an 80.0 million Belgium Franc (or approximately $1.8 million) corporate loan from Fortis Bank in Brussels, Belgium which is secured by all of the assets of Vari-Lite Production Services, N.V. and a guarantee by the Company. Principal plus interest at 5.58% will be repaid over the three year term of the loan with equal quarterly payments of 7.2 million Belgium Francs. The Company has borrowed money to purchase computer equipment and office furniture and fixtures and conventional lighting equipment. These loans are typically amortized over three years and bear interest at various rates ranging from 2.0% to 10.35%. Proceeds received under this type of financing were approximately $2.6 million and $1.4 million for the nine-month periods ending June 30, 2000 and 1999, respectively, and borrowings outstanding under this type of financing at June 30, 2000 and 1999 were approximately $4.0 million and $3.8 million, respectively. At September 30, 1998, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $24.2 million, which effectively changed the Company's variable LIBOR interest rate exposure on a substantial portion of its U.S. dollar borrowings to a fixed weighted average interest rate of 7.79%. In August 1999, the Company terminated the interest rate swap agreements for $0.3 million in cash, which was recorded as a gain and was included in selling, general and administrative expense. The Company's business requires significant capital expenditures. Capital expenditures for the nine months ended June 30, 2000 and 1999 were approximately $2.5 million and $10.5 million, respectively, of which approximately $2.0 million and $9.9 million were for rental equipment inventories. The majority of the Company's revenues are generated through the rental of automated lighting and concert sound systems and, as such, the Company must maintain a significant amount of rental equipment to meet customer demands. 16 The Company had a working capital deficit of $39.7 million and $27.4 million at June 30, 1999 and 2000, respectively. The Company has historically maintained working capital deficits since the bulk of its revenue generating assets are classified as long-term assets rather than current assets. The Company anticipates a working capital deficit during the remainder of fiscal 2000 due to the scheduled maturity of the New Credit Facility on January 1, 2001, which was recorded as current debt as of June 30, 2000. The Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, the success of the Company in marketing, selling and supporting products sold, the level of competition, the success of the Company's research and development programs, the ability to achieve competitive and technological advances and general and economic conditions and other factors beyond the Company's control. Management believes that cash flow generated from operations will not be sufficient to pay the outstanding balance under the New Credit Facility and fund the Company's anticipated cash needs for operations and capital expenditures for the next twelve months. The Company is currently in discussions with several banks regarding refinancing the New Credit Facility. If the Company is unable to reach an agreement with a new financing source, the Company will be forced to negotiate an extension of the maturity date of the New Credit Facility. There can be no assurance that the Company will be able to either obtain new financing or extend the maturity date of the New Credit Facility. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements" as that phrase is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "anticipate," "believe," "estimate," "expect," "will," "could," "may" and similar expressions, as they relate to management or the Company, are intended to identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions, including without limitation the following as they relate to the Company: fluctuations in operating results and seasonality; ability to introduce new products; the success of the Company in marketing, selling and supporting products sold; technological changes; reliance on intellectual property; dependence on the entertainment industry; competition; dependence on management; foreign exchange risks; international trade risks; dependence on key suppliers and dependence on manufacturing facility. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not feel that the market risks for the three-month and nine-month periods ended June 30, 2000 substantially changed from those risks outline for the year ended September 30, 1999 in the Company's Form 10-K. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In August 1995, the Company brought suit asserting a number of claims of infringement of several of its patents by High End in the Northern District of Texas seeking monetary damages and injunctive relief to prevent future patent infringement. In December 1998, the court approved a negotiated settlement between the Company and High End, the specific terms of which are confidential, but included a cash settlement paid to the Company, a cross license of certain patents and authorization for High End to continue to sell all of the products that were subject to the suit. In December 1998, the Company brought a similar suit against Martin Gruppen A/S and Martin Professional A/S (collectively, "Martin") in the Eastern District of Texas. In July 1999, the court entered a preliminary injunction which prohibits Martin from making, using, leasing or offering for sale or lease in the United States, or importing into the United States, certain Martin products. The injunction was upheld on appeal in June 2000. The Company will continue with the suit, which is expected to go to trial in late 2000. In November 1999, four automated lighting manufacturers, Coemar S.p.A., Clay Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each filed suit against the Company in the Southern District of New York. Each of the lawsuits seeks declaration from the court that one of the Company's patents, which was the subject of the litigation with High End and Martin, is invalid, unenforceable and/or not infringed by each of the lighting manufacturers. In July 2000, the New York court dismissed the suits by SGM Elettronica, s.r.l. and Studio Due s.r.l. for lack of subject matter jurisdiction and moved the suits by Coemar S.p.A. and Clay Paky S.p.A. to the Northern District of Texas, in Dallas. No trial date has been set. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) No reports on Form 8-K were filed for the quarter ended June 30, 2000. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARI-LITE INTERNATIONAL, INC. Date: August 9, 2000 By: /s/ JEROME L. TROJAN III ----------------- ---------------------------- Jerome L. Trojan III Vice President - Finance, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 19