<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 MARCH 31, 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 May 10, 2000,
there were 7,800,003 shares of Common Stock outstanding.
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VARI-LITE INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1999 and March 31, 2000............................. 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended March 31, 1999 and 2000......... 4
Condensed Consolidated Statements of Income and Comprehensive
Income for the six months ended March 31, 1999 and 2000........... 5
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 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......... 18
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders................ 19
Item 6. Exhibits and Reports on Form 8-K................................... 20
SIGNATURES................................................................. 21
</TABLE>
2
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, MARCH 31,
1999 2000
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................ $ 1,969 $ 4,756
Receivables, less allowance for doubtful accounts of $720 and $738.............. 13,056 11,397
Inventory....................................................................... 6,586 7,910
Prepaid expense and other current assets........................................ 1,715 1,718
----------- -------------
TOTAL CURRENT ASSETS......................................................... 23,326 25,781
EQUIPMENT AND OTHER PROPERTY:
Lighting and sound equipment.................................................... 135,220 133,247
Machinery and tools............................................................. 6,044 5,841
Furniture and fixtures.......................................................... 5,009 5,595
Office and computer equipment................................................... 11,060 10,340
Work in progress and raw materials inventory.................................... 3,040 1,758
----------- -------------
160,373 156,781
Less accumulated depreciation and amortization............................... 83,323 85,588
----------- -------------
77,050 71,193
OTHER ASSETS....................................................................... 7,324 7,068
----------- -------------
TOTAL ASSETS................................................................. $ 107,700 $ 104,042
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................... $ 11,855 $ 10,003
Unearned revenue................................................................ 2,606 2,299
Income taxes payable............................................................ 440 43
Current portion of long-term obligations........................................ 8,591 45,691
----------- -------------
TOTAL CURRENT LIABILITIES.................................................... 23,492 58,036
LONG-TERM OBLIGATIONS.............................................................. 39,459 1,969
DEFERRED INCOME TAXES.............................................................. 1,514 1,265
----------- -------------
TOTAL LIABILITIES............................................................ 64,465 61,270
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) (24)
Stock purchase warrants......................................................... - -
Accumulated other comprehensive income - foreign currency translation
adjustment................................................................. 892 392
Retained earnings............................................................... 16,748 16,779
----------- -------------
TOTAL STOCKHOLDERS' EQUITY................................................... 43,235 42,772
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 107,700 $ 104,042
=========== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Rental revenues ................................................... $ 20,881 $ 17,630
Product sales and services revenues ............................... 2,289 3,089
----------- -----------
TOTAL REVENUES ................................................. 23,170 20,719
Rental cost........................................................ 11,003 8,735
Product sales and services cost ................................... 1,769 1,748
----------- -----------
TOTAL COST OF SALES ............................................ 12,772 10,483
----------- -----------
GROSS PROFIT ................................................... 10,398 10,236
Selling, general and administrative expense........................ 8,860 9,802
Research and development expense .................................. 1,236 1,272
----------- -----------
TOTAL OPERATING EXPENSES ....................................... 10,096 11,074
----------- -----------
OPERATING INCOME (LOSS) .......................................... 302 (838)
Interest expense (net) ............................................ 991 1,213
----------- -----------
LOSS BEFORE INCOME TAX ............................................ (689) (2,051)
Income tax benefit ................................................ (280) (810)
----------- -----------
NET LOSS ......................................................... (409) (1,241)
Other comprehensive loss - foreign currency translation adjustments (52) (143)
----------- -----------
COMPREHENSIVE LOSS ................................................ (461) $ (1,384)
=========== ===========
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING ............. 7,800,003 7,800,003
=========== ===========
PER SHARE INFORMATION
BASIC AND DILUTED:
Net loss....................................................... $ (0.05) $(0 16)
Dividends declared................................................. $ -- $ --
</TABLE>
See notes to condensed consolidated financial statements.
