-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlDoyIkZVHIkYY8kG1CSGyNhRvITgzHJbmibWrhZ7ilvOHyrKpDJrmEATuNVftm6 jGaI6ZMrB3U1c6tHD3b/Vw== 0000912057-97-031097.txt : 19970922 0000912057-97-031097.hdr.sgml : 19970922 ACCESSION NUMBER: 0000912057-97-031097 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19970918 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI LITE INTERNATIONAL INC CENTRAL INDEX KEY: 0001033491 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 752239444 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33559 FILM NUMBER: 97682363 BUSINESS ADDRESS: STREET 1: 201 REGAL ROW CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146301963 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1997 REGISTRATION NO. 333-33559 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VARI-LITE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 3648 75-2239444 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) H. R. BRUTSCHE III PRESIDENT AND CHIEF EXECUTIVE OFFICER 201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: ALAN J. PERKINS JEFFREY A. CHAPMAN GARDERE & WYNNE, L.L.P. VINSON & ELKINS L.L.P. 1601 ELM STREET, SUITE 3000 2001 ROSS AVENUE, SUITE 3700 DALLAS, TEXAS 75201 DALLAS, TEXAS 75201 (214) 999-3000 (214) 220-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION DATED SEPTEMBER 18, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2,000,000 SHARES [LOGO] VARI-LITE INTERNATIONAL COMMON STOCK -------------- All of the 2,000,000 shares of common stock, par value $0.10 per share (the "Common Stock"), offered hereby are being sold by Vari-Lite International, Inc. (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $11.50 and $13.50 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "LITE." ------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS PRICE TO UNDERWRITING TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share......................................... $ $ $ Total(3).......................................... $ $ $
(1) The Company and the Selling Stockholders (as hereinafter defined) have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses of $725,000, which are payable by the Company. (3) Certain stockholders of the Company (the "Selling Stockholders") have granted the Underwriters a 45-day option to purchase up to 300,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Selling Stockholders" and "Underwriting." ------------------- The Common Stock is offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them and subject to certain conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders, in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1997. A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. THE DATE OF THIS PROSPECTUS IS , 1997. Vari-Lite International, Inc. provides high technology, creativity and service to the world of entertainment production. Vari-Lite International twice has received Emmy-Registered Trademark- Awards for Outstanding Achievement in Engineering by the National Academy of Television Arts and Sciences for its contribution to television lighting. Since 1990 six Tony-Registered Trademark- Awards have been awarded to [Picture of the Company's products in use] designers using VARI*LITE-Registered Trademark- equipment on Broadway stages. Five Emmy-Registered Trademark- Awards have been awarded to designers using VARI*LITE-Registered Trademark- equipment on network television broadcasts. [Picture of [Picture of Emmy Award] Tony Award]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." [INSIDE GATE] [Picture of man at Artisan-Registered Trademark- console controlling lights.] Entertainment production is a global, [Picture from The Rolling Stones Voodoo multi-billion dollar industry. Lounge Tour] concert touring theatre television and film corporate events and an increasing variety of commercial and recreational environments. Vari-Lite International is in business concert touring to meet the demanding artistic, technical and logistic requirements of its clients in each of these markets and satisfy the expectations of an evermore discerning public.
[INSIDE COVER] In 1981, Vari-Lite International revolutionized television and film the professional entertainment lighting industry [Picture of stage of Academy by inventing the VARI*LITE-Registered Trademark- Award Telecast] The 63rd system, the first automated lighting system that Annual Academy Award Telecast allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. A global distribution network and an excellent reputation for service and reliability has led to the use of the VARI*LITE-Registered Trademark- system in virtually every form of entertainment lighting. corporate events [Picture of Whirlpool Product Launch] Whirlpool Product Launch theatre [Picture of stage of Show Boat production] Livent, Inc. brings Show Boat to Broadway [Continuation of picture from The Rolling Stones opera Voodoo Lounge Tour] [Picture of stage of "Trista and Isalde" production] "Trista and Isalde" The Los Angeles Opera "Voodoo Lounge Tour" The Rolling Stones
PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) REFLECTS THE REINCORPORATION ("REINCORPORATION") OF THE COMPANY AS A DELAWARE CORPORATION PURSUANT TO A MERGER OF VARI-LITE INTERNATIONAL, INC., A TEXAS CORPORATION ("VARI-LITE TEXAS"), INTO THE COMPANY, WHICH WILL BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING AND IN WHICH THE SHARES OF CLASS A AND CLASS B COMMON STOCK OF VARI-LITE TEXAS WILL BE CONVERTED INTO SHARES OF THE COMPANY'S COMMON STOCK ON A 3.76368-FOR-ONE BASIS AND (B) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION UNLESS SPECIFICALLY PROVIDED OTHERWISE. ALL REFERENCES TO THE COMPANY IN THIS PROSPECTUS REFER TO VARI-LITE INTERNATIONAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE. THE COMPANY The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring , theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its long-standing collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990 and have won five Emmy-Registered Trademark- Awards for network television broadcast lighting design. The Company won an Emmy-Registered Trademark- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Fleetwood Mac, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Garth Brooks, Mary Chapin Carpenter, Wynona Judd, Barbra Streisand, Diana Ross, Whitney Houston, Celine Dion, Sheryl Crow, Pearl Jam, Aerosmith, Bush and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, RAGTIME, SHOW BOAT, RENT, LORD OF THE DANCE, CAROUSEL, SMOKEY JOE'S CAFE, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE and OLIVER. 3 - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-Registered Trademark- Awards, Tony-Registered Trademark- Awards, Grammy Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, LATE NIGHT WITH CONAN O'BRIEN, VIBE, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies CONTACT, FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Microsoft, Compaq, IBM, Sony, Sprint, Nike, Reebok, Oldsmobile, Ford, Lincoln, BMW, Upjohn, Glaxo, Whirlpool and Gillette, among others. - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark-automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. 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 Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include (i) maintaining its commitment to innovation, (ii) expanding its worldwide distribution capabilities and (iii) continuing to offer value-added complementary services. The Company's predecessor, Vari-Lite Texas, 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. Immediately prior to the consummation of the Offering, 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. 4 THE OFFERING Common Stock offered by the Company......... 2,000,000 shares Common Stock to be outstanding after the Offering................................... 7,800,003 shares(1) Use of Proceeds............................. The net proceeds will be used to repay indebtedness under the Company's Credit Agreement (as hereinafter defined). See "Use of Proceeds." Proposed Nasdaq National Market symbol...... "LITE"
- ------- (1) Excludes 496,000 shares of Common Stock issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants with an exercise price of $11.53 per share. See "Management--Employee Benefit Plans--Omnibus Plan" and "Shares Eligible for Future Sale." RISK FACTORS The risk factors that an investor should consider include, but are not limited to: (i) fluctuations in operating results and seasonality; (ii) ability to introduce new products; technological changes; (iii) reliance on intellectual property; (iv) capitalized litigation costs; (v) dependence on entertainment industry; (vi) competition; (vii) dependence on management; (viii) risks of acquisitions; (ix) foreign exchange risk; international trade risk; (x) dependence on key suppliers; (xi) dependence on manufacturing facility; (xii) control of the Company by existing stockholders; (xiii) lack of prior public market; possible volatility of stock price; determination of offering price; (xiv) effect of certain charter and by-law provisions; (xv) dilution; and (xvi) shares eligible for future sale. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED JUNE YEARS ENDED SEPTEMBER 30, 30, ----------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- 1996 --------- ----------- (UNAUDITED) INCOME STATEMENT DATA: Revenue: Rental revenues........................... $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Products sales and service revenues....... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- ----------- --------- Total revenues.......................... 31,132 35,253 53,812 74,910 77,138 53,431 66,895 Gross profit................................ 19,088 20,645 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense................................... 13,343 13,170 19,181 28,163 30,077 22,230 24,855 Research and development expense............ 1,948 2,347 3,033 3,283 4,404 2,947 4,872 Operating income............................ 3,797 5,128 8,539 10,539 8,449 4,386 7,643 Interest expense (net)...................... 1,675 1,606 1,805 2,788 3,092 2,437 2,694 Income before extraordinary loss............ $ 1,349 $ 2,269 $ 4,334 $ 4,714 $ 3,119 $ 1,136 $ 2,956 Net income per share(1)..................... $ 0.23 $ 0.39 $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 Weighted average shares outstanding......... 5,801 5,773 5,772 5,814 5,912 5,928 5,819 PRO FORMA DATA(2): Income before extraordinary loss............ $ 4,258 $ 3,847 Net income per share........................ $ 0.54 $ 0.49 Weighted average shares outstanding......... 7,912 7,819 OTHER DATA: EBITDA(3)................................... $ 8,084 $ 10,230 $ 14,620 $ 19,161 $ 18,517 $ 11,928 $ 16,287 Net cash provided by operations............. 6,950 7,879 10,937 14,513 8,531 3,286 11,972 Net cash used in investing activities....... (5,443) (10,789) (18,924) (20,641) (12,432) (9,125) (20,389) Net cash provided by (used in) financing activities................................ (949) 2,094 9,355 7,307 2,564 3,061 7,634 Capital expenditures........................ 5,503 11,050 13,566 20,748 12,587 9,125 20,518
JUNE 30, 1997 ------------------------ AS ACTUAL ADJUSTED(4) --------- ------------- BALANCE SHEET DATA: Total assets.......................................................................... $ 92,614 $ 92,614 Total debt............................................................................ 45,361 22,836 Stockholders' equity.................................................................. 27,420 49,945
- ------- (1) Net income per share in fiscal 1994 includes an extraordinary loss from early extinguishment of debt of $0.13 per share. (2) Pro forma data gives effect to the Offering and the application of the proceeds therefrom to repay the Company's outstanding borrowings under the Credit Agreement at the beginning of the periods presented, assuming the repayment of $22.5 million of debt at weighted average interest rates of 8.69% and 8.83% for the fiscal year ended September 30, 1996 and the nine-month period ended June 30, 1997, respectively. See "Use of Proceeds." (3) EBITDA is calculated herein as income before income taxes 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. (4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed Offering price of $12.50 per share and the anticipated application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. WHEN USED IN THIS PROSPECTUS, 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 THOSE DESCRIBED IN THIS PROSPECTUS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. FLUCTUATIONS IN OPERATING RESULTS AND SEASONALITY The Company has experienced and is expected to continue to experience significant fluctuations in its 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. Revenue from concert touring accounted for 48.5%, 38.2%, 33.0%, 31.0% and 30.9% of the Company's total revenue for the fiscal years ended September 30, 1994, 1995 and 1996 and for the nine months ended June 30, 1996 and 1997, respectively. The Company's expenses are based, in part, on its expectations as to future revenue and, as a result, net income for a given period could be disproportionately affected by a reduction in revenue. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in the winter months. 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. While the Company expects to experience growth in revenue and profit, there can be no assurance that the Company's historical levels of revenue or profits will be sustained, particularly on a quarterly basis. Furthermore, there can be no assurance that the concert touring market on which the Company is dependent will continue to emphasize lighting as an important element of concert shows or that the Company's current or future products will continue to be used by concert touring customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Fluctuations and Seasonality." ABILITY TO INTRODUCE NEW PRODUCTS; TECHNOLOGICAL CHANGES The Company's past success has depended, and its future growth will depend, in large part, on its ability to enhance and develop new features for its existing products, to develop new technology, to introduce new products to meet changing customer requirements and to adapt to evolving technology. There can be no assurance that the Company will successfully develop such new technology, enhancements, features or new products or that the Company's products will continue to achieve market acceptance. Any delay in or failure to complete development of such technology, enhancements, features or new products, or any failure of the Company's products to continue to achieve market acceptance, could have a material adverse effect on the Company. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies uncompetitive or obsolete. In 1996, the Company introduced its Irideon-Registered Trademark- interior lighting product line, including the AR5-TM- luminaire and the Composer-Registered Trademark- control system. In 1998, the Company anticipates introducing its high brightness, multi-feature VL7-TM- spot luminaire. There can be no assurance that these products will gain market acceptance or satisfactory revenue growth or profitability. 7 RELIANCE ON INTELLECTUAL PROPERTY The Company generally relies on a combination of patent, trade secret, copyright and trademark laws, contracts and technical measures to establish and protect its proprietary rights in its products and technologies. However, the Company believes that such measures provide only limited protection, and there is no assurance that such measures will be adequate to prevent misappropriation. As of August 31, 1997, the Company had more than 25 United States patents, more than 10 applications for United States patents pending with respect to certain elements of its hardware and software and more than 20 United States registered trademarks. As of August 31, 1997, the Company had more than 110 foreign patents and more than 100 applications for foreign patents pending. There can be no assurance that any patents will be issued from the applications pending or, if patents are issued, that the claims allowed under such patents or other patents of the Company will be sufficiently broad to deter or prohibit others from marketing similar products. Revenues generated in countries in which the Company has limited or no patent protection may be adversely affected by sales of products by competitors utilizing the Company's United States patented technology. Although the Company takes precautions to protect its trade secrets, it may be possible for unauthorized third parties to copy portions of the Company's technology or to obtain and use information that the Company regards as proprietary. Furthermore, the laws of certain countries in which the Company's products are or may be distributed do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. In addition, there can be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. Any failure by the Company to protect its intellectual property, including any failure to prevail in the High End Lawsuit (as hereinafter defined), could have a material adverse effect on the Company. Significant and protracted litigation may be necessary to protect the Company's intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement. The Company believes that its products do not infringe any existing third-party proprietary rights; however, there can be no assurance that third-party claims alleging infringement will not be asserted against the Company in the future. If infringement is alleged, the Company could be required to discontinue the use of certain processes, to cease the manufacture, use and rental or sale of infringing products, to incur significant litigation damages, costs and expenses and to either develop non-infringing technology or obtain licenses to use the alleged infringing technology. There can be no assurance that the Company would be able to develop such alternative technologies or to obtain such licenses on terms commercially acceptable to the Company, if at all. Any infringement claims could have a material adverse effect on the Company. See "Business--Intellectual Property." CAPITALIZED LITIGATION COSTS The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit ($3.0 million as of August 31, 1997, and an estimated additional $1.1 million through consummation of the trial), a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. There can be no assurance that the Company will not be required to expense its costs relating to the High End Lawsuit. Furthermore, the defendant has asserted as a counterclaim that the Company has used the Company's patents to violate the antitrust laws. Although the Company believes such counterclaim is without merit and intends to vigorously contest such counterclaim, if the defendant were to receive a judgment in its favor with respect to such counterclaim, the Company could be held liable for the defendant's damages which could be substantial. See "Business--Legal Proceedings." 8 DEPENDENCE ON ENTERTAINMENT INDUSTRY Revenues from the concert touring, theatre, television and film markets accounted for 81.5%, 71.7%, 72.0%, 70.2% and 71.4%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and for the nine months ended June 30, 1996 and 1997, respectively. Generally, the amounts spent on entertainment by the general public are discretionary and may be adversely affected by general economic conditions. A significant reduction in the amounts spent on entertainment by the general public could have a material adverse effect on the Company. COMPETITION There is significant competition in many of the Company's markets, based primarily on product capability, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and customer service and support. In the Company's rental businesses, there are a number of competitors, particularly in the concert touring market. The Company competes in some cases with companies that are larger or have greater development, marketing and financial resources than the Company. There can be no assurance that the Company will be able to compete successfully in its markets or that competitive pressures will not have a material adverse effect on the Company. See "Business--Competition." DEPENDENCE ON MANAGEMENT The success of the Company's business is highly dependent upon the Company's President and Chief Executive Officer, H.R. Brutsche III, and the Company's Chief Science Officer, James M. Bornhorst. The loss of the services of either of such individuals could have a material adverse effect on the Company, and there can be no assurance that the Company will be able to retain the services of such individuals. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled managerial, operational, technical, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, assimilating and retaining the personnel it requires to develop, manufacture and market its products or expand its operations. See "Business--Employees" and "Management." RISKS OF ACQUISITIONS The Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. The Company currently has no agreements or understandings with respect to any potential acquisitions. FOREIGN EXCHANGE RISK; INTERNATIONAL TRADE RISK International revenues accounted for 37.0%, 46.9%, 49.3%, 48.4% and 48.7%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1996 and 1997, respectively. Although the Company has offices, distributors, dealers and sales representatives in more than 20 foreign countries, substantially all of the Company's foreign revenue was generated by its offices in England and Japan. In addition, the Company purchases certain components used in its products from manufacturers located in foreign countries. As a result, the Company's operations may be adversely affected by fluctuations of the value of the U.S. dollar against foreign currencies, political instability resulting in the disruption of trade with foreign countries, the imposition of additional regulations relating to imports or duties, taxes and other charges, longer payment cycles, difficulties in receivables collection and restrictions on the transfer of funds. The Company has historically hedged its currency fluctuation risk by borrowing in British 9 pounds sterling and Japanese yen under the Credit Agreement, a portion of which will be repaid with the net proceeds of the Offering. The Company may enter into additional transactions in the future to hedge such risks; however there can be no assurance that the Company will enter into such additional transactions or that any such transactions will effectively hedge the Company's currency risk. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DEPENDENCE ON KEY SUPPLIERS The Company has frequently worked in concert with certain of its key suppliers to design and develop new technologies which have been incorporated into its products and is dependent upon such suppliers for many important components used in the Company's automated lighting systems. The Company generally purchases these components pursuant to purchase orders and has no guaranteed supply arrangements with such suppliers. Some of these suppliers, including Optical Coating Laboratory, Inc. and Philips Lighting Company, are critical to the Company's continued uninterrupted production because they provide custom-designed components. Major delivery delays or termination of the Company's relationship with any supplier of such components could materially adversely affect the Company. There can be no assurance that the Company's suppliers will continue to be able and willing to meet the Company's requirements for its key components. DEPENDENCE ON MANUFACTURING FACILITY The Company's principal manufacturing facility is located in Dallas, Texas. The Company is dependent on this facility and a disruption of the Company's manufacturing operations could have a material adverse effect on the Company. Such disruption could result from various factors, including human error or a natural disaster such as a tornado, fire or flood. CONTROL OF THE COMPANY BY EXISTING STOCKHOLDERS Upon consummation of the Offering, the Company's directors, officers and employees will beneficially own approximately 47% of the outstanding Common Stock. The holders of a majority of the outstanding Common Stock can elect all of the directors of the Company and can approve, delay or prevent certain fundamental corporate transactions, including mergers, consolidations and the sale of substantially all of the Company's assets. For so long as these stockholders own a significant percentage of the Common Stock, they will retain substantial influence over the affairs of the Company which may result in decisions that are not in the best interest of all stockholders of the Company. These factors, along with the factors described in "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws," may also have the effect of delaying or preventing a change in management or voting control of the Company. See "Principal Stockholders." LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that after the Offering an active public market for the Common Stock will develop or be sustained or that any market that may develop for the Common Stock will be liquid. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including quarterly variations in operating results and the liquidity of the market for the Common Stock. The Offering price for the Common Stock offered hereby was determined by negotiation between the Company and the Underwriters and may not be indicative of the prices at which the Common Stock will trade after the Offering. There can be no assurance that the market price of the Common Stock after the Offering will not fall below the Offering price. See "Underwriting." 10 EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS The Company's Certificate of Incorporation and By-Laws include provisions that may have the effect of discouraging proposals by third parties to acquire a controlling interest in the Company, which could deprive stockholders of the opportunity to consider an offer they would otherwise accept. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws." DILUTION Based on an assumed Offering price of $12.50 per share, new investors purchasing the Common Stock offered hereby will experience immediate dilution in net tangible book value of approximately $6.60 per share. In addition, the future exercise of stock options and warrants would result in further dilution. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have 7,800,003 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately 5,696,592 of such shares will have been held for more than one year as of the date of this Prospectus and may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subject to the volume, manner of sale and other limitations of Rule 144. The Company and certain stockholders who will collectively own 5,778,111 shares of Common Stock immediately following the Offering, and the holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed not to sell or otherwise transfer any shares of Common Stock for a period of 180 days after the effective date of the Offering without the prior written consent of A.G. Edwards & Sons, Inc. Upon completion of the Offering, the Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan (as hereinafter defined) and the ESOP (as hereinafter defined). See "Shares Eligible for Future Sale" and "Underwriting." 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company in the Offering, after deducting the estimated underwriting discount and estimated Offering expenses to be paid by the Company, are estimated to be $22.5 million, assuming an Offering price of $12.50 per share. The Company will not receive any proceeds from the sale of shares of Common Stock if the Underwriters exercise their over-allotment option. See "Underwriting." The Company intends to use the net proceeds of the Offering to repay indebtedness of approximately $22.5 million under the Company's multicurrency credit agreement, dated March 31, 1994, as amended (the "Credit Agreement"), which will allow the Company to reborrow funds under the Credit Agreement to purchase and construct additional rental equipment, to expand its domestic and international distribution channels, to pursue potential acquisitions of complementary businesses and for other general corporate purposes. The Company currently has no agreements or understandings with respect to potential acquisitions. As of August 31, 1997, approximately $42.5 million was outstanding under the Credit Agreement (based on currency exchange rates as of such date). The Credit Agreement provides for U.S. dollar denominated revolving credit and term credit facilities in the amount of $23.0 million and $20.5 million, respectively, British pounds sterling denominated revolving credit and term credit facilities in the amount of $4.9 million and $6.3 million (U.S. dollar equivalents as of August 31, 1997), respectively, and Japanese yen denominated revolving credit and term credit facilities in the amount of $6.0 million and $1.2 million (U.S. dollar equivalents as of August 31, 1997), respectively. The U.S. dollar denominated revolving credit facility bears interest at the prime rate of Brown Brothers Harriman & Co., agent under the Credit Agreement ("BBH"), plus 1.0% (9.50% as of August 31, 1997). The British pounds sterling denominated revolving credit facility bears interest at a rate determined by reference to the London interbank offered rate ("LIBOR") for deposits in British pounds sterling plus 2.0% (9.15% as of August 31, 1997). The Japanese yen denominated revolving credit facility bears interest at a rate determined by reference to the "Euroyen TIBOR" rate on the Bloomberg Financial Markets service at "TIBOEY" plus 3.5% (4.06% as of August 31, 1997). The U.S. dollar denominated term loan bears interest at either BBH's prime rate plus 1.0% (9.50% as of August 31, 1997) or a rate determined by reference to LIBOR for deposits in U.S. dollars plus 3.5% (9.31% as of August 31, 1997). The British pounds sterling denominated term loan bears interest at a rate determined by reference to LIBOR for deposits in British pounds sterling plus 2.0% (8.44% as of August 31, 1997). The Japanese yen denominated term loan bears interest at a rate determined by reference to the Tokyo interbank offered rate for deposits in Japanese yen plus 2.5% (3.15% as of August 31, 1997). Mandatory payments of principal are due and payable quarterly on each term loan and interest is payable monthly or on the last day of any eurocurrency interest period. The entire outstanding principal balance of the term loans and the revolving credit facilities is due and payable in full on June 30, 2001. Until April 1, 1998, a prepayment penalty equal to 0.25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risk; International Trade Risk" and Note E of "Notes to Consolidated Financial Statements." DIVIDEND POLICY The Company paid dividends of approximately $0.6 million with respect to each of the 1994, 1995, 1996 and 1997 fiscal years. The Company does not anticipate paying any other cash dividends on the Common Stock in the foreseeable future and anticipates 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 and financial condition and such other factors the Board of Directors deems relevant. In addition, the Credit Agreement limits the amount of dividends that may be paid by the Company in any fiscal year to 30% of net income (as defined in the Credit Agreement) for such fiscal year. 12 DILUTION The net tangible book value attributable to the Company's Common Stock at June 30, 1997 was $23.5 million ($4.06 per share). "Net tangible book value per share" represents the Company's total tangible assets less total liabilities divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 2,000,000 shares of Common Stock to be sold by the Company in the Offering (at an assumed Offering price of $12.50 per share), and after deducting the estimated underwriting discount and expenses of the Offering to be paid by the Company, and the application of the net proceeds as set forth under "Use of Proceeds," the Company's net tangible book value as of June 30, 1997, would have been $46.1 million ($5.90 per share), representing an immediate increase of $1.84 in net tangible book value per share to existing stockholders and an immediate dilution of $6.60 in net tangible book value per share to new investors purchasing shares in the Offering. The following table illustrates this dilution per share of Common Stock: Assumed Offering price per share..................................... $ 12.50 Net tangible book value per share at June 30, 1997................. $ 4.06 Increase per share attributable to new investors................... 1.84 --------- Pro forma net tangible book value per share after the Offering....... 5.90 --------- Dilution of net tangible book value per share to new investors(1).... $ 6.60 --------- ---------
- ------- (1) Excludes 242,233 shares issuable upon exercise of warrants with an exercise price of $11.53 per share. To the extent any of these warrants are exercised, new investors would suffer further dilution. See "Shares Eligible for Future Sale." The following table sets forth, on a pro forma basis as of June 30, 1997, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company and the total cash consideration and average price per share paid to the Company (based upon an assumed Offering price of $12.50 per share for new investors):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- -------------------------- PRICE PER NUMBER(1) PERCENT AMOUNT PERCENT SHARE ------------ ----------- ------------- ----------- ----------- Existing stockholders(2).............................. 5,800,003 74.4% $ 3,929,000 13.6% $ 0.68 New investors......................................... 2,000,000 25.6% 25,000,000 86.4% $ 12.50 ------------ ----- ------------- ----- 7,800,003 100.0% $ 28,929,000 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
- ------- (1) Excludes 496,000 shares issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants at an exercise price of $11.53 per share. To the extent any of these options or warrants are exercised, new investors would suffer further dilution. See "Management-- Employee Benefit Plans--Omnibus Plan" and "Shares Eligible for Future Sale." (2) Approximately 91.5% of the shares of Common Stock owned by existing stockholders have been held by them since 1982. 13 CAPITALIZATION The following table sets forth the Company's capitalization at June 30, 1997 (a) on a historical basis and (b) as adjusted to give effect to the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed Offering price of $12.50 per share and the application of the net proceeds therefrom as described in "Use of Proceeds." The data set forth below should be read in conjunction with the other financial information presented elsewhere in this Prospectus.
JUNE 30, 1997 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt.............................. $ 7,768 $ 7,768 --------- ----------- --------- ----------- Long-term debt, net of current portion.................................................... $ 37,593 $ 15,068 Stockholders' equity(1): Preferred Stock, $0.10 par value; 10,000,000 shares authorized, no shares issued and outstanding; no shares issued and outstanding as adjusted............................. $ -- $ -- Common Stock, $0.10 par value; 40,000,000 shares authorized, 5,800,003 shares issued and outstanding; 7,800,003 shares issued and outstanding as adjusted...................... 580 780 Additional paid-in capital.............................................................. 3,162 25,487 Stockholder notes receivable............................................................ (186) (186) Stock purchase warrants................................................................. 600 600 Cumulative foreign currency translation adjustment...................................... 1,137 1,137 Retained earnings....................................................................... 22,127 22,127 --------- ----------- Total stockholders' equity............................................................ 27,420 49,945 --------- ----------- Total capitalization.................................................................. $ 72,781 $ 72,781 --------- ----------- --------- -----------
- ------- (1) Excludes exercise price to be paid in connection with the issuance of 496,000 shares of Common Stock issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants with an exercise price of $11.53 per share. 14 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE 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, 1996 and for the nine-month period ended June 30, 1997 have been derived from the audited consolidated financial statements of the Company. The selected consolidated financial data for the nine-month period ended June 30, 1996 have been derived from the unaudited consolidated financial statements of the Company which, in the opinion of the Company's management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for the nine-month period ended June 30, 1997 are not necessarily indicative of results that may be expected for the full year. 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 Prospectus.
