-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VyE9dVEEyXN3oBIl6+a9YD32p2lZztl34IoFvsoKT7RTqYMhAsUTPWdk59Xl8Cdd AT9VK2ffulUCPLR1d6F++A== 0001047469-99-006153.txt : 19990217 0001047469-99-006153.hdr.sgml : 19990217 ACCESSION NUMBER: 0001047469-99-006153 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI LITE INTERNATIONAL INC CENTRAL INDEX KEY: 0001033491 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 752239444 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-33559 FILM NUMBER: 99541799 BUSINESS ADDRESS: STREET 1: 201 REGAL ROW CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146301963 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 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 February 12, 1999, 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 DECEMBER 31, 1998
PART I. - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31, 1998 .......................... 3 Consolidated Statements of Income for the three months ended December 31, 1997 and 1998 ................. 4 Consolidated Statements of Cash Flows for the three months ended December 31, 1997 and 1998 ................. 5 Notes to Consolidated Financial Statements ........................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................................... 10 PART II. - OTHER INFORMATION Item 1. Legal Proceedings ................................................. 15 Item 6. Exhibits and Reports on Form 8-K .................................. 15 SIGNATURES ................................................................. 16
2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, DECEMBER 31, 1998 1998 ---------- ----------- CURRENT ASSETS: Cash ............................................................... $ 3,838 $ 3,956 Receivables, less allowance for doubtful accounts of $900 and $932.. 13,471 14,593 Inventory .......................................................... 6,075 4,624 Prepaid expense and other current assets ........................... 1,749 1,784 ---------- ----------- TOTAL CURRENT ASSETS ........................................... 25,133 24,957 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment ....................................... 127,763 128,626 Machinery and tools ................................................ 5,097 6,320 Furniture and fixtures ............................................. 4,439 4,542 Office and computer equipment ...................................... 10,399 10,307 Work in progess and raw materials inventory ........................ 5,320 4,373 ---------- ----------- 153,018 154,168 Less accumulated depreciation and amortization ................. 71,745 74,489 ---------- ----------- 81,273 79,679 OTHER ASSETS ......................................................... 8,221 8,715 ---------- ----------- TOTAL ASSETS ................................................... $ 114,627 $ 113,351 ---------- ----------- ---------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses .............................. $ 13,189 $ 11,464 Unearned revenue ................................................... 1,694 1,800 Income taxes payable ............................................... 999 393 Current portion of long-term obligations ........................... 3,049 2,734 ---------- ----------- TOTAL CURRENT LIABILITIES ...................................... 18,931 16,391 LONG-TERM OBLIGATIONS ................................................ 47,284 48,481 DEFERRED INCOME TAXES ................................................ 3,708 3,705 ---------- ----------- TOTAL LIABILITIES .............................................. 69,923 68,577 COMMITMENTS AND CONTINGENCIES 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; 7,800,003 and 7,800,003 shares outstanding) ...................... 785 785 Treasury Stock ..................................................... (186) (186) Additional paid-in capital ......................................... 24,426 24,426 Stockholder notes receivable ....................................... (82) (77) Stock purchase warrants ............................................ 600 600 Accumulated other comprehensive loss - foreign currency translation adjustment ........................................... (230) (407) Retained earnings .................................................. 19,391 19,633 ---------- ----------- TOTAL STOCKHOLDERS' EQUITY ..................................... 44,704 44,774 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 114,627 $ 113,351 ---------- ----------- ---------- -----------
See notes to consolidated financial statements. 3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998 (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA)
1997 1998 ---------- ---------- Rental revenues ................................................................................. $ 19,170 $ 22,634 Product sales and services revenues ............................................................. 3,349 2,614 ---------- ---------- TOTAL REVENUES ............................................................................... 22,519 25,248 Rental costs..................................................................................... 7,567 10,963 Product sales and services costs................................................................. 2,314 1,882 ---------- ---------- TOTAL COST OF SALES .......................................................................... 9,881 12,845 ---------- ---------- GROSS PROFIT ................................................................................. 