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