NINE MONTHS ENDED JUNE YEARS ENDED SEPTEMBER 30, 30, ----------------------------------------------------- ------------------------ 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ----------- ----------- (UNAUDITED) INCOME STATEMENT DATA: Revenue: Rental revenues.............................. $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Products sales and service revenues.......... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- ----------- ----------- Total revenues............................. 31,132 35,253 53,812 74,910 77,138 53,431 66,895 Rental costs................................... 10,395 12,320 18,775 26,288 26,425 18,267 22,115 Product sales and service costs................ 1,649 2,288 4,284 6,637 7,783 5,601 7,410 --------- --------- --------- --------- --------- ----------- ----------- Gross profit................................... 19,088 20,645 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense.... 13,343 13,170 19,181 28,163 30,077 22,230 24,855 Research and development expense............... 1,948 2,347 3,033 3,283 4,404 2,947 4,872 --------- --------- --------- --------- --------- ----------- ----------- Operating income............................... 3,797 5,128 8,539 10,539 8,449 4,386 7,643 Interest expense (net)......................... 1,675 1,606 1,805 2,788 3,092 2,437 2,694 --------- --------- --------- --------- --------- ----------- ----------- Income before taxes and extraordinary loss..... 2,122 3,522 6,734 7,751 5,357 1,949 4,949 Income taxes................................... 773 1,253 2,400 3,037 2,238 813 1,993 --------- --------- --------- --------- --------- ----------- ----------- Income before extraordinary loss............... 1,349 2,269 4,334 4,714 3,119 1,136 2,956 Extraordinary loss from early extinguishment of debt (net of tax of $389).................... -- -- 756 -- -- -- -- --------- --------- --------- --------- --------- ----------- ----------- Net income..................................... $ 1,349 $ 2,269 $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 --------- --------- --------- --------- --------- ----------- ----------- --------- --------- --------- --------- --------- ----------- ----------- Net income per share........................... $ 0.23 $ 0.39 $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 Cash dividends per share(1).................... $ 0.05 $ 0.05 $ 0.05 $ 0.10 $ 0.11 $ 0.10 $ 0.10 Weighted average shares outstanding............ 5,801 5,773 5,772 5,814 5,912 5,928 5,819 OTHER DATA: EBITDA(2)...................................... $ 8,084 $ 10,230 $ 14,620 $ 19,161 $ 18,517 $ 11,928 $ 16,287 Net cash provided by operations................ 6,950 7,879 10,937 14,513 8,531 3,286 11,972 Net cash used in investing activities.......... (5,443) (10,789) (18,924) (20,641) (12,432) (9,125) (20,389) Net cash provided by (used in) financing activities................................... (949) 2,094 9,355 7,307 2,564 3,061 7,634 Capital expenditures........................... 5,503 11,050 13,566 20,748 12,587 9,125 20,518 SEPTEMBER 30, ----------------------------------------------------- JUNE 30, 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- ----------- BALANCE SHEET DATA: Total assets................................... $ 30,607 $ 37,626 $ 57,223 $ 73,465 $ 78,581 $ 92,614 Total debt..................................... 13,574 16,648 27,497 34,870 37,349 45,361 Stockholders' equity........................... 11,085 13,302 16,631 21,329 24,538 27,420
- --------- (1) After the Offering, 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 "Dividend Policy." (2) EBITDA is calculated herein as income before income taxes 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. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine-month periods ended June 30, 1996 and 1997. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. GENERAL The Company is a leading designer and manufacturer of automated lighting systems and products which are marketed exclusively through its domestic and international facilities and an independent distributor network. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems and other products and provides services to the entertainment industry, including markets such as concert touring, theatre, television and film and corporate events. In addition, the Company sells its Irideon-Registered Trademark- automated lighting systems for use in a wide variety of architectural applications. The Company's revenues are generated through the rental of lighting and sound systems and equipment, and through sales of related products and services and architectural lighting systems. Rental revenues include revenues generated from leases of VARI*LITE-Registered Trademark- automated lighting systems, concert sound systems and conventional lighting equipment. Revenues from product sales and services include custom stage construction and stage set design services, design and production management services and the sale of Irideon-Registered Trademark- automated lighting systems and related products. Rental revenues were $47.6 million, $65.9 million and $65.7 million or 88.5%, 87.9% and 85.2% of total revenues during fiscal 1994, 1995 and 1996, 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 $4.4 million, $9.9 million and $4.5 million during fiscal 1994, 1995 and 1996, 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 capital expenditures incurred to manufacture or purchase 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 custom stage construction and stage set design services, design and production management services to corporations and business associations for conventions, business meetings and special events and sales of Irideon-Registered Trademark- automated lighting systems. The Company first introduced its Irideon-Registered Trademark- lighting system in 1993 and revenues from the Irideon-Registered Trademark- product line have increased from $0.8 million in fiscal 1994 to $2.6 million in fiscal 1996, and $3.3 million for nine-month period ended June 30, 1997. During fiscal 1994, 1995 and 1996, and for the nine-month period ended June 30,1997, the Company's Irideon-Registered Trademark- product line experienced operating losses of $0.1 million, $0.9 million, $1.2 million and $0.9 million, respectively, due to start-up costs. To date, the gross margin percentage of Irideon-Registered Trademark- products has been lower than those of the Company's rental business. Although the gross margin percentage of Irideon-Registered Trademark- products is expected to improve, it is expected to remain below that of the Company's rental business. 16 The following table reflects the percentages of total revenues by market:
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Concert Touring............................................... 48.5% 38.2% 33.0% 31.0% 30.9% Theatre....................................................... 19.3 20.6 22.7 20.9 25.1 Television and Film........................................... 13.7 12.9 16.3 18.3 15.4 Corporate Events.............................................. 11.1 14.0 12.2 13.9 12.8 Other......................................................... 7.4 14.3 15.8 15.9 15.8 --------- --------- --------- --------- --------- Total Revenues.............................................. 100.0% 100.0% 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, during the past three fiscal years, 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. The following table reflects the Company's geographic region revenues as a percentage of total revenues (see Note J of the "Notes to Consolidated Financial Statements"):
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- North America................................................. 63.0% 53.1% 50.7% 51.6% 51.3% Europe........................................................ 23.7 33.8 34.5 34.3 34.7 Asia.......................................................... 13.3 13.1 14.8 14.1 14.0 --------- --------- --------- --------- --------- Total Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The majority of European and Asian revenues are denominated in British pounds sterling and Japanese yen, respectively. The increase in European revenues in fiscal 1995 primarily resulted from the VLEH acquisition (as hereinafter defined) for approximately $6.0 million on March 31, 1994. The acquired companies provided lighting services and custom stage construction and stage set design services and included the Company's London, England VARI*LITE-Registered Trademark- distributor. The VLEH acquisition was accounted for by the Company using the purchase method of accounting. In addition to London, the Company has offices in Tokyo, Hong Kong and Madrid. 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 continues to increase. 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 maintains foreign currency borrowings to act as an economic hedge against fluctuations in British pounds sterling and Japanese yen. See "Risk Factors--Foreign Exchange Risk; International Trade Risk" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 17 RESULTS OF OPERATIONS The following table sets forth the percentages of total revenues represented by certain income statement data and other data for the indicated periods:
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Rental revenues....................................................... 88.5% 87.9% 85.2% 84.9% 84.0% Product sales and service revenues.................................... 11.5 12.1 14.8 15.1 16.0 --------- --------- --------- --------- --------- Total revenues...................................................... 100.0 100.0 100.0 100.0 100.0 Rental costs.......................................................... 34.9 35.1 34.3 34.2 33.1 Product sales and service costs....................................... 8.0 8.9 10.1 10.5 11.0 --------- --------- --------- --------- --------- Gross margin.......................................................... 57.1 56.0 55.6 55.3 55.9 Selling, general and administrative expense........................... 35.6 37.5 39.0 41.6 37.2 Research and development expense...................................... 5.6 4.4 5.7 5.5 7.3 --------- --------- --------- --------- --------- Operating income...................................................... 15.9 14.1 10.9 8.2 11.4 Interest expense (net)................................................ 3.4 3.7 4.0 4.6 4.0 --------- --------- --------- --------- --------- Income before taxes and extraordinary loss............................ 12.5 10.4 6.9 3.6 7.4 Incomes taxes......................................................... 4.5 4.1 2.9 1.5 3.0 --------- --------- --------- --------- --------- Income before extraordinary loss...................................... 8.0 6.3 4.0 2.1 4.4 Extraordinary loss.................................................... 1.4 -- -- -- -- --------- --------- --------- --------- --------- Net income............................................................ 6.6% 6.3% 4.0% 2.1% 4.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER DATA: Rental revenues....................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Rental costs.......................................................... 39.4 39.9 40.2 40.2 39.3 --------- --------- --------- --------- --------- Rental gross margin................................................... 60.6% 60.1% 59.8% 59.8% 60.7% Product sales and service revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% Product sales and service costs....................................... 69.2 73.4 68.3 69.6 69.3 --------- --------- --------- --------- --------- Product sales and service gross margin................................ 30.8% 26.6% 31.7% 30.4% 30.7% EBITDA................................................................ 27.2% 25.6% 24.0% 22.3% 24.3%
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996 REVENUES. Total revenues increased 25.2%, or $13.5 million, to $66.9 million in the nine-month period ended June 30, 1997, compared to $53.4 million in the nine-month period ended June 30, 1996. The revenue increase was attributable primarily to the factors set forth below. Rental revenues increased 23.8%, or $10.8 million, to $56.2 million in the nine-month period ended June 30, 1997, compared to $45.4 million in the nine-month period ended June 30, 1996. This increase was primarily the result of an overall increase in concert touring revenues due to an improved concert touring market during the nine-month period ended June 30, 1997 compared to the nine-month period ended June 30, 1996. As a result, the Company experienced increased rental revenues from both automated lighting systems and sound systems, as well as from other related products and services. Rental revenues from sales-type leases accounted for approximately 34.1%, or $3.7 million, of the increase in rental revenues in the nine-month period ended June 30, 1997, compared with the nine-month period ended June 30, 1996. The increase in sales-type lease revenues was primarily due to significant leases with a new theatrical production and an amusement park. 18 Product sales and service revenues increased 32.9%, or $2.7 million, to $10.7 million in the nine-month period ended June 30, 1997, compared to $8.0 million in the nine-month period ended June 30, 1996. This increase was primarily due to sales of the Company's Irideon-Registered Trademark- automated lighting products which increased 123.2%, or $1.8 million, to $3.3 million in the nine-month period ended June 30, 1997, compared to $1.5 million in the nine-month period ended June 30, 1996. The remainder of the increase was primarily attributable to the increase in revenues from stage construction services as a result of increased concert touring activity. RENTAL COSTS. Rental costs increased 21.1%, or $3.8 million, to $22.1 million in the nine-month period ended June 30, 1997, compared to $18.3 million in the nine-month period ended June 30, 1996. Rental costs as a percentage of rental revenues decreased to 39.3% in the nine-month period ended June 30, 1997, from 40.2% in the nine-month period ended June 30, 1996. The decrease in rental costs as a percentage of total rental revenues was primarily due to higher utilization of the Company's rental equipment and increased leverage of fixed costs during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. Also contributing to this decrease was a decrease in sales-type lease costs as a percentage of sales-type lease rental revenues in the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. The decrease in sales-type lease costs was due to the leasing of older equipment during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 32.3%, or $1.8 million, to $7.4 million in the nine-month period ended June 30, 1997, compared to $5.6 million in the nine-month period ended June 30, 1996. Product sales and service costs as a percentage of product sales and service revenues decreased to 69.3% in the nine-month period ended June 30, 1997, from 69.6% in the nine-month period ended June 30, 1996. The decrease in product sales and service costs as a percentage of the related revenues was primarily due to the Irideon-Registered Trademark- product line, which experienced improved production efficiencies and an increase in direct sales. Partially offsetting this decrease was an increase in product sales and service costs for the Company's custom stage construction business that was subcontracted to others by the Company during the 1997 period, compared to the 1996 period. Product sales and service costs associated with subcontracted services are generally higher than costs associated with services provided directly by the Company. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 11.8%, or $2.7 million, to $24.9 million in the nine-month period ended June 30, 1997, compared to $22.2 million in the nine-month period ended June 30, 1996. This increase resulted primarily from payroll and related costs to support the Company's continued growth. This expense as a percentage of total revenues decreased to 37.2% in the nine-month period ended June 30, 1997, from 41.6% in the nine-month period ended June 30, 1996, due to costs incurred during fiscal year 1996 resulting from increases in personnel and improvements in information systems in anticipation of growth which occurred in fiscal 1997. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 65.3%, or $2.0 million, to $4.9 million in the nine-month period ended June 30, 1997, compared to $2.9 million in the nine-month period ended June 30, 1996. This expense as a percentage of total revenues increased to 7.3% in the nine-month period ended June 30, 1997, from 5.5% in the nine-month period ended June 30, 1996. These increases were primarily the result of an increase in the employee-related costs associated with adding research and development engineers during fiscal 1996 and the nine-month period ended June 30, 1997. INTEREST EXPENSE. Interest expense increased 10.5%, or $0.3 million, to $2.7 million in the nine-month period ended June 30, 1997, compared to $2.4 million in the nine-month period ended June 30, 1996. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures. INCOME TAXES. Effective tax rates in the nine-month periods ended June 30, 1997 and 1996 were 40.3% and 41.7%, respectively. 19 FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 REVENUES. Total revenues increased 3.0%, or $2.2 million, to $77.1 million in fiscal 1996, compared to $74.9 million in fiscal 1995. The revenue increase was attributable primarily to the factors set forth below. Rental revenues decreased $0.2 million to $65.7 million in fiscal 1996, compared to $65.9 million in fiscal 1995. This decrease was primarily the result of a 54.2%, or $5.4 million, decrease in rental revenues from sales-type leases, which decreased to $4.5 million in fiscal 1996, compared to $9.9 million in fiscal 1995, primarily due to large, one-time sales-type leases to one major casino and to several major cloned touring theatrical productions in fiscal 1995. Additionally, the Company experienced an overall decrease in concert touring revenues in fiscal 1996 as a result of a downturn in the concert touring market compared with fiscal 1995. These decreases were offset by increased rental revenues earned from the Company's VARI*LITE-Registered Trademark- automated lighting systems as more of these products were available for rental as a result of fiscal 1995 capital expenditures, and an increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 26.0%, or $2.4 million, to $11.4 million in fiscal 1996, compared to $9.0 million in fiscal 1995. Product sales and service revenues increased as a percentage of total revenues to 14.8% in fiscal 1996, from 12.1% in fiscal 1995. This increase in revenue was primarily due to sales of Irideon-Registered Trademark- automated lighting products which increased 180.9%, or $1.7 million, to $2.6 million in fiscal 1996, compared to $0.9 million in fiscal 1995. RENTAL COSTS. Rental costs increased 0.5%, or $0.1 million, to $26.4 million in fiscal 1996, compared to $26.3 million in fiscal 1995. Rental costs as a percentage of rental revenues increased to 40.2% in fiscal 1996, from 39.9% in fiscal 1995. This increase was primarily the result of increased sales-type lease costs as a percentage of sales-type lease rental revenues in fiscal 1996, compared to fiscal 1995, due to the leasing of newer equipment during fiscal 1996, compared to fiscal 1995. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 17.3%, or $1.2 million, to $7.8 million in fiscal 1996 compared to $6.6 million in fiscal 1995. Product sales and service costs as a percentage of product sales and service revenues decreased from 73.4% in fiscal 1995 to 68.3% in fiscal 1996. The decrease in these costs as a percentage of their related revenues was primarily the result of operating improvements in the Company's custom stage construction business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 6.8%, or $1.9 million, to $30.1 million in fiscal 1996, compared to $28.2 million in fiscal 1995. This expense as a percentage of total revenues increased to 39.0% in fiscal 1996 from 37.5% in fiscal 1995. These increases primarily resulted from increased payroll and related costs and depreciation expense associated with increases in personnel and improvements in information systems necessitated by the Company's continued growth. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 34.1%, or $1.1 million, to $4.4 million in fiscal 1996, compared to $3.3 million in fiscal 1995. This expense as a percentage of total revenues increased to 5.7% in fiscal 1996, from 4.4% in fiscal 1995. These increases were primarily the result of an increase in the employee-related costs associated with adding 16 research and development engineers during fiscal 1996. INTEREST EXPENSE. Interest expense increased 10.9%, or $0.3 million, to $3.1 million in fiscal 1996, compared to $2.8 million in fiscal 1995. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures in fiscal 1995 and 1996. INCOME TAXES. Effective tax rates in fiscal 1996 and 1995 were 41.7% and 39.2%, respectively. FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 REVENUES. Total revenues increased 39.2%, or $21.1 million, to $74.9 million in fiscal 1995, compared to $53.8 million in fiscal 1994. Approximately 56.2% of the growth in total revenues, or $11.9 million, was attributable to revenues generated from Vari-Lite Europe Holdings Limited ("VLEH"), the Company's London, England based subsidiary which was formed to acquire three companies on March 31, 1994 (the "VLEH acquisition"). As a result, only six months of VLEH's operations were included in fiscal 1994. Also during fiscal 20 1995, the Company earned $8.9 million, or approximately 11.9% of total revenues, from the rental of automated lighting and sound systems and other lighting products and services used on the Rolling Stones Voodoo Lounge tour. Rental revenues increased 38.3%, or $18.3 million, to $65.9 million in fiscal 1995, compared to $47.6 million in fiscal 1994. Approximately 48.1% of the growth in rental revenues, or $8.8 million, was attributable to an increase in revenues from the VLEH acquisition. Rental revenues from sales-type leases accounted for approximately 30.0%, or $5.5 million, of the increase in rental revenues from fiscal 1994 to fiscal 1995. The increase in sales-type lease revenues was primarily due to one major casino installation and an increase in the cloning of several major touring theatrical productions in fiscal 1995. The remainder of the increase in rental revenues was primarily due to revenues earned from the Rolling Stones Voodoo Lounge tour and an overall increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 46.2%, or $2.8 million, to $9.0 million in fiscal 1995, compared to $6.2 million in fiscal 1994. Product sales and service revenues increased as a percentage of total revenues to 12.1% in fiscal 1995, from 11.5% in fiscal 1994. These increases were primarily attributable to the VLEH acquisition. RENTAL COSTS. Rental costs increased 40.0%, or $7.5 million, to $26.3 million in fiscal 1995, compared to $18.8 million in fiscal 1994. Rental costs as a percentage of rental revenues increased to 39.9% in fiscal 1995, from 39.4% in fiscal 1994. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 54.9%, or $2.3 million, to $6.6 million in fiscal 1995, compared to $4.3 million in fiscal 1994. Product sales and service costs as a percentage of product sales and service revenues increased to 73.4% in fiscal 1995 from to 69.2% in fiscal 1994. These increases were primarily the result of higher than anticipated costs to construct custom stages and design stage sets for customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 46.8%, or $9.0 million, to $28.2 million in fiscal 1995, compared to $19.2 million in fiscal 1994. This expense as a percentage of total revenues increased to 37.5% in fiscal 1995 from 35.6% in fiscal 1994. These increases were partially due to the non-recurring costs in fiscal 1995 associated with the VLEH acquisition and an increase in consulting and employee benefit expenses in fiscal 1995 as a result of the Company's initiatives to improve its human resource and process management. During fiscal 1995, the Company established the ESOP and Equivalence Plan (as hereinafter defined) and accrued contributions to them of an aggregate of $0.8 million. These increases were also partially due to unusually high design modification costs in fiscal 1995 to improve performance of certain rental equipment and costs to make certain VARI*LITE-Registered Trademark- products compliant with international safety regulations. The remainder of the increases in selling, general and administrative expense resulted primarily from payroll and related costs in fiscal 1995 to support continued growth. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 8.2%, or $0.3 million, to $3.3 million in fiscal 1995, compared to $3.0 million in fiscal 1994. This increase was primarily attributable to costs incurred during fiscal 1995 in connection with the development of the Company's Irideon-Registered Trademark- products. This expense as a percentage of revenues decreased to 4.4% in fiscal 1995, from 5.6% in fiscal 1994. INTEREST EXPENSE. Interest expense increased 54.5%, or $1.0 million, to $2.8 million in fiscal 1995, compared to $1.8 million in fiscal 1994. This increase was attributable to additional long-term borrowings incurred by the Company to fund the VLEH acquisition and other capital expenditures primarily associated with an increase in rental assets. INCOME TAXES. Effective tax rates in fiscal 1995 and 1994 were 39.2% and 35.6%, respectively. The increase in the effective tax rate in fiscal 1995 was primarily due to increased earnings from the Company's subsidiary in Japan, which are taxed at a higher rate than the Company's other earnings, and increased earnings in certain states in which the Company is subject to state income tax. EXTRAORDINARY LOSS. During fiscal 1994, the Company entered into the Credit Agreement, the proceeds of which were used to refinance outstanding indebtedness under then existing credit facilities, to fund the VLEH 21 acquisition and to build rental equipment. The Company incurred prepayment penalties, net of taxes, of $0.8 million relating to the early extinguishment of the existing debt. See "--Liquidity and Capital Resources." QUARTERLY FLUCTUATIONS AND SEASONALITY The following table sets forth certain income statement data and EBITDA for each of the Company's last 15 quarters, 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 1994 Total revenues.................................... $ 9,778 $ 9,591 $ 15,160 $ 19,283 $ 53,812 EBITDA............................................ 2,659 2,025 3,720 6,216 14,620 Operating income.................................. 1,321 633 2,019 4,566 8,539 Fiscal 1995 Total revenues.................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 $ 74,910 EBITDA............................................ 6,224 4,027 4,495 4,415 19,161 Operating income.................................. 4,267 1,951 2,284 2,037 10,539 Fiscal 1996 Total revenues.................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 $ 77,138 EBITDA............................................ 3,648 3,436 4,845 6,588 18,517 Operating income.................................. 1,186 915 2,285 4,063 8,449 Fiscal 1997 Total revenues.................................... $ 22,326 $ 22,384 $ 22,185 EBITDA............................................ 5,215 5,083 5,989 Operating income.................................. 2,424 2,265 2,954
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. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in winter months. 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. While the Company expects to experience growth in its revenues and profits, there can be no assurance that the Company's historical levels of revenues or profits will be sustained, particularly on a quarterly basis. See "Risk Factors--Fluctuations in Operating Results and Seasonality." 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 $10.9 million, $14.5 million, $8.5 million and $12.0 million during fiscal 1994, 1995 and 1996 and for the nine months ended June 30, 1997, respectively. The Company intends to use the net proceeds of the Offering to repay indebtedness under the Credit Agreement. As of August 31, 1997, approximately $42.5 million was outstanding under the Credit Agreement (based on currency exchange rates as of August 31, 1997). The Credit Agreement contains compliance covenants, including requirements that the Company achieve certain financial ratios or tests, including a fixed charge ratio, earnings ratio, minimum net worth test, leverage ratio, capital expenditure coverage ratio and total debt to cash flow ratio. In addition, the Credit Agreement places limitations on the ability to pay stockholder distributions, make capital expenditures in excess of specified amounts, incur additional indebtedness (subject to certain 22 exceptions), make certain loans or investments, sell assets or reacquire Common Stock. The Company incurs a commitment fee equal to 0.5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all of the Company's assets, except those pledged to distributors, are pledged as collateral under the Credit Agreement. The Company expects to obtain a new credit facility after completion of the Offering. The Company has hedged a portion of its currency fluctuation risk by borrowing in British pounds sterling and Japanese yen under the Credit Agreement. Cash generated from the Company's England and Japan offices is typically denominated in British pounds sterling and Japanese yen, respectively, and is used to pay expenses incurred in these currencies and service the foreign currency borrowings. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risks; International Trade Risk," "Use of Proceeds" and Note E of "Notes to Consolidated Financial Statements." The Company has 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 advance to the Company an amount equal to the cost to manufacture the equipment, and enter into agreements whereby the distributors have 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 10.25% annually. Proceeds received under these distributorship agreements were approximately $1.0 million, $2.2 million, $1.7 million and $0.6 million for fiscal 1994, 1995 and 1996 and for the nine-month period ended June 30, 1997, respectively, and outstanding borrowings from distributors at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $2.1 million, $2.9 million, $2.8 million and $2.1 million, respectively. All amounts advanced by distributors are accounted for by the Company as short-term debt. See "Business-- Marketing, Sales and Distribution." The Company has borrowed money to purchase computer equipment and office furniture and fixtures. These loans typically amortize over three years and bear interest at various rates ranging from 8.25% to 10.40%. Proceeds received under this type of financing were approximately $0.2 million, $1.6 million, $1.8 million and $1.1 million for fiscal 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, respectively, and borrowings outstanding at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $0.7 million, $1.7 million, $2.8 million and $3.0 million, respectively. 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, 1994, 1995 and 1996 and June 30, 1997, the Company had unearned revenue related to customer advances of approximately $1.3 million, $1.6 million, $2.2 million and $2.5 million, respectively. Dividends paid to stockholders totaled approximately $0.6 million with respect to each of fiscal 1994, 1995, 1996 and 1997. The Company does not anticipate paying any additional cash dividends after the consummation of the Offering. See "Dividend Policy." The Company's business requires significant capital expenditures. Capital expenditures for fiscal 1994, 1995 and 1996 were approximately $13.6 million, $20.7 million and $12.6 million, respectively, of which approximately $12.2 million, $18.0 million and $10.2 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 $47.6 million at the beginning of fiscal 1994 to $102.5 million at June 30, 1997. 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 Company's management anticipates capital expenditures of approximately $23.0 million during fiscal 1997, primarily for expansion of rental inventories. 23 Inventory included in current assets consists primarily of raw materials and finished goods for the Company's Irideon-Registered Trademark- products and spare parts inventory for the Company's VARI*LITE-Registered Trademark- automated lighting equipment. Raw materials represented 38.1%, 83.4% and 88.6% of total inventory at September 30, 1995 and 1996 and June 30, 1997, respectively. The fluctuation in raw materials as a percentage of total inventory was caused primarily by changes in the timing of the manufacturing of Irideon-Registered Trademark- products which are manufactured as orders are received. The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to remain ahead of its competitors. In fiscal 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. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. The Company had a working capital deficit of approximately $2.0 million, $4.8 million, $0.6 million and $1.3 million at September 30, 1994, 1995 and 1996, and June 30, 1997, respectively. 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. In December 1995, the Company entered into a lease with an unaffiliated developer which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million. The Company is leasing this land for an initial term of five years, with six five-year renewal options. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3.6 million paid by the developer to acquire the land. The Company has the right to obligate the developer to construct a building on the land that the Company would lease for a term that would be identical to the land lease. The Company has an option to purchase the property at the end of the initial lease term or at any time during the renewal terms for its original cost. The Company intends to cause the developer to construct a 233,000 square foot facility where it will consolidate all of its Dallas, Texas operations in fiscal 2000. The land lease is, and the facility lease (if any) will be, accounted for as operating leases for financial reporting purposes. See "Business--Properties" and Note G of the "Notes to Consolidated Financial Statements." The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit (approximately $3.0 million as of August 31, 1997, and an estimated additional $1.1 million through consummation of the trial). Unless the Company receives a judgment in this litigation that at least one of its patents has been infringed and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. See "Risk Factors--Capitalized Litigation Costs" and "Business--Litigation." Management believes that cash flow generated from operations, combined with the net proceeds from the Offering and borrowing capacity under the Credit Agreement (after giving effect to the application of the proceeds of the Offering) should be sufficient to fund its anticipated operating needs and capital expenditures for at least twelve months after the date of the Offering. However, 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 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. 24 BUSINESS GENERAL The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its long-standing collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990 and have won five Emmy-Registered Trademark- Awards for network television broadcast lighting design. The Company won an Emmy-Registered Trademark- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Fleetwood Mac, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Garth Brooks, Mary Chapin Carpenter, Wynona Judd, Barbra Streisand, Diana Ross, Whitney Houston, Celine Dion, Sheryl Crow, Pearl Jam, Aerosmith, Bush and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, RAGTIME, SHOW BOAT, RENT, LORD OF THE DANCE, CAROUSEL, SMOKEY JOE'S CAFE, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE and OLIVER. - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-Registered Trademark- Awards, Tony-Registered Trademark- Awards, Grammy Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, LATE NIGHT WITH CONAN O'BRIEN, VIBE, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies CONTACT, FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Microsoft, Compaq, IBM, Sony, Sprint, Nike, Reebok, Oldsmobile, Ford, Lincoln, BMW, Upjohn, Glaxo, Whirlpool and Gillette, among others. 25 - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark- automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. 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 Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. INDUSTRY The Company believes that the entertainment industry is an international, multi-billion dollar industry. Lighting plays an integral role in the entertainment industry, providing illumination of concert, theatre, television and film performers, as well as creating special effects to augment a performance. In general, the Company believes that approximately 10% of total revenues (in the case of concert touring and theatre) or of total production budgets (in the case of television, film and corporate events) are spent on lighting and sound. The Company further believes that lighting and sound are critical elements in determining the quality of a production and, therefore, end-users consider quality an important factor in selecting vendors. The Company believes that its industry leadership position results in large part from its reputation in the entertainment community for innovative, high performance products and quality service. In the early 1980's, the concert touring market was the first to recognize that automated lighting could be used not only to augment a performance but also as an additional source of entertainment. According to an industry source, the concert touring market in North America has grown at an annual rate of approximately 6% over the past nine years, as measured by major headliner arena ticket sales. The Company believes that the international concert touring market will grow at a faster rate because it is at an earlier stage in its development. The theatre market, as measured by the North American live theatre box office receipts, has grown by an annual rate of approximately 11% over the last ten years according to VARIETY. More importantly, touring shows, for which the Company's automated lighting systems are ideally suited, accounted for 60% of the total market in 1996 compared to 52% in 1986. The Company believes that the North American and international theatre markets continue to represent a significant opportunity for the Company. Although the Company currently derives less than 20% of its revenue from the television and film markets, these markets are the largest markets in which the Company participates. The Company believes that it is the leading provider of automated lighting systems for television special events, such as award shows, and intends to target a broader spectrum of television and film productions in the future. In recent years, lighting designers have begun to utilize entertainment lighting in new settings such as corporate events, restaurants, casinos, cruise ships and retail settings. The Company has broadened the application of its existing technologies and developed new technologies and products to address this demand, such as the Company's Irideon-Registered Trademark- product line for architectural use. The Company expects the demand for entertainment lighting in both existing and new settings to increase in the future. 26 STRATEGY The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include: - MAINTAINING ITS COMMITMENT TO INNOVATION. The Company expects to remain committed to research and development. By continuing to develop leading edge, innovative technologies for use in multiple proprietary automated lighting products with novel and versatile features, the Company expects to maintain its leadership positions in existing markets and create demand for its products in new markets. - EXPANDING ITS WORLDWIDE DISTRIBUTION CAPABILITIES. The Company intends to continue leveraging its position as an industry leader in automated lighting by expanding its domestic and international distribution channels by opening new offices, affiliating with additional independent distributors and acquiring complementary businesses. The Company intends to increase its focus as a full-service provider of quality products and services by further expanding and diversifying its worldwide inventory and distribution system, improving its extensive education and training programs and continuing to emphasize customer service. The Company expects to significantly amplify its recent efforts to offer a full range of lighting services and products, including conventional lighting products, in order to compete effectively for all of its customers' lighting needs. - CONTINUING TO OFFER VALUE-ADDED COMPLEMENTARY SERVICES. The Company intends to continue providing complementary sound, conventional lighting, custom stage construction and stage set design services, and design and production management services, thereby offering comprehensive solutions to its customers' needs and leveraging its customer relationships to maximize revenue. PRODUCTS AND SERVICES AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company designs, manufactures and markets 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. The Company rents rather than sells its VARI*LITE-Registered Trademark- automated lighting systems. VL1-TM- LUMINAIRE. The Company's initial product, the revolutionary VL1-TM- luminaire, was the first automated luminaire using a dichroic filter color changing system, thereby becoming the first compact, easily transportable light capable of the real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. The VL1-TM- luminaire was introduced in 1981 and remained in service until 1996. SERIES 200-TM- SYSTEM. The Company's VL2C-Registered Trademark- spot luminaire, VL4-Registered Trademark- 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 such as faces 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-Registered Trademark- 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 a 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. 27 The VL4-Registered Trademark- wash luminaire projects a dispersed soft-edge light beam for even illumination of objects and areas. The VL4-Registered Trademark- 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-tenths of a second, or program the system for timed color cross-fades. In addition, the VL4-Registered Trademark-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-Registered Trademark- wash luminaire (including the VL5Arc-TM- and VL5B-TM- luminaires), the VL6-Registered Trademark- spot luminaire and the VLM-TM- automated moving mirror, as well as the Artisan-Registered Trademark- Plus and mini-Artisan-Registered Trademark- 2 control consoles, also appeals to major concert touring clients who want to rent large systems. The VL5-Registered Trademark- luminaire is lighter than the VL4-Registered Trademark- 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-Registered Trademark- 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 VL6-Registered Trademark- spot luminaire is the companion to the VL5-Registered Trademark- 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 VL5Arc-TM- luminaire, which won the "Product of the Year/ Lighting" for 1996, awarded by Lighting Dimensions magazine, has a brighter bulb than the VL5-Registered Trademark- luminaire and an innovative fluid-filled variable lens (patent pending) which allows beam size control. 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. The Company's VL5-Registered Trademark- wash luminaires and VL6-Registered Trademark- spot luminaires are compatible with the industry-standard DMX 512 digital protocol and, as such, can be operated by DMX 512 control consoles, unlike the Company's other products which require the more sophisticated, higher performance of the Company's proprietary control consoles which use a high speed, bi-directional communications protocol. ARTISAN-REGISTERED TRADEMARK- 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 used either where space is limited or as a back-up system to the Artisan-Registered Trademark- Plus control console. 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 considers these services to be of critical importance to its business. The Company maintains extensive, custom-designed training facilities in its Dallas, Texas and London, England offices, where it trains both its own personnel and customers who find it more efficient to have their own personnel operate and maintain the VARI*LITE-Registered Trademark- equipment. The Company also provides smaller training facilities in its New York, Los Angeles and Tokyo offices. 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. 28 AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION VL1-TM- 1981 The original VARI*LITE-Registered Trademark- spot luminaire. Rendered obsolete in most markets by subsequent VARI*LITE-Registered Trademark- products. VL2C-Registered 1986 A high intensity spot luminaire using an arc light bulb. Trademark- Favored by concert, television and theatrical lighting designers due to its beam quality, motion control, bright colors and wide range of color choices. VL4-Registered 1988 A wash luminaire using an arc light bulb and featuring a Trademark- high speed douser. The brightness and precisely timed control of light intensity and beam size appeal to concert, theatre and television and film clients. VL5-Registered 1992 A lighter, less expensive version of the VL4-Registered Trademark- Trademark- wash luminaire using a tungsten light bulb. Silent operation, compactness and lighter weight appeal to theatrical, concert, television and film and corporate events users. Lower cost attracts both major concert touring clients wanting to lease larger systems and entry level concert touring clients with budgetary constraints. VL5Arc-TM- 1997 A VL5-Registered Trademark- luminaire utilizing a 600 watt arc source for very high brightness and a beam control device. Used in productions where high brightness is required. VL5B-TM- 1995 A VL5-Registered Trademark- luminaire with a color system designed for the television and theatre markets with an enhanced pastel range. VL6-Registered 1994 A compact, virtually silent spot luminaire which is the Trademark- companion to the VL5-Registered Trademark- wash luminaire. The brightness, small size and low cost of this luminaire appeal to all lighting disciplines, especially theatrical and television and film users as well as corporate events. VL7-TM- 1998 A high brightness, multi-feature spot luminaire. Expected to (projected) service all markets. VLM-TM- 1994 An automated dual-sided moving mirror able to pan and tilt 360 degrees. Appeals to both large and entry level concert touring clients. Artisan-Registered 1986 A computerized console required to control most of the Trademark- Plus Company's luminaires. Uses a proprietary communications protocol which allows the operator more functionality, efficiency and control of lighting effects than the industry standard DMX 512 protocol. Mini-Artisan-Registered 1994 A smaller, less expensive console designed to operate the Trademark- 2 Company's luminaires. Often used as a back-up console to the Artisan-Registered Trademark- Plus console.
29 AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. In 1993, the Company began to apply its existing automated lighting technologies to create its Irideon-Registered Trademark-products for the architectural lighting industry. Through its subsidiary Irideon, Inc. ("Irideon"), the Company sells Irideon-Registered Trademark- automated lighting products, even though it continues to rent all of its non-architectural products. AR500 LUMINAIRE-TM-. The AR500-TM- weather-proof wash luminaire is the Company's first product designed specifically for exterior illumination of objects such as monuments, bridges and commercial buildings. Like the Company's other products, the AR500-TM- luminaire uses the Company's patented color changing system to produce smooth color cross-fades through virtually the entire color spectrum. Various lenses permit the light beam size to be altered and a douser provides the ability to dim beam intensity. Lighting Dimensions Magazine named the AR500-TM- luminaire the "Product of the Year/Lighting, Architectural Category" in 1993. Since its introduction, the Company has sold over 1,300 AR500-TM- luminaires. AR5-TM- LUMINAIRE. In 1996, the Company began selling interior architectural automated lights for use in permanent architectural installations. The AR5-TM- wash luminaire, which is the first product in a planned family of products for interior applications, uses new dichroic filter coatings, many plastic components and a newly-developed light source. These features make this product attractive to lighting and interior designers because it is less expensive than the Company's VARI*LITE-Registered Trademark- products and does not require trained operators after the initial set-up. The AR5-TM- wash luminaire was named "Product of the Year/Lighting, Architectural Category" in 1995 by Lighting Dimensions magazine and in 1996 won "Best New Product of the Year" at Lightfair International. COMPOSER-REGISTERED TRADEMARK- CONTROL SYSTEM. The AR500-TM- and AR5-TM- luminaires both are operated with the Composer-Registered Trademark-control system. The Composer-Registered Trademark- is a Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer. After programming has been completed, the personal computer can be removed and lighting cues or sequences can be activated via an internal clock or from wall switches. The Composer-Registered Trademark- control system is DMX compatible which, among other things, allows it to operate products manufactured by others. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION AR500-TM- 1993 A weather-proof wash luminaire with the capability to change beam color, size or intensity. The first automated luminaire designed specifically for outdoor uses such as building exteriors and landmarks and has the "UL-Registered Trademark-" rating for "wet" location. AR5-TM- 1996 An automated wash luminaire designed for architectural applications such as restaurants, casinos, retail stores, corporate showrooms and shopping malls. Composer-Registered 1996 The control system used to operate Irideon-Registered Trademark- Trademark- architectural luminaires. A Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer with playback via an internal clock or wall switches, thereby eliminating the need for trained operators after initial set-up.
COMPLEMENTARY BUSINESSES The Company is a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set 30 design services, 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. Its clients have included The Rolling Stones, KISS, Janet Jackson, Eric Clapton, Paul McCartney, Genesis, Phil Collins, the Beach Boys, James Taylor, Willie Nelson, Alanis Morissette, Reba McEntire, Vince Gill, Alan Jackson, Moody Blues, Bob Seger, the Cranberries, INXS, Stone Temple Pilots and Smashing Pumpkins. 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. The quality of the PRISM-Registered Trademark- sound system is evidenced by the numerous awards Showco has received, including awards from Mix Magazine for "Outstanding Institutional Achievement--Sound Reinforcement Company of the Year" in 1988 and 1991 through 1993 (for which it was also nominated in 1994 through 1997) and for "Outstanding Technical Achievement--Sound Reinforcement Product of the Year" (for the PRISM-Registered Trademark- Digital Control System) in 1990, the Performance Readers Poll for "Sound Company of the Year" in 1988, 1989 and 1991 and Live Sound! "Instrumental Tin Ear Award--International Touring Company of the Year" in 1995. Since 1987, three different Showco sound engineers have won Mix Magazine's "Sound Engineer of the Year" award. CONVENTIONAL LIGHTING PRODUCTS. Through its subsidiaries, Theatre Projects Lighting Services Limited ("Theatre Projects"), which was acquired in 1994, and Vari-Lite, the Company offers conventional lighting equipment, including numerous types of luminaires and control consoles, large search lights, automatic gel scrollers, trusses, dimmers and smoke machines, to London's West End theatre market and the United Kingdom and European theatre touring markets, as well as to concert touring artists worldwide and to businesses for corporate events. The Company has rented equipment to such West End theatre productions as CATS, PHANTOM OF THE OPERA, SUNSET BOULEVARD and JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and to performers such as The Rolling Stones, Paul McCartney, Phil Collins, Vince Gill, Mary Chapin Carpenter and Torvill and Dean, among others. The Company is also very active in the special events market, providing services to numerous events for the British royalty. In the corporate event market, the Company has provided its conventional lighting products to numerous annual shareholder meetings and new product launches. STAGES AND STAGE SETS. Through its Brilliant Stages Limited ("Brilliant Stages") subsidiary, which was acquired in 1994, the Company sells custom stage and stage set design and construction services to the international concert touring, theatre and industrial trade show and corporate events markets. The Company's welded aluminum stages are designed using CAD software and are constructed to facilitate rapid assembly, disassembly and loading in a semi-trailer for efficient transportation. The Company is noted for high-tech stages and stage sets that include distinctive hydraulic components and sophisticated electronic effects, such as the stages and stage sets designed and built for the Rolling Stones Voodoo Lounge tour in 1995 and the Rolling Stones Bridges to Babylon Tour '97, and has provided stages and stage sets to other concert tour customers such as Pink Floyd, Elton John, Tina Turner, U2, Metallica, Peter Gabriel and Phil Collins, and to trade shows for Whirlpool, Smirnoff, Fuji Television and Philips, among others. The Company has also provided services to such theatre productions as JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and LES MISERABLES. 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, new product launches and special events. The Company provides concept development, scenery, lighting, sound, special effects, scripting, media production, sound and entertainment production for such events. Clients of the Company for these services include Mary Kay Cosmetics, Inc., Kawasaki Motor Corp., U.S.A., Warner/Elektra/Atlantic Records, The Hong Kong Trade Development Council and EXCEL Communications, Inc. 31 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, as well as to the architectural market. 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, architects, corporations and business associations. The Company believes that its customer relationships, reputation for innovative, quality products, worldwide distribution and excellent service are the keys to its success. The Rolling Stones represented 11.9% of the Company's revenues in fiscal 1995. No other customer has accounted for more than 10% of the Company's revenues for at least the last three fiscal years. AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company rents rather than sells its VARI*LITE-Registered Trademark-automated lighting products. In addition to providing the Company with a higher level of quality control over its rental products, which require trained operators and maintenance personnel, the Company believes renting has enabled it to better protect its intellectual property and generate revenues from each product over an extended time period. In order to compete effectively, the Company relies heavily on its reputation as an innovative industry leader and strives to develop strong relationships with lighting designers and other individuals who recommend lighting products to end-users. The Company markets its automated lighting systems and services in the United States through Company-owned offices in Dallas, New York, Los Angeles, Nashville, Orlando, Las Vegas and Chicago and an independent distributor system. Each Company-owned office targets a specific market segment. For example, the New York office targets the theatre market, the Nashville office targets the country music, television and concert markets, the Los Angeles office targets the television and film market and the Orlando, Las Vegas and Chicago offices target the corporate events market. The independent distributors 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, Hong Kong and Madrid, as well as, at August 31, 1997, independent distributors in Australia, Austria, Belgium, France, Germany, Korea, Singapore and Sweden and 27 independent dealers in 36 cities in the United States, Puerto Rico, Mexico, Canada, the United Kingdom and five other countries in Europe. The Company has two basic types of distribution arrangements: independent distributors and independent dealers. Under the first arrangement, the distributor advances the Company the funds needed to build the lighting systems to be rented by that distributor. Although the distributor is solely responsible for renting the equipment and providing support services to end-users, rental revenues are split on a predetermined basis between the Company and the distributor, with the distributor retaining the Company's share until the distributor's advances to the Company have been repaid. Distributors are required to undergo four weeks of intensive training in operation and maintenance of the Company's lighting systems. Under the second arrangement, independent dealers rent the less expensive Series 300-TM- systems from the Company generally for fixed lease payments over a five-year term and bear the entire risk of renting the lighting systems to end-users in regional markets. In order to satisfy customers who wanted to purchase the Company's lighting systems, in 1989 the Company began entering into 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. As of August 31, 1997, the Company had entered into over 50 sales-type leases with customers such as the Ringling Brothers and Barnum & Bailey Circus, the Las Vegas Hilton, Mirage and MGM Grand hotels in Las Vegas, the Lyric Opera in Chicago, The San Francisco Opera, Busch Gardens in Florida, the Mel Tillis Theater in Branson, Missouri and the Aladdin touring ice show. 32 Recently, the Company has begun to further emphasize its full-service strategy by expanding its capability to offer conventional lighting products. This effort is designed to increase the Company's revenues from the rental of all VARI*LITE-Registered Trademark- products. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. The Company sells its architectural lighting products primarily through a worldwide network of independent sales representatives and distributors, but also directly, to lighting designers who recommend lighting equipment for architectural applications such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. CONVENTIONAL LIGHTING PRODUCTS. The Company's conventional lighting operations, which have historically operated independently from the VARI*LITE-Registered Trademark- product operations, maintain internal marketing and distribution departments and rely heavily on the Company's established 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 and price. The Company has recently begun to integrate these operations with those of its VARI*LITE-Registered Trademark- products in order to improve its position as a full-service provider. 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. STAGES AND STAGE SETS. The Company markets its custom stage construction and stage set design services principally to production companies and set and lighting designers. The Company relies on a bidding process to award almost all contracts, but the Company believes its reputation for quickly producing quality products with sophisticated high technology motion and other features is the key element to its marketing success. Although the Company relies to some degree on the trade press for publicity, it engages in very little advertising. 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 Since 1970, the Company and its predecessors have continually developed proprietary products that serve the entertainment industry. 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 August 31, 1997, the Company's research and development group consisted of over 65 engineers. 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, 1994, 1995 and 1996, the Company's research and development expenditures totaled $3.0 million, $3.3 million and $4.4 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 August 31, 1997, the Company had registered and received more than 25 domestic patents and more than 110 foreign patents in several different countries and territories. In addition, the Company had more than 10 patent applications pending in the United States on automated lighting technology and more than 100 patent applications pending worldwide. 33 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. See "Risk Factors--Reliance on Intellectual Property." 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- Plus, Mini-Artisan-Registered Trademark- 2, Series 100-TM-, Series 200-TM-, VL1-TM-, VL2C-Registered Trademark-, VL4-Registered Trademark-, VL5-Registered Trademark-, VL5Arc-TM-, VL5B-TM-, VL6-Registered Trademark-, Showco-TM-, PRISM-Registered Trademark-, Irideon-Registered Trademark-, AR500-TM-, AR5-TM- and Composer-Registered Trademark-. MANUFACTURING With the exception of the Company's stage construction business, which is based in London, England, 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. In North America, compliance is certified by Underwriters Laboratories, Inc.-Registered Trademark- and the Canadian Standards Association. In the European Union, the CE mark signifies compliance with standards for Electromagnetic Compatibility and Low Voltage Directives and the TUV Rheinland GS Safety Mark signifies safety compliance. The Company builds all new equipment and is retrofitting certain existing equipment to be in compliance with these standards and marks. 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. See "Risk Factors-- Dependence on Key Suppliers." 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 (i) which products are in highest demand in various geographic markets and whether certain equipment should be relocated to increase utilization and revenue, (ii) whether product shortages that require the production of additional units exist and (iii) whether current pricing is at the appropriate level. The maximum utilization rates of the Company equipment are affected by production scheduling requirements of the concert touring, theatre, television and film and corporate events markets. Utilization rates are also limited by the need for maintenance, service 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. 34 MANAGEMENT INFORMATION SYSTEMS The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to compete successfully. In fiscal 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. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. 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"), Light & Sound Design, Ltd. and Martin Gruppen A/S. Of these competitors, only Light & Sound Design, Ltd. manufactures and rents equipment, while the others sell equipment to other rental companies. In the theatre, television and film, concert touring and corporate event markets, the Company competes with a number of conventional lighting rental companies, who also purchase automated lighting equipment from others. The Company competes primarily on the basis of product capabilities, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and 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. However, other companies such as Maryland Sound Industries, Inc., Audio Analysts USA, Inc., dB Sound, Inc. and Southern California Sound Image, Inc. compete effectively by offering less sophisticated equipment at lower prices. The Company competes in this business principally on product capabilities, quality and reliability, price, brand name recognition, reputation and customer service. The Company's custom stage construction and stage set design business competes principally in the United Kingdom and to a lesser extent in the United States. The primary factors affecting competition in this market include reputation for quality and the ability to quickly design and build sophisticated state-of-the-art stages and stage sets. 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. PROPERTIES The Company leases all of its facilities, including five facilities comprising approximately 153,000 square feet in Dallas, Texas under leases that expire in April 1999, but can be extended until at least April 2000. The Dallas facilities contain the Company's executive offices, manufacturing, warehouse, maintenance, advanced technologies and research and development facilities and training center. The executive offices, warehouse and manufacturing space of Vari-Lite Europe Limited ("Vari-Lite Europe"), Theatre Projects and Brilliant Stages are located in London, England in two facilities with approximately 71,500 square feet that are leased through January 1998 and March 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 10,300 square feet, the terms of which expire in February 1999 and October 2000. In addition, the Company leases sales offices in Chicago, Hong Kong, Madrid, Las Vegas, Los Angeles, Nashville, New York and Orlando. The Company believes it maintains generally adequate insurance with respect to its properties. In December 1995, the Company entered into a lease with an unaffiliated developer which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million. The Company is leasing this land for an initial term of five years, with six five-year renewal options. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3.6 million paid by the developer to acquire the land. The Company has the right to obligate the developer to construct a building on the land that the Company would lease for a term that would be identical to the land lease. The Company has an option to purchase the property at the end of the initial term or at any time during 35 the renewal terms for its original cost. The Company intends to cause the developer to construct a 233,000 square foot facility where it will consolidate all of its Dallas, Texas operations in fiscal 2000. The land lease is, and the facility lease (if any) will be, accounted for as operating leases for financial reporting purposes. See Note G of the "Notes to Consolidated Financial Statements." 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"). The Company also sought a temporary restraining order for alleged trade secrets violations, which the court denied. High End has denied the Company's claims and has counterclaimed seeking to have certain of the Company's patents declared invalid and alleging that the Company's claims are frivolous and that the Company has violated federal antitrust laws. The Company believes High End's counterclaims are without merit. Discovery in this matter is proceeding and trial is currently scheduled for February 1998. The Company has capitalized and expects to continue to capitalize its costs relating to this lawsuit ($3.0 million as of August 31, 1997 and an estimated additional $1.1 million through consummation of the trial). Unless the Company receives a judgment in this litigation that High End has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. EMPLOYEES As of August 31, 1997, the Company had 459 full-time employees. In addition, the Company had 201 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. 36 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the executive officers and directors of the Company.