12,638 12,403 Selling, general and administrative expense ..................................................... 8,257 9,703 Research and development expense ................................................................ 1,573 1,246 ---------- ---------- TOTAL OPERATING EXPENSES ..................................................................... 9,830 10,949 ---------- ---------- OPERATING INCOME ................................................................................ 2,808 1,454 Interest expense (net) .......................................................................... 729 1,041 ---------- ---------- INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......................................................................... 2,079 413 Income taxes .................................................................................... 821 171 ---------- ---------- INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... 1,258 242 Extraordinary loss .............................................................................. (737) - Cumulative effect of change in accounting principle ............................................. (195) - ---------- ---------- NET INCOME ...................................................................................... 326 242 Other comprehensive income (loss) - foreign currency translation adjustments .................... 113 (177) ---------- ---------- COMPREHENSIVE INCOME ............................................................................ $ 439 $ 65 ---------- ---------- ---------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING ............................................................. 7,452,177 7,800,003 ---------- ---------- ---------- ---------- WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING ..................................................... 7,467,192 7,800,003 ---------- ---------- ---------- ---------- PER SHARE INFORMATION BASIC: Income before extraordinary loss and cumulative effect of change in accounting principle .............................................................................. $ 0.17 $ 0.03 Extraordinary loss .......................................................................... (0.10) - Cumulative effect of change in accounting principle ......................................... (0.03) - Net income .................................................................................. $ 0.04 $ 0.03 DILUTED: Income before extraordinary loss and cumulative effect of change in accounting principle ............................................................................... $ 0.17 $ 0.03 Extraordinary loss .......................................................................... (0.10) - Cumulative effect of change in accounting principle ......................................... (0.03) - Net income .................................................................................. $ 0.04 $ 0.03 Dividends declared .............................................................................. $ - $ -
See notes to consolidated financial statements. 4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998 (UNAUDITED) (IN THOUSANDS)
1997 1998 ---------- ---------- Cash flows from operating activities: Net income ............................................................. $ 326 $ 242 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................................ 3,192 3,859 Amortization of note discount and deferred loan fees ................. 54 13 Provision for doubtful accounts ...................................... 31 17 Extraordinary loss from early extinguishment of debt ................. 737 - Cumulative effect of change in accounting principle .................. 195 - Deferred income taxes ................................................ 200 (3) Gain on sale of Brilliant Stages assets and cancellation of land lease - (599) Loss (gain) on sale of equipment ..................................... (38) 13 Provisions for ESOP and ESEP contributions ........................... 63 63 Net change in assets and liabilities: Accounts receivable .............................................. (615) (1,139) Prepaid expenses ................................................. 22 (41) Inventory ........................................................ (1,481) (490) Other assets ..................................................... (893) 658 Accounts payable, accrued liabilities and income taxes payable ... (2,993) (2,395) Unearned revenue ................................................. (391) 106 ---------- ---------- Net cash provided by (used in) operating activities .............. (1,591) 304 Cash flows from investing activities: Capital expenditures, including rental equipment ....................... (3,967) (2,904) Acquisition of French distributor....................................... - (1,188) Proceeds from sale of Irideon and Brilliant Stages assets and cancellation of land lease ....................................... - 2,892 Proceeds from sale of equipment ........................................ 67 - ---------- ---------- Net cash used in investing activities ............................ (3,900) (1,200) Cash flows from financing activities: Proceeds from issuance of debt ......................................... 43,033 6,808 Principal payments on debt ............................................. (58,354) (5,795) Proceeds from issuance of distributor advances ......................... 