**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.    20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THESECURITIES**

**AND EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2002**

 

**COMMISSIONFILE NUMBER:  0-23159**

 

**Vari-Lite International, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                                      |   | **75-2239444**                        |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                   |   | (I.R.S. Employer  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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý    No o

 

Indicate the number of sharesoutstanding of each of the Issuer’s classes of common stock, as of the latestpracticable date:  As of May 10, 2002,there were 7,800,003 shares of Common Stock outstanding.

 

 

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VARI-LITE INTERNATIONAL,INC.

INDEX TO QUARTERLY REPORTON FORM 10-Q

FOR THE QUARTER ENDEDMARCH 31, 2002

 
| PART I. - FINANCIAL INFORMATION |
|---------------------------------|
|                            |
| Item 1.                         | Financial Statements: |
|                            |
|                            | Condensed  Consolidated Balance Sheets as of September 30, 2001 and March 31, 2002 |
|                            |
|                            | Condensed Consolidated Statements of  Income and Comprehensive Income for the three months ended March 31, 2001 and  2002 |
|                            |
|                            | Condensed Consolidated Statements of  Income and Comprehensive Income for the six months ended March 31, 2001 and  2002 |
|                            |
|                            | Condensed  Consolidated Statements of Cash Flows for the six months ended March 31, 2001  and 2002 |
|                            |
|                            | 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 |
|                            |   |
| PART II. - OTHER INFORMATION    |
|                            |
| Item  1.                        | Legal Proceedings |
|                            |   |
| Item  4.                        | Submission  of Matters to a Vote of Security Holders |
|                            |   |
| Item 6.                         | Exhibits and  Reports on Form 8-K |
|                            |   |
| SIGNATURES                      |

 

2

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**VARI–LITE INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(Unaudited)**

 

**(In thousands except share data)**

** **
|                                                                                                                 |   | **September 30,  2001** |   | **March 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
| **ASSETS**                                                                                                           |   |                    |   |                |   |
| CURRENT ASSETS:                                                                                                      |   |                    |   |                |   |
| Cash                                                                                                                 |   | $                       | 3,686  |                | $      | 1,673 |   |
| Receivables, less allowance for doubtful accounts of  $603 and $732                                                  |   | 9,679                   |   | 8,665               |   |
| Inventory                                                                                                            |   | 15,388                  |   | 15,960              |   |
| Prepaid expense and other current assets                                                                             |   | 783                     |   | 1,701               |   |
| TOTAL CURRENT ASSETS                                                                                                 |   | 29,536                  |   | 27,999              |   |
| EQUIPMENT AND OTHER PROPERTY:                                                                                        |   |                    |   |                |   |
| Lighting and sound equipment                                                                                         |   | 103,032                 |   | 104,690             |   |
| Machinery and tools                                                                                                  |   | 3,578                   |   | 3,573               |   |
| Furniture and fixtures                                                                                               |   | 4,207                   |   | 4,565               |   |
| Office and computer equipment                                                                                        |   | 10,501                  |   | 10,326              |   |
|                                                                                                                 |   | 121,318                 |   | 123,154             |   |
| Less accumulated depreciation and amortization                                                                       |   | 72,712                  |   | 76,709              |   |
|                                                                                                                 |   | 48,606                  |   | 46,445              |   |
| OTHER ASSETS                                                                                                         |   | 2,076                   |   | 1,946               |   |
| TOTAL ASSETS                                                                                                         |   | $                       | 80,218 |                | $      | 76,390 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                        |   |                    |   |                |   |
| CURRENT LIABILITIES:                                                                                                 |   |                    |   |                |   |
| Accounts payable and accrued expenses                                                                                |   | $                       | 8,079  |                | $      | 9,566 |   |
| Unearned revenue                                                                                                     |   | 1,201                   |   | 867                 |   |
| Income taxes payable                                                                                                 |   | 146                     |   | 328                 |   |
| Current portion of long-term obligations                                                                             |   | 4,893                   |   | 4,710               |   |
| TOTAL CURRENT LIABILITIES                                                                                            |   | 14,319                  |   | 15,471              |   |
| LONG-TERM OBLIGATIONS                                                                                                |   | 18,363                  |   | 16,478              |   |
| DEFERRED INCOME TAXES                                                                                                |   | 2,209                   |   | 1,399               |   |
| TOTAL LIABILITIES                                                                                                    |   | 34,891                  |   | 33,348              |   |
| 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 shares outstanding) |   | 785                     |   | 785                 |   |
| Treasury Stock                                                                                                       |   | (186                    | )      | (186                | )      |
| Additional paid-in capital                                                                                           |   | 25,026                  |   | 25,026              |   |
| Accumulated other comprehensive income (loss) - foreign  currency translationadjustment                              |   | 791                     |   | (231                | )      |
| Retained earnings                                                                                                    |   | 18,911                  |   | 17,648              |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                      |   | 45,327                  |   | 43,042              |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                      |   | $                       | 80,218 |                | $      | 76,390 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**VARI–LITE INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)**

** **

**For the ThreeMonths Ended March 31, 2001 and 2002**

 

**(Unaudited)**

 