NAME AGE POSITION - ---------------------------------- --- ------------------------------------------------------------------------ H. R. Brutsche III(1) 52 Chairman of the Board, President and Chief Executive Officer of the Company Michael P. Herman 54 Vice President-Finance, Chief Financial Officer and Secretary of the Company James H. Clark, Jr.(1)(2) 61 Director of the Company John D. Maxson(1) 57 Director of the Company and Chairman of the Board of Showco and Ignition J. Anthony Smith(3) 52 Director of the Company C. Vincent Prothro(2)(3)(4) 55 Director of the Company John R. Rettberg(2)(3)(4) 60 Director of the Company Keizo Akimoto 63 President and Representative Director of Vari-Lite Asia David W. Alley 52 Executive Vice President--International Operations and Director of Vari-Lite James P. Bates 51 Vice President--Information Technology and Chief Information Officer of the Company James M. Bornhorst 51 Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology and Director of Vari-Lite Richard W. Bratcher, Jr. 37 President, Chief Executive Officer and Director of Showco Brian L. Croft 59 Managing Director of VLEH Robert V. Dungan 45 Vice President, General Manager and Director of Irideon Loren J. Haas 39 Executive Vice President--North American Operations of Vari-Lite Janis C. Pestinger 46 Vice President--Administration and Assistant Secretary of the Company T. Clay Powers 38 Vice President--Product Development and Manufacturing of Vari-Lite and Director of Showco J. Scott Thompson 45 President, Chief Executive Officer and Director of Ignition
- ------- (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee (4) Member of the Omnibus Plan Committee H.R. BRUTSCHE III is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Brutsche has served as Chairman of the Board, President and Chief Executive Officer of the Company and its predecessors since 1980. Mr. Brutsche also serves as Chairman of the Board of VLEH, Vari-Lite Europe, Brilliant Stages and Theatre Projects and as President and Chief Executive Officer of Vari-Lite and Irideon. MICHAEL P. HERMAN joined the Company in June 1993 as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer. In January 1997, Mr. Herman ceased acting as Treasurer of the Company. Mr. Herman also serves as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer of Vari-Lite, Irideon, 37 Showco and Ignition. From May 1991 to May 1993, Mr. Herman was the Vice President--Finance and Chief Financial Officer of Barry's Cameras, Inc., a chain of retail camera and video stores. JAMES H. CLARK, JR. has been a director of the Company and its predecessors since 1978. Mr. Clark serves as Chairman of the Company's Executive Committee and Audit Committee and is a director of all of the Company's subsidiaries. Mr. Clark has been the Managing General Partner of Clark Partnership, Ltd., an investment and venture capital partnership, since 1988, and serves as Chairman of the Board of Texas Freezer Co. Mr. Clark's son is married to Mr. Prothro's daughter. JOHN D. MAXSON is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Maxson has served as Chairman of the Board of Showco for approximately 25 years and as Chairman of Ignition since its inception in September 1994. J. ANTHONY SMITH has been a director of the Company and its predecessors since 1981. Mr. Smith also serves as a director of all of the Company's subsidiaries. Mr. Smith has been the Managing Director of each of Hit & Run Music (Publishing) Limited, an international independent music publisher, and Hit & Run Music Limited, a professional manager of musicians, for over 20 years, and the Managing Director of Ives Street Developments Limited, a property management company, for six years. C. VINCENT PROTHRO has been a director of the Company since April 1996. Mr. Prothro has been Chairman of the Board of Dallas Semiconductor Corporation, a manufacturer of electronic chips and chip-based subsystems, since 1984 and its Chief Executive Officer and President since 1989. Mr. Prothro is also a general partner of Southwest Enterprise Associates, L.P., a venture capital fund. Mr. Prothro's daughter is married to Mr. Clark's son. JOHN R. RETTBERG has been a director of the Company since April 1996 and serves as Chairman of the Company's Compensation Committee and Omnibus Committee. Mr. Rettberg currently serves as a consultant to the Northrop Grumman Corporation ("Northrop Grumman"), an advanced technology company operating primarily in the fields of aircraft and military electronics design, development and manufacturing. Mr. Rettberg has served in this capacity since his retirement from Northrup Grumman on January 1, 1995. Mr. Rettberg joined Northrop Grumman in 1962 and, prior to his retirement, was Corporate Vice President and Treasurer. Mr. Rettberg is also a director of J.P. Morgan Investment Mgmt., a manager of mutual funds. KEIZO AKIMOTO joined Vari-Lite Asia at its inception in 1984 and has been its Representative Director (equivalent of chief executive officer) since 1985 and its President since 1992. DAVID W. ALLEY has been Executive Vice President--International Operations of Vari-Lite since February 1995 and has been a director of Vari-Lite since March 1987 and of each of VLEH and Vari-Lite Asia since October 1994. From December 1993 to February 1995, Mr. Alley served as Vice President-East and West Coast Operations of Vari-Lite and as its Vice President-West Coast Operations from June 1990 until December 1993. Mr. Alley has held various other positions with Vari-Lite and Showco since 1981. JAMES P. BATES has been the Vice President--Information Technology and Chief Information Officer of the Company since September 1996. Prior to that time since 1989, Mr. Bates held various positions with DSC Communications Corp., most recently serving as Director of Applications Systems Implementation. JAMES M. BORNHORST has been the Vice President and Chief Science Officer of the Company and the Vice President--Advanced Technology of Vari-Lite since October 1995 and a director of Vari-Lite since its inception. Prior to October 1995, Mr. Bornhorst served as Vice President--Engineering of Vari-Lite since 1983 and has been employed since 1972 in various other capacities with Showco and Vari-Lite. RICHARD W. BRATCHER, JR. has been the President and Chief Executive Officer and a director of Showco since July 1996. He served as Vice President and General Manager of Showco from August 1993 until July 1996 and as its shop manager of Showco from August 1987 until August 1993. Mr. Bratcher has also served in various other capacities with Showco since 1983. BRIAN L. CROFT has been the Managing Director of VLEH and Vari-Lite Europe since the formation of VLEH and its acquisition of Vari-Lite Europe in March 1994. From 1989 until its acquisition by the Company in 38 March 1994, Mr. Croft was the General Manager and a director of Vari-Lite Europe, Ltd., which was then an independent VARI*LITE-Registered Trademark- distributor and a subsidiary of the Samuelson Group plc. ROBERT V. DUNGAN has served as Vice President and General Manager of Irideon since its inception in September 1994 and as a director of Irideon since January 1996. From January 1993 to September 1994, Mr. Dungan served as Vice President-Products Group of Vari-Lite and served as its Operations Manager from 1988 until January 1993. He has also served in various other capacities with Vari-Lite since 1983. LOREN J. HAAS has been the Executive Vice President--North American Operations of Vari-Lite since February 1995. From October 1992 until February 1995, Mr. Haas was General Manager--Dallas of Vari-Lite and was its Marketing Manager from December 1990 until October 1992. Mr. Haas has served in various other capacities with Vari-Lite since 1987. JANIS C. PESTINGER has been Vice President--Administration and Assistant Secretary of the Company since November 1996 and May 1993, respectively. Ms. Pestinger also has served as Vice President--Administration of Vari-Lite since December 1993 and for more than three years prior to that as its Risk and Benefits Manager. Ms. Pestinger has served in various other positions with Vari-Lite and Showco since 1979. T. CLAY POWERS has been the Vice President--Product Development and Manufacturing of Vari-Lite since July 1996. Prior to that he served as the President and Chief Executive Officer of Showco since April 1992. Mr. Powers also has served as a director of Showco since December 1990. From January 1991 to April 1992, Mr. Powers served as Vice President and General Manager of Showco and from January 1990 to January 1991 Mr. Powers served as its Vice President--Internal Operations. Mr. Powers has served in various other capacities with Showco since 1982. J. SCOTT THOMPSON has served as President and Chief Executive Officer of Ignition since October 1994 and as a director of Ignition and its predecessor since January 1992. Prior to October 1994, Mr. Thompson was a Vice President of Showco since 1987 and served in various capacities with Showco since 1978. Except for Mr. Brutsche, all executive officers serve at the discretion of the Board of Directors. See "Management--Employment Agreements." BOARD OF DIRECTORS DIRECTOR CLASSES. The Board of Directors is comprised of two Class I Directors (Messrs. Maxson and Prothro), two Class II Directors (Messrs. Clark and Rettberg) and two Class III Directors (Messrs. Brutsche and Smith). The terms of the Class I, Class II and Class III directors will expire at the annual meetings of stockholders of the Company held in 1998, 1999 and 2000, respectively. At each of those annual meetings and thereafter, directors will be elected for a three-year term to succeed the directors of the class whose terms are then to expire. DIRECTOR COMPENSATION. Each director who is not an employee of the Company or any of its subsidiaries is paid an annual fee of $20,000, plus $1,000 for each meeting of the Board of Directors or a Committee of the Board of Directors attended. The Company also pays all transportation and lodging costs for directors to attend meetings of the Board of Directors and its Committees. Each of Messrs. Clark, Maxson and Smith also receives $10,000 annually plus $250 per meeting for serving as a director of Vari-Lite, $5,000 annually plus $62.50 per meeting for serving as a director of VLEH, $4,000 annually plus $125 per meeting for serving as a director of Showco, $4,000 annually plus $62.50 per meeting for serving as a director of each of Vari-Lite Europe and Theatre Projects, $3,000 annually plus $125 per meeting for serving as a director of each of Vari-Lite Asia, Ignition and Irideon and $3,000 annually plus $62.50 per meeting for serving as a director of Brilliant Stages. As of July 1, 1995, the Company entered into a Deferred Compensation Agreement ("Deferred Compensation Agreement") with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with each of Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after 39 the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. Each of Messrs. Clark, Maxson and Smith (each a "Consultant") also has entered into a Consulting Agreement with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson each receives an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more life insurance policies (collectively "Policies" and individually "Policy") pursuant to split-dollar agreements (the "Split-Dollar Agreements") with the Company. The Split-Dollar Agreements each provides for sharing the costs and benefits of the Policy between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. An irrevocable trust created or an individual designated by Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, who is the owner of the Policy (the "Owner") reimburses the Company for the portion of the premium attributable to the death benefit protection of each Policy (the "P.S. 58 Cost"). The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policy that is subject to such Split-Dollar Agreement. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee and an Omnibus Committee. The Executive Committee is composed of Messrs. Clark, Maxson and Brutsche, with Mr. Clark serving as Chairman. The Executive Committee has the authority, between meetings of the Board of Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must be approved by the entire Board. The Audit Committee is composed of Messrs. Clark, Prothro and Rettberg, with Mr. Clark serving as Chairman. The Audit Committee is responsible for (a) reviewing the scope of, and the fees for, the annual audit, (b) reviewing with the independent auditors the Company's accounting practices and policies, (c) reviewing with the independent auditors their final report, (d) reviewing with internal and independent auditors overall accounting and financial controls and (e) being available to the independent auditors for consultation purposes. The Compensation Committee is composed of Messrs. Smith, Prothro and Rettberg, with Mr. Rettberg serving as Chairman. With the exception of granting awards under the Omnibus Plan and Annual Incentive Plan (as hereinafter defined), the Compensation Committee determines the compensation of the officers of the Company and performs other similar functions. 40 The Omnibus Committee is composed of Messrs. Prothro and Rettberg, with Mr. Rettberg serving as Chairman. The Omnibus Committee administers the Omnibus Plan and the Annual Incentive Plan, including the determination of eligibility and the granting of awards under such plans. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to the Company's chief executive officer and its four other most highly compensated executive officers and a former executive officer of the Company for services rendered for the fiscal year ended September 30, 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
FISCAL 1996 ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) COMPENSATION($) - ---------------------------------------------------------- --------- ----------- --------------- ---------------- H. R. Brutsche III........................................ 433,008 48,713 167,000(1) 45,259(2) Chairman of the Board, President and Chief Executive Officer of the Company Keizo Akimoto............................................. 199,737(3) 19,495(3) -- 2,805(4) Representative Director of Vari-Lite Asia David W. Alley............................................ 154,500 11,513 -- 6,660(5) Executive Vice President--International Operations of Vari-Lite James M. Bornhorst........................................ 136,299 9,449 -- 6,374(6) Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology of Vari-Lite T. Clay Powers............................................ 126,267 10,500 -- 6,849(7) Vice President--Product Development and Manufacturing of Vari-Lite James E. Kinnu(8) ........................................ 350,016 35,002 -- --
- ------- (1) This amount was paid to Mr. Brutsche pursuant to the Deferred Compensation Agreement. See "Management--Board of Directors--Directors Compensation." (2) This amount includes $3,292 and $20,725 which were paid on behalf of Mr. Brutsche for the Policies pursuant to the Split-Dollar Agreements and for a term life insurance policy, respectively, maintained on the life of Mr. Brutsche; $13,817 which was paid to reimburse Mr. Brutsche for taxable income incurred with respect to the premiums paid on his behalf on the term life insurance policy; $4,620 which was contributed by the Company on behalf of Mr. Brutsche to the Company's 401(k) plan; and $2,805 worth of Common Stock held in the ESOP which was allocated to Mr. Brutsche. See "Management--Employment Agreements." (3) Calculated by applying the conversion rate of Japanese yen to U.S. dollars based on the exchange rate in effect at the end of each month during fiscal 1996. (4) This amount was contributed by the Company on behalf of Mr. Akimoto to the Equivalence Plan. (5) This amount includes $3,855 which was contributed by the Company on behalf of Mr. Alley to the Company's 401(k) plan and $2,805 worth of Common Stock held in the ESOP which was allocated to Mr. Alley. (6) This amount includes $3,756 which was contributed by the Company on behalf of Mr. Bornhorst to the Company's 401(k) plan and $2,618 worth of Common Stock held in the ESOP which was allocated to Mr. Bornhorst. (7) This amount includes $4,231 which was contributed by the Company on behalf of Mr. Powers to the Company's 401(k) plan and $2,618 worth of Common Stock held in the ESOP which was allocated to Mr. Powers. (8) Prior to his departure from the Company, effective September 30, 1996, Mr. Kinnu served as the Company's Senior Executive Vice President and Chief Operating Officer. 41 EMPLOYMENT AGREEMENTS As of July 1, 1995, the Company entered into an Employment Agreement (the "Brutsche Employment Agreement") with H. R. Brutsche III, Chairman of the Board, President and Chief Executive Officer of the Company. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. Mr. Brutsche may be terminated in the event of his death or permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If Mr. Brutsche is terminated because of his death, his estate will receive his salary through the end of the month in which his death occurs plus the prorated portion of any bonus due to him pursuant to the Annual Incentive Plan. If Mr. Brutsche is terminated because of his permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits he receives. If Mr. Brutsche is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. In addition to those provided for under the Brutsche Employment Agreement, Mr. Brutsche is eligible to receive certain other benefits. See "Management--Board of Directors--Director Compensation." The Company entered into an Employment Agreement (the "Kinnu Employment Agreement") with James E. Kinnu, the former Senior Executive Vice President and Chief Operating Officer of the Company, as of August 28, 1995. The Kinnu Employment Agreement had an initial term of three years and provided for Mr. Kinnu to receive an annual base salary of $350,000 and to participate in the Company's employee benefit plans. Pursuant to the Kinnu Employment Agreement, on September 10, 1995, Mr. Kinnu received an interest-free loan of $200,000 (the "Kinnu Loan") for a term of three years with the principal to be forgiven in equal amounts each month over the term of the Kinnu Employment Agreement, and reimbursement of relocation expenses of up to $25,000. Effective September 30, 1996, Mr. Kinnu was terminated by the Company without cause. In connection with his termination, the Company will continue to pay Mr. Kinnu as a consultant $350,000 per year until September 30, 1998, agreed to cancel and forgive the Kinnu Loan and acquired 37,637 shares of Common Stock in consideration for the forgiveness and cancellation of Mr. Kinnu's $132,900 principal amount indebtedness to the Company, which accrued interest at 8% per annum, matured on August 31, 1998 and was incurred by Mr. Kinnu to acquire such shares of Common Stock. EMPLOYEE BENEFIT PLANS OMNIBUS PLAN. In August 1996, the Company adopted the Vari-Lite International, Inc. 1997 Omnibus Plan (the "Omnibus Plan") to attract and retain qualified employees and non-employee directors. An aggregate of 800,000 shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications, has been authorized for issuance upon exercise of options or as bonus stock. In addition, stock appreciation rights ("SARs"), phantom stock, dividend equivalents or restricted or performance awards ("Awards") may be granted under the Omnibus Plan. The Omnibus Committee administers the Omnibus Plan and determines to whom Awards are to be granted and the terms and conditions, including the number of shares and the period of exercisability thereof. Awards may be granted to officers, management, other key employees and to non-employee directors of the Company or any of its present or future subsidiaries as determined by the Omnibus Committee, provided that any options to be granted to non-employee directors who are members of the Omnibus Committee must be granted by the entire Board of Directors of the Company. The Omnibus Plan authorizes the grant or issuance of both nonqualified stock options and incentive stock options, with the terms of each such option set forth in separate agreements. The Omnibus Plan requires that the exercise price for each stock option must be not less than 100% of the fair market value of the Common Stock at 42 the time the option is granted. No incentive stock option, however, may be granted to either a non-employee director or to an employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company unless the option price is at least 110% of the fair market value of the Common Stock at the date of grant. The fair market value of stock options that may be granted to an employee in any calendar year is not limited, but no employee may be granted incentive stock options that first become exercisable during a calendar year to purchase Common Stock with an aggregate fair market value (determined at the time of grant) in excess of $100,000. In addition, no grantee may be granted more than an aggregate of 800,000 shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications. SARs may be granted separately or in tandem with the grant of an option. Any performance awards may be denominated or payable in cash, Common Stock, other securities or other Awards and shall confer on the holder thereof the right to receive payments based upon the achievement of such performance goals and for such periods as the Omnibus Committee may establish. Bonus stock may be sold to the grantees at various prices (but not below par value) and made subject to such restrictions as may be determined by the Omnibus Committee. The Omnibus Committee may grant other Awards that provide the grantee with the right to purchase Common Stock or that are valued by reference to the fair market value of the Common Stock including, but not limited to, phantom securities or dividend equivalents. The exercise or purchase price for all options, restricted stock and other rights to acquire Common Stock, together with any applicable tax required to be withheld, may be paid in cash or, at the discretion of the Omnibus Committee, with shares of Common Stock owned by the grantee (or issuable upon exercise of the option), execution of a promissory note by the grantee or with other lawful consideration. The dates on which options or other Awards first become exercisable and on which they expire will be set forth in individual stock options or other agreements setting forth the terms of the Awards. Such agreements may provide that options and other awards expire upon termination of the grantee's status as an employee or director or for any other reason and may provide that such options continue to be exercisable following the grantee's death or disability by the grantee's estate or by the person who acquired the right to exercise the option by bequest or inheritance, or by the grantee or his representative in the event of the grantee's disability, provided the option is exercised prior to the earlier of the date of its expiration or six months after the date of the grantee's death or disability. In the event of a change of control (as defined in the Omnibus Plan) of the Company, all Awards that have not expired will become fully and immediately vested and exercisable and may be exercised for the remaining term of such Awards. No Award may be assigned or transferred by the grantee, except by will or the laws of intestate succession, although shares of Common Stock issued under the Omnibus Plan may be transferred if all applicable restrictions have lapsed. Amendments of the Omnibus Plan to change the class of persons eligible to be granted awards or increase the number of shares as to which options or bonus stock may be granted (except for adjustments resulting from stock splits and the like) require the approval of the Company's stockholders. In all other respects the Omnibus Plan can be amended, modified, suspended or terminated by the Omnibus Committee, unless such action would otherwise require stockholder approval as a matter of applicable law, regulation or rule. Amendments of the Omnibus Plan may not, without the consent of the grantee, affect such grantee's rights under an Award previously granted, unless the Award itself otherwise expressly so provides. The Omnibus Plan terminates 10 years from the date of its adoption by the Company's Board of Directors. Subject to and concurrently with consummation of the Offering, options to purchase 496,000 shares of Common Stock have been granted, with an exercise price equal to the Offering price, to directors, officers and certain key employees of the Company, including options to purchase 75,000, 15,000, 20,000, 25,000, 25,000, 12,000, 12,000, 10,000, 4,800 and 4,800 shares of Common Stock granted to Messrs. Brutsche, Akimoto, Alley, Bornhorst, Powers, Clark, Maxson, Smith, Prothro and Rettberg, respectively. ESOP. The Company adopted the Vari-Lite International, Inc. Employees' Stock Ownership Plan (the "ESOP"), effective as of January 1, 1995, for the benefit of its employees and the employees of its participating 43 subsidiaries (the Company and its participating subsidiaries are referred to herein as the "Employers") who are at least 21 years of age, have completed at least one "year of service" (as defined in the ESOP) and are actively contributing to the Company's 401(k) plan. The ESOP is intended to be an eligible individual account stock bonus plan that qualifies under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and, subject to certain maximum provisions, allocates the Employers' discretionary contributions to each participating employee according to the ratio of such employee's total compensation to the aggregate amount of compensation received by all participants in the ESOP. The term "compensation" includes base salary paid during a plan year and cafeteria deferrals under Section 125 of the Code, but does not include reimbursements or other expenses, allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation, welfare benefits, bonuses, overtime pay or amounts deferred under a salary deferral arrangement under Section 401(k) of the Code. The Company intends, but is not required, to make annual contributions to the ESOP in the form of nonelective contributions and qualified matching contributions (as each is defined in the ESOP) consisting of shares of Common Stock, cash or a combination thereof. The ESOP provides for full distributions of employee account balances for normal and late retirements, disability and death and distributions of vested portions of employee accounts upon a separation of service (as defined in the ESOP). Generally, a participant's benefits under the ESOP will become vested 20% per year commencing upon completion of three years of service and be fully vested upon completion of seven years of service. The assets of the ESOP are held by Overton Bank and Trust, N.A., as trustee of The Vari-Lite International, Inc. Employees' Stock Ownership Trust, which Trust is intended to be exempt from taxation under Section 501(a) of the Code. The Company acts as Plan Administrator of the ESOP. EQUIVALENCE PLAN. The Company adopted The Vari-Lite International, Inc. Employees' Stock Equivalence Plan (the "Equivalence Plan"), effective as of January 1, 1995, for the benefit of certain employees of subsidiaries of the Company domiciled outside of the United States who are at least 21 years of age and have completed at least one "year of service" (as defined in the Equivalence Plan). The Equivalence Plan is intended to be a nonqualified employee retirement plan known as a phantom stock plan under United States tax laws. Employees participating in the Equivalence Plan are eligible to receive stock equivalence units ("Units") credited to their accounts along with the contractual right to receive the cash value of such Units in the future. No shares of stock will be distributed under the Equivalence Plan. The value of each Unit is equal to the fair market value of one share of Common Stock on the date such Unit is credited to a participant's account. Upon conversion of the Units in accordance with the terms of the Equivalence Plan, participants shall be entitled to receive, for each Unit converted, an amount equal to the fair market value of one share of Common Stock on the date of conversion. A holder of Units shall not have any dividend or voting rights or any other rights as a stockholder of the Company, unless otherwise provided by the Board of Directors of the Company. The number of Units awarded under the Equivalence Plan, if any, will be determined each year by the Compensation Committee. The Company's awards of Units under the Equivalence Plan shall be made, subject to certain maximum provisions, according to the ratio of each eligible employee's total compensation to the amount of total compensation received by all participants in the Equivalence Plan. The Equivalence Plan provides for full distributions of employee account balances upon the retirement, disability or death of an employee and distributions of vested percentages of employee accounts upon termination of employment for any other reason. Generally, a participant's benefits under the Equivalence Plan will fully vest upon his or her completion of seven years of service. The Company established an irrevocable grantor trust within the meaning of the Code (commonly referred to as a rabbi trust) to provide funding for benefit payments from the Equivalence Plan. Although the employers' contributions to the rabbi trust are generally irrevocable, the assets placed in the trust must remain subject to the claims of the employers' creditors. The rabbi trust provides the participants in the Equivalence Plan with additional security that they will receive benefits in the event of a change in the management of the Company. 44 The assets of the Equivalence Plan are held by Bank of Butterfield International (Cayman) Ltd., as trustee of The Vari-Lite International, Inc. Equivalence Plan Trust, and the Company acts as Plan Administrator. ANNUAL INCENTIVE PLAN. On June 13, 1995, the Company adopted the Vari-Lite International, Inc. Annual Incentive Plan (the "Annual Incentive Plan"), effective October 1, 1994, to provide annual bonuses to eligible employees. Any employee who is employed by the Company or one of its subsidiaries on March 31 of a year shall be considered an eligible employee for that year. Bonus amounts for a year may be granted based on predetermined targets ("formula derived awards") or in the discretion of the Omnibus Committee ("discretionary awards"), or a combination of both. The targets for each year are established by the Omnibus Committee and may be based solely on the Company's attaining its operating income goal for that year (as established by the Omnibus Committee) or may be based in part on the level of attainment by the Company of that operating income goal and in part on the level of attainment of performance measures established by the Omnibus Committee for that year based on subsidiary, department or individual performance, or a combination thereof as determined by the Omnibus Committee. The relative weight placed on each performance measure by the Omnibus Committee may vary for each eligible employee based on his position with the Company, or its subsidiaries or departments. Each year each eligible employee shall have the opportunity to earn a specified percentage of his base salary (excluding any bonus, commission or overtime) for that year as a formula derived award. The range of percentage of base salary that a participant may earn as a formula derived award is specified in the Annual Incentive Plan and is determined by each eligible employee's level of responsibility and potential impact on the Company's performance. No eligible employee shall be deemed to have earned a formula derived award for a year unless the Company attains the threshold level (specified in the Annual Incentive Plan) of operating income established for that year, although the Company expects to modify this restriction in the future. Discretionary awards are not limited. The Company shall make payment of all bonus amounts for a year, if any, to each eligible employee in cash no later than 90 days after the end of that year (the "Payout Date"). Unless an eligible employee's employment terminates due to death, total disability or retirement at or after age 65 during the year after he has been employed for at least six months during that year, the employee must be employed by the Company or one of its subsidiaries on the Payout Date for a year to be entitled to receive payment of his bonus, if any, for that year. If an eligible employee becomes eligible after the first day of the year or dies, retires at or after age 65 or becomes totally disabled during the year, after being employed by the Company for at least six months during that year, the bonus amount, if any, payable to him for that year shall be prorated to reflect the actual length of his service with the Company and its subsidiaries during that year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION At the beginning the fiscal year ended September 30, 1996, the Compensation Committee of the Company consisted of Messrs. Maxson, Clark and Brutsche. Mr. Brutsche is the Chairman of the Board, President and Chief Executive Officer of the Company. In May 1996, Messrs. Smith, Prothro and Rettberg replaced Messrs. Maxson, Clark and Brutsche on the Compensation Committee. As of July 1, 1995, the Company entered into the Brutsche Employment Agreement with Mr. Brutsche, Chairman of the Board, President and Chief Executive Officer of the Company. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. Mr. Brutsche may be terminated in the event of his death or permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If Mr. Brutsche is terminated because of his death, his estate will receive his salary through the end of the month in which his death occurs plus the prorated portion of any bonus due to him pursuant to the Annual 45 Incentive Plan. If Mr. Brutsche is terminated because of his permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits. If Mr. Brutsche is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. As of July 1, 1995, the Company entered into the Deferred Compensation Agreements with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. Messrs. Clark, Maxson and Smith also have entered into the Consulting Agreements with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson each receives an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more Policies pursuant to Split-Dollar Agreements with the Company. The Split-Dollar Agreements each provides for sharing the costs and benefits of the Policy between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. The Owner reimburses the Company for the P.S. 58 Cost. The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policy that is subject to such Split-Dollar Agreement. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. CERTAIN TRANSACTIONS In fiscal years 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, Philip D.C. Collins, who beneficially owns more than five percent of the Common Stock of the Company, paid the Company, $1.5 million, $0.9 million, $0 and $1.9 million, respectively, for the rental of automated lighting products and other services for use in his concert tours. Hit & Run Music Limited, a corporation owned by J. Anthony Smith, manages Mr. Collins. The Company believes that the terms of the above transactions were at least as favorable to the Company as those which could have been obtained in an arm's length transaction with an unaffiliated third party. In addition, certain directors of the Company receive deferred compensation and consulting payments. See "Management--Compensation Committee Interlocks and Inside Participation." 46 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock, as of September 15, 1997, by (a) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (b) each director of the Company, (c) each Named Executive Officer and (d) all executive officers and directors as a group. The Company believes that each of such stockholders has the sole voting and dispositive power over the shares held by such stockholder except as otherwise indicated. See "Risk Factors--Control of the Company by Existing Stockholders."
