**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.   20549**

 

**FORM 10-Q**

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

** **

**FOR THEQUARTERLY PERIOD ENDED JUNE 30, 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                                            |   | (I.R.S. Employer    |
| incorporation or  organization)                                             |   | Identification No.) |
|                                                                        |   |                |
| **201  Regal Row, Dallas, Texas**                                           |   | **75247**           |
| (Address of principal  executive offices)                                   |   | (Zip Code)          |
|                                                                        |   |                |
| Registrant’s telephone  number including area code: **(214) 630-1963** |

 

                Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý   Noo

 

Indicate thenumber of shares outstanding of each of the Issuer’s classes of common stock,as of the latest practicable date: As of August 15, 2002, there were 7,800,003shares of Common Stock outstanding.

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**VARI-LITEINTERNATIONAL, INC.**

**INDEX TOQUARTERLY REPORT ON FORM 10-Q**

**FOR THEQUARTER ENDED JUNE 30, 2002**

 
| PART I. - FINANCIAL INFORMATION |
|---------------------------------|
|                            |   |
| Item 1. Financial Statements:   |
|                            |   |
|                            | Condensed  Consolidated Balance Sheets as of |
|                            | September 30,  2001 and June 30, 2002 |
|                            |   |
|                            | Condensed  Consolidated Statements of Income and Comprehensive |
|                            | Income  (Loss) for the three months ended June 30, 2001 and 2002. |
|                            |   |
|                            | Condensed  Consolidated Statements of Income and Comprehensive |
|                            | Income  (Loss)  for the nine months ended June  30, 2001 and 2002. |
|                            |   |
|                            | Condensed  Consolidated Statements of Cash Flows for |
|                            | the  nine months ended June 30, 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 3.                         | Defaults Upon  Senior Securities |
|                            |   |
| Item 6.                         | Exhibits and  Reports on Form 8-K. |
|                            |   |
| SIGNATURES                      |

 

2

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

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(In thousands except share data)**

**ASSETS**
|                                                                                                                  |   | **September  30, 2001** |   | **June 30,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------------------|--------|
| CURRENT ASSETS:                                                                                                       |   |                    |   |               |   |
| Cash                                                                                                                  |   | $                       | 3,686  |               | $      | 1,991 |   |
| Receivables,  less allowance for doubtful accounts of $603 and $849                                                   |   | 9,679                   |   | 9,550              |   |
| Inventory, less  valuation allowance of $407 and $5,307                                                               |   | 15,388                  |   | 12,071             |   |
| Prepaid expense  and other current assets                                                                             |   | 783                     |   | 2,015              |   |
|                                                                                                                  |   |                    |   |               |   |
| TOTAL CURRENT  ASSETS                                                                                                 |   | 29,536                  |   | 25,627             |   |
| EQUIPMENT AND  OTHER PROPERTY:                                                                                        |   |                    |   |               |   |
| Lighting and  sound equipment                                                                                         |   | 103,032                 |   | 104,805            |   |
| Machinery and  tools                                                                                                  |   | 3,578                   |   | 3,570              |   |
| Furniture and  fixtures                                                                                               |   | 4,207                   |   | 4,788              |   |
| Office and  computer equipment                                                                                        |   | 10,501                  |   | 10,523             |   |
|                                                                                                                  |   |                    |   |               |   |
|                                                                                                                  |   | 121,318                 |   | 123,686            |   |
| Less accumulated  depreciation and amortization                                                                       |   | 72,712                  |   | 78,692             |   |
|                                                                                                                  |   |                    |   |               |   |
|                                                                                                                  |   | 48,606                  |   | 44,994             |   |
| OTHER ASSETS                                                                                                          |   | 2,076                   |   | 655                |   |
|                                                                                                                  |   |                    |   |               |   |
| TOTAL ASSETS                                                                                                          |   | $                       | 80,218 |               | $      | 71,276 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                        |
| CURRENT  LIABILITIES:                                                                                                 |   |                    |   |               |   |   |   |
| Accounts payable                                                                                                      |   | $                       | 4,284  |               | $      | 4,675 |   |
| Accrued liabilities                                                                                                   |   |                    | 3,795  |               |   | 3,960 |   |
| Unearned revenue                                                                                                      |   |                    | 1,201  |               |   | 1,769 |   |
| Income taxes  payable                                                                                                 |   |                    | 146    |               |   | 27 |   |
| Current portion  of long-term obligations                                                                             |   |                    | 4,893  |               |   | 18,229 |   |
|                                                                                                                  |   |                    |   |               |   |   |   |
| TOTAL CURRENT  LIABILITIES                                                                                            |   |                    | 14,319 |               |   | 28,660 |   |
| LONG-TERM  OBLIGATIONS                                                                                                |   |                    | 18,363 |               |   | 5,015 |   |
| DEFERRED INCOME  TAXES                                                                                                |   |                    | 2,209  |               |   | — |   |
|                                                                                                                  |   |                    |   |               |   |   |   |
| TOTAL  LIABILITIES                                                                                                    |   |                    | 34,891 |               |   | 33,675 |   |
| 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 - foreign currency translation adjustment                                     |   |                    | 791    |               |   | 1,034 |   |
| Retained  earnings                                                                                                    |   |                    | 18,911 |               |   | 10,942 |   |
|                                                                                                                  |   |                    |   |               |   |   |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                      |   |                    | 45,327 |               |   | 37,601 |   |
|                                                                                                                  |   |                    |   |               |   |   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                      |   | $                       | 80,218 |               | $      | 71,276 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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