**(In thousands except share data)**

 
|                                                                 |   | **2001**  |   | **2002**  |   |
|----------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
| Rental revenues                                                      |   | $         | 11,414 |      | $      | 10,451 |   |
| Product sales and services revenues                                  |   | 6,923     |   | 4,161     |   |
| TOTAL REVENUES                                                       |   | 18,337    |   | 14,612    |   |
| Rental cost                                                          |   | 5,576     |   | 5,521     |   |
| Product sales and services cost                                      |   | 4,234     |   | 2,499     |   |
| TOTAL COST OF SALES                                                  |   | 9,810     |   | 8,020     |   |
| GROSS PROFIT                                                         |   | 8,527     |   | 6,592     |   |
| Selling, general and administrative expense                          |   | 7,229     |   | 6,730     |   |
| Research and development expense                                     |   | 1,183     |   | 954       |   |
| TOTAL OPERATING EXPENSES                                             |   | 8,412     |   | 7,684     |   |
| OPERATING INCOME (LOSS)                                              |   | 115       |   | (1,092    | )      |
| Interest expense (net)                                               |   | 491       |   | 251       |   |
| LOSS BEFORE INCOME TAX                                               |   | (376      | )      | (1,343    | )      |
| Income tax benefit                                                   |   | (147      | )      | (531      | )      |
| NET LOSS                                                             |   | (229      | )      | (812      | )      |
| Other comprehensive loss - foreign currency translation  adjustments |   | (247      | )      | (400      | )      |
| COMPREHENSIVE LOSS                                                   |   | $         | (476   | )         | $      | (1,212 | ) |
|                                                                 |   |      |   |      |   |
| WEIGHTED AVERAGE BASIC AND  DILUTED SHARES OUTSTANDING          |   | 7,800,003 |   | 7,800,003 |   |
|                                                                 |   |      |   |      |   |
| PER SHARE INFORMATION BASIC AND DILUTED:                             |   |      |   |      |   |
| Net loss                                                             |   | $         | (0.03  | )         | $      | (0.10 | ) |

 

See notes tocondensed consolidated financial statements.

 

4

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**VARI–LITEINTERNATIONAL, INC. AND SUBSIDIARIES**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME (LOSS)**

** **

**For the Six  Months Ended March 31, 2001 and 2002**

 

**(Unaudited)**

 

**(In thousandsexcept share data)**

 
|                                                                      |   | **2001**  |   | **2002**  |   |
|---------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
| Rental revenues                                                           |   | $         | 29,336 |      | $      | 21,570 |   |
| Product sales and services revenues                                       |   | 9,379     |   | 9,817     |   |
| TOTAL REVENUES                                                            |   | 38,715    |   | 31,387    |   |
| Rental cost                                                               |   | 12,755    |   | 10,617    |   |
| Product sales and services cost                                           |   | 6,226     |   | 6,123     |   |
| TOTAL COST OF SALES                                                       |   | 18,981    |   | 16,740    |   |
| GROSS PROFIT                                                              |   | 19,734    |   | 14,647    |   |
| Selling, general and administrative expense                               |   | 16,092    |   | 13,630    |   |
| Research and development expense                                          |   | 2,398     |   | 2,494     |   |
| TOTAL OPERATING EXPENSES                                                  |   | 18,490    |   | 16,124    |   |
| Gain on the sale of concert sound reinforcement  business                 |   | 7,100     |   | —    |   |
| OPERATING INCOME (LOSS)                                                   |   | 8,344     |   | (1,477    | )      |
| Interest expense (net)                                                    |   | 1,562     |   | 609       |   |
| INCOME (LOSS) BEFORE INCOME TAX                                           |   | 6,782     |   | (2,086    | )      |
| Income tax expense (benefit)                                              |   | 2,608     |   | (824      | )      |
| NET INCOME (LOSS)                                                         |   | 4,174     |   | (1,262    | )      |
| Other comprehensive loss – foreign currency translation  adjustments |   | (561      | )      | (1,022    | )      |
| COMPREHENSIVE INCOME (LOSS)                                               |   | $         | 4,735  |      | $      | (2,284 | ) |
|                                                                      |   |      |   |      |   |
| WEIGHTED AVERAGE BASIC SHARES OUTSTANDING                                 |   | 7,800,003 |   | 7,800,003 |   |
| WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING                               |   | 7,871,165 |   | 7,800,003 |   |
|                                                                      |   |      |   |      |   |
| PER SHARE INFORMATION BASIC AND DILUTED:                                  |   |      |   |      |   |
| Net income (loss)                                                         |   | $         | 0.53   |      | $      | (0.16 | ) |

 

See notes to condensed consolidated financialstatements.

