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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C.   20549**

**FORM 10-Q**

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001**

**COMMISSION FILE NUMBER:         0-23159**

| **Vari-Lite International, Inc.**                       |
|---------------------------------------------------------|
|                                                    | ****  |   |
| (Exact name of  registrant as specified in its charter) |

 

| **Delaware**                                                     | **75-2239444**                        |
|------------------------------------------------------------------|---------------------------------------|
| ****                                                             | ****                                  |
| (State or other  jurisdiction of  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 mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes ý   No o

Indicatethe number of shares outstanding of each of the Issuer’s classes of commonstock, as of the latest practicable date: As of August 10, 2001, there were 7,800,003 shares of Common Stockoutstanding.

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VARI-LITEINTERNATIONAL, INC.INDEX TO QUARTERLY REPORT ON FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2001

| PART  I. - FINANCIAL INFORMATION                                                                     |                                                                                                                     |
|------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                     |
| Item  1. Financial Statements:                                                                       |                                                                                                                     |
|                                                                                                 |                                                                                                                     |
|                                                                                                 | Condensed  Consolidated Balance Sheets as of September 30, 2000 and June 30, 2001                                        |   |
|                                                                                                 |                                                                                                                     |
|                                                                                                 | Condensed  Consolidated Statements of Income and Comprehensive Income for the three  months ended June 30, 2000 and 2001 |   |
|                                                                                                 |                                                                                                                     |
|                                                                                                 | Condensed  Consolidated Statements of Income and Comprehensive Income for the nine  months ended June 30, 2000 and 2001  |   |
|                                                                                                 |                                                                                                                     |
|                                                                                                 | Condensed  Consolidated Statements of Cash Flows for the nine months ended June 30, 2000  and 2001                       |   |
|                                                                                                 |                                                                                                                     |
|                                                                                                 | 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  6. Exhibits and Reports on Form 8-K                                                            |                                                                                                                     |
|                                                                                                 |                                                                                                                     |
| SIGNATURES                                                                                           |                                                                                                                     |

 

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(In thousands except share data)**

|                                         | **September  30,  2000**                                                                                             |    | **June 30,  2001** |    |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------|---------|--------------------|---------|
|                                         | ****                                                                                                            |    | ****          |    |
| **ASSETS**                                   |                                                                                                                 |
| CURRENT ASSETS:                              |                                                                                                                 |    |               |    |
|                                         | Cash                                                                                                                 | $       | 4,315              |    | $ | 2,494 |   |
|                                         | Receivables, less allowance for doubtful accounts of  $740 and $374                                                  | 12,369  |               | 9,411   |   |
|                                         | Inventory                                                                                                            | 13,695  |               | 16,017  |   |
|                                         | Prepaid expense and other current assets                                                                             | 1,352   |               | 1,390   |   |
|                                         |                                                                                                                 |    |               |    |   |
|                                         | TOTAL  CURRENT ASSETS                                                                                                | 31,731  |               | 29,312  |   |
| EQUIPMENT AND OTHER PROPERTY:                |                                                                                                                 |    |               |    |
|                                         | Lighting and sound equipment                                                                                         | 123,210 |               | 102,224 |   |
|                                         | Machinery and tools                                                                                                  | 5,678   |               | 3,443   |   |
|                                         | Furniture and fixtures                                                                                               | 5,089   |               | 4,172   |   |
|                                         | Office and computer equipment                                                                                        | 10,377  |               | 10,601  |   |
|                                         | Work in progress and raw materials inventory                                                                         | 680     |               | -       |   |
|                                         |                                                                                                                 |    |               |    |   |
|                                         | 145,034                                                                                                              |    | 120,440            |    |
|                                         | Less accumulated depreciation and amortization                                                                       | 84,097  |               | 70,371  |   |
|                                         |                                                                                                                 |    |               |    |   |
|                                         | 60,937                                                                                                               |    | 50,069             |    |
| OTHER ASSETS                                 | 2,035                                                                                                                |    | 2,215              |    |
|                                         |                                                                                                                 |    |               |    |
|                                         | TOTAL ASSETS                                                                                                         | $       | 94,703             |    | $ | 81,596 |   |
|                                         |                                                                                                                 |    |               |    |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**     |                                                                                                                 |
| CURRENT LIABILITIES:                         |                                                                                                                 |    |               |    |
|                                         | Accounts  payable and accrued expenses                                                                               | $       | 10,873             |    | $ | 7,739 |   |
|                                         | Unearned revenue                                                                                                     | 3,272   |               | 1,766   |   |
|                                         | Income taxes payable                                                                                                 | 82      |               | 380     |   |
|                                         | Current portion of long–term obligations                                                                        | 19,599  |               | 4,934   |   |
|                                         |                                                                                                                 |    |               |    |   |
|                                         | TOTAL CURRENT LIABILITIES                                                                                            | 33,826  |               | 14,819  |   |
| LONG–TERM OBLIGATIONS                   | 18,136                                                                                                               |    | 19,148             |    |
| DEFERRED INCOME TAXES                        | 993                                                                                                                  |    | 2,309              |    |
|                                         |                                                                                                                 |    |               |    |
|                                         | TOTAL LIABILITIES                                                                                                    | 52,955  |               | 36,276  |   |
| COMMITMENTS AND CONTINGENCIES  (Note 8) | -                                                                                                                    |    | -                  |    |
| 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  |   |
|                                         | Stockholder  notes receivable                                                                                        | (19     | )                  | -       |   |
|                                         | Accumulated other comprehensive income (loss) - foreign  currency translation adjustment                             | (319    | )                  | 361     |   |
|                                         | Retained earnings                                                                                                    | 16,461  |               | 19,334  |   |
|                                         |                                                                                                                 |         |               |         |   |
|                                         | TOTAL STOCKHOLDERS' EQUITY                                                                                           | 41,748  |               | 45,320  |   |
|                                         |                                                                                                                 |         |               |         |   |
|                                         | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                           | $       | 94,703             |    | $ | 81,596 |   |
|                                         |                                                                                                                 |         |               |         |   |

