**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.   20549**

 

**FORM 10-Q**

 

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

 

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2003**

 

**COMMISSIONFILE NUMBER:     0-23159**

 

**VLPS Lighting Services 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.) |
|                                                                              |   |                |
| **8617  Ambassador Row, Suite 120, Dallas, Texas**                                |   | **75247**           |
| (Address of principal  executive offices)                                         |   | (Zip Code)          |
|                                                                              |   |                |
| Registrant’s telephone  number including area code:  **(214) 630-1963** |

 

**Vari-LiteInternational, Inc. 201 Regal Row Dallas, Texas**(Former name, former address and former fiscal year, if changed since lastreport)

 

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   No o

 

Indicate the number ofshares outstanding of each of the Issuer’s classes of common stock, as ofthe latest practicable date: As of May 9, 2003, there were 7,455,103 shares ofCommon Stockoutstanding.

 

 

----

 

VLPS LIGHTING SERVICESINTERNATIONAL, INC.

INDEX TO QUARTERLY REPORTON FORM 10-Q

FOR THE QUARTER ENDEDMARCH 31, 2003

 
| PART I. - FINANCIAL INFORMATION                                                                      |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |
| Item 1. Financial Statements:                                                                        |
|                                                                                                 |   |
|                                                                                                 | Condensed  Consolidated Balance Sheets as of September 30, 2002 and March 31, 2003 |
|                                                                                                 |   |
|                                                                                                 | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  three months ended March 31, 2002 and 2003 |
|                                                                                                 |   |
|                                                                                                 | Condensed  Consolidated Statements of Operations and Comprehensive Income (Loss) for the  six months ended March 31, 2002 and 2003 |
|                                                                                                 |   |
|                                                                                                 | Condensed  Consolidated Statements of Cash Flows for the six months ended March 31, 2002  and 2003 |
|                                                                                                 |   |
|                                                                                                 | Notes  to Condensed Consolidated Financial Statements |
|                                                                                                 |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |
|                                                                                                 |   |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                  |
|                                                                                                 |   |
| Item  4. Controls and Procedures                                                                     |
|                                                                                                 |   |
| PART II. - OTHER INFORMATION                                                                         |
|                                                                                                 |   |
| Item 1. Legal Proceedings                                                                            |
|                                                                                                 |   |
| Item 4. Submission  of Matters to a Vote of Security Holders                                         |
|                                                                                                 |   |
| Item 6. Exhibits and  Reports on Form 8-K                                                            |
|                                                                                                 |   |
| SIGNATURES                                                                                           |

 

2

----

 

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

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**(Unaudited)**

 

**(In thousandsexcept share data)**

 
|                                                                                                                                                                                          |   | **September 30,  2002** |   | **March 31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
| **ASSETS**                                                                                                                                                                                    |   |                    |   |                |   |
| CURRENT ASSETS:                                                                                                                                                                               |   |                    |   |                |   |
| Cash                                                                                                                                                                                          |   | $                       | 2,296  |                | $      | 2,538 |   |
| Receivables, less allowance for doubtful accounts of  $827 and $530                                                                                                                           |   | 7,016                   |   | 7,802               |   |
| Inventory                                                                                                                                                                                     |   | 338                     |   | 515                 |   |
| Prepaid expense and other current assets                                                                                                                                                      |   | 1,306                   |   | 1,366               |   |
| Assets held for sale (Note 1)                                                                                                                                                                 |   | 13,097                  |   | —              |   |
| TOTAL CURRENT ASSETS                                                                                                                                                                          |   | 24,053                  |   | 12,221              |   |
| EQUIPMENT AND OTHER PROPERTY:                                                                                                                                                                 |   |                    |   |                |   |
| Lighting and sound equipment                                                                                                                                                                  |   | 101,372                 |   | 104,376             |   |
| Machinery and tools                                                                                                                                                                           |   | 1,169                   |   | 1,174               |   |
| Furniture and fixtures                                                                                                                                                                        |   | 864                     |   | 918                 |   |
| Office and computer equipment                                                                                                                                                                 |   | 3,355                   |   | 3,458               |   |
| Repair and maintenance inventory                                                                                                                                                              |   | 384                     |   | 318                 |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
|                                                                                                                                                                                          |   | 107,144                 |   | 110,244             |   |
| Less accumulated depreciation and amortization                                                                                                                                                |   | 67,477                  |   | 71,955              |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
|                                                                                                                                                                                          |   | 39,667                  |   | 38,289              |   |
| OTHER ASSETS                                                                                                                                                                                  |   | 580                     |   | 333                 |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| TOTAL ASSETS                                                                                                                                                                                  |   | $                       | 64,300 |                | $      | 50,843 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                 |   |                    |   |                |   |
| CURRENT LIABILITIES:                                                                                                                                                                          |   |                    |   |                |   |
| Accounts payable                                                                                                                                                                              |   | $                       | 3,709  |                | $      | 5,183 |   |
| Accrued liabilities                                                                                                                                                                           |   | 2,500                   |   | 3,384               |   |
| Unearned revenue                                                                                                                                                                              |   | 1,632                   |   | 1,286               |   |
| Income taxes payable                                                                                                                                                                          |   | 329                     |   | 172                 |   |
| Current portion of long-term obligations                                                                                                                                                      |   | 14,003                  |   | 2,967               |   |
| Liabilities held for sale (Note 1)                                                                                                                                                            |   | 2,068                   |   | —              |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| TOTAL CURRENT LIABILITIES                                                                                                                                                                     |   | 24,241                  |   | 12,992              |   |
| LONG-TERM OBLIGATIONS                                                                                                                                                                         |   | 6,801                   |   | 4,973               |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| DEFERRED INCOME TAXES                                                                                                                                                                         |   | —                  |   | —              |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| TOTAL LIABILITIES                                                                                                                                                                             |   | 31,042                  |   | 17,965              |   |
| COMMITMENTS AND CONTINGENCIES  (Note 4)                                                                                                                                                  |   | —                  |   | —              |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                    |   |                    |   |                |   |
| Preferred Stock, $0.10 par value (10,000,000 shares  authorized; no shares issued)                                                                                                            |   | —                  |   | —              |   |
| Common Stock, $0.10 par value (40,000,000 shares  authorized; 7,845,167 shares issued; 7,800,003 and 7,455,103 shares  outstanding as of September 30, 2002 and March 31, 2003, respectively) |   | 785                     |   | 785                 |   |
| Treasury Stock                                                                                                                                                                                |   | (186                    | )      | (617                | )      |
| Additional paid-in capital                                                                                                                                                                    |   | 25,026                  |   | 25,026              |   |
| Accumulated other comprehensive income  - foreign currency translation  adjustment..                                                                                                     |   | 1,058                   |   | 1,372               |   |
| Retained earnings                                                                                                                                                                             |   | 6,575                   |   | 6,312               |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                                                                                               |   | 33,258                  |   | 32,878              |   |
|                                                                                                                                                                                          |   |                    |   |                |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                               |   | $                       | 64,300 |                | $      | 50,843 |   |

