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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 THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

        COMMISSION FILE NUMBER: 0-23159

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

Delaware
(State or other jurisdiction of
incorporation or organization)
  75-2239444
(I.R.S. Employer
Identification No.)

201 Regal Row, Dallas, Texas
(Address of principal executive offices)

 

75247
(Zip Code)

        Registrant's telephone number including area code: (214) 630-1963

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date: As of February 14, 2003, there were 7,480,103 shares of Common Stock outstanding.





VARI-LITE INTERNATIONAL, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2002

 
   
  Page
PART I.—FINANCIAL INFORMATION    

Item 1. Financial Statements:

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2002

 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended December 31, 2001 and 2002

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2001 and 2002

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

13

Item 14.

 

Controls and Procedures

 

13


PART II.—OTHER INFORMATION


 


 

Item 1.

 

Legal Proceedings

 

14

Item 6.

 

Exhibits and Reports on Form 8-K

 

14

SIGNATURES

 

15

2



VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 
  September 30,
2002

  December 31,
2002

 
 
  (In thousands except share data)

 
ASSETS  
CURRENT ASSETS:              
 
Cash

 

$

2,296

 

$

3,052

 
  Receivables, less allowance for doubtful accounts of $827 and $715     7,016     7,279  
  Inventory     338     128  
  Prepaid expense and other current assets     1,306     808  
  Assets held for sale (Note 1)     13,097      
   
 
 
    TOTAL CURRENT ASSETS     24,053     11,267  
EQUIPMENT AND OTHER PROPERTY:              
  Lighting and sound equipment     101,372     103,668  
  Machinery and tools     1,169     1,179  
  Furniture and fixtures     864     1,002  
  Office and computer equipment     3,355     3,442  
  Repair and maintenance inventory     384     590  
   
 
 
      107,144     109,881  
    Less accumulated depreciation and amortization     67,477     70,194  
   
 
 
      39,667     39,687  
OTHER ASSETS     580     353  
   
 
 
    TOTAL ASSETS   $ 64,300   $ 51,307  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 
  Accounts payable   $ 3,709   $ 4,406  
  Accrued liabilities     2,500     3,312  
  Unearned revenue     1,632     1,396  
  Income taxes payable     329     295  
  Current portion of long-term obligations     14,003     2,994  
  Liabilities held for sale (Note 1)     2,068      
   
 
 
    TOTAL CURRENT LIABILITIES     24,241     12,403  
LONG-TERM OBLIGATIONS     6,801     6,221  
DEFERRED INCOME TAXES          
   
 
 
    TOTAL LIABILITIES     31,042     18,624  
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     1,058     1,594  
  Retained earnings     6,575     5,464  
   
 
 
    TOTAL STOCKHOLDERS' EQUITY     33,258     32,683  
   
 
 
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 64,300   $ 51,307  
   
 
 

See notes to condensed consolidated financial statements.

3



VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended December 31, 2001 and 2002

(Unaudited)

 
  2001
  2002
 
 
  (In thousands except share data)

 
Rental revenues   $ 11,119   $ 12,523  
Product sales and services revenues     2,044     2,856  
   
 
 
    TOTAL REVENUES     13,163     15,379  
Rental cost     5,096     5,517  
Product sales and services cost     1,172     2,156  
   
 
 
    TOTAL COST OF SALES     6,268     7,673  
   
 
 
    GROSS PROFIT     6,895     7,706  
Selling, general and administrative expense     4,857     5,885  
Research and development expense     342     244  
   
 
 
    TOTAL OPERATING EXPENSES     5,199     6,129  
   
 
 
OPERATING INCOME     1,696     1,577  
Interest expense (net)     354     548  
   
 
 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES     1,342     1,029  
Income tax expense     517     351  
   
 
 
INCOME FROM CONTINUING OPERATIONS     825     678  
DISCONTINUED OPERATIONS (Note 1)              
    Loss from operations of sales and manufacturing business (including loss on disposal of $1,000 in 2002)     (1,275 )   (1,788 )
   
 
 
NET LOSS     (450 )   (1,110 )
Other comprehensive income (loss)—foreign currency translation adjustment     (623 )   536  
   
 
 
COMPREHENSIVE LOSS   $ (1,073 ) $ (574 )
   
 
 

WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING

 

 

7,800,003

 

 

7,800,003

 
   
 
 

PER SHARE INFORMATION BASIC AND DILUTED:

 

 

 

 

 

 

 
  Net loss   $ (0.06 ) $ (0.14 )

See notes to condensed consolidated financial statements.

