<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
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
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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 11, 2000, there
were 7,800,003 shares of Common Stock outstanding.
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<TABLE>
<CAPTION>
VARI-LITE INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
PART I. - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1999.............................. 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended December 31, 1998 and 1999.......... 4
Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 1998 and 1999...................... 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 15
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................ 16
SIGNATURES...................................................................... 17
</TABLE>
2
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<TABLE>
<CAPTION>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1999
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<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 1,969 $ 4,543
Receivables, less allowance for doubtful accounts of $720 and $697.............. 13,056 14,713
Inventory....................................................................... 6,586 6,870
Prepaid expense and other current assets........................................ 1,715 1,350
-------- --------
TOTAL CURRENT ASSETS......................................................... 23,326 27,476
EQUIPMENT AND OTHER PROPERTY:
Lighting and sound equipment.................................................... 135,220 134,314
Machinery and tools............................................................. 6,044 5,937
Furniture and fixtures.......................................................... 5,009 5,600
Office and computer equipment................................................... 11,060 10,583
Work in progress and raw materials inventory.................................... 3,040 1,623
-------- --------
160,373 158,057
Less accumulated depreciation and amortization............................... 83,323 84,288
-------- --------
77,050 73,769
OTHER ASSETS....................................................................... 7,324 7,298
-------- --------
TOTAL ASSETS................................................................. $107,700 $108,543
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................... $ 11,855 $ 9,997
Unearned revenue................................................................ 2,606 2,787
Income taxes payable............................................................ 440 475
Current portion of long-term obligations........................................ 8,591 8,901
-------- --------
TOTAL CURRENT LIABILITIES.................................................... 23,492 22,160
LONG-TERM OBLIGATIONS.............................................................. 39,459 40,481
DEFERRED INCOME TAXES.............................................................. 1,514 1,749
-------- --------
TOTAL LIABILITIES............................................................ 64,465 64,390
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par value (10,000,000 shares authorized; no shares
outstanding)................................................................. - -
Common Stock, $0.10 par value (40,000,000 shares authorized; 7,845,167 shares
issued; 7,800,003 shares outstanding)........................................ 785 785
Treasury Stock.................................................................. (186) (186)
Additional paid-in capital...................................................... 25,026 25,026
Stockholder notes receivable.................................................... (30) (27)
Stock purchase warrants......................................................... - -
Accumulated other comprehensive income - foreign currency translation
adjustment................................................................. 892 535
Retained earnings............................................................... 16,748 18,020
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TOTAL STOCKHOLDERS' EQUITY................................................... 43,235 44,153
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $107,700 $108,543
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
1998 1999
------ ------
<S> <C> <C>
Rental revenues ................................................... $ 22,634 $ 24,292
Product sales and services revenues ............................... 2,614 3,387
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TOTAL REVENUES ................................................. 25,248 27,679
Rental cost ....................................................... 10,963 11,068
Product sales and services cost ................................... 1,882 2,174
---------- ----------
TOTAL COST OF SALES ............................................ 12,845 13,242
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GROSS PROFIT ................................................... 12,403 14,437
Selling, general and administrative expense ....................... 9,703 9,927
Research and development expense .................................. 1,246 1,195
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TOTAL OPERATING EXPENSES ....................................... 10,949 11,122
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OPERATING INCOME .................................................. 1,454 3,315
Interest expense (net) ............................................ 1,041 1,213
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INCOME BEFORE INCOME TAX .......................................... 413 2,102
Income tax expense ................................................ 171 830
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NET INCOME ........................................................ 242 1,272
Other comprehensive loss - foreign currency translation adjustments (177) (357)
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COMPREHENSIVE INCOME .............................................. $ 65 $ 915
========== ==========
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING ............. 7,800,003 7,800,003
========== ==========
PER SHARE INFORMATION
BASIC AND DILUTED:
Net income .................................................... $ 0.03 $ 0.16
Dividends declared ................................................ $ -- $ --
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1999
(UNAUDITED)
(IN THOUSANDS)
1998 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 242 $ 1,272