 

See  notes to condensedconsolidated financial statements.

 

3

----

 

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

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE****INCOME (LOSS)**

 

**For the ThreeMonths Ended March 31, 2002 and 2003**

 

**(Unaudited)**

 

**(In thousandsexcept share data)**

 
|                                                                     |   | **2002**  |   | **2003**  |   |
|--------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                     |   |      |   |      |   |
| Rental revenues                                                          |   | $         | 10,451 |      | $      | 11,520 |   |
| Product sales and services revenues                                      |   | 1,124     |   | 2,524     |   |
|                                                                     |   |      |   |      |   |
| TOTAL REVENUES                                                           |   | 11,575    |   | 14,044    |   |
| Rental cost                                                              |   | 5,521     |   | 5,609     |   |
| Product sales and services cost                                          |   | 674       |   | 1,559     |   |
|                                                                     |   |      |   |      |   |
| TOTAL COST OF SALES                                                      |   | 6,195     |   | 7,168     |   |
|                                                                     |   |      |   |      |   |
| GROSS PROFIT                                                             |   | 5,380     |   | 6,876     |   |
| Selling, general and administrative expense                              |   | 5,466     |   | 5,842     |   |
| Research and development expense                                         |   | 269       |   | 156       |   |
| TOTAL OPERATING EXPENSES                                                 |   | 5,735     |   | 5,998     |   |
|                                                                     |   |      |   |      |   |
| OPERATING INCOME (LOSS)                                                  |   | (355      | )      | 878       |   |
| Interest expense (net)                                                   |   | 246       |   | 156       |   |
|                                                                     |   |      |   |      |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME  TAXES            |   | (601      | )      | 722       |   |
| Income tax benefit                                                       |   | (232      | )      | (126      | )      |
|                                                                     |   |      |   |      |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                                 |   | (369      | )      | 848       |   |
| DISCONTINUED OPERATIONS (Note 1)                                         |   |      |   |      |   |
| Loss from operations of sales and manufacturing  business                |   | (443      | )      | —    |   |
| NET INCOME (LOSS)                                                        |   | (812      | )      | 848       |   |
|                                                                     |   |      |   |      |   |
| Other comprehensive loss – foreign currency translation  adjustment |   | (400      | )      | (222      | )      |
| COMPREHENSIVE INCOME (LOSS)                                              |   | $         | (1,212 | )         | $      | 626 |   |
|                                                                     |   |      |   |      |   |
| WEIGHTED AVERAGE BASIC SHARES OUTSTANDING                                |   | 7,800,003 |   | 7,551,413 |   |
|                                                                     |   |      |   |      |   |
| WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING                              |   | 7,800,003 |   | 7,642,398 |   |
|                                                                     |   |      |   |      |   |
| PER SHARE INFORMATION BASIC AND DILUTED:                                 |   |      |   |      |   |
| Net income (loss)                                                        |   | $         | (0.10  | )         | $      | 0.11 |   |

 

See  notes to condensedconsolidated financial statements.

 

4

----

 

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

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS AND COMPREHENSIVE****INCOME (LOSS)**

 

**For the Six Months Ended March 31, 2002 and 2003**

 

**(Unaudited)**

 

**(In thousands except share data)**

 
|                                                                                                    |   | **2002**  |   | **2003**  |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                                    |   |      |   |      |   |
| Rental revenues                                                                                         |   | $         | 21,570 |      | $      | 24,042 |   |
| Product sales and services revenues                                                                     |   | 3,168     |   | 5,380     |   |
|                                                                                                    |   |      |   |      |   |
| TOTAL REVENUES                                                                                          |   | 24,738    |   | 29,422    |   |
| Rental cost                                                                                             |   | 10,618    |   | 11,126    |   |
| Product sales and services cost                                                                         |   | 1,845     |   | 3,714     |   |
|                                                                                                    |   |      |   |      |   |
| TOTAL COST OF SALES                                                                                     |   | 12,463    |   | 14,840    |   |
|                                                                                                    |   |      |   |      |   |
| GROSS PROFIT                                                                                            |   | 12,275    |   | 14,582    |   |
| Selling, general and administrative expense                                                             |   | 10,322    |   | 11,727    |   |
| Research and development expense                                                                        |   | 611       |   | 400       |   |
| TOTAL OPERATING EXPENSES                                                                                |   | 10,933    |   | 12,127    |   |
|                                                                                                    |   |      |   |      |   |
| OPERATING INCOME                                                                                        |   | 1,342     |   | 2,455     |   |
| Interest expense (net)                                                                                  |   | 601       |   | 704       |   |
|                                                                                                    |   |      |   |      |   |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                   |   | 741       |   | 1,751     |   |
| Income tax expense                                                                                      |   | 285       |   | 225       |   |
|                                                                                                    |   |      |   |      |   |
| INCOME FROM CONTINUING OPERATIONS                                                                       |   | 456       |   | 1,526     |   |
| DISCONTINUED OPERATIONS (Note 1)                                                                        |   |      |   |      |   |
| Loss from operations of sales and manufacturing  business including loss on disposal of $1,000 in 2003) |   | (1,718    | )      | (1,788    | )      |
| NET LOSS                                                                                                |   | (1,262    | )      | (262      | )      |
|                                                                                                    |   |      |   |      |   |
| Other comprehensive income (loss) – foreign currency  translation adjustment                       |   | (1,022    | )      | 314       |   |
| COMPREHENSIVE INCOME (LOSS)                                                                             |   | $         | (2,284 | )         | $      | 52 |   |
|                                                                                                    |   |      |   |      |   |
| WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING                                                   |   | 7,800,003 |   | 7,677,074 |   |
|                                                                                                    |   |      |   |      |   |
| PER SHARE INFORMATION BASIC AND DILUTED:                                                                |   |      |   |      |   |
| Net loss                                                                                                |   | $         | (0.16  | )         | $      | (0.03 | ) |

 

See notes tocondensed consolidated financial statements.

