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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23159
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VARI-LITE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2239444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 REGAL ROW, DALLAS, TEXAS 75247
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (214) 630-1963
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE
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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 /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on January 10, 2000, was $4,348,269. As of that date, 7,800,003
shares of the registrant's Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III of this Annual Report on Form 10-K
is incorporated by reference from the registrant's definitive proxy statement
for its annual meeting of stockholders to be held on March 10, 2000.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Consolidated Financial Data........................ 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 23
Item 13. Certain Relationships and Related Transactions.............. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 24
SIGNATURES............................................................ 29
INDEX TO FINANCIAL STATEMENTS......................................... F-1
2
PART I
ITEM 1. BUSINESS
GENERAL
The Company is a leading international designer, manufacturer and
distributor of automated lighting equipment and provider of related services to
the entertainment industry, servicing markets such as concert touring, theatre,
television, film and corporate events. The Company markets its proprietary
VARI*LITE automated lighting equipment and other products and services through
its domestic and international Vari-Lite Production Services facilities and an
independent dealer network. Historically, the Company has only rented its
VARI*LITE-Registered Trademark- products rather than offering products for sale,
however, the Company intends to begin selling certain
VARI*LITE-Registered Trademark- products in fiscal 2000. The Company is also a
leader in providing complementary products and services to the entertainment
industry, including concert sound reinforcement systems, conventional lighting
equipment and design and production management services for conventions,
business meetings and special events.
The Company's predecessor was incorporated in 1988 in the State of Texas as
a holding company to own Showco, Inc. ("Showco"), which began operations in
1970, and Vari-Lite, Inc. ("Vari-Lite"), which began operations in 1981. On
October 15, 1997, the Company was reincorporated in the State of Delaware. The
Company's principal executive offices are located at 201 Regal Row, Dallas,
Texas 75247 and its telephone number is (214) 630-1963.
PRODUCTS AND SERVICES
VARI*LITE-Registered Trademark- AUTOMATED LIGHTING PRODUCTS.
The Company designs, manufactures and distributes an extensive line of
integrated automated lighting systems, including light fixtures, or
"luminaires," control consoles and support equipment, and provides system
operators and maintenance services. To accommodate users who prefer to operate
the Company's lighting systems independently, the Company also conducts
extensive training programs. To date, the Company has only rented its
VARI*LITE-Registered Trademark- products through its rental offices rather than
offering products for sale. However, as a result of the emergence of competing
products along with the increased demand of certain customers to own rather than
rent the products, the Company intends to begin selling certain
VARI*LITE-Registered Trademark- products in fiscal 2000.
SERIES 200-TM- SYSTEM. The Company's VL2C-TM- spot luminaire, VL4-TM- wash
luminaire and Artisan-Registered Trademark-Plus and
mini-Artisan-Registered Trademark-2 control consoles constitute the Company's
Series 200-TM- system. Spot luminaires create a hard-edged, crisp beam which can
be used for precisely focused illumination and visual effects, as well as for
projecting custom light images and designs through the use of "gobos", designs
etched into a piece of glass or cut into a piece of metal through which a light
beam is directed to create an image. The VL2C-TM- spot luminaire can change
light color in one-tenth of a second and can produce more than 120 separate
light colors through the use of the Company's patented color changing system. In
designing the Series 200-TM- system, the Company patented a number of features
which it believes makes the Company's light systems superior to those of its
competitors. The Company is the only industry participant which combines
patented dichroic filter color changing systems, advanced heat removal
techniques and computer control systems that utilize distributed processing and
resident cue memory in each luminaire. By using such technology to execute a
lighting effect (or cue), an operator can transmit a single command to up to
1,000 luminaires simultaneously, each of which stores its own set of cues. As a
result, customers using the Company's systems can create lighting presentations
with greater flexibility, complexity, speed and precision than with competing
products.
The VL4-TM- wash luminaire projects a dispersed soft-edge light beam for
even illumination of objects and areas. The VL4-TM- luminaire's patented color
changing system allows the user to select 30 preset and 160 programmable colors
from thousands of available colors and to change these colors in less than
three-
3
tenths of a second, or program the system for timed color cross-fades. In
addition, the VL4-TM- luminaire features precisely timed control of light
intensity, including the ability to instantaneously turn the light fixture on
and off. Continuous adjustment of diffusion and beam angle provides enhanced
control of the beam shape.
SERIES 300-TM- SYSTEM. The Company developed its Series 300-TM- automated
lighting system principally to satisfy the demands of the theatre and television
and film markets for virtually silent, light weight automated lighting products
with sophisticated color changing features. The Company's Series 300-TM- system,
including the VL5-TM-, VL5Arc-TM- and VL5B-TM- wash luminaires, the VL6-TM-,
VL6B-TM-, VL7-TM- and VL7B-TM- spot luminaires, and the VLM-TM- automated moving
mirror, as well as the Artisan-Registered Trademark-Plus,
mini-Artisan-Registered Trademark-2 and Virtuoso-TM- control consoles, also
appeals to major concert touring clients who want to rent large systems. The
VL5-TM- luminaire is lighter than the VL4-TM- luminaire, and its cold-mirror
reflector both eliminates the need for noisy cooling fans and reduces the amount
of heat the lights emit onto the stage. Color changes for the VL5-TM- are
controlled by a system that allows color cross-fades in as little as
seven-tenths of a second and interchangeable lenses work with an internal
diffusing mechanism to provide a wide variety of beam sizes and shapes. The
VL5Arc-TM- luminaire has a brighter bulb than the VL5-TM- luminaire and a
patented fluid-filled variable lens which allows beam size control. The VL6-TM-
spot luminaire is the companion to the VL5-TM- wash luminaire, and has two
interchangeable 12-position wheels of dichroic color filters and gobos for split
second color and image changes and multi-color beams. The VL6B-TM- spot
luminaire adds a 3:1 zoom optics system and rotating gobos to the VL6-TM-. The
VL7-TM- spot luminaire has a revolutionary collection optics system that
produces a bright beam and provides an 8:1 zoom. Other features of the VL7-TM-
include full color spectrum crossfades with unparalleled precision and
repeatability via the unique CVF-TM- System, strobe, image morphing and fixed
and rotating gobos. The VL7B-TM- spot luminaire adds a four frame shuttering
system to the VL7-TM- fixture. The VLM-TM- automated moving mirror is a
dual-sided highly reflective Lexan-Registered Trademark- polycarbonate mirror
panel. With its ability to both pan and tilt 360 degrees, the VLM-TM-automated
moving mirror can be used to augment the effects produced by
VARI*LITE-Registered Trademark- wash and spot luminaires, or it can be used with
conventional lights to create limited beam motion at a very low cost.
SERIES 2200. The VL2201-TM- spot luminaire, which includes all of the
features available in the VL6B-TM-, includes an upper enclosure that houses the
control electronics, as well as a power factor corrected arc power supply.
SERIES 2400. The VL2400-TM- Series wash luminaires, which are based upon
the VL5-TM- architecture, has three light source choices and two beam control
options, for a total of six model configurations. The luminaire is available
with a zoomable beam spreading mechanism or in a collimated beam configuration.
The innovative DICHRO*TUNE-TM- radial color changer employs enhanced dichroic
color filters to produce smooth, full spectrum color crossfades. An internal
douser provides intensity control and strobing. The luminaires include an upper
enclosure that houses the control electronics, as well as a power factor
corrected arc power supply or an SCR dimmer.
The Company's luminaires are compatible with the industry-standard DMX 512
digital protocol and, as such, can be operated by DMX 512 control consoles, as
well as the Company's more sophisticated, higher performance proprietary control
consoles which use a high speed, bi-directional communications protocol.
LIGHTING CONTROL SYSTEMS. The Company's primary control console, the
Artisan-Registered Trademark-Plus, is used to operate all of the Company's
VARI*LITE-Registered Trademark- products. It provides control of up to 1,000
luminaires, dimmers and other equipment with up to 1,000 cues per channel,
allowing the operator to control each luminaire or to store and play back preset
cues. The Company also rents the smaller, less expensive
mini-Artisan-Registered Trademark-2 control console which has substantially the
same capabilities as the Artisan-Registered Trademark-Plus control console, but
requires longer programming time. Accordingly, the
mini-Artisan-Registered Trademark-2 control console is often
4
used either as the primary control system where space is limited or as a back-up
system to the Artisan-Registered Trademark-Plus control console. The Company
recently introduced the Virtuoso-TM- control console, which is the Company's
newest control system. This control system offers expanded control over
VARI*LITE-Registered Trademark- luminaires, DMX automated lights and
conventional luminaires with fully integrated 3-D graphics display.
OTHER PRODUCTS AND SERVICES. The Company provides trained personnel to
operate its automated lighting systems and offers training courses, maintenance
and other support services to customers. The Company maintains training
facilities in its Dallas, New York, Los Angeles, Tokyo and London offices, where
it trains both its own personnel and customers who find it more efficient to
have their personnel operate and maintain the VARI*LITE-Registered Trademark-
equipment.
In addition to luminaires and control consoles, the Company rents related
equipment required to operate the Company's systems, such as power and control
signal distribution equipment, dimmers and cables. The Company has also
developed a unique stackable, plastic injection-molded storage case for
transporting its equipment. The Company's cases are custom-designed to protect
VARI*LITE-Registered Trademark- equipment and last longer than the
industry-standard carpet covered wood or laminate cases. These cases are also
significantly lighter than other cases, thereby reducing transportation costs.
The Company also sold Irideon-Registered Trademark- architectural automated
lighting systems until the disposal of that product line in October 1998.
COMPLEMENTARY BUSINESSES
The Company is a leader in providing complementary products and services to
the entertainment industry, including concert sound systems, conventional
lighting equipment and design and production management services for
conventions, business meetings and special events.
CONCERT SOUND SYSTEMS. The Company's Showco subsidiary rents concert sound
systems and provides related services almost exclusively to the worldwide
concert touring market. The Company's PRISM-Registered Trademark- sound system
was introduced in 1986 as the first large scale concert sound system engineered
as a totally integrated system specifically for use in concert touring. The
proprietary, scalable PRISM-Registered Trademark- system can be used in any
venue from smaller theatres to stadiums and is easier to assemble, disassemble
and transport than competitive sound systems. In November 1998, the Company
introduced the PRISM-Registered Trademark-L3, which is a compact loudspeaker
system that incorporates the scalability of the PRISM-Registered Trademark-
system. Showco both rents and sells the PRISM-Registered Trademark-L3 system,
which appeals to the needs of smaller venues and a broader customer base than
the larger PRISM-Registered Trademark- system. Also, in November 1998, the
Company introduced the SHOWCONSOLE-TM-, a revolutionary audio control desk that
provides instant total recall live sound mixing eliminating the need for
multiple mixing consoles for multi-artist performances, and adds other
innovative audio control features.
CONVENTIONAL LIGHTING PRODUCTS. The Company offers conventional lighting
and rigging equipment, including numerous types of luminaires and control
consoles, large search lights, automatic gel scrollers, trusses, motors, dimmers
and smoke machines.
CORPORATE MEETINGS AND SPECIAL EVENTS. The Company, through its IGNITION!
Creative Group, Inc. ("Ignition") subsidiary, provides design and production
management services to businesses for conventions, business meetings and special
events. The Company provides concept development, scenery, lighting, sound,
special effects, scripting, media production and entertainment production for
such events.
The Company also provided custom stage and stage set design and construction
services until the sale of that product line in December 1998.
5
MARKETING, SALES AND DISTRIBUTION
The Company markets its products and services to the entertainment industry,
including concert touring, theatre, television and film and corporate events
markets. Depending on the circumstances, the Company solicits business from
lighting and set designers and consultants, sound engineers, artist managers,
producers, production managers and production companies, promoters, corporations
and business associations. The Company believes that its quality products,
reputation for innovation, customer relationships, worldwide distribution and
excellent service are the keys to its success. No customer has accounted for
more than 10% of the Company's revenues for at least the last three fiscal
years.
In 1998, the Company began to emphasize its full-service strategy by
expanding the products and services it offers to include a more extensive
selection of conventional lighting products and related services. This effort is
designed to accommodate the comprehensive lighting needs of the Company's rental
customers by offering "one-stop" shopping.
VARI*LITE-Registered Trademark- AUTOMATED LIGHTING PRODUCTS. To date, the
Company has only rented its VARI*LITE-Registered Trademark- products rather than
offering the products for sale. The initial decision to distribute the Company's
products through a rental network was largely driven by the demands of the
Company's primary customers at the time--the concert touring market. In
addition, the rental only strategy provided the Company with a higher level of
quality control over its rental products, which require trained operators and
maintenance personnel. The Company also believes renting has enabled it to
better protect its intellectual property and generate revenue from each product
over an extended time period. However, as a result of the emergence of competing
automated lighting products, along with the increased demand of certain
customers to own rather to rent the products, the Company intends to begin
selling certain VARI*LITE-Registered Trademark- products in fiscal 2000.
The Company markets its automated lighting systems and services in the
United States both through Company-owned offices located in New York, Los
Angeles, Nashville, Orlando, Las Vegas and Chicago and an independent dealer
system. Each Company-owned office is strategically located to take advantage of
specific market segments. For example, the New York office targets the theatre
market, the Nashville office targets the country music, television and concert
touring markets, the Los Angeles office targets the television, film and concert
touring market, and the Orlando, Las Vegas, and Chicago offices target the
corporate events market. The independent dealers focus on specific geographic
markets and tend to rent to all market segments. The Company's international
distribution system comprises Company-owned locations in London, Tokyo,
Brussels, Paris, Madrid, Stockholm, Amsterdam and Hong Kong, as well as, at
January 10, 2000, independent dealers in 40 cities in North America and Europe.
In order to satisfy customers who wanted to purchase the Company's lighting
systems, the Company has offered sales-type leases. Under the typical sales-type
lease, the customer rents the Company's equipment for either a five- or a
ten-year term, with unlimited one-year renewal options, for a lump sum payment
at the commencement of the term, plus a nominal renewal option exercise price.
The customer is normally responsible for maintaining the equipment under these
arrangements, but often enters into a maintenance agreement with the Company.
CONVENTIONAL LIGHTING PRODUCTS. The Company's conventional lighting
operations, which have historically operated independently were integrated into
the Company's operations in 1998 to improve the Company's position as a
full-service provider. These operations, established under the name Vari-Lite
Production Services, rely heavily on the Company's reputation for quality and
service, which is enhanced by its high visibility projects and customers. The
Company reinforces this reputation by advertising in trade and specialty
magazines. Although most of the Company's conventional lighting contracts are
procured through a bidding process, the Company believes that competition in
this industry is based on expertise, quality, price and full service
capabilities.