4
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Rental revenues ................................................... $ 43,515 $ 41,922
Product sales and services revenues ............................... 4,903 6,476
----------- -----------
TOTAL REVENUES ................................................. 48,418 48,398
Rental cost ....................................................... 21,966 19,803
Product sales and services cost ................................... 3,651 3,922
----------- -----------
TOTAL COST OF SALES ............................................ 25,617 23,725
----------- -----------
GROSS PROFIT ................................................... 22,801 24,673
Selling, general and administrative expense ...................... 18,563 19,729
Research and development expense .................................. 2,482 2,467
----------- -----------
TOTAL OPERATING EXPENSES ....................................... 21,045 22,196
----------- -----------
OPERATING INCOME ................................................. 1,756 2,477
Interest expense (net) ............................................ 2,032 2,426
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX .................................. (276) 51
Income tax expense (benefit) ...................................... (109) 20
----------- -----------
NET INCOME (LOSS) ................................................. (167) 31
Other comprehensive loss - foreign currency translation adjustments (229) (500)
----------- -----------
COMPREHENSIVE LOSS ................................................ $ (396) $ (469)
=========== ===========
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING ......................... 7,800,003 7,800,003
=========== ===========
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING ....................... 7,800,003 7,833,682
=========== ===========
PER SHARE INFORMATION
BASIC AND DILUTED:
Net income (loss) ............................................. $ (0.02) $ 0.00
Dividends declared ................................................ $ -- $ --
</TABLE>
See notes to condensed consolidated financial statements.
5
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VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................................... $ (167) $ 31
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ............................................ 7,882 7,080
Amortization of note discount and deferred loan
fees ................................................................... 57 94
Provision for doubtful accounts .......................................... 32 30
Deferred income taxes .................................................... (277) (249)
Gain on sale of Brilliant Stages assets and cancellation of land lease (599) --
Gain on sale of equipment ................................................ (138) (583)
Provisions for ESOP and ESEP contributions ............................... 125 125
Net change in assets and liabilities:
Accounts receivable .................................................... (1,157) 1,629
Prepaid expenses ....................................................... (693) (3)
Inventory .............................................................. (1,657) (1,324)
Other assets ........................................................... 808 (1)
Accounts payable, accrued liabilities and income taxes payable ........ (2,008) (2,374)
Unearned revenue ....................................................... (341) (307)
-------- --------
Net cash provided by operating activities .............................. 1,867 4,148
Cash flows from investing activities:
Capital expenditures, including rental equipment............................. (5,660) (2,341)
Acquisition of European company ............................................. (1,191) --
Proceeds from sale of Irideon and Brilliant Stages assets and
cancellation of land lease ............................................... 2,892 --
Proceeds from sale of equipment ............................................. 268 1,528
-------- --------
Net cash used in investing activities................................... (3,691) (813)
Cash flows from financing activities:
Proceeds from issuance of debt .............................................. 16,835 22,809
Principal payments on debt .................................................. (15,908) (23,215)
Principal payments on distributor advances .................................. (172) (51)
Proceeds from payments on stockholder notes receivable ...................... 26 6
-------- --------
Net cash provided by (used in) financing activities .................... 781 (451)
Effect from foreign currency translation adjustment ............................ 380 (97)
-------- --------
Net increase (decrease) during the period ...................................... (663) 2,787
Cash, beginning of period ...................................................... 3,838 1,969
-------- --------
Cash, end of period ........................................................... $ 3,175 $ 4,756
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense .............................................. $ 1,730 $ 2,336
Cash paid for income taxes .................................................. $ 1,213 $ 583
</TABLE>
See notes to condensed consolidated financial statements.