SHARES PERCENTAGE OF OUTSTANDING BENEFICIALLY OWNED COMMON STOCK BEFORE -------------------------------------- NAME THE OFFERING BEFORE OFFERING AFTER OFFERING(1) - ------------------------------------------------------ ------------------------ ----------------- ------------------- H. R. Brutsche III(2)................................. 743,997 12.8 9.5 James H. Clark, Jr.(3)(4)............................. 650,699 11.2 8.3 John D. Maxson(3)(5).................................. 743,187 12.8 9.5 C. Vincent Prothro.................................... -- -- -- John R. Rettberg...................................... -- -- -- J. Anthony Smith(6)................................... 811,540 14.0 10.4 Anthony G. Banks(6)................................... 811,532 14.0 10.4 Philip D.C. Collins(6)................................ 811,536 14.0 10.4 Michael J.C.C. Rutherford(6).......................... 811,532 14.0 10.4 Alice Spradley(7)..................................... 455,402 7.9 5.8 Keizo Akimoto......................................... -- -- -- David W. Alley(8)..................................... 38,447 * * James M. Bornhorst(9)................................. 221,636 3.8 2.8 T. Clay Powers(10).................................... 10,740 * * James E. Kinnu(11).................................... -- -- -- All officers and directors as a group (18 persons)(12)........................................ 3,335,623 57.5 42.8
- -------- * less than one percent (1) Assumes no shares are sold pursuant to any exercise of the Underwriters' over-allotment option. See "Selling Stockholders." (2) Includes 45,164 shares held by Brutsche Family Trust, a trust of which BBH serves as trustee, and 810 shares held by the ESOP for the benefit of Mr. Brutsche. Mr. Brutsche disclaims beneficial ownership of the shares held by Brutsche Family Trust. Mr. Brutsche's address is 201 Regal Row, Dallas, Texas 75247. (3) The address of Messrs. Clark and Maxson is 8117 Preston Road, Suite 220, Dallas, Texas 75225. (4) Includes 621,801 shares held by Clark Partnership, Ltd., a limited partnership of which Mr. Clark is the managing general partner, and 3,764 shares held by Mr. Clark's wife. Mr. Clark disclaims beneficial ownership of the shares owned by his wife. (5) Includes 53,542 shares held by Peggy Maxson 1996 Irrevocable Trust, a trust of which BBH serves as trustee. Mr. Maxson disclaims beneficial ownership of such shares. (6) The shares beneficially owned by Messrs. Banks, Collins, Rutherford and Smith include 414,336 shares, 414,336 shares, 414,336 shares and 414,340 shares held by Walbrook Trustees (Jersey) Ltd., Re: G45 ("G45"), Walbrook Trustees (Jersey) Ltd., Re: G46 ("G46"), Walbrook Trustees (Jersey) Ltd., Re: G47 ("G47") and Walbrook Trustees (Jersey) Ltd., Re: G48 ("G48"), respectively. G45, G46, G47 and G48 are the stockholders of Ashtray Music Ltd., a United Kingdom limited company. The 318,787 shares held by Ashtray Music Ltd. are included in the shares owned beneficially by each of Messrs. Banks, Collins, Rutherford and Smith. Except for 78,409 shares, 78,413 shares, 78,409 shares and 78,413 shares, which are owned by Messrs. Banks, Collins, Rutherford and Smith, respectively, Messrs. Banks, Collins, Rutherford and Smith disclaim beneficial ownership of all such shares. (7) Includes 56,192 shares held by The Walter & Alice Spradley Family Trust, 203,243 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #1, 56,192 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #2A and 139,775 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #2B. Alice Spradley is the trustee of all of such trusts. Mrs. Spradley's address is 3131 McKinney Avenue, Suite 490, Dallas, Texas 75204. (8) Includes 810 shares held by the ESOP for the benefit of Mr. Alley. (9) Includes 693 shares held by the ESOP for the benefit of Mr. Bornhorst. (10) Includes 650 shares held by the ESOP for the benefit of Mr. Powers. (11) Effective September 30, 1996, Mr. Kinnu was terminated as the Company's Senior Executive Vice President and Chief Operating Officer. (12) Includes 5,912 shares held by the ESOP for the benefit of some of such persons. 47 SELLING STOCKHOLDERS The Selling Stockholders listed in the following table have granted to the several Underwriters options, exercisable within 45 days from the date of this Prospectus, to purchase up to 300,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." The respective number of shares of Common Stock subject to such options by each Selling Stockholder is set forth opposite his name. The amount beneficially owned by the Selling Stockholders prior to the Offering are as of September 15, 1997:
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE THE SHARES OFFERED OWNED AFTER THE OFFERING SUBJECT TO OFFERING(1) ---------------------- OVER-ALLOTMENT ---------------------- NAME NUMBER PERCENTAGE OPTIONS NUMBER PERCENTAGE - ---------------------------------------------------------------- --------- ----------- --------------- --------- ----------- David W. Alley(2)(3)............................................ 38,447 * 1,976 36,471 * Ashtray Music Ltd.(4)........................................... 318,787 5.5 26,728 292,059 3.7 Anthony G. Banks(4)............................................. 811,532 14.0 4,116 758,936 9.7 H.R. Brutsche III(2)(5)......................................... 743,997 12.8 39,972 704,025 9.0 Clark Partnership, Ltd.(6)...................................... 621,801 10.7 34,412 587,389 7.5 James H. Clark, Jr.(2)(6)(7).................................... 650,699 11.2 1,319 614,968 7.9 James H. Cullum Clark(7)........................................ 73,670 1.3 3,867 69,803 * Philip D.C. Collins(4)(8)....................................... 811,536 14.0 4,116 758,940 9.7 John Covington(9)(10)........................................... 80,514 1.4 4,205 76,309 * Brian L. Croft(2)............................................... 9,409 * 409 9,000 * Robert V. Dungan(2)(11)......................................... 9,833 * 494 9,339 * Robert W. Magruder(9)(12)....................................... 28,249 * 1,457 26,792 * John D. Maxson(2)(13)........................................... 743,187 12.8 39,536 700,840 9.0 Peggy Maxson 1996 Irrevocable Trust(13)......................... 53,542 * 2,811 50,731 * Howard Page(9)(14).............................................. 4,163 * 198 3,965 * Michael J.C.C. Rutherford(4).................................... 811,532 14.0 4,116 758,936 9.7 J. Anthony Smith(2)(4)(8)....................................... 811,540 14.0 4,116 758,944 9.7 The Walter & Alice Spradley Living Trust--Marital Trust #1...... 203,243 3.5 26,476 176,767 2.2 Brooks W. Taylor(9)(15)......................................... 80,538 1.4 4,205 76,333 * J. Scott Thompson(2)(16)........................................ 37,635 * 1,708 35,927 * Thomas Walsh(9)(17)............................................. 80,552 1.4 4,205 76,347 * Walbrook Trustees (Jersey) Ltd., Re: G45(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G46(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G47(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G48(4)..................... 733,127 12.6 21,752 684,647 8.8 Yale 1994 Trust................................................. 18,818 * 2,550 16,268 *
- -------- * less than one percent. (1) Assumes that the Underwriters' over-allotment option is exercised in full. (2) Executive officer or director of the Company. See "Management--Directors and Executive Officers." (3) Includes 810 shares held by the ESOP for the benefit of Mr. Alley. (4) The shares beneficially owned by Messrs. Banks, Collins, Rutherford and Smith include 414,336 shares, 414,336 shares, 414,336 shares and 414,340 shares held by G45, G46, G47 and G48, respectively. G45, G46, G47 and G48 are the stockholders of Ashtray Music Ltd., a United Kingdom limited company. The 318,787 shares held by Ashtray Music Ltd. are included in the shares owned beneficially by each of Messrs. Banks, Collins, Rutherford and Smith. Except for 78,409 shares, 78,413 shares, 78,409 shares and 78,413 shares, which are owned by Messrs. Banks, Collins, Rutherford and Smith, respectively, Messrs. Banks, Collins, Rutherford and Smith disclaim beneficial ownership of all such shares. (5) Includes 45,164 shares held by Brutsche Family Trust, a trust of which BBH serves as trustee, and 810 shares held by the ESOP for the benefit of Mr. Brutsche. Mr. Brutsche disclaims beneficial ownership of such shares. (6) The shares beneficially owned by Mr. Clark include 621,801 shares held by Clark Partnership, Ltd., a limited partnership of which Mr. Clark is the managing general partner, and 3,764 shares held by Mr. Clark's wife. Mr. Clark disclaims beneficial ownership of the shares held by his wife. (7) Mr. James H. Clark, Jr. is the father of Mr. James H. Cullum Clark. (8) Mr. Collins is a significant customer of the Company and Mr. Smith owns the corporation that manages Mr. Collins. See "Management--Certain Transactions." (9) Non-executive officer employee of the Company. (10) Includes 419 shares held by the ESOP for the benefit of Mr. Covington. (11) Includes 424 shares held by the ESOP for the benefit of Mr. Dungan. (12) Includes 503 shares held by the ESOP for the benefit of Mr. Magruder. (13) The shares of Common Stock held by Peggy Maxson 1996 Irrevocable Trust are beneficially owned by Mr. Maxson, who disclaims beneficial ownership of such shares. (14) Includes 399 shares held by the ESOP for the benefit of Mr. Page. (15) Includes 443 shares held by the ESOP for the benefit of Mr. Taylor. (16) Includes 480 shares held by the ESOP for the benefit of Mr. Thompson. (17) Includes 457 shares held by the ESOP for the benefit of Mr. Walsh. 48 DESCRIPTION OF CAPITAL STOCK The Company has authorized capital stock consisting of 40,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. At September 15, 1997, there were 5,800,003 shares of Common Stock outstanding, owned by 54 holders of record, and there were no shares of Preferred Stock outstanding. A total of 800,000 shares of Common Stock are reserved for future issuance under, and for issuance upon the exercise of options to be granted under the Omnibus Plan, and a total of 242,233 shares of Common Stock are reserved for issuance upon the exercise of outstanding warrants. See "Management--Omnibus Plan" and "Shares Eligible for Future Sale." Upon consummation of the Offering, 7,800,003 shares of Common Stock and no shares of Preferred Stock will be outstanding. COMMON STOCK All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby when issued and paid for will be, fully paid and nonassessable. All holders of Common Stock have full voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Votes may not be cumulated in the election of directors. Stockholders have no preemptive or subscription rights. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors from funds legally available therefor and are entitled, upon liquidation, to share ratably in all assets remaining after payment of liabilities. The rights of holders of Common Stock will be subject to any preferential rights of any Preferred Stock which may be issued in the future. The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. PREFERRED STOCK The Board of Directors of the Company is authorized (without any further action by the stockholders) to issue Preferred Stock in one or more series and to fix voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences. The Board of Directors may issue Preferred Stock for such consideration and on such terms as it deems desirable. Satisfaction of any dividend preferences of outstanding Preferred Stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of Directors of the Company, without stockholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the holders of Common Stock. The Company has no present intention to issue any shares of Preferred Stock. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS ANTI-TAKEOVER PROVISIONS. The Certificate of Incorporation and By-Laws contain certain provisions, in addition to the authorization of the Preferred Stock, that may reduce the likelihood of a change in management or voting control of the Company without the consent of the Company's Board of Directors. These provisions could have the effect of delaying, deterring or preventing tender offers or takeover attempts that some or a majority of the Company's stockholders might consider to be in the stockholders' best interest, including offers or attempts that might result in a premium over the market price for the Common Stock. The By-Laws of the Company can be amended by the stockholders of the Company only upon the affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company. Additionally, in the event of a change of control (as defined in the Omnibus Plan) of the Company, all awards under the Omnibus Plan that have not expired become fully and immediately vested and exercisable and may be exercised for the remaining terms of such awards. 49 STAGGERED BOARD OF DIRECTORS. The Certificate of Incorporation and By-Laws divide the Board of Directors into three classes that are elected to staggered three-year terms. The Company believes that a staggered Board of Directors will help assure the continuity and stability of the Company's Board of Directors and the Company's business strategies and policies. In addition, the staggered board provisions help ensure that the Company's Board of Directors, if confronted with an unsolicited proposal from a third party that has acquired a block of the voting stock of the Company, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all stockholders. The staggered board provisions could increase the likelihood that, in the event of a takeover of the Company, incumbent directors would retain their positions. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. REMOVAL OF DIRECTORS DURING THEIR TERMS. Under the Certificate of Incorporation and By-Laws, directors may be removed during their term of service only "for cause" and only by the affirmative vote of not less than 80% of the outstanding voting stock of the Company. As defined, "for cause" means: (i) commission of an act of fraud or embezzlement against the Company; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Company or its stockholders; or (iv) breach of fiduciary duty owed to the Company. The By-Laws also provide that vacant directorships may be filled by the Board of Directors. STOCKHOLDER ACTION. Unless limited by the Certificate of Incorporation of a corporation, the Delaware General Corporation Law permits stockholder action without a meeting, without prior notice and without a vote upon the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The Certificate of Incorporation and By-Laws prohibit stockholder action without a meeting. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. Additionally, the Certificate of Incorporation and By-Laws provide that meetings of the stockholders can only be called by the Chief Executive Officer, a majority of the Board of Directors or holders of not less than 50% of the outstanding voting stock of the Company. FAIR PRICE PROVISION. The Certificate of Incorporation includes a "fair price" provision that requires the affirmative vote of the holders of at least 80% of the outstanding voting stock of the Company to approve a merger with, or disposition of assets or the issuance of securities having a fair market value of $5.0 million or more to, an interested stockholder (as hereinafter defined), a liquidation proposed by an interested stockholder or the reclassification of the Company's securities or a similar transaction that increases the interested stockholder's proportionate ownership in the Company. An "interested stockholder" is anyone who owns or controls, directly, indirectly or together with others, 10% or more of the Company's voting stock. A transaction with an interested stockholder will not require stockholder approval if a majority of disinterested directors (as defined in the Certificate of Incorporation) approves the transaction or if the transaction involves the distribution to the stockholders of cash or other consideration that satisfies the "fair price" criteria set forth in the Certificate of Incorporation, which generally require that all stockholders receive equal treatment, an adequate price and adequate disclosure. The fair price provision of the Certificate of Incorporation may not be amended without the affirmative vote of at least 80% of the Company's outstanding voting stock. In addition, Section 203 of the Delaware General Corporation Law, much like the fair price provision described above, limits the ability of a corporation to enter into certain business combinations with an "interested stockholder" (generally defined as a person owning 15% or more of a corporation's outstanding voting stock) unless certain conditions are met. The Certificate of Incorporation, however, includes a provision electing not to be governed by Section 203. EVALUATION FACTORS. The Certificate of Incorporation contains a provision that allows the Board of Directors to evaluate factors other than the price offered when considering a proposed acquisition of the Company. The Certificate of Incorporation permits the Board of Directors to consider the social, legal and 50 economic effects of the proposed acquisition upon the Company's employees, suppliers, customers and the communities in which the Company operates. The Board of Directors can also consider any other factors it deems relevant, including not only the consideration offered in the proposed transaction relative to the market price of the Common Stock but also the value of the Company in a freely negotiated transaction and in relation to the estimate by the Board of Directors of the future value of the Company as an independent entity. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. STOCKHOLDER PROPOSALS AND NOMINATIONS. The Company's By-Laws provide that notice of proposed stockholder nominations for the election of directors must be given in writing to the Secretary of the Company at the principal executive offices of the Company not less than 75 days nor more than 85 days prior to the meeting at which directors are to be elected (or if fewer than 75 days' notice or prior public disclosure of the stockholders' meeting date is given or made by the Company, not later than the 10th day following the day on which the notice was mailed or such public disclosure was made). The By-Laws also provide that at an annual stockholders' meeting, and subject to any other applicable requirements, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors or by a stockholder who has given timely prior written notice to the Secretary of the Company of such stockholder's intention to bring such business before the meeting. For such stockholder's notice to be timely, it must be delivered to or mailed and received at the principal executive offices of the Company not later than the date that corresponds to 120 days prior to the date the Company's proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders. Such notice must contain certain information specified in the By-Laws. LIMITATIONS ON LIABILITY OF DIRECTORS. The Certificate of Incorporation limits the liability of directors to the extent allowed by the Delaware General Corporation Law. Specifically, directors will not be held liable to the Company or its stockholders for an act or omission in such capacity as a director, except for liability as a result of: (i) a breach of the duty of loyalty to the Company or its stockholders; (ii) actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) payment of an improper dividend or improper repurchase of the Company's stock under Section 174 of the Delaware General Corporation Law; or (iv) actions or omissions pursuant to which the director will receive an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of the Company unless the stockholder can demonstrate one of the specified bases for liability. This provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The Certificate of Incorporation does not eliminate the directors' duty of care. The inclusion of this provision in the Certificate of Incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise benefit the Company and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. INDEMNIFICATION. The Certificate of Incorporation and By-Laws provide that the Company is generally required to indemnify its directors and officers for all judgments, fines, settlements, legal fees and other expenses incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with the Company or another entity that the director or officer serves at the Company's request, subject to certain conditions, and to advance funds to its directors and officers to enable them to defend against such proceedings. To receive indemnification, the director or officer must have been successful in the legal proceeding or acted in good faith and in what was reasonably believed to be a lawful manner and in the Company's best interest. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. 51 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the current stockholders of the Company will own approximately 74% of the outstanding Common Stock (71% if the Underwriters' over-allotment option is exercised in full). The Company and certain stockholders who will collectively own shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed with A.G. Edwards & Sons, Inc. not to sell, grant any option to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Underwriting." Upon completion of the Offering, the Company will have 7,800,003 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately 5,696,592 of such shares will have been held for more than one year as of the date of this Prospectus and (subject to the expiration or release from the 180-day lock-up agreements with A.G. Edwards & Sons, Inc.) may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Exchange Act, subject to the volume, manner of sale and other limitations of Rule 144. See "Underwriting." In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed between the later of the date on which "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an "affiliate" of the Company (as that term is defined in Rule 144), then the holder of such restricted shares (including an affiliate) is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of (a) 1% of the then-outstanding shares of Common Stock (78,000 shares upon completion of the Offering), and (b) the average weekly reported trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain notice and manner-of-sale requirements and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an affiliate of the Company (in general, a person who is not a director, officer or principal stockholder of the Company) during the three months prior to resale and who has beneficially owned such shares for at least two years is entitled to sell such restricted stock under Rule 144 without regard to the requirements discussed above, other than the manner-of-sale provisions. The Company is unable to estimate the number of shares that may be sold in the future by its stockholders since this will depend on the market price for the Common Stock, the personal circumstances of the stockholders and other factors. Any sale of substantial amounts of shares in the open market may significantly reduce the market price of the Common Stock offered hereby. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act may be relied upon with respect to the resale of shares of Common Stock originally purchased from the Company by its employees, directors and officers prior to the date the Company becomes subject to the reporting requirements of the Exchange Act pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. Shares of Common Stock issued in reliance on Rule 701 are "restricted shares" and, beginning 90 days after the Company becomes subject to the reporting requirements of the Exchange Act, may be sold by persons other than affiliates, subject to the provisions regarding manner-of-sale under Rule 144, and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. The Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan and the ESOP. After the effective date of such registration statements, shares owned pursuant to grants of Awards under the Omnibus Plan or issued pursuant to the ESOP will be available for resale in the public market without restriction by 52 persons who are not affiliates of the Company, and to the extent they are held by affiliates, pursuant to Rule 144, without observance of the holding period requirements. Effective with the consummation of the Offering, options to purchase a total of 496,000 shares of Common Stock will be granted under the Omnibus Plan, none of which will be exercisable in less than one year from the date of grant, and 42,944 shares will be owned by the ESOP. See "Risk Factors--Control of the Company by Existing Stockholders," "Management--Employee Benefit Plans--Omnibus Plan," "Management--Employee Benefits Plans--ESOP" and "Management-- Employee Benefits Plans--Equivalence Plan." In connection with an amendment to the Credit Agreement on July 31, 1996, the Company issued to certain members of its bank syndicate warrants to purchase an aggregate of 242,233 shares of Common Stock at an exercise price of $11.53 per share, all of which will remain outstanding after consummation of the Offering. The outstanding warrants can be exercised at any time and the underlying shares can be sold either pursuant to demand registration rights which are exercisable on the first anniversary of the consummation of the Offering and thereafter on an annual basis through December 31, 2004, or pursuant to piggyback registration rights which are exercisable at any time. UNDERWRITING The Underwriters named below have severally agreed with the Company subject to the terms and conditions of the Underwriting Agreement, to purchase the respective numbers of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITERS SHARES - ---------------------------------------------------------------------------------- ---------- A.G. Edwards & Sons, Inc.......................................................... EVEREN Securities, Inc............................................................ ---------- Total........................................................................... 2,000,000 ---------- ----------
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock, if any are purchased. The Company has been advised by A.G. Edwards & Sons, Inc. and EVEREN Securities, Inc., the Representatives of the several Underwriters (the "Representatives"), that the Underwriters propose to offer the Common Stock to the public at the Offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share and that the Underwriters and such dealers may reallow a discount of not in excess of $ per share to other dealers. The Offering price and the concession and discount to dealers may be changed by the Underwriters after the Offering. 53 In the Underwriting Agreement, the Selling Stockholders have granted the Underwriters options, expiring at the close of business on the 45th day subsequent to the date of this Prospectus, to purchase up to an aggregate of 300,000 additional shares of Common Stock at the Offering price, less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such options solely to cover over-allotments, if any, in the sale of the shares. To the extent the Underwriters exercise such options, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the option shares as the number of shares to be purchased by it shown in the table above bears to 2,000,000, and the Selling Stockholders will be obligated, pursuant to the options, to sell such shares to the Underwriters for which they will receive all of the proceeds. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The liability of each Selling Stockholder under this indemnity is limited to the amount of his proceeds. The Company and certain stockholders who collectively will own 5,778,111 shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock, other than the shares offered pursuant to this Prospectus, for a period of 180 days from the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Shares Eligible for Future Sale." In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company and the Selling Stockholders, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 300,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, A.G. Edwards & Sons, Inc., on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if it is undertaken, it may be discontinued at any time. The Representatives has informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The Offering price for the Common Stock was determined by negotiation between the Company and the Representatives. Among the factors considered in determining the Offering price was the history of and the prospects for the Company and the industry in which it operates, the past and present operating results of the Company and the trends of such results, the future prospects of the Company, an assessment of the Company's management, the general condition for the securities markets at the time of the Offering and the prices for similar securities of comparable companies. 54 LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Gardere & Wynne, L.L.P., Dallas, Texas. Certain legal matters pertaining to the Common Stock will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas. EXPERTS The consolidated financial statements of the Company as of September 30, 1995 and 1996 and for each of the three years in the period ended September 30, 1996, and as of June 30, 1997 and for the nine months in the period then ended, included in this Prospectus and the Registration Statement have been audited by Deloitte & Touche LLP, independent certified public accountants, as stated in their report thereon appearing herein, and have been so included in reliance upon the report of such firm given upon the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information concerning the Company and the Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, copies of which may be inspected at the Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, or copies of which may be obtained from the Commission at such office upon payment of the fees prescribed by the Commission or on the Internet at HTTP://WWW.SEC.GOV. The summaries in this Prospectus of additional information included in the Registration Statement or any exhibit thereto are qualified in their entirety by reference to such information or exhibit filed with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 55 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, 1995 and 1996, and June 30, 1997...... F-3 Consolidated Statements of Income for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 (unaudited) and 1997.............. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1997.................... F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 (unaudited) and 1997.............. F-6 Notes to Consolidated Financial Statements............................................ F-7
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, 1995 and 1996 and June 30, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996 and for the nine-month period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1995 and 1996 and June 30, 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 and for the nine-month period ended June 30, 1997, in conformity with generally accepted accounting principles. Dallas, Texas August 27, 1997 (October , 1997, as to the first paragraph of Note F) The accompanying consolidated financial statements are presented to give effect to the Company's reincorporation in Delaware and related recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. The above opinion is in the form which will be signed by Deloitte & Touche LLP upon effectiveness of the above events, assuming that from August 27, 1997 to the effective date of such events, no other material events have occurred which would affect the accompanying consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas September 18, 1997 F-2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, -------------------- JUNE 30, 1995 1996 1997 --------- --------- ----------- CURRENT ASSETS: Cash........................................................................... $ 3,973 $ 2,633 $ 1,350 Receivables, less allowance for doubtful accounts of $495, $348 and $448....... 8,616 12,078 13,554 Inventory...................................................................... 2,013 2,395 2,996 Prepaid expense and other current assets....................................... 1,876 816 2,016 --------- --------- ----------- TOTAL CURRENT ASSETS......................................................... 16,478 17,922 19,916 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment................................................... 79,486 87,932 102,497 Machinery and tools............................................................ 1,591 2,179 2,149 Furniture and fixtures......................................................... 3,563 3,728 3,791 Office and computer equipment.................................................. 5,244 7,593 8,035 Work in progress and raw materials inventory................................... 3,759 3,259 6,806 --------- --------- ----------- 93,643 104,691 123,278 Less accumulated depreciation and amortization............................... 38,620 47,982 55,652 --------- --------- ----------- 55,023 56,709 67,626 OTHER ASSETS..................................................................... 1,964 3,950 5,072 --------- --------- ----------- TOTAL ASSETS................................................................. $ 73,465 $ 78,581 $ 92,614 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses.......................................... $ 10,361 $ 8,596 $ 10,833 Unearned revenue............................................................... 1,622 2,195 2,478 Income taxes payable........................................................... 857 350 105 Current portion of long-term obligations....................................... 8,477 7,427 7,768 --------- --------- ----------- TOTAL CURRENT LIABILITIES.................................................... 21,317 18,568 21,184 LONG-TERM OBLIGATIONS............................................................ 26,393 29,922 37,593 DEFERRED INCOME TAXES............................................................ 4,426 5,553 6,417 --------- --------- ----------- TOTAL LIABILITIES............................................................ 52,136 54,043 65,194 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $0.10 par value (10,000,000 shares authorized)................ -- -- -- Common Stock, $0.10 par value (40,000,000 shares authorized)................... 581 583 585 Treasury Stock................................................................. -- (28) (186) Additional paid-in capital..................................................... 2,843 3,096 3,343 Stockholder notes receivable................................................... (399) (353) (186) Stock purchase warrants........................................................ 663 600 600 Cumulative foreign currency translation adjustment............................. 780 905 1,137 Retained earnings.............................................................. 16,861 19,735 22,127 --------- --------- ----------- TOTAL STOCKHOLDERS' EQUITY................................................... 21,329 24,538 27,420 --------- --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 73,465 $ 78,581 $ 92,614 --------- --------- ----------- --------- --------- -----------
See notes to consolidated financial statements. F-3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER FOR THE NINE MONTHS 30, ENDED JUNE 30, ------------------------------- ---------------------- 1994 1995 1996 1996 1997 --------- --------- --------- ----------- --------- (UNAUDITED) Rental revenues.......................................... $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Product sales and services revenues...................... 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- ----------- --------- TOTAL REVENUES......................................... 53,812 74,910 77,138 53,431 66,895 Rental cost.............................................. 18,775 26,288 26,425 18,267 22,115 Product sales and services cost.......................... 4,284 6,637 7,783 5,601 7,410 --------- --------- --------- ----------- --------- TOTAL COST OF SALES.................................... 23,059 32,925 34,208 23,868 29,525 --------- --------- --------- ----------- --------- GROSS PROFIT........................................... 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense.............. 19,181 28,163 30,077 22,230 24,855 Research and development expense......................... 3,033 3,283 4,404 2,947 4,872 --------- --------- --------- ----------- --------- TOTAL OPERATING EXPENSES............................... 22,214 31,446 34,481 25,177 29,727 --------- --------- --------- ----------- --------- OPERATING INCOME......................................... 8,539 10,539 8,449 4,386 7,643 Interest expense (net)................................... 1,805 2,788 3,092 2,437 2,694 --------- --------- --------- ----------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 6,734 7,751 5,357 1,949 4,949 Income taxes............................................. 2,400 3,037 2,238 813 1,993 --------- --------- --------- ----------- --------- INCOME BEFORE EXTRAORDINARY LOSS......................... 4,334 4,714 3,119 1,136 2,956 Extraordinary loss from early extinguishment of debt (net of tax of $389)........................................ 756 -- -- -- -- --------- --------- --------- ----------- --------- NET INCOME............................................... $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING...................... 5,771,648 5,814,014 5,911,983 5,928,266 5,818,571 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- NET INCOME PER SHARE..................................... $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- ---------
See notes to consolidated financial statements. F-4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL --------------------- --------------------- ---------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- --------- ---------- --------- --------- ----------- ----------- BALANCE, OCTOBER 1, 1993............... -- $ -- 5,645,967 $ 564 -- $ -- $ 1,936 Dividends declared..................... Shares purchased and retired........... (1,709) -- (4) Shares issued.......................... 47,046 5 97 Net effect of translation adjustment... Adjust warrant valuation allowance..... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1994............ -- -- 5,691,304 569 -- -- 2,029 Dividends declared..................... Shares issued.......................... 90,328 9 322 Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 32,055 3 492 Net effect of translation adjustment... Adjust warrant valuation allowance..... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1995............ -- -- 5,813,687 581 -- -- 2,843 Dividends declared..................... Purchase of treasury stock............. (7,527) (28) Purchases of stock warrants............ Issuance of stock warrants............. Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 16,515 2 253 Net effect of translation adjustment... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1996............ -- -- 5,830,202 583 (7,527) (28) 3,096 Dividends declared..................... Purchase of treasury stock............. (37,637) (158) Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 14,965 2 247 Net effect of translation adjustment... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, JUNE 30, 1997................. -- $ -- 5,845,167 $ 585 (45,164) $ (186) $ 3,343 ---------- --------- ---------- --------- --------- ----- ----------- ---------- --------- ---------- --------- --------- ----- ----------- CUMULATIVE FOREIGN STOCKHOLDER STOCK CURRENCY NOTES PURCHASE TRANSLATION RETAINED RECEIVABLE WARRANTS ADJUSTMENT EARNINGS TOTAL ------------- ----------- ----------- ----------- --------- BALANCE, OCTOBER 1, 1993............... $ -- $ 480 $ 651 $ 9,671 $ 13,302 Dividends declared..................... (315) (315) Shares purchased and retired........... (4) Shares issued.......................... (99) 3 Net effect of translation adjustment... 67 67 Adjust warrant valuation allowance..... 67 (67) -- Net income............................. 3,578 3,578 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1994............ (99) 547 718 12,867 16,631 Dividends declared..................... (604) (604) Shares issued.......................... (323) 8 Payments on stockholder notes receivable........................... 23 23 Issuance of stock to the ESOP and ESEP................................. 495 Net effect of translation adjustment... 62 62 Adjust warrant valuation allowance..... 116 (116) -- Net income............................. 4,714 4,714 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1995............ (399) 663 780 16,861 21,329 Dividends declared..................... (648) (648) Purchase of treasury stock............. (28) Purchases of stock warrants............ (663) 403 (260) Issuance of stock warrants............. 600 600 Payments on stockholder notes receivable........................... 46 46 Issuance of stock to the ESOP and ESEP................................. 255 Net effect of translation adjustment... 125 125 Net income............................. 3,119 3,119 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1996............ (353) 600 905 19,735 24,538 Dividends declared..................... (564) (564) Purchase of treasury stock............. (158) Payments on stockholder notes receivable........................... 167 167 Issuance of stock to the ESOP and ESEP................................. 249 Net effect of translation adjustment... 232 232 Net income............................. 2,956 2,956 ----- ----- ----------- ----------- --------- BALANCE, JUNE 30, 1997................. $ (186) $ 600 $ 1,137 $ 22,127 $ 27,420 ----- ----- ----------- ----------- --------- ----- ----- ----------- ----------- ---------
See notes to consolidated financial statements. F-5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER FOR THE NINE MONTHS 30, ENDED JUNE 30, ------------------------------- ---------------------- 1994 1995 1996 1996 1997 --------- --------- --------- ----------- --------- (UNAUDITED) Cash flows from operating activities: Net income....................................................... $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 5,876 8,436 9,869 7,393 8,490 Amortization of note discount and deferred loan fees........... 205 186 199 149 265 Extraordinary loss from the early extinguishment of debt....... 756 -- -- -- -- Provision for doubtful accounts................................ 67 334 348 103 94 Deferred income taxes.......................................... 958 702 1,127 (51) 864 Loss (gain) on sale of equipment and other property............ (53) (15) 42 -- (41) Cost of rental equipment sold under sales-type leases.......... -- 353 606 -- 1,515 Provisions for ESOP and ESEP contributions..................... -- 750 250 186 189 Net change in assets and liabilities: Accounts receivable.......................................... (2,823) (2,896) (3,396) (3,423) (1,570) Prepaid expenses............................................. (959) (15) 1,060 (394) (1,200) Inventory.................................................... -- (1,031) (382) (475) (601) Other assets................................................. (1,130) (370) (2,616) (1,880) (1,325) Accounts payable, accrued liabilities and income taxes payable.................................................... 3,543 3,079 (2,726) (1,823) 1,045 Unearned revenue............................................. 919 286 1,031 2,365 1,291 --------- --------- --------- ----------- --------- Net cash provided by operating activities.................... 10,937 14,513 8,531 3,286 11,972 Cash flows from investing activities: Capital expenditures, including rental equipment................. (13,566) (20,748) (12,587) (9,125) (20,518) VLEH acquisition................................................. (5,940) -- -- -- -- Proceeds from sale of equipment.................................. 582 107 155 -- 129 --------- --------- --------- ----------- --------- Net cash used in investing activities........................ (18,924) (20,641) (12,432) (9,125) (20,389) Cash flows from financing activities: Proceeds from issuance of debt................................... 25,800 10,998 28,204 12,476 16,967 Principal payments on debt....................................... (12,525) (3,926) (24,601) (8,869) (8,127) Proceeds from issuance of distributor advances................... 997 2,168 1,745 1,306 604 Principal payments on distributor advances....................... (4,200) (1,362) (1,894) (1,322) (1,254) Proceeds from payments on stockholder notes receivable........... -- 33 46 38 166 Proceeds from issuance of common stock........................... 102 -- -- -- -- Prepayment penalty from early extinguishment of debt............. (500) -- -- -- -- Purchase of common stock......................................... (4) -- -- -- -- Purchase of treasury stock....................................... -- -- (28) -- (158) Purchase of stock warrant........................................ -- -- (260) -- -- Dividends paid................................................... (315) (604) (648) (568) (564) --------- --------- --------- ----------- --------- Net cash provided by financing activities.................... 9,355 7,307 2,564 3,061 7,634 Effect on cash from foreign currency translation adjustment........ 99 (624) (3) 47 (500) --------- --------- --------- ----------- --------- Net increase (decrease) during the period.......................... 1,467 555 (1,340) (2,731) (1,283) Cash, beginning of period.......................................... 1,951 3,418 3,973 3,973 2,633 --------- --------- --------- ----------- --------- Cash, end of period................................................ $ 3,418 $ 3,973 $ 2,633 $ 1,242 $ 1,350 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Supplemental Cash Flow Information - ------------------------------------------------------------------- Cash paid for interest expense................................... $ 1,812 $ 2,905 $ 3,234 $ 2,564 $ 2,956 Cash paid for income taxes....................................... $ 1,111 $ 1,752 $ 1,528 $ 1,470 $ 1,765 Non-cash transactions: Acquisition of property under capital leases................... $ 302 $ -- $ -- $ -- $ -- Warrants issued................................................ $ -- $ -- $ 600 $ -- $ -- Warrant retired................................................ $ -- $ -- $ (403) $ -- $ --
See notes to consolidated financial statements. F-6 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE A--ORGANIZATION: Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. On March 31, 1994, the Company formed Vari-Lite Europe Holdings Limited ("VLEH") to acquire the net assets, consisting primarily of equipment and property, and the operations of three London-based companies, which were in the business of providing lighting services and stage and stage set design and construction services. The total purchase price, including related acquisition and financing costs was approximately $6,000, which was funded with a portion of the proceeds from the Company's Credit Facility (see Note E). The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the tangible assets acquired and liabilities assumed based upon a determination of their fair values at the acquisition date. The results of operations of VLEH have been included in the consolidated financial statements since the date of the VLEH acquisition. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES The consolidated financial statements of Vari-Lite International, Inc. includes the accounts of its wholly-owned subsidiaries Vari-Lite, Inc., Showco, Inc., Irideon, Inc., IGNITION! Creative Group, Inc., Concert Production Lighting, Inc., Vari-Lite Asia, Inc. (a Japanese corporation), Vari-Lite Hong Kong Limited and VLEH and its subsidiaries. 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. INTERIM FINANCIAL STATEMENTS The consolidated statements of income, stockholders' equity and cash flows for the nine months ended June 30, 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which included only normal, recurring adjustments) necessary to present fairly the results of operations and cash flows for the nine months ended June 30, 1996, have been made. The results of operations for the nine months ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. INTEREST RATE SWAP AGREEMENTS The Company uses interest rate swap agreements to reduce risks associated with variable interest rates and does not enter into such transactions for speculative or trading purposes. The net interest received or paid on interest rate swap agreements is reflected as income or expense of the relevant hedged position. Gains and losses resulting from the termination of interest rate swap agreements are recognized in the period of sale. F-7 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has certain financial instruments consisting primarily of cash, accounts and lease receivables, debt and long-term obligations and interest rate swap agreements. The carrying values of substantially all of the financial instruments approximate their respective fair values. INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs 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 amortization are provided on the straight-line method over the estimated useful lives of the various classes of equipment and other property. In 1996, management reevaluated the estimated useful lives of the Company's lighting equipment and accordingly lengthened the lives of certain lighting equipment to correspond with the anticipated revenue of the equipment. LONG-LIVED ASSETS As required by Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Long-Lived Assets," 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. No such impairment losses have been identified by the Company. 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. 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 architectural products are recognized upon shipment of the equipment. In 1995, one customer accounted for 11.9% of the Company's revenues. No other customer accounted for more than 10% of the Company's revenues during any of the three years in the period ended September 30, 1996 or the nine months ended June 30, 1997. F-8 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (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. 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. 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 included in stockholders' equity. 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. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("the FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years ending after December 15, 1995. Management intends to implement only the disclosure requirements of such statement for employee stock- based compensation. However, the accounting provisions of this statement will be required to be implemented upon the future issuance of non-employee stock-based compensation. The Company does not believe that there will be a material impact to the historically reported net income per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Implementation of SFAS No. 128 will have no effect on the Company's results of operations, financial position or cash flows but will require a change in the calculation of earnings per share. The Company does not believe that there will be a material impact to the reported amount of earnings per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 129, "Capital Structure," which is effective for financial statements for periods ending after December 15, 1997. Implementation of SFAS No. 129 will have no effect on the Company's results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. SFAS No. 130 will F-9 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) require that changes in the balances of items that are reported directly in a separate component of stockholders' equity (such as unrealized gains and losses and minimum pension liability adjustments) be added to net income to arrive at comprehensive income. Implementation of SFAS No. 130 will have no effect on the Company's results of operations, financial position or cash flows, but will require additional footnote disclosures presenting the Company's comprehensive income. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for financial statements for periods beginning after December 15, 1997. Implementation of SFAS No. 131 will have no effect on the Company's results of operations, financial position or cash flows, but may require a change in the disclosures regarding the Company's operating segments. OTHER Certain reclassifications have been made to the September 30, 1994, 1995 and 1996 and the June 30, 1996 consolidated financial statements to conform to the presentation in the June 30, 1997 consolidated financial statements. NOTE C--INVENTORY: Inventory consists of the following:
SEPTEMBER 30, JUNE 30, -------------------- ----------- 1995 1996 1997 --------- --------- ----------- Raw materials.................................................... $ 766 $ 1,998 $ 2,654 Work in progress................................................. 216 294 197 Finished goods................................................... 1,031 103 145 --------- --------- ----------- $ 2,013 $ 2,395 $ 2,996 --------- --------- ----------- --------- --------- -----------
NOTE D--OTHER ASSETS: Other assets consist of the following:
SEPTEMBER 30, JUNE 30, -------------------- ----------- 1995 1996 1997 --------- --------- ----------- Patents and trademarks........................................... $ 263 $ 2,355 $ 3,093 Deferred financing costs......................................... 947 1,432 1,436 Other, including sales-type lease receivables.................... 1,239 865 1,448 --------- --------- ----------- 2,449 4,652 5,977 Less accumulated amortization.................................... (485) (702) (905) --------- --------- ----------- $ 1,964 $ 3,950 $ 5,072 --------- --------- ----------- --------- --------- -----------
F-10 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE D--OTHER ASSETS: (CONTINUED) Included in the amount of patents and trademarks are amounts capitalized by the Company relating to the High End Lawsuit, a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company related to the High End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. NOTE E--LONG-TERM OBLIGATIONS: Long-term obligations expressed in U.S. dollars consist of the following:
SEPTEMBER 30, JUNE 30, -------------------- --------- 1995 1996 1997 --------- --------- --------- Credit Facility: Term loans: U.S. dollars............................................. $ 12,600 $ 20,000 $ 18,500 British pounds sterling.................................. 7,408 5,830 5,326 Japanese yen............................................. 1,805 1,284 1,064 Discount................................................. -- (600) (488) --------- --------- --------- Net term loans......................................... 21,813 26,514 24,402 Revolving lines of credit: U.S. dollars............................................. 7,000 2,184 10,200 British pounds sterling.................................. 1,346 3,052 4,328 Japanese yen............................................. -- -- 1,410 --------- --------- --------- Total revolving lines of credit........................ 8,346 5,236 15,938 Advances from distributors................................... 2,943 2,810 2,063 Obligations under capital leases with interest at 8.6% to 10.4%, maturities through 1999............................. 530 348 201 Other........................................................ 1,238 2,441 2,757 --------- --------- --------- 34,870 37,349 45,361 Less current portion......................................... (8,477) (7,427) (7,768) --------- --------- --------- $ 26,393 $ 29,922 $ 37,593 --------- --------- --------- --------- --------- ---------
F-11 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED) The Company's Credit Facility allows borrowings up to $28,000 under a revolving line of credit. The Company incurred prepayment penalties in 1994 of $756 (net of tax benefit of $389) relating to the early extinguishment of its prior debt facility, which was expensed in the consolidated statement of income as an extraordinary loss. Loans under the revolver may be drawn in U.S. dollars, British pounds sterling or Japanese yen, subject to their availability under the Credit Facility. Interest on the term loans and the revolvers is calculated as follows:
LOAN DENOMINATION INTEREST RATE - -------------------------------------------- -------------------------------------------- U.S. dollar term Prime rate plus 1% or LIBOR (for deposits in U.S. dollars) plus 3.5% Multicurrency revolver Prime rate plus 1% for U.S. dollar borrowings and Euroyen TIBOR plus 3.5% for Japanese yen borrowings British pounds sterling term LIBOR (for deposits in British pounds sterling) rate plus 2% British pounds sterling revolver LIBOR (for deposits in British pounds sterling) rate plus 2% Japanese yen term TIBOR rate plus 2.5%
Based on the outstanding amounts under the Credit Facility as of September 30, 1995 and 1996 and June 30, 1997, the weighted average interest rates were 10.35%, 8.69% and 8.83%, respectively. At September 30, 1996 and June 30, 1997, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $19,800 and $17,700, respectively, which effectively changes the Company's variable LIBOR interest rate exposure on substantially all of its U.S. dollar term borrowings to a fixed weighted average interest rate of 9.60%. The interest rate swap agreements mature on or before the maturity date of the related borrowings as follows:
SEPTEMBER 30, JUNE 30, 1996 1997 ------------- --------- Year one............................................................ $ 3,050 $ 3,800 Year two............................................................ 3,800 5,900 Year three.......................................................... 5,450 1,000 Year four........................................................... 1,000 7,000 Year five........................................................... 6,500 -- ------------- --------- $ 19,800 $ 17,700 ------------- --------- ------------- ---------
The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the other parties. Principal payments of approximately $852 under the multicurrency term loan are due quarterly and increase to $1,102 per quarter on September 30, 1997 through the remaining term of the loan. A lump sum payment of approximately $8,355 is due June 30, 2001. Interest on outstanding term loans is due quarterly. Principal amounts outstanding under the revolving line of credit are due June 30, 2001 and interest on outstanding amounts is due monthly. Until April 1, 1998, a prepayment penalty equal to 0.25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the Credit Facility places limitations on the ability to pay stockholder distributions, make capital expenditures, incur additional indebtedness, make certain loans or investments, sell F-12 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED) assets or reacquire the Company's stock. The Company incurs a commitment fee equal to 0.5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all of the Company's assets, except those pledged to distributors (described below), are pledged as collateral under the Credit Facility. 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 G). The remaining balances outstanding under such borrowings at September 30, 1995 and 1996, and June 30, 1997, were $2,943, $2,810 and $2,063, respectively. Equipment with a net book value of approximately $8,700 at June 30, 1997 ($7,500 at September 30, 1996) has been pledged to the distributors as collateral for such loans. The interest rate on substantially all the notes is variable and ranged from 3% to 7% for the years ended September 30, 1995 and 1996 and the nine months ended June 30, 1997. 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:
SEPTEMBER JUNE 30, 30, 1996 1997 ------------ --------- Year one............................................................ $ 7,427 $ 7,768 Year two............................................................ 5,204 5,353 Year three.......................................................... 4,872 4,762 Year four........................................................... 4,225 27,478 Year five........................................................... 15,621 -- ------------ --------- $ 37,349 $ 45,361 ------------ --------- ------------ ---------
NOTE F--STOCKHOLDERS' EQUITY: On October , 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 will receive 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 retroactive 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 with voting and conversion rights that could adversely affect the holders of common stock. In connection with a prior debt facility, the Company and a lender entered into a warrant purchase agreement, which granted the lender a warrant to purchase shares of Common Stock. The Company initially allocated $400 of the proceeds under this facility to the warrant and in subsequent years increased such warrant value to an amount equal to the warrant valuation (as defined). During 1996, the Company repurchased the warrant from the holder for $260. 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). After December 31, 2001, and through the warrant expiration date of December 31, 2004, the warrant holders may put the shares of Common Stock issuable pursuant to the warrants back to the Company at the price specified in the warrant agreement. This put right will terminate upon the occurrence of certain events, including completion of this initial public offering. The terms of the warrants also provide for registration rights and adjustments to the price and number of shares in certain circumstances. As of September 30, 1996 and June 30, 1997, no warrants had been exercised. F-13 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: 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 $2,864, $3,797, $4,893, $3,778 and $3,576 for the years ended September 30, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, respectively. The lighting equipment under these leasing arrangements had a net book value of approximately $7,552, $7,473 and $8,736 at September 30, 1995 and 1996, and June 30, 1997, 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 $4,427, $9,914, $4,544, $2,318 and $6,009 and cost of products and services of $1,465, $3,422, $2,223, $1,023 and $2,054 for the years ended September 30, 1994, 1995 and 1996, and the nine months ended June 30, 1996 (unaudited) and 1997, 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 a certain geographic area. The Company provides the lighting equipment to the dealers, who pay a monthly rental fee to the Company. Future minimum lease payments receivable, including those which relate to sales-type leases and are included in other assets, are as follows:
SALES-TYPE OPERATING ------------------------------ -------------------------- SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1996 JUNE 30, 1997 1996 1997 --------------- ------------- ------------- ----------- Year one................................ $ 344 $ 181 $ 929 $ 1,798 Year two................................ 303 102 920 1,830 Year three.............................. 151 -- 785 1,577 Year four............................... -- -- 519 1,329 Year five............................... -- -- 209 1,089 Thereafter.............................. -- -- 20 19 ----- ----- ------ ----------- Total minimum lease payments............ 798 283 $ 3,382 $ 7,642 ------ ----------- ------ ----------- Less amount representing interest....... (105) (28) ----- ----- Present value of net minimum lease payments.............................. 693 255 Less current portion.................... (279) (177) ----- ----- Long-term lease receivables............. $ 414 $ 78 ----- ----- ----- -----
F-14 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) AS LESSEE The Company leases certain computers and equipment. The following is a summary of assets held under capital leases:
SEPTEMBER 30, JUNE 30, -------------------- --------- 1995 1996 1997 --------- --------- --------- Computers and equipment under capital leases............ $ 2,563 $ 2,563 $ 2,563 Less accumulated depreciation........................... (2,014) (2,144) (2,241) --------- --------- --------- Property under capital leases, net...................... $ 549 $ 419 $ 322 --------- --------- --------- --------- --------- ---------
The Company also leases manufacturing facilities and office space. The future minimum lease payments, including those which relate to capital leases and are included in long-term obligations, are as follows:
CAPITAL OPERATING ---------------------------- -------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, 1996 1997 1996 1997 --------------- ----------- ------------- ----------- 1997....................................... $ 223 $ 136 $ 1,109 $ 1,132 1998....................................... 99 63 897 802 1999....................................... 44 -- 527 454 2000....................................... -- -- 400 243 2001....................................... -- -- -- -- ----- ----- ------ ----------- Total minimum lease payments............... 366 199 $ 2,933 $ 2,631 ------ ----------- ------ ----------- Less amount representing interest.......... (18) (14) ----- ----- Present value of net minimum lease payments................................. 348 185 Less current portion....................... (200) (134) ----- ----- Long-term lease obligations................ $ 148 $ 51 ----- ----- ----- -----
Rental expense for the years ended September 30, 1994, 1995 and 1996, and the nine months ended June 30, 1996 (unaudited) and 1997 was approximately $1,347, $1,957, $2,397, $1,760 and $1,956, respectively. In December 1995, the Company entered into a lease with an unaffiliated developer ("Lessor") for land to be used as the site for a new corporate facility. After the initial lease term ending in December 2000, the lease may be renewed for up to six additional five-year terms by agreement of the parties. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3,600 paid by the Lessor to acquire the land. In addition, the Company has an option to purchase the land at the end of the initial term or at any time during the renewal terms for a price equal to the Lessor's cost. Rent payable under the lease is based upon the $3,600 spent by the Lessor to acquire the land and the Lessor's cost of funds from time to time. At September 30, 1996 and June 30, 1997, the Company had an interest rate swap agreement with one of its primary lenders relating to a notional amount of $3,600, which effectively changes the Company's variable rent exposure on this lease to a fixed annual amount of $388. This interest rate swap F-15 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) agreement matures in October 2000. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the other party. Future minimum rental commitments and rent expense for the year ended September 30, 1996, and the nine months ended June 30, 1996 (unaudited) and 1997, have been included in the amounts above. NOTE H--INCOME TAXES: The provision for income taxes consists of the following:
SEPTEMBER 30, JUNE 30, ------------------------------- ------------------------ 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ------------- (UNAUDITED) Current: U.S. Federal................................................ $ 1,273 $ 1,289 $ 100 $ 87 $ 104 State....................................................... -- 217 54 46 3 International............................................... 169 829 957 731 976 Deferred: U.S. Federal................................................ 860 906 992 (50) 765 State....................................................... 20 217 135 (1) 145 International............................................... 78 (421) -- -- -- --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 1,993 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
A reconciliation of income taxes computed at the U.S. Federal statutory tax rate to the provision for income tax is as follows:
SEPTEMBER 30, JUNE 30, ------------------------------- ------------------------ 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ------------- (UNAUDITED) Income tax expense at U.S. Federal statutory rate............. $ 2,289 $ 2,635 $ 1,821 $ 663 $ 1,683 Cumulative effect of change in accounting principle........... 90 -- -- -- -- International taxes........................................... 119 153 255 93 198 State taxes................................................... -- 434 189 69 94 Foreign and general business tax credits...................... (128) (300) (100) -- -- Other--primarily permanent differences........................ 30 115 73 (12) 18 --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 1,993 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
Deferred income taxes have been provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Deferred income taxes resulted principally from the use of accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes. In 1995 and 1996 and for the nine months ended June 30, 1996 (unaudited) and 1997, there was no valuation allowance at the beginning or end of the respective fiscal period. F-16 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE H--INCOME TAXES: (CONTINUED) For tax purposes, the Company has approximately $2,200 of foreign tax credits that expire in 1997 through 2001. In addition, approximately $507 of alternative minimum tax credits (which do not expire) is 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. International income taxes relate to the results of operations of the wholly-owned subsidiaries, Vari-Lite Asia, Inc., Vari-Lite Hong Kong Limited and VLEH, as well as to withholding taxes on revenue generated by the Company's foreign distributors. NOTE I--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, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, the Company's cost to match employee contributions was approximately $150, $300, $242, $195 and $193, respectively. Substantially all employees of VLEH 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 $46, $140, $156, $114 and $150, representing matching contributions for the years ended September 30, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, 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 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. The Company contributed to the ESOP and ESEP an aggregate of 48,570 and 14,965 shares of Common Stock for fiscal 1995 and 1996, respectively, which were valued at $750 and $250, respectively. Such shares are included as outstanding for purposes of calculating net income per share. Dividends on these shares have been recorded as a reduction to retained earnings. For contributions of Common Stock to the ESOP and ESEP for fiscal 1997, the Company has accrued $189 through June 30, 1997. F-17 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE J--OPERATIONS BY GEOGRAPHIC AREA: The income statement and balance sheet information by geographic area is summarized in the following table:
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ---------------------------------------------------- Net Revenues........................................ $ 37,903 $ 7,141 $ 12,744 $ (3,976) $ 53,812 Net Income.......................................... 3,280 51 247 -- 3,578 September 30, 1995 - ---------------------------------------------------- Net Revenues........................................ $ 43,443 $ 9,779 $ 25,337 $ (3,649) $ 74,910 Net Income.......................................... 3,381 773 560 -- 4,714 September 30, 1996 - ---------------------------------------------------- Net Revenues........................................ $ 45,253 $ 11,401 $ 26,584 $ (6,100) $ 77,138 Net Income.......................................... 1,590 1,153 376 -- 3,119 June 30, 1996 (unaudited) - ---------------------------------------------------- Net Revenues........................................ $ 31,824 $ 7,524 $ 18,313 $ (4,230) $ 53,431 Net Income.......................................... 584 560 (8) -- 1,136 June 30, 1997 - ---------------------------------------------------- Net Revenues........................................ $ 40,364 $ 9,336 $ 23,232 $ (6,037) $ 66,895 Net Income.......................................... 1,643 924 389 -- 2,956
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ---------------------------------------------------- Assets.............................................. $ 53,317 $ 5,349 $ 13,068 $ (14,511) $ 57,223 Liabilities......................................... 33,589 2,545 11,691 (7,233) 40,592 September 30, 1995 - ---------------------------------------------------- Assets.............................................. $ 69,180 $ 5,698 $ 15,591 ($ 17,004) $ 73,465 Liabilities......................................... 46,462 3,191 13,522 (11,039) 52,136 September 30, 1996 - ---------------------------------------------------- Assets.............................................. $ 70,060 $ 4,760 $ 13,529 ($ 9,768) $ 78,581 Liabilities......................................... 45,623 2,486 10,838 (4,904) 54,043 June 30, 1996 (unaudited) - ---------------------------------------------------- Assets.............................................. $ 69,076 $ 6,205 $ 15,440 $ (12,639) $ 78,082 Liabilities......................................... 46,542 3,330 12,947 (6,673) 56,146 June 30, 1997 - ---------------------------------------------------- Assets.............................................. $ 80,977 $ 5,297 17,768 $ (11,428) $ 92,614 Liabilities......................................... 55,496 1,808 14,454 (6,564) 65,194
F-18 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE K--RELATED PARTY TRANSACTIONS: Certain directors provided consulting services to the Company and received fees totaling approximately $526, $424, $512, $374 and $467 for the years ended September 30, 1994 and 1995 and 1996 and for the nine months ended June 30, 1996 (unaudited) and 1997, respectively. At September 30, 1996 and June 30, 1997, the Company had notes receivable from stockholders totaling $353 and $186, respectively, related to common stock purchases. The notes bear interest at various rates, mature at various times, and are collateralized by 88,446 shares of common stock. The Company received from a stockholder of the Company $1,500, $900, $0 and $1,942 in the years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1997, respectively, for the rental of automated lighting products and other services. NOTE L--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the years ended September 30, 1995 and 1996, and the nine months ended June 30, 1997:
YEAR ENDED SEPTEMBER 30, 1995 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 Income before income taxes.................................... 3,670 1,277 1,533 1,271 Net income.................................................... 2,232 777 932 773 Net income per share.......................................... 0.38 0.14 0.16 0.13 YEAR ENDED SEPTEMBER 30, 1996 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 Income before income taxes.................................... 359 113 1,476 3,409 Net income.................................................... 209 66 861 1,983 Net income per share.......................................... 0.03 0.01 0.15 0.34 YEAR ENDED SEPTEMBER 30, 1997 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 22,326 $ 22,384 $ 22,185 Income before income taxes.................................... 1,551 1,372 2,026 Net income.................................................... 892 789 1,275 Net income per share.......................................... 0.15 0.14 0.22
F-19 [INSIDE BACK COVER] LOOKING AHEAD . . . Vari-Lite International has incorporated its [Picture of LAX VARI*LITE-Registered Trademark- technology into its new Building] Irideon-Registered Trademark- equipment for the architectural market. A growing product line of interior and exterior fixtures and control systems bring the trademark excellence of our stage and studio lighting systems to the spaces where we live, work and enjoy our lives. Long a Los Angeles landmark, the LAX Themed Building has been stunningly relit with Irideon-Registered Trademark- fixtures. [Picture of LAX Building] [Picture of VL6-TM- spot luminaire] [Picture of LAX Building] [Picture of VL5-TM- wash luminaire] [Picture of mini-Artisan-Registered Trademark-2 console] [Picture of engineer developing product] The compact virtually silent Series 300-TM- products Vari-Lite [VL6-TM- spot luminaire (top), VL5-TM- wash luminaire International has (middle), and mini-Artisan-Registered Trademark-2 console protected its (bottom)] have broadened the appeal of investment in VARI*LITE-Registered Trademark- products in many markets. research and - -C-Copyright 1997 Vari-Lite, Inc. All rights reserved. development with VARI*LITE-Registered Trademark- and an aggressive mini-Artisan-Registered Trademark- are registered trademarks intellectual of Vari-Lite, Inc. VL5-TM-, VL6-TM-, Series 300-TM- are property program. trademarks of Vari-Lite, Inc. Irideon-Registered Trademark- It has been is a registered trademark of Irideon, Inc. in the U.S. and granted more than other countries. The Vari-Lite International Globe is a 25 U.S. patents trademark of Vari-Lite International, Inc. and more than 110 Emmy-Registered Trademark- and the Emmy Statuette are foreign patents. registered trademarks of ATAS/NATAS. Tony-Registered Trademark- is a registered trademark of The American Theater Wing and The League of American Theaters and Producers, Inc. Vari-Lite, Inc. products are protected by patents granted and pending in the U.S. and other countries.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 12 Dividend Policy........................................................... 12 Dilution.................................................................. 13 Capitalization............................................................ 14 Selected Consolidated Financial Data...................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 16 Business.................................................................. 25 Management................................................................ 37 Principal Stockholders.................................................... 47 Selling Stockholders...................................................... 48 Description of Capital Stock.............................................. 49 Shares Eligible for Future Sale........................................... 52 Underwriting.............................................................. 53 Legal Matters............................................................. 55 Experts................................................................... 55 Additional Information.................................................... 55 Index to Consolidated Financial Statements................................ F-1
------------------- UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,000,000 SHARES [LOGO] VARI-LITE INTERNATIONAL COMMON STOCK ----------------- PROSPECTUS ----------------- A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses to be paid by the Company in connection with the offering described in this Registration Statement will be as follows. All of the amounts except the SEC registration fee, the NASD fee and the Nasdaq National Market listing fee are estimates.
ITEM AMOUNT - ---------------------------------------------------------------------------------- ---------- SEC registration fee.............................................................. $ 9,410 NASD fee.......................................................................... 3,605 Nasdaq National Market listing fee................................................ 37,000 Legal fees and expenses........................................................... 200,000 Accounting fees and expenses...................................................... 200,000 Printing expenses................................................................. 100,000 Fees and expenses for qualification under state securities laws (including legal fees)........................................................................... 5,000 Transfer agent's and registrar's fees and expenses................................ 20,000 Miscellaneous..................................................................... 149,985 ---------- Total........................................................................... $ 725,000* ---------- ----------
- ------- * None of this amount is to be borne by the Selling Stockholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant is incorporated under the laws of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person against expenses, fines and settlements actually and reasonably incurred by any such person in connection with a threatened, pending or completed action, suit or proceeding in which he is involved by reason of the fact that he is or was a director, officer, employee or agent of such corporation, provided that (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. If the action or suit is by or in the name of the corporation, the corporation may indemnify any such person against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit is brought determines upon application that, despite the adjudication of liability but in light of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. As permitted by the Delaware General Corporation Law, the Certificate of Incorporation provides that the directors and officers of the Registrant shall be indemnified by the Registrant against certain liabilities that those persons may incur in their capacities as directors or officers. The Certificate of Incorporation eliminates the liability of directors of the Registrant, under certain circumstances, to the maximum extent permitted by the Delaware General Corporation Law. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws" included in the Prospectus. II-1 The Company has entered into Indemnification Agreements with the directors and officers of the Company and its subsidiaries pursuant to which the Company has agreed to indemnify such individuals to the fullest extent authorized by the Delaware General Corporation Law. The Underwriting Agreement filed as Exhibit 1.1 hereto contains reciprocal agreements of indemnity between the Registrant and the Underwriters as to certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), and in certain circumstances provides for indemnification of the Registrant's directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since August 31, 1994 the Registrant has issued and sold the following securities (all such amounts having been adjusted to reflect the reincorporation of the Registrant as a Delaware corporation pursuant to a merger with Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), which will be effected immediately prior to the consummation of the Offering and pursuant to which the two classes of Common Stock of Vari-Lite Texas will be converted into the Registrant's Common Stock on a 3.76368-for-one basis) without registration under the Securities Act (none of which sales were underwritten): On September 28, 1994, the Registrant issued 18,818 shares of Common Stock at a purchase price of $2.49 per share to Michael P. Herman, an officer and employee of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On March 31, 1995, the Registrant issued 9,409 shares of Common Stock at a purchase price of $3.40 per share to Brian L. Croft, an officer and employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 15, 1995, the Registrant issued 3,764, 3,764, 7,527, 9,409, 9,409, 9,409 and 37,637 shares of Common Stock at a purchase price of $3.69 per share to Richard W. Bratcher, Jr., Howard Page, T. Clay Powers, Loren J. Haas, Janis C. Pestinger, J. Scott Thompson and James E. Kinnu, respectively. Mr. Kinnu was an officer and employee of the Registrant. Messrs. Powers, Thompson, Bratcher and Haas and Ms. Pestinger are officers and employees of subsidiaries of the Registrant and Mr. Page is an employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 29, 1995, the Registrant issued 32,055 shares to Overton Bank and Trust, N.A., as trustee of the Vari-Lite International, Inc. Employees' Stock Ownership Plan ("ESOP"), as the Registrant's discretionary contribution in the amount of $494,995.26, or $15.44 per share, to the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On July 31, 1996, the Registrant issued warrants to purchase 242,233 shares of Common Stock at an exercise price of $11.53 per share (determined on September 30, 1996) to certain members of the Company's bank syndicate. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 30, 1996, the Registrant issued 16,082 shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the Vari-Lite International, Inc. Employees' Stock Equivalence Plan ("ESEP"), as the Registrant's discretionary contribution in the amount of $248,340.35, or $15.44 per share, to the ESEP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 30, 1996, the Registrant issued 433 shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's additional discretionary contribution in the amount of $6,683.63, or $15.44 per share, II-2 to the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued 10,456 shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's discretionary contribution in the amount of $174,652.86, or $16.70 per share, to the ESOP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued 4,509 shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the ESEP, as the Registrant's discretionary contribution in the amount of $75,318.26, or $16.70 per share, to the ESEP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ *1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant *3.2 -- By-Laws of the Registrant *4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas *5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III *10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson *10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith
II-3 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft *10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson *10.18 -- Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement) 10.21 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan *10.22 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.23 -- Vari-Lite International, Inc. Annual Incentive Plan (as amended and restated) *10.24 -- First Amendment to Vari-Lite International, Inc. Annual Incentive Plan 10.25 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.26 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.30 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas
II-4 10.31 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.32 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.33 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Company and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.35 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.36 -- 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. 10.37 -- Guaranty, dated as of December 21, 1995, by the Registrant *10.38 -- Form of Indemnification Agreement with Directors and Officers *10.39 -- Agreement and Plan of Merger, dated as of August 27, 1997, between the Registrant and Vari-Lite Texas **10.40 -- International Swap Dealers Association, Inc. Master Agreement, dated as of November 23, 1993, between the Registrant and Brown Brothers, Harriman & Co. (along with confirmation of Interest Rate Swap Transaction) **10.41 -- 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) *21.1 -- List of Registrant's Subsidiaries *23.1 -- Consent of Deloitte & Touche LLP *23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney 27.1 -- Financial Data Schedule
- ------- * Filed herewith ** To be filed by amendment Unless otherwise indicated, all exhibits were previously filed. (b) Financial Statement Schedules Not applicable ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any II-5 action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes to provide to the representatives of the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the representatives of the underwriters to permit prompt delivery to each purchaser. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas and State of Texas on the 18th day of September, 1997. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. BRUTSCHE III ----------------------------------------- H.R. Brutsche III CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities indicated on the 18th day of September, 1997. NAME TITLE - ------------------------------ ----------------------------------------------- /s/ H.R. BRUTSCHE III Chairman of the Board, President and Chief - ------------------------------ Executive Officer (Principal Executive H.R. Brutsche III Officer) * Vice President--Finance, Chief Financial - ------------------------------ Officer and Secretary (Principal Financial Michael P. Herman and Accounting Officer) * - ------------------------------ Director James H. Clark, Jr. * - ------------------------------ Director John D. Maxson * - ------------------------------ Director C. Vincent Prothro * - ------------------------------ Director John R. Rettberg * - ------------------------------ Director J. Anthony Smith *By: /s/ H.R. BRUTSCHE III ------------------------- H.R. Brutsche III ATTORNEY-IN-FACT II-7 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ *1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant *3.2 -- By-Laws of the Registrant *4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas *5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III *10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson *10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft *10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III
*10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson *10.18 -- Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement) 10.21 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan *10.22 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.23 -- Vari-Lite International, Inc. Annual Incentive Plan (as amended and restated) *10.24 -- First Amendment to Vari-Lite International, Inc. Annual Incentive Plan 10.25 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.26 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.30 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.31 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.32 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.33 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Company and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.35 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.36 -- 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. 10.37 -- Guaranty, dated as of December 21, 1995, by the Registrant *10.38 -- Form of Indemnification Agreement with Directors and Officers
*10.39 -- Agreement and Plan of Merger, dated as of August 27, 1997, between the Registrant and Vari-Lite Texas **10.40 -- International Swap Dealers Association, Inc. Master Agreement, dated as of November 23, 1993, between the Registrant and Brown Brothers, Harriman & Co. (along with confirmation of Interest Rate Swap Transaction) **10.41 -- 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) *21.1 -- List of Registrant's Subsidiaries *23.1 -- Consent of Deloitte & Touche LLP *23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney 27.1 -- Financial Data Schedule
- ------- * Filed herewith ** To be filed by amendment Unless otherwise indicated, all exhibits were previously filed. EX-1.1 2 EXHIBIT 1.1 2,000,000 SHARES COMMON STOCK ($0.10 PAR VALUE) UNDERWRITING AGREEMENT ---------------------- _________________, 1997 A.G. EDWARDS & SONS, INC. EVEREN Securities, Inc. As Representatives of the Several Underwriters c/o A.G. Edwards & Sons, Inc. One North Jefferson Avenue St. Louis, Missouri 63103 The undersigned, Vari-Lite International, Inc., a Delaware corporation (the "Company"), and the persons listed on Schedule I hereto (the "Selling Stockholders" and together with the Company, the "Sellers"), hereby address you as the representatives (the "Representatives") of each of the persons, firms and corporations listed on Schedule II hereto (collectively, the "Underwriters") and hereby confirm their agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell to the Underwriters 2,000,000 shares (the "Firm Shares") of its common stock, par value $0.10 per share ("Common Stock"), as provided in Section 2 of this Agreement. Solely for the purpose of covering over-allotments in the sale of the Firm Shares, the Selling Stockholders propose to grant to the Underwriters the right to purchase up to an additional 300,000 shares of Common Stock (the "Option Shares"), as provided in Section 3 of this Agreement. The Firm Shares and the Option Shares are herein sometimes referred to as the "Shares" and are more fully described in the Prospectus hereinafter defined. 2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth,(a) the Company hereby agrees to issue and sell the Firm Shares and (b) each Underwriter, agrees, severally and not jointly, to purchase from the Company, at a price of $_______ per share (the "Purchase Price"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto. The Company will deliver definitive certificates for the Firm Shares, at the office of A.G. Edwards & Sons, Inc., 77 Water Street, New York, New York ("Edwards' Office"), or such other place as you and the Company may mutually agree upon, for the respective accounts of the several Underwriters against payment to the Company of the Purchase Price for the Firm Shares by wire transfer or certified or bank cashiers' check payable in clearing house (next day available) funds payable to the order of the Company and delivered to the offices of Gardere & Wynne, L.L.P., 1601 Elm Street, Suite 3000, Dallas, Texas 75201, or at such other place as may be agreed upon between you and the Company (the "Place of Closing"), at 10:00 a.m., Dallas, Texas time, on the third or fourth business day, unless otherwise permitted by the Securities and Exchange Commission (the "Commission") pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the date of the public offering of the Shares (the "Closing Date"). The Closing Date and the Place of Closing may be varied by agreement between you and the Company. The certificates for the Firm Shares so to be delivered will be made available to you for inspection at Edwards' Office (or such other place as you and the Company may mutually agree upon) at least one full business day prior to the Closing Date and will be registered in such names and denominations as you may request at least two full business days prior to the Closing Date. It is understood that an Underwriter, individually, may (but shall not be obligated to) make payment on behalf of the other Underwriters whose checks shall not have been received prior to the Closing Date for Shares to be purchased by such Underwriter. Any such payment by an Underwriter shall not relieve the other Underwriters of any of their obligations hereunder. It is understood that the Underwriters propose to offer the Shares to the public upon the terms and conditions set forth in the Registration Statement hereinafter defined. 3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (a) each Selling Stockholder agrees, severally and not jointly, to sell up to the number of Option Shares set forth opposite such Selling Stockholder's name in Schedule I hereto and (b) the Underwriters shall have the right to purchase, severally and not jointly, up to an aggregate of 300,000 Option Shares from the Selling Stockholders at the Purchase Price. Such Option Shares shall be purchased from each such Selling Stockholder for the account of each Underwriter in the same proportion as the number of Firm Shares set forth opposite such Underwriter's name bears to the total number of Firm Shares (subject to adjustment by you to eliminate fractional shares). If the option is exercised in part, the respective number of Option Shares being purchased shall be sold by each Selling Stockholder in the same proportion as the number of Option Shares set forth opposite each such Selling Stockholders' name bears to the total number of Option Shares (subject to adjustment by you to eliminate fractional shares). Option Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The options are exercisable on behalf of the several Underwriters by you, as the Representatives, at any time, and from time to time, before the expiration of 45 days from the date of this Agreement, for the purchase of all or part of the Option Shares covered thereby, by notice 2 given by you to the Attorneys-in-Fact (as hereinafter defined) for the Selling Stockholders in the manner provided in Section 13 hereof, setting forth the number of Option Shares as to which the Underwriters are exercising the options, and the date for payment and delivery of said Option Shares, which date shall be (a) no earlier than the Closing Date and (b) no earlier than two business days after such notice, unless otherwise agreed to by the parties, and no later than ten business days after such notice. You may terminate the options at any time, as to any unexercised portion thereof, by giving written notice to the Attorneys-in-Fact for the Selling Stockholders to such effect. You shall make such allocation of the Option Shares among the Underwriters as may be required to eliminate purchases of fractional Shares. Delivery of the Option Shares with respect to which the options shall have been exercised shall be made to or upon your order at Edwards' Office (or at such other place as you and the Attorneys-in-Fact may mutually agree upon), against payment by you of the Purchase Price therefor to the Selling Stockholders by wire transfer or certified or bank cashier's check or checks, payable in clearing house (next day available) funds at the Place of Closing. Such payment and delivery shall be made at 10:00 a.m., Dallas, Texas time, on the date designated in the notice given by you as above provided for, unless some other date and time are agreed upon, which date and time of payment and delivery are called the "Option Closing Date." The certificates for the Option Shares so to be delivered will be made available to you for inspection at Edwards' Office (or such other place as you and the Attorneys-in-Fact may mutually agree upon) at least one full business day prior to the Option Closing Date and will be registered in such names and denominations as you may request at least one full business day prior to the Option Closing Date. 4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. (a) The Company represents and warrants to, and agrees with, each Underwriter that: (i) A registration statement on Form S-1 (Registration No. 333-33559) with respect to the Shares, including a preliminary prospectus, and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company pursuant to and in conformity with the requirements of the Securities Act of 1933 (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Commission thereunder and has been filed with the Commission under the Act. Copies of such registration statement, including any amendments thereto, each related preliminary prospectus (meeting the requirements of Rule 430 or 430A of the Rules and Regulations) contained therein, the exhibits, financial statements and schedules, have heretofore been delivered by the Company to you. If such registration statement has not become effective under the Act, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to 3 become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective under the Act, a final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed promptly by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations. The term "Registration Statement" as used herein means the registration statement as amended at the time it becomes or became effective under the Act (the "Effective Date"), including financial statements and all exhibits, a registration statement, if applicable, filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the offering registered under the Act and, if applicable, the information deemed to be included by Rule 430A or Rule 434 of the Rules and Regulations. The term "Prospectus" as used herein means (A) the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations,(B) if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date or (C) if a Term Sheet or Abbreviated Term Sheet (as such terms are defined in Rule 434(b) and 434(c), respectively, of the Rules and Regulations) is filed with the Commission pursuant to Rule 424(b)(7) of the Rules and Regulations, the Term Sheet or Abbreviated Term Sheet and the last Preliminary Prospectus filed with the Commission prior to the time the Registration Statement became effective, taken together. The term "Preliminary Prospectus" as used herein means a preliminary prospectus as contemplated by Rule 430 or 430A of the Rules and Regulations included at any time in the Registration Statement. (ii) The Commission has not issued, and, to the knowledge of the Company, is not threatening to issue, an order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, nor instituted proceedings for that purpose. Each Preliminary Prospectus at its date of issue, the Registration Statement and the Prospectus and any amendments or supplements thereto contains or will contain, as the case may be, all statements which are required to be stated therein by, and in all material respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto, as of the applicable effective date, and neither the Prospectus nor any supplement thereto contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters specifically for use in the preparation thereof. (iii) The filing of the Registration Statement and the execution, delivery and performance of this Agreement have been duly authorized by the Board of Directors of 4 the Company; this Agreement constitutes a valid and legally binding obligation of the Company enforceable in accordance with its terms (except as may be limited by bankruptcy, rehabilitation, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, by general principles of equity, and by public policy underlying or reflected in applicable securities laws and regulations); the issue and sale of the Firm Shares by the Company and the performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with or result in a violation of the Company's charter or bylaws or result in a breach or violation of any of the terms and provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or its subsidiaries under, any statute, or under any indenture, mortgage, deed of trust, note, loan agreement, sale and leaseback arrangement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which they are bound or to which any of the properties or assets of the Company or its subsidiaries is subject, or (assuming compliance with the registration and filing requirements of all applicable state securities or Blue Sky laws) violate or conflict with any law, order, rule or regulation or decree of any court or governmental agency or body having jurisdiction over the Company or its subsidiaries or their properties, except to such extent as does not materially adversely affect the business of the Company and its subsidiaries, taken as a whole; and no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the consummation of the transactions herein contemplated, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Act or Rules and Regulations or any state securities or Blue Sky laws. (iv) Except as described in the Prospectus, neither the Company nor any of its subsidiaries has sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree. Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company and its subsidiaries, taken as a whole, have not incurred any material liabilities or material obligations, direct or contingent, other than in the ordinary course of business, or entered into any material transactions not in the ordinary course of business, and there has not been any material change in the capital stock or long-term debt of the Company and its subsidiaries, taken as a whole, or any material adverse effect on the condition (financial or other), net worth, business, affairs, properties, management, prospects or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received 5 by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided; and the Company and its subsidiaries have no knowledge of any tax proceeding or action pending or threatened against the Company or its subsidiaries which might have a Material Adverse Effect. (v) Except described in the Prospectus, there is not now pending or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company or its subsidiaries is a party before or by any court or public, regulatory or governmental agency or body which might be expected to result (individually or in the aggregate) in a Material Adverse Effect, or might be expected to materially and adversely affect (individually or in the aggregate) the properties or assets thereof. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (vi) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; all the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Stockholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive rights, rights of first refusal or similar rights that have not been waived or satisfied; and the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive rights, rights of first refusal or similar right. (vii) Each of Company and its subsidiaries has been duly organized and is validly existing and in good standing under the laws of its jurisdiction of organization, with full power and authority (corporate or other) to own, lease and operate its properties and conduct its business as described in the Registration Statement; each of the Company and its subsidiaries is duly qualified and is in good standing to do business in each state or other jurisdiction in which its ownership or leasing of property or conduct of business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; and the outstanding shares of capital stock of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are owned by the Company (directly or indirectly) free and clear of any mortgage, pledge, lien, encumbrance, charge or adverse claim and are not the subject of any agreement or understanding with any person (except to the Company's lenders); no options, warrants or other rights to purchase, agreement or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the subsidiaries are outstanding. 