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

**For the Three Months Ended June 30,2001 and 2002**

**(Unaudited)**

**(In thousands except share data)**
|                                                                                           |   | **2001**  |   | **2002**  |   |
|------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                           |   |      |   |      |   |
| Rental revenues                                                                                |   | $         | 12,572 |      | $      | 10,007 |   |
| Product sales  and services revenues                                                           |   | 3,012     |   | 5,578     |   |
|                                                                                           |   |      |   |      |   |
| TOTAL REVENUES                                                                                 |   | 15,584    |   | 15,585    |   |
| Rental cost                                                                                    |   | 6,264     |   | 5,496     |   |
| Product sales  and services cost                                                               |   | 1,892     |   | 3,887     |   |
|                                                                                           |   |      |   |      |   |
| TOTAL COST OF  SALES                                                                           |   | 8,156     |   | 9,383     |   |
|                                                                                           |   |      |   |      |   |
| GROSS PROFIT                                                                                   |   | 7,428     |   | 6,202     |   |
| Selling, general  and administrative expense                                                   |   | 7,910     |   | 6,840     |   |
| Research and  development expense                                                              |   | 1,318     |   | 889       |   |
| Reserve for  excess, slow moving and obsolete inventory                                        |   | —    |   | 4,900     |   |
| Write-off of  receivables related to premiums paid under split-dollar life insurance  policies |   | —    |   | 1,348     |   |
| TOTAL OPERATING  EXPENSES                                                                      |   | 9,228     |   | 13,977    |   |
|                                                                                           |   |      |   |      |   |
| OPERATING LOSS                                                                                 |   | (1,800    | )      | (7,775    | )      |
| Interest expense  (net)                                                                        |   | 351       |   | 349       |   |
|                                                                                           |   |      |   |      |   |
| LOSS BEFORE  INCOME TAX                                                                        |   | (2,151    | )      | (8,124    | )      |
| Income tax  benefit                                                                            |   | (850      | )      | (1,418    | )      |
|                                                                                           |   |      |   |      |   |
| NET LOSS                                                                                       |   | (1,301    | )      | (6,706    | )      |
|                                                                                           |   |      |   |      |   |
| Other  comprehensive income - foreign currency translation adjustment                          |   | 118       |   | 1,265     |   |
| COMPREHENSIVE  LOSS.                                                                           |   | $         | (1,183 | )         | $      | (5,441 | ) |
|                                                                                           |   |      |   |      |   |
| WEIGHTED AVERAGE  BASIC AND  DILUTED SHARES OUTSTANDING                                   |   | 7,800,003 |   | 7,800,003 |   |
|                                                                                           |   |      |   |      |   |
| PER SHARE  INFORMATION                                                                         |   |      |   |      |   |
| BASIC AND  DILUTED:                                                                            |   |      |   |      |   |
| Net loss                                                                                       |   | $         | (0.17  | )         | $      | (0.86 | ) |

 

See notes to condensed consolidated financial statements.

 

4

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

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

**For the Nine  Months Ended June 30, 2001 and 2002**

**(Unaudited)**

**(In thousands except share data)**
|                                                                                           |   | **2001**  |   | **2002**  |   |
|------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                           |   |      |   |      |   |
| Rental revenues                                                                                |   | $         | 41,908 |      | $      | 31,577 |   |
| Product sales  and services revenues                                                           |   | 12,391    |   | 15,395    |   |
|                                                                                           |   |      |   |      |   |
| TOTAL REVENUES                                                                                 |   | 54,299    |   | 46,972    |   |
| Rental cost                                                                                    |   | 19,019    |   | 16,113    |   |
| Product sales  and services cost                                                               |   | 8,118     |   | 10,011    |   |
|                                                                                           |   |      |   |      |   |
| TOTAL COST OF  SALES                                                                           |   | 27,137    |   | 26,124    |   |
|                                                                                           |   |      |   |      |   |
| GROSS PROFIT                                                                                   |   | 27,162    |   | 20,848    |   |
| Selling, general  and administrative expense                                                   |   | 24,002    |   | 20,470    |   |
| Research and  development expense                                                              |   | 3,716     |   | 3,384     |   |
| Gain on the sale  of concert sound reinforcement business                                      |   | (7,100    | )      | —    |   |
| Reserve for  excess, slow moving and obsolete inventory                                        |   | —    |   | 4,900     |   |
| Write-off of  receivables related to premiums paid under split-dollar life insurance  policies |   | —    |   | 1,348     |   |
| TOTAL OPERATING  EXPENSES                                                                      |   | 20,618    |   | 30,102    |   |
|                                                                                           |   |      |   |      |   |
| OPERATING INCOME  (LOSS)                                                                       |   | 6,544     |   | (9,254    | )      |
| Interest expense  (net)                                                                        |   | 1,913     |   | 957       |   |
|                                                                                           |   |      |   |      |   |
| INCOME (LOSS)  BEFORE INCOME TAX                                                               |   | 4,631     |   | (10,211   | )      |
| Income tax  expense (benefit)                                                                  |   | 1,758     |   | (2,243    | )      |
|                                                                                           |   |      |   |      |   |
| NET INCOME  (LOSS)                                                                             |   | 2,873     |   | (7,968    | )      |
|                                                                                           |   |      |   |      |   |
| Other  comprehensive income - foreign currency translation adjustment                          |   | 679       |   | 242       |   |
| COMPREHENSIVE  INCOME (LOSS)                                                                   |   | $         | 3,552  |      | $      | (7,726 | ) |
|                                                                                           |   |      |   |      |   |
| WEIGHTED AVERAGE  BASIC SHARES OUTSTANDING                                                     |   | 7,800,003 |   | 7,800,003 |   |
|                                                                                           |   |      |   |      |   |
| WEIGHTED AVERAGE  DILUTED SHARES OUTSTANDING                                                   |   | 7,876,463 |   | 7,800,003 |   |
|                                                                                           |   |      |   |      |   |
| PER SHARE  INFORMATION                                                                         |   |      |   |      |   |
| BASIC:                                                                                         |   |      |   |      |   |
| Net income  (loss)                                                                             |   | $         | 0.37   |      | $      | (1.02 | ) |
| DILUTED:                                                                                       |   |      |   |      |   |
| Net income  (loss)                                                                             |   | $         | 0.36   |      | $      | (1.02 | ) |

 

See notes to condensed consolidated financialstatements.