Seenotes to condensed consolidated financial statements.

 

 

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME**

**For the Three Months Ended June 30,2000 and 2001**

**(Unaudited)**

**(In thousands except share data)**

|                                                                             | **2000**                        |       | **2001**   |       |
|----------------------------------------------------------------------------------|---------------------------------|------------|------------|------------|
| ** **                                                                       | ****                       | ** ** | ****  | ** ** |
| Rental revenues                                                             | $                               | 17,869     |       | $          | 12,572 |   |
| Product sales and services revenues                                         | 3,640                           |       | 3,012      |       |
|                                                                             |                            |       |       |       |
|                                                                             | TOTAL REVENUES             | 21,509     |       | 15,584     |   |
| Rental cost                                                                 | 8,262                           |       | 6,264      |       |
| Product sales and services cost                                             | 2,228                           |       | 1,892      |       |
|                                                                             |                            |       |       |       |
|                                                                             | TOTAL COST OF SALES        | 10,490     |       | 8,156      |   |
|                                                                             |                            |       |       |       |   |
|                                                                             | GROSS PROFIT               | 11,019     |       | 7,428      |   |
| Selling, general and administrative expense                                 | 8,533                           |       | 7,910      |       |
| Research and development expense                                            | 1,287                           |       | 1,318      |       |
| Impairment of assets                                                        | 650                             |       | -          |       |
|                                                                             |                            |       |       |       |
|                                                                             | TOTAL OPERATING EXPENSES   | 10,470     |       | 9,228      |   |
|                                                                             |                            |       |       |       |
| OPERATING INCOME (LOSS)                                                     | 549                             |       | (1,800     | )          |
| Interest expense (net)                                                      | 1,196                           |       | 351        |       |
|                                                                             |                            |       |       |       |
| LOSS BEFORE INCOME TAX                                                           | (647                            | )          | (2,151     | )          |
| Income tax benefit                                                               | (255                            | )          | (850       | )          |
|                                                                             |                            |       |       |       |
| NET LOSS                                                                         | (392                            | )          | (1,301     | )          |
|                                                                             |                            |       |       |       |
| Other comprehensive gain (loss) – foreign currency  translation adjustments | (329                            | )          | 118        |       |
|                                                                             |                            |       |       |       |
| COMPREHENSIVE LOSS                                                               | $                               | (721       | )          | $          | (1,183 | ) |
|                                                                             |                            |       |       |       |
| WEIGHTED AVERAGE BASIC   AND DILUTED SHARES OUTSTANDING                | 7,800,003                       |       | 7,800,003  |       |
|                                                                             |                            |       |       |       |
|                                                                             |                            |       |       |       |
| PER SHARE INFORMATION                                                       |                            |       |       |       |
| BASIC AND DILUTED:                                                          |                            |       |       |       |
|                                                                             | Net loss                        | $          | (0.05      | )          | $ | (0.17 | ) |

See notes to condensed consolidated financial statements.****CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVEINCOME**