277 - Principal payments on distributor advances ............................. (205) (125) Proceeds from payments on stockholder notes receivable ................. 10 5 Proceeds from public offering of common stock .......................... 21,307 - ---------- ---------- Net cash provided by financing activities ........................ 6,068 893 Effect from foreign currency translation adjustment ...................... (177) 121 ---------- ---------- Net increase during the period ........................................... 400 118 Cash, beginning of period ................................................ 1,862 3,838 ---------- ---------- Cash, end of period ...................................................... $ 2,262 $ 3,956 ---------- ---------- ---------- ---------- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense ......................................... $ 805 $ 1,099 Cash paid for income taxes ............................................. $ 477 $ 1,133
See notes to consolidated financial statements. 5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) 1. Interim Financial Information The accompanying unaudited 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 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 months ended December 31, 1998 are not indicative of the results of operations that may be expected for any other interim periods or for the fiscal year ending September 30, 1999. 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, 1998. 2. Inventory Inventory consists of the following:
September 30, December 31, 1998 1998 ------------- ------------ Raw materials ......... $5,283 $4,447 Work in progress ...... 616 177 Finished goods ........ 176 - ------ ------ $6,075 $4,624 ------ ------ ------ ------
3. Initial Public Offering On October 15, 1997, in conjunction with the Company's reincorporation in Delaware and an initial public offering, the Board of Directors of the Company created a new class of common stock and authorized 40,000,000 shares. As a result of the reincorporation, stockholders received 3.76368 shares of common stock for each share of the Company's Class A common stock and Class B common stock held by the stockholders. The Company filed a Registration Statement (Commission file no. 333-33559) for the public offering of 2,300,000 shares of common stock which became effective October 16, 1997. The Company sold 2,000,000 shares of common stock for $12.00 per share for an aggregate amount of $24,000 and certain stockholders of the Company sold 300,000 shares of common stock for $12.00 per share for an aggregate amount of $3,600. 4. Long-Term Debt and Extraordinary Loss On December 19, 1997, the Company entered into a five-year $50,000 multicurrency revolving credit facility (the "New Credit Facility") and canceled its existing credit facility. The initial $50,000 committment on the New Credit Facility, as amended in December 1998, 6 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) decreases by $1,000 during each of the third and fourth quarters of fiscal 1999 and $1,500 per quarter thereafter through maturity. Borrowings under the New Credit Facility bear interest at the lender's base rate or LIBOR plus a rate margin ranging from 1.00% to 3.50% 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's domestic subsidiaries 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. In December 1997, the Company expensed deferred financing costs related to the prior debt facility of $737 (net of tax benefit of $481) relating to the early extinguishment of debt, which have been reflected in the consolidated statements of income as an extraordinary loss. 5. Net Income Per Share During fiscal 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." All EPS information for all periods presented have been restated to present basic and diluted EPS under the provisions of SFAS No. 128. Options to purchase shares of Common Stock at prices ranging from $11.875 to $13.20 were outstanding during the three months ended December 31, 1997 and were included in the computation of diluted EPS. In November 1998, options to purchase shares of Common Stock, which originally ranged from $7.875 to $12.00, were repriced to $3.75 and were outstanding during the three months ended December 31, 1998 but were not included in the computation of diluted EPS because the exercise price of the options was greater than the average market price of the common shares. 7 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) The following is a computation of shares used in calculating diluted income per share for the three months ended December 31, 1997 and 1998:
1997 1998 --------- --------- Weighted average shares outstanding ................................. 7,452,177 7,800,003 Dilutive effect of stock options and warrants after application of treasury stock method ......................................... 15,015 - --------- --------- Shares used in calculating diluted income per share ................. 7,467,192 7,800,003 --------- --------- --------- ---------