6 (viii) Deloitte & Touche LLP, the accounting firm which has certified the financial statements filed with the Commission as a part of the Registration Statement, is an independent public accounting firm within the meaning of the Act and the Rules and Regulations. (ix) The financial statements, together with related schedules and notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as otherwise disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, fairly presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (x) Neither the Company nor any of its subsidiaries is in violation of its respective charter or bylaws or other organizational or governing documents or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of the Company's subsidiaries or their respective property is bound, except for such defaults which, individually or in the aggregate, would not have a Material Adverse Effect. (xi) Neither the Company nor any subsidiary is in violation of any other laws, ordinances or governmental rules or regulations to which it is subject, except for violations which, individually or in the aggregate, would not have a Material Adverse Effect, and neither the Company nor any subsidiary has, at any time during the past five years,(A) made any unlawful contributions to any candidate for any political office, or failed fully to disclose any contribution in violation of law, or (B) made any payment to any state, federal or foreign government official, or other person charged with similar public or quasi-public duty (other than payment required or permitted by applicable law). (xii) Each of the Company and its subsidiaries have such certificates, permits, licenses, franchises and authorizations of governmental or regulatory authorities (collectively, "permits"), as are necessary to conduct its business or own, lease and operate its respective properties, except for those the absence of which would not result in a Material 7 Adverse Effect; the Company and its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company and/or any of its subsidiaries. (xiii) Each of the Company and its subsidiaries owns or possesses the patents, patent licenses, trademarks, trade names, service marks, service names, copyrights and other intellectual property rights (collectively, "Intellectual Property") necessary to carry on its business as presently conducted and, except as otherwise set forth in the Prospectus, neither the Company nor any of its subsidiaries have received any notice of infringement or conflict with asserted rights of others with respect to the Intellectual Property which, individually or in the aggregate, if the subject of any unfavorable decision, ruling or finding, could reasonably be expected to have a Material Adverse Effect. (xiv) Each of the Company and its subsidiaries has good and marketable title to all property owned by it, free and clear of all liens, claims, encumbrances, restrictions and defects, except such as are described in the Registration Statement or do not interfere with the use made or proposed to be made of such property or liens for taxes not yet due and payable; and any property held under lease or sublease by the Company or its subsidiaries is held under valid, subsisting and enforceable leases or subleases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property by the Company and its subsidiaries, and neither the Company nor any subsidiary has any notice or knowledge of any material claim of any sort which has been asserted, or any notice or knowledge of any material claim of any sort which may be asserted, by anyone adverse to the Company's or any subsidiary's rights as lessee or sublessee under any lease or sublease described above, or affecting or questioning the Company's or any of its subsidiaries' rights to the continued possession of the leased or subleased premises under any such lease or sublease in conflict with the terms thereof. (xv) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the 8 aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (xvi) The Company has not, directly or indirectly, (A) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement or (B) since the filing of the Registration Statement, except for the Underwriters, (1) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Shares or (2) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company (except for the sale of Shares by the Selling Stockholders under this Agreement). (xvii) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (xviii) The Company and each of its subsidiaries carry, OR are covered by, insurance in such amounts and covering such risks as is reasonably adequate for the conduct of their respective businesses and the value of their respective properties. (xix) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company, except as disclosed in the Registration Statement. (xx) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida). (xxi) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or its subsidiaries, except as disclosed in the Registration Statement. (xxii) There is (A) no significant unfair labor practice complaint pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no material grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, and (B) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any of its subsidiaries, to the best knowledge of the Company, is threatened 9 against the Company or any of its subsidiaries except for such actions specified in clause (A) or (B) above, which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (b) Each Selling Stockholder, severally and not jointly, represents and warrants as to itself to and agrees with each Underwriter and the Company that: (i) All authorizations and consents necessary for the execution and delivery by it of this Agreement and the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder have been given and are in full force and effect on the date hereof and, if applicable, will be in full force and effect on the Option Closing Date. (ii) Such Selling Stockholder has, and on the Option Closing Date will have, good and marketable title to the Shares to be sold by such Selling Stockholder, free and clear of all restrictions on transfer (other than those contained in the custody agreement and the irrevocable power of attorney described below), liens, mortgages, pledges, encumbrances, claims, equities and security interests whatsoever, and has, and on the Option Closing Date will have, full legal right, power and authority to enter into this Agreement, the Custody Agreement (the "Custody Agreement") between the Selling Stockholders and the Company, as custodian (the "Custodian"), and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder. (iii) Upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire good and marketable title to such Shares to be sold by such Selling Stockholder hereunder, free and clear of all restrictions on transfer, liens, mortgages, pledges, encumbrances, claims, equities and security interests whatsoever. (iv) The execution, delivery and performance of this Agreement by or on behalf of such Selling Stockholder, compliance by such Selling Stockholder with all the provisions hereof and the consummation by such Selling Stockholder of the transactions on its part contemplated hereby will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such may be required under the Act, state securities laws or Blue Sky laws or the By-laws and rules of the NASD) and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Selling Stockholder, if not an individual, or any agreement, indenture or other instrument to which such Selling Stockholder is a party or by which such Selling Stockholder or property of such Selling Stockholder is bound, or (assuming compliance with the registration and filing requirements of all applicable state securities or Blue Sky laws) violate or conflict with any laws, administrative regulation or ruling or court decree applicable to such Selling Stockholder or property of such Selling Stockholder. 10 (v) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which might be reasonably expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, and such Selling Stockholder is not aware of any such actions taken or to be taken by affiliates of such Selling Stockholder. (vi) When the Registration Statement becomes effective and at all times subsequent thereto, such information in the Registration Statement and Prospectus and any amendments or supplements thereto as specifically refers to such Selling Stockholder will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (vii) Certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder hereunder have been placed in the custody of the Custodian under the Custody Agreement, duly executed and delivered by such Selling Stockholder, with the Custodian having the authority to deliver the Shares to be sold by such Selling Stockholder hereunder, and such Selling Stockholder has duly executed and delivered a Power of Attorney (the "Power of Attorney") appointing each of H. R. Brutsche III, James H. Clark, Jr. and John D. Maxson as such Selling Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with the Attorneys-in-Fact having authority to execute and deliver this Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided in Section 3, to authorize the delivery of the Shares to be sold by it hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. (viii) The Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Custodian under the Custody Agreement and of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable. (ix) The obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Stockholder or by the occurrence of any other event, and if any Selling Stockholder should die or become incapacitated, or if any other such event should occur before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf 11 of such Selling Stockholder in accordance with the terms and conditions of this Agreement and of the Custody Agreement, and actions taken by the Custodian pursuant to the Custody Agreement or by the Attorneys-in-Fact pursuant to the Power of Attorney shall be as valid as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian or Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity or other event. (x) Such Selling Stockholder is not prompted to sell shares of Common Stock by any information concerning the Company or any of its subsidiaries which is required to be (and is not) included in the Registration Statement. (c) Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of a Selling Stockholder as such and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. 5. ADDITIONAL COVENANTS. The Company and, where expressly indicated, the Selling Stockholders, covenant and agree with the several Underwriters that: (a) If the Registration Statement is not effective under the Act, the Company will use its commercially reasonable efforts to cause the Registration Statement to become effective as promptly as possible, and it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement has become effective. The Company (i) will prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations, if required, a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations or otherwise or a Term Sheet or Abbreviated Term Sheet, as applicable;(ii) will not file any amendment to the Registration Statement or supplement to the Prospectus of which the Underwriters shall not previously have been advised and furnished with a copy or to which the Underwriters shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations; and (iii) will promptly notify you after it shall have received notice thereof of the time when any amendment to the Registration Statement becomes effective or when any supplement to the Prospectus has been filed. (b) The Company will advise the Underwriters promptly, after it shall receive notice or obtain knowledge thereof, of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution or threatening of any proceedings for that purpose, and the Company will use its commercially reasonable efforts to prevent the issuance of 12 any such stop order preventing or suspending the use of the Prospectus and, if issued, to obtain as soon as possible the lifting thereof. (c) The Company will cooperate with the Underwriters and their counsel in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as they may have designated and will make such applications, file such documents and furnish such information as may be necessary for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent or to subject itself to taxation as doing business in any jurisdiction where it is not now so taxed. The Company will, from time to time, file such statements, reports and other documents as are or may be required to continue such qualifications in effect for so long a period as the Underwriters may reasonably request. (d) The Company will deliver to, or upon the order of, the Underwriters, without charge from time to time, as many copies of any Preliminary Prospectus as they may reasonably request. The Company will deliver to, or upon the order of, the Underwriters without charge as many copies of the Prospectus, or as it thereafter may be amended or supplemented, as they may from time to time reasonably request. The Company consents to the use of such Prospectus by the Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for such other purposes and for such period of time thereafter as the Prospectus is required by law to be delivered in connection with the offering or sale of the Shares. The Company will deliver to the Underwriters at or before the Closing Date three signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Underwriters such number of copies of the Registration Statement, without exhibits, and of all amendments thereto, as they may reasonably request. (e) The Company will not file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or make any amendment or supplement to the Prospectus, including the issuance or filing of any term sheet within the meaning of Rule 434, of which you shall not previously have been advised or to which you shall reasonably object; and will prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus, or make any amendment or supplement to the Prospectus, including the issuance or filing of any term sheet within the meaning of Rule 434, which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its commercially reasonable efforts to cause the same to become promptly effective. (f) If, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in your judgment or in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in light 13 of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law. (g) The Company will make generally available to its stockholders and will file as an exhibit in a report pursuant to the Exchange Act, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise the Underwriters in writing when such statement has been so made available. (h) The Company will, for a period of three years from the Closing Date, deliver to the Representatives at their principal executive offices a reasonable number of copies of annual reports, quarterly reports, current reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to any significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. Any report, document or other information required to be furnished under this paragraph (h) shall be furnished as soon as practicable after such report, document or information becomes available. (i) The Company will apply the proceeds from the sale of the Shares as set forth in the description under "Use of Proceeds" in the Prospectus, which description complies in all respects with the requirements of Item 504 of Regulation S-K. (j) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Shares under the Act. (k) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its subsidiaries for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (l) The Company will use its commercially reasonable efforts to obtain approval for quotation of the Common Stock on the Nasdaq National Market (the "Nasdaq"). 14 (m) The Selling Stockholders, severally and not jointly, and the Company hereby agree to, and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company and (ii) each Selling Stockholder, pursuant to which each such person and entity agrees, not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge (other than to the Company) or grant any option to purchase or otherwise dispose or transfer (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other disposition or transfer)(i) any shares of Common Stock or other capital stock of the Company, or (ii) any other securities convertible into, or exchangeable or exercisable for, shares of Common Stock or such other capital stock, beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by such person, without the prior written consent of A. G. Edwards & Sons, Inc. for a period of 180 days after the date of the Prospectus, other than (A) pursuant to a tender or exchange offer for shares of Common Stock,(B) to an immediate family member or a trust established for the benefit of such person or an immediate family member of such person (provided that any such family member or trust shall have executed and delivered to the Underwriters an agreement of substantially the tenor of this Section 5(m)),(C) pursuant to a qualified domestic relations order (provided that any such party shall have executed and delivered to the Underwriters an agreement of substantially the tenor of this Section 5(m)),(D) pursuant to a pledge or gift of such shares (provided that any such pledgee or donee shall have executed and delivered to the Underwriters an agreement of substantially the tenor of this Section 5(m)), or (E) by operation of law. Notwithstanding the foregoing, during such period the Company may (1) grant awards pursuant to the Company's 1997 Omnibus Plan,(2) issue shares of its Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and disclosed in the Prospectus and (3) issue shares of its Common Stock to its Employees' Stock Ownership Plan and Employees' Stock Equivalence Plan. (n) Each of the Selling Stockholders will use its commercially reasonable efforts to do and perform all things required or necessary to be done and performed under this Agreement by it prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase and pay for the Shares, as provided herein, will be subject to the accuracy in all material respects, as of the date hereof and as of the Closing Date (and, if applicable, the Option Closing Date), of the representations and warranties of the Company and the Selling Stockholders contained herein, to the performance in all material respects by the Company and the Selling Stockholders of their covenants and obligations hereunder and to the following additional conditions: (a) All filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made. No stop order suspending the effectiveness of the Registration Statement, as 15 amended from time to time, shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened or contemplated by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Underwriters. (b) No Underwriter shall have disclosed in writing to the Company on or prior to the Closing Date (and, if applicable, the Option Closing Date), that the Registration Statement or Prospectus or any amendment or supplement thereto contains an untrue statement of fact which, in the opinion of counsel to the Underwriters, is material, or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On the Closing Date (and, if applicable, the Option Closing Date), you shall have received the opinion of Gardere & Wynne, counsel for the Company, addressed to you and dated the Closing Date (and, if applicable, the Option Closing Date), to the effect that: (i) Each of the Company and its United States subsidiaries is a corporation, validly existing and, where applicable, in good standing under the laws of its jurisdiction of organization, with the corporate power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus; each of the Company and its United States subsidiaries is duly qualified and is in good standing to do business in each state or other jurisdiction in which its ownership or leasing of property or conduct of business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; the outstanding shares of capital stock of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and, to the knowledge of such counsel after due inquiry, are owned of record by the Company free and clear of any mortgage, pledge, lien, encumbrance, charge or adverse claim (other than restrictions on transfer imposed by applicable securities laws) and are not the subject of any agreement or understanding with any person, other than the pledge of such shares to the Company's lenders; and, to the knowledge of such counsel after due inquiry, no options, warrants or other rights to purchase, or agreements or other obligations to issue, or rights to convert any obligations into, shares of capital stock or ownership interests in the subsidiaries are outstanding. (ii) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained under the caption "Description of Capital Stock" in the Prospectus; all the outstanding shares of capital stock of the Company (including the Shares to be sold hereunder by the Selling Stockholders) have been duly authorized and validly issued and are fully paid, non-assessable and, to the knowledge of such counsel after due inquiry, were not issued or sold by the Company in 16 violation of any statutory preemptive rights or contractual preemptive rights, rights of first refusal or similar rights that have not been waived or satisfied; and the shares of Common Stock to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and, to the knowledge of such counsel after due inquiry, the issuance of such Shares will not violate any statutory preemptive rights or any contractual preemptive rights, rights of first refusal or similar rights of any other person. (iii) The Registration Statement has become effective under the Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission. (iv) The Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations (except that such counsel need express no opinion as to the financial statements and the notes thereto, related schedules and other statistical and financial data included therein). (v) To the knowledge of such counsel after due inquiry, there are no contracts or documents required to be filed as exhibits to the Registration Statement or required to be described in the Prospectus that are not so filed or described as required, and statements contained in the Prospectus, insofar as they purport to summarize the provisions of such contracts and documents, present fair summaries of such provisions. (vi) No authorization, approval, consent, order, registration or qualification of or with any court or governmental body, authority or agency is required as a condition to the Company's execution and delivery of, and the performance of its obligations under, this Agreement, except such as may be required under the Act or the Rules and Regulations or as may be required by the NASD or under state securities and Blue Sky laws (as to each of which exceptions such counsel need express no opinion). (vii) To the knowledge of such counsel after due inquiry, neither the Company nor any of its subsidiaries is in violation of its respective charter, bylaws or other organizational or governing documents and, to the knowledge of such counsel after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the 17 Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound. (viii) The filing of the Registration Statement has been duly authorized by the Board of Directors of the Company. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company enforceable in accordance with its terms (except as may be limited by bankruptcy, rehabilitation, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, by general principles of equity, and by public policy underlying or reflected in applicable securities laws and regulations). The Company's performance of this Agreement and its consummation of the transactions contemplated herein will not (A) conflict with or result in a violation of the Company's charter or bylaws, (B) result in a breach or violation of any of the terms and provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or its subsidiaries under any indenture, mortgage, deed of trust, note, loan agreement, sale and leaseback arrangement, or other agreement or instrument, in any case known to such counsel after due inquiry, to which the Company or any of its subsidiaries is a party or by which any of them are bound or to which any of the properties or assets of the Company or its subsidiaries is subject, (C) violate any statute of the United States of America or the State of Texas or the Delaware General Corporate Law, in any case generally applicable to transactions of the type contemplated hereby, or (D) to the knowledge of such counsel, violate any order, rule, regulation or decree of any court or governmental agency or body having jurisdiction over the Company or its subsidiaries or their properties, except, in the case of any such violation, breach, default, conflict, creation or imposition, to such extent as individually, or in the aggregate, does not have a Material Adverse Effect. (ix) To the knowledge of such counsel after due inquiry, other than as set forth in the Prospectus, there are no legal, governmental or regulatory proceedings pending or threatened to which the Company or any of its subsidiaries is a party or of which the business or properties of the Company or any of its subsidiaries is subject that are required to be described in the Prospectus and are not so described. (x) To the knowledge of such counsel after due inquiry,(A) the Company and its subsidiaries have such permits from governmental agencies of the United States and the State of Texas ("Permits") as are necessary to conduct their businesses and own, lease and operate their respective properties as described in the Prospectus, except where the failure to have a Permit would not, individually or in the aggregate, have a Material Adverse Effect; (B) the Company and its subsidiaries have fulfilled and performed all of their material obligations with respect to such Permits, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such Permit, subject in each case to 18 such qualifications as may be set forth in the Prospectus, except where the failure to fulfill or perform such material obligations or the occurrence of any such event would not, individually or in the aggregate, have a Material Adverse Effect; and (C) each Permit is in full force and effect and each of the Company and its subsidiaries is operating in compliance with its Permits. There are no proceedings pending or, to the knowledge of such counsel after due inquiry, threatened against the Company or any of its subsidiaries that seek to cause any Permit to be revoked, withdrawn, canceled, suspended or not renewed, except where the failure of a Permit to be in full force and effect would not, individually or in the aggregate, have a Material Adverse Effect. (xi) The statements made in the Registration Statement under the captions "Dividend Policy," "Capitalization" and "Description of Capital Stock," to the extent that they constitute summaries of documents referred to therein, present fair summaries of such documents in all material respects and, insofar as they purport to describe matters of law or legal conclusions, are accurate in all material respects. (xii) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (xiii) To the knowledge of such counsel after due inquiry, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company under the Act, except as described in the Registration Statement, and the sale of the Shares in accordance with this Agreement does not violate the terms of any such agreement described in the Registration Statement. Such counsel shall also state that they have participated in the preparation of the Registration Statement and Prospectus and in conferences with officers and other representatives of the Company, counsel for the Underwriters, representatives of the independent public accountants for the Company and your representatives at which the contents of the Registration Statement and Prospectus and related matters were discussed, and that, although they are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (or any amendment thereof or supplement thereto prior to the Closing Date or the Option Closing Date, as the case may be, as of the date of such amendment or supplement), on the basis of the foregoing (relying as to materiality to a large degree upon the opinions of officers and other representatives of the Company), no facts have come to their attention that lead them to believe that (1) the Registration Statement, as of the time it became effective (or any amendment thereto made prior to the Closing Date or the Option Closing Date, as the case may be, as of the date of such amendment), contained or as of the Closing Date or the Option Closing Date, as the case may be, contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements 19 therein not misleading, or (2) the Prospectus, as of the date thereof (or any amendment thereof or supplement thereto made prior to the Closing Date or the Option Closing Date, as the case may be, as of the date of such amendment or supplement), contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that, with respect to the financial statements and the notes thereto or other financial or statistical data included in the Registration Statement or the Prospectus, such counsel need express no opinion). (d) On the Closing Date (and, if applicable, the Option Closing Date), you shall have received the opinions of counsel from law firms in such countries (other than the United States) as are reasonably requested by the Representatives to the effect that (A) each of the Company's non-United States subsidiaries validly exists and, where applicable, is in good standing under the laws of its jurisdiction of organization with the power and authority to own, lease and operate its properties and conduct its business as described in the Prospectus and (B) each of the Company and its subsidiaries is duly qualified and is in good standing to do business in each country or other jurisdiction in which its ownership or leasing of property or conduct of business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect. (e) If applicable, on the Option Closing Date you shall have received an opinion of counsel from a law firm reasonably satisfactory to the Representatives for each Selling Stockholder, addressed to you and dated the Option Closing Date, to the effect that: (i) If such Selling Stockholder is not a natural person, such Selling Stockholder has duly authorized the execution and delivery of the Custody Agreement and the Power of Attorney. Such Selling Stockholder has duly executed and delivered the Custody Agreement and the Power of Attorney. (ii) If such Selling Stockholder is not a natural person, this Agreement has been duly authorized on behalf of such Selling Stockholder. This Agreement has been duly authorized (if such Selling Stockholder is not a natural person), executed and delivered on behalf of such Selling Stockholder, and is a valid and binding agreement of such Selling Stockholder, enforceable against such Selling Stockholder in accordance with its terms (except as may be limited by bankruptcy, rehabilitation, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, by general principles of equity and by public policy underlying or reflected in applicable securities laws and regulations). (iii) To the knowledge of such counsel after due inquiry, such Selling Stockholder has full legal right, power and authority, and all necessary approvals, authorizations and orders of any court, or governmental or regulatory agency or body as are 20 required for the execution, delivery and performance of this Agreement and the Custodian Agreement except as may be required under the Act or the Rules and Regulations or as may be required by the NASD or under the state securities and Blue Sky laws (as to each of which exceptions counsel need express no opinion). (iv) To the knowledge of such counsel after due inquiry, such Selling Stockholder is the registered owner of the Option Shares to be sold by such Selling Stockholder hereunder, and upon delivery of and payment for such Option Shares as contemplated by this Agreement, each of the Underwriters who has acquired Option Shares from such Selling Stockholder in good faith and without notice of any adverse claim within the meaning of Chapter 8 of the Texas Uniform Commercial Code will acquire the Option Shares being sold by such Selling Stockholder on the Option Closing Date free of any adverse claim. The owner of such Option Shares, if other than such Selling Stockholder, is precluded from asserting against the Underwriters the ineffectiveness of any authorized endorsement or instruction, assuming the Underwriters purchased such Option Shares for value in good faith and without notice of any adverse claim. (f) You shall have received on the Closing Date (and, if applicable, the Option Closing Date), from Vinson & Elkins L.L.P., counsel to the Underwriters, such opinion or opinions, dated the Closing Date (and, if applicable, the Option Closing Date) with respect to the incorporation of the Company, the validity of the Shares, the Registration Statement, the Prospectus and other related matters as you may reasonably require; the Company and Selling Stockholders shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (g) You shall have received at or prior to the Closing Date from Vinson & Elkins L.L.P., a memorandum or memoranda, in form and substance satisfactory to you, with respect to the qualification for offering and sale by the Underwriters of the Shares under state securities or Blue Sky laws of such jurisdictions as the Underwriters may have designated to the Company. (h) On the business day immediately preceding the date of this Agreement and on the Closing Date (and, if applicable, the Option Closing Date), you shall have received from Deloitte & Touche LLP, a letter or letters, dated the date of this Agreement and the Closing Date (and, if applicable, the Option Closing Date), respectively, in form and substance satisfactory to you, confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the published Rules and Regulations, and the answer to Item 509 of Regulation S-K set forth in the Registration Statement is correct insofar as it relates to them, and stating to the effect set forth in Schedule III hereto. (i) Except as contemplated in the Prospectus, (i) neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements 21 included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, and (ii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, or entered into transactions, and there shall not have been any change in the capital stock or long-term debt of the Company and its subsidiaries or any change in the condition (financial or other), net worth, business, affairs, management, prospects or results of operations of the Company or its subsidiaries, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material or adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares being delivered on such Closing Date (and, if applicable, the Option Closing Date) on the terms and in the manner contemplated in the Prospectus. (j) There shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the American Stock Exchange or the establishing on such exchanges by the Commission or by such exchanges of minimum or maximum prices which are not in force and effect on the date hereof; (ii) a general moratorium on commercial banking activities declared by either federal or state authorities; (iii) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iii) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus; (iv) any calamity or crisis, change in national, international or world affairs, act of God, change in the international or domestic markets, or change in the existing financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in this clause (iv) makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus; or (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority, or the taking of any action by any federal, state or local government or agency in respect of fiscal or monetary affairs, if the effect of any such event specified in this clause (v) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus. (k) You shall have received certificates, dated the Closing Date (and, if applicable, the Option Closing Date) and signed by the President and the Chief Financial Officer of the Company stating that (i) they have carefully examined the Registration Statement and the Prospectus as amended or supplemented and nothing has come to their attention that would lead them to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto as of their respective effective dates, contained, and the Prospectus as amended or supplemented at such Closing Date, contains any untrue statement of a material fact, or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, 22 in light of the circumstances under which they were made, not misleading, and, that (ii) all representations and warranties made herein by the Company are true and correct in all material respects at such Closing Date, with the same effect as if made on and as of such Closing Date, and all agreements herein to be performed by the Company on or prior to such Closing Date have been duly performed in all material respects. (l) The Company shall have delivered to you the agreements specified in Section 5(n) hereof. (m) The Company and each of the Selling Stockholders shall not have failed, refused or been unable, at or prior to the Closing Date (and, if applicable, the Option Closing Date) to have performed in all material respects any agreement on their part to be performed or any of the conditions herein contained and required to be performed or satisfied by them at or prior to such Closing Date. (n) You shall have received on the Closing Date (i) a United States Treasury Department Form W-9 from each Selling Stockholder who is a U.S. Person (as defined under applicable U.S. federal tax legislation) and (ii) a United States Treasury Department Form W-8 from each Selling Stockholder who is not a U.S. Person to the effect that such Selling Stockholder is not a U.S. Person. (o) The Company and the Selling Stockholders shall have furnished to you at the Closing Date (and, if applicable, the Option Closing Date) such other certificates as you may have reasonably requested as to the accuracy, on and as of such date, of the representations and warranties of the Company and the Selling Stockholders herein and as to the performance by the Company and the Selling Stockholders of their obligations hereunder. (p) The Shares shall have been approved for trading upon official notice of issuance on the Nasdaq. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Vinson & Elkins L.L.P., counsel for the several Underwriters. The Company and Selling Stockholders will furnish you with such conformed copies of such opinions, certificates, letters and documents as you may request. If any of the conditions specified above in this Section 6 shall not have been satisfied at or prior to the Closing Date (and, if applicable, the Option Closing Date) or waived by you in writing, this Agreement may be terminated by you on notice to the Company and the Selling Stockholders. 7. INDEMNIFICATION. (a) The Company and the Selling Stockholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who 23 controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any losses, claims, damages, liabilities and judgments, joint or several, to which such Underwriter or such controlling person may become subject, insofar as such losses, claims, damages, liabilities or judgments arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company and the Selling Stockholders shall not be liable in any such case to the extent that any such loss, claim, damage, liability or judgment arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you or by any Underwriter through you, specifically for use in the preparation thereof; and provided, further, that if any Preliminary Prospectus or the Prospectus contained any alleged untrue statement or allegedly omitted to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and such statement or omission shall have been corrected in a revised Preliminary Prospectus or in the Prospectus or in an amended or supplemented Prospectus, the Company and the Selling Stockholders shall not be liable to any Underwriter or controlling person under this subsection (a) with respect to such alleged untrue statement or alleged omission to the extent that any such loss, claim, damage, liability or judgment of such Underwriter or controlling person results from the fact that such Underwriter sold Shares to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, such revised Preliminary Prospectus or Prospectus or amended or supplemented Prospectus. Notwithstanding the foregoing, in no event shall a Selling Stockholder be liable under the provisions of this Section 7 for any amount in excess of the aggregate amount of proceeds that such Selling Stockholder received from the sale of the Shares pursuant to this Agreement. The Company, the Selling Stockholders and the Underwriters acknowledge and agree that the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement or the Prospectus consists of the information set forth in the last paragraph on the front cover page of the Prospectus (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act and the information in paragraphs three, seven, and eight under the caption "Underwriting" in the Prospectus. This indemnity agreement shall be in addition to any liabilities which the Company or the Selling Stockholders may otherwise have. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and, each person, if any, who controls the Company within the meaning of Section 15 of 24 the Act or Section 20 of the Exchange Act, and each Selling Stockholder and each person, if any, who controls such Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any losses, claims, damages, liabilities or judgments, joint or several, to which the Company or any such director, officer or controlling person or any such Selling Stockholder or controlling person of such Selling Stockholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages, liabilities or judgments arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such Preliminary Prospectus or the Prospectus, such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by any such Underwriter specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person or any such Selling Stockholder or controlling person of such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement shall be in addition to any liabilities which the Underwriters may otherwise have. (c) Any party which proposes to assert the right to be indemnified under this Section 7 shall, within ten days after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party under this Section 7, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve such indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 7. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and, except as hereinafter provided, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses. The indemnified party shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party at the expense of the indemnifying party has been authorized by the indemnifying party, (ii) the indemnified party shall have been advised by such counsel that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense, or certain aspects of the defense, of such action (in which case the indemnifying party shall not have the right to direct the defense of such action with respect to those 25 matters or aspects of the defense on which a conflict exists or may exist on behalf of the indemnified party) or (iii) the indemnifying party shall have failed to assume the defense and employ counsel reasonably satisfactory to the indemnified party, in any of which events such fees and expenses to the extent applicable shall be borne by the indemnifying party. An indemnifying party shall not be liable for any settlement of any action or claim effected without its written consent, but if settled with the written consent of the indemnifying party, such indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. Each indemnified party, as a condition of such indemnity, shall cooperate in good faith with the indemnifying party in the defense of any such action or claim. (d) If the indemnification provided for in this Section 7 is for any reason, other than pursuant to the terms thereof, judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) to be unavailable to an indemnified party under subsections (a) or (b) above in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault, as applicable, of the Company, the Selling Stockholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as other relevant equitable considerations. The relative benefits received by, as applicable, the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such 26 purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) Each Selling Stockholder hereby designates the Company as its authorized agent, upon which process may be served in any action, suit or proceeding which may be instituted in any state or federal court in the State of Missouri by any Underwriter or person controlling any Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 7, and each Seller will accept the jurisdiction of such court in such action, and waives, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to such Selling Stockholder, at the address for notices specified in Section 13 hereof. 8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, and agreements of the Company and the Selling Stockholders contained in Sections 7 and 12 herein or in certificates delivered pursuant hereto, and the agreements of the Underwriters contained in Section 7 hereof, shall remain operative and in full force and effect regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any Underwriter or any controlling person, the Company or any of its officers, directors or any controlling persons, or the Selling Stockholders, and shall survive delivery of the Shares to the Underwriters hereunder. 9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of thirty-six hours within which to procure another party or parties reasonably satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Stockholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Stockholders notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Stockholders shall have the right to 27 postpone the Closing Date for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any persons substituted under this Section 9 with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters made by you or the Company and the Selling Stockholders as provided in subsection (a) above, the aggregate number of Shares which remains unpurchased does not exceed one tenth of the total Shares to be sold on the Closing Date, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the Shares which such Underwriter agreed to purchase hereunder and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters made by you or the Company and the Selling Stockholders as provided in subsection (a) above, the number of Shares which remains unpurchased exceeds one tenth of the total Shares to be sold on the Closing Date, or if the Company and the Selling Stockholders shall not exercise the right described in subsection (b) above to require the non-defaulting Underwriters to purchase Shares of the defaulting Underwriter or Underwriters, then this Agreement shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company and the Selling Stockholders except for the expenses to be borne by the Company and the Underwriters as provided in Section 12 hereof and the indemnity and contribution agreements in Section 7 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. EFFECTIVE DATE AND TERMINATION. (a) This Agreement shall become effective at 1:00 p.m., St. Louis time, on the first business day following the effective date of the Registration Statement, or at such earlier time after the effective date of the Registration Statement as you in your discretion shall first release the Shares for offering to the public; provided, however, that the provisions of Section 7 and 12 hereof shall at all times be effective. For the purposes of this Section 10(a), the Shares shall be deemed to have been released to the public upon release by you of the publication of a newspaper advertisement relating to the Shares or upon release of telegrams, facsimile transmissions or letters offering the Shares for sale to securities dealers, whichever shall first occur. 28 (b) This Agreement may be terminated by you at any time before it becomes effective in accordance with Section 10(a) by notice to the Company and the Selling Stockholders; provided, however, that the provisions of this Section 10 and of Section 7 and Section 12 hereof shall at all times be effective. In the event of any termination of this Agreement pursuant to Section 9 hereof or this Section 10(b), the Company and the Selling Stockholders shall not then be under any liability to any Underwriter except as provided in Section 7 hereof or Section 12 hereof. (c) This Agreement may be terminated by you at any time at or prior to the Closing Date by notice to the Company and the Selling Stockholders if any condition specified in Section 6 hereof shall not have been satisfied on or prior to the Closing Date. Any such termination shall be without liability of any party to any other party except as provided in Sections 7 and 12 hereof. (d) This Agreement also may be terminated by you, by notice to the Company and the Selling Stockholders, as to any obligation of the Underwriters to purchase the Option Shares, if any condition specified in Section 6 hereof shall not have been satisfied at or prior to the Option Closing Date or as provided in Section 9 of this Agreement. If you terminate this Agreement as provided in Sections 10(b), 10(c) or 10(d), you shall notify the Company and the Selling Stockholders by telephone or telegram, confirmed by letter. 11. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, agrees with you and the Company: (a) To pay or to cause to be paid all transfer taxes with respect to the Shares to be sold by such Selling Stockholder; and (b) To take all reasonable actions in cooperation with the Company and the Underwriters to cause the Registration Statement to become effective at the earliest possible time, to do and perform all things to be done and performed under this Agreement prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. 12. COSTS AND EXPENSES. The Company will bear and pay the costs and expenses incident to the registration of the Shares and public offering thereof, including, without limitation, (a) the fees and expenses of the Company's accountants and the fees and expenses of counsel for the Company and the Selling Stockholders, (b)the preparation, printing, filing, delivery and shipping of the Registration Statement, each Preliminary Prospectus, the Prospectus and any amendments or supplements thereto and the printing, delivery and shipping of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, Underwriters' Questionnaires and Powers of Attorney and Blue Sky Memoranda, (c) the furnishing of copies of such documents to the 29 Underwriters, (d) the registration or qualification of the Shares for offering and sale under the securities and Blue Sky laws of the various states, including the reasonable fees and disbursements of Underwriters' counsel relating to such registration or qualification, (e) the fees payable to the NASD and the Commission in connection with their review of the proposed offering of the Shares, (f) all printing and engraving costs related to preparation of the certificates for the Shares, including transfer agent and registrar fees, (g) all initial transfer taxes, if any,(h) all fees and expenses relating to the authorization of the Shares for trading on Nasdaq, (i) all travel expenses, including air fare and accommodation expenses, of representatives of the Company in connection with the offering of the Shares and (j) all of the other costs and expenses incident to the performance by the Company of the registration and offering of the Shares; provided, however, that the Underwriters will bear and pay the fees and expenses of the Underwriters' counsel (other than fees and disbursements relating to the registration or qualification of the Shares for offering and sale under the securities and Blue Sky laws of the various states), the Underwriters' out-of-pocket expenses and any advertising costs and expenses incurred by the Underwriters incident to the public offering of the Shares. If this Agreement is terminated by you in accordance with the provisions of Section 10(c), the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel to the Underwriters. 13. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to the Underwriters shall be mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North Jefferson Avenue, St. Louis, Missouri 63103, Attention: Syndicate, facsimile number (314) 289-7387, or if sent to the Company shall be mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed to the Company at Vari-Lite International, Inc., 201 Regal Row, Dallas, Texas 75247, Attention: H.R. Brutsche III, President, facsimile number (214) 630-5867, or if sent to any Selling Stockholder shall be mailed, delivered, sent by facsimile transmission or telegraphed and confirmed to such Selling Stockholder, c/o the Attorneys-in-Fact at 201 Regal Row, Dallas, Texas 75247, Attention: H.R. Brutsche III. Notice to any Underwriter pursuant to Section 7 shall be mailed, delivered, sent by facsimile transmission or telegraphed and confirmed to such Underwriter's address as it appears in the Underwriters' Questionnaire furnished in connection with the offering of the Shares or as otherwise furnished to the Company and the Selling Stockholder. 14. PARTIES. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Selling Stockholders, and the Company and their respective heirs, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, corporation or other entity, other than the parties hereto and their respective heirs, successors and assigns and the controlling persons, officers and directors referred to in Section 7, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective heirs, successors 30 and assigns and said controlling persons and said officers and directors, and for the benefit of no other person, corporation or other entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of the Underwriters, made or given by you on behalf of the Underwriters, as if the same shall have been made or given in writing by the Underwriters. 15. COUNTERPARTS. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 16. PRONOUNS. Whenever a pronoun of any gender or number is used herein, it shall, where appropriate, be deemed to include any other gender and number. 17. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Missouri. [Remainder of page intentionally left blank] 31 If the foregoing is in accordance with your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, each of the Selling Stockholders and the Underwriters. VARI-LITE INTERNATIONAL, INC. By: H.R. Brutsche III President Selling Stockholders Named in Schedule I Hereto By: H.R. Brutsche III Attorney-in-Fact Accepted in St. Louis, Missouri as of the date first above written, on behalf of ourselves and each of the several Underwriters named in Schedule II hereto. A.G. EDWARDS & SONS, INC. By: Name: Title: EVEREN Securities, Inc. By: Name: Title: 32 SCHEDULE I NUMBER OF SELLING STOCKHOLDERS OPTION SHARES -------------------- ------------- ------- Total 300,000 ------- ------- 33 SCHEDULE II NUMBER NAME OF SHARES ---- --------- A.G. Edwards & Sons, Inc. EVEREN Securities, Inc. --------- Total 2,000,000 --------- --------- II-1 SCHEDULE III Pursuant to Section 6(g) of the Underwriting Agreement, Deloitte & Touche LLP shall furnish letters to the Underwriters to the effect that: 1. They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable Rules and Regulations thereunder. 2. In their opinion, the financial statements and any supplementary financial information and schedules audited (and, if applicable, prospective financial statements and/or pro forma financial information examined) by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Rules and Regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, selected financial data, pro forma financial information, prospective financial statements and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished to the Representatives of the Underwriters (the "Representatives"). 