**For the Nine  Months Ended June 30, 2000 and 2001**

**(Unaudited)**

**(In thousands except share data)**
 **2000** **2001**  **** ** ****** ** **     Rental revenues$58,177 $41,908 Product sales and services revenues11,730 12,391       TOTAL REVENUES69,907 54,299 Rental cost27,139 19,019 Product sales and services cost7,076 8,118       TOTAL COST OF SALES34,215 27,137        GROSS PROFIT35,692 27,162 Selling, general and administrative expense28,168 24,002 Research and development expense3,754 3,716 Impairment of assets650 -       TOTAL OPERATING EXPENSES32,572 27,718      Gain on sale of concert sound reinforcement business- 7,100      OPERATING INCOME3,120 6,544 Interest expense (net)3,716 1,913      INCOME (LOSS) BEFORE INCOME TAX(596)4,631 Income tax expense (benefit)(235)1,758      NET INCOME (LOSS)(361)2,873      Other comprehensive loss – foreign currency translation  adjustments(829)(314)Reclassification adjustment – sale of continental  European operations- 993      COMPREHENSIVE INCOME (LOSS)$(1,190)$3,552      WEIGHTED AVERAGE BASIC SHARES OUTSTANDING7,800,003 7,800,003      WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING7,800,003 7,876,463      PER SHARE INFORMATION    BASIC:     Net income (loss)$(0.05)$0.37 DILUTED:     Net income (loss)$(0.05)$0.36  
See notes to condensed consolidated financial statements.****CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**For the Nine Months Ended June 30, 2000 and 2001**

**(Unaudited)**

**(In thousands)**
 2000 2001      Cash flows from operating activities:     Net income (loss)$(361)$2,873  Adjustments to reconcile net income (loss) to net cash  provided by operating activities:     Depreciation and amortization10,536 7,823  Amortization of note discount and deferred loan fees141 362  Provision for doubtful accounts83 138  Impairment of assets650 -  Deferred income taxes(591)1,316  Gain on sale of concert sound reinforcement business- (7,100) Gain (loss) on sale of equipment and other property(1,882)80  Net change in assets and liabilities:     Accounts receivable1,131 385  Prepaid expenses(428)(124) Inventory(5,923)(2,322) Other assets(469)(460) Accounts payable, accrued liabilities and income taxes  payable965 (1,272) Unearned revenue987 (1,173)       Net cash provided by operating activities4,839 526      Cash flows from investing activities:     Capital expenditures, including rental equipment(2,470)(7,460) Proceeds from sale of concert sound reinforcement  business- 11,946  Proceeds from sale of European operations- 5,258  Proceeds from sale of equipment3,687 71       Net  cash provided by investing activities1,217 9,815      Cash flows from financing activities:     Proceeds from issuance of debt27,805 49,288  Principal payments on debt(31,795)(60,603) Principal payments on distributor advances(263)-  Proceeds from payments on stockholder notes receivable8 19       Net cash used in financing activities(4,245)(11,296)Effect of exchange rate changes on cash and cash  equivalents(306)(866)     Net  increase (decrease) in cash during the period1,505 (1,821)Cash, beginning of period1,969 4,315      Cash, end of period$3,474 $2,494      **Supplemental Cash Flow Information**     Cash paid for interest expense$4,160 $1,936  Cash paid for income taxes$614 $267  
See notes to condensed consolidated financial statements.
**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousands except share data)**

1. Interim Financial Information

             Theaccompanying unaudited condensed consolidated financial statements of Vari-LiteInternational, Inc. (the “Company”) have been prepared by the Company inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.

             Inthe opinion of management, the condensed consolidated financial statementscontain all adjustments, consisting of normal recurring adjustments, considerednecessary to present fairly the consolidated financial position, results ofoperations and cash flows of the Company. The results of operations for thethree and nine-month periods ended June 30, 2001 are not necessarily indicativeof the results of operations that may be expected for any other interim periodsor for the fiscal year ending September 30, 2001.

             Forfurther information, refer to the consolidated financial statements andaccompanying notes included in the Company’s Annual Report on Form 10-K for theyear ended September 30, 2000.  Certainprior year balances have been reclassified to conform to the current yearpresentation.

2.  Inventory

             Inventoryconsists of the following:
 September  30,  2000 June  30,  2001      Raw materials$12,341 $13,494 Work in progress698 551 Finished goods656 1,972       $13,695 $16,017      
 

