<PAGE>
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.
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(Exact name of registrant as specified in its charter)
Delaware 75-2239444
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(State or other jurisdiction of ( I.R.S. Employer
incorporation or organization) Identification No.)
201 Regal Row, Dallas, Texas 75247
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(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.
<PAGE>
VARI-LITE INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page
<S> <C> <C>
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
</TABLE>
2
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
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<S> <C> <C>
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
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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
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153,018 154,168
Less accumulated depreciation and amortization ................. 71,745 74,489
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81,273 79,679
OTHER ASSETS ......................................................... 8,221 8,715
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TOTAL ASSETS ................................................... $ 114,627 $ 113,351
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---------- -----------
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
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TOTAL CURRENT LIABILITIES ...................................... 18,931 16,391
LONG-TERM OBLIGATIONS ................................................ 47,284 48,481
DEFERRED INCOME TAXES ................................................ 3,708 3,705
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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
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TOTAL STOCKHOLDERS' EQUITY ..................................... 44,704 44,774
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 114,627 $ 113,351
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</TABLE>
See notes to consolidated financial statements.
3
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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)
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
Rental revenues ................................................................................. $ 19,170 $ 22,634
Product sales and services revenues ............................................................. 3,349 2,614
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TOTAL REVENUES ............................................................................... 22,519 25,248
Rental costs..................................................................................... 7,567 10,963
Product sales and services costs................................................................. 2,314 1,882
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TOTAL COST OF SALES .......................................................................... 9,881 12,845
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GROSS PROFIT ................................................................................. 12,638 12,403
Selling, general and administrative expense ..................................................... 8,257 9,703
Research and development expense ................................................................ 1,573 1,246
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TOTAL OPERATING EXPENSES ..................................................................... 9,830 10,949
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OPERATING INCOME ................................................................................ 2,808 1,454
Interest expense (net) .......................................................................... 729 1,041
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INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ......................................................................... 2,079 413
Income taxes .................................................................................... 821 171
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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) -
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NET INCOME ...................................................................................... 326 242
Other comprehensive income (loss) - foreign currency translation adjustments .................... 113 (177)
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COMPREHENSIVE INCOME ............................................................................ $ 439 $ 65
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WEIGHTED AVERAGE SHARES OUTSTANDING ............................................................. 7,452,177 7,800,003
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---------- ----------
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING ..................................................... 7,467,192 7,800,003
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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 .............................................................................. $ - $ -
</TABLE>
See notes to consolidated financial statements.
4
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
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
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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
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Cash, end of period ...................................................... $ 2,262 $ 3,956
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---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense ......................................... $ 805 $ 1,099
Cash paid for income taxes ............................................. $ 477 $ 1,133
</TABLE>
See notes to consolidated financial statements.
5
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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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1998
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<S> <C> <C>
Raw materials ......... $5,283 $4,447
Work in progress ...... 616 177
Finished goods ........ 176 -
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$6,075 $4,624
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</TABLE>
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
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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
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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:
<TABLE>
<CAPTION>
1997 1998
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<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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
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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
<PAGE>
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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<S> <C> <C>
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
</TABLE>
(b) No reports on Form 8-K were filed for the quarter ended
December 31, 1998.
15
<PAGE>
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
<PAGE>
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).
<PAGE>
(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-
<PAGE>
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).
<PAGE>
(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-
<PAGE>
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).
<PAGE>
(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-
<PAGE>
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).
<PAGE>
(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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,956
<SECURITIES> 0
<RECEIVABLES> 15,525
<ALLOWANCES> (932)
<INVENTORY> 4,624
<CURRENT-ASSETS> 24,957
<PP&E> 154,168
<DEPRECIATION> (74,489)
<TOTAL-ASSETS> 113,351
<CURRENT-LIABILITIES> 16,391
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 44,774
<TOTAL-LIABILITY-AND-EQUITY> 113,351
<SALES> 2,614
<TOTAL-REVENUES> 22,634
<CGS> 1,882
<TOTAL-COSTS> 10,963
<OTHER-EXPENSES> 10,949
<LOSS-PROVISION> 923
<INTEREST-EXPENSE> 1,041
<INCOME-PRETAX> 413
<INCOME-TAX> 171
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