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 3,859 3,576
Amortization of note discount and deferred loan fees .................. 13 47
Provision for doubtful accounts ....................................... 17 15
Deferred income taxes ................................................. (3) 235
Gain on sale of Brilliant Stages assets and cancellation of land lease (599) --
(Gain) loss on sale of equipment ...................................... 13 (821)
Provisions for ESOP and ESEP contributions ............................ 63 63
Net change in assets and liabilities:
Accounts receivable ............................................... (1,139) (1,672)
Prepaid expenses .................................................. (41) 365
Inventory ......................................................... (490) (284)
Other assets ...................................................... 658 (109)
Accounts payable, accrued liabilities and income taxes payable ... (2,395) (1,885)
Unearned revenue .................................................. 106 181
------- --------
Net cash provided by operating activities ......................... 304 983
Cash flows from investing activities:
Capital expenditures, including rental equipment ......................... (2,904) (1,120)
Acquisition of European company .......................................... (1,188) --
Proceeds from sale of Irideon and Brilliant Stages assets and
cancellation of land lease ............................................ 2,892 --
Proceeds from sale of equipment .......................................... -- 1,522
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Net cash provided by (used in) investing activities ............... (1,200) 402
Cash flows from financing activities:
Proceeds from issuance of debt ........................................... 6,808 20,460
Principal payments on debt ............................................... (5,795) (19,180)
Principal payments on distributor advances ............................... (125) --
Proceeds from payments on stockholder notes receivable ................... 5 3
------- --------
Net cash provided by financing activities ......................... 893 1,283
Effect from foreign currency translation adjustment ........................ 121 (94)
------- --------
Net increase during the period .............................................. 118 2,574
Cash, beginning of period .................................................. 3,838 1,969
------- --------
Cash, end of period ......................................................... $ 3,956 $ 4,543
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense ........................................... $ 1,099 $ 1,019
Cash paid for income taxes ............................................... $ 1,133 $ 473
</TABLE>
See notes to condensed consolidated financial statements.
5
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
1. Interim Financial Information
The accompanying unaudited condensed consolidated financial
statements of Vari-Lite International, Inc. (the "Company") have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the condensed consolidated financial
statements contain all adjustments, consisting of normal recurring
adjustments, considered necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company. The results of
operations for the three-month period ended December 31, 1999 are not
necessarily indicative of the results of operations that may be expected for
any other interim periods or for the fiscal year ending September 30, 2000.
For further information, refer to the consolidated financial
statements and accompanying notes included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1999.
2. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
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<S> <C> <C>
Raw materials.............................................. $5,854 $6,080
Work in progress........................................... 587 704
Finished goods............................................. 145 86
------ ------
$6,586 $6,870
====== ======
</TABLE>
3. Segment Reporting
In 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about product lines, geographic areas and major customers. The
method for determining what information to report is based on the way that
management organizes the operation segments within the Company for making
operational decisions and assessments of financial performance. The Company's
chief operating decision maker is considered to be the Company's Chief
Executive Office ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about
6
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
revenues by geographic region for purposes of making operating decisions and
assessing financial performance. The Company has three reportable segments:
North America, Europe and Pacific Rim, which are organized, managed and
analyzed geographically and operate in a single industry segment. Information
about the Company's operations for the three months ended December 31, 1998
and 1999 is presented below:
<TABLE>
<CAPTION>
NORTH AMERICA PACIFIC EUROPE INTERCOMPANY TOTAL
------------- RIM ------ ------------ -----
---
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998:
Net Revenue from unaffliliated
customers .............................. $11,391 $3,010 $10,847 $ -- $ 25,248
Intersegment sales ...................... 4,587 -- -- (4,587) --
------- ------ ------- ------- --------
Total net revenues ..................... 15,978 3,010 10,847 (4,587) 25,248
Operating income (loss) ................. 534 299 621 -- 1,454
Depreciation and amortization ........... 2,980 30 862 -- 3,872
Total segment assets ................ 94,154 6,411 20,482 (7,696) 113,351
DECEMBER 31, 1999:
Net Revenues from unaffliliated
customers .............................. $14,425 $4,245 $ 9,009 $ -- $ 27,679
Intersegment sales ...................... 5,277 -- -- (5,277) --
------- ------ ------- ------- --------
Total net revenues ................... 19,702 4,245 9,009 (5,277) 27,679
Operating income (loss) ................. 2,535 895 1,857 (1,972) 3,315
Depreciation and amortization ........... 3,064 47 512 -- 3,623
Total segment assets .................... 92,124 8,919 16,008 (8,508) 108,543
</TABLE>
4. Long-Term Debt and Extraordinary Loss
On December 19, 1997, the Company entered into it's current credit
facility (the "New Credit Facility") and canceled its existing credit
facility. As of September 30, 1999, the commitment under the New Credit
Facility, as amended on August 25, 1999, was $49,000. At December 31, 1999,
the commitment under the New Credit Facility was $46,100. The commitment under
the New Credit Facility decreases to $38,000 on April 30, 2000 and the loan
matures on January 1, 2001.