 

5

----

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**For the Six Months Ended March 31, 2002 and 2003**

 

**(Unaudited)**

 

**(In thousands)**

 
|                                                                             |   | **2002** |   | **2003** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Cash flows from operating activities:                                            |   |     |   |     |   |
| Net loss                                                                         |   | $        | (1,262 | )        | $      | (262 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |   |     |   |     |   |
| Depreciation and amortization                                                    |   | 5,219    |   | 4,925    |   |
| Amortization of note discount and deferred loan fees                             |   | 84       |   | 66       |   |
| Provision for doubtful accounts                                                  |   | 161      |   | 205      |   |
| Deferred income taxes                                                            |   | (810     | )      | —   |   |
| Extraordinary loss from the early extinguishment of  debt                        |   | —   |   | 215      |   |
| Loss on sale of equipment and other property                                     |   | 51       |   | 23       |   |
| Net change in assets and liabilities:                                            |   |     |   |     |   |
| Accounts receivable                                                              |   | 854      |   | 753      |   |
| Prepaid expenses                                                                 |   | (918     | )      | (31      | )      |
| Inventory                                                                        |   | (571     | )      | 139      |   |
| Other assets                                                                     |   | 62       |   | (15      | )      |
| Accounts payable, accrued liabilities and income taxes  payable                  |   | 1,669    |   | 472      |   |
| Unearned revenue                                                                 |   | (333     | )      | (347     | )      |
|                                                                             |   |     |   |     |   |
| Net cash provided by operating activities                                        |   | 4,206    |   | 6,143    |   |
|                                                                             |   |     |   |     |   |
| Cash flows from investing activities:                                            |   |     |   |     |   |
| Capital expenditures, including rental equipment                                 |   | (3,594   | )      | (3,537   | )      |
| Proceeds from sale of manufacturing and sales business                           |   | —   |   | 10,647   |   |
| Proceeds from sale of equipment                                                  |   | 47       |   | 87       |   |
|                                                                             |   |     |   |     |   |
| Net cash provided by (used in) investing activities                              |   | (3,547   | )      | 7,197    |   |
|                                                                             |   |     |   |     |   |
| Cash flows from financing activities:                                            |   |     |   |     |   |
| Proceeds from issuance of debt                                                   |   | 28,691   |   | 34,419   |   |
| Principal payments on debt                                                       |   | (30,560  | )      | (47,364  | )      |
| Purchase of treasury stock                                                       |   | —   |   | (431     | )      |
|                                                                             |   |     |   |     |   |
| Net cash used in financing activities                                            |   | (1,869   | )      | (13,376  | )      |
| Effect of exchange rate changes on cash and cash  equivalents                    |   | (803     | )      | 278      |   |
|                                                                             |   |     |   |     |   |
| Net increase (decrease) in cash during the period                                |   | (2,013   | )      | 242      |   |
| Cash, beginning of period                                                        |   | 3,686    |   | 2,296    |   |
|                                                                             |   |     |   |     |   |
| Cash, end of period                                                              |   | $        | 1,673  |     | $      | 2,538 |   |
|                                                                             |   |     |   |     |   |
| **Supplemental Cash Flow Information**                                           |   |     |   |     |   |
| Cash paid for interest expense                                                   |   | $        | 729    |     | $      | 550 |   |
| Cash paid for income taxes                                                       |   | $        | 366    |     | $      | 249 |   |

 

See notes tocondensed consolidated financial statements.

 

6

----

 

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

 

**NOTES****TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(Unaudited)**

 

**(Inthousands except share data)**

 

1.             Interim FinancialInformation

 

The accompanyingunaudited condensed consolidated financial statements of VLPS Lighting ServicesInternational, 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.

 

On November 18, 2002, theCompany sold substantially all of the assets of its manufacturing and salesbusiness to Genlyte Thomas Group LLC (“Genlyte”) for $10,641.  The sale included all of the sales,marketing, manufacturing and engineering operations associated with thisbusiness, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4,500, of which $3,500was recognized in fiscal 2002 as an impairment of net assets held for sale. Theremaining charge of $1,000, which represents severance payments, was recognizedin the first quarter of fiscal 2003. As part of this transaction, the Companyentered into a supply agreement, pursuant to which Genlyte agreed tomanufacture and sell to the Company, for a minimum of ten years, VARI*LITEequipment and parts to support existing and future VARI*LITE products andappointed the Company as the exclusive distributor of VARI*LITE products inEurope and Japan and a non-exclusive dealer in North America.

 

On October 1, 2002, theCompany adopted Statement of Financial Accounting Standards (“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  Accordingly, the September 30, 2002 BalanceSheet has been reclassified to reflect the assets and liabilities from themanufacturing and sales business as held for sale and the Statements ofOperations for the three and six-month periods ended March 31, 2002 and 2003reflect the results of operations of the manufacturing and sales business asdiscontinued operations.  The operationsof the manufacturing and sales business are included only through the date of thesale.

 

In the opinion ofmanagement, the condensed consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, considered necessaryto present fairly the consolidated financial position, results of operationsand cash flows of the Company. The results of operations for the three andsix-month periods ended March 31, 2003 are not necessarily indicative of theresults of operations that may be expected for any other interim periods or forthe fiscal year ending September 30, 2003.

 

For further information,refer to the consolidated financial statements and accompanying notes includedin the Company’s Annual Report on Form 10-K for the year ended September 30,2002.

