**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.   20549**

** **

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF1934**

** **

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003**

** **

**COMMISSION FILENUMBER:     0-23159**

 

**VLPS Lighting Services International, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                                |   | **75-2239444**                        |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                             |   | (I.R.S. Employer  Identification No.) |
|                                                                                        |   |                                  |
| **8617 Ambassador Row, Suite 120, 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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 ý   Noo

 

Indicate the number of shares outstanding of each of the Issuer’sclasses of common stock, as of the latest practicable date: As of August 11,2003, there were 7,455,103 shares of Common Stock outstanding.

 

 

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VLPS LIGHTING SERVICES INTERNATIONAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003

 
| PART I. -  FINANCIAL INFORMATION                                                                    |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |   |
| Item 1.  Financial Statements:                                                                      |
|                                                                                                |   |
|                                                                                                | Condensed Consolidated Balance Sheets as of  September 30, 2002 and June 30, 2003 |
|                                                                                                |   |
|                                                                                                | Condensed Consolidated Statements of  Operations and Comprehensive Income (Loss) for the three months ended  June 30, 2002 and 2003 |
|                                                                                                |   |
|                                                                                                | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  nine months ended June 30, 2002 and 2003 |
|                                                                                                |   |
|                                                                                                | Condensed Consolidated Statements of Cash Flows for the nine months  ended June 30, 2002 and 2003 |
|                                                                                                |   |
|                                                                                                | Notes to Condensed Consolidated Financial  Statements |
|                                                                                                |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|                                                                                                |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 |
|                                                                                                |   |
| Item 4. Controls and Procedures                                                                     |   |
|                                                                                                |   |
| PART II. - OTHER INFORMATION                                                                        |
|                                                                                                |   |
| Item 1. Legal Proceedings                                                                           |   |
|                                                                                                |   |
| Item 6. Exhibits and Reports on Form 8-K                                                            |   |
|                                                                                                |   |
| SIGNATURES                                                                                          |   |
|                                                                                                     |  |  |

 

2

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**VLPS LIGHTINGSERVICES INTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

** **

**(Unaudited)**

** **

**(In thousands exceptshare data)**

** **

**ASSETS**

** **
|                                                                                                                                                                                          |   | **September 30,****2002** |   | **June 30,****2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|----------------------|--------|
| CURRENT ASSETS:                                                                                                                                                                               |   |                      |   |                 |   |
| Cash                                                                                                                                                                                          |   | $                         | 2,296  |                 | $      | 4,873 |   |
| Receivables,  less allowance for doubtful accounts of $827 and $572                                                                                                                           |   | 7,016                     |   | 7,780                |   |
| Inventory                                                                                                                                                                                     |   | 722                       |   | 1,004                |   |
| Prepaid expense  and other current assets                                                                                                                                                     |   | 1,306                     |   | 1,950                |   |
| Assets held for  sale (Note 1)                                                                                                                                                                |   | 13,097                    |   | —               |   |
| TOTAL CURRENT  ASSETS                                                                                                                                                                         |   | 24,437                    |   | 15,607               |   |
| EQUIPMENT AND  OTHER PROPERTY:                                                                                                                                                                |   |                      |   |                 |   |
| Lighting and sound  equipment                                                                                                                                                                 |   | 101,372                   |   | 108,158              |   |
| Machinery and  tools                                                                                                                                                                          |   | 1,169                     |   | 1,216                |   |
| Furniture and  fixtures                                                                                                                                                                       |   | 864                       |   | 954                  |   |
| Office and  computer equipment                                                                                                                                                                |   | 3,355                     |   | 3,867                |   |
|                                                                                                                                                                                          |   | 106,760                   |   | 114,195              |   |
| Less  accumulated depreciation and amortization                                                                                                                                               |   | 67,477                    |   | 75,343               |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
|                                                                                                                                                                                          |   | 39,283                    |   | 38,852               |   |
| OTHER ASSETS                                                                                                                                                                                  |   | 580                       |   | 368                  |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| TOTAL ASSETS                                                                                                                                                                                  |   | $                         | 64,300 |                 | $      | 54,827 |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                |   |                      |   |                 |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| CURRENT  LIABILITIES:                                                                                                                                                                         |   |                      |   |                 |   |
| Accounts  payable                                                                                                                                                                             |   | $                         | 3,709  |                 | $      | 6,496 |   |
| Accrued  liabilities                                                                                                                                                                          |   | 2,500                     |   | 3,429                |   |
| Unearned  revenue                                                                                                                                                                             |   | 1,632                     |   | 1,972                |   |
| Income taxes  payable                                                                                                                                                                         |   | 329                       |   | 310                  |   |
| Current portion  of long-term obligations                                                                                                                                                     |   | 14,003                    |   | 2,268                |   |
| Liabilities  held for sale (Note 1)                                                                                                                                                           |   | 2,068                     |   | —               |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| TOTAL CURRENT  LIABILITIES                                                                                                                                                                    |   | 24,241                    |   | 14,475               |   |
| LONG-TERM  OBLIGATIONS                                                                                                                                                                        |   | 6,801                     |   | 5,659                |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| DEFERRED INCOME  TAXES                                                                                                                                                                        |   | —                    |   | 103                  |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| TOTAL  LIABILITIES                                                                                                                                                                            |   | 31,042                    |   | 20,237               |   |
| COMMITMENTS AND  CONTINGENCIES  (Note 4)                                                                                                                                                 |   | —                    |   | —               |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                   |   |                      |   |                 |   |
| Preferred  Stock, $0.10 par value (10,000,000 shares authorized; no shares issued)                                                                                                            |   | —                    |   | —               |   |
| Common Stock,  $0.10 par value (40,000,000 shares authorized; 7,845,167 shares issued;  7,800,003 and 7,455,103 shares outstanding as of September 30, 2002 and June  30, 2003, respectively) |   | 785                       |   | 785                  |   |
| Treasury Stock                                                                                                                                                                                |   | (186                      | )      | (617                 | )      |
| Additional  paid-in capital                                                                                                                                                                   |   | 25,026                    |   | 25,026               |   |
| Accumulated  other comprehensive income - foreign currency translation adjustment                                                                                                             |   | 1,058                     |   | 1,366                |   |
| Retained  earnings                                                                                                                                                                            |   | 6,575                     |   | 8,030                |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                                                                                              |   | 33,258                    |   | 34,590               |   |
|                                                                                                                                                                                          |   |                      |   |                 |   |
| TOTAL LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                              |   | $                         | 64,300 |                 | $      | 54,827 |   |

 

See notes to condensedconsolidated financial statements.