3. Segment Reporting

             TheCompany's chief operating decision maker is considered to be the Company'sChief Operating Officer ("COO"). The COO reviews financialinformation presented on a consolidated basis accompanied by disaggregatedinformation about revenues by geographic region and by product lines forpurposes of making operating decisions and assessing financial performance. TheCompany has three reportable segments: North America, Europe and Asia, whichare organized, managed and analyzed geographically and operate in a singleindustry segment. Information about the Company's operations for the three andnine-month periods ended June 30, 2000 and 2001 is presented below:
 **Three Months Ended**  ****  **North America** **Asia** **Europe** **Intercompany** **Total**  ****  ****  ****  ****  ****  **June 30, 2000:**          ****           Net Revenues from unaffliliated customers$13,709 $2,061 $5,739 $- $21,509 Intersegment sales4,311 232 894 (5,437)-            Total net revenues18,020 2,293 6,633 (5,437)21,509 Operating income (loss)1,544 (24)822 (1,793)549 Depreciation and amortization2,855 42 558 - 3,455 Total assets89,765 7,351 18,541 (11,226)104,431            **June 30, 2001:**          ****           Net Revenues from unaffliliated customers$10,860 $1,425 $3,299 $- $15,584 Intersegment sales2,229 9 27 (2,265)-            Total net revenues13,089 1,434 3,326 (2,265)15,584 Operating income (loss)(1,621)(256)246 (169)(1,800)Depreciation and amortization1,963 50 590 - 2,603 Total assets66,493 7,703 17,020 (9,620)81,596   ** ** ** ** ** ** ** ** ** ** **Nine Months Ended**** ** ****   **North America**** ****Asia**** ****Europe**** ****Intercompany**** ****Total**** ** ****  ****  ****  ****  ****  **June 30, 2000:**          ****           Net Revenues from unaffliliated customers$40,968 $7,869 $21,070 $- $69,907 Intersegment sales15,244 232 894 (16,370)-            Total net revenues56,212 8,101 21,964 (16,370)69,907 Operating income (loss)5,660 (66)3,248 (5,722)3,120 Depreciation and amortization8,900 134 1,502 - 10,536 Total assets89,765 7,351 18,541 (11,226)104,431            **June 30, 2001:**          ****           Net Revenues from unaffliliated customers$38,073 $6,755 $9,471 $- $54,299 Intersegment sales5,328 47 32 (5,407)-            Total net revenues43,401 6,802 9,503 (5,407)54,299 Operating income4,157 757 1,799 (169)6,544 Depreciation and amortization5,838 172 1,813 - 7,823 Total assets66,493 7,703 17,020 (9,620)81,596 
 

 

 

 

4. Debt

             OnDecember 19, 1997, the Company entered into a $50,000 multicurrencyrevolving credit  facility (the “OldCredit Facility”). Borrowings under the Old Credit Facility were $32,200 atSeptember 30, 2000.  Subsequent toSeptember 30, 2000, the Company used proceeds of $22,200 from the sale of theCompany’s concert sound reinforcement business, the sale of the Company’scontinental European rental operations and the funding of the London Bank Loan(hereinafter defined) to reduce borrowings under the Old Credit Facility to$10,000.

             On December 29, 2000, Vari-Lite,Inc. a wholly owned subsidiary of the Company (“Vari-Lite”), entered into athree-year $24,500 credit facility (the “New Credit Facility”) which includes a$12,000 term loan (the “Term Loan”), a $5,000 revolving credit facility (the“Revolver”) and a $3,000 term commitment to fund capital expenditures (the“Capital Expenditure Loan”).  TheRevolver and the Capital Expenditure Loan commitments will increase to $7,500and $5,000, respectively, by January 15, 2002, if the Company achieves specificfinancial performance.  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 toavailability under a borrowing base of eligible inventory and accountsreceivable (as defined in the New Credit Facility).  Initially, all outstanding borrowings under the New CreditFacility bear interest at the lender’s base rate or LIBOR, plus a rate marginof 0.75% and 2.50%, respectively.  Beginningon January 15, 2002, all outstanding balances under the New Credit Facilitywill 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 capital stockof 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. 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.

             On November 23, 2000, the Company'sU.K. subsidiary entered into a British pounds sterling 4,000 (USD 5,800) termloan with a United Kingdom bank (the “London Bank Loan”).  The London Bank Loan, which accrues interestat the rate of 9.1% per annum and amortizes over 48 months, is secured by allof the assets of the Company’s London operations.  Other terms of the London Bank Loan include certain financialcovenants, limitations on capital expenditures and intercompany payments andthe guarantee of the Company.

             TheCompany has borrowed money to purchase computer equipment and office furnitureand fixtures and conventional lighting equipment.  These loans are typically amortized over three years and bearinterest at various rates ranging from 1.62% to 10.35%.  Proceeds received under this type offinancing were approximately $2,562 and $1,135 for the nine-month periodsending June 30, 2000 and 2001, respectively, and borrowings outstanding underthis type of financing at June 30, 2000 and 2001 were approximately $4,040 and$2,367, respectively.