6
CONCERT SOUND SYSTEMS. The Company markets its concert sound equipment
directly to end-users worldwide. Showco develops personal relationships with
artist managers, sound engineers, production managers and event producers and
relies on its reputation for superior quality and service to attract customers.
CORPORATE MEETINGS AND SPECIAL EVENTS. The Company sells its design and
production management services to corporate meeting planners and sales and
marketing executives. In-house salespeople seek requests for proposals through
cold calls, sales letters and professional mailings and, to a lesser extent,
through advertising in trade publications. Upon receiving an invitation to
submit a proposal, the Company assembles a project team which develops concepts
and designs for a multi-media presentation to the potential client.
RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY
The Company's proprietary technology and development of innovative products
that meet the needs of its customers have enabled it to expand the applications
for its technology to new products and markets. From time to time, the Company
collaborates with unaffiliated entities to supplement and complement its
internal research and development activities.
As of September 30, 1999, the Company's research and development group
consisted of over 49 engineers, technicians and related personnel. These
internal capabilities enable the Company to continually improve existing
products, design new products and develop new technology to meet the needs of
its customers. In the fiscal years ended September 30, 1997, 1998 and 1999, the
Company's research and development expenditures totaled $6.7 million,
$6.7 million and $5.6 million, respectively.
The Company's extensive research and development efforts have produced a
number of leading-edge technological developments in the automated lighting
industry. When appropriate, the Company seeks patent protection for its
products, particularly in its automated lighting business. As of September 30,
1999, the Company had registered and received more than 39 domestic patents and
more than 261 foreign patents in several different countries and territories. In
addition, the Company had more than 15 patent applications pending in the United
States on automated lighting technology and more than 85 patent applications
pending worldwide. The Company's patents cover the basic concepts, control
software, control hardware and features unique to each of the Company's
VARI*LITE-Registered Trademark- luminaire models. The Company believes that its
patents provide it with a substantial competitive advantage in the automated
lighting industry, and the Company's ability to compete in the future will
depend in part on maintaining its technological advantage over its competitors.
The Company has obtained trademark protection in the United States and
numerous foreign countries on various names, including, among others,
VARI*LITE-Registered Trademark-, Artisan-Registered Trademark-, Virtuoso-TM-,
Visionary -TM-, ArtisanVLQ-TM-, Series 100-TM-, Series 200-TM-, Series 300-TM-,
VL1-TM-, VL2C-TM-, VL4-TM-, VL5-TM-, VL5Arc-TM-, VL5B-TM-, VL6-TM-, VL6B-TM-,
VL7-TM-, VL7B-TM-, VL2201-TM-, VL2400-TM-, VLM-TM-, VARI*IMAGE-TM-,
DICHRO*TUNE-TM-, DICHRO*WHEEL-TM-, Showco-TM-, PRISM-Registered Trademark-,
PRISML3-TM- and SHOWCONSOLE-TM-.
MANUFACTURING
The Company's manufacturing facilities are located in Dallas, Texas. The
Company's manufacturing process principally consists of procuring, inspecting
and assembling components custom-made by others to the Company's specifications.
The Company generally provides its suppliers with specifications for its
components and pays for all tooling used in their production. The Company
emphasizes the quality and reliability of its products and, accordingly, submits
all finished products to rigorous testing both at the time they are manufactured
and when they are returned to the Company at the termination of each rental
agreement.
7
The Company has frequently worked in concert with certain of its key
suppliers to design and develop new technologies which have been incorporated
into the Company's products specifically to meet its requirements. As a result,
although most components and raw materials used by the Company are available
from more than one supplier, many important components for the Company's
lighting systems are provided by one vendor and are custom-designed (often
jointly by the Company and its vendors). The Company attempts to maintain
adequate inventories of these components and, based on its experience, does not
anticipate problems obtaining sufficient supplies in the foreseeable future. The
loss of any supplier that is the sole vendor of a component would delay the
Company's manufacturing schedules and possibly force the Company to purchase new
tooling, but the Company believes substitute suppliers can be found for all
components of all of its products.
EQUIPMENT INVENTORY MANAGEMENT
The Company uses an inventory control and management system to locate its
rental equipment at all times anywhere in the world. Each piece of equipment is
serialized for identification purposes. Equipment utilization is centrally
monitored at the Company's headquarters to determine (1) which products are in
highest demand in various geographic markets and whether certain equipment
should be relocated to increase utilization and revenue, (2) whether product
shortages that require the production of additional units exist and (3) whether
current pricing is at the appropriate level.
The maximum utilization rates of the Company's equipment are affected by
production scheduling requirements of the customers' various markets.
Utilization rates are also impacted by the quantity of inventory, maintenance
requirements and shipping time. The Company's inventory control system helps the
Company optimize its utilization rates in light of these factors in order to
satisfy customer requirements and maximize revenue.
COMPETITION
Each of the Company's businesses is highly competitive. In its automated
lighting business, the Company primarily competes with Coemar SPA, Clay Paky
SPA, High End Systems, Inc. ("High End"), Martin Gruppen A/S and Production
Resource Group, PLC. Of these competitors, only Production Resource Group, PLC
rents equipment, while the others sell equipment to other rental companies. The
Company's Vari-Lite Production Services rental operations compete with a number
of conventional lighting rental companies. The Company competes primarily on the
basis of product capabilities, quality, reliability, price, worldwide
distribution, full service capabilities, brand name recognition,reputation,
customer service and support. The VARI*LITE-Registered Trademark- brand name has
been recognized for years as the preeminent brand name for automated lighting.
The Company has several national concert sound competitors, the most
significant of which is Clair Brothers Audio, as well as Maryland Sound
Industries, Inc., Audio Analysts USA, Inc., dB Sound, Inc. and Southern
California Sound Image, Inc. The Company competes in this business principally
on product capabilities, quality, reliability, price, brand name recognition,
reputation and customer service.
The market for design and production management services is highly
competitive and fragmented, including hundreds of free-lance producers and
designers. Competition in this industry is based primarily on personal
relationships and creativity.
EMPLOYEES
As of September 30, 1999, the Company had 451 full-time employees. In
addition, the Company had 222 part-time and temporary employees. None of the
Company's employees is a party to any collective bargaining agreement and the
Company has never experienced a work stoppage. The Company considers its
relations with its employees to be good.
8
ITEM 2. PROPERTIES
The Company leases all of its facilities, including four facilities
comprising approximately 135,700 square feet in Dallas, Texas under leases that
expire in April 2003. The Dallas facilities contain the Company's executive
offices, manufacturing, warehouse, maintenance, research and development
facilities and training center. The executive offices and warehouse space of
Vari-Lite Production Services, Ltd. are located in London, England in one
facility comprising approximately 57,000 square feet and the associated lease
expires in April 2010. The executive offices of Vari-Lite Asia, Inc. ("Vari-Lite
Asia"), as well as its technical center, are located in Tokyo in two leased
facilities aggregating approximately 23,300 square feet, the terms of which
expire in February 2001 and November 2004. In addition, the Company leases sales
offices in Brussels, Amsterdam, Stockholm, Paris, Madrid, Hong Kong, Chicago,
Las Vegas, Los Angeles, Nashville, New York and Orlando. The Company believes it
maintains generally adequate insurance with respect to its properties.
ITEM 3. 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.
In August 1995, the Company brought suit asserting a number of claims of
infringement of several of its patents by High End in the Northern District of
Texas seeking monetary damages and injunctive relief to prevent future patent
infringement (the "High End Lawsuit"). In December, 1998, the court approved a
negotiated settlement between the Company and High End, the specific terms of
which are confidential, but included a cash settlement paid to the Company, a
cross license of certain patents and authorization for High End to continue to
sell all of the products that were subject to the suit.
In December 1998, the Company brought a similar suit against Martin Gruppen
A/S and Martin Professional A/S (collectively, "Martin") in the Eastern District
of Texas. In July 1999, the court entered a preliminary injunction which
prohibits Martin from making, using, leasing or offering for sale or lease in
the United States, or importing into the United States, certain Martin products.
Martin was subsequently denied a stay of execution pending appeal and is
pursuing an appeal to the injunction. The Company will continue with the suit,
which is expected to go to trial in late 2000.
In November 1999, four automated lighting manufacturers, Coemar S.p.A., Clay
Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each filed suit
against the Company in the Southern District of New York. Each of the lawsuits
seeks declaration from the court that one of the Company's patents, the subject
of the High End lawsuit and the litigation with Martin, is invalid,
unenforceable and/or not infringed by each of the lighting manufacturers. The
Company has filed motions to dismiss these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "LITE." The Company consummated its initial public offering of Common
Stock on October 16, 1997. The following table sets forth, on a per share basis
for the periods indicated, the high and low sale prices for the Common Stock as
reported by the Nasdaq National Market:
PRICE RANGE
-------------------
HIGH LOW
-------- --------
Fiscal Year 1998
First Quarter............................................. $13.125 $11.750
Second Quarter............................................ $12.688 $11.375
Third Quarter............................................. $10.000 $ 5.750
Fourth Quarter............................................ $ 6.375 $ 2.000
Fiscal Year 1999
First Quarter............................................. $ 4.750 $ 2.000
Second Quarter............................................ $ 4.250 $ 2.625
Third Quarter............................................. $ 2.813 $ 2.000
Fourth Quarter............................................ $ 2.125 $ 0.875
Fiscal Year 2000
First Quarter............................................. $ 1.688 $ 0.938
Second Quarter (through January 10, 2000)................. $ 1.219 $ 0.938
There were 68 stockholders of record of Common Stock on January 10, 2000.
The Company paid dividends of approximately $0.6 million with respect to the
1997 fiscal year. The Company has not paid, and does not anticipate paying in
the foreseeable future, any other cash dividends and expects that future
earnings will be retained to finance operations and expansion. The payment of
cash dividends in the future will be at the discretion of the Board of Directors
and will depend upon the Company's earnings levels, capital requirements,
financial condition and such other factors the Board of Directors deems
relevant.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the Company as of and
for each of the five fiscal years in the period ended September 30, 1999, have
been derived from the audited consolidated financial statements of the Company.
This data should be read in conjunction with the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this report.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Rental revenues............................................. $ 65,864 $ 65,741 $ 75,529 $ 74,863 $ 83,863
Product sales and service revenues.......................... 9,046 11,397 15,129 13,513 7,669
-------- -------- -------- -------- --------
Total revenues.......................................... 74,910 77,138 90,658 88,376 91,532
Rental costs................................................ 26,288 26,425 29,371 33,764 41,561
Product sales and service costs............................. 6,637 7,783 10,676 9,880 5,389
-------- -------- -------- -------- --------
Gross profit................................................ 41,985 42,930 50,611 44,732 44,582
Selling, general and administrative expense................. 28,163 30,077 32,983 35,077 38,360
Research and development expense............................ 3,283 4,404 6,657 6,690 5,586
Impairment of assets........................................ -- -- -- 3,542 --
Restructuring costs......................................... -- -- -- 1,080 600
-------- -------- -------- -------- --------
Operating income (loss)..................................... 10,539 8,449 10,971 (1,657) 36
Interest expense (net)...................................... 2,788 3,092 3,726 2,818 4,404
-------- -------- -------- -------- --------
Income (loss) before taxes, extraordinary loss and
cumulative effect of change in accounting principle....... 7,751 5,357 7,245 (4,475) (4,368)
Income taxes (benefit)...................................... 3,037 2,238 2,916 (1,785) (1,725)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle.................. 4,714 3,119 4,329 (2,690) (2,643)
Extraordinary loss from early extinguishment of debt........ -- -- -- (737) --
Cumulative effect of change in accounting principle......... -- -- -- (195) --
-------- -------- -------- -------- --------
Net income (loss)........................................... $ 4,714 $ 3,119 $ 4,329 $ (3,622) $ (2,643)
======== ======== ======== ======== ========
Net income (loss) per basic share........................... $ 0.83 $ 0.54 $ 0.75 $ (0.47) $ (0.34)
Net income (loss) per diluted share......................... $ 0.81 $ 0.53 $ 0.74 $ (0.47) $ (0.34)
Cash dividends per share(1)................................. $ 0.10 $ 0.11 $ 0.18 $ -- $ --
Weighted average basic shares outstanding................... 5,699 5,813 5,799 7,712 7,800
Weighted average diluted shares outstanding................. 5,814 5,912 5,819 7,712 7,800
OTHER DATA:
EBITDA(2)................................................... $ 19,161 $ 18,517 $ 22,634 $ 11,921 $ 15,402
Net cash provided by operations............................. 14,513 7,925 15,237 6,474 8,494
Net cash used in investing activities....................... (20,641) (11,826) (23,071) (27,576) (10,040)
Net cash provided (used) by financing activities............ 7,307 2,564 8,346 23.673 (2,181)
Capital expenditures........................................ 20,748 11,981 23,212 25,841 12,914
AS OF SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Total assets................................................ $73,465 $78,581 $96,704 $114,627 $107,700
Total debt.................................................. 34,870 37,349 46,242 50,333 48,050
Stockholders' equity........................................ 21,329 24,538 27,541 44,704 43,235
- ------------------------------
(1) The Company does not anticipate paying any cash dividends on the Common
Stock for the foreseeable future and anticipates that future earnings will
be retained to finance future operations and expansion. See "Market for
Registrant's Common Equity and Related Stockholder Matters."
(2) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principals as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading international designer, manufacturer and
distributor of automated lighting equipment and provider of related services to
the entertainment industry, servicing markets such as concert touring, theatre,
television, film and corporate events. The Company markets its proprietary
VARI*LITE-Registered Trademark- automated lighting equipment and other products
and services through its domestic and international Vari-Lite Production
Services facilities and an independent dealer network. Historically, the Company
has only rented its VARI*LITE-Registered Trademark- products rather than
offering products for sale, however, the Company intends to begin selling
certain VARI*LITE-Registered Trademark- products in fiscal 2000. The Company is
also a leader in providing complementary products and services to the
entertainment industry, including concert sound reinforcement systems,
conventional lighting equipment and design and production management services
for conventions, business meetings and special events.
The Company's revenues are generated from rental and leasing of
VARI*LITE-Registered Trademark- automated lighting systems, concert sound
systems and conventional lighting equipment. Revenues from product sales and
services are derived from design and production management services.
Rental revenues were $75.5 million, $74.9 million and $83.9 million or
83.3%, 84.7% and 91.6% of total revenues during fiscal 1997, 1998 and 1999,
respectively. The majority of the Company's rental revenues are earned from the
rental of VARI*LITE-Registered Trademark- automated lighting systems, with the
remainder from the rental of concert sound systems and conventional lighting
equipment. The Company's rental revenues are recorded as earned over the term of
each contract, except for revenues from sales-type leases which are recorded and
typically paid at the inception of the lease. Sales-type leases are long-term
leases for the Company's VARI*LITE-Registered Trademark- automated lighting
systems and are accounted for as sales for financial accounting purposes.