 

3

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**VLPS LIGHTINGSERVICES INTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVEINCOME (LOSS)**

** **

**For the Three Months Ended June 30, 2002 and2003**

** **

**(Unaudited)**

** **

**(In thousands except share data)**

 
|                                                                                           |   | **2002**  |   | **2003**  |   |
|------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                           |   |      |   |      |   |
| Rental revenues                                                                                |   | $         | 10,007 |      | $      | 13,469 |   |
| Product sales  and services revenues                                                           |   | 1,262     |   | 2,204     |   |
| TOTAL REVENUES                                                                                 |   | 11,269    |   | 15,673    |   |
| Rental cost                                                                                    |   | 5,496     |   | 6,253     |   |
| Product sales  and services cost                                                               |   | 1,031     |   | 1,576     |   |
| TOTAL COST OF  SALES                                                                           |   | 6,527     |   | 7,829     |   |
| GROSS PROFIT                                                                                   |   | 4,742     |   | 7,844     |   |
| Selling,  general and administrative expense                                                   |   | 5,586     |   | 5,323     |   |
| Research and  development expense                                                              |   | 265       |   | 216       |   |
| Write off of  receivables related to premiums paid under split-dollar life insurance  policies |   | 1,348     |   | —    |   |
| TOTAL OPERATING  EXPENSES                                                                      |   | 7,199     |   | 5,539     |   |
| OPERATING  INCOME (LOSS)                                                                       |   | (2,457    | )      | 2,305     |   |
| Interest expense  (net)                                                                        |   | 345       |   | 148       |   |
| INCOME (LOSS) FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES                                  |   | (2,802    | )      | 2,157     |   |
| Income tax  expense                                                                            |   | 618       |   | 438       |   |
| INCOME (LOSS)  FROM CONTINUING OPERATIONS                                                      |   | (3,420    | )      | 1,719     |   |
| DISCONTINUED  OPERATIONS (Note 1)                                                              |   |      |   |      |   |
| Loss from operations  of sales and manufacturing business                                      |   | (3,286    | )      | —    |   |
| NET INCOME  (LOSS)                                                                             |   | (6,706    | )      | 1,719     |   |
| Other  comprehensive income (loss) – foreign currency translation adjustment              |   | 1,265     |   | (6        | )      |
| COMPREHENSIVE  INCOME (LOSS)                                                                   |   | $         | (5,441 | )         | $      | 1,713 |   |
|                                                                                           |   |      |   |      |   |
| WEIGHTED AVERAGE  BASIC SHARES OUTSTANDING                                                     |   | 7,800,003 |   | 7,455,103 |   |
|                                                                                           |   |      |   |      |   |
| WEIGHTED  AVERAGE DILUTED SHARES OUTSTANDING                                                   |   | 7,800,003 |   | 7,631,458 |   |
|                                                                                           |   |      |   |      |   |
| PER SHARE  INFORMATION                                                                         |   |      |   |      |   |
| BASIC :                                                                                        |   |      |   |      |   |
| Net income  (loss)                                                                             |   | $         | (0.86  | )         | $      | 0.23 |   |
| DILUTED:                                                                                       |   |      |   |      |   |
| Net income  (loss)                                                                             |   | $         | (0.86  | )         | $      | 0.23 |   |

 

See notes to condensedconsolidated financial statements.

 

4

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**VLPS****LIGHTING SERVICES INTERNATIONAL, INC. ANDSUBSIDIARIES**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)**

** **

**For the Nine MonthsEnded June 30, 2002 and 2003**

** **

**(Unaudited)**

** **

**(In thousands except share data)**

** **
|                                                                                                    |   | **2002**  |   | **2003**  |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                                    |   |      |   |      |   |
| Rental revenues                                                                                         |   | $         | 31,577 |      | $      | 37,511 |   |
| Product sales  and services revenues                                                                    |   | 4,430     |   | 7,584     |   |
| TOTAL REVENUES                                                                                          |   | 36,007    |   | 45,095    |   |
| Rental cost                                                                                             |   | 16,114    |   | 17,379    |   |
| Product sales  and services cost                                                                        |   | 2,876     |   | 5,290     |   |
| TOTAL COST OF  SALES                                                                                    |   | 18,990    |   | 22,669    |   |
| GROSS PROFIT                                                                                            |   | 17,017    |   | 22,426    |   |
| Selling,  general and administrative expense                                                            |   | 15,909    |   | 17,051    |   |
| Research and development  expense                                                                       |   | 876       |   | 616       |   |
| Write off of  receivables related to premiums paid under split-dollar life insurance  policies          |   | 1,348     |   | —    |   |
| TOTAL OPERATING  EXPENSES                                                                               |   | 18,133    |   | 17,667    |   |
| OPERATING  INCOME (LOSS)                                                                                |   | (1,116    | )      | 4,759     |   |
| Interest  expense (net)                                                                                 |   | 946       |   | 852       |   |
| INCOME (LOSS) FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES                                           |   | (2,062    | )      | 3,907     |   |
| Income tax  expense                                                                                     |   | 902       |   | 663       |   |
| INCOME (LOSS)  FROM CONTINUING OPERATIONS                                                               |   | (2,964    | )      | 3,244     |   |
| DISCONTINUED  OPERATIONS (Note 1)                                                                       |   |      |   |      |   |
| Loss from  operations of sales and manufacturing business including loss on disposal of  $1,000 in 2003 |   | (5,004    | )      | (1,788    | )      |
| NET INCOME  (LOSS)                                                                                      |   | (7,968    | )      | 1,456     |   |
| Other  comprehensive income – foreign currency translation adjustment                              |   | 242       |   | 308       |   |
| COMPREHENSIVE  INCOME (LOSS)                                                                            |   | $         | (7,726 | )         | $      | 1,764 |   |
|                                                                                                    |   |      |   |      |   |
| WEIGHTED  AVERAGE BASIC SHARES OUTSTANDING                                                              |   | 7,800,003 |   | 7,603,084 |   |
|                                                                                                    |   |      |   |      |   |
| WEIGHTED  AVERAGE DILUTED SHARES OUTSTANDING                                                            |   | 7,800,003 |   | 7,700,506 |   |
|                                                                                                    |   |      |   |      |   |
| PER SHARE  INFORMATION                                                                                  |   |      |   |      |   |
| BASIC :                                                                                                 |   |      |   |      |   |
| Net income  (loss)                                                                                      |   | $         | (1.02  | )         | $      | 0.19 |   |
| DILUTED:                                                                                                |   |      |   |      |   |
| Net income  (loss)                                                                                      |   | $         | (1.02  | )         | $      | 0.19 |   |

 

See notes to condensedconsolidated financial statements.