 

5

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Nine Months Ended June 30, 2001and 2002**

**(Unaudited)**

**(In thousands)**
|                                                                                           |   | **2001** |   | **2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from  operating activities:                                                         |   |     |   |     |   |
| Net income  (loss)                                                                             |   | $        | 2,873  |     | $      | (7,968 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:      |   |     |   |     |   |
| Depreciation and  amortization                                                                 |   | 7,823    |   | 7,859    |   |
| Amortization of  note discount and deferred loan fees                                          |   | 362      |   | 129      |   |
| Provision for  doubtful accounts                                                               |   | 138      |   | 244      |   |
| Deferred income  taxes                                                                         |   | 1,316    |   | (2,209   | )      |
| Gain on sale of  concert sound reinforcement business                                          |   | (7,100   | )      | —   |   |
| Reserve for  excess, slow moving and obsolete inventory                                        |   | —   |   | 4,900    |   |
| Write-off of  receivables related to premiums paid under split-dollar life insurance  policies |   | —   |   | 1,348    |   |
| Loss on sale of  equipment and other property                                                  |   | 80       |   | 214      |   |
| Net change in  assets and liabilities:                                                         |   |     |   |     |   |
| Accounts  receivable                                                                           |   | 385      |   | (114     | )      |
| Prepaid expenses                                                                               |   | (124     | )      | (1,232   | )      |
| Inventory                                                                                      |   | (2,322   | )      | (1,126   | )      |
| Other assets                                                                                   |   | (460     | )      | (35      | )      |
| Accounts  payable, accrued liabilities and income taxes payable                                |   | (1,272   | )      | 438      |   |
| Unearned revenue                                                                               |   | (1,173   | )      | 568      |   |
|                                                                                           |   |     |   |     |   |
| Net cash  provided by operating activities                                                     |   | 526      |   | 3,016    |   |
|                                                                                           |   |     |   |     |   |
| Cash flows from  investing activities:                                                         |   |     |   |     |   |
| Capital  expenditures, including rental equipment                                              |   | (7,460   | )      | (4,615   | )      |
| Proceeds from  sale of concert sound reinforcement business                                    |   | 11,946   |   | —   |   |
| Proceeds from  sale of European operations                                                     |   | 5,258    |   | —   |   |
| Proceeds from  sale of equipment                                                               |   | 71       |   | 87       |   |
|                                                                                           |   |     |   |     |   |
| Net cash  provided by (used in) investing activities                                           |   | 9,815    |   | (4,528   | )      |
|                                                                                           |   |     |   |     |   |
| Cash flows from  financing activities:                                                         |   |     |   |     |   |
| Proceeds from  issuance of debt                                                                |   | 49,288   |   | 45,894   |   |
| Principal  payments on debt                                                                    |   | (60,603  | )      | (46,152  | )      |
| Proceeds from  payments on stockholder notes receivable                                        |   | 19       |   | —   |   |
|                                                                                           |   |     |   |     |   |
| Net cash used in  financing activities                                                         |   | (11,296  | )      | (258     | )      |
| Effect of  exchange rate changes on cash and cash equivalents                                  |   | (866     | )      | 75       |   |
|                                                                                           |   |     |   |     |   |
| Net decrease in  cash during the period                                                        |   | (1,821   | )      | (1,695   | )      |
| Cash, beginning  of period                                                                     |   | 4,315    |   | 3,686    |   |
|                                                                                           |   |     |   |     |   |
| Cash, end of  period                                                                           |   | $        | 2,494  |     | $      | 1,991 |   |
|                                                                                           |   |     |   |     |   |
| **Supplemental  Cash Flow Information**                                                        |   |     |   |     |   |
| Cash paid for  interest expense                                                                |   | $        | 1,936  |     | $      | 1,075 |   |
| Cash paid for  income taxes                                                                    |   | $        | 267    |     | $      | 674 |   |

 

See notes to condensed consolidated financial statements.

 

6

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

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(In thousandsexcept 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 nine-month periods ended June 30, 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 June30, 2001 consolidated financial statements to conform to the presentation inthe June 30, 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 consistsof the following:
|               |   | **September  30, 2001** |   | **June 30,  2002** |   |
|--------------------|--------|-------------------------|--------|--------------------|--------|
| Raw materials      |   | $                       | 13,493 |               | $      | 15,688 |   |
| Inventory  reserve |   | (407                    | )      | (5,307             | )      |
| Work in progress   |   | 567                     |   | 474                |   |
| Finished goods     |   | 1,735                   |   | 1,216              |   |
|               |   | $                       | 15,388 |               | $      | 12,071 |   |

 

In the three-month periodended June 30, 2002, an additional reserve of $4,900 was made for excess, slowmoving and obsolete inventory primarily associated with repair and maintenanceparts to support the Company’s Series 200 and Series 300 automated lightingproducts.

 

 

7

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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.

 

OnDecember 29, 2000, Vari-Lite, Inc. (“Vari-Lite”), entered a new credit facility(the “New Credit Facility”), which includes the $12,000 Term Loan, the $5,000Revolver and the $3,000 Capital Expenditure Loan.  The Term Loan and Capital Expenditure Loan amortize over 84months (subject to a balloon payment on termination of the New Credit Facilityas discussed below). Borrowings under the Revolver are subject to availabilityunder a borrowing base of eligible inventory and accounts receivable (asdefined in the New Credit Facility).  Asof June 30, 2002, there was $2,495 outstanding under the Revolver.  Prior to January 15, 2002, all outstandingborrowings under the New Credit Facility bore interest at the lender’s baserate or LIBOR, plus a rate margin of 0.75% and 2.50%, respectively.  From January 15, 2002 through July 31, 2002,all outstanding balances under the New Credit Facility bore interest at thelender’s base rate or LIBOR, plus a rate margin of 0.75% or 2.50%,respectively. Beginning August 1, 2002, all outstanding balances under the NewCredit Facility bear interest at the lender’s base rate or LIBOR, plus a ratemargin ranging from 1.25% to 1.75% or 3.00% to 3.50%, 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 June 30, 2002.  Inaddition, the New Credit Facility places limitations on annual capitalexpenditures and on the ability to incur additional indebtedness, make certainloans or investments, sell assets, pay dividends or reacquire the Company’sstock.  The New Credit Facilityterminates on December 31, 2003.  Upontermination of the New Credit Facility, the entire outstanding indebtednessthereunder becomes due and payable in full.

 

As of June 30, 2002, allbalances outstanding under the New Credit Facility were classified as currentdue to the likelihood that the Company will not be able to meet all of thefinancial ratio covenants under this facility beginning on December 31, 2002.After further evaluation, management also believes that as of March 31, 2002,it was unlikely that the Company was going to meet all of these covenants as ofDecember 31, 2002. Therefore, the balances outstanding under the New CreditFacility as of March 31, 2002 should also have been classified as current. TheCompany’s management is currently negotiating an amendment to the New CreditFacility with modified financial covenants and is considering other financingoptions to replace the New Credit Facility. There can be no assurancesregarding the Company’s ability

 

8

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to obtain additional financing or the successfulcompletion of an amendment to the New Credit Facility. If the Company is notsuccessful in amending or refinancing the New Credit Facility, the lenders willbe entitled to pursue all rights available under the New Credit Facility in theevent the Company does not meet the financial ratio covenants or the terms ofother compliance covenants.