 

5

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## **VARI–LITEINTERNATIONAL, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**For the SixMonths Ended March 31, 2001 and 2002**

 

**(Unaudited)**

 

**(In thousands)**

** **
|                                                                                      |   | **2001** |   | **2002** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from operating  activities:                                                    |   |     |   |     |   |
| Net income (loss)                                                                         |   | $        | 4,174  |     | $      | (1,262 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities: |   |     |   |     |   |
| Depreciation and amortization                                                             |   | 5,220    |   | 5,219    |   |
| Amortization of note discount and deferred loan fees                                      |   | 335      |   | 84       |   |
| Provision for doubtful accounts                                                           |   | 30       |   | 161      |   |
| Deferred income taxes                                                                     |   | 2,097    |   | (810     | )      |
| Gain on sale of concert sound reinforcement business                                      |   | (7,100   | )      | —   |   |
| Loss on sale of equipment and other property                                              |   | 130      |   | 51       |   |
|  Net change in  assets and liabilities:                                              |   |     |   |     |   |
| Accounts receivable                                                                       |   | 219      |   | 854      |   |
| Prepaid expenses                                                                          |   | (1,170   | )      | (918     | )      |
| Inventory                                                                                 |   | (1,430   | )      | (571     | )      |
| Other assets                                                                              |   | (499     | )      | 62       |   |
| Accounts payable, accrued liabilities and income taxes  payable                           |   | (2,060   | )      | 1,669    |   |
| Unearned revenue                                                                          |   | (1,032   | )      | (333     | )      |
| Net cash provided by (used in) operating activities                                       |   | (1,086   | )      | 4,206    |   |
|                                                                                      |   |     |   |     |   |
| Cash flows from investing activities:                                                     |   |     |   |     |   |
| Capital expenditures, including rental equipment                                          |   | (5,318   | )      | (3,594   | )      |
| Proceeds from sale of concert sound reinforcement  business                               |   | 11,946   |   | —   |   |
| Proceeds from sale of European operations                                                 |   | 5,258    |   | —   |   |
| Proceeds from sale of equipment                                                           |   | 29       |   | 47       |   |
| Net cash provided by (used in)  investing activities                                      |   | 11,915   |   | (3,547   | )      |
|                                                                                      |   |     |   |     |   |
| Cash flows from financing activities:                                                     |   |     |   |     |   |
| Proceeds from issuance of debt                                                            |   | 32,226   |   | 28,691   |   |
| Principal payments on debt                                                                |   | (42,998  | )      | (30,560  | )      |
| Proceeds from payments on stockholder notes receivable                                    |   | 19       |   | —   |   |
| Net cash used in financing activities                                                     |   | (10,753  | )      | (1,869   | )      |
| Effect of exchange rate changes on cash and cash  equivalents                             |   | (740     | )      | (803     | )      |
| Net decrease in cash during the  period                                                   |   | (664     | )      | (2,013   | )      |
| Cash, beginning of period                                                                 |   | 4,315    |   | 3,686    |   |
| Cash, end of period                                                                       |   | $        | 3,651  |     | $      | 1,673 |   |
| **Supplemental Cash Flow Information**                                                    |   |     |   |     |   |
| Cash paid for interest expense                                                            |   | $        | 1,471  |     | $      | 729 |   |
| Cash paid for income taxes                                                                |   | $        | 187    |     | $      | 366 |   |

 

See notes to condensed consolidated financialstatements.

 

6

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## **VARI–LITEINTERNATIONAL, INC. AND SUBSIDIARIES**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

** **

**(Inthousands except share data)**

** **

1.  Interim FinancialInformation

 

The accompanying unaudited condensed consolidatedfinancial statements of Vari-Lite International, Inc. (the “Company”) have beenprepared by the Company in accordance with generally accepted accountingprinciples for interim financial information and the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.

 

In the opinion of management, the condensedconsolidated financial statements contain all adjustments, consisting of normalrecurring adjustments, considered necessary to present fairly the consolidatedfinancial position, results of operations and cash flows of the Company. Theresults of operations for the three and six-month periods ended March 31, 2002are not necessarily indicative of the results of operations that may beexpected for any other interim periods or for the fiscal year ending September30, 2002.

 

Certain reclassifications have been made to the March31, 2001 consolidated financial statements to conform to the presentation inthe March 31, 2002 consolidated financial statements.

 

For further information, refer to the consolidatedfinancial statements and accompanying notes included in the Company’s AnnualReport on Form 10-K for the year ended September 30, 2001.

 

2.  Inventory

 

Inventory consists of thefollowing:

 
|             |   | **September 30,  2001** |   | **March 31,  2002** |   |
|------------------|--------|-------------------------|--------|---------------------|--------|
| Raw  materials   |   | $                       | 13,086 |                | $      | 13,882 |   |
| Work in progress |   | 567                     |   | 726                 |   |
| Finished goods   |   | 1,735                   |   | 1,352               |   |
|             |   | $                       | 15,388 |                | $      | 15,960 |   |

 

3.  Debt

 

On December 19, 1997, theCompany entered into a $50,000 multicurrency revolving credit  facility (the “Old Credit Facility”).Borrowings under the Old Credit Facility were $32,200 at September 30,2000.  Subsequent to September 30, 2000,the Company used proceeds of $22,200 from the sale of the Company’s concertsound reinforcement business and continental European rental operations and thefunding of the London Bank Loans (hereinafter defined) to reduce borrowingsunder the Old Credit Facility to $10,000.