 

5

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**VLPSLIGHTING SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

** **

**For the Nine Months Ended June 30, 2002 and2003**

** **

**(Unaudited)**

** **

**(In thousands)**

** **
|                                                                                           |   | **2002** |   | **2003** |   |
|------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from  operating activities:                                                         |   |     |   |     |   |
| Net income  (loss)                                                                             |   | $        | (7,968 | )        | $      | 1,456 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:      |   |     |   |     |   |
| Depreciation  and amortization                                                                 |   | 7,859    |   | 7,378    |   |
| Amortization of  note discount and deferred loan fees                                          |   | 129      |   | 11       |   |
| Provision for  doubtful accounts                                                               |   | 244      |   | 232      |   |
| Deferred income  taxes                                                                         |   | (2,209   | )      | 103      |   |
| Reserve for  excess, slow moving and obsolete inventory                                        |   | 4,900    |   | —   |   |
| Write-off of  receivables related to premiums paid under split-dollar life insurance  policies |   | 1,348    |   | —   |   |
| Other                                                                                          |   | —   |   | 215      |   |
| Loss on sale of  equipment and other property                                                  |   | 214      |   | 39       |   |
| Net change in  assets and liabilities:                                                         |   |     |   |     |   |
| Accounts  receivable                                                                           |   | (114     | )      | 748      |   |
| Prepaid  expenses                                                                              |   | (1,232   | )      | (614     | )      |
| Inventory                                                                                      |   | (1,126   | )      | (33      | )      |
| Other assets                                                                                   |   | (35      | )      | 4        |   |
| Accounts  payable, accrued liabilities and income taxes payable                                |   | 438      |   | 1,967    |   |
| Unearned  revenue                                                                              |   | 568      |   | 340      |   |
|                                                                                           |   |     |   |     |   |
| Net cash  provided by operating activities                                                     |   | 3,016    |   | 11,846   |   |
|                                                                                           |   |     |   |     |   |
| Cash flows from  investing activities:                                                         |   |     |   |     |   |
| Capital  expenditures, including rental equipment                                              |   | (4,615   | )      | (6,432   | )      |
| Proceeds from  sale of manufacturing and sales business                                        |   | —   |   | 10,641   |   |
| Proceeds from  sale of equipment                                                               |   | 87       |   | 109      |   |
|                                                                                           |   |     |   |     |   |
| Net cash provided by (used in)  investing activities                                           |   | (4,528   | )      | 4,318    |   |
|                                                                                           |   |     |   |     |   |
| Cash flows from  financing activities:                                                         |   |     |   |     |   |
| Proceeds from  issuance of debt                                                                |   | 45,894   |   | 76,426   |   |
| Principal payments on debt                                                                     |   | (46,152  | )      | (89,614  | )      |
| Purchase of treasury stock                                                                     |   | —   |   | (431     | )      |
|                                                                                           |   |     |   |     |   |
| Net cash used  in financing activities                                                         |   | (258     | )      | (13,619  | )      |
| Effect of  exchange rate changes on cash and cash equivalents                                  |   | 75       |   | 32       |   |
| Net increase (decrease) in cash  during the period                                             |   | (1,695   | )      | 2,577    |   |
| Cash, beginning  of period                                                                     |   | 3,686    |   | 2,296    |   |
|                                                                                           |   |     |   |     |   |
| Cash, end of  period                                                                           |   | $        | 1,991  |     | $      | 4,873 |   |
|                                                                                           |   |     |   |     |   |
| **Supplemental Cash  Flow Information**                                                        |   |     |   |     |   |
| Cash paid for  interest expense                                                                |   | $        | 1,075  |     | $      | 684 |   |
| Cash paid for  income taxes                                                                    |   | $        | 674    |     | $      | 524 |   |

 

See notes to condensedconsolidated financial statements.

 

6

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**VLPS LIGHTING SERVICES INTERNATIONAL, INC.AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(Unaudited)**

**(In thousands except share data)**

 

1.             InterimFinancial Information

 

Theaccompanying unaudited condensed consolidated financial statements of VLPSLighting Services International, Inc. (the “Company”) have been prepared by theCompany in accordance with generally accepted accounting principles for interimfinancial information and the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.

 

On November18, 2002, the Company sold substantially all of the assets of its manufacturingand sales business to Genlyte Thomas Group LLC (“Genlyte”) for $10,641.  The sale included all of the sales,marketing, manufacturing and engineering operations associated with thisbusiness, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4,500, of which $3,500was recognized in fiscal 2002 as an impairment of net assets held for sale. Theremaining charge of $1,000, which represents severance payments, was recognizedin the first quarter of fiscal 2003. As part of this transaction, the Companyentered into a supply agreement, pursuant to which Genlyte agreed tomanufacture and sell to the Company, for a minimum of ten years, VARI*LITEequipment and parts to support existing and future VARI*LITE products andappointed the Company as the exclusive distributor of VARI*LITE products inEurope and Japan and a non-exclusive dealer in North America.

 

On October 1,2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Accordingly, the September 30, 2002 BalanceSheet has been reclassified to reflect the assets and liabilities from themanufacturing and sales business as held for sale and the Statements ofOperations for the three and nine-month periods ended June 30, 2002 and thenine-month period ended June 30, 2003 reflect the results of operations of themanufacturing and sales business as discontinued operations.  The operations of the manufacturing andsales business are included only through the date of the sale.

 

In the opinionof management, the condensed consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, considered necessaryto present fairly the consolidated financial position, results of operationsand cash flows of the Company. The results of operations for the three andnine-month periods ended June 30, 2003 are not necessarily indicative of theresults of operations that may be expected for any other interim periods or forthe fiscal year ending September 30, 2003.

 

For furtherinformation, refer to the consolidated financial statements and accompanyingnotes included in the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2002.