 

On November 23, 2000, September27, 2001 and March 25, 2002, the Company’s London subsidiary entered intoBritish pounds sterling loans of 4,000 (USD 5,800), 500 (USD 727) and 400 (USD570), respectively, with a U. K. bank (collectively, the “London BankLoans”.)  The London Bank Loans accrueinterest at the rate of 9.10%, 7.78% and 7.77% per annum, respectively, andamortize over 48 months, 60 months and 60 months, respectively.  The London Bank Loans are secured by all ofthe assets of the Company’s London operations and include certain financialcovenants, limitations on capital expenditures and intercompany payments andthe guarantee of the Company.

 

                The Company has borrowed moneyto purchase computer equipment and office furniture and fixtures andconventional lighting equipment.  Theseloans are typically amortized over three to five years and bear interest at variousrates ranging from 1.50% to 10.35%. Proceeds received under this type of financing were approximately $1,135and $2,448 for the nine-month periods ending June 30, 2001 and 2002,respectively, and borrowings outstanding under this type of financing at June30, 2001 and 2002 were approximately $2,367 and $3,720, respectively.

 

4.               Commitments and Contingencies

 

                In the ordinarycourse of its business, the Company is from time to time threatened with ornamed as a defendant in various lawsuits, including patent infringement claims.The Company is not currently involved in any material legal proceedings.

 

5.               Segment Reporting

 

                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 geographicregion and by product lines for purposes of making operating decisions andassessing financial performance. The Company has three reportable segments:North America, Europe and Asia, which are organized, managed and analyzedgeographically and operate in a single industry segment. 

 

9

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Informationabout the Company’s operations for the three and nine-month periods ended June30, 2001 and 2002 is presented below: 
|                                     |   | **Three  Months Ended June 30, 2001** |   |
|------------------------------------------|--------|---------------------------------------|--------|
|                                     |   | **North America**                     |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues from unaffiliated customers |   | $                                     | 10,860 |   | $ | 1,425 |   | $ | 3,299 |   | $ | — |   | $ | 15,584 |   |
| Intersegment sales                       |   | 2,229                                 |   | 9 |   | 27 |   | (2,265 | ) | — |   |
|                                     |   |                                  |   |   |   |   |   |   |   |   |   |
| Total net revenues                       |   | 13,089                                |   | 1,434 |   | 3,326 |   | (2,265 | ) | 15,584 |   |
| Operating income (loss)                  |   | (1,621                                | )      | (256 | ) | 246 |   | (169 | ) | (1,800 | ) |
| Depreciation and amortization            |   | 1,963                                 |   | 50 |   | 590 |   | — |   | 2,603 |   |
| Total assets                             |   | 66,493                                |   | 7,703 |   | 17,020 |   | (9,620 | ) | 81,596 |   |
|                                          |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                     |   | **Three Months Ended June 30, 2002** |   |
|------------------------------------------|--------|--------------------------------------|--------|
|                                     |   | **North America**                    |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues from unaffiliated customers |   | $                                    | 8,778  |   | $ | 2,926 |   | $ | 3,881 |   | $ | — |   | $ | 15,585 |   |
| Intersegment sales                       |   | 2,675                                |   | 5 |   | — |   | (2,680 | ) | — |   |
|                                     |   |                                 |   |   |   |   |   |   |   |   |   |
| Total net revenues                       |   | 11,453                               |   | 2,931 |   | 3,881 |   | (2,680 | ) | 15,585 |   |
| Operating income (loss)                  |   | (7,855                               | )      | (137 | ) | 225 |   | (8 | ) | (7,775 | ) |
| Depreciation and amortization            |   | 2,030                                |   | 92 |   | 577 |   | (61 | ) | 2,638 |   |
| Total assets                             |   | 55,200                               |   | 8,525 |   | 16,866 |   | (9,315 | ) | 71,276 |   |
|                                          |        |                                      |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                     |   | **Nine Months Ended June 30, 2001** |   |
|------------------------------------------|--------|-------------------------------------|--------|
|                                     |   | **North  America**                  |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues from unaffiliated customers |   | $                                   | 38,073 |   | $ | 6,755 |   | $ | 9,471 |   | $ | — |   | $ | 54,299 |   |
| Intersegment sales                       |   | 5,328                               |   | 47 |   | 32 |   | (5,407 | ) | — |   |
|                                     |   |                                |   |   |   |   |   |   |   |   |   |
| Total net revenues                       |   | 43,401                              |   | 6,802 |   | 9,503 |   | (5,407 | ) | 54,299 |   |
| Operating income                         |   | 4,157                               |   | 757 |   | 1,799 |   | (169 | ) | 6,544 |   |
| Depreciation and amortization            |   | 5,838                               |   | 172 |   | 1,813 |   | — |   | 7,823 |   |
| Total assets                             |   | 66,493                              |   | 7,703 |   | 17,020 |   | (9,620 | ) | 81,596 |   |
|                                          |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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|                                     |   | **Nine Months Ended June 30, 2002** |   |
|------------------------------------------|--------|-------------------------------------|--------|
|                                     |   | **North America**                   |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
|                                     |   |                                |   |   |   |   |   |   |   |   |   |
| Net revenues from unaffiliated customers |   | $                                   | 27,891 |   | $ | 8,156 |   | $ | 10,925 |   | $ | — |   | $ | 46,972 |   |
| Intersegment sales                       |   | 10,166                              |   | 22 |   | 42 |   | (10,230 | ) | — |   |
|                                     |   |                                |   |   |   |   |   |   |   |   |   |
| Total net revenues                       |   | 38,057                              |   | 8,178 |   | 10,967 |   | (10,230 | ) | 46,972 |   |
| Operating income (loss)                  |   | (9,753                              | )      | 565 |   | 790 |   | (856 | ) | (9,254 | ) |
| Depreciation and amortization            |   | 6,025                               |   | 219 |   | 1,724 |   | (109 | ) | 7,859 |   |
| Total assets                             |   | 55,200                              |   | 8,525 |   | 16,866 |   | (9,315 | ) | 71,276 |   |
|                                          |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 June 30,** |   | **Nine  Months ended June 30,** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                                                      |   | **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 |   | —                           |   | —                          |   | 76,460 |   | — |   |
|                                                                                      |   |                             |   |                            |   |   |   |   |   |
| Shares used in  calculating diluted net loss per share                                    |   | 7,800,003                        |   | 7,800,003                       |   | 7,876,463 |   | 7,800,003 |   |

 

For the three-month period ended June 30, 2001 and2002, net loss per share excludes stock options of 739,700 and 729,200,respectively, and warrants of 296,057 and 296,057, respectively, which wereanti-dilutive. For the nine-month period ended June 30, 2001, net income pershare excludes stock options of 663,240 and warrants of 296,057 which wereanti-dilutive, but includes 76,460 options which were dilutive.  For the nine-month period ended June 30,2002, net loss per share excludes stock options of 729,200 and warrants of296,057 which were anti-dilutive.