6. Accounting Standards Changes In 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities", which requires that such costs be expensed as incurred. The Company's practice has been to record the costs of bringing significant new operations into operation as deferred charges and to amortize them over periods of not more than five years. The Company early adopted the SOP retroactively as of October 1, 1997, and restated 1998 first quarter results to record a pre-tax charge of $282 ($195 after taxes, or $0.03 per basic and diluted share) as a cumulative effect of this accounting change. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", will be effective in 1999 and requires the disclosure of certain information about the Company's operating segments on a basis consistent with the way the Company is organized and operated. This standard expands or modifies disclosures and, accordingly, will have no effect on the Company's consolidated financial position, results of operations or cash flows. 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 2000. The Company is currently analyzing the 8 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE DATA) 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 strategic 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. 9. Lease Cancellation In December 1995, the Company entered into an operating lease with an unaffiliated land developer ("Lessor"). In December 1998, the lease was canceled as a result of the sale of the land by the Lessor, resulting in a gain to the Company of approximately $500. 10. Legal Proceedings 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 United States District Court for 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 cash 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 the subject of the suit. The settlement, recorded in December 1998, does not affect the sale or use of any of the Company's or High End's products or services that existed at the time of settlement. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 REVENUES. Total revenues increased 12.1%, or $2.7 million, to $25.2 million in the three-month period ended December 31, 1998, compared to $22.5 million in the three-month period ended December 31, 1997. The revenue increase was attributable primarily to the factors set forth below. Rental revenues increased 18.1%, or $3.4 million, to $22.6 million in the three-month period ended December 31, 1998, compared to $19.2 million in the three-month period ended December 31, 1997, which was primarily due to the acquisition of several of the Company's European distributors in fiscal 1998. Prior to acquiring a distributor, the Company recognized approximately one-half of the rental revenue earned by the distributor. After acquiring a distributor, the Company's results reflect all of the revenues earned by the distributor. Product sales and services revenues decreased 22.0%, or $0.7 million, to $2.6 million in the three-month period ended December 31, 1998, compared to $3.3 million in the three-month period ended December 31, 1997. This decrease was primarily due to the sale of the Company's Irideon-Registered Trademark- automated lighting product line in October 1998. RENTAL COSTS. Rental costs increased 44.9%, or $3.4 million, to $11.0 million in the three-month period ended December 31, 1998, compared to $7.6 million in the three-month period ended December 31, 1997. Rental costs as a percentage of rental revenues increased to 48.4% in the three-month period ended December 31, 1998, from 39.5% in the three-month period ended December 31, 1997. The increase in rental costs as a percentage of total rental revenues was primarily due to increased costs associated with the higher level of conventional equipment rentals, pricing pressures from competitors which resulted in increased costs associated with renting more equipment without a corresponding increase in revenue and the inclusion of all of the costs of the European distributors that were acquired in fiscal 1998. Prior to acquiring a distributor, the Company's rental costs associated with distributor rental revenues was almost entirely the depreciation on the equipment assigned to the distributor. After acquiring a distributor, the Company's results reflect all of the additional rental costs incurred by the distributor. PRODUCT SALES AND SERVICES COSTS. Product sales and services costs decreased 18.7%, or $0.4 million, to $1.9 million in the three-month period ended December 31, 1998, compared to $2.3 million in the three-month period ended December 31, 1997. Product sales and services costs as a percentage of product sales and services revenue increased to 72.0% in the three-month period ended December 31, 1998, from 69.1% in the three-month period ended December 31, 1997. The increase in product sales and services costs as a percentage of the related revenues was 10 primarily due to increased costs in the Company's custom stage construction business, which includes costs subcontracted to others by the Company. Product sales and services costs associated with subcontracted services constituted a higher percentage of the total product sales and services revenue in the three-month period ended December 31, 1998 as compared to the three-month period ended December 31, 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 17.5%, or $1.4 million, to $9.7 million in the three-month period ended December 31, 1998, compared to $8.3 million in the three-month period ended December 31, 1997. This increase resulted primarily from the acquisition of certain of the Company's European distributors in fiscal 1998, partially offset by $0.6 million in gains from a lease cancellation and the sale of substantially all of the assets of the Company's Brilliant Stages, Ltd. subsidiary. This expense as a percentage of total revenues increased to 38.4% in the three-month period ended December 31, 1998, from 36.7% in the three-month period ended December 31, 1997. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense decreased 20.8%, or $0.4 million, to $1.2 million in the three-month period ended December 31, 1998, compared to $1.6 million in the three-month period ended December 31, 1997. This expense as a percentage of total revenues decreased to 4.9% in the three-month period ended December 31, 1998, from 7.0% in the three-month period ended December 31, 1997. This decrease was primarily the result of a decrease in employee-related costs as a result of employee terminations from the restructuring of the Company in fiscal 1998. INTEREST EXPENSE. Interest expense increased 42.8%, or $0.3 million, to $1.0 million in the three-month period ended December 31, 1998, compared to $0.7 million in the three-month period ended December 31, 1997. This increase was due to higher interest rates and a higher debt level in the period ended December 31, 1998. EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was recorded in the three-month period ended December 31, 1997, net of $0.4 million of tax benefit, relating to the early extinguishment of debt. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. During the period ended December 31, 1997, the Company recorded a cumulative effect of change in accounting principle loss of $0.2 million, net of $0.1 million of tax benefit, relating to start-up costs that had previously been capitalized. INCOME TAXES. Effective tax rates in the periods ended December 31, 1998 and 1997 were 41.4% 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 11 Company's operating activities used cash of $1.6 million and generated cash flow of $0.3 million for the three-month periods ended December 31, 1997 and 1998, respectively. During fiscal 1997, the Company borrowed under a multicurrency credit agreement (the "Old Credit Agreement") to partially finance its operations and capital expenditures. On October 21, 1997, the Company consummated the initial public offering of its common stock and used the net proceeds thereof, approximately $21.3 million, to repay indebtedness under the Old Credit Agreement. On December 19, 1997, the Company entered into a five-year $50,000 multicurrency revolving credit facility (the "New Credit Facility") and canceled its existing credit facility. The initial $50,000 committment on the New Credit Facility, as amended in December 1998, decreases by $1,000 during each of the third and fourth quarters of fiscal 1999 and $1,500 per quarter thereafter through maturity. Borrowings under the New Credit Facility bear interest at the lender's base rate or LIBOR plus a rate margin ranging from 1.00% to 3.50% 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's domestic subsidiaries 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. In December 1997, the Company expensed deferred financing costs related to the prior debt facility of $737 (net of tax benefit of $481) relating to the early extinguishment of debt, which have been reflected in the consolidated statements of income as an extraordinary loss. The Company has hedged a portion of its currency fluctuation risk by borrowing in French francs, British pounds sterling and Japanese yen under its New Credit Facility. Cash generated from the Company's France, England and Japan offices is typically denominated in French francs, British pounds sterling and Japanese yen, respectively, and is used to pay expenses incurred in those currencies and service the foreign currency borrowings. The Company is a party to three interest rate swap agreements which will fix the Company's effective interest costs under a portion of the New Credit Agreement. The Company's business requires significant capital expenditures. Capital expenditures for the three months ended December 31, 1997 and 1998 were approximately $4.0 million and $2.9 million, respectively, of which approximately $3.9 million and $2.8 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. The Company had a working capital surplus of $9.1 million and $8.6 million at December 31, 1997 and 1998, respectively. The working capital surplus at December 31, 1997 12 and 1998 is primarily due to higher accounts receivable and lower current portion of long-term debt as a result of the New Credit Agreement. Management believes that cash flow generated from operations and borrowing capacity under the New Credit Agreement should be sufficient to fund its anticipated operating needs and capital expenditures for at least the next twelve months. However, because the Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, 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, there can be no assurance that sufficient capital resources will be available to fund the expected expansion of its business beyond such period. IMPACT OF THE YEAR 2000 ISSUE The term "year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 is approached and reached. These problems generally arise from the fact that most of the world's computer hardware and software have historically used only 2 digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's". These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. In 1995 and 1996, the Company invested approximately $2.2 million constructing a wide-area network throughout the United States and implementing Oracle financial and manufacturing applications. The Company has conducted a review of its computer systems to identify the systems that could be affected by the year 2000 issue and is attempting to ensure that its information systems and technology and computer systems are year 2000 ready. This review is part of the Company's overall upgrade of its systems and as a result the Company has no