5. Net Income Per Share

             Basicearnings per share are computed based upon the weighted average number ofcommon shares outstanding.  Dilutedearnings per share reflects the dilutive effect, if any, of stock options andwarrants. 
 Three  Months ended  June 30, Nine  Months ended  June 30,       2000 2001 2000 2001          Weighted average  shares outstanding7,800,003 7,800,003 7,800,003 7,800,003          Dilutive effect of  stock options and warrants after application of treasury stock method- - - 76,460                   Shares used in  calculating diluted income per share7,800,003 7,800,003 7,800,003 7,876,463          
             Forthe three-month period ended June 30, 2000 and 2001, earnings per shareexcludes stock options of 686,900 and 739,700, respectively, and warrants of296,057 and 296,057, respectively, which are anti-dilutive.  For the nine-month period ended June 30,2000, earnings per share excludes stock options of 686,900 and warrants of296,057 which are anti-dilutive. For the nine-month period ended June 30, 2001,earnings per share excludes warrants of 296,057 which are anti-dilutive.

6.          AccountingStandards Changes

             In June1998, the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments andHedging Activities.” As amended by SFAS No. 137 and SFAS No. 138, the Statementis effective for all fiscal years beginning after June 15, 2000.  SFAS No. 133, as amended, establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts and for hedgingactivities.  Under SFAS No. 133, certaincontracts that were not formerly considered derivatives may now meet thedefinition of a derivative.  The Companyadopted SFAS No. 133 effective October 1, 2000. The adoption of SFAS No. 133did not have a significant impact on the financial position or results of operationsof the Company because the Company does not have significant derivativeactivity.

7. Dispositions

             OnOctober 26, 2000, the Company sold 100% of its interest in Vari-LiteInternational Europe, B.V. (“VLI Europe”) and 0.4% of its interest in Vari-LiteProduction Services, SAS and Vari-Lite sold all of the VARI*LITEÒ lighting equipment usedin those operations.  VLI Europe owned100% of Vari-Lite Production Services, N.V., 99.6% of Vari-Lite ProductionServices, 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.

             OnNovember 17, 2000, the Company transferred substantially all of the assets ofShowco, Inc. to Clearsho, Inc. (“Clearsho”), which assumed certain of Showco’scontract liabilities, in exchange for the sole membership interest inClearsho.  On November 17, 2000, Showcosold 100% of its interest in Clearsho which resulted in a net pre-tax gain of$7,100.

8. Commitments, Contingencies and LegalProceedings

             In theordinary course of its business, the Company is from time to time threatenedwith or named as a defendant in various lawsuits, including patent infringementclaims. Additionally, the Company has filed lawsuits claiming infringements ofits patents by third parties for which the Company has been subject tocounterclaims.

             InNovember 1999, Coemar S.p.A. andClay Paky S.p.A. filed separate lawsuits against the Company in the UnitedStates District Court for the Southern District of New York.  The suits were transferred to the UnitedStates District Court for the Northern District of Texas on July 12, 2000.  The lawsuits seek declarations from thecourt that a certain patent of the Company is invalid, unenforceable and/or notinfringed by Coemar S.p.A. and Clay Paky S.p.A.  In December 2000, the Company negotiated asettlement with Coemar S.p.A. and ClayPaky S.p.A, the specific terms of which are confidential, but included a cashsettlement paid to the Company and authorization for Coemar S.p.A. and Clay Paky S.p.A to continueto sell all existing products that were subject to the Company’s patents.  The lawsuits are currently stayed pending dismissal.

9.Pro Forma Financial Statements

             Pro forma adjustments to thecondensed consolidated statement of operations for the three and nine monthsended June 30, 2000 and 2001 reflect adjustments to eliminate the results ofthe continental European operations sold in October 2000 and Showco sold inNovember 2000 (See Note 7) and the reduction of interest expense as a result ofthe decrease in debt.  The Pro FormaFinancial Statements are presented for informational purposes only and do notpurport to be indicative of the results of operations that actually would havebeen achieved had the disposition been consummated on the financial statementdate or for any future period.
 Three Months Ended  June 30 Nine Months Ended  June 30  2000 2001 2000 2001                   Total  revenues$15,751 $15,584 $53,116 $52,672 Total  cost of sales7,214 8,156 25,029 26,474          Gross  profit8,537 7,428 28,087 26,198 Total  operating expenses9,020 9,228 27,953 27,340          Operating  income (loss)(483)(1,800)134 (1,142)Interest  expense (net)795 351 2,550 989          Loss  before income taxes(1,278)(2,151)(2,416)(2,131)Income  tax benefit(505)(849)(954)(913)         Net  loss$(773)$(1,301)$(1,462)$(1,218)         
 

**ITEM   2.          MANAGEMENT’S      DISCUSSION AND    ANALYSIS      OF        FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Resultsof Operations**

**ThreeMonths Ended June 30, 2001 Compared to Three Months Ended June 30, 2000**

*             Revenues*.   Total revenues decreased 27.6%, or $5.9million, to $15.6 million in the three-month period ended June 30, 2001,compared to $21.5 million in the three-month period ended June 30, 2000.  The revenue decrease was attributableprimarily to the factors set forth below.