 

7

----

 

2.               Inventory

 

Inventory consists of the following:

 

|                      |   | **September 30,****2002** |   | **March 31,****2003** |   |
|---------------------------|--------|---------------------------|--------|-----------------------|--------|
| Finished goods for resale |   | $                         | 338    |                  | $      | 515 |   |
|                           |        |                           |        |                       |        |  |  |

 

3.               Debt

 

OnDecember 19, 1997, the Company entered into a $50,000 multicurrencyrevolving credit  facility (the “OldCredit Facility”).  On December 29,2000, VLPS Lighting Services, Inc. (“VLPS”) entered into a new credit facility,which initially included a $12,000 Term Loan, a $5,000 Revolver and a $3,000Capital Expenditure Loan.  This facilitywith all subsequent amendments is herein referred to as the “New CreditFacility.” On November 18, 2002, the Company used $5,000 of the proceeds fromthe sale of the assets of its manufacturing and sales business to Genlyte torepay a portion of the borrowings outstanding under the Term Loan. Pursuant toan amendment to the New Credit Facility on December 31, 2002, the Term Loan andCapital Expenditure Loan were paid in full, the Revolver commitment wasincreased to $7,500 and capitalized loan origination fees of $215 were writtenoff.  As of March 31, 2003, there was $671outstanding under the Revolver.  Due tothe repayment of the Term Loan and Capital Expenditure Loan, the Companyclassified $10,900 as current debt as of September 30, 2002.  Borrowings under the Revolver are subject toavailability under a borrowing base of eligible lighting rental assets,inventory and accounts receivable (as defined in the New Credit Facility).  As of March 31, 2003, the eligible borrowingbase exceeded the Revolver commitment of $7,500.  Prior to June 30, 2002, all outstanding borrowings under the NewCredit Facility accrued interest at the lender’s base rate or LIBOR, plus arate margin of 0.75% and 2.50%, respectively. From June 30, 2002 through December 30, 2002, all outstanding balances underthe New Credit Facility accrued interest at the lender’s base rate or LIBOR,plus a rate margin ranging from 1.25% to 1.75% or 3.00% to 3.50%, respectively,based upon the Company’s ratio of Adjusted Funded Debt to EBITDA (as defined inthe New Credit Facility). Beginning on December 31, 2002, all outstandingbalances under the New Credit Facility accrue interest at the lender’s baserate or LIBOR, plus a rate margin of 0.50% and 2.25%, respectively.  The New Credit Facility is guaranteed by theCompany and is secured by all of the stock and substantially all of the assetsof VLPS, and a pledge of 65% of the outstanding capital stock of the Company’sforeign subsidiaries.  A commitment feeof 0.25% is charged on the average daily unused portion of the Revolver.  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, 2005.  Upon termination ofthe New Credit Facility, the entire outstanding indebtedness thereunder becomesdue and payable in full.

 

8

----

 

Beginningin fiscal 2001, the Company’s London subsidiary began financing its capitalexpenditures with British pounds sterling loans from a U. K. bank(collectively, the “London Bank Loans”) that amortize over 48 to 60 months andaccrue interest at various rates ranging from 6.3% to 9.10%. Borrowingsoutstanding at September 30, 2002 and March 31, 2003 were approximately $5,467and $5,094, respectively. The London Bank Loans are secured by all of theassets of the Company’s London operations and include certain financialcovenants, limitations on capital expenditures and intercompany payments andthe guarantee of the Company.

 

TheCompany has borrowed money to purchase computer equipment, office furniture andfixtures and conventional lighting equipment. These loans are typically amortized over three to five years and accrueinterest at various rates ranging from 1.62% to 10.35%. Borrowings outstandingunder this type of financing at September 30, 2002 and March 31, 2003 wereapproximately $2,324 and $1,689, respectively.

 

Netinterest expense consists of the following:

 
|                 |   | **Three Months ended  March 31,** |   | **Six Months ended  March 31,** |   |
|----------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                 |   | **2002**                          |   | **2003**                        |   | **2002** |   | **2003** |   |
| Interest Expense     |   | $                                 | 254    |                            | $      | 161 |   | $ | 644 |   | $ | 725 |   |
| Interest Income      |   | 8                                 |   | 5                               |   | 43 |   | 21 |   |
| Net Interest Expense |   | $                                 | 246    |                            | $      | 156 |   | $ | 601 |   | $ | 704 |   |

 

4.               Commitmentsand Contingencies

 

Inthe ordinary course of its business, the Company is from time to timethreatened with or named as a defendant in various lawsuits. The Company is notcurrently involved in any material legal proceedings.

 

5.               Segment Reporting

 

In1999, the Company adopted SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information,” which supersedes SFAS No. 14, “FinancialReporting for Segments of a Business Enterprise.”  SFAS No. 131 establishes standards for the reporting by publicbusiness enterprises of information about product lines, geographic areas andmajor customers.  The method fordetermining what information to report is based on the way that managementorganizes the operation segments within the Company for making operationaldecisions and assessments for financial performance.  The Company’s chief operating decision maker is considered to bethe Company’s Chief Executive Officer (“CEO”). The CEO 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 

 

9

----

 

America, Europe and Asia, which are organized, managed and analyzedgeographically and operate in a single industry segment. Information about theCompany’s operations for the three and six-month periods ended March 31, 2002and 2003 is presented below:

 
|                                      |   | **Three Months Ended March 31, 2002** |   |
|-------------------------------------------|--------|---------------------------------------|--------|
|                                      |   | **North America**                     |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                     | 7,103  |   | $ | 1,329 |   | $ | 3,143 |   | $ | — |   | $ | 11,575 |   |
| Intersegment  sales                       |   | 603                                   |   | 12 |   | 42 |   | (657 | ) | — |   |
|                                      |   |                                  |   |   |   |   |   |   |   |   |   |
| Total net  revenues                       |   | 7,706                                 |   | 1,341 |   | 3,185 |   | (657 | ) | 11,575 |   |
| Operating income  (loss)                  |   | 26                                    |   | (240 | ) | (141 | ) | — |   | (355 | ) |
| Depreciation and  amortization            |   | 1,801                                 |   | 53 |   | 560 |   | — |   | 2,414 |   |
| Total assets                              |   | 62,724                                |   | 7,595 |   | 15,045 |   | (8,974 | ) | 76,390 |   |
|                                           |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Three Months Ended March 31, 2003** |   |
|-------------------------------------------|--------|---------------------------------------|--------|
|                                      |   | **North America**                     |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                     | 8,414  |   | $ | 1,701 |   | $ | 3,929 |   | $ | — |   | $ | 14,044 |   |
| Intersegment  sales                       |   | 651                                   |   | 6 |   | 126 |   | (783 | ) | — |   |
|                                      |   |                                  |   |   |   |   |   |   |   |   |   |
| Total net  revenues                       |   | 9,065                                 |   | 1,707 |   | 4,055 |   | (783 | ) | 14,044 |   |
| Operating income  (loss)                  |   | 1,060                                 |   | (215 | ) | 33 |   | — |   | 878 |   |
| Depreciation and  amortization            |   | 1,618                                 |   | 61 |   | 612 |   | — |   | 2,291 |   |
| Total assets                              |   | 35,657                                |   | 9,073 |   | 15,772 |   | (9,659 | ) | 50,843 |   |
|                                           |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                      |   | **Six Months Ended March 31, 2002** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **North America**                   |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                   | 13,680 |   | $ | 4,014 |   | $ | 7,044 |   | $ | — |   | $ | 24,738 |   |
| Intersegment  sales                       |   | 1,302                               |   | 17 |   | 42 |   | (1,361 | ) | — |   |
|                                      |   |                                |   |   |   |   |   |   |   |   |   |
| Total net  revenues                       |   | 14,982                              |   | 4,031 |   | 7,086 |   | (1,361 | ) | 24,738 |   |
| Operating income  (loss)                  |   | 328                                 |   | 448 |   | 566 |   | — |   | 1,342 |   |
| Depreciation and  amortization            |   | 3,597                               |   | 99 |   | 1,145 |   | — |   | 4,841 |   |
| Total assets                              |   | 62,724                              |   | 7,595 |   | 15,045 |   | (8,974 | ) | 76,390 |   |
|                                           |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

10

----

 
|                                      |   | **Six Months Ended March 31, 2003** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **North America**                   |   | **Asia** |   | **Europe** |   | **Intercompany** |   | **Total** |   |
| Net revenues  from unaffiliated customers |   | $                                   | 15,744 |   | $ | 4,139 |   | $ | 9,539 |   | $ | — |   | $ | 29,422 |   |
| Intersegment  sales                       |   | 1,226                               |   | 9 |   | 197 |   | (1,432 | ) | — |   |
|                                      |   |                                |   |   |   |   |   |   |   |   |   |
| Total net  revenues                       |   | 16,970                              |   | 4,148 |   | 9,736 |   | (1,432 | ) | 29,422 |   |
| Operating income  (loss)                  |   | 1,453                               |   | 152 |   | 850 |   | — |   | 2,455 |   |
| Depreciation and  amortization            |   | 3,483                               |   | 104 |   | 1,208 |   | — |   | 4,795 |   |
| Total assets                              |   | 35,657                              |   | 9,073 |   | 15,772 |   | (9,659 | ) | 50,843 |   |
|                                           |        |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6.             Net Income (Loss) PerShare

 

Basic net income (loss) per share is computed basedupon the weighted average number of common shares outstanding.  Diluted net loss per share reflects thedilutive effect, if any, of stock options and warrants. 

 
|                                                                                      |   | **Three  Months ended  March 31,** |   | **Six Months  ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                                      |   | **2002**                           |   | **2003**                         |   | **2002** |   | **2003** |   |
| Weighted average  shares outstanding                                                      |   | 7,800,003                          |   | 7,551,413                        |   | 7,800,003 |   | 7,677,074 |   |
| Dilutive effect  of stock options and warrants after application of treasury stock method |   | —                             |   | 90,985                           |   | — |   | — |   |
|                                                                                      |   |                               |   |                             |   |   |   |   |   |
| Shares used in  calculating diluted net loss per share                                    |   | 7,800,003                          |   | 7,642,398                        |   | 7,800,003 |   | 7,677,074 |   |

 

For the three-month period ended March 31, 2002, netloss per share excludes stock options of 724,200 and warrants of 296,057 whichwere anti-dilutive.  For the three-monthperiod ended March 31, 2003, net income excludes stock options of 694,915 andwarrants of 296,057 which were anti-dilutive, but includes 90,985 options whichwere dilutive.  For the six-monthperiods ended March 31, 2002 and 2003, net loss per share excludes stockoptions of  724,200 and 785,900,respectively, and warrants of 296,057 and 296,057, respectively which wereanti-dilutive.

 

In January and March 2003, the Company repurchased344,900 shares of Common Stock from two unaffiliated parties for approximately$431.  The Company may in the future useearnings or available financing to pay cash dividends or repurchase Companyshares.  The Company may spend between$500 and $1,569 over the next 12 months to repurchase shares of the Company'sstock through open market purchases and/or private transactions.

 

11

----

 

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

 

**Resultsof Operations**

 

On November 18, 2002, the Company sold substantiallyall of the assets of its manufacturing and sales business to Genlyte ThomasGroup LLC (“Genlyte”) for $10.6 million. The sale included all of the sales, marketing, manufacturing andengineering operations associated with this business, as well as the VARI*LITEÒtrademark and substantially all patents and other intellectual propertyassociated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4.5 million, of which$3.5 million was recognized in fiscal 2002 as an impairment of net assets heldfor sale. The remaining charge of $1.0 million, which represents severancepayments, was recognized in the first quarter of fiscal 2003. As part of thistransaction, the Company entered into a supply agreement, pursuant to whichGenlyte agreed to manufacture and sell to the Company, for a minimum of tenyears, VARI*LITE equipment and parts to support existing and future VARI*LITEproducts and appointed the Company as the exclusive distributor of VARI*LITEproducts in Europe and Japan and a non-exclusive dealer in North America.