As of December 31, 1999, the Company had a principal payment of
approximately $8,100 due in April 2000. The Company expects that it will be
able to meet its obligation on April 30, 2000 through the use of funds from
operations, the deferral of certain planned capital expenditures, debt
financings and refinancings or asset dispositions. In the event that the
Company does not meet
7
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
its obligation on April 30, 2000, the lenders will be entitled to pursue all
rights available under the New Credit Facility.
Subsequent to December 31, 1999, the Company was in violation of two
technical covenants under the New Credit Facility. On January 11, 2000, the
Company signed an amendment to the New Credit Facility that waived the
violations, modified the covenants and eliminated the Company's ability to
borrow foreign currencies and establish LIBOR borrowings under the New Credit
Facility.
Borrowings under the New Credit Facility were $44,458 at December 31,
1999 and bear interest at the lender's base rate plus a rate margin ranging
from 1.00% to 3.50% (10.17% as of December 31, 1999) 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.
At September 30, 1998, the Company had interest rate swap agreements
with two of its primary lenders relating to a notional principal amount of
$24,200, which effectively changed the Company's variable LIBOR interest rate
exposure on a substantial portion of its U.S. dollar borrowings to a fixed
weighted average interest rate of 7.79%. In August 1999, the Company
terminated the interest rate swap agreements for $300 in cash which was
recorded as a gain and was included in selling, general and administrative
expense.
5. Net Income Per Share
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding. Diluted earnings per share reflects the
dilutive effect, if any, of stock options and warrants.
For the three-month period ended December 31, 1999, earnings per
share excludes 762,200 stock options and 296,057 warrants which are
anti-dilutive. For the three-month period ended December 31, 1998, earnings
per share excludes 605,900 stock options and 242,233 warrants which were
anti-dilutive.
8
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
6. Accounting Standards Changes
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This standard, which establishes new
accounting and reporting standards for derivative financial instruments, must
be adopted no later than the first quarter of the Company's fiscal year 2001.
The Company is currently analyzing the effect of this standard and does not
expect it to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
7. Acquisitions
In October 1998, the Company acquired the VARI*LITE-Registered
Trademark- distribution rights and related assets of its French distributor
for approximately $1,200 in cash, virtually all of which has been recorded as
goodwill.
8. Dispositions
During fiscal 1998, the Company made a 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. In December 1998, the lease was canceled as a
result of the sale of the land by the developer, resulting in a gain to the
Company of approximately $500.
10.Commitments, Contingencies and Legal Proceedings
In the ordinary course of its business, the Company is from time to
time threatened with or named as a defendant in various lawsuits, including
patent infringement claims. Additionally, the Company has filed lawsuits
claiming infringements of its patents by third parties for which the Company
has been subject to counterclaims.
9
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
In August 1995, the Company brought suit asserting a number of claims
of infringement of several of its patents by High End Systems, Inc. ("High
End") in the Northern District of Texas seeking monetary damages and
injunctive relief to prevent future patent infringement. In December, 1998,
the court approved a negotiated settlement between the Company and High End,
the specific terms of which are confidential, but included a cash settlement
paid to the Company, a cross license of certain patents and authorization for
High End to continue to sell all of the products that were subject to the suit.