4



VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended December 31, 2001 and 2002

(Unaudited)

 
  2001
  2002
 
 
  (In thousands)

 
Cash flows from operating activities:              
  Net loss   $ (450 ) $ (1,110 )
  Adjustments to reconcile net loss to net cash provided by operating activities:              
    Depreciation and amortization     2,604     2,543  
    Amortization of note discount and deferred loan fees     43     60  
    Provision for doubtful accounts     71     93  
    Deferred income taxes     (647 )    
    Severance accrual         1,000  
    Loss from the early extinguishment of debt         215  
    (Gain) loss on sale of equipment and other property     23     (53 )
    Net change in assets and liabilities:              
      Accounts receivable     898     1,388  
      Prepaid expenses     (637 )   527  
      Inventory     (1,139 )   253  
      Other assets     30     (29 )
      Accounts payable, accrued liabilities and income taxes payable     (180 )   (1,253 )
      Unearned revenue     (409 )   (238 )
   
 
 
      Net cash provided by operating activities     207     3,396  
Cash flows from investing activities:              
  Capital expenditures, including rental equipment     (589 )   (2,116 )
  Proceeds from sale of manufacturing and sales business         10,647  
  Proceeds from sale of equipment     35     184  
   
 
 
      Net cash provided by (used in) investing activities     (554 )   8,715  
Cash flows from financing activities:              
  Proceeds from issuance of debt     14,903     25,174  
  Principal payments on debt     (15,366 )   (36,929 )
   
 
 
      Net cash used in financing activities     (463 )   (11,755 )
Effect of exchange rate changes on cash and cash equivalents     (510 )   400  
   
 
 
Net increase (decrease) in cash during the period     (1,320 )   756  
Cash, beginning of period     3,686     2,296  
   
 
 
Cash, end of period   $ 2,366   $ 3,052  
   
 
 
Supplemental Cash Flow Information              
  Cash paid for interest expense   $ 376   $ 235  
  Cash paid for income taxes   $ 639   $ 247  

See notes to condensed consolidated financial statements.

5



VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands except share data)

1. Interim Financial Information

        The accompanying unaudited condensed consolidated financial statements of Vari-Lite International, Inc. (the "Company") have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information 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 required by generally accepted accounting principles for complete financial statements.

        On November 18, 2002, the Company sold substantially all of the assets of its manufacturing and sales business to Genlyte Thomas Group LLC ("Genlyte") for $10,647. The sale included all of the sales, marketing, manufacturing and engineering operations associated with this business, as well as the VARI*LITE® trademark and substantially all patents and other intellectual property associated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4,500, of which $3,500 was recognized in fiscal 2002 as an impairment of net assets held for sale. The remaining charge of $1,000, which represents severance payments, was recognized in the first quarter of fiscal 2003. As part of this transaction, the Company entered into a supply agreement, pursuant to which Genlyte agreed to manufacture and sell to the Company, for a minimum of ten years, all VARI*LITE equipment and parts to support existing and future VARI*LITE products and appointed the Company as the exclusive distributor of VARI*LITE products in Europe and Japan and a non-exclusive dealer in North America.

        On October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the September 30, 2002 Balance Sheet has been reclassified to reflect the assets and liabilities from the manufacturing and sales business as held for sale and the Statements of Operations for the three-months ended December 31, 2001 and 2002, reflect the results of operations of the manufacturing and sales business as discontinued operations. The operations of the manufacturing and sales business are included only through the date of the sale.

        In the opinion of management, the condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company. The results of operations for the three-month period ended December 31, 2002 are not necessarily indicative of the results of operations that may be expected for any other interim periods or for the fiscal year ending September 30, 2003.