 

7

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2.               Inventory

 

Inventory consists of thefollowing:

 
|                      |   | **September 30,****2002** |   | **June 30,****2003** |   |
|---------------------------|--------|---------------------------|--------|----------------------|--------|
| Raw materials             |   | $                         | 384    |                 | $      | 834 |   |
| Finished goods for resale |   | 338                       |   | 170                  |   |
|                      |   | $                         | 722    |                 | $      | 1,004 |   |

 

3.               Debt

 

On December 19, 1997, the Companyentered into a $50,000 multicurrency revolving credit  facility (the “Old Credit Facility”).  On December 29, 2000, VLPS Lighting Services, Inc. (“VLPS”)entered into a new credit facility, which initially included a $12,000 TermLoan, a $5,000 Revolver and a $3,000 Capital Expenditure Loan.  This facility with all subsequent amendmentsis herein referred to as the “New Credit Facility.” On November 18, 2002, theCompany used $5,000 of the proceeds from the sale of the assets of itsmanufacturing and sales business to Genlyte to repay a portion of theborrowings outstanding under the Term Loan. Pursuant to an amendment to the NewCredit Facility on December 31, 2002, the Term Loan and Capital ExpenditureLoan were paid in full, the Revolver commitment was increased to $7,500 andcapitalized loan origination fees of $215 were written off.  As of June 30, 2003, there was nooutstanding balance under the Revolver. Due to the repayment of the Term Loan and Capital Expenditure Loan, theCompany classified $10,900 as current debt as of September 30, 2002.  Borrowings under the Revolver are subject toavailability under a borrowing base of eligible lighting rental assets,inventory and accounts receivable (as defined in the New Credit Facility).  As of June 30, 2003, the eligible borrowingbase exceeded the Revolver commitment of $7,500.  Prior to June 30, 2002, all outstanding borrowings under the NewCredit Facility accrued interest at the lender’s base rate or LIBOR, plus arate margin of 0.75% and 2.50%, respectively. From June 30, 2002 through December 30, 2002, all outstanding balancesunder the New Credit Facility accrued interest at the lender’s base rate orLIBOR, plus a rate margin ranging from 1.25% to 1.75% or 3.00% to 3.50%,respectively, based upon the Company’s ratio of Adjusted Funded Debt to EBITDA(as defined in the New Credit Facility). Beginning on December 31, 2002, alloutstanding balances under the New Credit Facility accrue interest at thelender’s base rate or LIBOR, plus a rate margin of 0.50% and 2.25%,respectively.  The New Credit Facilityis guaranteed by the Company and is secured by all of the stock andsubstantially all of the assets of VLPS, and a pledge of 65% of the outstandingcapital stock of the Company’s foreign subsidiaries.  A commitment fee of 0.25% is charged on the average daily unusedportion of the Revolver.  The New CreditFacility contains compliance covenants, including requirements that the Companyachieve certain financial ratios.  Inaddition, the New Credit Facility places limitations on annual capital expendituresand on the ability to incur additional indebtedness, make certain loans orinvestments, sell assets, pay dividends or reacquire the Company’s stock.  The New Credit Facility terminates onDecember 31, 2005.  Upon

 

8

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termination of the New Credit Facility, the entire outstandingindebtedness thereunder becomes due and payable in full.

 

Beginning in fiscal 2001, the Company’sLondon subsidiary began financing its capital expenditures with British poundssterling loans from a U. K. bank (collectively, the “London Bank Loans”) thatamortize over 48 to 60 months and accrue interest at various rates ranging from6.33% to 9.10%. In June 2003, four of these loans were consolidated andrefinanced into a single loan to be amortized over 48 months at an interestrate of 6.31%. Borrowings outstanding at September 30, 2002 and June 30, 2003were approximately $5,467 and $6,019, respectively. The London Bank Loans aresecured by all of the assets of the Company’s London operations and includecertain financial covenants, limitations on capital expenditures andintercompany payments and the guarantee of the Company.

 

The Company has borrowed money to purchasecomputer equipment, office furniture and fixtures and conventional lightingequipment.  These loans are typicallyamortized over three to five years and accrue interest at various rates rangingfrom 1.62% to 10.35%. Borrowings outstanding under this type of financing atSeptember 30, 2002 and June 30, 2003 were approximately $2,324 and $1,477,respectively.

 

Net interest expense consists of thefollowing:

 
|                  |   | **Three Months ended  June 30,** |   | **Nine Months ended  June 30,** |   |
|-----------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                  |   | **2002**                         |   | **2003**                        |   | **2002** |   | **2003** |   |
| Interest  Expense     |   | $                                | 356    |                            | $      | 152 |   | $ | 1,101 |   | $ | 877 |   |
| Interest Income       |   | 11                               |   | 4                               |   | 155 |   | 25 |   |
| Net Interest  Expense |   | $                                | 345    |                            | $      | 148 |   | $ | 946 |   | $ | 852 |   |

 

4.               Commitments andContingencies

 

In the ordinary course of its business, theCompany is from time to time threatened with or named as a defendant in variouslawsuits. The Company is not currently involved in any material legalproceedings.

 

5.               Segment Reporting – ContinuingOperations

 

In 1999, the Company adopted SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” whichsupersedes SFAS No. 14, “Financial Reporting for Segments of a BusinessEnterprise.”  SFAS No. 131 establishesstandards for the reporting by public business enterprises of information aboutproduct lines, geographic areas and major customers.  The method for determining what information to report is based onthe way that management organizes the operation segments within the Company formaking operational decisions and assessments for financial performance.  The Company’s chief operating decision makeris considered to be the Company’s Chief Executive Officer (“CEO”). The CEOreviews financial information presented on a consolidated basis accompanied bydisaggregated information

 

9

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about revenues by geographic region and by product lines for purposesof making operating decisions and assessing financial performance. The Companyhas three reportable segments: North America, Europe and Asia, which areorganized, managed and analyzed geographically and operate in a single industrysegment. Information about the Company’s operations for the three andnine-month periods ended June 30, 2002 and 2003 is presented below:

 
|                                      |   | **Three Months Ended June 30, 2002** |   |
|-------------------------------------------|--------|--------------------------------------|--------|
|                                      |   | **North America**                    |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                    | 3,246  |   | $ | 4,142 |   | $ | 3,881 |   | $ | — |   | $ | 11,269 |   |
| Intersegment  sales                       |   | 1,302                                |   | 5 |   | — |   | (1,307 | ) | — |   |
| Total net  revenues                       |   | 4,548                                |   | 4,147 |   | 3,881 |   | (1,307 | ) | 11,269 |   |
| Operating  income (loss)                  |   | (2,290                               | )      | (392 | ) | 225 |   | — |   | (2,457 | ) |
| Depreciation  and amortization            |   | 1,816                                |   | 72 |   | 573 |   | — |   | 2,461 |   |
| Total assets                              |   | 55,200                               |   | 8,525 |   | 16,866 |   | (9,315 | ) | 71,276 |   |
|                                           |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Three Months Ended June 30, 2003** |   |
|-------------------------------------------|--------|--------------------------------------|--------|
|                                      |   | **North America**                    |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                    | 8,096  |   | $ | 2,671 |   | $ | 4,906 |   | $ | — |   | $ | 15,673 |   |
| Intersegment  sales                       |   | 759                                  |   | 12 |   | 76 |   | (847 | ) | — |   |
| Total net  revenues                       |   | 8,855                                |   | 2,683 |   | 4,982 |   | (847 | ) | 15,673 |   |
| Operating  income (loss)                  |   | 1,046                                |   | 703 |   | 556 |   | — |   | 2,305 |   |
| Depreciation  and amortization            |   | 1,738                                |   | 88 |   | 628 |   | — |   | 2,454 |   |
| Total assets                              |   | 36,304                               |   | 9,505 |   | 17,961 |   | (8,943 | ) | 54,827 |   |
|                                           |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Nine Months Ended June 30, 2002** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **North America**                   |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                   | 16,926 |   | $ | 8,155 |   | $ | 10,926 |   | $ | — |   | $ | 36,007 |   |
| Intersegment  sales                       |   | 2,604                               |   | 22 |   | 42 |   | (2,668 | ) | — |   |
| Total net  revenues                       |   | 19,530                              |   | 8,177 |   | 10,968 |   | (2,668 | ) | 36,007 |   |
| Operating  income (loss)                  |   | (2,217                              | )      | 311 |   | 790 |   | — |   | (1,116 | ) |
| Depreciation  and amortization            |   | 5,412                               |   | 172 |   | 1,718 |   | — |   | 7,302 |   |
| Total assets                              |   | 55,200                              |   | 8,525 |   | 16,866 |   | (9,315 | ) | 71,276 |   |
|                                           |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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|                                      |   | **Nine Months Ended June 30, 2003** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **North America**                   |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                   | 23,840 |   | $ | 6,810 |   | $ | 14,445 |   | $ | — |   | $ | 45,095 |   |
| Intersegment  sales                       |   | 1,984                               |   | 22 |   | 273 |   | (2,279 | ) | — |   |
| Total net  revenues                       |   | 25,824                              |   | 6,832 |   | 14,718 |   | (2,279 | ) | 45,095 |   |
| Operating  income (loss)                  |   | 2,499                               |   | 854 |   | 1,406 |   | — |   | 4,759 |   |
| Depreciation  and amortization            |   | 5,222                               |   | 192 |   | 1,836 |   | — |   | 7,250 |   |
| Total assets                              |   | 36,304                              |   | 9,505 |   | 17,961 |   | (8,943 | ) | 54,827 |   |
|                                           |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6.             NetIncome (Loss) Per Share

 

Basic netincome (loss) per share is computed based upon the weighted average number ofcommon shares outstanding.  Diluted netloss per share reflects the dilutive effect, if any, of stock options andwarrants. 

 
|                                                                                      |   | **Three  Months ended  June 30,** |   | **Nine  Months ended  June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                                                      |   | **2002**                          |   | **2003**                         |   | **2002** |   | **2003** |   |
| Weighted average shares outstanding                                                       |   | 7,800,003                         |   | 7,455,103                        |   | 7,800,003 |   | 7,603,084 |   |
| Dilutive effect of stock options and warrants  after application of treasury stock method |   | —                            |   | 176,355                          |   | — |   | 97,422 |   |
| Shares used in calculating diluted net  income (loss) per share                           |   | 7,800,003                         |   | 7,631,458                        |   | 7,800,003 |   | 7,700,506 |   |

 

For thethree-month period ended June 30, 2002, net income (loss) per share excludesstock options of 729,200 and warrants of 296,057 which were anti-dilutive.  For the three-month period ended June 30,2003, net income per share excludes stock options of 604,545 and warrants of296,057 which were anti-dilutive, but includes 176,355 options which weredilutive.  For the nine-month periodended June 30, 2002, net loss per share excludes stock options of 729,200 andwarrants of 296,057 which were anti-dilutive. For the nine-month period endedJune 30, 2003, net income per share excludes stock options of 683,478 andwarrants of 296,057 which were anti-dilutive, but includes 97,422 options whichwere dilutive.

 

In January andMarch 2003, the Company repurchased 344,900 shares of Common Stock from twounaffiliated parties for approximately $431. The Company has declared a $0.04 per share dividend for all shareholdersof record on August 25, 2003.  Paymentof this dividend is expected to be made on or about September 4, 2003.  The Company may in the future use earningsor available financing to pay additional cash dividends or repurchase shares ofCommon Stock.  The Company may spendbetween $500 and $3,000 over the next 12 months to pay dividends and repurchaseshares of the Company’s stock through private transactions.

 

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7.     Stock-Based EmployeeCompensation

 

At June 30,2003, the Company had a stock-based employee compensation plan.  The Company accounts for this plan under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income, as all options grantedunder this plan had an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income and net incomeper share if the Company had applied the fair value recognition provisions forFASB Statement No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation.

 
|                                                                                                                                      |   | **Three  Months Ended  June 30,** |   | **Nine  Months Ended  June 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                                                                                                      |   | **2002**                          |   | **2003**                         |   | **2002** |   | **2003** |   |
| Net income (loss), as reported                                                                                                            |   | $                                 | (6,706 | )                                | $      | 1,719 |   | $ | (7,968 | ) | $ | 1,456 |   |
|                                                                                                                                      |   |                              |   |                             |   |   |   |   |   |
| Less:   Total stock-based employee compensation determined under fair value  based method for all awards, net of related tax effects |   | (78                               | )      | (15                              | )      | (233 | ) | (55 | ) |
|                                                                                                                                      |   |                              |   |                             |   |   |   |   |   |
| Pro forma net income (loss)                                                                                                               |   | $                                 | (6,784 | )                                | $      | 1,704 |   | $ | (8,201 | ) | $ | 1,401 |   |
|                                                                                                                                      |   |                              |   |                             |   |   |   |   |   |
| Net income per share:                                                                                                                     |   |                              |   |                             |   |   |   |   |   |
| Basic – as reported                                                                                                                  |   | $                                 | (0.86  | )                                | $      | 0.23 |   | $ | (1.02 | ) | $ | 0.19 |   |
| Basic – pro forma                                                                                                                    |   | $                                 | (0.87  | )                                | $      | 0.23 |   | $ | (1.05 | ) | $ | 0.18 |   |
|                                                                                                                                      |   |                              |   |                             |   |   |   |   |   |
| Diluted – as reported                                                                                                                |   | $                                 | (0.86  | )                                | $      | 0.23 |   | $ | (1.02 | ) | $ | 0.19 |   |
| Diluted – pro forma                                                                                                                  |   | $                                 | (0.87  | )                                | $      | 0.23 |   | $ | (1.05 | ) | $ | 0.18 |   |