In December 1998, the Company brought a similar suit against Martin
Gruppen A/S and Martin Professional A/S (collectively, "Martin") in the
Eastern District of Texas. In July 1999, the court entered a preliminary
injunction which prohibits Martin from making, using, leasing or offering for
sale or lease in the United States, or importing into the United States,
certain Martin products. Martin was subsequently denied a stay of execution
pending appeal and is pursuing an appeal to the injunction. The Company will
continue with the suit, which is expected to go to trial in late 2000.
In November 1999, four automated lighting manufacturers, Coemar
S.p.A., Clay Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each
filed suit against the Company in the Southern District of New York. Each of
the lawsuits seeks declaration from the court that one of the Company's
patents, the subject of the High End lawsuit and the litigation with Martin,
is invalid, unenforceable and/or not infringed by each of the lighting
manufacturers. The Company has filed motions to dismiss these lawsuits.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1998
REVENUES. Total revenues increased 9.6%, or $2.5 million, to $27.7
million in the three-month period ended December 31, 1999, compared to $25.2
million in the three-month period ended December 31, 1998. The revenue
increase was attributable primarily to the factors set forth below.
Rental revenues increased 7.3%, or $1.7 million, to $24.3 million in the
three-month period ended December 31, 1999, compared to $22.6 million in the
three-month period ended December 31, 1998. This increase was primarily due to
increased equipment rentals for worldwide millennium celebrations.
Product sales and services revenues increased 29.6%, or $0.8 million,
to $3.4 million in the three-month period ended December 31, 1999, compared
to $2.6 million in the three-month period ended December 31, 1998. This
increase was primarily due to revenue generated by the Company's design and
production management services subsidiary and revenue generated from the sale
of equipment to the Company's independent distributor in Australia.
Offsetting these increases were decreases in revenues due to the sale of the
Company's Irideon-Registered Trademark- automated product line in October
1998 and the Company's Brilliant Stages, Ltd. subsidiary ("Brilliant Stages")
in December 1998.
RENTAL COSTS. Rental costs increased 1.0%, or $0.1 million, to $11.1
million in the three-month period ended December 31, 1999, compared to $11.0
million in the three-month period ended December 31, 1998. Rental costs as a
percentage of rental revenues decreased to 45.6% in the three-month period
ended December 31, 1999, from 48.4% in the three-month period ended December
31, 1998. The decrease in rental costs as a percentage of total rental
revenues was primarily due to an overall increase in utilization and pricing
due to higher demand as a result of millennium events.
PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
increased 15.5%, or $0.2 million, to $2.1 million in the three-month period
ended December 31, 1999, compared to $1.9 million in the three-month period
ended December 31, 1998. Product sales and services costs as a percentage of
product sales and services revenues decreased to 64.2% in the three-month
period ended December 31, 1999, from 72.0% in the three-month period ended
December 31, 1998. The decrease in product sales and services costs as a
percentage of the related revenues was primarily due to the the sale of the
Company's Irideon-Registered Trademark- automated product line and Brilliant
Stages.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 2.3%, or $0.2 million, to $9.9 million in the
three-month period ended
11
<PAGE>
December 31, 1999, compared to $9.7 million in the three-month period ended
December 31, 1998. However, this expense as a percentage of total revenues
decreased to 35.9% in the three-month period ended December 31, 1999, from
38.4% in the three-month period ended December 31, 1998 as a result of a
greater increase in revenues than in this expense.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense in
the three-month period ended December 31, 1999 was approximately the same as
in the three-month period ended December 31, 1998. However, this expense as a
percentage of total revenues decreased to 4.3% in the three-month period ended
December 31, 1999, from 4.9% in the three-month period ended December 31, 1998.
INTEREST EXPENSE. Interest expense increased 16.5%, or $0.2 million, to
$1.2 million in the three-month period ended December 31, 1999, compared to
$1.0 million in the three-month period ended December 31, 1998. This increase
was due to higher interest rates in the period ended December 31, 1999.
INCOME TAXES. The effective tax rate in the three-month periods ended
December 31, 1999 and 1998 were 39.5% and 41.4%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations and capital
expenditures with cash flow from operations, bank borrowings and advances from
distributors and customers. The Company's operating activities generated cash
flow of $0.3 million and $1.0 million for the three-month periods ended
December 31, 1998 and 1999, respectively.