Revenues from sales-type leases were $8.7 million, $1.2 million and
$4.7 million during fiscal 1997, 1998 and 1999, respectively. Because sales-type
lease revenues are recorded in their entirety at the inception of the lease,
wide variations in revenues and earnings in any given quarter can occur. Rental
costs consist of direct costs of maintaining, supporting and delivering the
rental equipment and the depreciation costs of the rental equipment. The Company
depreciates rental equipment over periods of five to ten years. The direct costs
associated with sales-type leases include the net book value of the equipment
rented which is expensed in its entirety at the inception of the lease.
The Company generates sales revenue from its design and production
management services to corporations and business associations for conventions,
business meetings and special events. Through the first quarter of 1999, the
Company generated sales revenue from its custom stage and stage set design and
construction services and sales of Irideon-Registered Trademark- architectural
automated lighting systems. During fiscal 1998, the Company made a strategic
decision to dispose of the Irideon-Registered Trademark- product line. As a
result of this decision, the assets of Irideon-Registered Trademark- were
written down to their net realizable values, resulting in a pre-tax charge of
$3.5 million for the impairment of these assets in fiscal 1998. On October 30,
1998, the Company sold substantially all of the Irideon-Registered Trademark-
assets for their net book value. During fiscal 1997 and 1998, the Company's
Irideon product line experienced operating losses of $1.3 million and
$1.7 million and operating income of $0.2 million in fiscal 1999. On
December 31, 1998, the Company sold substantially all of the assets of Brilliant
Stages, Ltd., one of the Company's European subsidiaries. Brilliant Stages
incurred operating income of $0.4 million in fiscal 1997, an operating loss of
$0.5 million in fiscal 1998 and break even operating results in fiscal 1999.
12
The following table reflects the percentages of total revenues by market:
YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1998 1999
-------- -------- --------
Concert Touring............................................. 33.8% 35.0% 31.3%
Theatre..................................................... 24.4 18.2 13.1
Television and Film......................................... 14.7 15.5 20.9
Corporate Events............................................ 16.3 23.2 26.9
Other....................................................... 10.8 8.1 7.8
----- ----- -----
Total Revenue............................................. 100.0% 100.0% 100.0%
===== ===== =====
Although the Company expects revenues earned from concert touring (primarily
rental revenues) to continue to represent a significant percentage of the
Company's total revenues, from fiscal 1997 to fiscal 1999 concert touring
revenues have decreased as a percentage of the Company's total revenues due to
an increase in rental revenues generated from the Company's other customer
markets. The Company has experienced fluctuations in its concert touring
revenues because of the unpredictable nature of the timing and duration of such
tours and expects such fluctuations to continue in the future. Revenues earned
from theatre decreased from fiscal 1997 through fiscal 1999 primarily as a
result of a decrease in sales-type leases to this market segment. The Company
anticipates revenue from theatre will continue to fluctuate with the development
of new theatrical productions and the cloning of productions. Revenues earned
from television and film have increased from fiscal 1997 to fiscal 1999 as a
result of the increase in expanding worldwide television market and the need to
meet additional programming requirements. In addition, the Company has
experienced an increase in revenues from the corporate events market as a result
of an increasing number of companies that have exhibited the desire to create
entertainment-like productions.
The following table reflects the Company's geographic region revenues as a
percentage of total revenues (see Note M of the "Notes to Consolidated Financial
Statements"):
1997 1998 1999
-------- -------- --------
North America............................................... 53.5% 54.3% 52.0%
Europe...................................................... 34.7 34.6 35.3
Asia........................................................ 11.8 11.1 12.7
----- ----- -----
Total Revenue............................................. 100.0% 100.0% 100.0%
===== ===== =====
The majority of European and Asian revenues are denominated in British
pounds sterling and Japanese yen, respectively. The Company has offices in
London, Tokyo, Brussels, Paris, Madrid, Stockholm, Amsterdam, and Hong Kong. The
Company anticipates that foreign revenues will remain a significant part of the
Company's total revenues as the demand for entertainment in foreign markets
increases. Fluctuations in foreign currencies have impacted, and will continue
to impact, the Company's consolidated results of operations due to the
translation of foreign currencies into U.S. dollars. The Company has typically
maintained foreign currency borrowings to act as an economic hedge against
fluctuations in British pounds sterling and Japanese yen. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues (or as
percentages of a component of total revenues as shown) represented by certain
consolidated statements of operations and comprehensive income (loss) data and
other data for the indicated periods:
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Income Statement Data:
Rental revenues........................................... 83.3% 84.7% 91.6%
Product sales and service revenues........................ 16.7 15.3 8.4
----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0
Rental costs.............................................. 32.4 38.2 45.4
Product sales and service costs........................... 11.8 11.2 5.9
----- ----- -----
Gross margin.............................................. 55.8 50.6 48.7
Selling, general and administrative expense............... 36.4 39.7 41.9
Research and development expense.......................... 7.3 7.6 6.1
Impairment of assets...................................... -- 4.0 --
Restructuring costs....................................... -- 1.2 0.7
----- ----- -----
Operating income (loss)................................... 12.1 (1.9) --
Interest expense.......................................... 4.1 3.2 4.8
----- ----- -----
Income (loss) before income taxes, extraordinary item and
cumulative effect of change in accounting principle..... 8.0 (5.1) (4.8)
Incomes taxes (benefit)................................... 3.2 (2.0) (1.9)
----- ----- -----
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle................ 4.8 (3.1) (2.9)
Extraordinary loss........................................ -- (0.8) --
Cumulative effect of change in accounting principle....... -- (0.2) --
----- ----- -----
Net income (loss)......................................... 4.8% (4.1)% (2.9)%
===== ===== =====
Other Data:
Rental revenues........................................... 100.0% 100.0% 100.0%
Rental costs.............................................. 38.9 45.1 49.6
----- ----- -----
Rental gross margin....................................... 61.1% 54.9% 50.4%
===== ===== =====
Product sales and service revenues........................ 100.0% 100.0% 100.0%
Product sales and service costs........................... 70.6 73.1 70.3
----- ----- -----
Product sales and service gross margin.................... 29.4% 26.9% 29.7%
===== ===== =====
EBITDA(1)................................................. 25.0% 13.5% 16.8%
- --------------------------
(1) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumlative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principals as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.
14
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
REVENUES. Total revenues increased 3.6%, or $3.1 million, to $91.5 million
in fiscal 1999, compared to $88.4 million in fiscal 1998. The revenue increase
was attributable primarily to the factors set forth below.
Rental revenues increased 12.0%, or $9.0 million, to $83.9 million in fiscal
1999, compared to $74.9 million in fiscal 1998. This increase was primarily due
to the acquisition of several of the Company's European distributors in fiscal
1998. Prior to acquiring each distributor, the Company received and recognized
approximately one-half of the rental revenue earned by the distributor in
accordance with the terms of the distributor agreement. After acquiring each
distributor, the Company's results reflect all of the revenues the distributor
would have earned. In addition, the Company's sales-type lease revenues
increased as a result of the conversion of several North American dealers from a
monthly rental arrangement to a fully paid long term lease program. Rental
revenues from sales-type leases increased $3.5 million, to $4.7 million for
fiscal 1999, compared to $1.2 million for fiscal 1998. Finally, additional
revenue increases resulted from the opening of two new offices in fiscal 1998.
Product sales and services revenues decreased 43.3%, or $5.8 million, to
$7.7 million in fiscal 1999, compared to $13.5 million in fiscal 1998. This
decrease was primarily due to the sale of the Company's
Irideon-Registered Trademark- automated lighting product line in October 1998
and substantially all of the assets of the Company's Brilliant Stages, Ltd.
subsidiary ("Brilliant Stages") in December 1998.
RENTAL COSTS. Rental costs increased 23.1%, or $7.9 million, to
$41.6 million in fiscal 1999, compared to $33.7 million in fiscal 1998. Rental
costs as a percentage of rental revenues increased to 49.6% in fiscal 1999, from
45.1% in fiscal 1998. The increase in rental costs as a percentage of total
rental revenues was primarily due to increased costs associated with the higher
level of conventional equipment rentals which has a higher cost associated with
it than automated equipment, pricing pressures from competitors and the
inclusion of all of the costs of the operations of the European distributors
that were acquired in fiscal 1998. Prior to acquiring each distributor, the
Company's rental costs associated with distributor rental revenues were almost
exclusively the depreciation on the equipment assigned to the distributor. After
acquiring the distributor, the Company's results reflect all of the additional
rental costs incurred from operating the business previously operated by the
distributor.
PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
decreased 45.5%, or $4.5 million, to $5.4 million in fiscal 1999, compared to
$9.9 million in fiscal 1998. Product sales and services costs as a percentage of
product sales and services revenues decreased to 70.3% in fiscal 1999, from
73.1% in fiscal 1998. The decrease in product sales and services costs as a
percentage of the related revenues was primarily the result of the sale of the
Company's Irideon-Registered Trademark- automated lighting product line in
October 1998 and the sale of Brilliant Stages in December 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 9.4%, or $3.3 million, to $38.4 million in
fiscal 1999, compared to $35.1 million in fiscal 1998. This increase resulted
primarily from the additional administrative costs associated with the
acquisition of certain of the Company's European distributors in fiscal 1998.
This expense as a percentage of total revenues increased to 41.9% in fiscal 1999
from 39.7% in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased 16.5%, or $1.1 million, to $5.6 million in fiscal 1999, compared to
$6.7 million in fiscal 1998. This expense as a percentage of total revenues
decreased to 6.1% in fiscal 1999, from 7.6% in fiscal 1998. This decrease was
primarily the result of a decrease in employee-related costs as a result of
employee terminations from the restructuring of the Company in fiscal 1998.
15
IMPAIRMENT OF ASSETS. During 1998, the Company made a strategic decision to
dispose of its Irideon-Registered Trademark- architectural automated product
line, and the asset sale was completed in October 1998. As a result of this
decision, the Irideon-Registered Trademark- assets were written down to their
net realizable value, resulting in a pre-tax charge of $3.5 million during the
period ended September 30, 1998.
RESTRUCTURING COSTS. In 1999, the Company recorded a $0.6 million pretax
charge for the estimated costs of restructuring the Company's operations. The
charge includes severance payments and other costs associated with the
termination of approximately 15 employees. The charge also includes cost
associated with terminating leases and the write off of the net book value of
leasehold improvements associated with the closing of two offices. In 1998, the
Company recorded a pretax charge of $1.1 million for the estimated costs of
restructuring the Company's operations. The costs included the cost of employee
terminations and were comprised primarily of severance payments and other
employee related costs associated with terminating the employment of
approximately 75 people.
INTEREST EXPENSE. Interest expense increased 56.3%, or $1.6 million, to
$4.4 million in fiscal 1999, compared to $2.8 million in fiscal 1998. This
increase was due to higher interest rates and a higher debt level in fiscal
1999, as well as the write-off of loan origination fees of $0.3 million which
were previously capitalized.
EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was
recorded in fiscal 1998, net of $0.4 million of tax benefit, relating to the
early extinguishment of debt under the Company's old credit facility.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In fiscal 1998, the
Company recorded a cumulative effect of change in accounting principle loss of
$0.2 million, net of $0.1 million of tax benefit, relating to start-up costs
that had previously been capitalized.
INCOME TAXES. Effective tax rates in fiscal 1999 and 1998 were 39.5% and
39.9%, respectively.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1997
REVENUES. Total revenues decreased 2.5%, or $2.2 million, to $88.4 million
in fiscal 1998, compared to $90.6 million in fiscal 1997. The revenue decrease
was attributable primarily to the factors set forth below.
Rental revenues decreased 0.9%, or $0.6 million, to $74.9 million in fiscal
1998, compared to $75.5 million in fiscal 1997. This decrease was primarily due
to a lower volume of sales-type leases and a decrease in revenues in Asia due to
the economic situation in that region, partially offset by a strong performance
in North America and increased sales due to the acquisition of the Company's
Brussels-based distributor. Rental revenues from sales-type leases decreased
86.7%, or $7.5 million, to $1.2 million for fiscal 1998 compared to
$8.7 million for fiscal 1997.
Product sales and services revenues decreased 10.7%, or $1.6 million, to
$13.5 million in fiscal 1998, compared to $15.1 million in fiscal 1997. This
decrease was primarily due to lower revenues from the design and construction of
custom stages and stage sets which was partially offset by an increase in
revenues from the design and production management services.
RENTAL COSTS. Rental costs increased 15.0%, or $4.4 million, to
$33.7 million in fiscal 1998, compared to $29.3 million in fiscal 1997. Rental
costs as a percentage of rental revenues increased to 45.1% in fiscal 1998, from
38.9% in fiscal 1997. The increase in rental costs as a percentage of total
rental revenues was primarily due to the reduction in rental revenues from
sales-type leases for which the associated costs as a percentage of related
revenues is typically less than the costs as a percentage of revenue from
sources other than sales-type leases. In addition, to a lesser extent, pricing
pressures from competitors in fiscal 1998 created an environment in which
increased costs associated with renting more equipment were incurred without a
corresponding increase in revenue.
16
PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
decreased 7.5%, or $0.8 million, to $9.9 million in fiscal 1998, compared to
$10.7 million in fiscal 1997. Product sales and services costs as a percentage
of product sales and services revenues increased to 73.1% in fiscal 1998, from
70.6% in fiscal 1997. The increase in product sales and services costs as a
percentage of the related revenues was primarily the result of higher costs
associated with the sales of the Company's Irideon-Registered Trademark-
automated lighting products due to increased warranty expense associated with a
defect in the initial delivery of a new product and higher than anticipated
costs to design and construct custom stages and stage sets for customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 6.4%, or $2.1 million, to $35.1 million in
fiscal 1998, compared to $33.0 million in fiscal 1997. This increase resulted
primarily from the addition of the Company's Brussels-based distributor
companies, which was acquired in March 1998, and was partially offset by lower
professional services, payroll and related costs and other discretionary
expenses in the first half of the fiscal year. This expense as a percentage of
total revenues increased to 39.7% in fiscal 1998 from 36.4% in fiscal 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were
$6.7 million in fiscal 1998 and 1997.
IMPAIRMENT OF ASSETS. During fiscal 1998, the Company made a strategic
decision to dispose of its Irideon-Registered Trademark- architectural automated
product line, and the asset sale was completed in October 1998. As a result of
this decision, the Irideon-Registered Trademark- assets were written down to
their net realizable value, resulting in a pre-tax charge of $3.5 million during
the period ended September 30, 1998.