*             Rental Revenues.*Rental revenues decreased 29.6%, or $5.3 million, to $12.6 million in thethree-month period ended June 30, 2001, compared to $17.9 million in thethree-month period ended June 30, 2000. This decrease was primarily due to the sale of the Company’s continentalEuropean rental operations in October 2000, concert sound reinforcementbusiness in November 2000 and decreased revenues as a result of difficulteconomic conditions.

*             Product Sales and Services Revenues*.  Product sales and services revenuesdecreased 17.3%, or $0.6 million, to $3.0 million in the three-month periodended June 30, 2001, compared to $3.6 million in the three-month period endedJune 30, 2000. This decrease was primarily due the closing of the Company’scorporate meeting and special events management business in April 2001 due tothe loss of the business' largest customer.

*             Rental Costs.*  Rental cost decreased 24.2%, or $2.0million, to $6.3 million in the three-month period ended June 30, 2001,compared to $8.3 million in the three-month period ended June 30, 2000.  The decrease was primarily due to the saleof the Company’s continental European rental operations in October 2000 andconcert sound reinforcement business in November 2000.  Rental cost as a percentage of rentalrevenues increased to 49.8% in the three-month period ended June 30, 2001, from46.2% in the three-month period ended June 30, 2000.  This increase is due to decreased revenues and pricing pressuresas a result of difficult economic conditions.

*             Product Sales and ServicesCosts. *Product sales and services cost decreased 15.1%, or$0.3 million, to $1.9 million in the three-month period ended June 30, 2001,compared to $2.2 million in the three-month period ended June 30, 2000 as aresult of decreased product sales and services revenues.  Product sales and services cost as apercentage of product sales and services revenues increased to 62.8% in thethree-month period ended June 30, 2001, from 61.2% in the three-month periodended June 30, 2000.

*             Selling, General and AdministrativeExpense.*Selling, general andadministrative expense decreased 7.3%, or $0.6 million, to $7.9 million in thethree-month period ended June 30, 2001, compared to $8.5 million in thethree-month period ended June 30, 2000. This decrease was primarily due to the sale of the Company’s continentalEuropean rental operations in October 2000 and its concert sound reinforcementbusiness in November 2000 and the closing of the Company’s Hong Kong rentaloperations in January 2001 and corporate meeting and special events managementbusiness in April 2001. This expense as a percentage of total revenuesincreased to 50.8% in the three-month period ended June 30, 2001, from 39.7% inthe three-month period ended June 30, 2000, due to the aforementioneddivestitures and business closings and decreased revenues as a result ofdifficult economic conditions.

*             Research and Development Expense.*  Research and development expense in thethree-month period ended June 30, 2001 was approximately the same as inthree-month period ended June 30, 2000. This expense as a percentage of total revenues increased to 8.5% in thethree-month period ended June 30, 2001, from 6.0% in the three-month periodended June 30, 2000 as a result of decreased revenues for the period ended June30, 2001.

*             Interest Expense*.  Interest expense decreased 70.7%, or $0.8million, to $0.4 million in the three-month period ended June 30, 2001,compared to $1.2 million in the three-month period ended June 30, 2000 as aresult of a lower debt balance and a lower interest rate in the three-monthperiod ended June 30, 2001.

*             IncomeTaxes.*The effective tax rate in the three-month periods ended June 30, 2001 and 2000were 39.5% and 39.4%, respectively.

**NineMonths Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000**

*             Revenues*.   Total revenues decreased 22.3%, or $15.6million, to $54.3 million in the nine-month period ended June 30, 2001,compared to $69.9 million in the nine-month period ended June 30, 2000.  The revenue decrease was attributableprimarily to the factors set forth below.

*             Rental Revenues.*Rental revenues decreased 28.0%, or $16.3 million, to $41.9 million in thenine-month period ended June 30, 2001, compared to $58.2 million in thenine-month period ended June 30, 2000. This decrease was primarily due the sale of the Company’s continentalEuropean rental operations in October 2000 and concert sound reinforcementbusiness in November 2000 which collectively accounted for $1.6 million ofrental revenues in the nine-month period ended June 30, 2001 compared to $16.8million in the nine-month period ended June 30, 2000.

*             Product Sales and Services Revenues*.  Product sales and services revenuesincreased 5.6%, or $0.7 million, to $12.4 million in the nine-month periodended June 30, 2001, compared to $11.7 million in the nine-month period endedJune 30, 2000. This increase was primarily due to the sale of new and usedautomated lighting equipment, partially offset by the closing of the Company’scorporate meeting and special events management business in April 2001.