 

On October 1, 2002, the Company adopted SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly,the September 30, 2002 Balance Sheet has been reclassified to reflect theassets and liabilities from the manufacturing and sales business as held forsale and the Statements of Operations for the three and six-months ended March31, 2002 and 2003, reflect the results of operations of the manufacturing andsales business as discontinued operations. The operations of the manufacturingand sales business are included only through the date of the sale.

 

##### **Three Months Ended March 31, 2003 Compared to ThreeMonths Ended March 31, 2002**

 

*Revenues*.Total revenues were $14.0 million for the three-month period ended March 31,2003,   compared to $11.6 million forthe three-month period ended March 31, 2002. The components of these revenues are set forth below.

 

*RentalRevenues.* Rental revenues increased 10.2%, or $1.0 million,to $11.5 million in the three-month period ended March 31, 2003, compared to$10.5 million in the three-month period ended March 31, 2002.  This increase was due to overall marketimprovements in the Company’s North American and European businesses andincreased revenues from the concert touring and television markets which wasprimarily attributable to equipment and services provided for the *RollingStones Licks World Tour 2002/03* and many of the “reality” theme andaward show television programs.

 

*ProductSales and Services Revenues*. Product sales and services revenues increased 124.6%, or $1.4 million, to$2.5 million in the three-month period ended March 31, 2003, compared to $1.1million in the three-month period ended March 31, 2002. This increase was dueto an increase in product sales in the European and Japanese markets which areserviced by the Company’s London and Tokyo offices, respectively.

 

*RentalCost.*  Rental costincreased 1.6%, or $0.1 million, to $5.6 million in the three-month periodended March 31, 2003, compared to $5.5 million in the three-month period endedMarch 31, 2002.  However, rental cost asa percentage of rental revenues decreased to 48.7% in the three-month periodended March 31, 2003, from 52.8% in the three-month period ended March 31,2002.   This decrease was 

 

12

----

 

due to depreciation expense and other fixed charges representing alower percentage of revenues during the three-month period ended March 31, 2003as a result of increased revenues compared to the three-month period endedMarch 31, 2002.

 

*ProductSales and Services Cost.* Product sales and services cost increased 131.4%, or $0.9 million, to$1.6 million in the three-month period ended March 31, 2003, compared to $0.7million in the three-month period ended March 31, 2002. This increase wasprimarily due to increased new product sales. Product sales and services cost as a percentage of product sales andservices revenues increased to 61.7% in the three-month period ended March 31,2003, from 59.9% in the three-month period ended March 31, 2002, primarily dueto higher product costs associated with the sale of new automated lightingequipment sold in the three-month period ended March 31, 2003 as compared tothe lower costs associated with the sale of used automated lighting equipmentin the three-month period ended March 31, 2002.

 

*Selling,General and Administrative Expense.*Selling, general andadministrative expense increased 6.9%, or $0.3 million, to $5.8 million in thethree-month period ended March 31, 2003, compared to $5.5 million in thethree-month period ended March 31, 2002. This increase was primarily due toemployee bonuses and higher costs associated with the Company’s London andTokyo operations due to currency fluctuations between the U.S. dollar, Japaneseyen and British pound during the three-month period ended March 31, 2003compared to the three-month period ended March 31, 2002.  This expense as a percentage of totalrevenues decreased to 41.6% in the three-month period ended March 31, 2003,from 47.2% in the three-month period ended March 31, 2002.

 

*Researchand Development Expense.* Research and development expensedecreased 42.0%, or $0.1 million, to $0.2 million in the three-month periodended March 31, 2003, compared to $0.3 million in the three-month period endedMarch 31, 2002. This expense as a percentage of total revenues decreased to1.1% in the three-month period ended March 31, 2003, from 2.3% in thethree-month period ended March 31, 2002. These decreases were primarily due tocost reductions made during fiscal 2002.

 

*InterestExpense*.  Interestexpense decreased 36.8%, or $0.1 million, to $0.2 million in the three-monthperiod ended March 31, 2003, compared to $0.3 million in the three-month periodended March 31, 2002. This decrease was due to the early extinguishment of debtwith proceeds from the sale of the manufacturing and sales business in November2002.

 

*DiscontinuedOperations. *InNovember 2002, the Company sold substantially all of the assets of itsmanufacturing and sales business. The sale included all of the sales,marketing, manufacturing and engineering operations associated with thisdivision, as well as the VARI*LITEÒ trademark andsubstantially all patents and other intellectual property associated withVARI*LITE products. The operating results for this business are included indiscontinued operations through the date of the sale. The loss fromdiscontinued operations for the three-month period ended March 31, 2002 was$0.4 million.

 

*IncomeTaxes.* The effective tax rate in the three-month period endedMarch 31, 2003 was a tax benefit of 17.5% which compares to an effective taxrate of 38.6% in the three-month period ended March 31, 2002. The income taxbenefit for the three-month period ended March 31, 2003 represents income taxbenefit for the Company’s London and Tokyo operations at their respectivestatutory rates.  Income tax 

 

13

----

 

expense for the Company’s U.S. operations has been offset byadjustments to the valuation allowance against the Company’s deferred taxasset.

 

##### **Six Months Ended March 31, 2003 Compared to Six MonthsEnded March 31, 2002**

 

*Revenues*.Total revenues were $29.4 million for the six-month period ended March 31, 2003compared to $24.7 million for the six-month period ended March 31, 2002.  The components of these revenues are setforth below.

 

*RentalRevenues.* Rental revenues increased 11.5%, or $2.5 million,to $24.0 million in the six-month period ended March 31, 2003, compared to$21.5 million in the six-month period ended March 31, 2002.  This increase was due to overall marketimprovements in the Company’s North American and European businesses andincreased revenues from the concert touring and television markets which wasprimarily attributable to equipment and services provided for the *RollingStones Licks World Tour 2002/03* and many of the “reality” theme andaward show television programs.

 

*ProductSales and Services Revenues*. Product sales and services revenues increased 69.8%, or $2.2 million, to$5.4 million in the six-month period ended March 31, 2003, compared to $3.2million in the three-month period ended March 31, 2002. This increase was dueto an increase in product sales in the European and Japanese markets which areserviced by the Company’s London and Tokyo offices, respectively.