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

2. Inventory

        Inventory consists of the following:

 
  September 30,
2002

  December 31,
2002

Finished goods for resale   $ 338   $ 128
   
 
    $ 338   $ 128
   
 

6


3. Debt

        On December 19, 1997, the Company entered into a $50,000 multicurrency revolving credit facility (the "Old Credit Facility"). On December 29, 2000, VLPS Lighting Services, Inc. ("VLPS") entered into a new credit facility, which initially included a $12,000 Term Loan, a $5,000 Revolver and a $3,000 Capital Expenditure Loan. This facility with all subsequent amendments is herein referred to as the "New Credit Facility." On November 18, 2002, the Company used $5,000 of the proceeds from the sale of the assets of its manufacturing and sales business to Genlyte to repay a portion of the borrowings outstanding under the Term Loan. Pursuant to an amendment to the New Credit Facility on December 31, 2002, the Term Loan and Capital Expenditure Loan were paid in full, the Revolver commitment was increased to $7,500 and capitalized loan origination fees of $215 were written off. As of December 31, 2002, there was $1,597 outstanding under the Revolver. Due to the repayment of the Term Loan and Capital Expenditure Loan, the Company classified $10,900 as current debt as of September 30, 2002. Borrowings under the Revolver are subject to availability under a borrowing base of eligible lighting rental assets, inventory and accounts receivable (as defined in the New Credit Facility). As of December 31, 2002, the eligible borrowing base exceeded the Revolver commitment of $7,500. Prior to June 30, 2002, all outstanding borrowings under the New Credit Facility accrued interest at the lender's base rate or LIBOR, plus a rate margin of 0.75% and 2.50%, respectively. From June 30, 2002 through December 30, 2002, all outstanding balances under the 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 in the New Credit Facility). Beginning on December 31, 2002, all outstanding balances under the New Credit Facility accrue interest at the lender's base rate or LIBOR, plus a rate margin of 0.50% and 2.25%, respectively. The New Credit Facility is guaranteed by the Company and is secured by all of the stock and substantially all of the assets of VLPS, and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused portion of the Revolver. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The New Credit Facility terminates on December 31, 2005. Upon termination of the New Credit Facility, the entire outstanding indebtedness thereunder becomes due and payable in full.

        Beginning in fiscal 2001, the Company's London subsidiary began financing its capital expenditures with British pounds sterling loans from a U. K. bank (collectively, the "London Bank Loans") that amortize over 48 to 60 months and accrue interest at various rates ranging from 7.6% to 9.10%. Borrowings outstanding at September 30, 2002 and December 31, 2002 were approximately $5,467 and $5,123, respectively. The London Bank Loans are secured by all of the assets of the Company's London operations and include certain financial covenants, limitations on capital expenditures and intercompany payments and the guarantee of the Company.

        The Company has borrowed money to purchase computer equipment and office furniture and fixtures and conventional lighting equipment. These loans are typically amortized over three to five years and accrue interest at various rates ranging from 1.62% to 10.35%. Borrowings outstanding under

7



this type of financing at September 30, 2002 and December 31, 2002 were approximately $2,324 and $1,946, respectively.

4. Commitments and Contingencies

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

5. Segment Reporting

        In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments for financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product lines for purposes of making operating decisions and assessing financial performance. The Company has three reportable segments: North America, Europe and Asia, which are organized, managed and analyzed geographically and operate in a single industry segment. Information about the Company's operations for the three-month periods ended December 31, 2001 and 2002 is presented below:

 
  Three Months Ended December 31, 2001
 
  North America
  Asia
  Europe
  Intercompany
  Total
Net revenues from unaffiliated customers   $ 5,904   $ 3,357   $ 3,902   $   $ 13,163
Intersegment sales     699     5         (704 )  
   
 
 
 
 
  Total net revenues     6,603     3,362     3,902     (704 )   13,163
Operating income (loss)     88     844     764         1,696
Depreciation and amortization     1,782     59     586         2,427
Total assets     61,925     7,751     15,924     (8,242 )   77,358
 
  Three Months Ended December 31, 2002
 
  North America
  Asia
  Europe
  Intercompany
  Total
Net revenues from unaffiliated customers   $ 7,214   $ 2,556   $ 5,609   $   $ 15,379
Intersegment sales     574     4     71     (649 )  
   
 
 
 
 