6
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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 and six-month periods ended March 31, 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, March 31,
1999 2000
---- ----
<S> <C> <C>
Raw materials ......................................................... $5,854 $7,360
Work in progress ...................................................... 587 415
Finished goods ........................................................ 145 135
------ ------
$6,586 $7,910
====== ======
</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
Office ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about
7
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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 and six months ended March 31,
1999 and 2000 is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
PACIFIC
NORTH AMERICA RIM EUROPE INTERCOMPANY TOTAL
------------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
MARCH 31, 1999:
Net Revenues from unaffliliated customers $ 13,999 $ 2,717 $ 6,454 $ -- $ 23,170
Intersegment sales ...................... 5,156 -- -- (5,156) --
--------- --------- --------- --------- ---------
Total net revenues .................... 19,155 2,717 6,454 (5,156) 23,170
Operating income (loss) ................. 2,278 16 (451) (1,541) 302
Depreciation and amortization ........... 3,166 32 870 -- 4,068
Total segment assets .................... 95,429 6,242 17,055 (6,701) 112,025
MARCH 31, 2000:
Net Revenues from unaffliliated customers $ 12,834 $ 1,563 $ 6,322 $ -- $ 20,719
Intersegment sales ...................... 5,656 -- -- (5,656) --
--------- --------- --------- --------- ---------
Total net revenues .................... 18,490 1,563 6,322 (5,656) 20,719
Operating income (loss) ................. 1,487 (937) 569 (1,957) (838)
Depreciation and amortization ........... 3,075 45 432 -- 3,552
Total segment assets .................... 90,689 7,555 14,836 (9,038) 104,042
</TABLE>
8
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------------------
PACIFIC
NORTH AMERICA RIM EUROPE INTERCOMPANY TOTAL
------------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
MARCH 31, 1999:
Net Revenues from unaffliliated customers $ 25,390 $ 5,727 $ 17,301 $ -- $ 48,418
Intersegment sales ...................... 9,743 -- -- (9,743) --
------------- -------- -------- ------------ --------
Total net revenues .................... 35,133 5,727 17,301 (9,743) 48,418
Operating income ........................ 3,684 358 879 (3,165) 1,756
Depreciation and amortization ........... 6,146 62 1,731 -- 7,939
Total segment assets .................... 95,429 6,242 17,055 (6,701) 112,025
MARCH 31, 2000:
Net Revenues from unaffliliated customers $ 27,259 $ 5,808 $ 15,331 $ -- $ 48,398
Intersegment sales ...................... 10,933 -- -- (10,933) --
------------- -------- -------- ------------ --------
Total net revenues .................... 38,192 5,808 15,331 (10,933) 48,398
Operating income (loss) ................. 4,022 (42) 2,426 (3,929) 2,477
Depreciation and amortization ........... 6,138 92 944 -- 7,174
Total segment assets .................... 90,689 7,555 14,836 (9,038) 104,042
</TABLE>
4. Long-Term 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 March 31, 2000, the commitment under
the New Credit Facility was $45,940.
Borrowings under the New Credit Facility were $43,427 at March 31,
2000 and bear interest at the lender's base rate plus a margin ranging from
1.00% to 3.50% (10.25% as of March 31, 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.
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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. 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.
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.
The following is a reconciliation of shares used in calculating diluted
income per share for the three-month and six-month periods ended March 31, 1999
and 2000:
<TABLE>
<CAPTION>
Three Months ended Six Months ended
March 31, March 31,
------------------------------ -----------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding... 7,800,003 7,800,003 7,800,003 7,800,003
Dilutive effect of stock options and warrants
after application of treasury stock
method.............................. - - - 33,679
--------- --------- --------- ---------
Shares used in calculating diluted income per
share.......................... 7,800,003 7,800,003 7,800,003 7,833,682
========= ========= ========= =========
</TABLE>
For the three-month period ended March 31, 2000, earnings per share
excludes 762,200 stock options and 296,057 warrants which were anti-dilutive.
For the three-month and six-month periods ended March 31, 1999, earnings per
share excludes 600,300 stock options and 242,233
10
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warrants which were anti-dilutive. In addition, for the six month period ended
March 31, 2000, 296,057 warrants were excluded as anti-dilutive.
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
11
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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. 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, 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. The Company has filed motions to dismiss these lawsuits.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Total revenues decreased 10.6%, or $2.5 million, to $20.7
million in the three-month period ended March 31, 2000, compared to $23.2
million in the three-month period ended March 31, 1999. The revenue decrease was
attributable primarily to the factors set forth below.
Rental revenues decreased 15.6%, or $3.3 million, to $17.6 million in
the three-month period ended March 31, 2000, compared to $20.9 million in the
three-month period ended March 31, 1999. This decrease was primarily due to a
decrease in the Company's Asian lighting rental operations and a substantial
decrease in sales-type leases in the three-month period ended March 31, 2000.
The decrease in sales-type lease revenues is a result of significant leases in
the prior year quarter to a large theatrical production and to the Company's
North American dealers that converted from a monthly rental arrangement to a
paid-up long-term lease program.