 

*RentalCost.*  Rental costincreased 4.8%, or $0.5 million, to $11.1 million in the six-month period endedMarch 31, 2003, compared to $10.6 million in the six-month period ended March31, 2002.  However, rental cost as apercentage of rental revenues decreased to 46.3% in the six-month period endedMarch 31, 2003, from 49.2% in the six-month period ended March 31, 2002.   This decrease was due to depreciationexpense and other fixed charges representing a lower percentage of revenuesduring the six-month period ended March 31, 2003 as a result of increasedrevenues compared to the six-month period ended March 31, 2002.

 

*ProductSales and Services Cost.* Product sales and services cost increased 101.3%, or $1.9 million, to$3.7 million in the six-month period ended March 31, 2003, compared to $1.8million in the six-month period ended March 31, 2002. This increase wasprimarily due to increased new product sales. Product sales and services cost as a percentage of product sales andservices revenues increased to 69.0% in the six-month period ended March 31,2003, from 58.3% in the six-month period ended March 31, 2002 primarily due tohigher product costs associated with the sale of new automated lightingequipment sold in the six-month period ended March 31, 2003 as compared to thelower costs associated with the sale of used automated lighting equipment inthe six-month period ended March 31, 2002.

 

*Selling,General and Administrative Expense.*Selling, general andadministrative expense increased 13.6%, or $1.4 million, to $11.7 million inthe six-month period ended March 31, 2003, compared to $10.3 million in thesix-month period ended March 31, 2002. This increase was primarily due toemployee bonuses and higher costs associated with the Company’s London andTokyo operations due to currency fluctuations between the U.S. dollar, Japaneseyen and British pound during the six- month period ended March 31, 2003compared to the six-month period ended March 31, 2002.  This expense as a percentage of totalrevenues decreased to 39.9% in the six-month period ended March 31, 2003, from41.7% in the six-month period ended March 31, 2002.

 

14

----

 

*Researchand Development Expense.* Research and development expensedecreased 34.5%, or $0.2 million, to $0.4 million in the six-month period endedMarch 31, 2003, compared to $0.6 million in the six-month period ended March31, 2002. This expense as a percentage of total revenues decreased to 1.4% inthe six-month period ended March 31, 2003, from 2.5% in the six-month periodended March 31, 2002. These decreases were primarily due to cost reductionsmade during fiscal 2002.

 

*InterestExpense*.  Interestexpense increased 17.1%, or $0.1 million, to $0.7 million in the six-monthperiod ended March 31, 2003, compared to $0.6 million in the six-month periodended March 31, 2002. This increase was due to a non-cash charge of $0.2million in the six-month period ended March 31, 2003 relating to the write-offof capitalized loan origination costs due to the early extinguishment of debtwith proceeds from the sale of the manufacturing and sales business in November2002.

 

*DiscontinuedOperations. *InNovember 2002, the Company sold substantially all of the assets of itsmanufacturing and sales business. The sale included all of the sales,marketing, manufacturing and engineering operations associated with thisdivision, as well as the VARI*LITEÒ trademark andsubstantially all patents and other intellectual property associated withVARI*LITE products.  This transactionresulted in a pre-tax loss of $4.5 million, of which $3.5 million wasrecognized in fiscal 2002 as an impairment of net assets held for sale. Theremaining charge of $1.0 million, which represents severance payments, wasrecognized in the first quarter of fiscal 2003. The operating results for thisbusiness are included in discontinued operations. The loss from discontinuedoperations in the six-month periods ended March 31, 2003 and 2002 was $1.8million and $1.7 million, respectively.

 

*IncomeTaxes.* The effective tax rates in the six-month periods endedMarch 31, 2003 and 2002 were 12.8% and 38.5%, respectively.  The income tax expense for the six-monthperiod ended March 31, 2003 represents income tax expense for the Company’sLondon and Tokyo operations at their respective statutory rates.  Income tax expense for the Company’s U.S.operations has been offset by adjustments to the valuation allowance againstthe Company’s deferred tax asset.

 

**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 $4.2 million and $6.1 million,respectively, in the six-month periods ending March 31, 2002 and 2003.

 

On December 19, 1997, the Company entered into a$50.0 million multicurrency revolving credit facility (the “Old Credit Facility”). On December 29, 2000, VLPS Lighting Services, Inc. (“VLPS”) entered intoa new credit facility, which initially included a $12.0 million Term Loan, a$5.0 million Revolver and a $3.0 million Capital Expenditure Loan.  This facility with all subsequent amendmentsis herein referred to as the “New Credit Facility.” On November 18, 2002, theCompany used $5.0 million of the proceeds from the sale of the assets of itsmanufacturing and sales business to Genlyte to repay a portion of theborrowings outstanding under the Term Loan. Pursuant to an amendment to the NewCredit Facility on December 31, 2003, the Term Loan and Capital ExpenditureLoan were paid in full, the Revolver commitment was increased to $7.5 millionand capitalized loan origination fees of $0.2 million were written off.  As of March 31, 2003, there was $0.7 millionoutstanding under the Revolver.  Due tothe repayment of the Term Loan and Capital Expenditure Loan, the Companyclassified $10.9 as current debt as of September 30, 2002.  

 

15

----

 

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

 

Beginning in fiscal 2001, the Company’s Londonsubsidiary began financing its capital expenditures with British poundssterling loans from a U. K. bank (collectively, the “London Bank Loans”) that amortizeover 48 to 60 months and accrue interest at various rates ranging from 6.3% to9.10%. Borrowings outstanding at September 30, 2002 and March 31, 2003 wereapproximately $5.5 million and $5.1 million, 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 money to purchase computerequipment, office furniture and fixtures and conventional lightingequipment.  These loans are typicallyamortized over three to five years and accrue interest at various rates rangingfrom 1.62% to 10.35%. Borrowings outstanding under this type of financing at September30, 2002 and March 31, 2003 were approximately $2.3 million and $1.7 million,respectively.