 

7.               Dispositions

 

                On October 26,2000, the Company sold 100% of its interest in Vari-Lite International Europe,B.V. (“VLI Europe”) and 0.4% of its interest in Vari-Lite Production Services,SAS, and Vari-Lite sold all of the VARI*LITEÒlighting equipment used in those operations. VLI Europe owned 100% of Vari-Lite Production Services, N.V., 99.6% ofVari-Lite Production Services, SAS and 100% of Vari-Lite Production Services,AB.  This transaction resulted in apre-tax charge of $3,200 which was recorded as an asset impairment in thefourth quarter of fiscal year 2000.

 

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                On November 17,2000, the Company transferred substantially all of the assets of Showco, Inc.to Clearsho, Inc. (“Clearsho”), which assumed certain of Showco’s contractliabilities, in exchange for the sole membership interest in Clearsho.  On November 17, 2000, Showco sold 100% ofits interest in Clearsho which resulted in a net pre-tax gain of $7,100.

 

8.                   Write-off of Receivables related to Premiums paidunder Split-Dollar Life Insurance Policies

 

On June 30, 2002, the Company and certain directors ofthe Company mutually agreed to terminate all of the outstanding deferredcompensation and consulting agreements that existed between these parties.  In addition, the Company has assigned all ofits rights and obligations under split-dollar agreements with certaindirectors, including its obligation to pay future premiums on life insurancepolicies and the Company’s interest in the collateral assignment of deathbenefits under those policies, to the respecive directors or theirdesignees.  Under the collateralassignment, the Company was entitled to recoup the cumulative premiums paid bythe Company from the cash surrender value or death benefits under thepolicies.  As a result of theassignment, the Company wrote-off $1,348 at June 30, 2002, which represented areceivable related to premiums paid by the Company. The cancellation of thedeferred compensation and consulting agreements combined with reductions indirectors fees and base compensation to the Company’s CEO will result in annualcash savings of $596. Additionally, the assignment of the Company’s obligationsunder the split-dollar life insurance agreements will result in additional cashsavings of $757 that would have been due over the remaining term of thoseinsurance policies.

 

 

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

 

**Resultsof Operations**

 

**ThreeMonths Ended June 30, 2002 Compared to Three Months Ended June 30, 2001**

 

*Revenues*.  Total revenues for the three-month period ended June 30, 2002 were $15.6million compared to the three-month period ended June 30, 2001 of $15.6million.  The components of theserevenues are set forth below.

 

*RentalRevenues.* Rentalrevenues decreased 20.4%, or $2.6 million, to $10.0 million in the three-monthperiod ended June 30, 2002, compared to $12.6 million in the three-month periodended June 30, 2001.  This decrease wasdue to the weak economy which continues to have a negative impact on liveentertainment events.

 

*ProductSales and Services Revenues*.  Productsales and services revenues increased 85.2%, or $2.6 million, to $5.6 millionin the three-month period ended June 30, 2002, compared to $3.0 million in thethree-month period ended June 30, 2001. This increase was due to the increasein sales of VARI*LITEÒ automated lighting equipment which theCompany commenced selling in fiscal 2000. Despite the weak economy, theCompany’s product sales business continued to grow due to increases in thenumber of products available for sale, good demand for the productsinternationally and increased sales and marketing efforts.

 

*RentalCost.*  Rental cost decreased 12.3%, or $0.8million, to $5.5 million in the three-month period ended June 30, 2002,compared to $6.3 million in the three-month period ended June 30, 2001.  However, rental cost as a percentage ofrental revenues increased to 54.9% in the three-month period ended June 30,2002, from 49.8% in the three-month period ended June 30, 2001.   This increase was due to depreciationexpense representing a higher percentage of revenues during the three-monthperiod ended June 30,2002 as a result of decreased revenues due to difficulteconomic conditions.

 

*ProductSales and Services Cost.*  Product sales and servicescost increased 105.5%, or $2.0 million, to $3.9 million in the three-monthperiod ended June 30, 2002, compared to $1.9 million in the three-month periodended June 30, 2001. This increase was primarily due to increased product salesrevenue in the three-month period ended June 30, 2002. Product sales andservices cost as a percentage of product sales and services revenues increasedto 69.7% in the three-month period ended June 30, 2002, from 62.8% in thethree-month period ended June 30, 2001 as a result of the increased sales ofrecently introduced products which generally have lower gross margins than themore mature products sold by the Company.

 

*Selling,General and Administrative Expense.*Selling, general and administrative expense decreased13.5%, or $1.1 million, to $6.8 million in the three-month period ended June30, 2002, compared to $7.9 million in the three-month period ended June 30,2001. This decrease was due to the expense reduction efforts undertaken in thefirst and third quarters of fiscal 2002. This expense as a percentage of totalrevenues decreased to 43.9% in the three-month period ended June 30, 2002, from

 

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50.8% in the three-month period ended June 30, 2001 as a result of theaforementioned expense reductions.

 

*Researchand Development Expense.*  Research and developmentexpense decreased 32.5%, or $0.4 million, to $0.9 million in the three-monthperiod ended June 30, 2002, compared to $1.3 million in three-month periodended June 30, 2001.  This decrease wasprimarily due to expense reduction efforts undertaken in the first and thirdquarters of fiscal 2002. This expense as a percentage of total revenuesdecreased to 5.7% in the three-month period ended June 30, 2002, from 8.5% inthe three-month period ended June 30, 2001 as a result of the aforementionedexpense reductions.