RESTRUCTURING COSTS. In fiscal 1998, the Company recorded a pretax charge
of $1.1 million for the estimated costs of restructuring the Company's
operations. The costs include the cost of employee terminations and were
comprised primarily of severance payments and other employee related costs
associated with terminating the employment of approximately 75 people.
INTEREST EXPENSE. Interest expense decreased 24.4%, or $0.9 million, to
$2.8 million in fiscal 1998, compared to $3.7 million in fiscal 1997. This
decrease was attributable to the reduction in indebtedness from the use of the
proceeds from the Company's initial public offering in October 1997 to repay
$21.3 million of indebtedness and the subsequent negotiation of a new credit
facility in December 1997 with lower interest rates.
EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was
recorded in fiscal 1998, net of $0.4 million of tax benefit, relating to the
early extinguishment of debt under the Company's old credit facility.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In fiscal 1998, the
Company recorded a cumulative effect of change in accounting principle loss of
$0.2 million, net of $0.1 million of tax benefit, relating to start-up costs
that had previously been capitalized.
INCOME TAXES. Effective tax rates in fiscal 1998 and 1997 were 39.9% and
40.2%, respectively.
17
QUARTERLY FLUCTUATIONS AND SEASONALITY
The following table sets forth certain quarterly income statement data and
EBITDA for each of the Company's last three fiscal years, which were derived
from unaudited financial statements of the Company. In the opinion of the
Company's management, this income statement data contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation thereof.
QUARTERS ENDED
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 FISCAL YEAR
----------- -------- -------- ------------ -----------
(IN THOUSANDS)
FISCAL 1997
Total Revenues.......................... $22,326 $22,384 $22,185 $23,763 $90,658
EBITDA.................................. 5,215 5,083 5,989 6,347 22,634
Operating income........................ 2,424 2,265 2,954 3,328 10,971
FISCAL 1998
Total Revenues.......................... $22,519 $19,227 $22,529 $24,101 $88,376
EBITDA.................................. 6,033 3,134 4,099 (1,345) 11,921
Operating income (loss)................. 2,808 (128) 662 (4,999) (1,657)
FISCAL 1999
Total Revenues.......................... $25,248 $23,170 $20,066 $23,048 $91,532
EBITDA.................................. 5,326 4,370 3,035 2,671 15,402
Operating income (loss)................. 1,454 302 (699) (1,021) 36
- ------------------------
EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus depreciation,
amortization and net interest expense. The Company believes that EBITDA serves
as an important financial analysis tool for measuring and comparing financial
information such as liquidity, operating performance and leverage. EBITDA should
not be considered an alternative to net income or other cash flow measures
determined under generally accepted accounting principles as an indicator of the
Company's performance or liquidity. EBITDA as disclosed herein may not be
comparable to EBITDA as disclosed by other companies.
The Company has experienced and is expected to continue to experience
fluctuations in quarterly operating results, both between different quarters
within the same fiscal year and with respect to the same quarter between
different fiscal years. These fluctuations arise from several factors, including
the timing and dollar value of sales-type leases with customers, the dependence
of the Company on concert tours, which are unpredictable in timing and duration,
the introduction of new products and general economic conditions both
domestically and internationally. Because of the possibilities of significant
fluctuations, results for any quarter may not be indicative of results that may
be achieved in a full year. EBITDA and operating loss for the quarter ended
September 30, 1998, include charges totaling $4.6 million for the write-down of
impaired Irideon-Registered Trademark- assets to their net realizable value and
employee termination costs associated with restructuring the Company's
operations. EBITDA and operating loss for the quarter ended September 30, 1999,
include charges totaling $0.6 million for employee termination costs associated
with restructuring the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations and capital
expenditures with cash flow from operations, bank borrowings and advances from
distributors and customers. The Company's operating activities generated cash
flow of approximately $15.2 million, $6.5 million and $8.5 million during fiscal
1997, 1998 and 1999, respectively.
During fiscal 1997, the Company borrowed under a multicurrency credit
agreement (the "Old Credit Agreement") to partially finance its operations and
capital expenditures. On October 21, 1997, the Company consummated the initial
public offering of its common stock and used the net proceeds thereof,
18
approximately $21.3 million, to repay indebtedness under the Old Credit
Agreement. On December 19, 1997, the Company entered into a $50.0 million
multicurrency revolving credit facility (the "New Credit Facility") and canceled
its existing credit facility. At September 30, 1999, the commitment under the
amended New Credit Facility was $47.3 million; which decreases to $46.5 million
on March 31, 2000 and $38.0 million on April 30, 2000, and the loan matures on
January 1, 2001. Borrowings under the amended New Credit Facility were
$44.5 million at September 30, 1999 and bear interest at the lender's base rate
plus a rate margin ranging from 1.00% to 3.50% based upon the Company's ratio of
Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility) and are
secured by substantially all of the assets owned by the Company's domestic
subsidiaries and a pledge of 65% of the outstanding capital stock of the
Company's foreign subsidiaries. A commitment fee is charged on the average daily
unused portion of the New Credit Facility at a rate ranging from 0.20% to 0.50%
per annum based upon the ratio of Adjusted Funded Debt to EBITDA. The amended
New Credit Facility contains compliance covenants, including requirements that
the Company achieve certain financial ratios. In addition, the amended 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. In December 1997,
the Company expensed deferred financing costs related to the prior debt facility
of $0.7 million (net of tax benefit of $0.4 million) relating to the early
extinguishment of debt, which have been reflected in the consolidated statements
of income as an extraordinary loss.
As of September 30, 1999, the Company has a principal payment of
approximately $6.5 million due in April 2000. The Company has used proceeds of
approximately $3.3 million from asset sales and equipment financings to reduce
this obligation subsequent to September 30, 1999. The Company expects that it
will be able to meet its remaining obligation on April 30, 2000 through the use
of funds from operations, the deferral of certain planned capital expenditures,
debt financings and refinancings or asset dispositions. In the event that the
Company does not meet its obligation on April 30, 2000, the lenders will be
entitled to pursue all rights available under the New Credit Facility.
Subsequent to September 30, 1999, the Company was in violation of two
technical covenants of its New Credit Facility. On January 11, 2000, the Company
signed an amendment to its New Credit Facility that waived the violations and
modified the covenants. Management believes they can meet these covenants in the
future.
The Company has typically hedged a portion of its currency fluctuation risk
by borrowing in French francs, British pounds sterling and Japanese yen under
its New Credit Facility. Cash generated from the Company's France, England and
Japan offices is typically denominated in French francs, British pounds sterling
and Japanese yen, respectively, and is used to pay expenses incurred in those
currencies and service any foreign currency borrowings. The amendment to the New
Credit Facility, on January 11, 2000, eliminated the Company's ability to borrow
foreign currencies under the New Credit Facility. In the future, the Company may
use other financial instruments to hedge its foreign currency fluctuation risk.
Prior to fiscal 1999, the Company had funded the costs to manufacture
automated lighting equipment to be rented to certain distributors with advances
made by the distributors under the terms of the Company's distributorship
agreements. The distributors typically advanced to the Company an amount equal
to the cost to manufacture the equipment, and entered into agreements whereby
the distributors had the exclusive right to sublease the lighting equipment
within defined territories. Borrowings by the Company under these agreements,
which are secured by liens against the applicable equipment, are repaid by the
Company through future rentals due from the distributors under the terms of
their distributorship agreements and bear interest at various rates ranging up
to 7% annually. Proceeds received under these distributorship agreements were
approximately $1.2 million and $0.7 million for fiscal 1997 and 1998,
respectively, and outstanding borrowings from distributors at September 30,
1997, 1998 and 1999 were approximately $2.3 million, $1.2 million and
$0.3 million, respectively. All amounts advanced by distributors are accounted
for by the Company as short-term debt. See "Business--Marketing, Sales and
Distribution."
19
The Company has borrowed money to purchase computer equipment and office
furniture and fixtures and conventional lighting equipment. These loans
typically amortize over three years and bear interest at various rates ranging
from 2.0% to 8.71%. Proceeds received under this type of financing were
approximately $1.1 million, $2.0 million and $1.4 million for fiscal 1997, 1998
and 1999, respectively, and borrowings outstanding under this type of financing
at September 30, 1997, 1998 and 1999 were approximately $2.6 million,
$3.2 million and $2.6 million, respectively. In November 1999, the Company
borrowed an additional $1.8 under a three-year amortizing loan.
The Company has also used customer advances to fund short-term working
capital and immediate capital expenditure needs for specific contracts. As of
September 30, 1997, 1998 and 1999, the Company had unearned revenue related to
customer advances of approximately $3.0 million, $1.7 million and $2.6 million,
respectively.
Dividends paid to stockholders totaled approximately $0.6 million with
respect to fiscal 1997. The Company did not pay dividends in fiscal 1998 and
1999 and does not anticipate paying any additional cash dividends for the
foreseeable future. See "Market for Registrant's Common Equity and Related
Stockholder Matters."
Historically, the Company's business has required significant capital
expenditures. Capital expenditures for fiscal 1997, 1998 and 1999 were
approximately $23.2 million, $25.8 million and $12.9 million, respectively, of
which approximately $19.2 million, $22.6 million and $11.2 million were for
rental equipment inventories. The majority of the Company's revenues are
generated through the rental of automated lighting and concert sound systems
and, as such, the Company must maintain a significant amount of rental equipment
to meet customer demands. Total rental equipment inventories increased from
approximately $61.6 million at the beginning of fiscal 1995 to $134.1 million at
September 30, 1999. This increase primarily consisted of automated lighting
equipment, including new products, additional inventory of existing products and
the replacement of equipment leased under sales-type leases. The amended New
Credit Facility limits the Company's capital expenditures in fiscal 2000 to
$4.0 million, which will be used primarily to purchase rental equipment.
Inventory included in current assets consists primarily of spare parts
inventory for the Company's VARI*LITE-Registered Trademark- automated lighting
equipment and, until the sale of the Irideon-Registered Trademark- product line
in October 1998, raw materials and finished goods for
Irideon-Registered Trademark- products. Raw materials represented 86%, 87% and
89% of total inventory at September 30, 1997, 1998 and 1999, respectively.
The Company had a working capital deficit of approximately $0.8 million at
September 30, 1997. The Company had a working capital surplus of $6.2 million at
September 30, 1998 and a working capital deficit of approximately $0.2 million
at September 30, 1999. The Company has historically maintained working capital
deficits since the bulk of its revenue generating assets are classified as
long-term assets rather than current assets. The working capital surplus in 1998
was primarily the result of terminating the Old Credit Agreement, which included
borrowings classified as current at September 30, 1997, with proceeds from the
New Credit Facility.
Management believes that cash flow generated from operations and borrowing
capacity under the New Credit Facility will not be sufficient to meet the
scheduled commitment reductions under the New Credit Facility, the anticipated
operating cash needs and capital expenditures for the next twelve months.
Additionally, the New Credit Facility has a maturity date of January 1, 2001 at
which time the entire amounts outstanding under the facility will become due.
The Company is currently in discussions with several banks regarding the
refinancing of the New Credit Facility. The Company's management believes that
they will obtain adequate cash from operations, cost reductions, deferral of
capital expenditures, asset sales, other financing sources and either proceeds
from a new credit agreement or an amendment to the New Credit Facility to meet
the Company's needs for the next twelve months and for the maturity of the New
Credit Facility. Because the Company's future operating results will depend on a
number of factors, including the demand for the Company's products and services,
the success of the Company to market, sale
20
and support products sold, the level of competition, the success of the
Company's research and development programs, the ability to achieve competitive
and technological advances and 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.
INFLATION
The Company has generally been able to offset cost increases with increases
in the rental rates and sales prices charged for its products and services.
Accordingly, the Company does not believe that inflation has had a material
effect on its results of operations to date. However, there can be no assurance
that the Company's business will not be adversely affected by inflation in the
future.
IMPACT OF THE YEAR 2000 ISSUE
The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
was approached and reached. These problems generally arise from the fact that
most of the world's computer hardware and software have historically used only
two digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000's" from dates in the "1900's". These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that make use of the date field.
In 1995 and 1996, the Company invested approximately $2.2 million
constructing a wide-area network throughout the United States and implementing
Oracle financial and manufacturing applications. In October 1998, the Company
developed an extensive Year 2000 readiness plan. This was a comprehensive
project to review and modify, as necessary, its computer applications, hardware
and other equipment to make them Year-2000 compliant. The project was organized
into three principal areas: hardware/software on desktop systems,
hardware/software on embedded systems and hardware/software on enterprise
systems. Each of these areas involved inventory, assessment, remediation,
testing and implementation. The Company completed all business-critical systems
remediation, testing and implementation by September of 1999. In addition, the
Company obtained compliance statements from all major vendors, customers and
manufactures of all computer-related equipment and devices.
As a result of the successful implementation and deployment of the Company's
Year 2000 readiness plan, the Company has experienced no downtime or loss of any
information as a result of the year 2000 change over. The Company is committed
to continuous monitoring of all systems, applications and operating systems.
Updates for applications and operating systems will be obtained as they become
necessary and available. All new systems and software will be added only after
compliance has been verified.
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; ability to introduce new products; the success of the Company to
market, sale and support products sold; technological changes; reliance on
intellectual property; dependence on entertainment industry; competition;
dependence on management; foreign exchange risk; international trade risk;
dependence on key suppliers and dependence on manufacturing facility; and the
year 2000 issue. Should one or more of these risks or uncertainties
21
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk primarily due to fluctuations in
interest rates and foreign currency.
As of September 30, 1999, with all other variables held constant, a
hypothetical one percentage point increase in interest rates would result in an
increase in interest expense of approximately $0.5 million.
The Company has typically hedged a portion of its currency fluctuation risk
by borrowing in French francs, British pounds sterling and Japanese yen under
its New Credit Facility. Cash generated from the Company's France, England and
Japan offices is typically denominated in French francs, British pounds sterling
and Japanese yen, respectively, and is used to pay expenses incurred in those
currencies and service any foreign currency borrowings. The amendment to the New
Credit Facility, on January 11, 2000, eliminated the Company's ability to borrow
foreign currencies under the New Credit Facility. In the future, the Company may
use other financial instruments to hedge its foreign currency fluctuation risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
which are required by this Item 8 are listed in Part IV, Item 14(a) of this
report. Such consolidated financial statements are included herein beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
22
PART III
Certain information required by Part III is omitted from this Report on the
basis that the registrant will file a definitive proxy statement pursuant to
Regulation 14A for its annual meeting of shareholders to be held on March 10,
2000 (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee and Omnibus Committee on Executive Compensation or the Stock
Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this item is incorporated by reference to the sections entitled
"Election of Directors" and "Management--Executive Officers" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Outstanding Capital Stock" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Transactions with Directors, Officers and Affiliates" in the
Proxy Statement.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements
The Financial Statements listed below are filed as part of this Annual
Report on Form 10-K.