  Total net revenues     7,788     2,560     5,680     (649 )   15,379
Operating income (loss)     386     373     818         1,577
Depreciation and amortization     1,831     74     600         2,505
Total assets     34,660     8,942     17,175     (9,470 )   51,307

8


6. Net Loss Per Share

      Basic net loss per share is computed based upon the weighted 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
December 31,

 
  2001
  2002
Weighted average shares outstanding   7,800,003   7,800,003
Dilutive effect of stock options and warrants after application of treasury stock method    
   
 
Shares used in calculating diluted net loss per share   7,800,003   7,800,003
   
 

        For the three-month period ended December 31, 2001 and 2002, net loss per share excludes stock options of 730,200 and 874,200, respectively, and warrants of 296,057 and 296,057, respectively, which were anti-dilutive.

7. Subsequent Event

        In January 2003, the Company repurchased 319,900 shares of Common Stock for approximately $399 which approximated the market value.

9



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001

        On November 18, 2002, the Company sold substantially all of the assets of its manufacturing and sales business to Genlyte Thomas Group LLC ("Genlyte") for $10,647. The sale included all of the sales, marketing, manufacturing and engineering operations associated with this business, as well as the VARI*LITE® trademark and substantially all patents and other intellectual property associated with VARI*LITE products. This transaction resulted in a pre-tax loss of $4,500, of which $3,500 was recognized in fiscal 2002 as an impairment of net assets held for sale. The remaining charge of $1,000, which represents severance payments, was recognized in the first quarter of fiscal 2003. As part of this transaction, the Company entered into a supply agreement, pursuant to which Genlyte agreed to manufacture and sell to the Company, for a minimum of ten years, all VARI*LITE equipment and parts to support existing and future VARI*LITE products and appointed the Company as the exclusive distributor of VARI*LITE products in Europe and Japan and a non-exclusive dealer in North America.

        On October 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, the September 30, 2002 Balance Sheet has been reclassified to reflect the assets and liabilities from the manufacturing and sales business as held for sale and the Statements of Operations for the three-months ended December 31, 2001 and 2002, reflect the results of operations of the manufacturing and sales business as discontinued operations. The operations of the manufacturing and sales business are included only through the date of the sale.

        Revenues.    Total revenues for the three-month period ended December 31, 2002 were $15.4 million compared to the three-month period ended December 31, 2001 of $13.2 million. The components of these revenues are set forth below.

        Rental Revenues.    Rental revenues increased 12.6%, or $1.4 million, to $12.5 million in the three-month period ended December 31, 2002, compared to $11.1 million in the three-month period ended December 31, 2001. This increase was due to overall market improvements in the Company's North American and London offices and increased revenues from concert touring which is primarily attributable to revenues earned by the Company for equipment and services provided for the Rolling Stones Licks World Tour 2002/03.

        Product Sales and Services Revenues.    Product sales and services revenues increased 39.7%, or $0.8 million, to $2.9 million in the three-month period ended December 31, 2002, compared to $2.1 million in the three-month period ended December 31, 2001. This increase was due to an increase in product sales by the Company's foreign offices.

        Rental Cost.    Rental cost increased 8.2%, or $0.4 million, to $5.5 million in the three-month period ended December 31, 2002, compared to $5.1 million in the three-month period ended December 31, 2001. However, rental cost as a percentage of rental revenues decreased to 44.1% in the three-month period ended December 31, 2002, from 45.8% in the three-month period ended December 31, 2001. This decrease was due to depreciation expense representing a lower percentage of revenues during the three-month period ended December 31, 2002 as a result of increased revenues compared to the three-month period ended December 31, 2001.

        Product Sales and Services Cost.    Product sales and services cost increased 84.0%, or $1.0 million, to $2.2 million in the three-month period ended December 31, 2002, compared to $1.2 million in the three-month period ended December 31, 2001. This increase was primarily due to increased new product sales. Product sales and services cost as a percentage of product sales and services revenues

10



increased to 75.5% in the three-month period ended December 31, 2002, from 57.3% in the three-month period ended December 31, 2001 primarily due to higher product sales cost as a percentage of respective revenues associated with the sale of new products during the three-month period ended December 31, 2002.