separate budget for year 2000 compliance. Expenses relating to reviewing and assessing systems are included in historical operating expenses as part of information systems and technology and have not been separately identified. The Company's upgrades are substantially complete and management expects the upgrade to the European-based operations to be completed by the middle of the 1999 calendar year. Management believes that with the installation of the new systems, conversion to new software and modifications to existing software, the year 2000 issue will pose no significant operational problems for the Company. The Company is currently discussing with its vendors and customers the possibility of any year 2000 interface difficulties that may affect the Company. The ability of third parties with whom the Company transacts business to adequately address their year 2000 issue is, however, outside the Company's control. To date, the Company has not identified any information technology assets under the control of the Company that represent a material risk of not being year 2000 ready or for which a suitable alternative cannot be implemented. The Company does not have a contingency plan with respect to the year 2000 issue if the information systems and technology upgrade is not completed or is delayed beyond the end of 1999. 13 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 terms "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; technological changes; reliance on intellectual property; dependence on entertainment industry; competition; dependence on management; foreign exchange risk; international trade risk; dependence on key suppliers and dependence on manufacturing facility; and the year 2000 issue. 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. 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 United States District Court for 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 cash 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 the subject of the suit. The settlement, recorded in December 1998, does not affect the sale or use of any of the Company's or High End's products or services that existed at the time of settlement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.36 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and H.R. Brutsche III 10.37 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and John D. Maxson 10.38 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and James H. Clark, Jr. 10.39 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and J. Anthony Smith 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1998. 15 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: February 12, 1999 By: /s/ MICHAEL P. HERMAN --------------------- --------------------------------------- Michael P. Herman Vice President - Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 16 EX-10.36 2 EXHIBIT 10.36 AMENDMENT NO. 1 TO THE DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE INTERNATIONAL, INC. AND H. R. BRUTSCHE III This Amendment No. 1, effective as of November 2, 1998, is by and between Vari-Lite International, Inc. (the "Company") and H. R. Brutsche III (the "Director"). W I T N E S S E T H: WHEREAS, Vari-Lite Holdings, Inc. and the Director entered into a Deferred Compensation Agreement (the "Agreement") dated July 1, 1995; and WHEREAS, Vari-Lite Holdings, Inc. changed its name effective December 27, 1995 to Vari-Lite International, Inc.; and WHEREAS, the Company has recently suffered a decline in financial performance and management and the Board of the Directors of the Company have reviewed and adopted proposals for reducing expenses of the Company in order to improve the Company's financial performance; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has determined that it is in the best financial interest of the Company to amend the Agreement effective November 2, 1998 to reduce the monthly payments payable thereunder after December 31, 1998 to one-half the current monthly payment amount and to extend the payment period thereunder to December 31, 2003; and WHEREAS, the Director is the President and Chief Executive Officer of the Company and a significant stockholder of the Company and agrees that it is in the best financial interest of the Company to consent to the amendment to his Agreement proposed by the Compensation Committee; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 1 of the Agreement is hereby amended to read as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount that is payable in equal monthly installments in the amounts specified in subsections (a) and (b) below on the first day of each month (the "Deferred Compensation Payments") to the Director (or if the Director dies, to his beneficiary as provided in Section 4(a) of the Agreement) during the Term (as hereinafter defined). (a) ANNUAL AMOUNT PRIOR TO JANUARY 1, 1999. The Company agrees to pay an annual amount of $167,000 payable in equal monthly installments on the first day of each month during the Term until December 31, 1998. (b) ANNUAL AMOUNT AFTER DECEMBER 31, 1998. The Company agrees to pay an annual amount of $83,500 payable in equal monthly installments on the first day of each month commencing after December 31, 1998 until the end of the Term. If the financial performance of the Company improves, as determined by the Compensation Committee in its sole and absolute discretion, the Compensation Committee, in its sole and absolute discretion, may determine to restore the annual amount payable to the Director under subsection (b) above to the original annual amount of $167,000. Section 2 of the Agreement is hereby amended to read as follows: 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments (in the amount determined pursuant to Section 1) for the period commencing on July 1, 1995 and ending December 31, 2003 (the "Term"), unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Agreement as of this 2nd day of November, 1998. COMPANY: VARI-LITE INTERNATIONAL, INC. By: /s/ Mike Herman ------------------------------------ Michael P. Herman Vice President - Finance DIRECTOR: /s/ H. R. Brutsche III ---------------------------------------- H. R. Brutsche III -2- EX-10.37 3 EXHIBIT 10.37 AMENDMENT NO. 1 TO THE DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE INTERNATIONAL, INC. AND JOHN D. MAXSON This Amendment No. 1, effective as of November 2, 1998, is by and between Vari-Lite International, Inc. (the "Company") and John D. Maxson (the "Director"). W I T N E S S E T H: WHEREAS, Vari-Lite Holdings, Inc. and the Director entered into a Deferred Compensation Agreement (the "Agreement") dated July 1, 1995; and WHEREAS, Vari-Lite Holdings, Inc. changed its name effective December 27, 1995 to Vari-Lite International, Inc.; and WHEREAS, the Company has recently suffered a decline in its financial performance and management and the Board of Directors of the Company have reviewed and determined proposals for reducing expenses of the Company in order to improve the Company's financial performance; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has determined that it is in the best financial interest of the Company to amend the Agreement effective November 2, 1998 to reduce the monthly payments payable thereunder after December 31, 1998 to one-half of the current monthly payment amount and to extend the payment period thereunder to December 31, 2003; and WHEREAS, the Director is a significant stockholder of the Company and agrees that it is in the best financial interest of the Company to consent to the amendment to his Agreement proposed by the Compensation Committee; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 1 of the Agreement is hereby amended to read as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount that is payable in equal monthly installments in the amounts specified in subsections (a) and (b) below on the first day of each month (the "Deferred Compensation Payments") to the Director (or if the Director dies, to his beneficiary as provided in Section 4(a) of the Agreement) during the Term (as hereinafter defined). (a) ANNUAL AMOUNT PRIOR TO JANUARY 1, 1999. The Company agrees to pay an annual amount of $167,000 payable in equal monthly installments on the first day of each month during the Term until December 31, 1998. (b) ANNUAL AMOUNT AFTER DECEMBER 31, 1998. The Company agrees to pay an annual amount of $83,500 payable in equal monthly installments on the first day of each month commencing after December 31, 1998 until the end of the Term. If the financial performance of the Company improves, as determined by the Compensation Committee in its sole and absolute discretion, the Compensation Committee, in its sole and absolute discretion, may determine to restore the annual amount payable to the Director under subsection (b) above to the original annual amount of $167,000. Section 2 of the Agreement is hereby amended to read as follows: 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments (in the amount determined pursuant to Section 1) for the period commencing on July 1, 1995 and ending December 31, 2003 (the "Term"), unless such payments terminate as the result of one of the terminating events set forth in Section 3 of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Agreement as of this 2nd day of November, 1998. COMPANY: VARI-LITE INTERNATIONAL, INC. By: /s/ Mike Herman ----------------------------------- Michael P. Herman Vice President - Finance DIRECTOR: /s/ John D. Maxson -------------------------------------- John D. Maxson -2- EX-10.38 4 EXHIBIT 10.38 AMENDMENT NO. 1 TO THE DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE INTERNATIONAL, INC. AND JAMES H. CLARK, JR. This Amendment No. 1, effective as of November 2, 1998, is by and between Vari-Lite International, Inc. (the "Company") and James H. Clark, Jr. (the "Director"). W I T N E S S E T H: WHEREAS, Vari-Lite Holdings, Inc. and the Director entered into a Deferred Compensation Agreement (the "Agreement") dated July 1, 1995; and WHEREAS, Vari-Lite Holdings, Inc. changed its name effective December 27, 1995 to Vari-Lite International, Inc.; and WHEREAS, the Company has recently suffered a decline in financial performance and management and the Board of the Directors of the Company have reviewed and determined proposals for reducing expenses of the Company in order to improve the Company's financial performance; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has determined that it is in the best financial interest of the Company to amend the Agreement effective November 2, 1998 to reduce the monthly payments payable thereunder after December 31, 1998 to one-half the current monthly payment amount and to extend the payment period thereunder to December 31, 2003; and WHEREAS, the Director is a significant stockholder of the Company and agrees that it is the best financial interest of the Company to consent to the amendment to his Agreement proposed by the Compensation Committee; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 1 of the Agreement is hereby amended to read