(b) Financial Statement Schedule
SCHEDULE DESCRIPTION PAGE
- -------- ----------- --------
II Valuation and Qualifying Accounts........................... S-1
The auditors' report with respect to the above-listed financial statement
schedule appears on page F-2 of this report. All other financial statements and
schedules not listed are omitted either because they are not applicable or not
required, or the required information is included in the consolidated financial
statements.
(c) Reports on Form 8-K
A Form 8-K was filed on September 27, 1999 reporting on the adoption by the
Company of a Rights Plan.
(d) Exhibits
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
3.1 -- Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 No. 333-33559)
3.2 -- By-Laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 No.
333-33559)
*3.3 -- Certificate of Designation of Rights, Preferences and
Privileges of Series A Junior Participating Preferred Stock,
dated September 22, 1999
4.1 -- Form of certificate representing shares of the Company's
Common Stock (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1 No.
333-33559)
4.2 -- Warrant Agreement, dated as of July 31, 1996, among the
Company, Brown Brothers Harriman & Co., NBD Bank, SunTrust
Bank, Atlanta (formerly known as Trust Company Bank) and
Comerica BankTexas (incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-1 No.
333-33559)
*4.3 -- Supplement, dated as of August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Chase Bank of Texas, N.A.
*4.4 -- Amendment No. 1 dated as of August 31, 1999 to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Brown Brothers Harriman & Co.
*4.5 -- Amendment No. 1 dated August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Suntrust Bank, Atlanta
*4.6 -- Amendment No. 1 dated August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and Comerica Bank-Texas
*4.7 -- Amendment No. 1 dated August 31, 1999, to the Warrant
Agreement, dated as of July 31, 1996, between the Company
and The First National Bank of Chicago (as successor to NBD
Bank)
24
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
*4.8 -- Supplement, dated August 31, 1999, to the Warrant Agreement,
dated as of July 31, 1996, between the Company, Brown
Brothers Harriman & Co., the First National Bank of Chicago
as successor to NBD Bank, Suntrust Bank, Comerica
Bank-Texas, and Chase Bank of Texas, N.A. (CBT)
10.1 -- Employment Agreement, dated as of July 1, 1995, between the
Company and H.R. Brutsche III (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.2 -- Amendment No. 1, dated as of August 11, 1997, to the
Employment Agreement, dated as of July 1, 1995, between the
Company and H.R. Brutsche III (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.3 -- Consulting Agreement, dated as of July 1, 1995, between the
Company and J. Anthony Smith (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.4 -- Consulting Agreement, dated as of July 1, 1995, between the
Company and John D. Maxson (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.5 -- Amendment No. 1, dated as of August 11, 1997, to the
Consulting Agreement, dated as of July 1, 1995, between the
Company and John D. Maxson (incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.6 -- Consulting Agreement, dated as of July 1, 1995, between the
Company and James H. Clark, Jr. (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and H. R. Brutsche III (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and John D. Maxson (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and James H. Clark, Jr. (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995,
between the Company and J. Anthony Smith (incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.11 -- Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
H. R. Brutsche III (incorporated by reference to Exhibit
10.11 to the Company's Registration Statement on Form S-1
No. 333-33559)
10.12 -- Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
John D. Maxson (incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form S-1 No.
333-33559)
10.13 -- Compensation Continuation Agreement, dated as of March 31,
1994, among the Company, Vari-Lite, Inc., Showco, Inc. and
James H. Clark, Jr. (incorporated by reference to Exhibit
10.13 to the Company's Registration Statement on Form S-1
No. 333-33559)
25
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
10.14 -- Statement and Terms of Employment, dated as of April 1,
1994, between Vari-Lite Europe Ltd. and Brian L. Croft
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among
the Company, Brown Brothers Harriman Trust Company of Texas,
trustee of the H.R. Brutsche III Insurance Trust, and H.R.
Brutsche III (incorporated by reference to Exhibit 10.15 to
the Company's Registration Statement on Form S-1 No.
333-33559)
10.16 -- Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1995, among the Company, Brown Brothers Harriman
Trust Company of Texas, trustee of the H.R. Brutsche III
Insurance Trust, and H. R. Brutsche III (incorporated by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1 No. 333- 33559)
10.17 -- Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1997, among the Company, Brown Brothers Harriman
Trust Company of Texas, trustee of the John D. Maxson 1995
Irrevocable Trust, and John D. Maxson (incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 No. 333- 33559)
10.18 -- Split-Dollar Life Insurance Agreement, dated as of October
12, 1995, among the Company, James Howard Cullum Clark and
James H. Clark, Jr. (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1
No. 333-33559)
10.19 -- Amended and Restated Split-Dollar Agreement, dated as of
October 12, 1995, between the Company, James Howard Cullum
Clark and James H. Clark, Jr. (incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan (including
forms of Incentive Stock Option Agreement and Nonqualified
Stock Option Agreement) (incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.21 -- Vari-Lite International, Inc. Employees' Stock Ownership
Plan (incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.22 -- Vari-Lite International, Inc. Employees' Stock Equivalence
Plan (incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.23 -- Vari-Lite International, Inc. Annual Incentive Plan (as
amended and restated) (incorporated by reference to Exhibit
10.23 to the Company's Registration Statement on Form S-1
No. 333-33559)
10.24 -- Employment Agreement, dated as of August 28, 1995, by and
between the Company and James E. Kinnu (incorporated by
reference to Exhibit 10.34 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.25 -- Severance Agreement, dated as of September 30, 1996, by and
between the Company and James E. Kinnu (incorporated by
reference to Exhibit 10.35 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.26 -- Ground Lease, dated as of December 21, 1995, among Brazos
Beltline Development, Inc. and Vari-Lite, Inc., Showco,
Inc., IGNITION! Creative Services, Inc., Concert Production
Lighting, Inc. and Irideon, Inc. (incorporated by reference
to Exhibit 10.36 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.27 -- Guaranty, dated as of December 21, 1995, by the Company
(incorporated by reference to Exhibit 10.37 to the Company's
Registration Statement on Form S-1 No. 333-33559)
26
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
10.28 -- Form of Indemnification Agreement with Directors and
Officers (incorporated by reference to Exhibit 10.38 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.29 -- Agreement and Plan of Merger, dated as of August 27, 1997,
between the Company and Vari-Lite Texas (incorporated by
reference to Exhibit 10.39 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.30 -- International Swap Dealers Association, Inc. Master
Agreement, dated as of November 23, 1993, between the
Company and Brown Brothers, Harriman & Co. (along with
confirmation of Interest Rate Swap Transaction)
(incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-1 No. 333- 33559)
10.31 -- International Swap Dealers Association, Inc. Master
Agreement, dated as of September 13, 1996, between
Vari-Lite, Inc. and SunTrust Bank, Atlanta (along with
confirmations of Interest Rate Transactions) (incorporated
by reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.32 -- Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the other banks thereunder (incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1997)
10.33 -- Amendment No.1, dated April 24, 1998 to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the other
banks thereunder (incorporated by reference 10.33 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998)
10.34 -- Amendment No. 2, dated July 31, 1998 to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the other
banks thereunder (incorporated by reference to Exhibit 10.34
to the Company's Quarterly Report for the quarterly period
ended June 30, 1998)
10.35 -- Amendment No. 3, dated December 15, 1998 to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the other banks thereunder (incorporated by reference to
Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998)
10.36 -- Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and H.R. Brutsche' III (incorporated by
reference to Exhibit 10.36 to the Company's Quarterly Report
for the quarterly period ended December 31, 1998)
10.37 -- Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and John D. Maxson (incorporated by reference to
Exhibit 10.37 to the Company's Quarterly Report for the
quarterly period ended December 31, 1998)
10.38 -- Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and James H. Clark, Jr. (incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report
for the quarterly period ended December 31, 1998)
10.39 -- Amendment No. 1, effective November 2, 1998, to the Deferred
Compensation Agreement, dated as of July 1, 1995, between
the Company and J. Anthony Smith (incorporated by reference
to Exhibit 10.39 to the Company's Quarterly Report for the
quarterly period ended December 31, 1998)
27
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
10.40 -- Amendment No. 1, effective January 1, 1998, to the Vari-Lite
International, Inc. Employees' Stock Ownership Plan dated
September 27, 1995 (incorporated by reference to Exhibit
10.40 to the Company's Quarterly Report for the quarterly
period ended March 31, 1999)
10.41 -- Amendment No. 1, effective January 1, 1998, to the Vari-Lite
International, Inc. Employees' Stock Ownership Trust dated
September 27, 1995 (incorporated by reference to Exhibit
10.41 to the Company's Quarterly Report for the quarterly
period ended March 31, 1999)
10.42 -- Amendment No. 4, dated April 1, 1999 to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the banks
thereunder (incorporated by reference to Exhibit 10.42 to
the Company's Quarterly Report for the quarterly period
ended March 31, 1999)
10.43 -- Temporary Waiver Agreement, dated August 12, 1999 to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and SunTrust Bank, Atlanta, as agent
for the banks thereunder (incorporated by reference to
Exhibit 10.43 to the Company's Quarterly Report for the
quarterly period ended June 30, 1999)
10.44 -- Rights Agreement, dated as of September 27, 1999, by and
between the Company and Chase Mellon shareholder services,
L.L.C. (incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K filed September 22, 1999)
*10.45 -- Amendment No. 5, dated August 25, 1999, to the Multicurrency
Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the banks
thereunder
*10.46 -- Amendment No. 6, dated January 11, 2000, to the
Multicurrency Credit Agreement, dated as of December 19,
1997, among the Company and Sun Trust Bank, Atlanta, as
agent for the banks thereunder.
21.1 -- List of Company's Subsidiaries (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998)
*23.1 -- Consent of Deloitte & Touche, LLP
*27.1 -- Financial Data Schedule
- ------------------------
* Filed herewith.
28
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas
and State of Texas on the 13th day of January, 2000.
VARI-LITE INTERNATIONAL, INC.
By: /s/ H.R. BRUTSCHE' III
-----------------------------------------
H.R. Brutsche' III
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the 13th day of January, 2000.
/s/ H.R. BRUTSCHE' III
------------------------------------------- Chariman of the Board and Chief Executive
H.R. Brutsche' III Officer (Principal Executive Officer)
/s/ JEROME L. TROJAN III Vice President--Finance, Chief Financial
------------------------------------------- Officer, Treasurer and Secretary (Principal
Jerome L. Trojan III Financial and Accounting Officer)
/s/ JAMES H. CLARK, JR.
------------------------------------------- Director
James H. Clark, Jr.
/s/ JOHN D. MAXSON
------------------------------------------- Director
John D. Maxson
/s/ C. VINCENT PROTHRO
------------------------------------------- Director
C. Vincent Prothro
/s/ JOHN R. RETTBERG
------------------------------------------- Director
John R. Rettberg
/s/ J. ANTHONY SMITH
------------------------------------------- Director
J. Anthony Smith
29
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of September 30, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Years Ended September 30, 1997,
1998, and 1999............................................ F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1997, 1998 and 1999............. F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1998 and 1999......................... F-6
Notes to Consolidated Financial Statements.................. F-7
The following financial statement supplementary schedule of the Registrant
and its subsidiaries required to be included in Item 14 (a) (b) is listed below:
Schedule II--Valuation and Qualifying Accounts.............. S-1
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Vari-Lite International, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Vari-Lite
International, Inc. and subsidiaries (herein referred to as "the Company") as of
September 30, 1998 and 1999, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity and of cash
flows for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed in the index at
Item 14 (a)(b). These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
September 30, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
December 14, 1999
(January 11, 2000 as to the fifth paragraph of Note E)
F-2
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
1998 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 3,838 $ 1,969
Receivables, less allowance for doubtful accounts of $900
and $720................................................ 13,471 13,056
Inventory................................................. 6,075 6,586
Prepaid expense and other current assets.................. 1,749 1,715
-------- --------
TOTAL CURRENT ASSETS.................................... 25,133 23,326
EQUIPMENT AND OTHER PROPERTY:
Lighting and sound equipment.............................. 127,763 135,220
Machinery and tools....................................... 5,097 6,044
Furniture and fixtures.................................... 4,439 5,009
Office and computer equipment............................. 10,399 11,060
Work in progress and raw materials inventory.............. 5,320 3,040
-------- --------
153,018 160,373
Less accumulated depreciation and amortization.......... 71,745 83,323
-------- --------
81,273 77,050
OTHER ASSETS................................................ 8,221 7,324
-------- --------
TOTAL ASSETS............................................ $114,627 $107,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 13,189 $ 11,855
Unearned revenue.......................................... 1,694 2,606
Income taxes payable...................................... 999 440
Current portion of long-term obligations.................. 3,049 8,591
-------- --------
TOTAL CURRENT LIABILITIES............................... 18,931 23,492
LONG-TERM OBLIGATIONS....................................... 47,284 39,459
DEFERRED INCOME TAXES....................................... 3,708 1,514
-------- --------
TOTAL LIABILITIES....................................... 69,923 64,465
COMMITMENTS AND CONTINGENCIES (Note F)...................... -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par value (10,000,000 shares
authorized; no shares outstanding)...................... -- --
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................................ 24,426 25,026
Stockholder notes receivable.............................. (82) (30)
Stock purchase warrants................................... 600 --
Accumulated other comprehensive income (loss)--foreign
currency translation adjustment......................... (230) 892
Retained earnings......................................... 19,391 16,748
-------- --------
TOTAL STOCKHOLDERS' EQUITY.............................. 44,704 43,235
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $114,627 $107,700
======== ========
See notes to consolidated financial statements.