Product sales and services revenues increased 35.0%, or $0.8 million,
to $3.1 million in the three-month period ended March 31, 2000, compared to
$2.3 million in the three-month period ended March 31, 1999. This increase was
primarily due to the sale of automated lighting equipment to an independent
distributor and to a large theatrical production.
RENTAL COST. Rental cost decreased 20.6%, or $2.3 million, to $8.7
million in the three-month period ended March 31, 2000, compared to $11.0
million in the three-month period ended March 31, 1999. Rental cost as a
percentage of rental revenues decreased to 49.5% in the three-month period
ended March 31, 2000, from 52.7% in the three-month period ended March 31,
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 was
approximately the same in the three-month period ended March 31, 2000 as in
the three-month period ended March 31, 1999. Product sales and services cost
as a percentage of product sales and services revenues decreased to 56.6% in
the three-month period ended March 31, 2000, from 77.3% in the three-month
period ended March 31, 1999. The 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 service revenues during the
three-month period ended March 31, 2000 compared to March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 10.6%, or $0.9 million, to $9.8 million in
the three-month period ended March 31, 2000, compared to $8.9 million in the
three-month period ended March 31, 1999. This expense as a percentage of total
revenues increased to 47.3% in the three-month period ended March 31, 2000,
from 38.2% in the three-month period ended March 31, 1999 primarily due to
additional sales and marketing expenses associated with the introduction of
the Company's new products that will be sold beginning in May 2000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense in
the three-month period ended March 31, 2000 was unchanged compared to the
three-month period ended March
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31, 1999. However, this expense as a percentage of total revenues increased
to 6.1% in the three-month period ended March 31, 2000, from 5.3% in the
three-month period ended March 31, 1999.
INTEREST EXPENSE. Interest expense increased 22.4%, or $0.2 million, to
$1.2 million in the three-month period ended March 31, 2000, compared to $1.0
million in the three-month period ended March 31, 1999. This increase was due to
higher interest rates in the period ended March 31, 2000.
INCOME TAXES. The effective tax rate in the three-month periods ended
March 31, 2000 and 1999 were 39.5% and 40.6%, respectively.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
REVENUES. Total revenues in the six-month period ended March 31, 2000
were approximately the same as the total revenues in the six-month period ended
March 31, 1999. The components of revenue are set forth below.
Rental revenues decreased 3.7%, or $1.6 million, to $41.9 million in
the six-month period ended March 31, 2000, compared to $43.5 million in the
six-month period ended March 31, 1999. This decrease was primarily due to
substantial revenue from sales-type leases in the six-month period ended March
31, 1999 which did not occur in the six-month period ended March 31, 2000.
Product sales and services revenues increased 32.1%, or $1.6 million,
to $6.5 million in the six-month period ended March 31, 2000, compared to $4.9
million in the six-month period ended March 31, 1999. This increase was
primarily due to increased revenue generated by the Company's design and
production management services subsidiary and revenue generated from the sale
of automated lighting equipment to certain of the Company's independent
distributors and to a large theatrical production. 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 COST. Rental cost decreased 9.9%, or $2.2 million, to $19.8
million in the six-month period ended March 31, 2000, compared to $22.0
million in the six-month period ended March 31, 1999. Rental cost as a
percentage of rental revenues decreased to 47.2% in the six-month period ended
March 31, 2000, from 50.5% in the six-month period ended March 31, 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 7.4%, or $0.2 million, to $3.9 million in the six-month period ended
March 31, 2000, compared to $3.7 million in the six-month period ended March
31, 1999. Product sales and services cost as a percentage of product sales and
services revenues decreased to 60.6% in the six-month period ended March 31,
2000, from 74.5% in the six-month period ended March 31, 1999. This decrease
was primarily due to the sale 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 six-month
period ended March 31, 2000 compared to March 31, 1999.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 6.3%, or $1.1 million, to $19.7 million in
the six-month period ended March 31, 2000, compared to $18.6 million in the
six-month period ended March 31, 1999. This increase was primarily due to
additional sales and marketing expenses associated with the introduction of
the Company's new products that will be sold beginning in May 2000, partially
offset by a gain on the cancellation of a land lease during the six-month
period ended March 31, 1999. This expense as a percentage of total revenues
increased to 40.8% in the six-month period ended March 31, 2000, from 38.3%
in the six-month period ended March 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense in
the six-month period ended March 31, 2000 was approximately the same as in the
six-month period ended March 31, 1999. This expense as a percentage of total
revenues for the six-month periods ended March 31, 2000 and 1999 was 5.1%.