 

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**ITEM 2. ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

On November18, 2002, the Company sold substantially all of the assets of its manufacturingand sales business to Genlyte Thomas Group LLC (“Genlyte”) for $10.6million.  The sale included all of thesales, marketing, manufacturing and engineering operations associated with thisbusiness, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4.5 million, of which$3.5 million was recognized in fiscal 2002 as an impairment of net assets heldfor sale. The remaining charge of $1.0 million, which represents severancepayments, was recognized in the first quarter of fiscal 2003. As part of thistransaction, the Company entered into a supply agreement, pursuant to whichGenlyte agreed to manufacture and sell to the Company, for a minimum of tenyears, VARI*LITE equipment and parts to support existing and future VARI*LITEproducts and appointed the Company as the exclusive distributor of VARI*LITEproducts in Europe and Japan and a non-exclusive dealer in North America.

 

On October 1,2002, the Company adopted SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” Accordingly, the September 30, 2002 BalanceSheet has been reclassified to reflect the assets and liabilities from themanufacturing and sales business as held for sale and the Statements ofOperations for the three and nine-months ended June 30, 2002 and 2003, reflectthe results of operations of the manufacturing and sales business asdiscontinued operations. The operations of the manufacturing and sales businessare included only through the date of the sale.

 

**ThreeMonths Ended June 30, 2003 Compared to Three Months Ended June 30, 2002**

 

*Revenues*. Totalrevenues were $15.7 million for the three-month period ended June 30, 2003,compared to $11.3 million for the three-month period ended June 30, 2002.  The components of these revenues are setforth below.

 

*Rental Revenues.*Rental revenues increased 34.6%, or $3.5 million, to $13.5 million in thethree-month period ended June 30, 2003, compared to $10.0 million in thethree-month period ended June 30, 2002. This increase was due to market improvements in all markets served bythe Company’s offices in North America, London and Tokyo. In particular, theCompany continues to experience increased revenues from the concert touringmarket, which was primarily attributable to equipment and services provided forthe *RollingStones Licks World Tour 2002/03*, and television markets, including many of the “reality” theme andaward show television programs.

 

*Product Sales and Services Revenues*.  Product sales and services revenuesincreased 74.6%, or $0.9 million, to $2.2 million in the three-month periodended June 30, 2003, compared to $1.3 million in the three-month period endedJune 30, 2002. This increase was due to an increase in product sales in theEuropean and Japanese markets.

 

*Rental Cost.*  Rental cost increased 13.8%, or $0.8million, to $6.3 million in the three-month period ended June 30, 2003,compared to $5.5 million in the three-month period ended June 30, 2002.  However, rental cost as a percentage ofrental revenues decreased to 46.4% in the three-month period ended June 30,2003, from 54.9% in the three-month period ended June 30, 2002.  This decrease was due

 

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to depreciation expense andother fixed charges representing a lower percentage of revenues during thethree-month period ended June 30, 2003 as a result of increased revenuescompared to the three-month period ended June 30, 2002.

 

*Product Sales and Services Cost.*  Product sales and services cost increased52.9%, or $0.5 million, to $1.5 million in the three-month period ended June30, 2003, compared to $1.0 million in the three-month period ended June 30,2002. This increase was primarily due to increased new product sales.  Product sales and services cost as apercentage of product sales and services revenues decreased to 71.5% in thethree-month period ended June 30, 2003, from 81.7% in the three-month periodended June 30, 2002, primarily due to higher costs associated with the sale ofused equipment during the three-month period ended June 30, 2002.

 

*Selling, General and Administrative Expense.*Selling,general and administrative expense decreased 4.7%, or $0.3 million, to $5.3million in the three-month period ended June 30, 2003, compared to $5.6 millionin the three-month period ended June 30, 2002. This expense as a percentage oftotal revenues decreased to 34.0% in the three-month period ended June 30,2003, from 49.6% in the three-month period ended June 30, 2002 as a result ofthe significant increase in revenue.

 

*Research and Development Expense.*Research and development expense decreased 18.5%, or $0.1 million, to $0.2million in the three-month period ended June 30, 2003, compared to $0.3 millionin the three-month period ended June 30, 2002. This expense as a percentage oftotal revenues decreased to 1.4% in the three-month period ended June 30, 2003,from 2.4% in the three-month period ended June 30, 2002. These decreases wereprimarily due to cost reductions made during fiscal 2003, as well as a resultof the significant increase in revenue.

* *

*Interest Expense*.  Interest expense decreased 57.1%, or $0.2million, to $0.1 million in the three-month period ended June 30, 2003,compared to $0.3 million in the three-month period ended June 30, 2002. Thisdecrease was due to the repayment of debt with proceeds from the sale of themanufacturing and sales business in November 2002.

 

*Discontinued Operations. *In November 2002,the Company sold substantially all of the assets of its manufacturing and salesbusiness. The sale included all of the sales, marketing, manufacturing andengineering operations associated with this division, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. The operating results for this business areincluded in discontinued operations through the date of the sale. The loss fromdiscontinued operations for the three-month period ended June 30, 2002 was $3.3million.

 

*Income Taxes.* The effective tax rates in the three-monthperiods ended June 30, 2003 and 2002 were 20.3% and negative 22.1%,respectively. The income tax expense for the three-month period ended June 30,2003 represents income tax expense for the Company’s London and Tokyooperations at their respective statutory rates.  The negative tax rate for the three-month period ended June 30,2002 is due to a reserve of $1.8 million established against the Company’sdeferred tax asset.  The Companyconsidered this reserve necessary due to the uncertainty of the Company’sability to ultimately realize the benefit of the deferred tax asset as a resultof past operational losses.  Income taxexpense for the three-month period ended June 30, 2003 for the Company’s U.S.operations has been offset by adjustments to the valuation allowance againstthe Company’s deferred tax asset.

 

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##### **Nine Months EndedJune 30, 2003 Compared to Nine Months Ended June 30, 2002**

 

*Revenues*. Totalrevenues were $45.1 million for the nine-month period ended June 30, 2003compared to $36.0 million for the nine-month period ended June 30, 2002.  The components of these revenues are setforth below.