 

On December 29, 2000, Vari-Lite,Inc. (“Vari-Lite”), entered a new credit facility (the “New Credit Facility”),which includes the $12,000 Term Loan, the $5,000 Revolver and the

 

7

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 $3,000Capital Expenditure Loan.  The Term Loanand Capital Expenditure Loan amortize over 84 months (subject to a balloonpayment on termination of the New Credit Facility as discussed below).Borrowings under the Revolver are subject to availability under a borrowingbase of eligible inventory and accounts receivable (as defined in the New CreditFacility).  As of March 31, 2002, therewas $2,259 outstanding under the Revolver. Prior to January 15, 2002, all outstanding borrowings under the NewCredit Facility bore interest at the lender’s base rate or LIBOR, plus a ratemargin of 0.75% and 2.50%, respectively. Since January 15, 2002, all outstanding balances under the New CreditFacility bear interest at the lender’s base rate or LIBOR, plus a rate marginranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon theCompany’s ratio of Adjusted Funded Debt to EBITDA (as defined in the New CreditFacility).  The New Credit Facility isguaranteed by the Company and is secured by all of the stock and substantiallyall of the assets of Vari-Lite and a pledge of 65% of the outstanding capitalstock of the Company’s foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused portionof the New Credit Facility.  The NewCredit Facility contains compliance covenants, including requirements that theCompany achieve certain financial ratios, as amended on March 31, 2002.  In addition, the New Credit Facility placeslimitations on annual capital expenditures and on the ability to incuradditional indebtedness, make certain loans or investments, sell assets, pay dividendsor reacquire the Company’s stock.  TheNew Credit Facility terminates on December 31, 2003.  Upon termination of the New Credit Facility, the entireoutstanding indebtedness thereunder becomes due and payable in full.

 

On November 23, 2000, September27, 2001 and March 25, 2002, theCompany’s London subsidiary entered into British pounds sterling loans of 4,000(USD 5,800), 500 (USD 727) and 400 (USD 570), respectively, with a U. K. bank(collectively, the “London Bank Loans”.) The London Bank Loans accrue interest at the rate of 9.10%, 7.78% and7.77% per annum, respectively, and amortize over 48 months, 60 months and 60months, respectively.  The London BankLoans are secured by all of the assets of the Company’s London operations andinclude certain financial covenants, limitations on capital expenditures andintercompany payments and the guarantee of the Company.

 

The Company has borrowed money topurchase computer equipment and office furniture and fixtures and conventionallighting equipment.  These loans aretypically amortized over three years and bear interest at various rates rangingfrom 1.50% to 10.35%.  Proceeds receivedunder this type of financing were approximately $1,135 and $137 for the six-monthperiods ending March 31, 2001 and 2002, respectively, and borrowingsoutstanding under this type of financing at March 31, 2001 and 2002 wereapproximately $3,572 and $1,306, respectively.

 

4.  Commitments and Contingencies

 

In the ordinary course of itsbusiness, the Company is from time to time threatened with or named as adefendant in various lawsuits, including patent infringement claims. TheCompany is not currently involved in any material legal proceedings.

 

8

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5.  SegmentReporting

 

The Company’s chief operatingdecision maker is considered to be the Company’s Chief Operating Officer(“COO”). The COO reviews financial information presented on a consolidatedbasis accompanied by disaggregated information about revenues by geographic regionand by product lines for purposes of making operating decisions and assessingfinancial performance. The Company has 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 and six-monthperiods ended March 31, 2001 and 2002 is presented below:

 
|                                      |   | **Three Months Ended** |   |
|-------------------------------------------|--------|------------------------|--------|
|                                      |   | **North America**      |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| **March 31, 2001:**                       |   |                   |   |   |   |   |   |   |   |   |   |
| Net Revenues from unaffliliated customers |   | $                      | 14,679 |   | $ | 1,162 |   | $ | 2,496 |   | $ | — |   | $ | 18,337 |   |
| Intersegment sales                        |   | 1,724                  |   | 3 |   | (5 | ) | (1,722 | ) | — |   |
| Total net revenues                        |   | 16,403                 |   | 1,165 |   | 2,491 |   | (1,722 | ) | 18,337 |   |
| Operating income (loss)                   |   | 216                    |   | (755 | ) | 654 |   | — |   | 115 |   |
| Depreciation and amortization             |   | 1,898                  |   | 44 |   | 607 |   | — |   | 2,549 |   |
| Total assets                              |   | 68,374                 |   | 8,525 |   | 15,590 |   | (8,780 | ) | 83,709 |   |
|                                           |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Three Months Ended** |   |
|-------------------------------------------|--------|------------------------|--------|
|                                      |   | **North America**      |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| **March 31, 2002:**                       |   |                   |   |   |   |   |   |   |   |   |   |
| Net Revenues from unaffliliated customers |   | $                      | 9,596  |   | $ | 1,873 |   | $ | 3,143 |   | $ | — |   | $ | 14,612 |   |
| Intersegment sales                        |   | 5,350                  |   | 12 |   | 42 |   | (5,404 | ) | — |   |
| Total net revenues                        |   | 14,946                 |   | 1,885 |   | 3,185 |   | (5,404 | ) | 14,612 |   |
| Operating loss                            |   | (753                   | )      | (198 | ) | (141 | ) | — |   | (1,092 | ) |
| Depreciation and amortization             |   | 2,002                  |   | 53 |   | 560 |   | — |   | 2,615 |   |
| Total assets                              |   | 62,724                 |   | 7,595 |   | 15,045 |   | (8,974 | ) | 76,390 |   |
|                                           |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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|                                      |   | **Six Months Ended** |   |
|-------------------------------------------|--------|----------------------|--------|
|                                      |   | **North America**    |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| **March 31, 2001:**                       |   |                 |   |   |   |   |   |   |   |   |   |
| Net Revenues from unaffliliated customers |   | $                    | 27,213 |   | $ | 5,330 |   | $ | 6,172 |   | $ | — |   | $ | 38,715 |   |
| Intersegment sales                        |   | 3,099                |   | 38 |   | 5 |   | (3,142 | ) | — |   |
| Total net revenues                        |   | 30,312               |   | 5,368 |   | 6,177 |   | (3,142 | ) | 38,715 |   |
| Operating income                          |   | 5,778                |   | 1,013 |   | 1,553 |   | — |   | 8,344 |   |
| Depreciation and amortization             |   | 3,876                |   | 121 |   | 1,223 |   | — |   | 5,220 |   |
| Total assets                              |   | 68,374               |   | 8,525 |   | 15,590 |   | (8,780 | ) | 83,709 |   |
|                                           |        |                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Six Months Ended** |   |
|-------------------------------------------|--------|----------------------|--------|
|                                      |   | **North America**    |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| **March 31, 2002:**                       |   |                 |   |   |   |   |   |   |   |   |   |
| Net Revenues from unaffliliated customers |   | $                    | 19,113 |   | $ | 5,230 |   | $ | 7,044 |   | $ | — |   | $ | 31,387 |   |
| Intersegment sales                        |   | 7,490                |   | 17 |   | 42 |   | (7,549 | ) | — |   |
| Total net revenues                        |   | 26,603               |   | 5,247 |   | 7,086 |   | (7,549 | ) | 31,387 |   |
| Operating income (loss)                   |   | (2,746               | )      | 703 |   | 566 |   | — |   | (1,477 | ) |
| Depreciation and amortization             |   | 3,975                |   | 99 |   | 1,145 |   | — |   | 5,219 |   |
| Total assets                              |   | 62,724               |   | 7,595 |   | 15,045 |   | (8,974 | ) | 76,390 |   |
|                                           |        |                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6.  Net Loss Per Share

 

Basic net loss per share is computed based upon theweighted average number of common shares outstanding.  Diluted net loss per share reflects the dilutive effect, if any,of stock options and warrants. 

 
|                                                                                      |   | **Three  Months ended March 31,** |   | **Six Months  ended March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **2001**                          |   | **2002**                        |   | **2001** |   | **2002** |   |
| 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 |   | —                            |   | —                          |   | 71,162 |   | — |   |
| Shares used in  calculating diluted net loss per share                                    |   | 7,800,003                         |   | 7,800,003                       |   | 7,871,165 |   | 7,800,003 |   |

 

For the three-month period ended March 31, 2001 and2002, net loss per share excludes stock options of 693,700 and 724,200,respectively, and warrants of 296,057 and 296,057, respectively, which wereanti-dilutive.  For the six-month periodended March 31, 2001, net income per share excludes stock options of 622,538and warrants of 296,057 which were anti-dilutive, but includes 71,162 optionswhich were dilutive.  For the six-monthperiod ended March 31, 2002, net loss per share excludes stock options of724,200 and warrants of 296,057 which were anti-dilutive.  

 

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7.  Dispositions

 

On October 26, 2000, the Company sold 100% of itsinterest in Vari-Lite International Europe, B.V. (“VLI Europe”) and 0.4% of itsinterest in Vari-Lite Production Services, SAS, and Vari-Lite sold all of theVARI*LITEÒ lighting equipmentused in those operations.  VLI Europeowned 100% of Vari-Lite Production Services, N.V., 99.6% of Vari-LiteProduction Services, SAS and 100% of Vari-Lite Production Services, AB.  This transaction resulted in a pre-taxcharge of $3,200 which was recorded as an asset impairment in the fourthquarter of fiscal year 2000.

 

On November 17, 2000, the Company transferredsubstantially all of the assets of Showco, Inc. to Clearsho, Inc. (“Clearsho”),which assumed certain of Showco’s contract liabilities, in exchange for thesole membership interest in Clearsho. On November 17, 2000, Showco sold 100% of its interest in Clearsho whichresulted in a net pre-tax gain of $7,100.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2002 Compared to Three Months Ended March 31, 2001**

 

*Revenues*.   Total revenues decreased 20.3%, or $3.7 million, to $14.6 million in thethree-month period ended March 31, 2002, compared to $18.3 million in thethree-month period ended March 31, 2001. The revenue decrease was attributable primarily to the factors set forthbelow.

 

*RentalRevenues. * Rental revenues decreased 8.4%, or $1.0million, to $10.4 million in the three-month period ended March 31, 2002,compared to $11.4 million in the three-month period ended March 31, 2001.  This decrease was due to the weak economycombined with the ongoing effects of the September 11, 2001 attacks.