        Selling, General and Administrative Expense.    Selling, general and administrative expense increased 21.2%, or $1.0 million, to $5.9 million in the three-month period ended December 31, 2002, compared to $4.9 million in the three-month period ended December 31, 2001. This increase was primarily due to higher employee bonuses and higher costs associated with the Company's London and Tokyo operations due to the currency fluctuations between the U.S. dollar and the Japanese yen and British pound during the three month period ended December 31, 2002 when compared to the three month period ended December 31, 2001. This expense as a percentage of total revenues increased to 38.3% in the three-month period ended December 31, 2002, from 36.9% in the three-month period ended December 31, 2001.

        Research and Development Expense.    Research and development expense decreased 28.7%, or $0.1 million, to $0.2 million in the three-month period ended December 31, 2002, compared to $0.3 million in the three-month period ended December 31, 2001. This expense as a percentage of total revenues decreased to 1.6% in the three-month period ended December 31, 2002, from 2.6% in the three-month period ended December 31, 2001. These decreases were primarily due to cost reductions made during fiscal 2002.

        Interest Expense.    Interest expense increased 54.8%, or $0.2 million, to $0.5 million in the three-month period ended December 31, 2002, compared to $0.3 million in the three-month period ended December 31, 2001. This increase was due to a non-cash charge of $0.2 million in the three-month period ended December 31, 2002 relating to the write-off of capitalized loan origination costs due to the early extinguishment of debt with proceeds from the sale of the manufacturing and sales business in November 2002.

        Discontinued Operations.    In November 2002, the Company sold substantially all of the assets of its manufacturing and sales business. The sale included all of the sales, marketing, manufacturing and engineering operations associated with this business, as well as the VARI*LITE® trademark and substantially all patents and other intellectual property associated 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 held for sale. The remaining charge of $1.0 million, which represents severance payments, was recognized in the first quarter of fiscal 2003. The operating results for this business are included in discontinued operations. The loss from discontinued operations increased 40.2% or $0.5 million, to $1.8 million in the three-month period ended December 31, 2002 compared to $1.3 million in the three-month period ended December 31, 2001. The increase in the loss of the discontinued operations is primarily due to the accrual of $1.0 million of severance expenses during the three-month period ended December 31, 2002.

        Income Taxes.    The effective tax rates in the three-month periods ended December 31, 2002 and 2001 were 34.1% and 38.5%, respectively.

Liquidity and Capital Resources

        Historically, the Company has financed its operations and capital expenditures with cash flow from operations, bank borrowings and advances from customers. The Company's operating activities generated cash flow of $0.2 million and $3.4 million, respectively, in the three-month periods ending December 31, 2001 and 2002.

        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"),

11



entered into a 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 amendments is herein referred to as the "New Credit Facility." On November 18, 2002, the Company used $5.0 million of the proceeds from the sale of the assets of its manufacturing and sales business to Genlyte to repay a portion of the borrowings outstanding under the Term Loan. Purusant to an amendment to the New Credit Facility on December 31, 2002, the Term Loan and Capital Expenditure Loan were paid in full, the Revolver commitment was increased to $7.5 million and capitalized loan origination fees of $0.2 million were written off. As of December 31, 2002, there was $1.6 million outstanding under the Revolver. Due to the repayment of the Term Loan and Capital Expenditure Loan, the Company classified $10.9 as current debt as of September 30, 2002. Borrowings under the Revolver are subject to availability under a borrowing base of eligible lighting rental assets, inventory and accounts receivable (as defined in the New Credit Facility). As of December 31, 2002, the eligible borrowing base exceeded the Revolver commitment of $7.5 million. Prior to June 30, 2002, all outstanding borrowings under the New Credit Facility accrued interest at the lender's base rate or LIBOR, plus a rate margin of 0.75% and 2.50%, respectively. From June 30, 2002 through December 30, 2002, all outstanding balances under the 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 in the New Credit Facility). Beginning on December 31, 2002, all outstanding balances under the New Credit Facility accrue interest at the lender's base rate or LIBOR, plus a rate margin of 0.50% and 2.25%, respectively. The New Credit Facility is guaranteed by the Company and is secured by all of the stock and substantially all of the assets of VLPS, and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused portion of the Revolver. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The New Credit Facility terminates on December 31, 2005. Upon termination of the New Credit Facility, the entire outstanding indebtedness thereunder becomes due and payable in full.