as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount that is payable in equal monthly installments in the amounts specified in subsections (a) and (b) below on the first day of each month (the "Deferred Compensation Payments") to the Director (or if the Director dies, to his beneficiary as provided in Section 4(a) of the Agreement) during the Term (as hereinafter defined). (a) ANNUAL AMOUNT PRIOR TO JANUARY 1, 1999. The Company agrees to pay an annual amount of $167,000 payable in equal monthly installments on the first day of each month during the Term until December 31, 1998. (b) ANNUAL AMOUNT AFTER DECEMBER 31, 1998. The Company agrees to pay an annual amount of $83,500 payable in equal monthly installments on the first day of each month commencing after December 31, 1998 until the end of the Term. If the financial performance of the Company improves, as determined by the Compensation Committee in its sole and absolute discretion, the Compensation Committee, in its sole and absolute discretion, may determine to restore the annual amount payable to the Director under subsection (b) above to the original annual amount of $167,000. Section 2 of the Agreement is hereby amended to read as follows: 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments (in the amount determined pursuant to Section 1) for the period commencing on July 1, 1995 and ending December 31, 2003 (the "Term"), unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Agreement as of this 2nd day of November, 1998. COMPANY: VARI-LITE INTERNATIONAL, INC. By: /s/ Mike Herman ------------------------------------ Michael P. Herman Vice President - Finance DIRECTOR: /s/ James H. Clark, Jr. ---------------------------------------- James H. Clark, Jr. -2- EX-10.39 5 EXHIBIT 10.39 AMENDMENT NO. 1 TO THE DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE INTERNATIONAL, INC. AND J. ANTHONY SMITH This Amendment No. 1, effective as of November 2, 1998, is by and between Vari-Lite International, Inc. (the "Company") and J. Anthony Smith (the "Director"). W I T N E S S E T H: WHEREAS, Vari-Lite Holdings, Inc. and the Director entered into a Deferred Compensation Agreement (the "Agreement") dated July 1, 1995; and WHEREAS, Vari-Lite Holdings, Inc. changed its name effective December 27, 1995 to Vari-Lite International, Inc.; and WHEREAS, the Company has recently suffered a decline in its financial performance and management and the Board of Directors of the Company have reviewed and determined proposals for reducing expenses of the Company in order to improve the Company's financial performance; and WHEREAS, the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") has determined that it is in the best financial interest of the Company to amend the Agreement effective November 2, 1998 to reduce the monthly payments payable thereunder after December 31, 1998 to one-half of the current monthly payment amount and to extend the payment period thereunder to December 31, 2003; and WHEREAS, the Director is a significant stockholder of the Company and agrees that it is in the best financial interest of the Company to consent to the amendment to his Agreement proposed by the Compensation Committee; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 1 of the Agreement is hereby amended to read as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount that is payable in equal monthly installments in the amounts specified in subsections (a) and (b) below on the first day of each month (the "Deferred Compensation Payments") to the Director (or if the Director dies, to his beneficiary as provided in Section 4(a) of the Agreement) during the Term (as hereinafter defined). (a) ANNUAL AMOUNT PRIOR TO JANUARY 1, 1999. The Company agrees to pay an annual amount of $167,000 payable in equal monthly installments on the first day of each month during the Term until December 31, 1998. (b) ANNUAL AMOUNT AFTER DECEMBER 31, 1998. The Company agrees to pay an annual amount of $83,500 payable in equal monthly installments on the first day of each month commencing after December 31, 1998 until the end of the Term. If the financial performance of the Company improves, as determined by the Compensation Committee in its sole and absolute discretion, the Compensation Committee, in its sole and absolute discretion, may determine to restore the annual amount payable to the Director under subsection (b) above to the original annual amount of $167,000. Section 2 of the Agreement is hereby amended to read as follows: 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments (in the amount determined pursuant to Section 1) for the period commencing on July 1, 1995 and ending December 31, 2003 (the "Term"), unless such payments terminate as the result of one of the terminating events set forth in Section 3 of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to the Agreement as of this 2nd day of November, 1998. COMPANY: VARI-LITE INTERNATIONAL, INC. By: /s/ Mike Herman ----------------------------------- Michael P. Herman Vice President - Finance DIRECTOR: /s/ J. Anthony Smith -------------------------------------- J. Anthony Smith -2- EX-27.1 6 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 OF VARI-LITE INTERNATIONAL, INC. AS SET FORTH IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS SEP-30-1998 DEC-31-1998 3,956 0 15,525 (932) 4,624 24,957 154,168 (74,489) 113,351 16,391 0 0 0 0 44,774 113,351 2,614 22,634 1,882 10,963 10,949 923 1,041 413 171 0 0 0 0 242 0.03 0.03
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