F-3
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1998 1999
---------- ---------- ----------
Rental revenues............................................. $ 75,529 $ 74,863 $ 83,863
Product sales and services revenues......................... 15,129 13,513 7,669
---------- ---------- ----------
TOTAL REVENUES............................................ 90,658 88,376 91,532
Rental cost................................................. 29,371 33,764 41,561
Product sales and services cost............................. 10,676 9,880 5,389
---------- ---------- ----------
TOTAL COST OF SALES....................................... 40,047 43,644 46,950
---------- ---------- ----------
GROSS PROFIT................................................ 50,611 44,732 44,582
Selling, general and administrative expense................. 32,983 35,077 38,360
Research and development expense............................ 6,657 6,690 5,586
Impairment of assets........................................ -- 3,542 --
Restructuring costs......................................... -- 1,080 600
---------- ---------- ----------
TOTAL OPERATING EXPENSES.................................. 39,640 46,389 44,546
---------- ---------- ----------
OPERATING INCOME (LOSS)..................................... 10,971 (1,657) 36
Interest expense (net)...................................... 3,726 2,818 4,404
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....... 7,245 (4,475) (4,368)
Income taxes (benefit)...................................... 2,916 (1,785) (1,725)
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. 4,329 (2,690) (2,643)
Extraordinary loss from early extinguishment of debt........ -- (737) --
Cumulative effect of change in accounting principle......... -- (195) --
---------- ---------- ----------
NET INCOME (LOSS)........................................... 4,329 (3,622) (2,643)
Other comprehensive income (loss)--foreign currency
translation adjustment.................................... (544) (591) 1,122
---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS)................................. $ 3,785 $ (4,213) $ (1,521)
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 5,799,328 7,712,332 7,800,003
Dilutive effect of stock warrants........................... 19,473 -- --
---------- ---------- ----------
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING................. 5,818,801 7,712,332 7,800,003
========== ========== ==========
PER SHARE INFORMATION
BASIC:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle................ $ 0.75 $ (0.35) $ (0.34)
Extraordinary loss........................................ $ -- $ (0.10) $ --
Cumulative effect of change in accounting principle....... $ -- $ (0.02) $ --
---------- ---------- ----------
Net income (loss)......................................... $ 0.75 $ (0.47) $ (0.34)
========== ========== ==========
DILUTED:
Income (loss) before extraordinary loss and cumulative
effect of change in accounting principle................ $ 0.74 $ (0.35) $ (0.34)
Extraordinary loss........................................ $ -- $ (0.10) $ --
Cumulative effect of change in accounting principle....... $ -- $ (0.02) $ --
---------- ---------- ----------
Net income (loss)......................................... $ 0.74 $ (0.47) $ (0.34)
========== ========== ==========
Dividends declared........................................ $ 0.18 $ 0.00 $ 0.00
========== ========== ==========
See notes to consolidated financial statements.
F-4
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL STOCKHOLDER
------------------- -------------------- ------------------- PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
-------- -------- --------- -------- -------- -------- ---------- -----------
BALANCE, OCTOBER 1, 1996.......... -- $-- 5,830,202 $583 (7,527) $ (28) $ 3,096 $(353)
Dividends declared................
Purchase of treasury stock........ (37,637) (158)
Payments on stockholder notes
receivable...................... 177
Issuance of stock to the ESOP and
ESEP............................ 14,965 2 248
Other comprehensive loss--foreign
currency translation
adjustment......................
Net income........................
--- --- --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 1997....... -- -- 5,845,167 585 (45,164) (186) 3,344 (176)
Initial public offering........... 2,000,000 200 21,082
Payments on stockholder notes
receivable...................... 94
Other comprehensive loss--foreign
currency translation
adjustment......................
Net loss..........................
--- --- --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 1998....... -- -- 7,845,167 785 (45,164) (186) 24,426 (82)
Payments on stockholder notes
receivable...................... 52
Repricing of stock warrants....... 600
Other comprehensive
income--foreign currency
translation adjustment..........
Net loss..........................
--- --- --------- ---- ------- ----- ------- -----
BALANCE, SEPTEMBER 30, 1999....... -- $-- 7,845,167 $785 (45,164) $(186) $25,026 $ (30)
=== === ========= ==== ======= ===== ======= =====
ACCUMULATED
STOCK OTHER
PURCHASE COMPREHENSIVE RETAINED
WARRANTS INCOME EARNINGS TOTAL
-------- ------------- -------- --------
BALANCE, OCTOBER 1, 1996.......... $ 600 $ 905 $19,735 $24,538
Dividends declared................ (1,051) (1,051)
Purchase of treasury stock........ (158)
Payments on stockholder notes
receivable...................... 177
Issuance of stock to the ESOP and
ESEP............................ 250
Other comprehensive loss--foreign
currency translation
adjustment...................... (544) (544)
Net income........................ 4,329 4,329
----- ------ ------- -------
BALANCE, SEPTEMBER 30, 1997....... 600 361 23,013 27,541
Initial public offering........... 21,282
Payments on stockholder notes
receivable...................... 94
Other comprehensive loss--foreign
currency translation
adjustment...................... (591) (591)
Net loss.......................... (3,622) (3,622)
----- ------ ------- -------
BALANCE, SEPTEMBER 30, 1998....... 600 (230) 19,391 44,704
Payments on stockholder notes
receivable...................... 52
Repricing of stock warrants....... (600) --
Other comprehensive
income--foreign currency
translation adjustment.......... 1,122 1,122
Net loss.......................... (2,643) (2,643)
----- ------ ------- -------
BALANCE, SEPTEMBER 30, 1999....... $ -- $ 892 $16,748 $43,235
===== ====== ======= =======
See notes to consolidated financial statements.
F-5
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS)
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 4,329 $ (3,622) $ (2,643)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 11,459 13,515 15,230
Amortization of note discount and deferred loan fees.... 346 83 136
Provision for doubtful accounts......................... 134 641 140
Extraordinary loss from early extinguishment of debt.... -- 737 --
Cumulative effect of change in accounting principle..... -- 195 --
Impairment of assets.................................... -- 3,542 --
Deferred income taxes................................... 1,470 (2,735) (2,194)
Gain on sale of equipment and other property............ (171) (18) (159)
Provisions for ESOP and ESEP contributions.............. 250 250 250
Gain on sale of Brilliant Stages, loss on sale of Dubai
and cancellation of land lease......................... -- -- (462)
Net change in assets and liabilities:
Accounts receivable................................... (2,500) 1,758 268
Inventory............................................. (1,655) (3,561) (2,545)
Prepaid expenses...................................... (1,720) 746 12
Other assets.......................................... (1,462) (3,085) 1,668
Accounts payable, accrued liabilities and income taxes
payable.............................................. 3,960 (568) (2,119)
Unearned revenue...................................... 797 (1,404) 912
-------- -------- --------
Net cash provided by operating activities............... 15,237 6,474 8,494
Cash flows from investing activities:
Capital expenditures, including rental equipment.......... (23,212) (25,841) (12,914)
Acquisition of European companies, net of cash acquired... -- (1,833) (1,192)
Proceeds from sale of Irideon, Brilliant Stages and Dubai
assets and cancellation of land lease................... -- -- 3,666
Proceeds from sale of equipment........................... 141 98 400
-------- -------- --------
Net cash used in investing activities................... (23,071) (27,576) (10,040)
Cash flows from financing activities:
Proceeds from issuance of debt............................ 21,997 79,760 33,178
Principal payments on debt................................ (12,189) (76,418) (34,765)
Proceeds from issuance of distributor advances............ 1,237 690 --
Principal payments on distributor advances................ (1,667) (1,735) (646)
Proceeds from payments on stockholder notes receivable.... 177 94 52
Proceeds from public offering of common stock............. -- 21,282 --
Purchase of treasury stock................................ (158) -- --
Dividends paid............................................ (1,051) -- --
-------- -------- --------
Net cash provided (used) by financing activities........ 8,346 23,673 (2,181)
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,283) (595) 1,858
-------- -------- --------
Net increase (decrease) during the year..................... (771) 1,976 (1,869)
Cash, beginning of year..................................... 2,633 1,862 3,838
-------- -------- --------
Cash, end of year........................................... $ 1,862 $ 3,838 $ 1,969
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense............................ $ 4,102 $ 2,732 $ 3,958
Cash paid for income taxes................................ $ 1,787 $ 1,313 $ 821
Non-cash transactions:
Warrants issued......................................... $ -- $ -- $ --
Warrants retired........................................ $ -- $ -- $ (600)
See notes to consolidated financial statements.
F-6
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE A--ORGANIZATION:
The Company is a leading international designer, manufacturer and
distributor of automated lighting equipment and provider of related services to
the entertainment industry, servicing markets such as concert touring, theatre,
television, film and corporate events. The Company markets its proprietary
VARI*LITE automated lighting equipment and other products and services through
its domestic and international Vari-Lite Production Services facilities and an
independent dealer network.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements of Vari-Lite International, Inc.
include the accounts of its wholly-owned subsidiaries which consist of operating
and holding companies. The operating companies consist of Vari-Lite, Inc.,
Showco, Inc., IR Sub, Inc. (formerly Irideon, Inc.), IGNITION! Creative
Group, Inc., BS Sub, Ltd. (formerly Brilliant Stages, Ltd.), Vari-Lite
Asia, Inc., Vari-Lite Production Services Hong Kong Limited, Vari-Lite
Production Services, Ltd., Vari-Lite Production Services, SL, Vari-Lite
Production Services, NV, Vari-Lite Production Services, AB, and Vari-Lite
Production Services, SAS. The wholly-owned holding companies include Vari-Lite
Europe Holdings Limited, Vari-Lite International Europe, B.V. and Vari-Lite
Production Services Europe, NV. During 1998, the Company acquired two of its
distributors for a total purchase price of approximately $3,160 which created
approximately $1,000 of goodwill. In October 1998, the Company acquired the
VARI*LITE-Registered Trademark- distribution rights and related assets of its
French distributor for approximately $1,200, virtually all of which was recorded
as goodwill. On October 30, 1998, the Company sold substantially all of the
assets of its Irideon architectural automated lighting product line for its net
book value, after writedown, of approximately $2,000, (see Note I). On
December 31, 1998, the Company sold substantially all of the assets of Brilliant
Stages, Ltd., one of the Company's European subsidiaries. On September 23, 1999,
the Company sold substantially all of the assets of its Dubai operation. All
material intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual results could differ from these estimates.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement cost and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
EQUIPMENT AND OTHER PROPERTY
Equipment and other property are stated at cost or, in the case of
capitalized leases, at the lower of the present value of future lease payments
or the fair value of the equipment. Depreciation and
F-7
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
amortization are provided on the straight-line method over the estimated useful
lives ranging from three to ten years of the various classes of equipment and
other property.
LONG-LIVED ASSETS
As required by Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be
Disposed Of," the Company assesses potential impairments to its long-lived
assets when there is evidence that events or changes in circumstances have made
recovery of the assets' carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset.
OTHER ASSETS
The Company capitalizes and includes in other assets deferred financing
costs and the costs of acquiring patents and trademarks on its products.
Deferred financing costs are amortized over the term of the related debt.
Amortization on patents and trademarks is computed on the straight-line basis
over the lives of the patents or trademarks or the period of expected benefit.
In addition, the Company capitalizes legal costs associated with the pursuit of
third parties for infringement of certain of the Company's patents, copyrights
and trademarks when the Company is successful, or management believes it will be
successful, and that these costs will be recovered pursuant to SFAS No. 121.
These costs are amortized over the lives of the applicable patents, copyrights
and trademarks.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
identifiable tangible and intangible net assets of businesses acquired. Goodwill
is amortized on a straight-line basis over periods not exceeding 25 years. The
recoverability of carrying values of intangible assets is evaluated on a
recurring basis. The primary indicators are current and forecasted profitability
of the related acquired business.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," the asset
and liability accounts of the Company's non-U.S. subsidiaries are translated
into U.S. dollars using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at exchange rates which approximate the
average rates prevailing during the year. The cumulative translation gains and
losses are a component of comprehensive income and included in stockholders'
equity.
REVENUE RECOGNITION
Revenues related to equipment rental and services are recognized as earned
over the terms of the contracts. Revenues from long-term leases classified as
sales-type leases are recognized upon delivery and installation of the
equipment. Revenues related to the sale of products are recognized upon shipment
of the equipment.
F-8
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT
Costs incurred in connection with the development of new products are
considered research and development costs and are charged to operations as
incurred.
DERIVATIVE INSTRUMENTS
The Company had entered into an interest rate swap agreement to reduce the
risks associated with variable interest rates. The interest rate swap agreement
corresponded to a portion of the outstanding principal balance of the Company's
line of credit. The Company recorded the amount paid or received pursuant to the
swap agreement as an adjustment to interest expense, and the related payable or
receivable to or from the counterparty as a liability or asset, respectively.
The termination of the interest swap prior to the scheduled maturity resulted in
a charge to expense for the amount of unamortized costs and payments required
under the agreement. The Company terminated the interest rate swap agreement in
August 1999 for $300 in cash from the counterparty. As a result, the Company
recorded a gain for the amount of cash received. The gain is included in
selling, general and administrative expenses in the accompanying income
statement.
The fair value of the interest rate swap agreement, which was carried at
zero value at September 30, 1998 was a liability to the Company of approximately
$940.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments at September 30, 1998
and 1999, the Company has used available market information and other valuation
methodologies. Some judgment is necessarily required in interpreting market data
to develop the estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
The carrying amounts of cash, receivables, payables and long term
obligations approximated fair value as of September 30, 1998 and 1999.
EQUITY-BASED COMPENSATION
SFAS No. 123 establishes a method of accounting whereby recognized option
pricing models are used to estimate the fair value of equity based compensation,
including options. The Company has elected, as provided by SFAS No. 123, not to
recognize compensation expense for employee equity based compensation as
calculated under SFAS No. 123, but will recognize any related expense in
accordance with the provisions of APB Opinion No. 25. Disclosure of amounts
required by SFAS 123 are included in Note G.
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes," and files a consolidated federal income tax
return. Deferred tax assets and liabilities are recorded based on the difference
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Provision is
made for deferred taxes relating to temporary differences in the recognition of
income and expense for financial reporting and for income tax purposes.
F-9
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER SHARE
Net income per share is calculated by dividing net income by the weighted
average shares outstanding for the applicable period. Common stock equivalents,
including warrants and options, are included, to the extent considered dilutive,
using the treasury stock method and are assumed to be outstanding for the full
period in the period of issuance. Options to purchase 556,000 and 736,100 shares
of Common Stock at prices ranging from $1.125 to $13.20 were outstanding at
September 30, 1998 and 1999, respectively, but were not included in the
computation of diluted EPS because exercise prices of the options were greater
than the average market price of the common shares. Warrants to purchase 242,233
and 296,057 shares of Common Stock at a price of $12.00 and $3.75 were
outstanding at September 30, 1998 and 1999, respectively, but were not included
in the computation of diluted EPS as they were antidilutive.