        Beginning in fiscal 2001, the Company's London subsidiary began financing its capital expenditures with British pounds sterling loans from a U. K. bank (collectively, the "London Bank Loans") that amortize over 48 to 60 months and accrue interest at various rates ranging from 7.6% to 9.10%. Borrowings outstanding at September 30, 2002 and December 31, 2002 were approximately $5.5 million and $5.1 million, respectively. The London Bank Loans are secured by all of the assets of the Company's London operations and include certain financial covenants, limitations on capital expenditures and intercompany payments and the guarantee of the Company.

        The Company has borrowed money to purchase computer equipment and office furniture and fixtures and conventional lighting equipment. These loans are typically amortized over three to five years and accrue interest at various rates ranging from 1.62% to 10.35%. Borrowings outstanding under this type of financing at September 30, 2002 and December 31, 2002 were approximately $2.3 million and $1.9 million, respectively.

        The Company's business requires significant capital expenditures. Capital expenditures for the three months ended December 31, 2001 and 2002 were approximately $0.6 million and $2.1 million, respectively, of which approximately $0.4 million and $2.1 million were for rental and demo equipment inventories. The majority of the Company's revenues are generated through the rental of automated lighting systems and, as such, the Company must maintain a significant amount of rental equipment to meet customer demands.

        Management believes that cash flow generated from operations and borrowing capacity under the New Credit Facility will be sufficient to meet the anticipated operating cash needs and capital

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expenditures for the next twelve months. Because the Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, competition, general and economic conditions and other factors beyond the Company's control, there can be no assurance that sufficient capital resources will be available to fund the expected expansion of its business beyond such period.

Disclosure Regarding Forward-Looking Statements

        This report includes "forward-looking statements" as that phrase is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "anticipate," "believe," "estimate," "expect," "will," "could," "may" and similar expressions, as they relate to management or the Company, are intended to identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions, including without limitation the following as they relate to the Company: fluctuations in operating results and seasonality; technological changes; dependence on entertainment industry; competition; dependence on management; foreign exchange risk; international trade risk; and dependence on key suppliers. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company does not believe that the market risks for the three-month period ended December 31, 2002 substantially changed from those risks outlined for the year ended September 30, 2002 in the Company's Form 10-K.


ITEM 14. CONTROLS AND PROCEDURES

        The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure 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 "Evaluation Date"), which was within 90 days of this Report, have concluded in their judgment that, as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its subsidiaries would be made known to them.

        Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

        There were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the Evaluation Date.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. The Company is not currently involved in any material legal proceedings.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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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 the undersigned thereunto duly authorized.


 

 

VARI-LITE INTERNATIONAL, INC.

Date: February 14, 2003

 

By:

/s/  
JEROME L. TROJAN III      
Vice President—Finance,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)

15



CERTIFICATIONS

I, H. R. Brutsché III, certify that:


Date: February 14, 2003    
    /s/  H. R. BRUTSCHÉ III      
H. R. Brutsché III
Chairman of the Board and Chief Executive Officer

 

 

 

16


I, Jerome L. Trojan III, certify that:


Date: February 14, 2003    

 

 

/s/  
JEROME L. TROJAN III      
Jerome L. Trojan III
Vice President—Finance, Chief Financial Officer, Treasurer and Secretary

17



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 the Quarterly Report of Vari-Lite International, Inc. (the "Company") on Form 10-Q for the quarterly period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date:     February 14, 2003    

 

By:

/s/  
H. R. BRUTSCHÉ III      
H. R. Brutsché III
Chairman of the Board and Chief Executive Officer

Date:     February 14, 2003    

 

By:

/s/  
JEROME L. TROJAN III      
Jerome L. Trojan III
Vice President—Finance, Chief Financial Officer, Treasurer and Secretary

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QuickLinks

VARI-LITE INTERNATIONAL, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2002
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Three Months Ended December 31, 2001 and 2002 (Unaudited)
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended December 31, 2001 and 2002 (Unaudited)
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands except share data)
SIGNATURES
CERTIFICATIONS
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002