On December 19, 1997, the Company entered into the New Credit
Facility and canceled its existing credit facility. As of September 30, 1999,
the commitment under the New Credit Facility, as amended on August 25, 1999,
was $49.0 million. At December 31, 1999, the commitment under the New Credit
Facility was $46.1 million. The commitment under the New Credit Facility
decreases to $38.0 million on April 30, 2000 and the loan matures on January 1,
2001.
As of December 31, 1999, the Company had a principal payment of
approximately $8.1 million due in April 2000. The Company expects that it
will be able to meet its obligation on April 30, 2000 through the use of
funds from operations, the deferral of certain planned capital expenditures,
debt financings and refinancings or asset dispositions. In the event that the
Company does not meet its obligation on April 30, 2000, the lenders will be
entitled to pursue all rights available under the New Credit Facility.
Subsequent to December 31, 1999, the Company was in violation of two
technical covenants under the New Credit Facility. On January 11, 2000, the
Company signed an amendment to the New Credit Facility that waived the
violations, modified the covenants and eliminated the Company's ability to
borrow foreign currencies and establish LIBOR borrowings under the New Credit
Facility.
12
<PAGE>
Borrowings under the New Credit Facility were $44.5 million at
December 31, 1999 and bear interest at the lender's base rate plus a rate
margin ranging from 1.00% to 3.50% (10.17% as of December 31, 1999) 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.
At September 30, 1998, the Company had interest rate swap agreements
with two of its primary lenders relating to a notional principal amount of
$24.2 million, which effectively changed the Company's variable LIBOR
interest rate exposure on a substantial portion of its U.S. dollar borrowings
to a fixed weighted average interest rate of 7.79%. In August 1999, the
Company terminated the interest rate swap agreements for $0.3 million in cash
which was recorded as a gain and was included in selling, general and
administrative expense.
The Company's business requires significant capital expenditures.
Capital expenditures for the three months ended December 31, 1998 and 1999
were approximately $2.9 million and $1.1 million, respectively, of which
approximately $2.8 million and $0.9 million were for rental equipment
inventories. The majority of the Company's revenues are generated through the
rental of automated lighting and concert sound systems and, as such, the
Company must maintain a significant amount of rental equipment to meet
customer demands.
The Company had a working capital surplus of $8.6 million and $5.3
million at December 31, 1998 and 1999, respectively. The Company has
historically maintained working capital deficits since the bulk of its
revenue generating assets are classified as long-term assets rather than
current assets. The working capital surplus in 1998 and 1999 was primarily
the result of receivables and cash generated during the quarter ended
December 31, 1998 and 1999. The Company anticipates a working capital deficit
during the remainder of fiscal 2000 due to the scheduled maturity of the New
Credit Facility on January 1, 2001.
Management believes that cash flow generated from operations and
borrowing capacity under the New Credit Facility will not be sufficient to
meet the scheduled commitment reductions under the New Credit Facility, the
anticipated operating cash needs and capital expenditures for the next twelve
months. Additionally, the New Credit Facility has a maturity date of January
1, 2001 at which time the entire amounts outstanding under the New Credit
Facility will become due. The Company is currently in discussions with several
banks regarding the refinancing of the New Credit Facility. The Company's
management believes that they will obtain adequate cash from operations, cost
reductions, deferral of capital expenditures, asset sales, other financing
sources and either proceeds from a new credit agreement or an amendment to the
New Credit Facility to meet the Company's needs for the next twelve months and
for the maturity of the New Credit Facility. Because
13
<PAGE>
the Company's future operating results will depend on a number of factors,
including the demand for the Company's products and services, the success of
the Company in marketing, selling and supporting products sold, the level of
competition, the success of the Company's research and development programs,
the ability to achieve competitive and technological advances and general and
economic conditions and other factors beyond the Company's control, there can
be no assurance that sufficient capital resources will be available to fund
the expected expansion of its business beyond such period or to meet the
commitment reductions under the New Credit Facility.