*             Rental Costs.*  Rental cost decreased 29.9%, or $8.1million, to $19.0 million in the nine-month period ended June 30, 2001,compared to $27.1 million in the nine-month period ended June 30, 2000.  Rental cost as a percentage of rental revenuesdecreased to 45.4% in the nine-month period ended June 30, 2001, from 46.6% inthe nine-month period ended June 30, 2000. The decrease in rental cost as a percentage of total rental revenues wasprimarily due to the sale of the Company’s continental European operations inOctober 2000 and concert sound reinforcement business in November 2000.

 

*             Product Sales and ServicesCosts. *Product sales and services cost increased 14.7%, or$1.0 million, to $8.1 million in the nine-month period ended June 30, 2001,compared to $7.1 million in the nine-month period ended June 30, 2000.  Product sales and services cost as apercentage of product sales and services revenues increased to 65.5% in thenine-month period ended June 30, 2001, from 60.3% in the nine-month periodended June 30, 2000, primarily due to the higher costs associated with themanufacture and sale of new automated lighting equipment sold in the nine-monthperiod ended June 30, 2001 as compared to the lower costs associated with thesale of used automated lighting equipment in the nine-month period ended June30, 2000.

*             Selling, General and AdministrativeExpense.*Selling, general andadministrative expense decreased 14.8%, or $4.2 million, to $24.0 million inthe nine-month period ended June 30, 2001, compared to $28.2 million in thenine-month period ended June 30, 2000. This decrease is primarily due to thesale of the Company’s continental European rental operations in October2000 and concert sound reinforcement business in November 2000 andthe closing of the Company's Hong Kong rental operations in January 2001 andcorporate meeting and special events management business in April 2001. Thisexpense as a percentage of total revenues increased to 44.2% in the nine-monthperiod ended June 30, 2001, from 40.3% in the nine-month period ended June 30,2000, as a result of decreased revenues for the period ended June 30, 2001.

*             Research and Development Expense.*Research and development expense in the nine-month period ended June 30, 2001was approximately the same as in nine-month period ended June 30, 2000.  This expense as a percentage of totalrevenues increased to 6.8% in the nine-month period ended June 30, 2001, from5.4% in the nine-month period ended June 30, 2000 as a result of decreasedrevenues for the period ended June 30, 2001.

*             Interest Expense*.  Interest expense decreased 48.5%, or $1.8million, to $1.9 million in the nine-month period ended June 30, 2001, comparedto $3.7 million in the nine-month period ended June 30, 2000 as a result of alower debt balance and a lower interest rate in the nine-month period endedJune 30, 2001.

*             IncomeTaxes.*The effective tax rate in the nine-month periods ended June 30, 2001 and 2000were 38.0% and 39.4%, respectively.

**Liquidityand Capital Resources**

             Historically,the Company has financed its operations and capital expenditures with cash flowfrom operations, bank borrowings and advances from distributors andcustomers.  The Company’s operatingactivities generated cash flow of $4.8 million and $0.5 million in thenine-month periods ended June 30, 2000 and 2001, respectively.

             OnDecember 19, 1997, the Company entered into the Old Credit Facility.  Borrowings under the Old Credit Facilitywere $32.2 million at September 30, 2000. Subsequent to September 30, 2000, the Company used proceeds of $22.2million from the sale of the Company’s concert sound reinforcement business,and continental European rental operations and the funding of the London BankLoan to reduce borrowings under the Old Credit Facility to $10.0 million.

             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 Revolver and the Capital ExpenditureLoan commitments will increase to $7.5 million and $5.0 million, respectively,by January 15, 2002, if the Company achieves specific financialperformance.  The Term Loan and CapitalExpenditure Loan amortize over 84 months (subject to a balloon payment ontermination 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).  Initially, all outstanding borrowings under the New CreditFacility bear interest at the lender’s base rate or LIBOR, plus a rate marginof 0.75% and 2.50%, respectively. Beginning on January 15, 2002, all outstanding balances under the NewCredit Facility will bear interest at the lender’s base rate or LIBOR, plus arate margin ranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, basedupon the Company’s ratio of Adjusted Funded Debt to EBITDA (as defined in theNew Credit 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.  In addition, the New CreditFacility places limitations on annual capital expenditures and on the abilityto incur additional indebtedness, make certain loans or investments, sellassets, pay dividends or reacquire the Company’s stock.  The New Credit Facility terminates onDecember 31, 2003.  Upon termination ofthe New Credit Facility, the entire outstanding indebtedness thereunder becomesdue and payable in full.

             On November 23, 2000, the Company'sU.K. subsidiary entered into the British pounds sterling 4.0 million (USD 5.8million) London Bank Loan.  The LondonBank Loan, which accrues interest at the rate of 9.1% per annum and amortizesover 48 months, is secured by all of the assets of the Company’s Londonoperations.  Other terms of the LondonBank Loan include certain financial covenants, limitations on capitalexpenditures and intercompany payments and the guarantee of the Company.