 

*ProductSales andServices Revenues*.  Product sales and services revenues decreased 39.9%, or $2.7 million, to$4.2 million in the three-month period ended March 31, 2002, compared to $6.9million in the three-month period ended March 31, 2001. This decrease wasprimarily due to a $2.6 million decrease in revenue resulting from the closingof the Company’s corporate meeting and special events management business inApril 2001.

 

*RentalCost.*   Rental cost inthe three-month period ended March 31, 2002 was unchanged compared to thethree-month period ended March 31, 2001. However, rental cost as a percentage of rental revenues increased to 52.8%in the three-month period ended March 31, 2002, from 48.9% in the three-monthperiod ended March 31, 2001.  Thisincrease was due to depreciation expense representing a higher percentage ofrevenues during the three-month period ended March 31, 2002 as a result ofdecreased revenues due to difficult economic conditions.

 

*ProductSales and Services Cost.*  Product sales and services cost decreased 41.0%, or $1.7 million,to $2.5 million in the three-month period ended March 31, 2002, compared to$4.2 million in the three-month period ended March 31, 2001. This decrease wasprimarily due to the closing of the Company’s corporate meeting and specialevents management business in April 2001. Product sales and services cost as apercentage of product sales and services revenues decreased to 60.1% in thethree-month period ended March 31, 2002, from 61.2% in the three-month periodended March 31, 2001 as a result of the closing of the Company's corporatemeeting and special events management business which had higher costs as apercentage of revenue.

 

*Selling,General and Administrative Expense.  *Selling,general and administrative expense decreased 6.9%, or $0.5 million, to $6.7million in the three-month period ended March 31, 2002, compared to $7.2million in the three-month period ended March 31, 2001. This decrease was dueto the closing of the Company’s corporate meeting and special events managementbusiness in April 2001, as well as expense reduction efforts undertaken in thefirst quarter of fiscal 2002.  Thisexpense as a percentage of total revenues increased to 46.1% in the three-monthperiod ended March 31, 2002, from 39.4% in the three-month period ended March31, 2001 as a result of decreased revenues.

 

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*Researchand Development Expense.*  Research and development expense decreased 19.4%, or $0.2million, to $1.0 million in the three-month period ended March 31, 2002,compared to $1.2 million in three-month period ended March 31, 2001.  This decrease was primarily due to expensereduction efforts undertaken in the first quarter of fiscal 2002. This expenseas a percentage of total revenues for the period ended March 31, 2002 was 6.5%,unchanged from the three-month period ended March 31, 2001.

 

*InterestExpense*.   Interestexpense decreased 48.9%, or $0.2 million, to $0.3 million in the three-monthperiod ended March 31, 2002, compared to $0.5 million in the three-month periodended March 31, 2001, as a result of reduced borrowings and lower interestrates in the three-month period ended March 31, 2002 as well as interest incomeof $0.1 million from an income tax refund.

 

*Income Taxes. * Theeffective tax rate in the three-month periods ended March 31, 2002 and 2001were 39.5% and 39.1%, respectively.

 

**SixMonths Ended March 31, 2002 Compared to Six Months Ended March 31, 2001**

 

*Revenues*.   Total revenues decreased 18.9%, or $7.3million, to $31.4 million in the six-month period ended March 31, 2002,compared to $38.7 million in the six-month period ended March 31, 2001.  The revenue decrease was attributableprimarily to the factors set forth below.

* *

*RentalRevenues. * Rental revenues decreased 26.5%, or $7.7million, to $21.6 million in the six-month period ended March 31, 2002,compared to $29.3 million in the six-month period ended March 31, 2001. Thisdecrease was due to the weak economy combined with the ongoing effects of theSeptember 11, 2001 attacks and the sale of the Company’s concert soundreinforcement business in November 2000 which accounted for $1.6 million inrevenues in the six-month period ended March 31, 2001.

 

*ProductSales and Services Revenues*.   Product sales and services revenues increased 4.7%, or $0.4million, to $9.8 million in the six-month period ended March 31, 2002, comparedto $9.4 million in the six-month period ended March 31, 2001. This increase wasdue to a $4.1 million increase in sales of VARI*LITEÒautomated lighting equipment which was partially offset by a $3.7 milliondecrease in revenue due to the closing of the Company’s corporate meeting andspecial events management business in April 2001.

 

*RentalCost.*   Rental costdecreased 16.8%, or $2.2 million, to $10.6 million in the six-month periodended March 31, 2002, compared to $12.8 million in the six-month period endedMarch 31, 2001.  This decrease was dueto reduced revenues as a result of a weak economy and the sale of the Company’sconcert sound reinforcement business in November 2000.  Rental cost as a percentage of rentalrevenues increased to 49.2% in the six-month period ended March 31, 2002, from43.5% in the six-month period ended March 31, 2001.  This increase was due to depreciation expense representing ahigher percentage of revenues during the six-month period ended March 31, 2002as a result of decreased revenues due to difficult economic conditions.