ACCOUNTING STANDARDS CHANGES
In 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that such costs be expensed as incurred. The
Company's practice had been to record the costs of bringing significant new
operations into operation as deferred charges and to amortize them over periods
of not more than five years. The Company early adopted the SOP effective
October 1, 1997, with a 1998 first quarter pre-tax charge of $282 ($195 after
taxes, or $0.02 per basic and diluted share) as a cumulative effect of this
accounting change.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. This standard, which establishes new accounting and
reporting standards for derivative financial instruments, must be adopted no
later than 2001. The Company is currently analyzing the effect of this standard
and does not expect it to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
SEGMENT REPORTING
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information", was issued, effective for fiscal years beginning after
December 15, 1997. This Statement requires that public business enterprises
report financial and descriptive information about their reportable operating
segments. The Company operates in geographic segments located in North America,
Europe and the Pacific Rim. The Company markets its products and services to the
entertainment industry, including concert touring, theatre, television and film
and corporate events markets. Depending on the circumstances, the Company
solicits business from lighting and set designers and consultants, sound
engineers, artist managers, producers, production managers and production
companies, promoters, corporations and business associations. No customer has
accounted for more than 10% of the Company's revenues for at least the last
three fiscal years. The Company does not rely on any major customer for a
significant amount of its operations. See Note M for segment information.
F-10
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE C--INVENTORY:
Inventory consists of the following:
1998 1999
-------- --------
Raw materials............................................... $5,283 $5,854
Work in progress............................................ 616 587
Finished goods.............................................. 176 145
------ ------
$6,075 $6,586
====== ======
NOTE D--OTHER ASSETS:
Other assets consist of the following:
1998 1999
-------- --------
Patents and trademarks...................................... $5,686 $3,170
Goodwill.................................................... 1,299 2,482
Deferred financing costs.................................... 426 900
Other, including sales-type lease receivables............... 1,144 1,555
------ ------
8,555 8,107
Less accumulated amortization............................... (334) (783)
------ ------
$8,221 $7,324
====== ======
Included in the amount of patents and trademarks are the amounts capitalized
by the Company relating to patent infringement suits in which the Company is the
plaintiff (See Note F).
F-11
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE E--LONG-TERM OBLIGATIONS:
Long-term obligations expressed in U.S. dollars consist of the following:
1998 1999
-------- --------
Revolving lines of credit:
U.S. dollars............................................ $34,000 $33,360
British pounds sterling................................. 8,500 7,330
Japanese yen............................................ 981 2,587
French franc............................................ 1,340 1,222
------- -------
Total revolving lines of credit....................... 44,821 44,499
Advances from distributors................................ 1,228 279
Obligations under capital leases with interest at 2.3% to
3.5%, maturities through 2003........................... 1,171 647
Term loans with interest at 7.5% to 8.7%.................. 3,113 2,625
------- -------
50,333 48,050
Less current portion...................................... (3,049) (8,591)
------- -------
$47,284 $39,459
======= =======
Based on the outstanding amounts under the $50,000 multicurrency revolving
credit facility (the "New Credit Facility") as of September 30, 1998 and 1999,
the weighted average interest rates were 7.80% and 8.42%, respectively.
On December 19, 1997, the Company entered into the New Credit Facility and
canceled its existing credit facility. As of September 30, 1999, the commitment
under the New Credit Facility, as amended on August 25, 1999, was $49,000. At
September 30, 1999, the commitment under the New Credit Facility was $47,300.
The commitment under the New Credit Facility decreases to $46,500 on March 31,
2000, $38,000 on April 30, 2000 and the loan matures on January 1, 2001.
As of September 30, 1999, the Company has a principal payment of
approximately $6,500 due in April 2000. The Company has used proceeds of
approximately $3,300 from asset sales and equipment financings to reduce this
obligation subsequent to September 30, 1999. The Company expects that it will be
able to meet its remaining obligation on April 30, 2000 through the use of funds
from operations, the deferral of certain planned capital expenditures, debt
financings and refinancings or asset dispositions. In the event that the Company
does not meet its obligation on April 30, 2000, the lenders will be entitled to
pursue all rights available under the New Credit Facility.
Subsequent to September 30, 1999, the Company was in violation of two
technical covenants for its New Credit Facility. On January 11, 2000, the
Company signed an amendment to its New Credit Facility that waived the
violations and modified the covenants and eliminated the Company's ability to
borrow foreign currencies and establish LIBOR borrowings under the facility.
Borrowings under the amended New Credit Facility were $44,499 at
September 30, 1999 and bear interest at the lender's base rate plus a rate
margin ranging from 1.00% to 3.50% (8.42% as of September 30, 1999) based upon
the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in
F-12
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED)
the New Credit Facility) and are secured by substantially all of the assets
owned by the Company's domestic subsidiaries and a pledge of 65% of the
outstanding capital stock of the Company's foreign subsidiaries. A commitment
fee is charged on the average daily unused portion of the New Credit Facility at
a rate ranging from 0.20% to 0.50% per annum based upon the ratio of Adjusted
Funded Debt to EBITDA. The amended New Credit Facility contains compliance
covenants, including requirements that the Company achieve certain financial
ratios. In addition, the amended 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.
At September 30, 1998, the Company had interest rate swap agreements with
two of its primary lenders relating to a notional principal amount of $24,200,
which effectively changed the Company's variable LIBOR interest rate exposure on
a substantial portion of its U.S. dollar borrowings to a fixed weighted average
interest rate of 7.79%. The interest rate swap agreements matured in 1999
($4,200) and 2003 ($20,000). In August 1999, the Company terminated the interest
rate swap agreements for $300 in cash which was recorded as a gain and is
included in selling, general and administrative expenses in the accompanying
financial statement.
In December 1997, the Company expensed deferred financing costs related to
the prior debt facility of $737 (net of tax benefit of $481) relating to the
early extinguishment of debt, which have been reflected in the consolidated
statements of income as an extraordinary loss for the year ended September 30,
1998. In 1999, the Company wrote off a portion of the deferred financing costs
related to the New Credit Facility as a result of the modification in terms. The
write-off of $271 is included in the interest expense in the accompanying
financial statements.
In connection with certain distributor agreements, the Company has received
advances to provide the necessary funds for construction of the leased lighting
systems (see Note H). The remaining balances outstanding under such borrowings
at September 30, 1998 and 1999, were $1,228 and $279, respectively. Equipment
with a net book value of approximately $3,900 at September 30, 1999 ($6,600 at
September 30, 1998) has been pledged to the distributors as collateral for such
loans. The interest rate on all of the notes ranged from 3% to 7% for the years
ended September 30, 1998 and 1999. Substantially all the advances are
nonrecourse and are repaid from the Company's portion of the rental revenue
earned on the associated leases.
Maturities of long-term obligations, including capital lease obligations,
are approximately as follows:
1998 1999
-------- --------
Year one.................................................. $ 3,049 $ 8,591
Year two.................................................. 4,488 39,090
Year three................................................ 6,610 357
Year four................................................. 6,186 12
Year five................................................. 30,000 --
------- -------
$50,333 $48,050
======= =======
F-13
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE F--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. Additionally, the Company has filed lawsuits claiming
infringements of its patents by third parties for which the Company has been
subject to counterclaims.
In August 1995, the Company brought suit asserting a number of claims of
infringement of several of its patents by High End Systems, Inc. seeking
monetary damages and injunctive relief to prevent future patent infringement
(the "High End Lawsuit"). In December, 1998, the court approved a negotiated
settlement between the Company and High End, the specific terms of which are
confidential, but included a cash settlement paid to the Company, a cross
license of certain patents and authorization for High End to continue to sell
all of the products that were subject to the suit.
In December 1998, the Company brought a similar suit against Martin Gruppen
A/S and Martin Professional A/S (collectively"Martin"). In July 1999, the court
entered a preliminary injunction which prohibits Martin from making, using,
leasing or offering for sale or lease in the United States, or importing into
the United States, certain Martin products, Martin was subsequently denied a
stay of execution pending appeal and is pursuing an appeal to the injunction.
The Company will continue with the suit, which is expected to go to trial in
late 2000.
In November 1999, four automated lighting manufacturers, Coemar S.p.A., Clay
Paky S.p.A., SGM Elettronica, s.r.l. and Studio Due s.r.l., each filed suit
against the Company. Each of the lawsuits seeks declaration from the court that
one of the Company's patents, the subject of the High End lawsuit and the
litigation with Martin, is invalid, unenforceable and/or not infringed by each
of the lighting manufacturers. The Company has filed motions to dismiss these
lawsuits.
NOTE G--STOCKHOLDERS' EQUITY:
On October 15, 1997, in conjunction with the Company's reincorporation in
Delaware and an initial public offering, the Board of Directors of the Company
created a new class of common stock and authorized 40,000,000 shares. As a
result of the reincorporation, stockholders received 3.76368 shares of common
stock for each share of the Company's Class A common stock and Class B common
stock held by the stockholders. Share amounts and the weighted average shares
outstanding for all periods presented give effect to the recapitalization of the
common stock. In addition, the Company authorized 10,000,000 shares of preferred
stock which the Company's Board of Directors may issue for such consideration
and on such terms as it deems desirable, including voting and conversion rights
that could adversely affect the holders of common stock.
The Company filed a Registration Statement (Commission file no. 333-33559)
for the public offering of 2,000,000 shares of common stock with the Securities
and Exchange Commission, which became effective October 16, 1997. The shares
were sold for $12.00 per share for an aggregate amount of $24,000. All of the
shares sold were offered by the Company. The net offering proceeds to the
Company of $21,282 were used to repay indebtedness under the Company's Credit
Facility.
On September 27, 1999, the Board of Directors approved the adoption of a
Stockholders Rights Plan (the "Rights Plan"). The Rights Plan is designed to
provide protection against coercive or unfair takeover
F-14
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
tactics. Under the Rights Plan, the Company made a dividend distribution of one
preferred stock purchase right for each share of common stock held of record as
of September 27, 1999. Each right entitles the holder to buy one-one thousandth
of a share of the Company's Series A Junior Participating Preferred Stock at an
initial exercise price of $8.50. The Rights will be exercisable only if a person
or group acquires beneficial ownership of 15% or more of the Company's common
stock or announces a tender offer which would result in such a person or group
beneficially owning 15% or more of the Company's common stock. At that time,
each Right not owned by such person or group will entitle its holder to
purchase, at the Rights then current exercise price, shares of the Company's
common stock having a value of twice the Right's exercise price. The Rights are
redeemable by the Company and expire on September 26, 2009.
The Company adopted a fixed option plan during fiscal 1998 which reserves
shares of common stock for issuance to executives, key employees and directors.
No compensation cost has been recognized for the stock options which were issued
at or above fair value at the date of grant in fiscal 1998 and 1999. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in fiscal 1998 and 1999 consistent
with the provisions in SFAS no. 123, the Company's net loss and loss per share
would have been as follows:
1998 1999
-------- --------
Net loss.................................................. $(3,911) $(3,200)
Basic and diluted net loss per share...................... $ (0.51) $ (0.41)
The weighted-average fair value of the individual options granted during
fiscal 1998 and 1999 is estimated at $4.44 and $1.52, respectively, on the date
of grant. The fair values were determined using a Black-Scholes option pricing
model with the following assumptions for 1998 and 1999:
Dividend yield.............................................. 0
Volatility.................................................. 30%
Risk-free interest rate..................................... 6%
Expected life............................................... 5 yrs.
Under the plan, the total number of stock options that may be granted is
800,000. The price of the options granted pursuant to the plan will be equal to
the fair market value of the common stock on the
F-15
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
date of grant. The options vest over a two month to five year period and expire
after ten years from the date of grant.
1998 1999
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE
-------- --------- -------- ---------
Outstanding--Beginning of year........................... -- $ -- 556 $ 12.00
Granted.................................................. 576 12.00 651 3.07
Exercised................................................ -- -- -- --
Forfeited................................................ (20) 12.00 (74) (7.91)
Canceled or expired...................................... -- -- (397) (11.87)
--- ------ ---- -------
Outstanding--End of year................................. 556 12.00 736 4.58
=== ====
Exercisable--End of year................................. 8 13.20 33 12.61
=== ====
At September 30, 1999, exercise prices, number of options outstanding and
remaining contractual life are as follows:
OUTSTANDING EXERCISABLE
---------------------------------------- --------------------
WEIGHTED-
WEIGHTED- REMAINING AVERAGE
NUMBER AVERAGE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICE (000) EXERCISE PRICE LIFE (YEARS) (000) PRICE
- -------------- -------- -------------- ------------ -------- ---------
$1.125..................................... 170 $1.125 9.9 -- --
$3.75...................................... 444 $ 3.75 8.25 -- --
$12.00..................................... 80 $12.00 8.04 16 $12.00
$13.20..................................... 42 $13.20 3.04 17 $13.20
On November 28, 1998, the Company cancelled options to acquired 12,000
shares of Common Stock at $7.875, 6,000 shares of Common Stock at $11.875 and
378,700 shares of Common Stock at $12.00. The Company simultaneously issued
options to acquire 396,700 shares of Common Stock at $3.75 per share which was
above the fair market value on the date of grant
In July 1996, in connection with an amendment to the Company's Credit
Facility, the Company issued warrants to purchase up to 242,233 shares of Common
Stock at an exercise price based on the Company's earnings as defined in the
warrant agreement ($11.53 per share). These warrants were valued at $600 and
recorded in stockholders' equity. The terms of the warrants also provide for
registration rights and adjustments to the price and number of shares in certain
circumstances. In August 1999, as part of an amendment to the Company's Credit
Facility, the Company issued additional warrants to purchase 53,824 shares of
Common Stock at $3.75 per share, which was above the fair market value on the
date of issuance. Accordingly, these warrants were assigned no value. The
amendment also repriced the warrants to purchase 242,233 shares from a price of
$11.53 per share to $3.75 per share. In connection with the repricing, the value
of the warrants were written off to additional paid in capital. The warrants
expire on December 31, 2004 and as of September 30, 1999, no warrants had been
exercised.
F-16
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE H--LEASES:
AS LESSOR
As lessor, the Company has agreements whereby it has leased certain lighting
equipment to various distributors. These agreements are accounted for as
operating leases. Under the terms of these agreements, these distributors have
the exclusive right for a specified time period to market the lighting equipment
by subrental within defined territories. The distributors' lease payments to the
Company are based on a pre-determined percentage of the gross rental revenue
received by the distributors from their subrental of the lighting equipment and
amounted to approximately $4,197, $2,693 and $1,253 for the years ended
September 30, 1997, 1998, and 1999, respectively. The lighting equipment under
these leasing arrangements had a net book value of approximately $8,231, $6,594
and $3,850 at September 30, 1997, 1998 and 1999, respectively.
The Company is also the lessor under sales-type leases. Leases classified as
sales-type leases generally stipulate that all lease payments be made within
30 days of the commencement of the lease term; however, the Company has also
entered into certain sales-type leases that allow for periodic payment
throughout the term of the lease. The Company recorded revenues of $8,699,
$1,154 and $4,665 and cost of products and services of $1,955, $369 and $1,674
for the years ended September 30, 1997, 1998 and 1999, respectively, related to
sales-type leases.