INTEREST EXPENSE. Interest expense increased 19.4%, or $0.4 million, to
$2.4 million in the six-month period ended March 31, 2000, compared to $2.0
million in the six-month period ended March 31, 1999. This increase was due to
higher interest rates in the period ended March 31, 2000.
INCOME TAXES. The effective tax rate in the six-month periods ended
March 31, 2000 and 1999 were 39.2% 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 $1.9 million and $4.1 million for the six-month periods ended March 31,
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 March 31, 2000,
the commitment under the New Credit Facility was $45.9 million.
Borrowings under the New Credit Facility were $43.4 million at March
31, 2000 and bear interest at the lender's base rate plus a margin ranging
from 1.00% to 3.50% (10.25% as of March 31, 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. The Company met its obligation on
April 30, 2000 through
15
<PAGE>
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 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.
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 six months ended March 31, 2000 and 1999 were
approximately $2.3 million and $5.7 million, respectively, of which
approximately $1.6 million and $5.5 million were for rental equipment
inventories. The majority of the Company's revenues are generated through the
rental of automated lighting and concert sound systems and, as such, the Company
must maintain a significant amount of rental equipment to meet customer demands.
The Company had a working capital surplus of $9.4 million at March 31,
1999 and a working capital deficit of $32.3 million at March 31, 2000. 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 March 31,
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.
16
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" as that phrase is
defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used in this
report, the 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.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not feel that the market risks for the three-month and
six-month periods ended March 31, 2000 substantially changed from those risks
outline for the year ended September 30, 1999 in the Company's Form 10-K.
18
<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 litigation with High End and Martin, is invalid,
unenforceable and/or not infringed by each of the lighting manufacturers. The
Company has filed motions to dismiss these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 10, 2000, the Annual Meeting of Stockholders was held in
Dallas, Texas. The stockholders were asked to elect two Class III directors to
serve until 2003. The vote was as follows:
<TABLE>
<CAPTION>
Against or
For Withheld Abstentions
--- -------- -----------
<S> <C> <C> <C>
H. R. Brutsche' III 6,951,239 37,544 -
J. Anthony Smith 6,843,937 144,846 -
</TABLE>
Messrs. Maxson, Clark, Rettberg and Prothro will continue as directors
of the Company.
The stockholders were also asked to approve an amendment to the
Vari-Lite International, Inc. 1997 Omnibus Plan to increase the number of
shares of Common Stock that may be issued upon exercise of options granted
under the plan from 800,000 shares to 1,200,000 shares. The vote was 5,403,673
for, 344,241 against or withheld, 47,547 abstentions and 1,193,322 broker non-
votes.
19
<PAGE>
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 March 31,
2000.
20
<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: May 10, 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)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2000 AND THE CONSOLIDATED
STATEMENTS OF INCOME FOR THE THREE-MONTH AND SIX-MONTH PERIOD ENDED MARCH 31,
2000 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
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-2000
<PERIOD-START> JAN-01-2000 OCT-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 4,756 4,756
<SECURITIES> 0 0
<RECEIVABLES> 12,135 12,135
<ALLOWANCES> (738) (738)
<INVENTORY> 7,910 7,910
<CURRENT-ASSETS> 25,781 25,781
<PP&E> 156,781 156,781
<DEPRECIATION> 85,588 85,588
<TOTAL-ASSETS> 104,042 104,042
<CURRENT-LIABILITIES> 58,036 58,036
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 42,772 42,772
<TOTAL-LIABILITY-AND-EQUITY> 104,042 104,042
<SALES> 3,089 6,476
<TOTAL-REVENUES> 20,719 48,398
<CGS> 1,748 3,922
<TOTAL-COSTS> 10,483 23,725
<OTHER-EXPENSES> 11,074 22,196
<LOSS-PROVISION> 15 30
<INTEREST-EXPENSE> 1,213 2,426
<INCOME-PRETAX> (2,051) 51
<INCOME-TAX> (810) 20
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,241) 31
<EPS-BASIC> (0.16) 0.00
<EPS-DILUTED> (0.16) 0.00
</TABLE>