 

*Rental Revenues.*Rental revenues increased 18.8%, or $5.9 million, to $37.5 million in thenine-month period ended June 30, 2003, compared to $31.6 million in thenine-month period ended June 30, 2002. This increase was due to marketimprovements in all markets served by the Company’s offices in North America,London and Tokyo.  In particular, theCompany continues to experience increased revenues from the concert touringmarket, which was primarily attributable to equipment and services provided forthe *RollingStones Licks World Tour 2002/03*, and television markets, including many of the “reality” themeand award show television programs.

 

*Product Sales and Services Revenues*.  Product sales and services revenuesincreased 71.2%, or $3.2 million, to $7.6 million in the nine-month periodended June 30, 2003, compared to $4.4 million in the nine-month period endedJune 30, 2002. This increase was due to an increase in product sales in theEuropean and Japanese markets.

 

*Rental Cost.*  Rental cost increased 7.9%, or $1.3 million,to $17.4 million in the nine-month period ended June 30, 2003, compared to$16.1 million in the nine-month period ended June 30, 2002.  However, rental cost as a percentage ofrental revenues decreased to 46.3% in the nine-month period ended June 30,2003, from 51.0% in the nine-month period ended June 30, 2002.  This decrease was due to depreciationexpense and other fixed charges representing a lower percentage of revenuesduring the nine-month period ended June 30, 2003 as a result of increasedrevenues compared to the nine-month period ended June 30, 2002.

 

*Product Sales and Services Cost.*  Product sales and services cost increased83.9%, or $2.4 million, to $5.3 million in the nine-month period ended June 30,2003, compared to $2.9 million in the nine-month period ended June 30, 2002.This increase was primarily due to increased new product sales.  Product sales and services cost as apercentage of product sales and services revenues increased to 69.8% in the nine-monthperiod ended June 30, 2003, from 64.9% in the nine-month period ended June 30,2002.

 

*Selling, General and Administrative Expense.*Selling,general and administrative expense increased 7.2%, or $1.1 million, to $17.1million in the nine-month period ended June 30, 2003, compared to $15.9 millionin the nine-month period ended June 30, 2002. This increase was primarily dueto employee bonuses and higher costs associated with the Company’s London andTokyo operations due to currency fluctuations between the U.S. dollar, Japaneseyen and British pound during the nine- month period ended June 30, 2003compared to the nine-month period ended June 30, 2002.  This expense as a percentage of totalrevenues decreased to 37.8% in the nine-month period ended June 30, 2003, from44.2% in the nine-month period ended June 30, 2002 as a result of thesignificant increase in revenue.

 

*Research and Development Expense.*Research and development expense decreased 29.7%, or $0.3 million, to $0.6million in the nine-month period ended June 30, 2003, compared to $0.9 millionin the nine-month period ended June 30, 2002. This expense as a percentage oftotal revenues decreased to

 

15

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1.4% in the nine-month periodended June 30, 2003, from 2.4% in the nine-month period ended June 30, 2002.These decreases were primarily due to cost reductions made during fiscal 2003,as well as a result of the significant increase in revenue.

 

*Interest Expense*.  Interest expense decreased 9.9%, or $0.1million, to $0.9 million in the nine-month period ended June 30, 2003, comparedto $1.0 million in the nine-month period ended June 30, 2002. This decrease wasdue to the early extinguishment of debt with proceeds from the sale of themanufacturing and sales business in November 2002.

 

*Discontinued Operations. *In November 2002,the Company sold substantially all of the assets of its manufacturing and salesbusiness. The sale included all of the sales, marketing, manufacturing andengineering operations associated with this division, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4.5 million, of which$3.5 million was recognized in fiscal 2002 as an impairment of net assets heldfor sale. The remaining charge of $1.0 million, which represents severancepayments, was recognized in the first quarter of fiscal 2003. The operatingresults for this business are included in discontinued operations. The lossfrom discontinued operations in the nine-month periods ended June 30, 2003 and2002 was $1.8 million and $5.0 million, respectively.

 

*Income Taxes.* The effective tax rates for the nine-monthperiods ended June 30, 2003 and 2002 were 17.0% and negative 43.7%,respectively. The income tax expense for the nine-month period ended June 30,2003 represents income tax expense for the Company’s London and Tokyooperations at their respective statutory rates.  The negative tax rate for the nine-month period ended June 30,2002 is due to a reserve of $1.8 million established against the Company’sdeferred tax asset.  The Companyconsidered this reserve necessary due to the uncertainty of the Company’sability to ultimately realize the benefit of the deferred tax asset as a resultof past operational losses.  Income taxexpense for the nine-month period ended June 30, 2003 for the Company’s U.S.operations has been offset by adjustments to the valuation allowance againstthe Company’s deferred tax asset.

 

**Liquidity and Capital Resources**

 

Historically,the Company has financed its operations and capital expenditures with cash flowfrom operations, bank borrowings and advances from customers.  The Company’s operating activities generatedcash flow of $3.0 million and $11.8 million, respectively, in the nine-monthperiods ending June 30, 2002 and 2003.

 

On December 19, 1997, the Companyentered into a $50.0 million multicurrency revolving credit  facility (the “Old Credit Facility”).  On December 29, 2000, VLPS LightingServices, Inc. (“VLPS”) entered into a new credit facility, which initiallyincluded a $12.0 million Term Loan, a $5.0 million Revolver and a $3.0 millionCapital Expenditure Loan.  This facilitywith all subsequent amendments is herein referred to as the “New CreditFacility.” On November 18, 2002, the Company used $5.0 million of the proceedsfrom the sale of the assets of its manufacturing and sales business to Genlyteto repay a portion of the borrowings outstanding under the Term Loan. Pursuantto an amendment to the New Credit Facility on December 31, 2003, the Term Loanand Capital Expenditure Loan were paid in full, the Revolver commitment wasincreased to $7.5 million and capitalized loan origination fees of $0.2 millionwere written off. As of June 30, 2003, there was no outstanding balance underthe Revolver.  Due to the repayment ofthe Term Loan and Capital Expenditure Loan, the Company classified $10.9 ascurrent debt as of September 30, 2002.