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
was approached and reached. These problems generally arise from the fact that
most of the world's computer hardware and software have historically used only
two 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. In October 1998, the Company
developed an extensive Year 2000 readiness plan. This was a comprehensive
project to review and modify, as necessary, its computer applications,
hardware and other equipment to make them Year-2000 compliant. The project was
organized into three principal areas: hardware/software on desktop systems,
hardware/software on embedded systems and hardware/software on enterprise
systems. Each of these areas involved inventory, assessment, remediation,
testing and implementation. The Company completed all business-critical
systems remediation, testing and implementation by September of 1999. In
addition, the Company obtained compliance statements from all major vendors,
customers and manufactures of all computer-related equipment and devices.
As a result of the successful implementation and deployment of the
Company's Year 2000 readiness plan, the Company has experienced no downtime or
loss of any information as a result of the year 2000 change over. The Company
is committed to continuous monitoring of all systems, applications and
operating systems. Updates for applications and operating systems will be
obtained as they become necessary and available. All new systems and software
will be added only after compliance has been verified.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" as that phrase is defined in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this report, the
words "anticipate," "believe," "estimate,"
14
<PAGE>
"expect," "will," "could," "may" and similar expressions, as they relate to
management or the Company, are intended to identify forward-looking
statements. Such statements reflect the current views of management with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including without limitation the following as they relate to the
Company: fluctuations in operating results and seasonality; ability to
introduce new products; the success of the Company in marketing, selling and
supporting products sold; technological changes; reliance on intellectual
property; dependence on the entertainment industry; competition; dependence on
management; foreign exchange risks; international trade risks; dependence on
key suppliers and dependence on manufacturing facility. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those described
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not feel that the market risks for the quarter ended
December 31, 1999 substantially changed from those risks outline for the year
ended September 30, 1999 in the Company's Form 10-K.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to
time threatened with or named as a defendant in various lawsuits, including
patent infringement claims. Additionally, the Company has filed lawsuits
claiming infringements of its patents by third parties for which the Company
has been subject to counterclaims.
In August 1995, the Company brought suit asserting a number of claims
of infringement of several of its patents by High End in the Northern District
of Texas seeking monetary damages and injunctive relief to prevent future
patent infringement. In December, 1998, the court approved a negotiated
settlement between the Company and High End, the specific terms of which are
confidential, but included a cash settlement paid to the Company, a cross
license of certain patents and authorization for High End to continue to sell
all of the products that were subject to the suit.
In December 1998, the Company brought a similar suit against Martin
in the Eastern District of Texas. In July 1999, the court entered a
preliminary injunction which prohibits Martin from making, using, leasing or
offering for sale or lease in the United States, or importing into the United
States, certain Martin products. Martin was subsequently denied a stay of
execution pending appeal and is pursuing an appeal to the injunction. The
Company will continue with the suit, which is expected to go to trial in late
2000.
In November 1999, four automated lighting manufacturers, Coemar
S.p.A., Clay Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each
filed suit against the Company in the Southern District of New York. Each of
the lawsuits seeks declaration from the court that one of the Company's
patents, the subject of the High End lawsuit and the litigation with Martin,
is invalid, unenforceable and/or not infringed by each of the lighting
manufacturers. The Company has filed motions to dismiss these lawsuits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended
December 31, 1999.
16
<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 11, 2000 By: /s/ JEROME L. TROJAN III
-------------------- ------------------------------
Jerome L. Trojan III
Vice President - Finance,
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheets as of December 31, 1999 and the
consolidated statements of income for the three-month period ended December 31,
1999 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-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,543
<SECURITIES> 0
<RECEIVABLES> 15,410
<ALLOWANCES> (697)
<INVENTORY> 6,870
<CURRENT-ASSETS> 27,476
<PP&E> 158,057
<DEPRECIATION> (84,288)
<TOTAL-ASSETS> 108,543
<CURRENT-LIABILITIES> 22,160
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 44,153
<TOTAL-LIABILITY-AND-EQUITY> 108,543
<SALES> 3,387
<TOTAL-REVENUES> 27,679
<CGS> 2,174
<TOTAL-COSTS> 13,242
<OTHER-EXPENSES> 11,122
<LOSS-PROVISION> 697
<INTEREST-EXPENSE> 1,213
<INCOME-PRETAX> 2,102
<INCOME-TAX> 830
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,272
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