 

*  Reserve for Excess,Slow Moving and Obsolete Inventory.*In the three-month period ended June 30, 2002, anadditional reserve of $4.9 million was made for excess, slow moving andobsolete inventory primarily associated with repair and maintenance parts tosupport the Company’s Series 200 and Series 300 automated lighting products,which are no longer produced by the Company but continue to be rented throughthe Company’s rental operations. The Company considered this reserve necessaryas a result of the decreased likelihood that these components will ultimatelybe consumed due to decreased rental revenues related to these lighting productsduring the three-month period ended June 30, 2002 and the market uncertaintyregarding economic conditions.

 

* Write-off of Receivables Related to PremiumsPaid under Split-Dollar Life Insurance Policies*. On June 30, 2002, the Company cancelled allconsulting and deferred compensation agreements between the Company and certaindirectors of the Company.  In addition,the Company has assigned all of its rights and obligations, under split-dollaragreements with certain directors, including its obligation to pay futurepremiums on life insurance policies and the Company’s interest in thecollateral assignment of death benefits under those policies, to the respectivedirectors or their designees.  Under thecollateral assignment, the Company was entitled to recoup the cumulativepremiums paid by the Company from the cash surrender value or death benefitsunder the policies. As a result of the assignment, the Company expensedreceivables related to premiums paid under those policies of $1.3 millionduring the three-month period ended June 30, 2002. The cancellation of thedeferred compensation and consulting agreements combined with reductions in directorsfees and base compensation to the Company’s CEO will result in annual cashsavings of $0.6 million. Additionally, the assignment of the Company’sobligations under the split-dollar life insurance agreements will result inadditional cash savings of $0.7 million that would have been due over theremaining term of those insurance policies.

 

*InterestExpense*.  Interest expense in the three-month periodended June 30, 2002 is unchanged from the three-month period ended June 30,2001.

 

*Income Taxes.* The effective tax rates in thethree-month periods ended June 30, 2002 and 2001 were 17.5% and 39.5%,respectively.  The decrease in theeffective tax rate during the three-month period ended June 30, 2002 is due toa reserve of $1.8 million established against the Company’s deferred tax asset.The Company considered this reserve necessary due to the uncertainty of theCompany’s ability to ultimately utilize the benefit of the deferred tax assetas a result of past operating losses.

 

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**NineMonths Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001**

 

*Revenues*.  Total revenues decreased 13.5%, or $7.3 million, to $47.0 million in thenine-month period ended June 30, 2002, compared to $54.3 million in thenine-month period ended June 30, 2001. The revenue decrease was attributable primarily to the factors set forthbelow.

 

*RentalRevenues.* Rentalrevenues decreased 24.7%, or $10.3 million, to $31.6 million in the nine-monthperiod ended June 30, 2002, compared to $41.9 million in the nine-month periodended June 30, 2001. This decrease was due to the weak economy combined withthe ongoing effects of the September 11, 2001 attacks, as well as the sale ofthe Company’s concert sound reinforcement business in November 2000, whichaccounted for $1.6 million in revenues in the nine-month period ended June 30,2001.

 

*ProductSales and Services Revenues*.  Productsales and services revenues increased 24.3%, or $3.0 million, to $15.4 millionin the nine-month period ended June 30, 2002, compared to $12.4 million in thenine-month period ended June 30, 2001. This increase was due to a $6.7 millionincrease in sales of VARI*LITEÒ automated lighting equipment which theCompany commenced selling in fiscal 2000. Despite the weak economy, theCompany’s product sales business continued to grow due to increases in thenumber of products available for sale, good demand for the productsinternationally and increased sales and marketing efforts. This increase waspartially offset by a $3.7 million decrease in revenues due to the closing ofthe Company’s corporate meeting and special events management business in April2001.

 

*RentalCost.*  Rental cost decreased 15.3%, or $2.9million, to $16.1 million in the nine-month period ended June 30, 2002,compared to $19.0 million in the nine-month period ended June 30, 2001.  This decrease was due to reduced revenues asa result of a weak economy and the sale of the Company’s concert sound reinforcementbusiness in November 2000.  Rental costas a percentage of rental revenues increased to 51.0% in the nine-month periodended June 30, 2002, from 45.4% in the nine-month period ended June 30,2001.  This increase was primarily dueto depreciation expense representing a higher percentage of revenues during thenine-month period ended June 30, 2002 as a result of decreased revenues due todifficult economic conditions.

 

*ProductSales and Services Cost.*  Product sales and servicescost increased 23.3%, or $1.9 million, to $10.0 million in the nine-monthperiod ended June 30, 2002, compared to $8.1 million in the nine-month periodended June 30, 2001. This increase was due to a $4.4 million increase in costof sales of VARI*LITEÒ automated lighting equipment offset by a$2.5 million decrease in product sales and services cost associated with theclosing of the Company’s corporate meeting and special events managementbusiness in April, 2001.  Product salesand services cost as a percentage of product sales and services revenuesdecreased to 65.0% in the nine-month period ended June 30, 2002, from 65.5% inthe nine-month period ended June 30, 2001.

 

*Selling,General and Administrative Expense.*Selling, general and administrative expense decreased14.7%, or $3.5 million, to $20.5 million in the nine-month period ended June30, 2002, compared to $24.0 million in the nine-month period ended June 30,2001. This decrease was primarily due to the sale of the Company’s concertsound reinforcement business in November 2000 and the closing of the Company’scorporate meeting and special events management business in April 2001, as wellas expense reduction efforts undertaken in the first and third quarters offiscal 2002.  This expense as apercentage of total revenues decreased to 43.6% in the nine-month period endedJune 30, 2002, from 

 

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44.2% in the nine-month period ended June 30, 2002 as a result of theaforementioned expense reductions.

 

*Researchand Development Expense.*  Research and developmentexpense decreased 9.0%, or $0.3 million, to $3.4 million in the nine-monthperiod ended June 30, 2002, compared to $3.7 million in nine-month period endedJune 30, 2001.  This decrease wasprimarily due to expense reduction efforts undertaken in the first and thirdquarters of fiscal 2002. This expense as a percentage of total revenuesincreased to 7.2% in the nine-month period ended June 30, 2002, from 6.8% inthe nine-month period ended June 30, 2001 as a result of decreased revenues.

 

*  Reserve for Excess,Slow Moving and Obsolete Inventory.*In the nine-month period ended June 30, 2002, anadditional reserve of $4.9 million was made for excess, slow moving andobsolete inventory primarily associated with repair and maintenance parts tosupport the Company’s Series 200 and Series 300 automated lighting products,which are no longer produced by the Company but continue to be rented throughthe Company’s rental operations. The Company considered this reserve necessaryas a result of the decreased likelihood that these components will ultimatelybe consumed due to decreased rental revenues related to these lighting productsduring the nine-month period ended June 30, 2002 and the market uncertaintyregarding economic conditions.