Equipment under leases which do not qualify as sales-type leases, including
distributor leases and dealer leases, are accounted for as operating leases.
Under dealer leases, dealers receive exclusive rights to subrent the Company's
lighting equipment in certain geographic areas. The Company provides the
lighting equipment to the dealers, who pay a monthly rental fee to the Company.
Future minimum lease payments receivable on non-cancelable operating leases
at September 30, 1999, are as follows:
OPERATING
---------
Year one.................................................... $ 366
Year two.................................................... 168
Year three.................................................. 27
------
Total minimum lease payments................................ $ 561
======
AS LESSEE
The Company leases certain computers and equipment. The following is a
summary of assets held under capital leases:
1998 1999
-------- --------
Computers and equipment under capital leases.............. $ 4,455 $ 4,070
Less accumulated depreciation............................. (3,090) (3,263)
------- -------
Property under capital leases, net........................ $ 1,365 $ 807
======= =======
F-17
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE H--LEASES: (CONTINUED)
The Company also leases manufacturing facilities and office space. The
future minimum lease payments as of September 30, 1999, including those which
relate to capital leases and are included in long-term obligations, are as
follows:
CAPITAL OPERATING
-------- ---------
Year one................................................... $ 376 $1,366
Year two................................................... 190 1,245
Year three................................................. 118 1,140
Year four.................................................. -- 964
Year five.................................................. -- 601
Thereafter................................................. -- 1,573
----- ------
Total minimum lease payments............................... 684 $6,889
======
Less amount representing interest.......................... (37)
-----
Present value of net minimum lease payments................ 647
Less current portion....................................... (351)
-----
Long-term lease obligations................................ $ 296
=====
Rental expense for the years ended September 30, 1997, 1998 and 1999 was
$2,616, $2,809 and $3,100, respectively.
In December 1995, the Company entered into a lease with an unaffiliated
developer for land. Rent expense under this lease was $388, $388 and $99 for the
years ended September 30, 1997, 1998 and 1999. In December, 1998, the lease was
canceled as a result of the sale of the land by the lessor, resulting in a gain
to the Company of approximately $500 which is included in selling, general and
administrative expense in the accompanying financial statements.
NOTE I--IMPAIRMENT OF ASSETS:
During fiscal 1998, the Company made a strategic decision to dispose of its
Irideon-Registered Trademark- architectural automated lighting product line. As
a result of this decision, the Irideon-Registered Trademark- assets were written
down to their net realizable value in accordance with SFAS No. 121. This
resulted in a pre-tax charge of $3,542 (or $2,179 after taxes, $0.28 per basic
and diluted share). On October 30, 1998, the Company sold substantially all of
the Irideon-Registered Trademark- assets for their net book value.
NOTE J--RESTRUCTURING COSTS:
In the fourth quarter of fiscal 1999, the Company recorded a pretax charge
of $600 (or $369 after tax benefit, $0.05 per basic and diluted share) for the
estimated costs of restructuring Company's operations. The charge includes
severance payments and other costs associated with the terminations of
approximately 15 employees. The charge also includes the cost associated with
terminating leases and the write off of the net book value of leasehold
improvements associated with the closing of two offices. Communication of the
employee terminations and office closings occurred prior to September 30, 1999
and severance
F-18
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE J--RESTRUCTURING COSTS: (CONTINUED)
payments are expected to be completed by the end of 2000. In the fourth quarter
of fiscal 1998, the Company recorded a pretax charge of $1,080 (or $664 after
tax benefit, $0.09 per basic and diluted share) for the estimated costs of
restructuring the Company's operations. The costs were comprised primarily of
severance payments and other employee related costs associated with terminating
the employment of approximately 75 people.
The following represents a rollforward of the restructuring accrual which is
included in accounts payable and accrued expenses in the accompanying financial
statements:
Balance at September 30, 1998............................... $1,080
Severance payments to employees............................. (977)
Legal fees.................................................. (54)
Other....................................................... (9)
Restructuring accrual recorded.............................. 600
------
Balance at September 30, 1999............................... $ 640
======
NOTE K--INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
1997 1998 1999
-------- -------- --------
Current:
U.S. Federal.............................................. $ -- $ -- $ --
State..................................................... 38 33 8
International............................................. 1,408 917 461
Deferred:
U.S. Federal.............................................. 927 (2,244) (1,608)
State..................................................... 367 (264) (262)
International............................................. 176 (807) (324)
------ ------- -------
Provision (benefit) for income taxes........................ 2,916 (2,365) (1,725)
Less: Deferred income taxes related to extraordinary
losses................................................ -- (452) --
Deferred income taxes related to cumulative effect of
change in accounting principle........................ -- (128) --
------ ------- -------
Provision (benefit) excluding income taxes related to
extraordinary losses and cumulative effect of change in
accounting principle...................................... $2,916 $(1,785) $(1,725)
====== ======= =======
F-19
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE K--INCOME TAXES: (CONTINUED)
A reconciliation of income taxes computed at the U.S. Federal statutory tax
rate to the provision for income tax is as follows:
1997 1998 1999
-------- -------- --------
Income tax expense at U.S. Federal statutory rate........... $2,463 $(2,036) $(1,485)
International taxes......................................... 287 (167) (126)
State taxes................................................. 267 (240) (131)
Foreign and general business tax credits.................... -- -- --
Other--primarily permanent differences...................... (101) 78 17
------ ------- -------
$2,916 $(2,365) $(1,725)
====== ======= =======
Deferred income taxes reflect the net tax effects of deductible temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company's net deferred income taxes, consist
of the following:
1998 1999
-------- --------
Deferred tax asset
Foreign tax credit carryover.............................. $ 2,615 $ 2,615
Net operating loss carryover.............................. 2,406 6,890
Alternative minimum tax credit carryover.................. 507 507
Reserve for loss on sale of Irideon....................... 1,345 --
Restructuring reserve..................................... 352 --
Other tax asset items..................................... 1,861 1,849
Deferred tax liability
Depreciation.............................................. (10,549) (12,270)
Other tax liability items................................. (1,701) (561)
-------- --------
Total....................................................... (3,164) (970)
Less: Valuation allowance................................... (544) (544)
-------- --------
Net deferred income taxes................................... $ (3,708) $ (1,514)
======== ========
For tax purposes, the Company has approximately $2,615 of foreign tax
credits that expire in 2000 through 2002 and a net operating loss carryover of
$19,686 that will expire in 2011 through 2019. In addition, approximately $507
of alternative minimum tax credits (which do not expire) are available to offset
future regular tax liability. The benefit of this tax credit carryforward has
been recognized for financial statement purposes as part of deferred taxes. In
fiscal 1998 and 1999, there was a valuation allowance of $544 related to foreign
tax credits.
International income taxes relate to the Company's operations in England,
Japan, Belgium, Sweden, Spain, France and Hong Kong, as well as to withholding
taxes on revenue generated by the Company's foreign distributors.
F-20
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE L--EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution 401(k) plan in which substantially
all its U.S. employees can elect to be participants. Under the terms of the
401(k) plan, employees can defer up to 20% of their earnings up to the permitted
maximum as defined by IRS regulations. The Company matches 50% of the employee's
contribution up to 5% of the employee's earnings during the plan year. During
the years ended September 30, 1997, 1998 and 1999, the Company's cost to match
employee contributions was approximately $257, $274 and $310, respectively.
Substantially all employees of the Company's London-based operations may
elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a
defined contribution plan under which employees may contribute up to 3% of their
base salaries. The Company makes contributions at a rate of 200% of the employee
contributions, with additional contributions made for certain key employees. The
Company incurred costs of $203, $231 and $208, representing matching
contributions for the years ended September 30, 1997, 1998 and 1999,
respectively.
The Company adopted an employee stock ownership plan ("ESOP"), effective
January 1, 1995, in which its U.S. employees are eligible to participate after
completing one year of service, attaining age twenty-one and being a participant
making elective deferrals in the Company's 401(k) Plan. Each year the Company
may make discretionary contributions of stock to the ESOP as determined by the
Board of Directors or a committee thereof. Participants' interests in the ESOP
are distributed in the form of cash or stock upon normal retirement, disability,
death or at a specific time after any other termination of employment.
The Company adopted an employee stock equivalence plan ("ESEP") for the
Company's non-U.S. subsidiaries, effective January 1, 1995, in which its
employees are eligible to participate after completing one year of service,
attaining age twenty-one and for London-based employees, participating in the
VLEH Pension Plan. Each year the Company may make discretionary contributions of
stock to the ESEP as determined by the Board of Directors or a committee
thereof. Participants' interests in the ESEP are distributed in the form of cash
upon normal retirement, disability, death or at a specific time after any other
termination of employment.
In 1997, the Company accrued $250 and subsequently in 1998 made a cash
contribution to the Trustee who in turn purchased 68,000 shares on the open
market. In 1998, the Company accrued $250 and subsequently in 1999 made a cash
contribution to the Trustee who in turn purchased 91,000 shares on the open
market. In 1999, the Company has accrued $250 for contribution to the ESOP and
ESEP.
NOTE M--SEGMENT INFORMATION:
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
operation segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Office ("CEO"). The CEO
reviews financial information presented on a consolidated basis accompanied by
disaggregated
F-21
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE M--SEGMENT INFORMATION: (CONTINUED)
information about revenues by geographic region for purposes of making operating
decisions and assessing financial performance. The Company has three reportable
segments: North America, Europe and Pacific Rim, which are organized, managed
and analyzed geographically and operate in a single industry segment.
Information about the Company's operations for the fiscal years ended
September 30, 1997, 1998 and 1999 is presented below:
PACIFIC
NORTH AMERICA RIM EUROPE INTERCOMPANY TOTAL
------------- -------- -------- ------------ --------
SEPTEMBER 30, 1997:
Net Revenues from unaffliliated
customers............................ $48,525 $10,667 $31,466 $ -- $ 90,658
Intersegment sales..................... 8,593 -- -- (8,593) --
------- ------- ------- -------- --------
Total net revenues................... 57,118 10,667 31,466 (8,593) 90,658
Operating income....................... 6,638 2,350 1,983 -- 10,971
Depreciation and amortization.......... 9,158 138 2,367 -- 11,663
Total segment assets................... 84,882 5,716 18,406 (12,300) 96,704
SEPTEMBER 30, 1998:
Net Revenues from unaffliliated
customers............................ $47,953 $ 9,858 $30,565 $ -- $ 88,376
Intersegment sales..................... 6,039 -- -- (6,039) --
------- ------- ------- -------- --------
Total net revenues................... 53,992 9,858 30,565 (6,039) 88,376
Operating income (loss)................ (1,884) 1,384 (1,157) -- (1,657)
Depreciation and amortization.......... 10,506 157 2,915 -- 13,578
Total segment assets................... 99,409 5,599 17,265 (7,646) 114,627
SEPTEMBER 30, 1999:
Net Revenues from unaffliliated
customers............................ $47,598 $11,668 $32,266 $ -- $ 91,532
Intersegment sales..................... 20,065 -- -- (20,065) --
------- ------- ------- -------- --------
Total net revenues..................... 67,663 11,668 32,266 (20,065) 91,532
Operating income (loss)................ 680 1,306 (1,950) -- 36
Depreciation and amortization.......... 12,421 139 2,806 -- 15,366
Total segment assets................... 93,747 7,585 15,386 (9,018) 107,700
NOTE N--RELATED PARTY TRANSACTIONS:
Certain directors provided consulting services to the Company and received
fees totaling approximately $234, $241 and $241 for the years ended
September 30, 1997, 1998 and 1999, respectively.
At September 30, 1998 and 1999, the Company had notes receivable from
stockholders totaling $82 and $30, respectively, related to common stock
purchases. The notes bear interest at 9.75% and are collateralized by 16,937
shares of common stock as of September 30, 1999.
The Company received from certain stockholders of the Company $2,623, $2,303
and $51 in the years ended September 30, 1997, 1998 and 1999, respectively, for
the rental of automated lighting products and other services.
F-22
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE O--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for
the years ended September 30, 1997, 1998 and 1999:
YEAR ENDED SEPTEMBER 30, 1997
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
Total Revenues.................................... $22,326 $22,384 $22,185 $23,763
Operating income.................................. 2,424 2,265 2,954 3,328
Net income........................................ 926 820 1,210 1,373
Net income per basic and diluted share............ 0.16 0.14 0.21 0.23
Common stock price per share
High............................................ N/A N/A N/A N/A
Low............................................. N/A N/A N/A N/A
YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
Total Revenues.................................... $22,519 $19,227 $22,529 $24,101
Operating income (loss)........................... 2,808 (128) 662 (4,999)
Net income (loss)................................. 326 (421) 0 (3,527)
Net income per basic and diluted share............ 0.04 (0.05) 0.00 (0.46)
Common stock price per share
High............................................ 13.125 12.688 10.000 6.375
Low............................................. 11.750 11.375 5.750 2.000
YEAR ENDED SEPTEMBER 30, 1999
------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
Total Revenues.................................... $25,248 $23,170 $20,066 $23,048
Operating income (loss)........................... 1,454 302 (699) (1,021)
Net income (loss)................................. 242 (409) (1,100) (1,376)
Net income per basic and diluted share............ 0.03 (0.05) (0.14) (0.18)
Common stock price per share
High............................................ 4.750 4.250 2.813 2.125
Low............................................. 2.000 2.625 2.000 0.875
The Company early adopted SOP 98-5 and restated 1998 first quarter results
to record a pre-tax charge of $282 as a cumulative effect of change in
accounting principle.
The operating loss for the quarter ended September 30, 1998, includes
charges totaling $4,600 for the write-down of impaired
Irideon-Registered Trademark- assets to their net realizable value and employee
termination costs associated with restructuring the Company's operations.
The operating loss for the quarter ended September 30, 1999, includes
charges totaling $600 for employee termination costs associated with
restructuring the Company's operations.
F-23
SCHEDULE II
VARI-LITE INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(in thousands of dollars)
CHARGED TO WRITE-OFFS
BEGINNING COSTS AND AND DISCOUNTS ENDING
DESCRIPTION BALANCE EXPENSES ALLOWED BALANCE
- ----------- --------- ---------- ------------- --------
September 30, 1997
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... $348 $134 $(32) $450
Allowance for excess and obsolete inventory....... 386 23 -- 409
September 30, 1998
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... 450 641 (191) 900
Allowance for excess and obsolete inventory....... 409 15 -- 424
September 30, 1999
Allowances deducted from assets to which they apply
Allowance for doubtful accounts................... 900 140 (320) 720
Allowance for excess and obsolete inventory....... 424 200 -- 624
S-1