             TheCompany has borrowed money to purchase computer equipment and office furnitureand fixtures and conventional lighting equipment.  These loans are amortized over three to five years and bearinterest at various rates ranging from 1.62% to 10.35%.  Proceeds received under this type offinancing were approximately $2.6 million and $1.1 million for the nine-monthperiods ending June 30, 2000 and 2001, respectively, and borrowings outstandingunder this type of financing at June 30, 2000 and 2001 were approximately $4.0million and $2.4 million, respectively.

             TheCompany’s business requires significant capital expenditures.  Capital expenditures for the nine monthsended June 30, 2000 and 2001 were approximately $2.5 million and $7.5 million,respectively, of which approximately $2.0 million and $6.7 million were forrental equipment inventories.  Themajority of the Company’s revenues are generated through the rental ofautomated lighting systems and, as such, the Company must maintain asignificant amount of rental equipment to meet customer demands.

             The Company had a working capitaldeficit of $27.4 million at June 30, 2000 and a working capital surplus of$14.5 million at June 30, 2001. The working capital deficit at June 30, 2000was primarily due to the scheduled maturity of the Old Credit Facility onJanuary 1, 2001, which was recorded as current debt as of June 30, 2000.  Theworking capital surplus at June 30, 2001 is primarily the result of therefinancing of the Old Credit Facility with the New Credit Facility and theoverall reduction in outstanding debt.

             Managementbelieves that cash flow generated from operations and borrowing capacity underthe New Credit Facility will be sufficient to meet the Company’s anticipatedoperating cash and capital expenditure needs 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, the success of the Company to market, sell andsupport products, the level of competition, the success of the Company’sresearch and development programs, the Company’s ability to achieve competitiveand technological advances and general and economic conditions and otherfactors beyond the Company’s control, there can be no assurance that sufficientcapital resources will be available to fund the business beyond such period.

  **Disclosure Regarding Forward-Looking Statements**

             This report includes "forward–lookingstatements" as that phrase is defined in Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. When used in this report, the words"anticipate," "believe," "estimate,""expect," "will," "could," "may" andsimilar expressions, as they relate to management or the Company, are intendedto identify forward–looking statements. Such statements reflect thecurrent views of management with respect to future events and are subject tocertain risks, uncertainties and assumptions, including without limitation thefollowing as they relate to the Company: fluctuations in operating results andseasonality; the success of the Company to market, sell and support products;technological changes; reliance on intellectual property; dependence on theentertainment industry; competition; dependence on management; foreign exchangerisk; international trade risk; dependence on key suppliers and dependence onmanufacturing facility. Should one or more of these risks or uncertainties materialize,or should underlying assumptions prove incorrect, actual results may varymaterially from those described herein.

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

             TheCompany does not believe that the market risks for the three-month andnine-month periods ended June 30, 2001 substantially changed from those risksoutlined for the year ended September 30, 2000 in the Company’s Form 10-K.

 

PARTII  OTHER INFORMATION

ITEM1.            LEGAL PROCEEDINGS

             In theordinary course of its business, the Company is from time to time threatenedwith or named as a defendant in various lawsuits, including patent infringementclaims. Additionally, the Company has filed lawsuits claiming infringements ofits patents by third parties for which the Company has been subject tocounterclaims.

             InNovember 1999, Coemar S.p.A. andClay Paky S.p.A. filed separate lawsuits against the Company in the UnitedStates District Court for the Southern District of New York.  The suits were transferred to the United StatesDistrict Court for the Northern District of Texas on July 12, 2000.  The lawsuits seek declarations from thecourt that a certain patent of the Company is invalid, unenforceable and/or notinfringed by Coemar S.p.A. and Clay Paky S.p.A.  In December 2000, the Company negotiated asettlement with Coemar S.p.A. and ClayPaky S.p.A, the specific terms of which are confidential, but included a cashsettlement paid to the Company and authorization for Coemar S.p.A. and Clay Paky S.p.A to continueto sell all existing products that were subject to the Company’s patents.  The lawsuits are currently stayed pending dismissal.
ITEM  6.EXHIBITS  AND REPORTS ON FORM 8-K   (a)Exhibits    10.60Employment  Agreement, dated July 11, 2001, between the Company and Robert H. Schacherl 10.61Amendment  No. 1, dated March 30, 2001, to the Financing Agreement, dated as of December  29, 2000, between Vari-Lite, Inc. and Firstar Bank, National Association 10.62Amendment  No. 2, dated June 30, 2001, to the Financing Agreement, dated as of December  29, 2000, between Vari-Lite, Inc. and Firstar Bank, National Association.    (b)No  reports on Form 8-K were filed for the quarter ended June 30, 2001.
 

 

 

**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
  **VARI-LITE INTERNATIONAL, INC.**   Date:August  10, 2001By:/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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