 

*Write-offof Receivables Related to Premiums Paid under Split-Dollar Life InsurancePolicies*. On June30, 2002, the Company cancelled all consulting and deferred compensationagreements between the Company and certain directors of the Company.  In addition, the Company has assigned all ofits rights and obligations, under split-dollar agreements with certaindirectors, including its obligation to pay future premiums on life insurancepolicies and the Company’s interest in the collateral assignment of deathbenefits under those policies, to the respective directors or theirdesignees.  Under the collateralassignment, the Company was entitled to recoup the cumulative premiums paid bythe Company from the cash surrender value or death benefits under the policies.As a result of the assignment, the Company expensed receivables related topremiums paid under those policies of $1.3 million during the nine-month periodended June 30, 2002. The cancellation of the deferred compensation andconsulting agreements combined with reductions in directors fees and basecompensation to the Company’s CEO will result in annual cash savings of $0.6million. Additionally, the assignment of the Company’s obligations under thesplit-dollar life insurance agreements will result in additional cash savingsof $0.7 million that would have been due over the remaining term of thoseinsurance policies.

 

*InterestExpense*.  Interest expense decreased 50.0%, or $1.0million, to $0.9 million in the nine-month period ended June 30, 2002, comparedto $1.9 million in the nine-month period ended June 30, 2001, as a result ofreduced borrowings and lower interest rates in the nine-month period ended June30, 2002, as well as interest income of $0.1 million from an income tax refund.

 

*Income Taxes.* The effective tax rates in thenine-month periods ended June 30, 2002 and 2001 were 22.0% and 38.0%,respectively. The decrease in the effective tax rate during the nine-monthperiod ended June 30, 2002 is due to a reserve of $1.8 million establishedagainst the Company’s deferred tax asset. The Company considered this reservenecessary due to the uncertainty of the Company’s ability to ultimately utilizethe benefit of the deferred tax asset as a result of past operating losses.

 

 

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**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 generated cash flow of $0.5 million and $3.0 million,respectively, in the nine-month periods ending June 30, 2001 and 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 June 30, 2002, there was $2.5 million outstanding under theRevolver.  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). From January 15, 2002 through July 31, 2002, all outstandingbalances under the New Credit Facility bore interest at the lender’s base rateor LIBOR, plus a rate margin ranging of 0.75% or 2.00%, respectively. BeginningAugust 1, 2002, all outstanding balances under the New Credit Facility bearinterest at the lender’s base rate or LIBOR, plus a rate margin ranging from1.25% to 1.75% or 3.00% to 3.50%, respectively, based upon the Company’s ratioof Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). TheNew Credit Facility is guaranteed by the Company and is secured by all of thestock and substantially all of the assets of Vari-Lite and a pledge of 65% ofthe outstanding 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 June 30, 2002.  Inaddition, the New Credit Facility places limitations on annual capitalexpenditures and on the ability to incur additional indebtedness, make certainloans or investments, sell assets, pay dividends or reacquire the Company’sstock.  The New Credit Facilityterminates on December 31, 2003.  Upontermination of the New Credit Facility, the entire outstanding indebtednessthereunder becomes due and payable in full.

 

As of June 30, 2002, allbalances outstanding under the New Credit Facility were classified as currentdue to the likelihood that the Company will not be able to meet all of thefinancial ratio covenants under this facility beginning on December 31, 2002. Afterfurther evaluation, management also believes that as of  March 31, 2002, it was unlikely that theCompany was going to meet all of these covenants as of December 31, 2002.Therefore, the balances outstanding under the New Credit Facility as of March 31,2002 should also have been classified as current. The Company’s management iscurrently negotiating an amendment to the New Credit Facility with modifiedfinancial covenants and is considering other financing options to replace theNew Credit Facility. There can be no assurances regarding the 

 

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Company’s ability to obtain additional financing orthe successful completion of an amendment to the New Credit Facility. If theCompany is not successful in amending or refinancing the New Credit Facility,the lenders will be entitled to pursue all rights available under the NewCredit Facility in the event the Company does not meet the financial ratiocovenants or the terms of other compliance covenants.

 

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 moneyto purchase computer equipment and office furniture and fixtures andconventional lighting equipment.  Theseloans are amortized over three to five years and bear interest at various ratesranging from 1.50% to 10.35%.  Proceedsreceived under this type of financing were approximately $1.1 million and $2.4million for the nine-month periods ending June 30, 2001 and 2002, respectively,and borrowings outstanding under this type of financing at June 30, 2001 and2002 were approximately $2.4 million and $3.7 million, respectively.

 

                The Company’sbusiness requires significant capital expenditures.  Capital expenditures for the nine months ended June 30, 2001 and2002 were approximately $7.5 million and $4.6 million, respectively, of whichapproximately $6.7 million and $4.4 million were for rental and demo equipmentinventories.  The majority of theCompany’s revenues are generated through the rental of automated lightingsystems and, as such, the Company must maintain a significant amount of rentalequipment to meet customer demands.

 

The Company’s ability to fund its anticipatedoperating needs and capital expenditures for at least the next twelve months issubject to the amount of cash flow generated from operations and the Company’sability to negotiate adequate borrowing capacity under an amendment to the NewCredit Facility and to access additional cash through other financing sourcesor asset sales. The Company’s future operating results will depend on a numberof factors, including the demand for the Company’s products and services**,**the Company’sability to market, sell and support products, competition, the success of theCompany’s research and development programs, the ability to achieve competitiveand technological advances, general and economic conditions and other factorsbeyond the Company’s control. While the Company’s management believesthat they will negotiate an amendment to the New Credit Facility or obtainadditional cash through other financing sources, there can be no assurance thatsufficient capital resources will be available to fund the Company’s businessduring or after the next twelve months.

 

**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

 

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subject to certain risks, uncertainties andassumptions, including without limitation the following as they relate to theCompany: fluctuations in operating results and seasonality; the Company’sability to market, sell and support products; technological changes; relianceon intellectual property; dependence on entertainment industry; competition;dependence on management; foreign exchange risk; international trade risk;dependence on key suppliers; dependence on manufacturing facility, customerdemand and business and economic cycles; and changes in capital and financialmarkets, including the performance of companies listed on the Nasdaq NationalMarket. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those described herein.