 

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Borrowings under the Revolver are subject to availability under aborrowing base of eligible lighting rental assets, inventory and accountsreceivable (as defined in the New Credit Facility).  As of June 30, 2003, the eligible borrowing base exceeded theRevolver commitment of $7.5 million. Prior to June 30, 2002, all outstanding borrowings under the New CreditFacility accrued interest at the lender’s base rate or LIBOR, plus a ratemargin of 0.75% and 2.50%, respectively. From June 30, 2002 through December 30, 2002, all outstanding balancesunder the New Credit Facility accrued interest at the lender’s base rate orLIBOR, plus a rate margin ranging from 1.25% to 1.75% or 3.00% to 3.50%,respectively, based upon the Company’s ratio of Adjusted Funded Debt to EBITDA(as defined in the New Credit Facility). Beginning on December 31, 2003, alloutstanding balances under the New Credit Facility accrue interest at thelender’s base rate or LIBOR, plus a rate margin of 0.50% and 2.25%,respectively.  The New Credit Facilityis guaranteed by the Company and is secured by all of the stock andsubstantially all of the assets of VLPS and a pledge of 65% of the outstandingcapital stock of the Company’s foreign subsidiaries.  A commitment fee of 0.25% is charged on the average daily unusedportion of the Revolver.  The New CreditFacility contains compliance covenants, including requirements that the Companyachieve certain financial ratios.  Inaddition, the New Credit Facility places limitations on annual capitalexpenditures and on the ability to incur additional indebtedness, make certainloans or investments, sell assets, pay dividends or reacquire the Company’sstock.  The New Credit Facilityterminates on December 31, 2005.  Upontermination of the New Credit Facility, the entire outstanding indebtednessthereunder becomes due and payable in full.

 

Beginning in fiscal 2001, the Company’s London subsidiary beganfinancing its capital expenditures with British pounds sterling loans from a U.K. bank (collectively, the “London Bank Loans”) that amortize over 48 to 60months and accrue interest at various rates ranging from 6.33% to 9.10%. InJune 2003, four of these loans were consolidated and refinanced into a singleloan to be amortized over 48 months at an interest rate of 6.31%.  Borrowings outstanding at September 30, 2002and June 30, 2003 were approximately $5.5 million and $6.0 million,respectively.  The London Bank Loans aresecured by all of the assets of the Company’s London operations and includecertain financial covenants, limitations on capital expenditures andintercompany payments and the guarantee of the Company.

 

The Company has borrowed money to purchasecomputer equipment, office furniture and fixtures and conventional lightingequipment.  These loans are typicallyamortized over three to five years and accrue interest at various rates rangingfrom 1.62% to 10.35%. Borrowings outstanding under this type of financing atSeptember 30, 2002 and June 30, 2003 were approximately $2.3 million and $1.5million, respectively.

 

The Company’sbusiness requires significant capital expenditures.  Capital expenditures for the nine months ended June 30, 2002 and2003 were approximately $4.6 million and $6.4 million, respectively, of whichapproximately $4.4 million and $5.8 million were for rental and demonstrationequipment inventories.  The majority ofthe Company’s revenues are generated through the rental of automated lightingsystems and, as such, the Company must maintain a significant amount of rentalequipment to meet customer demands.

 

In January andMarch 2003, the Company repurchased 344,900 shares of Common Stock from twounaffiliated parties for approximately $0.4 million. The Company has declared a$0.04 per share dividend for all shareholders of record on August 25,2003.  Payment of this dividend isexpected to be made on or about September 4, 2003.  The Company may in the future use earnings or available financingto pay additional cash dividends or repurchase shares of Common Stock.  The Company may spend

 

17

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between $0.5 million and $3.0million over the next 12 months to pay dividends and repurchase shares of theCompany’s stock through private transactions.

 

Managementbelieves that cash flow generated from operations and borrowing capacity underthe New Credit Facility will be sufficient to meet the anticipated operatingcash needs and capital expenditures for the next twelve months.  Because the Company’s future operatingresults will depend on a number of factors, including the demand for theCompany’s products and services, competition, general and economic conditionsand other factors beyond the Company’s control, there can be no assurance thatsufficient capital resources will be available to fund the expected expansionof its business beyond such period.

 

**Disclosure RegardingForward-Looking Statements**

 

This report includes “forward-looking statements” as that phraseis defined in Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. When usedin this report, the words “anticipate,” “believe,” “estimate,” “expect,”“will,” “could,” “may” and similar expressions, as they relate to management orthe Company, are intended to identify forward-looking statements. Suchstatements reflect the current views of management with respect to futureevents 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; technological changes;dependence on entertainment industry; competition; dependence on management;foreign exchange risk; international trade risk; and dependence on keysuppliers. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those described herein.

 

###### **ITEM 3**. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Companydoes not believe that the market risks for the nine-month period ended June 30,2003 substantially changed from those risks outlined for the year endedSeptember 30, 2002 in the Company’s Form 10-K.

 

**ITEM4****. CONTROLS AND PROCEDURES**

 

The Company’sChief Executive Officer and Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) asof June 30, 2003, the end of the period covered by this report (the “EvaluationDate”), have concluded in their judgment that, as of the Evaluation Date, theCompany’s disclosure controls and procedures were adequate and designed toensure that material information relating to the Company and its subsidiarieswould be made known to them.

 

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed in the Company’s reports filedor submitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed inthe Company’s reports filed under the Securities Exchange Act of 1934 isaccumulated and communicated to

 

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the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer asappropriate, to allow timely decisions regarding required disclosure.

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the internal controls subsequent to the EvaluationDate.

 

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**PARTII****  OTHERINFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

In the ordinary course of its business, theCompany is from time to time threatened with or named as a defendant in variouslawsuits. Additionally, the Company has filed lawsuits claiming infringementsof its patents by third parties for which the Company has been subject tocounterclaims. The Company is not currently involved in any material legalproceedings.

 

**ITEM 6.  EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)               Exhibits
| 10.91 | Mortgage,  dated June 25, 2003, between VLPS Lighting Services, Ltd. and Barclays Bank  PLC.                              |
|-------|---------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certifications  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                |
| 32.1  | Certification  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

(b)     A Form 8-K was filed onMay 14, 2003 reporting the press release announcing the Company’s financialresults for the quarter ended March 31, 2003.

 

A Form 8-K was filed on June 26, 2003 reporting on the dismissal ofDeloitte & Touche LLP as the Company’s Certifying Accountant and theappointment of Grant Thornton LLP as the Company’s Certifying Accountant.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                                          | **VLPS LIGHTING SERVICES INTERNATIONAL, INC.**                                                                             |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                       |   |   |
|                                          |                                                                                                                       |   |   |
| Date:    August  11, 2003 | By:                                                                                                                        | /s/ JEROME L. TROJAN III |   |
|                                          | Vice  President - Finance,  Chief Financial Officer, Treasurer and Secretary  (Principal Financial and Accounting Officer) |
|                                               |                                                                                                                            |  |  |  |

 

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