 

The Company’s business requires significant capitalexpenditures.  Capital expenditures forthe six months ended March 31, 2002 and 2003 were approximately $3.6 millionand $3.5 million, respectively, of which approximately $3.3 million each yearwas for rental and demonstration equipment inventories.  The majority of the Company’s revenues aregenerated through the rental of automated lighting systems and, as such, theCompany must maintain a significant amount of rental equipment to meet customerdemands.

 

In January and March 2003, the Company repurchased344,900 shares of Common Stock from two unaffiliated parties for approximately$0.4 million.  The Company may in thefuture use earnings or available financing to pay cash dividends or repurchaseCompany shares.  The Company may spendbetween $0.5 million and $1.6 million over the next 12 months to repurchaseshares of the Company's stock through open market purchases and/or privatetransactions.

 

Management believes that cash flow generated fromoperations and borrowing capacity under the New Credit Facility will besufficient to meet the anticipated operating cash needs and capitalexpenditures for the next twelve months. Because the Company’s future operating results will depend on a numberof factors, including the demand for the Company’s products and services,competition, general 

16

----

 

and economic conditions and other factors beyond the Company’s control,there can be no assurance that sufficient capital resources will be availableto fund the expected expansion of its business beyond such period.

 

**DisclosureRegarding Forward-Looking Statements**

 

This report includes “forward-lookingstatements” as that phrase is defined in Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. When used in this report, the words “anticipate,” “believe,”“estimate,” “expect,” “will,” “could,” “may” and similar expressions, as theyrelate to management or the Company, are intended to identify forward-lookingstatements. Such statements reflect the current views of management withrespect to future events and are subject to certain risks, uncertainties andassumptions, including without limitation the following as they relate to theCompany: fluctuations in operating results and seasonality; technologicalchanges; dependence on entertainment industry; competition; dependence onmanagement; foreign exchange risk; international trade risk; and dependence onkey suppliers. Should one or more of these risks or uncertainties materialize,or should underlying assumptions prove incorrect, actual results may vary materiallyfrom those described herein.

 

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

 

The Company does not believe that the market risks forthe six-month period ended March 31, 2003 substantially changed from thoserisks outlined for the year ended September 30, 2002 in the Company’s Form10-K.

 

**ITEM 4****. CONTROLSAND PROCEDURES**

 

The Company’s Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)under the Securities Exchange Act of 1934) as of a date (the “EvaluationDate”), which was within 90 days of this Report, have concluded in theirjudgment that, as of the Evaluation Date, the Company’s disclosure controls andprocedures were adequate and designed to ensure that material informationrelating to the Company and its subsidiaries would be made known to them.

 

Disclosure controls and procedures are controls andother procedures that are designed to ensure that information required to bedisclosed in the Company’s reports filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed in the Company’s reports filed under the SecuritiesExchange Act of 1934 is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer as appropriate, to allow timely decisions regarding requireddisclosure.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect theinternal controls subsequent to the Evaluation Date.

 

17

----

 

**PART II  OTHER INFORMAT****ION**

 

**ITEM 1.****     LEGAL PR****OCEEDINGS**

 

                                                Inthe ordinary course of its business, the Company is from time to timethreatened with or named as a defendant in various lawsuits. Additionally, theCompany has filed lawsuits claiming infringements of its patents by thirdparties for which the Company has been subject to counterclaims. The Company isnot currently involved in any material legal proceedings.

 

**ITEM4.****     SUBMISSIONOF MATTERS TO A****VOTE OF SECURITY HOLDERS**

 

On March 7, 2003, the Annual Meeting of Stockholderswas held in Dallas, Texas.  Thestockholders were asked to elect two Class III directors to serve until2006.  The vote was as follows:

 
|                    |   | **For**   |   | **Against or  Withheld** |   | **Abstentions** |   |
|-------------------------|--------|-----------|--------|--------------------------|--------|-----------------|--------|
| H.R. Brutsché  III |   | 6,452,738 |   | 840,546                  |   | 0               |   |
| J. Anthony Smith        |   | 7,182,742 |   | 110,542                  |   | 0               |   |

 

Messrs. James H. Clark, Jr., John D. Maxson, John R.Rettberg, William C. Scott and J.R.K. Tinkle will continue as directors of theCompany.

 

The stockholders were also asked to approve aCertificate of Amendment to the Company’s Certificate of Incorporation changingthe Company’s name from “Vari-Lite International, Inc.” to “VLPS LightingServices International, Inc.”  The votewas 7,183,313 for, 96,570 against or withheld and 13,401 abstentions.

 

**ITEM6.****     EXHIBITSAND REPORTS****ON FORM 8-K**

 

(a)                                  Exhibits

 
| 99.1 |   | Certification Pursuant to 18 U.S.C. Section 1350, As  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------|

 

(b)                                 Noreport on Form 8-K was filed for the quarter ended March 31, 2003.

 

18

----

 

**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.

 
|              | **VLPS  LIGHTING SERVICES INTERNATIONAL, INC.** |
|-------------------|-------------------------------------------------|
|              |                                            |
|              |                                            |
| Date: May 9, 2003 | By:                                             | /s/ JEROME L.  TROJAN III |
|              |                                            | Vice President -  Finance, |
|              |                                            | Chief Financial  Officer, Treasurer and Secretary |
|              |                                            | (Principal  Financial and Accounting Officer) |

 

19

----

 

**CERTIFICATIONS**

I, H. R. Brutsché III, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-Q of VLPS Lighting ServicesInternational, Inc.

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalent function):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 9,  2003 |                                              |
|--------------------------|---------------------------------------------------|
|                     |                                              |
|                     |                                              |
|                     | /s/ H. R. Brutsché III                       |   |
|                     | H. R. Brutsché III                           |
|                     | Chairman of the Board and Chief Executive Officer |

 

20

----

 

 

I, Jerome L. Trojan III, certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of VLPS Lighting ServicesInternational, Inc.

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report.

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May 9,  2003 |                                                                         |
|--------------------------|------------------------------------------------------------------------------|
|                     |                                                                         |
|                     |                                                                         |
|                     | /s/ Jerome L. Trojan III                                                     |   |
|                     | Jerome L. Trojan III                                                         |
|                     | Vice President - Finance, Chief Financial Officer,  Treasurer and  Secretary |

 

21

----