** **

** **

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

 

                The Company doesnot believe that the market risks for the three- and nine-month periods endedJune 30, 2002 substantially changed from those risks outlined for the year endedSeptember 30, 2001 in the Company’s Form 10-K.

 

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**PART II  OTHER INFORMATION**

 

**ITEM 1.  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.

 

**ITEM3.  DEFAULT UPON SENIOR SECURITIES**

 

                As of June 30, 2002, all balances outstanding underthe New Credit Facility were classified as current due to the likelihood thatthe Company will not be able to meet all of the financial ratio covenants underthis facility beginning on December 31, 2002. After further evaluation,management also believes that as of March 31, 2002, it was unlikely that the Company was going to meet allof these covenants as of December 31, 2002. Therefore, the balances outstandingunder the New Credit Facility as of March 31, 2002 should also have beenclassified as current. The Company’s management is currently negotiating anamendment to the New Credit Facility with modified financial covenants and isconsidering other financing options to replace the New Credit Facility. Therecan be no assurances regarding the Company’s ability to obtain additionalfinancing or the successful completion of an amendment to the New Credit Facility.If the Company is not successful in amending or refinancing the New CreditFacility, the lenders will be entitled to pursue all rights available under theNew Credit Facility in the event the Company does not meet the financial ratiocovenants or the terms of other compliance covenants.

 

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**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)    Exhibits

 
| 10.72 |   | Deferred Compensation  Termination Agreement, dated June 30, 2002, between the Company and H. R.  Brutsche’ III                                                                                                                                                             |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.73 |   | Deferred Compensation  Termination Agreement, dated June 30, 2002, between the Company and John D.  Maxson                                                                                                                                                                       |
| 10.74 |   | Deferred Compensation  Termination Agreement, dated June 30, 2002, between the Company and James H.  Clark, Jr.                                                                                                                                                                  |
| 10.75 |   | Deferred Compensation  Termination Agreement, dated June 30, 2002, between the Company and J.  Anthony Smith                                                                                                                                                                     |
| 10.76 |   | Amendment No. 1, effective  June 30, 2002, to the Consulting Agreement, dated as of July 1, 1995, between  the Company and John D. Maxson                                                                                                                                        |
| 10.77 |   | Termination of Consulting  Agreement, dated June 30, 2002, between the Company  and  James H. Clark                                                                                                                                                                              |
| 10.78 |   | Termination of Consulting  Agreement, dated June 30, 2002, between the Company  and  J. Anthony Smith                                                                                                                                                                            |
| 10.79 |   | Amendment No. 2, dated as of  June 30, 2002, to the Employment Agreement, dated as of July 1, 1995 between  the Company and H. R. Brutsche’ III                                                                                                                             |
| 10.80 |   | Assignment and Assumption  Agreement of Amended and Split-Dollar Life Insurance,dated as of June 30,  2002, among the Company, Brown Brothers Harriman Trust Company of Texas,  trustee of the H. R. Brutsche’ III Insurance Trust, and H. R. Brutsche’ III            |
| 10.81 |   | Assignment and Assumption  Agreement of Amended and Restated Split-Dollar Life Insurance, dated as of  June 30, 2002, among the Company, Brown Brothers Harriman Trust Company of  Texas, trustee of the H. R. Brutsche’ III Insurance Trust, and H. R.  Brutsche’ III |
| 10.82 |   | Assignment and Assumption  Agreement of Amended and Split-Dollar Life Insurance, dated as of June 30,  2002, among the Company, James Howard Cullum Clark, and James H. Clark, Jr.                                                                                               |
| 10.83 |   | Assignment and Assumption  Agreement of Amended and Restated Split-Dollar Life Insurance, dated as of  June 30, 2002, among the Company, James Howard Cullum Clark, and James H.  Clark, Jr.                                                                                     |
| 10.84 |   | Assignment and Assumption  Agreement of Amended and Restated Split-Dollar Life Insurance, dated as of  June 30, 2002, among the Company, Brown Brothers Harriman Trust Company of  Texas, trustee of the John D. Maxson Irrevocable Trust, and John D. Maxson                    |
| 10.85 |   | Amendment  No. 5, dated June 30, 2002, to the Financing Agreement, dated as of December  29, 2000, between Vari-Lite, Inc. and U.S. Bank National Association,  formerly known as Firstar Bank, National Association                                                             |

 

(b) No reports on Form8-K were filed for the quarter ended June 30, 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:  | August 15, 2002 |   |   | By:    | /s/ Jerome L.  Trojan III          |
|--------|-----------------|--------|--------|--------|------------------------------------|
|   |            |   |   |   | Vice President - Finance,          |
|   |            |   |   |   | Chief Financial Officer, Treasurer |
|   |            |   |   |   | and Secretary (Principal Financial |
|   |            |   |   |   | and Accounting Officer)            |

 

 

**CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,**

**AS ADOPTED PURSUANT TO SECTION 906 OF THE**

**SARBANES-OXLEY ACT OF 2002**

 

In connection with theQuarterly Report of Vari-Lite International, Inc. (the “Company”) on Form 10-Qfor the quarterly period ended June 30, 2002 as filed with the Securities andExchange Commission on the date hereof (the “Report”), the undersigned, in thecapacities and on the dates indicated below, hereby certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that:  (1) the Report fullycomplies with the requirements of section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and (2) the information contained in the Report fairlypresents, in all material respects, the financial condition and results ofoperations of the Company.
| Date:  | August 15, 2002 |   |   |   |   | By:    | /s/ H.R.  Brutsché III                       |
|--------|-----------------|--------|--------|--------|--------|--------|---------------------------------------------------|
|   |            |   |   |   |   |   | H.R. Brutsché  III                      |
|   |            |   |   |   |   |   | Chairman of the Board and Chief Executive Officer |
|   |            |   |   |   |   |   |                                              |
|   |            |   |   |   |   |   |                                              |
| Date:  | August 15, 2002 |   |   |   |   | By:    | /s/ Jerome L.  Trojan III                         |
|   |            |   |   |   |   |   | Jerome L. Trojan III                              |
|   |            |   |   |   |   |   | Vice President - Finance,                         |
|   |            |   |   |   |   |   | Chief Financial Officer, Treasurer                |
|   |            |   |   |   |   |   | and Secretary                                     |

 

 

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