 

*ProductSales and Services Cost.*  Product sales and services cost decreased 1.7%, or $0.1 million, to $6.1million in the six-month period ended March 31, 2002, compared to $6.2 millionin the six-month period ended March 31, 2001. This decrease was due to a $2.5million decrease in product sales and services cost associated with the closingof the Company’s corporate meeting and special events management business inApril 2001 offset by $2.4 million increase in cost of sales of VARI*LITEÒautomated lighting equipment.

 

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Product sales and services cost as a percentage of product sales andservices revenues decreased to 62.4% in the six-month period ended March 31,2002, from 66.4% in the six-month period ended March 31, 2001 as a result ofimproved manufacturing efficiencies and the closing of the Company's corporatemeeting and special events management business which had higher costs as apercentage of revenue.

 

*Selling,General and Administrative Expense.  *Selling,general and administrative expense decreased 15.3%, or $2.5 million, to $13.6million in the six-month period ended March 31, 2002, compared to $16.1 millionin the six-month period ended March 31, 2001. This decrease was primarily dueto the sale of the Company’s concert sound reinforcement business in November2000 and the closing of the Company’s corporate meeting and special eventsmanagement business in April 2001, as well as expense reduction effortsundertaken in the first quarter of fiscal 2002.  This expense as a percentage of total revenues increased to 43.4%in the six-month period ended March 31, 2002, from 41.6% in the six-monthperiod ended March 31, 2001 as a result of decreased revenues.

 

*Researchand Development Expense.*  Research and development expense in the six-month period ended March 31,2002 was unchanged as compared to the six-month period ended March 31,2001.  However, this expense as apercentage of total revenues increased to 7.9% in the six-month period endedMarch 31, 2002, from 6.2% in the six-month period ended March 31, 2001, as aresult of decreased revenues.

 

*InterestExpense*.   Interestexpense decreased 61.0%, or $1.0 million, to $0.6 million in the six-monthperiod ended March 31, 2002, compared to $1.6 million in the six-month periodended March 31, 2001, as a result of reduced borrowings and lower interestrates in the six-month period ended March 31, 2002 as well as interest incomeof $0.1 million from an income tax refund.

 

*Income Taxes.*   The effective tax rate in thesix-month periods ended March 31, 2002 and 2001 were 39.5% and 38.5%,respectively.

 

**Liquidityand Capital Resources**

 

Historically, the Company has financed its operationsand capital expenditures with cash flow from operations, bank borrowings andadvances from customers.  The Company’soperating activities used cash flow of $1.1 million for the six-month periodended March 31, 2001 and generated cash flow of $4.2 million in the six-month periodended March 31, 2002.

 

On December 19, 1997, theCompany entered into the Old Credit Facility. Borrowings under the Old CreditFacility were $32.2 million at September 30, 2000.  Subsequent to September 30, 2000, the Company used proceeds of$22.2 million from the sale of the Company’s concert sound reinforcementbusiness and continental European rental operations and the funding of theLondon Bank Loans to reduce borrowings under the Old Credit Facility to $10.0million.

 

On December 29, 2000, Vari-Liteentered into the New Credit Facility which includes the $12.0 Term Loan, the$5.0 million Revolver and the $3.0 million Capital Expenditure Loan. The TermLoan and Capital Expenditure Loan amortize over 84 months (subject to a balloonpayment on termination of the New Credit Facility as discussed below).  Borrowings under the Revolver are subject toavailability under a borrowing base of eligible inventory and accountsreceivable (as defined in the New Credit Facility).  As of March 31, 2002, there was $2.3 million outstanding underthe Revolver.  Prior to January 15,2002,  all outstanding borrowings underthe New Credit Facility bore interest at the lender’s base rate or LIBOR, plusa rate margin of 0.75% and 2.50%, respectively.  Since January 15, 2002, all outstanding balances under the NewCredit Facility bear interest at the lender’s base rate or LIBOR, plus a ratemargin ranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, based uponthe Company’s ratio of Adjusted Funded Debt to EBITDA (as defined in the NewCredit Facility).  The New CreditFacility is guaranteed by the Company and is secured by all of the stock andsubstantially all of the assets of Vari-Lite and a pledge of 65% of theoutstanding capital stock of the Company’s foreign subsidiaries.  A commitment fee of 0.25% is charged on theaverage daily unused portion of the New Credit Facility.  The New Credit Facility contains compliancecovenants, including requirements that the Company achieve certain financialratios, as amended on March 31, 2002. In addition, the New Credit Facility places limitations on annualcapital expenditures and on the ability to incur additional indebtedness, makecertain loans or investments, sell assets, pay dividends or reacquire theCompany’s stock.  The New CreditFacility terminates on December 31, 2003. Upon termination of the New Credit Facility, the entire outstandingindebtedness thereunder becomes due and payable in full.

 

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On November 23, 2000, September27, 2001 and March 25, 2002, the Company’s London subsidiary entered intoBritish pounds sterling loans of 4.0 million (USD 5.8 million), 0.5 million(USD 0.7 million) and 0.4 million (USD 0.6 million), respectively, with a U. K.bank (collectively, the “London Bank Loans”.) The London Bank Loans accrue interest at the rate of 9.10%, 7.78% and7.77% per annum, respectively, and amortize over 48 months, 60 months and 60months, respectively.  The London BankLoans are secured by all of the assets of the Company’s London operations andinclude certain financial covenants, limitations on capital expenditures andintercompany payments and the guarantee of the Company.

 

The Company has borrowed money topurchase computer equipment and office furniture and fixtures and conventionallighting equipment.  These loans areamortized over three to five years and bear interest at various rates rangingfrom 1.50% to 10.35%.  Proceeds receivedunder this type of financing were approximately $1.1 million and $0.1 millionfor the six-month periods ending March 31, 2001 and 2002, respectively, andborrowings outstanding under this type of financing at March 31, 2001 and 2002were approximately $3.6 million and $1.3 million, respectively.

 

The Company’s business requires significant capitalexpenditures.  Capital expenditures forthe six months ended March 31, 2001 and 2002 were approximately $5.3 millionand $3.6 million, respectively, of which approximately $4.6 million and $3.3million were for rental and demo equipment inventories.  The majority of the Company’s revenues aregenerated through the rental of automated lighting systems and, as such, theCompany must maintain a significant amount of rental equipment to meet customerdemands.

 

Management believesthat cash flow generated from operations and borrowing capacity under the NewCredit Facility will be sufficient to meet the anticipated operating cash needsand capital expenditures for the next twelve months.  Because the Company’s future operating results will depend on anumber of factors, including the demand for the Company’s products andservices, the Company’s ability to market, sell and support products,competition, the success of the Company’s research and development programs,the ability to achieve competitive and technological advances, general andeconomic conditions and other factors beyond the Company’s control, there canbe no assurance that sufficient capital resources will be available to fund theexpected expansion of its business beyond such period.

 

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**DisclosureRegarding Forward-Looking Statements**

 

This report includes “forward–lookingstatements” as that phrase is defined in Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. When used in this report, the words “anticipate,” “believe,”“estimate,” “expect,” “will,” “could,” “may” and similar expressions, as theyrelate to management or the Company, are intended to identify forward–lookingstatements. Such statements reflect the current views of management withrespect to future events and are subject to certain risks, uncertainties andassumptions, including without limitation the following as they relate to theCompany:  fluctuations in operatingresults and seasonality; the Company’s ability to market, sell and supportproducts; technological changes; reliance on intellectual property; dependenceon entertainment industry; competition; dependence on management; foreignexchange risk; international trade risk; dependence on key suppliers; anddependence on manufacturing facility. Should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,actual results may vary materially from those described herein.

 

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

 

The Company does not believe that the market risks forthe three and six-month periods ended March 31, 2002 substantially changed fromthose risks outlined for the year ended September 30, 2001 in the Company’sForm 10-K.

 

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**PART II  OTHER INFORMATION**

 

**ITEM1.                  LEGAL PROCEEDINGS**

 

In the ordinary course of itsbusiness, the Company is from time to time threatened with or named as adefendant in various lawsuits, including patent infringement claims.Additionally, the Company has filed lawsuits claiming infringements of itspatents by third parties for which the Company has been subject tocounterclaims. The Company is not currently involved in any material legalproceedings.

 

**ITEM4.                  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

On March 1, 2002, the Annual Meeting of Stockholderswas held in Dallas, Texas.  Thestockholders were asked to elect two Class II directors to serve until2005.  The vote was as follows:

 
|                |   | **For**   |   | **Against or  Withheld** |   | **Abstentions** |   |
|---------------------|--------|-----------|--------|--------------------------|--------|-----------------|--------|
| James H. Clark, Jr. |   | 6,740,837 |   | 59,014                   |   | 0               |   |
| John R. Rettberg    |   | 6,773,966 |   | 25,885                   |   | 0               |   |

 

Messrs. H.R. Brutsche ́ III, John D. Maxson, William C.Scott, J. Anthony Smith and J.R.K. Tinkle will continue as directors of theCompany.

 

**ITEM6.                  EXHIBITS AND REPORTSON FORM 8-K**

 

(a) Exhibits

 

3.4      Amendment to the By-Laws of the Companydated as of February 15, 2002.

10.70  Master Lease Purchase Agreement, dated March25, 2002, between Vari-Lite Europe, Ltd. and Barclays Mercantile BusinessFinance Limited.

10.71  Amendment No. 4, dated March 31, 2002, tothe Financing Agreement, dated as of December 29, 2000, between Vari-Lite, Inc.and U.S. Bank National Association, formerly known as Firstar Bank, NationalAssociation.

 

(b) No reports on Form8-K were filed for the quarter ended March 31, 2002.

 

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**SIGNATURES**

 

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

 
|   | **VARI-LITE  INTERNATIONAL, INC.** |
|--------|------------------------------------|
|   |                               |   |
| Date:  |    May 10,  2002         |   | By: | /s/ JEROME L.  TROJAN III |   |
|   |                               | Jerome L. Trojan  III |
|   |                               | Vice President -  Finance, |
|   |                               | Chief Financial  Officer, Treasurer |
|   |                               | and Secretary  (Principal Financial |
|   |                               | and Accounting  Officer) |
|        |                                    |  |  |  |  |

 

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