3. On the basis of limited procedures, not constituting an audit in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, performing the procedures specified by the AICPA for a review of interim financial information as discussed in SAS No. 71, Interim Financial Information, on the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (a) any material modifications should be made to the unaudited statements of consolidated income, statements of consolidated financial position and statements of consolidated cash flows included in the Prospectus for them to be in conformity with generally accepted accounting principles, or the unaudited statements of consolidated income, statements of consolidated financial position and statements of consolidated cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations thereunder. (b) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial III-1 statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included in the Prospectus. (c) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in Clause (a) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (b) were not determined on a basis substantially consistent with the basis for the audited consolidated financial statements included in the Prospectus. (d) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements. (e) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated working capital, net current assets or net assets or other items specified by the Representatives, or any changes in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter. (f) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in Clause (e) there were any decreases in consolidated net revenues or operating profit or the total or per share amounts of consolidated net income or any other changes in any other items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for changes, decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter. (g) In addition to the audit referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraph (3) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting records of the Company and its subsidiaries for the periods covered by their reports and any interim or other periods since the latest period covered by their reports, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement III-2 specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. III-3 EX-3.2 3 EXHIBIT 3.2 BY-LAWS OF VARI-LITE INTERNATIONAL, INC. (A DELAWARE CORPORATION) EFFECTIVE: AUGUST 11, 1997 ARTICLE I OFFICES Section 1. Registered Office. . . . . . . . . . . . . . . . . . . -1- Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . -1- ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Time and Place of Meetings . . . . . . . . . . . . . . -1- Section 2. Annual Meetings. . . . . . . . . . . . . . . . . . . . -1- Section 3. Notice of Annual Meetings. . . . . . . . . . . . . . . -1- Section 4. Special Meetings . . . . . . . . . . . . . . . . . . . -1- Section 5. Notice of Special Meetings . . . . . . . . . . . . . . -1- Section 6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . -1- Section 7. Order of Business. . . . . . . . . . . . . . . . . . . -2- Section 8. New Business . . . . . . . . . . . . . . . . . . . . . -2- Section 9. Voting . . . . . . . . . . . . . . . . . . . . . . . . -3- Section 10. List of Stockholders . . . . . . . . . . . . . . . . . -3- Section 11. Inspectors of Votes. . . . . . . . . . . . . . . . . . -3- Section 12. Actions Without a Meeting. . . . . . . . . . . . . . . -4- ARTICLE III BOARD OF DIRECTORS Section 1. Powers . . . . . . . . . . . . . . . . . . . . . . . . -4- Section 2. Number, Tenure and Qualification . . . . . . . . . . . -4- Section 3. Resignations . . . . . . . . . . . . . . . . . . . . . -4- Section 4. Nominations. . . . . . . . . . . . . . . . . . . . . . -4- Section 5. Removal. . . . . . . . . . . . . . . . . . . . . . . . -6- Section 6. Vacancies. . . . . . . . . . . . . . . . . . . . . . . -6- MEETINGS OF THE BOARD OF DIRECTORS Section 7. Time and Place of Meetings . . . . . . . . . . . . . . -6- Section 8. Annual Meetings. . . . . . . . . . . . . . . . . . . . -6- Section 9. Regular Meetings--Notice . . . . . . . . . . . . . . . -6- Section 10. Special Meetings--Notice . . . . . . . . . . . . . . . -6- Section 11. Quorum and Manner of Acting. . . . . . . . . . . . . . -6- COMMITTEES OF DIRECTORS Section 12. Executive Committee; How Constituted and Powers. . . . -7- -i- Section 13. Organization . . . . . . . . . . . . . . . . . . . . . -7- Section 14. Meetings . . . . . . . . . . . . . . . . . . . . . . . -7- Section 15. Other Committees . . . . . . . . . . . . . . . . . . . -7- Section 16. Minutes of Committees. . . . . . . . . . . . . . . . . -8- Section 17. Alternate Members of Committees. . . . . . . . . . . . -8- GENERAL Section 18. Actions Without a Meeting. . . . . . . . . . . . . . . -8- Section 19. Presence at Meetings by Means of Communications Equipment. . . . . . . . . . . . . . . . . . . . . . . -8- ARTICLE IV NOTICES Section 1. Type of Notice . . . . . . . . . . . . . . . . . . . . -8- Section 2. Waiver of Notice . . . . . . . . . . . . . . . . . . . -8- Section 3. Authorized Notices . . . . . . . . . . . . . . . . . . -9- ARTICLE V OFFICERS Section 1. Description. . . . . . . . . . . . . . . . . . . . . . -9- Section 2. Election . . . . . . . . . . . . . . . . . . . . . . . -9- Section 3. Salaries . . . . . . . . . . . . . . . . . . . . . . . -9- Section 4. Term . . . . . . . . . . . . . . . . . . . . . . . . . -9- Section 5. Duties of the Chairman . . . . . . . . . . . . . . . . -9- Section 6. Duties of the President. . . . . . . . . . . . . . . .-10- Section 7. Duties of Vice President--Finance. . . . . . . . . . .-10- Section 8. Duties of Vice Presidents and Assistant Vice Presidents. . . . . . . . . . . . . . . . . . . . . .-10- Section 9. Duties of Secretary and Assistant Secretaries. . . . .-10- Section 10. Duties of Treasurer and Assistant Treasurers . . . . .-11- Section 11. Duties of Controller and Assistant Controllers . . . .-11- ARTICLE VI INDEMNIFICATION Section 1. Actions Other Than by or in the Right of the Corporation Section 2. Actions by or in the Right of the Corporation. . . . .-12- Section 3. Determination of Right to Indemnification. . . . . . .-12- Section 4. Right to Indemnification . . . . . . . . . . . . . . .-12- Section 5. Prepaid Expenses . . . . . . . . . . . . . . . . . . .-12- Section 6. Right to Indemnification upon Application; Procedure upon Application . . . . . . . . . . . . . .-13- Section 7. Other Rights and Remedies. . . . . . . . . . . . . . .-13- Section 8. Insurance. . . . . . . . . . . . . . . . . . . . . . .-13- Section 9. Mergers. . . . . . . . . . . . . . . . . . . . . . . .-13- Section 10. Savings Provision. . . . . . . . . . . . . . . . . . .-13- -ii- ARTICLE VII CERTIFICATES REPRESENTING STOCK Section 1. Right to Certificate . . . . . . . . . . . . . . . . .-14- Section 2. Facsimile Signatures . . . . . . . . . . . . . . . . .-14- Section 3. New Certificates . . . . . . . . . . . . . . . . . . .-14- Section 4. Transfers. . . . . . . . . . . . . . . . . . . . . . .-14- Section 5. Record Date. . . . . . . . . . . . . . . . . . . . . .-15- Section 6. Registered Stockholders. . . . . . . . . . . . . . . .-15- ARTICLE VIII GENERAL PROVISIONS Section 1. Dividends. . . . . . . . . . . . . . . . . . . . . . .-15- Section 2. Reserves . . . . . . . . . . . . . . . . . . . . . . .-15- Section 3. Annual Statement . . . . . . . . . . . . . . . . . . .-15- Section 4. Checks . . . . . . . . . . . . . . . . . . . . . . . .-15- Section 5. Fiscal Year. . . . . . . . . . . . . . . . . . . . . .-15- Section 6. Corporate Seal . . . . . . . . . . . . . . . . . . . .-15- Section 7. Certificate of Incorporation . . . . . . . . . . . . .-15- ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-16- -iii- ARTICLE I OFFICES Section 1. REGISTERED OFFICE. The registered office of Vari-Lite International, Inc. (the "Corporation") shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. OTHER OFFICES. The Corporation may also have offices at such other place or places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as the Board of Directors shall designate and as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETINGS. Annual meetings of the stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors of the Corporation and stated in the notice of the meeting. At the annual meeting, the stockholders shall elect by a plurality vote by written ballot a Board of Directors and transact such other business as may properly be brought before the meeting. Section 3. NOTICE OF ANNUAL MEETINGS. Written notice of the annual meeting, stating the place, date and hour of the meeting, shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Section 4. SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time by the Chief Executive Officer or the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, and shall be called by the Chief Executive Officer, the President or the Secretary at the request in writing of the holders of not less than fifty percent (50%) of the voting power represented by all the shares issued, outstanding and entitled to be voted at the proposed special meeting, unless the Certificate of Incorporation provides for a different percentage, in which event such provision of the Certificate of Incorporation shall govern. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at special meetings shall be confined to the purposes stated in the notice of the meeting. Section 5. NOTICE OF SPECIAL MEETINGS. Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Section 6. QUORUM. The holders of stock having a majority of the voting power of the stock entitled to be voted thereat, present in person or represented by proxy, shall constitute a quorum for the -1- transaction of business at all meetings of the stockholders. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time without notice (other than announcement at the meeting at which the adjournment is taken of the time and place of the adjourned meeting) until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 7. ORDER OF BUSINESS. The order of business at annual meetings of stockholders and, so far as practicable, at other meetings of stockholders shall be determined by the Chief Executive Officer. Section 8. NEW BUSINESS. At an annual meeting of stockholders, only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the annual meeting. For any new business proposed by the Board of Directors to be properly brought before the annual meeting, such new business shall be approved by the Board of Directors and shall be stated in writing and filed with the Secretary of the Corporation at least five days before the date of the annual meeting, and all business so approved, stated and filed shall be considered at the annual meeting. Any stockholder may make any other proposal at the annual meeting, but unless properly brought before the annual meeting such proposal shall not be acted upon at the annual meeting. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given proper and timely notice thereof in writing to the Secretary of the Corporation as specified herein. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not later than the date that corresponds to 120 days prior to the date the Corporation's proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (c) the class and number of shares of the stock that are held of record, beneficially owned and represented by proxy on the date of such stockholder notice and on the record date of the meeting (if such date shall have been made publicly available) by the stockholder and by any other stockholders known by such stockholder to be supporting such proposal on such dates, (d) any financial interest of the stockholder in such proposal, and (e) all other information that would be required to be filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder or stockholders were a participant in a solicitation subject to Section 14 of the Securities Exchange Act of 1934, as amended. The Board of Directors may reject any stockholder proposal not made strictly in accordance with the terms of this Section 8. Alternatively, if the Board of Directors fails to consider the validity of any stockholder proposal, the presiding officer of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that the stockholder proposal was not made in strict accordance with the terms of this Section 8 and, if he should so determine, he shall so declare at the annual meeting and any such business or proposal not properly brought before the annual meeting shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, -2- filed and received as herein provided. Section 9. VOTING. Except as otherwise provided in the Certificate of Incorporation, each stockholder shall, at each meeting of the stockholders, be entitled to one vote in person or by proxy for each share of stock of the Corporation held by him and registered in his name on the books of the Corporation on the date fixed pursuant to the provisions of Section 5 of Article VII of these By-Laws as the record date for the determination of stockholders who shall be entitled to notice of and to vote at such meeting. Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held directly or indirectly by the Corporation, shall not be entitled to vote. Any vote by stock of the Corporation may be given at any meeting of stockholders by the stockholder entitled thereto, in person or by his proxy appointed by an instrument in writing subscribed by such stockholder or by his attorney thereunto duly authorized and delivered to the Secretary of the Corporation or to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date, unless said proxy shall provide for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. At all meetings of the stockholders, all matters, except where other provision is made by law, the Certificate of Incorporation or these By-Laws, shall be decided by the vote of a majority of the votes cast by the stockholders present in person or by proxy and entitled to vote thereat, a quorum being present. Unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat, or so directed by the presiding officer of the meeting, the vote thereat on any question other than the election or removal of directors need not be by written ballot. Upon a demand of any such stockholder for a vote by written ballot on any question or at the direction of such presiding officer that a vote by written ballot be taken on any question, such vote shall be taken by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. Section 10. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock ledger, either directly or through another officer of the Corporation designated by him or through a transfer agent appointed by the Board of Directors, to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days before said meeting, either at a place within the city where said meeting is to be held, which place shall be specified in the notice of said meeting, or, if not so specified, at the place where said meeting is to be held. The list shall also be produced and kept at the time and place of said meeting during the whole time thereof, and may be inspected by any stockholder of record who shall be present thereat. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, such list or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 11. INSPECTORS OF VOTES. The presiding officer of the meeting may appoint one or more inspectors of votes to act at each meeting of the stockholders, unless the Board of Directors shall have theretofore made such appointments. Each inspector of votes shall first subscribe an oath or affirmation faithfully to execute the duties of an inspector of votes at the meeting with strict impartiality and according to the best of his ability. Such inspectors of votes, if any, shall take charge of the ballots, if any, at the meeting, and after the balloting on any question, shall count the ballots cast and shall make -3- a report in writing to the secretary of the meeting of the results of the balloting. An inspector of votes need not be a stockholder of the Corporation, and any officer of the Corporation may be an inspector of votes on any question other than a vote for or against his election to any position with the Corporation or on any other question in which he may be directly interested. Section 12. ACTIONS WITHOUT A MEETING. All actions of the stockholders of the Corporation shall be taken at an annual or special meeting of stockholders and may not be taken by a consent or consents in writing. ARTICLE III BOARD OF DIRECTORS Section 1. POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors, which shall have and may exercise all powers of the Corporation and take all lawful acts as are not by statute, the Certificate of Incorporation or these By-Laws directed or required to be exercised or taken by the stockholders. Section 2. NUMBER, TENURE AND QUALIFICATION. The number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Board of Directors. The number of directors which shall constitute the whole Board of Directors shall not be less than one. The directors shall be divided, with respect to the time for which they severally hold office into three classes, Class I, Class II and Class III, as nearly equal in number as is reasonably possible, with the initial term of office of Class I directors to expire at the 1998 annual meeting of stockholders, the initial term of office of Class II directors to expire at the 1999 annual meeting of stockholders and the initial term of office of Class III directors to expire at the 2000 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. Directors need not be stockholders. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote on the election of directors at any annual or special meeting of stockholders. Such election shall be by written ballot. Section 3. RESIGNATIONS. Any director may resign at any time by giving written notice of his resignation to the Corporation, effective at the time specified therein or, if not specified, immediately upon its receipt by the Corporation. Unless otherwise specified in the notice, acceptance of a resignation shall not be necessary to make it effective. Section 4. NOMINATIONS. If a person is to be elected to the Board of Directors because of a vacancy existing on the Board, nomination shall be made only by the Board of Directors or of a nominating committee of the Board of Directors (the Board of Directors as a whole or such committee of the Board being referred to herein as the "nominating committee") pursuant to the affirmative vote of the majority of the entire membership of the nominating committee. The nominating committee shall also make nominations for the directors to be elected by the stockholders of the Corporation at an annual meeting of the stockholders as provided in this Section 4. -4- Only persons nominated in accordance with the procedures set forth in this Section 4 shall be eligible for election as directors at an annual meeting. The nominating committee shall select the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee, the nominating committee shall deliver written nominations to the Secretary at least 30 days prior to the date of the annual meeting. Management nominees substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee shall be delivered to the Secretary as promptly as practicable. Provided the nominating committee selects the management nominees, no nominees for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in accordance with the provisions of this Section 4. Ballots bearing the names of all the persons nominated for election as directors at an annual meeting in accordance with the procedures set forth in this Section 4 by the nominating committee and by stockholders shall be provided for use at the annual meeting. However, except in the case of a management nominee substituted as a result of the death, incapacity, disqualification or other inability to serve as a management nominee, if the nominating committee shall fail or refuse to nominate a slate of directors at least 30 days prior to the date of the annual meeting, nominations for directors may be made at the annual meeting by any stockholder entitled to vote and shall be voted upon. No person shall be elected as a director of the Corporation unless nominated in accordance with the terms set forth in this Section 4. Nominations of individuals for election to the Board of Directors of the Corporation at an annual meeting of stockholders may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting who complies with the procedures set forth in this Section 4. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 75 days prior to the date of the annual meeting of stockholders nor more than 85 days prior to the date of such annual meeting; provided, however, that if less than 75 days' notice or prior public disclosure of the date of the annual meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the 10th day following the earlier of (a) the day on which such notice of the date of the annual meetings was mailed or (b) the day on which such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the classes and number of shares of capital stock of the Corporation that are owned of record and beneficially owned by such person on the date of such stockholder notice and (D) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors pursuant to Section 14 under the Securities Exchange Act of 1934, as amended; and (ii) as to the stockholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees, and (B) the classes and number of shares of capital stock of the Corporation that are owned of record and beneficially owned by such stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. The Board of Directors may reject any nomination by a stockholder not made in strict accordance with the terms of this Section 4. Alternatively, if the Board of Directors fails to consider the validity of any nominations by a stockholder, the presiding officer of the annual meeting shall, if the facts warrant, determine and declare at the annual meeting that a nomination was not made in strict accordance with the terms of this Section 4, and, if he should so determine, he shall so declare at the annual meeting -5- and the defective nomination shall be disregarded. Section 5. REMOVAL. Any director may be removed from office at any time, but only "for cause" and only by the affirmative vote by written ballot of 80% of the voting interest of the stockholders of record of the Corporation entitled to vote, given at an annual meeting or at a special meeting of the stockholders called for that purpose. The vacancy in the Board of Directors caused by any such removal shall be filled by the Board of Directors as provided in Section 6 of this Article III. "For cause" means: (i) commission of an act of fraud or embezzlement against the Corporation; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Corporation or its stockholders; or (iv) breach of fiduciary duty owed to the Corporation. Section 6. VACANCIES. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled only by a majority of the directors then in office though less than a quorum or by a sole remaining director. Directors so chosen shall hold office until the annual meeting next after their election or until their successors are elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. MEETINGS OF THE BOARD OF DIRECTORS Section 7. TIME AND PLACE OF MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, at such time and places as it determines. Section 8. ANNUAL MEETINGS. The first meeting of each newly elected Board of Directors shall be held immediately following the annual meeting of stockholders, and no notice of such meeting to the newly elected directors shall be necessary in order legally to constitute the meeting, provided a quorum shall be present. If such meeting is not held immediately following the annual meeting of stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 9. REGULAR MEETINGS--NOTICE. Regular meetings of the Board of Directors may be held without notice. Section 10. SPECIAL MEETINGS--NOTICE. Special meetings of the Board of Directors may be called by the Chairman of the Board, Chief Executive Officer or two directors on 12 hours' notice to each director, either personally or by telephone or by mail, telegraph, telex, cable, wireless or other form of recorded communication; special meetings shall be called by the Secretary in like manner and on like notice on the written request of the Chairman of the Board, Chief Executive Officer or two directors. Notice of any such meeting need not be given to any director, however, if waived by him in writing or by telegraph, telex, cable, wireless or other form of recorded communication, or if he shall be present at the meeting. Section 11. QUORUM AND MANNER OF ACTING. At all meetings of the Board of Directors, 50% of the directors at the time in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of -6- Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. COMMITTEES OF DIRECTORS Section 12. EXECUTIVE COMMITTEE; HOW CONSTITUTED AND POWERS. The Board of Directors may in its discretion, by resolution passed by a majority of the whole Board of Directors, designate an Executive Committee consisting of one or more of the directors of the Corporation. Subject to the provisions of Section 141 of the General Corporation Law of the State of Delaware, the Certificate of Incorporation and these By-Laws, the Executive Committee shall have and may exercise, when the Board of Directors is not in session, all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and shall have the power to authorize the seal of the Corporation to be affixed to all papers which may require it; but the Executive Committee shall not have the power to fill vacancies in the Board of Directors, the Executive Committee or any other committee of directors or to elect or approve officers of the Corporation. The Executive Committee shall have the power and authority to authorize the issuance of common stock and grant and authorize options and other rights with respect to such issuance. The Board of Directors shall have the power at any time, by resolution passed by a majority of the whole Board of Directors, to change the membership of the Executive Committee, to fill all vacancies in it or to dissolve it, either with or without cause. Section 13. ORGANIZATION. The Chairman of the Executive Committee, to be selected by the Board of Directors, shall act as chairman at all meetings of the Executive Committee and the Secretary shall act as Secretary thereof. In case of the absence from any meeting of the Executive Committee of the Chairman of the Executive Committee or the Secretary, the Executive Committee may appoint a chairman or secretary, as the case may be, of the meeting. Section 14. MEETINGS. Regular meetings of the Executive Committee, of which no notice shall be necessary, may be held on such days and at such places, within or without the State of Delaware, as shall be fixed by resolution adopted by a majority of the Executive Committee and communicated in writing to all its members. Special meetings of the Executive Committee shall be held whenever called by the Chairman of the Executive Committee or a majority of the members of the Executive Committee then in office. Notice of each special meeting of the Executive Committee shall be given by mail, telegraph, telex, cable, wireless or other form of recorded communication or be delivered personally or by telephone to each member of the Executive Committee not less then 12 hours prior to the time at which such meeting is to be held. Notice of any such meeting need not be given to any member of the Executive Committee, however, if waived by him in writing or by telegraph, telex, cable, wireless or other form of recorded communication, or if he shall be present at such meeting; and any meeting of the Executive Committee shall be a legal meeting without any notice thereof having been given, if all the members of the Executive Committee shall be present thereat. Subject to the provisions of this Article III, the Executive Committee, by resolution adopted by a majority of the whole Executive Committee, shall fix its own rules of procedure. Section 15. OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more other committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. -7- Any committee, to the extent provided in the resolution of the Board of Directors and not prohibited by law, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it. At any meeting of a committee, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee. Section 16. MINUTES OF COMMITTEES. Each committee shall keep regular minutes of its meetings and proceedings and report the same to the Board of Directors at the next meeting thereof. Section 17. ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors may designate one or more directors as alternate members of the Executive Committee or any other committee, who may replace any absent or disqualified member at any meeting of the committee, or if none be so appointed, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. GENERAL Section 18. ACTIONS WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or the committee. Section 19. PRESENCE AT MEETINGS BY MEANS OF COMMUNICATIONS EQUIPMENT. Members of the Board of Directors, or of any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear one another. Participation in a meeting conducted pursuant to this section shall constitute presence in person at the meeting. ARTICLE IV NOTICES Section 1. TYPE OF NOTICE. Whenever, under the provisions of any applicable statute, the Certificate of Incorporation or these By-Laws, notice is required to be given to any director or stockholder, the requirement shall not be construed to mean personal notice, but such notice may be given in writing, in person or by mail, addressed to such director or stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when it shall be deposited in the United States mail. Notice to directors may also be given in any manner permitted by Article III hereof and shall be deemed to be given at the time when first transmitted by the method of communication so permitted. Section 2. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of any applicable statute, the Certificate of Incorporation or these By-Laws, a waiver thereof in writing, -8- signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto, and transmission of a waiver of notice by a director or stockholder by mail, telegraph, telex, cable, wireless or other form of recorded communication may constitute such a waiver. Section 3. AUTHORIZED NOTICES. Unless otherwise specified herein, the Secretary or such other person or persons as the Chief Executive Officer designates shall be authorized to give notices for the Corporation. ARTICLE V OFFICERS Section 1. DESCRIPTION. The elected officers of the Corporation shall be a President, one or more Vice Presidents with or without such descriptive titles as the Board of Directors shall deem appropriate, a Secretary, a Treasurer and a Controller and, if the Board of Directors so elects, a Chairman of the Board and Vice Chairman of the Board (each of whom shall be a director). The Board of Directors by resolution shall also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents as from time to time may appear to be necessary or advisable in the conduct of the affairs of the Corporation. Any two or more offices may be held by the same person. Section 2. ELECTION. The Board of Directors at its first meeting after each annual meeting of stockholders shall elect and appoint the officers to fill the positions designated in Section 1 of this Article V. Section 3. SALARIES. The Board of Directors shall fix all salaries of all elected officers of the Corporation. Section 4. TERM. An officer of the Corporation shall hold office until he resigns or his successor is chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. The Board of Directors shall fill any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise. Section 5. DUTIES OF THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall be the Chief Executive Officer of the Corporation and, subject to the provisions of these By-Laws, shall have general supervision of the affairs of the Corporation and shall have general and active control of all its business. He shall preside, when present, at all meetings of stockholders and at all meetings of the Board of Directors. He shall see that all orders and resolutions of the Board of Directors and the stockholders are carried into effect. He shall have general authority to execute bonds, deeds and contracts in the name of the Corporation and affix the corporate seal thereto; to sign stock certificates; to cause the employment or appointment of such employees and agents of the Corporation as the proper conduct of operations may require, and to fix their compensation, subject to the provisions of these By-Laws; to remove or suspend any employee or agent who shall have been employed or appointed under his authority or under authority of an officer subordinate to him; to suspend for cause, pending final action by the authority which shall have elected or appointed him, any officer subordinate to the Chairman of the Board; and, in general, to exercise all the powers and authority usually appertaining to the chief executive officer of a corporation, -9- except as otherwise provided in these By-Laws. Section 6. DUTIES OF THE PRESIDENT. In the absence of a Chairman of the Board, the President shall be the ranking and Chief Executive Officer of the Corporation, and shall have the duties and responsibilities, and the authority and power, of the Chairman of the Board. The President shall be the Chief Operating Officer of the Corporation and as such shall have, subject to review and approval of the Chairman of the Board, if one be elected, the responsibility for the operation of the Corporation and the authority of the Chairman of the Board. Section 7. DUTIES OF VICE PRESIDENT--FINANCE. There may be designated a Vice President--Finance, who, if so designated, shall be the Chief Financial Officer of the Corporation. He shall have active control of and responsibility for all matters pertaining to the financial affairs of the Corporation. His authority shall include the authorities of the Treasurer and Controller. He shall be responsible for approval of all filings with governmental agencies. He shall have the authority to execute and deliver bonds, deeds, contracts and stock certificates of and for the Corporation, and to affix the corporate seal thereto by handwritten or facsimile signature and all other powers customarily appertaining to his office, except to the extent otherwise limited or enlarged. He shall report to the President and to the Executive Committee and the Board of Directors of the Corporation at their request on all financial matters of the Corporation. Section 8. DUTIES OF VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board, or in the absence of any designation, in the order of their election) shall perform the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. If a Vice President is appointed or elected Chief Operating Officer of the Company, he or she shall be under the supervision of the President and shall perform such duties as may be prescribed by the President. The Vice Presidents shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. Section 9. DUTIES OF SECRETARY AND ASSISTANT SECRETARIES. The Secretary or an Assistant Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all proceedings of the meetings of the stockholders of the Corporation and of the Board of Directors in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. The Secretary shall be under the supervision of the President and shall perform such other duties as may be prescribed by the President. The Secretary shall have charge of the seal of the Corporation and have authority to affix the seal to any instrument requiring it. When so affixed, the seal shall be attested by the signature of the Secretary or Treasurer or an Assistant Secretary or Assistant Treasurer, which may be a facsimile. The Secretary shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent is properly accountable. The Secretary shall have authority to sign stock certificates, and shall generally perform all the duties usually appertaining to the office of the secretary of a corporation. Assistant Secretaries in the order of their seniority, unless otherwise determined by the Board of Directors, shall assist the Secretary, and in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary. They shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. -10- Section 10. DUTIES OF TREASURER AND ASSISTANT TREASURERS. The Treasurer shall have the responsibility for and custody over all assets of the Corporation, and the responsibility for handling of the liabilities of the Corporation. He shall cause proper entries of all receipts and disbursements of the Corporation to be recorded in its books of account. He or she shall have the responsibility for all matters pertaining to taxation and insurance. He or she shall have the authority to endorse for deposit or collection, or otherwise, all commercial paper payable to the Corporation, and to give proper receipts or discharges for all payments to the Corporation. He or she shall be responsible for all terms of credit granted by the Corporation and for the collection of all its accounts. He or she shall have the authority to execute and deliver bonds, deeds, contracts and stock certificates of and for the Corporation, and to affix the corporate seal thereto by handwritten or facsimile signature and all other powers customarily appertaining to his office, except to the extent otherwise limited or enlarged. The Treasurer shall be under the supervision of the Vice President--Finance and he or she shall perform such other duties as may be prescribed to him by the Vice President--Finance, if one be designated. Assistant Treasurers, in the order of their seniority, shall assist the Treasurer, and in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. Section 11. DUTIES OF CONTROLLER AND ASSISTANT CONTROLLERS. The Controller shall be the Chief Accounting Officer of the Corporation. He shall be responsible for all matters pertaining to the accounts of the Corporation, with the supervision of the books of account, their installation, arrangement and classification. The Controller shall maintain adequate records of all assets, liabilities and transactions; see that an adequate system of internal audit thereof is currently and regularly maintained; coordinate the efforts of the Corporation's independent public accountants in its external audit program; receive, review and consolidate all operating and financial statements of the Corporation; and prepare financial statements, reports and analyses. The Controller shall have supervision of the accounting practices of the Corporation. The Controller shall cause to be maintained an adequate system of financial control through a program of budgets, financial planning and interpretive reports. The Controller shall initiate and enforce accounting measures and procedures whereby the business of the Corporation shall be conducted with the maximum efficiency and economy. The Controller shall have all other powers customarily appertaining to the office of controller, except to the extent otherwise limited or enlarged. The Controller shall be under the supervision of the Vice President--Finance, if one be designated. The Assistant Controllers, in the order of their seniority, shall assist the Controller, and if the Controller is unavailable, perform the duties and exercise the powers of the Controller. ARTICLE VI INDEMNIFICATION Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (all of such persons being hereafter referred to in this Article VI as a "Corporate Functionary"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, -11- suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Corporate Functionary against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under Sections 1 or 2 of this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Corporate Functionary is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VI. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (ii) if there are no such directors or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders. Section 4. RIGHT TO INDEMNIFICATION. Notwithstanding the other provisions of this Article VI, to the extent that a Corporate Functionary has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 or 2 of this Article VI (including the dismissal of a proceeding without prejudice or the settlement of a proceeding without admission of liability), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 5. PREPAID EXPENSES. Expenses incurred by a Corporate Functionary in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Corporate Functionary to repay such amount if it shall ultimately be determined he is not entitled to be indemnified by the Corporation as authorized in this Article VI. Section 6. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification of a Corporate Functionary under Sections 2, 3 and 4, or any advance under Section 5, of this Article VI shall be made promptly upon, and in any event within 60 days after, the written request of the Corporate Functionary, unless with respect to applications under Sections 2, 3 or 5 of this Article -12- VI, a determination is reasonably and promptly made in accordance with Section 3 of this Article VI as to justify the Corporation in not indemnifying or making an advance of expenses to the Corporate Functionary. The right to indemnification or advance of expenses granted by this Article VI shall be enforceable by the Corporate Functionary in any court of competent jurisdiction if his claim for indemnification or advancement of expenses is denied, in whole or in part, or if no disposition of such claim is made within 60 days. The expenses of the Corporate Functionary incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. Section 7. OTHER RIGHTS AND REMEDIES. The indemnification and advancement of expenses provided by or granted pursuant to this Article VI shall not be deemed exclusive of any other rights to which any person seeking indemnification and/or advancement of expenses or may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Corporate Functionary and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal or modification of these By-Laws or relevant provisions of the Delaware General Corporation Law and other applicable law, if any, shall not affect any then existing rights of a Corporate Functionary to indemnification or advancement of expenses. Section 8. INSURANCE. Upon resolution passed by the Board of Directors, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI or the General Corporation Law of Delaware. Section 9. MERGERS. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 10. SAVINGS PROVISION. If this Article VI or any portion hereof shall be invalidated on any ground by a court of competent jurisdiction, the Corporation shall nevertheless indemnify each Corporate Functionary as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, including a grand jury proceeding or action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article VI that shall not have been invalidated. -13- ARTICLE VII CERTIFICATES REPRESENTING STOCK Section 1. RIGHT TO CERTIFICATE. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, option or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, that, except as otherwise provided in Section 202 of the General Corporation Law of the State of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. Section 2. FACSIMILE SIGNATURES. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. NEW CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of such new certificate. Section 4. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation, subject to any proper restrictions on transfer, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. RECORD DATE. The Board of Directors may fix, in advance, a record date for stockholders' meetings or for any other lawful purpose, which shall be no fewer than 10 nor more than 60 days before the date of the meeting or other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -14- Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not provided by the laws of the State of Delaware. ARTICLE VIII GENERAL PROVISIONS Section 1. DIVIDENDS. Dividends upon the capital stock of the Corporation, if any, may be declared by the Board of Directors (but not any committee thereof) at any meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock or other securities. Section 2. RESERVES. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. Section 3. ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. Section 4. CHECKS. All checks or demands for money and promissory notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time prescribe. Section 5. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6. CORPORATE SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and the word "Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. Section 7. CERTIFICATE OF INCORPORATION. These By-Laws are subject to the terms of the Certificate of Incorporation of the Corporation. ARTICLE IX AMENDMENTS These By-Laws may be altered, amended or repealed or new By-Laws adopted only in accordance with the Certificate of Incorporation of the Corporation and any other requirements specified in these By-Laws. -15- CERTIFICATION I, Michael P. Herman, Secretary of Vari-Lite International, Inc., a Delaware corporation, hereby certify that the foregoing is a true, accurate and complete copy of the By-Laws of Vari-Lite International, Inc., adopted by its Board of Directors as of August 11, 1997. /s/ Michael P. Herman ------------------------------------ Michael P. Herman, Secretary -16- EX-4.1 4 EXHIBIT 4.1 [LOGO] CUSIP 922152 10 3 ORGANIZED UNDER THE LAWS OF SEE REVERSE FOR CERTAIN THE STATE OF DELAWARE DEFINITIONS THIS CERTIFIES THAT IS THE REGISTERED HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF THE PAR VALUE OF $0.10 PER SHARE, OF VARI-LITE INTERNATIONAL, INC. (HEREINAFTER REFERRED TO AS THE "CORPORATION"), TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE ISSUED UNDER AND ARE SUBJECT TO ALL THE PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS OF THE CORPORATION AND ALL AMENDMENTS THERETO, COPIES OF WHICH ARE ON FILE WITH THE TRANSFER AGENT, TO ALL OF WHICH THE HOLDER OF THIS CERTIFICATE ASSENTS BY ACCEPTANCE HEREOF. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT. IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS, AND THE FACSIMILE OF ITS CORPORATE SEAL. DATED: Secretary [SEAL] President Countersigned: ChaseMellon Shareholder Services, L.L.C. Transfer Agent, By Authorized Signature The Corporation will furnish to any stockholder, upon request and without charge, a full statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof which the Corporation is authorized to issue and the qualifications, limitations or restrictions of such preferences and/or rights of each class of stock or series thereof. Any such request should be made to the Secretary of the Corporation at its principal place of business or to the Transfer Agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. Additional abbreviations may also be used though not in the list. TEN COM --as tenants in UNIF GIFT MIN ACT -- ... Custodian common .......................... (Minor) TEN ENT --as tenants by the under Uniform Gifts to Minors Act entireties .......................... (State) JT TEN -- as joint tenants with right of survivorship and not as tenants in common PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE FOR VALUE RECEIVED, .......... HEREBY SELLS, ASSIGNS AND TRANSFERS UNTO ............................................ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ............................................. ...................................... SHARES REPRESENTED BY THE WITHIN CERTIFICATE, AND HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS ............................................. ........ ATTORNEY TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. Dated, ........................... ................................... (SIGNATURE) NOTICE: ASSIGN ............................
MENT MUST CORRESPOND (SIGNATURE)NAME(S) AS WRITTEN UPON THE-->
FACE OF THE CERTIFICATE WITHOUT ALTERATION OR THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
WHATEVER. (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. SIGNATURE(S) GUARANTEED BY:
EX-5.1 5 EXHIBIT 5.1 September 18, 1997 Vari-Lite International, Inc. 201 Regal Row Dallas, Texas 75247 Gentlemen: We have served as counsel for Vari-Lite International, Inc., a Delaware corporation (the "Company"), and certain stockholders of the Company (the "Selling Stockholders"), in connection with the Registration Statement on Form S-1 (No. 333-33559) (the "Registration Statement"), filed with the Securities and Exchange Commission on August 13, 1997, as amended on September 18, 1997, covering the proposed public offering of 2,000,000 shares of Common Stock, $0.10 par value, of the Company ("Common Stock") to be issued and sold by the Company (the "Company Shares"), and, subject to the exercise of an over-allotment option granted by the Selling Stockholders, up to an additional 300,000 shares of Common Stock to be sold by the Selling Stockholders (the "Selling Stockholders Shares"). With respect to the foregoing, we have examined such documents and questions of law as we have deemed necessary to render the opinions expressed below. Based upon the foregoing, we are of the opinion that: 1. The Company Shares, when sold, issued and delivered in the manner and for the consideration stated in the Prospectus constituting a part of the Registration Statement and in the Underwriting Agreement described in the Registration Statement, will be duly authorized, validly issued, fully paid and nonassessable. 2. The Selling Stockholder Shares when issued to the Selling Stockholders pursuant to the terms of that certain Merger Agreement, dated as of August 27, 1997, by and between the Company and Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), which provides for the merger of Vari-Lite Texas into the Company, with the Company being the surviving corporation and the conversion of each share of Common Stock of Vari-Lite Texas into shares of Common Stock, will be duly authorized, validly issued, fully paid and nonassessable. We consent to the use of this letter opinion as Exhibit 5.1 to the Registration Statement and to the use of our name in the Registration Statement and in the Prospectus included therein under the heading "Legal Matters." Very truly yours, GARDERE & WYNNE, L.L.P. By: /s/ Alan J. Perkins ------------------------------------- Alan J. Perkins, Partner EX-10.2 6 EXHIBIT 10.2 AMENDMENT NO. 1 TO THE EMPLOYMENT AGREEMENT DATED AS OF JULY 1, 1995 BETWEEN VARI-LITE HOLDINGS, INC. AND H. R. BRUTSCHE III W I T N E S S E T H : WHEREAS, Vari-Lite Holdings, Inc. (the "Company") and H. R. Brutsche III (the "Executive") entered into an Employment Agreement ("Agreement") dated as of July 1, 1995; and WHEREAS, the Company changed its name effective December 27, 1995 to Vari- Lite International, Inc.; and WHEREAS, the Executive and the Company desire to amend the Agreement in certain respects retroactively so as to be effective as of July 1, 1995; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 9 of the Agreement is hereby amended by adding to the end thereof a new subsection (h) reading as follows: (h) CONTINUED MEDICAL COVERAGE. In addition to any benefit described in this Section 9, if the employment of the Executive is terminated for any reason other than for Cause, but the Executive continues to maintain a relationship with the Company or any of its affiliates by serving on the Board of Directors of one or more of such entities, the Executive and his dependents shall be entitled to continue to be covered under the medical and dental plans maintained by the Company and its affiliates after the continuation coverage period provided under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), for as long as the Executive continues to serve on the Board of Directors of the Company or one of its affiliates. The Executive and his dependents will be required to pay the premium charged by the medical and the dental plans to COBRA continuees for such continued coverage and shall be subject to the same requirements concerning the timing of premium payments as apply to COBRA continuees under the medical and dental plans. IN WITNESS WHEREOF the parties hereto have executed this Amendment No. 1 to the Agreement on this 11th day of August, 1997, but to be effective as of July 1, 1995. COMPANY: Vari-Lite International, Inc. By: /s/ Michael P. Herman --------------------------------- Michael P. Herman Vice President - Finance EXECUTIVE: /s/ H.R. Brutsche III --------------------------------- H. R. Brutsche III EX-10.5 7 EXHIBIT 10.5 AMENDMENT NO. 1 TO THE CONSULTING AGREEMENT DATED AS OF JULY 1, 1995 BETWEEN VARI-LITE HOLDINGS, INC. AND JOHN D. MAXSON W I T N E S S E T H : WHEREAS, Vari-Lite Holdings, Inc. (the "Company") entered into a Consulting Agreement ("Agreement") with John D. Maxson (the "Consultant") effective as of July 1, 1995; and WHEREAS, the Company changed its name effective December 27, 1995 to Vari- Lite International, Inc.; and WHEREAS, the Company and the Consultant desire to amend the Agreement in certain respects retroactively so as to be effective as of July 1, 1995; NOW, THEREFORE, in consideration of the foregoing, the Agreement is hereby amended as follows: Section 3 is hereby amended by replacing subsection (c) with the following: (c) OTHER EMPLOYEE BENEFITS. Consultant and his dependents shall be entitled to continue coverage under the medical and dental plans maintained by the Company and its affiliates after the continuation coverage period provided under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), for as long as Consultant continues to serve on the Board of Directors of the Company or any of its affiliates. The Consultant and his dependents will be required to pay the premium charged by the medical and the dental plans to COBRA continuees for such continued coverage and shall be subject to the same requirements concerning the timing of premium payments as apply to COBRA continuees under the medical and dental plans. Except as expressly provided in this Agreement, Consultant shall not be entitled, based on his status as a consultant, to participate in or receive benefits under any other programs maintained by the Company for its employees, including, without limitation, life, vision, disability, pension, profit sharing, or other retirement plans or other fringe benefits. IN WITNESS WHEREOF the parties hereto have executed this Amendment No. 1 to the Agreement on this 11th day of August, 1997, but to be effective as of July 1, 1995. COMPANY: Vari-Lite International, Inc. By: /s/ H.R. Brutsche III ------------------------------------ H. R. Brutsche III Chairman of the Board and President CONSULTANT: /s/ John D. Maxson ----------------------------------------- John D. Maxson EX-10.15 8 EXHIBIT 10.15 SPLIT-DOLLAR LIFE INSURANCE AGREEMENT INSURER: John Hancock Mutual Life Insurance Company POLICY: Modified Premium Whole Life Policy; Policy Number 67151530 INSURED: Harry R. Brutsche III OWNER: Brown Brothers Harriman Trust Company of Texas, trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 EMPLOYER: Vari-Lite Holdings, Inc. EFFECTIVE DATE: October 12, 1995 This SPLIT-DOLLAR LIFE INSURANCE AGREEMENT is made and effective as of the 12th day of October, 1995 by and between Owner, Insured and Employer (collectively, the "Parties") to define the rights, duties and obligations of the Parties relative to the modified premium whole life insurance policy, policy number 67151530 (the "Policy"), issued effective as of October 12, 1995 to Owner by Insurer insuring the life of Insured. A copy of the Policy is attached hereto as Exhibit A. Owner, Employer and Insured hereby agree as follows: I. BENEFICIARY DESIGNATION RIGHTS Owner may designate a beneficiary or beneficiaries to receive any proceeds payable under the Policy on death of Insured which are in excess of Employer's share of such proceeds, as determined by this Agreement. II. PREMIUM PAYMENT METHOD Each year, Employer agrees to forward the full amount of the annual premium due under the Policy for that year to Insurer on the date such premium is due until the occurrence of a termination event under Article VI. Each year, Owner agrees that he will pay to Employer, as partial reimbursement by Owner to Employer of the annual premium for the Policy, an amount equal to the economic benefit received by Insured during that tax year. The amount payable by Owner may be paid to Employer by payroll deduction or according to any other method which is agreeable to the Parties. Alternatively, if Employer and Owner agree that Employer shall pay to Insurer or that Owner shall reimburse to Employer some amount other than the amount stated in this Article II, the rights of Employer and Owner under the Policy shall be adjusted accordingly. If Employer is not reimbursed by Owner for a year for the full amount of the entire economic benefit received by Insured during that year, the economic benefit to the extent not reimbursed shall be reported by Employer as taxable income for that year to Insured. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 1 III. OWNER'S RETAINED INCIDENTS OF OWNERSHIP Except as to the limited policy security rights specifically granted Employer in the Assignment of Life Insurance Policy as Collateral in the form attached hereto as Exhibit B (the "Assignment") and as provided in Article VI, Owner retains all incidents of ownership in the Policy (including the right to surrender or cancel the Policy and the right to borrow against the Policy). Owner's right to borrow against the Policy shall be limited to an amount equal to the maximum loan value reduced by the Cumulative Unreimbursed Premiums (as defined in Article IV) paid or advanced by Employer under Article II. Owner's right to withdraw from the Policy's cash value under the Policy's partial surrender provisions shall be limited to the "partial surrender value" of the Policy, reduced by the Cumulative Unreimbursed Premiums. For purposes of this paragraph, "partial surrender value" of the Policy means the cash value of the Policy less any indebtedness and the cost of insurance until the next annual premium due date. IV. DIVISION OF POLICY DEATH PROCEEDS Division of the death proceeds of the Policy shall be made as follows: A. Employer shall be entitled to an amount equal to the cumulative premiums paid to Insurer by Employer less the amount of aggregate reimbursements paid to Employer by Owner under Article II (the "Cumulative Unreimbursed Premiums"). The beneficiary or beneficiaries designated by Owner in accordance with Article I shall be entitled to any remainder of such proceeds. B. If any interest is due upon the death proceeds under the terms of the Policy, Owner and Employer shall share such interest in the same manner that their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest. C. If, upon the death of Insured, there is a refund of unearned premiums under the Policy provisions, then, in such event, any refund shall be apportioned as follows: 1. Where Owner (or his assignee) has contributed to the Policy premium at the last required premium interval, the refund of unearned premiums shall be divided between Employer and Owner (or his assignee) as their respective share of the premium payment shall bear to the total premium for such interval. 2. Where Owner (or his assignee) has not contributed to the premium at the last premium interval, the refund of unearned premium shall be refunded in total to Employer. V. DIVISION OF THE NET CASH SURRENDER VALUE Division of the net cash surrender value of the Policy prior to death of Insured shall be made as follows: SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 2 Employer shall be entitled to an amount equal to the Cumulative Unreimbursed Premiums. Owner shall be entitled to any remainder of such net cash surrender value. To the extent that the Cumulative Unreimbursed Premiums exceed the net cash surrender value of the Policy, Owner shall be solely responsible for repayment of same to Employer. VI. TERMINATION OF AGREEMENT This Agreement shall terminate upon the occurrence of any one of the following events: A. Termination of Insured's Employment Agreement with Employer dated as of July 1, 1995 (the "Employment Agreement") in accordance with its terms; B. Delivery by Owner to Employer of Owner's request, at any time, to receive a release of the Assignment from Employer and agreement by Owner to pay the premiums; C. Owner's failure to reimburse Employer upon 30 days' written notice from Employer for Owner's proportionate share of premiums to Employer, if any, as mutually agreed upon by Owner and Employer pursuant to Article II; D. Death of Insured; or E. Breach of the terms of this Agreement by Employer. Except as provided below with respect to a breach of this Agreement by Employer, upon termination of this Agreement, Owner shall have a 90-day option to pay to Employer an amount equal to the aggregate of the Cumulative Unreimbursed Premiums and receive a release of the Assignment from Employer. Employer agrees that Owner may obtain this amount from the Policy by effectuating a policy loan or a withdrawal or by partial surrender of the Policy, as long as Employer receives reimbursement of the full amount of the Cumulative Unreimbursed Premiums. To assure that Employer will receive its entire interest, Employer may request that Owner provide Employer with collateral which is satisfactory to Employer, in its sole discretion. Alternatively, if Insured is to perform future services for Employer and if Insured is entitled to receive deferred compensation for these services pursuant to a separate agreement or agreements between Insured and Employer, then Employer shall have the right under this Agreement to release to Owner its interest in all or any portion of such compensation in partial or complete satisfaction of that deferred payment obligation. If this Agreement is terminated (i) on account of a breach of this Agreement by Employer, (ii) in connection with the retirement by Insured from the employment of Employer on or after age 55, or (iii) in connection with a "change of control" of Employer as defined in Section 9(e) of the Employment Agreement, Employer shall waive its right to repayment of the Cumulative Unreimbursed Premiums paid as of the termination date. Within 30 days of such termination date, Employer shall release the Assignment and Owner shall become the sole and absolute owner of the Policy. Owner may thereafter elect to continue to keep the Policy in effect by paying the premiums thereon, or alternatively, may elect to surrender the Policy pursuant to the terms thereof. If Employer does not release the Assignment of the Policy within this 30-day period, the Assignment will automatically terminate pursuant to the terms hereof. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 3 Nothing herein shall be construed to represent an ownership right or interest of Owner or Insured in or to any particular asset of Employer, nor shall Owner or Insured be deemed to be in constructive receipt of such amount. Owner does not have any right to a release of the Assignment by Employer without reimbursement of the Cumulative Unreimbursed Premiums but, instead, such right shall vest solely with the Employer. Owner may not anticipate, pledge, assign, hypothecate or, in any manner, exercise rights, ownership or control over this interest of Employer. Should Owner (or his assignees) fail to exercise one of these options within the prescribed 90-day period, the Policy will be surrendered to Insurer and the proceeds distributed between Employer and Owner as prescribed by Article V. VII. OWNER'S ASSIGNMENT RIGHTS Owner may, at any time, assign to any individual, trust or other organization all of his right, title and interest in the Policy and all of his rights, options, privileges and duties created under this Agreement. VIII. STATUS OF AGREEMENT AS ERISA PLAN This Agreement, together with the Policy and the Assignment attached hereto, constitutes an employee welfare benefit plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). IX. NAMED FIDUCIARY Employer is hereby designated the "Named Fiduciary" as defined in Section 402(a)(2) of ERISA until resignation or removal by Employer's Board of Directors. The business address of Employer is 201 Regal Row, Dallas, Texas 75247. The Named Fiduciary is hereby granted sole and absolute discretion to manage, control and administer the Agreement and to make all benefit entitlement determinations under the Agreement. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Agreement, including the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under the Agreement. The Named Fiduciary shall effect such allocation of its responsibilities by delivering to Employer a written instrument signed by it that specifies the nature and extent of the responsibilities allocated, including if appropriate the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under this Agreement. All documents related to the Agreement shall be retained by the Named Fiduciary and made available for examination at the above address. A copy of the Agreement, Assignment and Policy have been provided to Owner upon the execution of this Agreement. X. FUNDING The funding policy for the Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 4 XI. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments under this Agreement shall be in accordance with the provisions of Articles II through V, herein. XII. CLAIMS PROCEDURE If Owner or its beneficiary ("Claimant") fails to receive benefits to which it believes it is entitled under this Agreement, such person may file with the Named Fiduciary, at the address noted above, a written claim for such benefits. If a claim for benefits is denied, the Claimant may within 60 days following such denial, file with the Named Fiduciary a written claim objecting to the denial of such benefits. The Claimant or its representative may review the Agreement and any other documents which relate to the claim and may submit written comments to the Named Fiduciary. The Named Fiduciary shall render a written decision concerning the claim not later than 90 days after receipt of such claim. If the claim is denied, in whole or in part, such decision shall include (a) the reason or reasons for the denial; (b) a reference to the Agreement provisions constituting the basis of the denial; (c) a description of any additional material or information necessary for the Claimant to perfect his claim; (d) an explanation as to why such information or material is necessary; and (e) an explanation of the Agreement's appeal procedure. The claim shall be deemed to be denied if no response is received by the end of the review period. The Claimant may file with the Named Fiduciary a written notice of appeal of the Named Fiduciary's decision not later than 60 days after receiving the Named Fiduciary's written decision. The Named Fiduciary shall render a written decision on the appeal not later than 60 days after the appeal. Such decision shall include the specific reasons for the decision, including a reference to the Agreement's specific provisions where appropriate. The Named Fiduciary may extend the foregoing 90-day and 60-day periods during which it must respond to the Claimant by up to an additional 90 and 60 days respectively, if special circumstances beyond its control so require; provided that notice of such extension is given to the Claimant prior to the expiration of the initial 90-day or 60-day period, as the case may be. XIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any premium waived shall be considered for all purposes of this Agreement as having been paid by Owner. XIV. AMENDMENT This Agreement may be amended at any time and from time to time by a written instrument executed by Employer, Owner and Insured, and, if appropriate, their respective heirs, successors, personal representatives and assignees. XV. AGREEMENT BINDING UPON PARTIES This Agreement shall bind Employer, Owner and Insured, and their respective heirs, successors, personal representatives and assignees. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 5 XVI. INSURER NOT A PARTY TO AGREEMENT Insurer is not responsible for the legal or tax validity or effect of this Agreement. Further, Insurer shall not be deemed a party to this Agreement but will respect the rights of the Parties as herein developed upon receiving an executed copy of this Agreement. Insurer shall not be responsible to account for the actual premium contributions of the Parties hereunder but shall rely solely upon the written declarations of the Parties in any distributions or settlement of the Policy's lifetime or death values. Payment or other performance of its contractual obligations in accordance with the Policy provisions shall fully discharge Insurer from any and all liability. XVII. CONTROLLING STATE LAW This Agreement shall be subject to and construed under the laws of the State of Texas, to the extent not preempted by ERISA. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 6 This Split-Dollar Life Insurance Agreement is executed and effective as of the date first above written. INSURED: /s/ Harry R. Brutsche -------------------------------------------------- Harry R. Brutsche III OWNER: BROWN BROTHERS HARRIMAN TRUST COMPANY OF TEXAS, as Trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 By: /s/ Susan Hickey ---------------------------------------------- Name: /s/ Susan Hickey ---------------------------------------------- Title: Vice President ---------------------------------------------- EMPLOYER: VARI-LITE HOLDINGS, INC. By: /s/ Michael P. Herman ---------------------------------------------- Michael P. Herman Vice President--Finance SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 7 INSURER: John Hancock Mutual Life Insurance Company POLICY: Modified Premium Whole Life Policy; Policy Number 67151530 INSURED: Harry R. Brutsche III OWNER: Brown Brothers Harriman Trust Company of Texas, trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 EMPLOYER: Vari-Lite Holdings, Inc. This Split-Dollar Life Insurance Agreement was recorded by Insurer on July 22, 1997. John Hancock Mutual Life Insurance Company By: /s/ Bob Shin ------------------------------- Name: Bob Shin ------------------------------- Title: Secretary ------------------------------- SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 8 EX-10.16 9 EXHIBIT 10.16 AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT This AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT is made and effective as of the 12th day of October, 1995, by and between Vari-Lite Holdings, Inc. ("Employer"), Brown Brothers Harriman Trust Company of Texas, trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 ("Owner"), and Harry R. Brutsche III ("Insured"). W I T N E S S E T H: WHEREAS, Insured has served as Chief Executive Officer of Employer and on the Board of Directors of Employer and has contributed substantially to the success of Employer; and WHEREAS, Employer desired for Insured to continue to serve as its Chief Executive Officer and on its Board of Directors; and WHEREAS, to retain the services of Insured, Employer assisted him in establishing and maintaining an adequate life insurance program; and WHEREAS, Employer and Insured entered into a split-dollar life insurance agreement effective as of December 12, 1990 (the "Agreement") to define their respective rights, duties and obligations regarding a $2,000,000 face amount whole life insurance policy with supplemental insurance option, policy number 8592771 (the "Policy"), issued to Harry R. Brutsche III as owner and insured by Massachusetts Mutual Life Insurance Company (the "Insurer") insuring the life of Insured, a copy of which is attached hereto as Exhibit A; and WHEREAS, the face amount of the Policy was subsequently reduced to $1,200,000; and WHEREAS, pursuant to the Agreement, Employer made the entire premium payment to Insurer and Insured recognized as taxable income each year an amount equal to the economic benefit received by Insured during that year and Employer and Insured recognized and acknowledged the interest of Employer in the benefits and values of the Policy to the extent of the premium payments made by Employer to Insurer; and WHEREAS, Employer desires to continue assisting Insured in maintaining an adequate insurance program; and WHEREAS, Insured has assigned all of his ownership, rights and interests in the Policy to Brown Brothers Harriman Trust Company of Texas, in their capacity as trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995; and WHEREAS, the Employer, Insured and Owner desire to amend and restate the Agreement in order to (i) restate the rights, duties and obligations of Employer, Insured and Owner relative AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 1 to the Policy and the Agreement, (ii) provide for the reimbursement by Owner each year to Employer of a portion of the annual premium payment made by Employer equal to the economic benefit received by Insured during that year, and (iii) confirm the limited policy security rights specifically granted in the Policy to Employer as collateral; NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants herein contained, the parties hereto agree as follows: I. BENEFICIARY DESIGNATION RIGHTS Owner may designate a beneficiary or beneficiaries to receive any proceeds payable under the Policy on death of Insured which are in excess of Employer's share of such proceeds as determined by this Agreement. II. PREMIUM PAYMENT METHOD Each year, Employer agrees to forward the full amount of the annual premium due under the Policy for that year to Insurer on the date such premium is due until the occurrence of a termination event under Article VI. Each year, Owner agrees that he will pay to Employer, as partial reimbursement by Owner to Employer of the annual premium for the Policy, an amount equal to the economic benefit received by Insured during that tax year. The amount payable by Owner may be paid to Employer by payroll deduction or according to any other method which is agreeable to the parties. Alternatively, if Employer and Owner agree that Employer shall pay to Insurer or that Owner shall reimburse to Employer some amount other than the amount stated in this Article II, the rights of Employer and Owner under the Policy shall be adjusted accordingly. If Employer is not reimbursed by Owner for a year for the full amount of the entire economic benefit received by Insured during that year, the economic benefit to the extent not reimbursed shall be reported by Employer as taxable income for that year to Insured. III. OWNER'S RETAINED INCIDENTS OF OWNERSHIP Except as to the limited policy security rights specifically granted Employer in the Assignment of Life Insurance Policy as Collateral in the form attached hereto as Exhibit B (the "Assignment") and as provided in Article VI, Owner retains all incidents of ownership in the Policy (including the right to surrender or cancel the Policy and the right to borrow against the Policy). Owner is required to apply all dividends declared on the Policy to purchase paid-up insurance on the life of Insured. Owner agrees not to terminate or alter this dividend option without the consent of Employer. AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 2 Owner's right to borrow against the Policy shall be limited to an amount equal to the maximum loan value reduced by the Cumulative Unreimbursed Premiums (as defined in Article IV) paid or advanced by Employer under Article II. Owner's right to withdraw from the Policy's cash value under the Policy's partial surrender provisions shall be limited to the "partial surrender value" of the Policy, reduced by the Cumulative Unreimbursed Premiums. For purposes of this paragraph, "partial surrender value" of the Policy means the cash value of the Policy less any indebtedness and the cost of insurance until the next annual premium due date. IV. DIVISION OF POLICY DEATH PROCEEDS Division of the death proceeds of the Policy shall be made as follows: A. Employer shall be entitled to an amount equal to the cumulative premiums paid to Insurer by Employer less the amount of aggregate reimbursements paid to Employer by Owner under Article II (the "Cumulative Unreimbursed Premiums"). The beneficiary or beneficiaries designated by Owner in accordance with Article I shall be entitled to any remainder of such proceeds. B. If any interest is due upon the death proceeds under the terms of the Policy, Owner and Employer shall share such interest in the same manner that their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest. C. If, upon the death of Insured, there is a refund of unearned premiums under the Policy provisions, then, in such event, any refund shall be apportioned as follows: 1. Where Owner (or his assignee) has contributed to the Policy premium at the last required premium interval, the refund of unearned premiums shall be divided between Employer and Owner (or his assignee) as their respective share of the premium payment shall bear to the total premium for such interval. 2. Where Owner (or his assignee) has not contributed to the premium at the last premium interval, the refund of unearned premium shall be refunded in total to Employer. V. DIVISION OF THE NET CASH SURRENDER VALUE Division of the net cash surrender value of the Policy prior to death of Insured shall be made as follows: Employer shall be entitled to an amount equal to the Cumulative Unreimbursed Premiums. Owner shall be entitled to any remainder of such net cash surrender value. To the extent AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 3 that the Cumulative Unreimbursed Premiums exceed the net cash surrender value of the Policy, Owner shall be solely responsible for repayment of same to Employer. VI. TERMINATION OF AGREEMENT This Agreement shall terminate upon the occurrence of any one of the following events: A. Termination of Insured's Employment Agreement with Employer dated as of July 1, 1995 (the "Employment Agreement") in accordance with its terms; B. Delivery by Owner to Employer of Owner's request, at any time, to receive a release of the Assignment from Employer and agreement by Owner to pay the premiums; C. Owner's failure to reimburse Employer upon 30 days' written notice from Employer for Owner's proportionate share of premiums to Employer, if any, as mutually agreed upon by Owner and Employer pursuant to Article II; or D. Death of Insured; or E. Breach of the terms of this Agreement by Employer. Except as provided below with respect to a breach of this Agreement by Employer, upon termination of this Agreement, Owner shall have a 90-day option to pay to Employer an amount equal to the Cumulative Unreimbursed Premiums and receive a release of the Assignment from Employer. Employer agrees that Owner may obtain this amount from the Policy by effectuating a policy loan or a withdrawal or by partial surrender of the Policy, as long as Employer receives reimbursement of the full amount of the Cumulative Unreimbursed Premiums. To assure that Employer will receive its entire interest, Employer may request that Owner provide Employer with collateral which is satisfactory to Employer, in its sole discretion. Alternatively, if Insured is to perform future services for Employer and if Insured is entitled to receive deferred compensation for these services pursuant to a separate agreement or agreements between Insured and Employer, then Employer shall have the right under this Agreement to release to Owner its interest in all or any portion of such compensation in partial or complete satisfaction of that deferred payment obligation. If this Agreement is terminated (i) on account of a breach of this Agreement by Employer, (ii) in connection with the retirement by Insured from the employment of Employer on or after age 55, or (iii) in connection with a "change of control" of Employer as defined in Section 9(e) of the Employment Agreement, Employer shall waive its right to repayment of the Cumulative Unreimbursed Premiums paid as of the termination date. Within 30 days of such termination date, Employer shall release the Assignment and Owner shall become the sole and absolute owner of the Policy. Owner AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 4 may thereafter elect to continue to keep the Policy in effect by paying the premiums thereon, or alternatively, may elect to surrender the Policy pursuant to the terms thereof. If Employer does not release the Assignment of the Policy within this 30-day period, the Assignment will automatically terminate pursuant to the terms hereof. Nothing herein shall be construed to represent an ownership right or interest of Owner or Insured in or to any particular asset of Employer, nor shall Owner or Insured be deemed to be in constructive receipt of such amount. Owner does not have any right to a release of the Assignment by Employer without reimbursement of the Cumulative Unreimbursed Premiums but, instead, such right shall vest solely with Employer. Owner may not anticipate, pledge, assign, hypothecate or, in any manner, exercise rights, ownership or control over this interest of Employer. Should Owner (or his assignees) fail to exercise one of these options within the prescribed 90-day period, the Policy will be surrendered to Insurer and the proceeds distributed between Employer and Owner as prescribed by Article V. VII. OWNER'S ASSIGNMENT RIGHTS Owner may, at any time, assign to any individual, trust or other organization all of his right, title and interest in the Policy and all of his rights, options, privileges and duties created under this Agreement. VIII. STATUS OF AGREEMENT AS ERISA PLAN This Agreement, together with the Policy and the Assignment attached hereto, constitutes an employee welfare benefit plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). IX. NAMED FIDUCIARY Employer is hereby designated the "Named Fiduciary" as defined in Section 402(a)(2) of ERISA until resignation or removal by Employer's Board of Directors. The business address of Employer is 201 Regal Row, Dallas, Texas 75247. The Named Fiduciary is hereby granted sole and absolute authority to manage, control and administer the Agreement and to make all benefit entitlement determinations under the Agreement. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Agreement, including the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under the Agreement. The Named Fiduciary shall effect such allocation of its responsibilities by delivering to Employer a written instrument signed by it that specifies the nature and extent of the responsibilities allocated, including if appropriate the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under this Agreement. All documents related to the Agreement shall be retained by the Named Fiduciary and AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 5 made available for examination at the above address. Copies of the Agreement, Assignment and Policy have been provided to Owner upon the execution of this Agreement. X. FUNDING The funding policy for the Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XI. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments under this Agreement shall be in accordance with the provisions of Articles II through V, herein. XII. CLAIMS PROCEDURE If Owner or his beneficiary ("Claimant") fails to receive benefits to which he believes he is entitled under this Agreement, such person may file with the Named Fiduciary, at the address noted above, a written claim for such benefits. If a claim for benefits is denied, the Claimant may within 60 days following such denial, file with the Named Fiduciary a written claim objecting to the denial of such benefits. The Claimant or his representative may review the Agreement and any other documents which relate to the claim and may submit written comments to the Named Fiduciary. The Named Fiduciary shall render a written decision concerning the claim not later than 90 days after receipt of such claim. If the claim is denied, in whole or in part, such decision shall include (a) the reason or reasons for the denial; (b) a reference to the Agreement provisions constituting the basis of the denial; (c) a description of any additional material or information necessary for the Claimant to perfect his claim; (d) an explanation as to why such information or material is necessary; and (e) an explanation of the Agreement's appeal procedure. The claim shall be deemed to be denied if no response is received by the end of the review period. The Claimant may file with the Named Fiduciary a written notice of appeal of the Named Fiduciary's decision not later than 60 days after receiving the Named Fiduciary's written decision. The Named Fiduciary shall render a written decision on the appeal not later than 60 days after the appeal. Such decision shall include the specific reasons for the decision, including a reference to the Agreement's specific provisions where appropriate. The Named Fiduciary may extend the foregoing 90-day and 60- day periods during which it must respond to the Claimant by up to an additional 90 and 60 days respectively, if special circumstances beyond its control so require; provided that notice of such extension is given to the Claimant prior to the expiration of the initial 90-day or 60-day period, as the case may be. AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 6 XIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any premium waived shall be considered for all purposes of this Agreement as having been paid by Owner. XIV. AMENDMENT This Agreement may be amended at any time and from time to time by a written instrument executed by Employer, Owner and Insured, and, if appropriate, their respective heirs, successors, personal representatives and assignees. XV. AGREEMENT BINDING UPON PARTIES This Agreement shall bind Employer, Owner and Insured, and their respective heirs, successors, personal representatives and assignees. XVI. INSURER NOT A PARTY TO AGREEMENT Insurer is not responsible for the legal or tax validity or effect of this Agreement. Further, Insurer shall not be deemed a party to this Agreement but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Insurer shall not be responsible to account for the actual premium contributions of the parties hereunder but shall rely solely upon the written declarations of the parties in any distributions or settlement of the Policy's lifetime or death values. Payment or other performance of its contractual obligations in accordance with the Policy provisions shall fully discharge Insurer from any and all liability. XVII. CONTROLLING STATE LAW This Agreement shall be subject to and construed under the laws of the State of Texas, to the extent not preempted by ERISA. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 7 This Amended and Restated Split-Dollar Life Insurance Agreement is executed and effective as of the date first above written. INSURED: /s/ Harry R. Brutsche III ----------------------------------------- Harry R. Brutsche III OWNER: BROWN BROTHERS HARRIMAN TRUST COMPANY OF TEXAS, as Trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 By: /s/ Susan Hickey ------------------------------------- Name: Susan Hickey ----------------------------------- Title: Vice President ---------------------------------- EMPLOYER: VARI-LITE HOLDINGS, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President--Finance AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 8 INSURER: Massachusetts Mutual Life Insurance Company POLICY: Whole Life Policy with Supplemental Insurance Option; Policy Number 8592771 INSURED: Harry R. Brutsche III OWNER: Brown Brothers Harriman Trust Company of Texas, as Trustee of the Harry R. Brutsche III Insurance Trust, dated October 6, 1995 EMPLOYER: Vari-Lite Holdings, Inc. EFFECTIVE DATE: December 12, 1990 This Amended and Restated Split-Dollar Life Insurance Agreement was recorded by Insurer on August 12, 1997. By: /s/ Cheryl M. Foster ------------------------------------ Name: Cheryl M. Foster ---------------------------------- Title: Assistant Secretary --------------------------------- AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 9 EX-10.17 10 EXHIBIT 10.17 AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT This AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT is made and effective as of the 12th day of October, 1995, by and between Vari-Lite Holdings, Inc. ("Employer"), Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, dated October 11, 1995 ("Owner") and John D. Maxson ("Insured"). W I T N E S S E T H: WHEREAS, Insured has served on the Board of Directors of Employer and has contributed substantially to the success of Employer; and WHEREAS, Employer desired for Insured to continue to serve on its Board of Directors; and WHEREAS, to retain the services of Insured, Employer assisted him in establishing and maintaining an adequate life insurance program; and WHEREAS, Employer and Insured entered into a split-dollar life insurance agreement during and effective as of December 1990 (the "Original Agreement") to define their respective rights, duties and obligations regarding a $2,000,000 face amount whole life insurance policy (the "Original Policy") issued to John D. Maxson as owner and insured by Massachusetts Mutual Life Insurance Company (the "Original Insurer"); and WHEREAS, pursuant to the Original Agreement, Employer made the entire premium payment to Original Insurer and Insured recognized as taxable income each year an amount equal to the economic benefit received by Insured during the year and Employer and Insured have recognized and acknowledged the interest of Employer in the benefits and values of the Original Policy to the extent of the premium payments made by Employer to Original Insurer; and WHEREAS, Employer desires to continue assisting Insured in maintaining an adequate insurance program; and WHEREAS, Employer and Insured desire to amend and restate the Original Agreement in order to (i) restate the rights, duties and obligations of the parties under the Original Agreement, (ii) surrender the Original Policy and to contribute the cash surrender value of the Original Policy toward the purchase of flexible premium adjustable life insurance insuring the life of John D. Maxson, policy number A10137201L (the "New Policy"), issued by American General Life Insurance Company (the "Insurer") to Brown Brothers Harriman Trust Company of Texas, in their capacity as trustee of the John D. Maxson 1995 Irrevocable Trust, dated October 11, 1995, a copy of which is attached as Exhibit A, (iii) provide for the reimbursement AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 1 by Owner each year to Employer of a portion of the annual premium payment made by Employer equal to the economic benefit received by Insured during that year, and (iv) confirm the limited policy security rights specifically granted in the New Policy to Employer as collateral, including the extent to which such rights accrued to Employer with respect to premium payments by Employer to Original Insurer on the Original Policy; NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants herein contained, the parties hereto agree as follows: I. BENEFICIARY DESIGNATION RIGHTS Owner may designate a beneficiary or beneficiaries to receive any proceeds payable under the New Policy on death of Insured which are in excess of Employer's share of such proceeds, as determined by this Agreement. II. PREMIUM PAYMENT METHOD Employer was obligated by the terms of the Original Policy and the Original Agreement to pay all premiums required to keep the Original Policy in force, including any additional premiums required because the Original Policy was issued with a substandard rating. As of October 12, 1995, Employer's interest in the Original Policy was $205,006.22, which is an amount equal to the total premiums for the Original Policy paid by Employer to Original Insurer (hereinafter referred to as "Employer's Interest in the Original Policy"). Employer and Insured agree to surrender the Original Policy and to contribute the cash surrender value of the Original Policy as an unscheduled premium toward the purchase of the New Policy and that Employer will have an initial interest in the New Policy equal to Employer's Interest in the Original Policy. Each year thereafter, Employer agrees to forward the full amount of the annual premium due under the New Policy for that year to Insurer on the date such premium is due until the occurrence of a termination event under Article VI. Each year, Owner agrees that he will pay to Employer, as partial reimbursement by Owner to Employer of the annual premium for the New Policy, an amount equal to the economic benefit received by Insured during that tax year. The amount payable by Owner may be paid to Employer by payroll deduction or according to any other method which is agreeable to the parties. Alternatively, if Employer and Owner agree that Employer shall pay to Insurer or that Owner shall reimburse to Employer some amount other than the amount stated in this Article II, the rights of Employer and Owner under the New Policy shall be adjusted accordingly. If Employer is not reimbursed by Owner for a year for the full amount of the economic benefit received by Insured during that year, the economic benefit to the extent not reimbursed shall be reported by Employer as taxable income for that year to Insured. AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 2 III. OWNER'S RETAINED INCIDENTS OF OWNERSHIP Except as to the limited policy security rights specifically granted Employer in the Assignment of Life Insurance Policy as Collateral in the form attached hereto as Exhibit B (the "Assignment") and as provided in Article VI, Owner retains all incidents of ownership in the New Policy (including the right to surrender or cancel the New Policy and the right to borrow against the New Policy). Owner's right to borrow against the New Policy shall be limited to an amount equal to the maximum loan value reduced by the Cumulative Unreimbursed Premiums (as defined in Article IV) paid or advanced by Employer under Article II. Owner's right to withdraw from the New Policy's cash value under the New Policy's partial surrender provisions shall be limited to the "partial surrender value" of the New Policy, reduced by the Cumulative Unreimbursed Premiums. For purposes of this paragraph, "partial surrender value" of the New Policy means the cash value of the New Policy less any indebtedness and the cost of insurance until the next annual premium date. IV. DIVISION OF POLICY DEATH PROCEEDS Division of the death proceeds of the New Policy shall be made as follows: A. Employer shall be entitled to an amount equal to the SUM of (i) Employer's Interest in the Original Policy and (ii) the cumulative premiums paid to Insurer by Employer less the amount of aggregate reimbursements paid to Employer by Owner under Article II with respect to the New Policy (collectively the "Cumulative Unreimbursed Premiums"). The beneficiary or beneficiaries designated by Owner in accordance with Article I shall be entitled to any remainder of such proceeds. B. If any interest is due upon the death proceeds under the terms of the New Policy, Owner and Employer shall share such interest in the same manner that their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest. C. If, upon the death of Insured, there is a refund of unearned premiums under the New Policy provisions, then, in such event, any refund shall be apportioned as follows: 1. Where Owner (or his assignee) has contributed to the New Policy premium at the last required premium interval, the refund of unearned premiums shall be divided between Employer and Owner (or his assignee) as their respective share of the premium payment shall bear to the total premium for such interval. AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 3 2. Where Owner (or his assignee) has not contributed to the premium at the last premium interval, the refund of unearned premium shall be refunded in total to Employer. V. DIVISION OF THE NET CASH SURRENDER VALUE Division of the net cash surrender value of the New Policy prior to death of Insured shall be made as follows: Employer shall be entitled to an amount equal to the Cumulative Unreimbursed Premiums. Owner shall be entitled to any remainder of such net cash surrender value. To the extent the Cumulative Unreimbursed Premiums exceed the net cash surrender value of the New Policy, Owner shall be solely responsible for repayment of same to Employer. VI. TERMINATION OF AGREEMENT This Agreement shall terminate upon the occurrence of any one of the following events: A. Termination of both Insured's Consulting Agreement (the "Consulting Agreement") with Employer dated as of July 1, 1995 in accordance with its terms and Insured's directorship with Employer for any reason; B. Delivery by Owner to Employer of Owner's request, at any time, to receive a release of the Assignment from Employer and agreement by Owner to pay the premiums; C. Owner's failure to reimburse Employer upon 30 days' written notice from Employer for Owner's proportionate share of premiums to Employer, if any, as mutually agreed upon by Owner and Employer pursuant to Article II; D. Death of Insured; or E. Breach of the terms of this Agreement by Employer. Except as provided below with respect to a breach of this Agreement by Employer, upon termination of this Agreement, Owner shall have a 90-day option to pay to Employer an amount equal to the Cumulative Unreimbursed Premiums and receive a release of the Assignment from Employer. Employer agrees that Owner may obtain this amount from the New Policy by effectuating a policy loan or a withdrawal or by partial surrender of the New Policy, as long as Employer receives reimbursement of the full amount of the Cumulative Unreimbursed Premiums. To assure that Employer will receive its entire interest, Employer may request that Owner provide Employer with collateral which is satisfactory to Employer, in its sole discretion. AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 4 Alternatively, if Insured is to perform future services for Employer and if Insured is entitled to receive deferred compensation for these services pursuant to a separate agreement or agreements between Insured and Employer, then Employer shall have the right under this Agreement to release to Owner its interest in all or any portion of such compensation in partial or complete satisfaction of that deferred payment obligation. If this Agreement is terminated (i) on account of a breach of this Agreement by Employer, (ii) in connection with the retirement by Insured from his directorship and consulting relationship with Employer on or after age 60, or (iii) in connection with a "change of control" of Employer as defined in Section 6(e) of the Consulting Agreement, Employer shall waive its right to repayment of the Cumulative Unreimbursed Premiums paid as of the termination date. Within 30 days of such termination date, Employer shall release the Assignment and Owner shall become the sole and absolute owner of the Policy. Owner may thereafter elect to continue to keep the Policy in effect by paying the premiums thereon, or alternatively, may elect to surrender the Policy pursuant to the terms thereof. If Employer does not release the Assignment of the Policy within this 30-day period, the Assignment will automatically terminate pursuant to the terms hereof. Nothing herein shall be construed to represent an ownership right or interest of Owner or Insured in or to any particular asset of Employer, nor shall Owner or Insured be deemed to be in constructive receipt of such amount. Owner does not have any right to a release of the Assignment by Employer without reimbursement of the Cumulative Unreimbursed Premiums but, instead, such right shall vest solely with the Employer. Owner may not anticipate, pledge, assign, hypothecate or, in any manner, exercise rights, ownership or control over this interest of Employer. Should Owner (or his assignees) fail to exercise one of these options within the prescribed 90-day period, the New Policy will be surrendered to Insurer and the proceeds distributed between Employer and Owner as prescribed by Article V. VII. OWNER'S ASSIGNMENT RIGHTS Owner may, at any time, assign to any individual, trust or other organization all of its right, title and interest in the New Policy and all of its rights, options, privileges and duties created under this Agreement. VIII. STATUS OF AGREEMENT AS ERISA PLAN This Agreement, together with the New Policy and the Assignment attached hereto, constitutes an employee welfare benefit plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 5 IX. NAMED FIDUCIARY Employer is hereby designated the "Named Fiduciary" as defined in Section 402(a)(2) of ERISA until resignation or removal by Employer's Board of Directors. The business address of Employer is 201 Regal Row, Dallas, Texas 75247. The Named Fiduciary is hereby granted sole and absolute authority to manage, control and administer the Agreement and to make all benefit entitlement determinations under the Agreement. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Agreement, including the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under the Agreement. The Named Fiduciary shall effect such allocation of its responsibilities by delivering to Employer a written instrument signed by it that specifies the nature and extent of the responsibilities allocated, including if appropriate the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under this Agreement. All documents related to the Agreement shall be retained by the Named Fiduciary and made available for examination at the above address. A copy of the Agreement, Assignment and New Policy have been provided to Owner, upon the execution of this Agreement. X. FUNDING The funding policy for the Agreement shall be to maintain the New Policy in force by paying, when due, all premiums required. XI. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments under this Agreement shall be in accordance with the provisions of Articles II through V, herein. XII. CLAIMS PROCEDURE If Owner or its beneficiary ("Claimant") fails to receive benefits to which it believes it is entitled under this Agreement, such person may file with the Named Fiduciary, at the address noted above, a written claim for such benefits. If a claim for benefits is denied, the Claimant may within 60 days following such denial, file with the Named Fiduciary a written claim objecting to the denial of such benefits. The Claimant or its representative may review the Agreement and any other documents which relate to the claim and may submit written comments to the Named Fiduciary. The Named Fiduciary shall render a written decision concerning the claim not later than 90 days after receipt of such claim. If the claim is denied, in whole or in part, such decision shall include (a) the reason or reasons for the denial; (b) a reference to the Agreement provisions constituting the basis of the denial; (c) a description of any additional material or information necessary for the Claimant to perfect his claim; (d) an AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 6 explanation as to why such information or material is necessary; and (e) an explanation of the Agreement's appeal procedure. The claim shall be deemed to be denied if no response is received by the end of the review period. The Claimant may file with the Named Fiduciary a written notice of appeal of the Named Fiduciary's decision not later than 60 days after receiving the Named Fiduciary's written decision. The Named Fiduciary shall render a written decision on the appeal not later than 60 days after the appeal. Such decision shall include the specific reasons for the decision, including a reference to the Agreement's specific provisions where appropriate. The Named Fiduciary may extend the foregoing 90-day and 60- day periods during which it must respond to the Claimant by up to an additional 90 and 60 days respectively, if special circumstances beyond its control so require; provided that notice of such extension is given to the Claimant prior to the expiration of the initial 90-day or 60-day period, as the case may be. XIII. AMENDMENT This Agreement may be amended at any time and from time to time by a written instrument executed by Employer, Owner and Insured and, if appropriate, their respective heirs, successors, personal representatives and assignees. XIV. AGREEMENT BINDING UPON PARTIES This Agreement shall bind Employer, Owner and Insured, and their respective heirs, successors, personal representatives and assignees. XV. INSURER NOT A PARTY TO AGREEMENT Insurer is not responsible for the legal or tax validity or effect of this Agreement. Further, Insurer shall not be deemed a party to this Agreement but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Insurer shall not be responsible to account for the actual premium contributions of the parties hereunder but shall rely solely upon the written declarations of the parties in any distributions or settlement of the New Policy's lifetime or death values. Payment or other performance of its contractual obligations in accordance with the New Policy provisions shall fully discharge Insurer from any and all liability. XVI. CONTROLLING STATE LAW This Agreement shall be subject to and construed under the laws of the State of Texas, to the extent not preempted by ERISA. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 7 This Amended and Restated Split-Dollar Life Insurance Agreement is executed and effective as of the date first above written. INSURED: /s/ John D. Maxson ---------------------------------------- John D. Maxson OWNER: BROWN BROTHERS HARRIMAN TRUST COMPANY OF TEXAS, as Trustee of the John D. Maxson 1995 Irrevocable Trust, dated October 11, 1995 By: /s/ Susan Hickey ------------------------------------- Name: Susan Hickey ----------------------------------- Title: Vice President ---------------------------------- EMPLOYER: VARI-LITE HOLDINGS, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President--Finance AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 8 INSURER: American General Life Insurance Company POLICY: Flexible Premium Adjustable Life Policy; Policy Number A10137201L INSURED: John D. Maxson OWNER: Brown Brothers Harriman Trust Company of Texas, Trustee of the John D. Maxson 1995 Irrevocable Trust, dated October 11, 1995 EMPLOYER: Vari-Lite Holdings, Inc. This Amended and Restated Split-Dollar Life Insurance Agreement was recorded by Insurer on August 7, 1997. American General Life Insurance Company By: /s/ American General Life Ins Co. ------------------------------------- Name: Simon J. Leek ----------------------------------- Title: Administration Officer ---------------------------------- AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 9 EX-10.18 11 EXHIBIT 10.18 SPLIT-DOLLAR LIFE INSURANCE AGREEMENT INSURER: John Hancock Mutual Life Insurance Company POLICY: Modified Premium Whole Life Policy; Policy Number 67127330 INSURED: James H. Clark, Jr. OWNER: James Howard Cullum Clark EMPLOYER: Vari-Lite Holdings, Inc. EFFECTIVE DATE: October 12, 1995 This SPLIT-DOLLAR LIFE INSURANCE AGREEMENT is made and effective as of the 12th day of October, 1995 by and between Owner, Insured and Employer (collectively, the "Parties") to define the rights, duties and obligations of the Parties relative to the modified premium whole life insurance policy, policy number 67127330 (the "Policy"), issued to Owner by Insurer insuring the life of Insured. A copy of the Policy is attached hereto as Exhibit A. Owner, Employer and Insured hereby agree as follows: I. BENEFICIARY DESIGNATION RIGHTS Owner may designate a beneficiary or beneficiaries to receive any proceeds payable under the Policy on death of Insured which are in excess of Employer's share of such proceeds, as determined by this Agreement. II. PREMIUM PAYMENT METHOD Each year, Employer agrees to forward the full amount of the annual premium due under the Policy for that year to Insurer on the date such premium is due until the occurrence of a termination event under Article VI. Each year, Owner agrees that he will pay to Employer, as partial reimbursement by Owner to Employer of the annual premium for the Policy, an amount equal to the economic benefit received by Insured during that tax year. The amount payable by Owner may be paid to Employer by payroll deduction or according to any other method which is agreeable to the Parties. Alternatively, if Employer and Owner agree that Employer shall pay to Insurer or that Owner shall reimburse to Employer some amount other than the amount stated in this Article II, the rights of Employer and Owner under the Policy shall be adjusted accordingly. If Employer is not reimbursed by Owner for a year for the full amount of the entire economic benefit received by Insured during that year, the economic benefit to the extent not reimbursed shall be reported by Employer as taxable income for that year to Insured. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 1 III. OWNER'S RETAINED INCIDENTS OF OWNERSHIP Except as to the limited policy security rights specifically granted Employer in the Assignment of Life Insurance Policy as Collateral in the form attached hereto as Exhibit B (the "Assignment"), Owner retains all incidents of ownership in the Policy (including the right to surrender or cancel the Policy and the right to borrow against the Policy). Owner's right to borrow against the Policy shall be limited to an amount equal to the maximum loan value reduced by the Cumulative Unreimbursed Premiums (as defined in Article IV) paid or advanced by Employer under Article II. Owner's right to withdraw from the Policy's cash value under the Policy's partial surrender provisions shall be limited to the "partial surrender value" of the Policy, reduced by the Cumulative Unreimbursed Premiums. For purposes of this paragraph, "partial surrender value" of the Policy means the cash value of the Policy less any indebtedness and the cost of insurance until the next monthly anniversary. IV. DIVISION OF POLICY DEATH PROCEEDS Division of the death proceeds of the Policy shall be made as follows: A. Employer shall be entitled to an amount equal to the cumulative premiums paid to Insurer by Employer less the amount of aggregate reimbursements paid to Employer by Owner under Article II (the "Cumulative Unreimbursed Premiums"). The beneficiary or beneficiaries designated by Owner in accordance with Article I shall be entitled to any remainder of such proceeds. B. If any interest is due upon the death proceeds under the terms of the Policy, Owner and Employer shall share such interest in the same manner that their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest. C. If, upon the death of Insured, there is a refund of unearned premiums under the Policy provisions, then, in such event, any refund shall be apportioned as follows: 1. Where Owner (or his assignee) has contributed to the Policy premium at the last required premium interval, the refund of unearned premiums shall be divided between Employer and Owner (or his assignee) as their respective share of the premium payment shall bear to the total premium for such interval. 2. Where Owner (or his assignee) has not contributed to the premium at the last premium interval, the refund of unearned premium shall be refunded in total to Employer. To the extent that the Cumulative Unreimbursed Premiums exceed the death proceeds of the Policy, Owner shall be solely responsible for repayment of same to Employer. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 2 V. DIVISION OF THE NET CASH SURRENDER VALUE Division of the net cash surrender value of the Policy shall be made as follows: Employer shall be entitled to an amount equal to the Cumulative Unreimbursed Premiums. Owner shall be entitled to any remainder of such net cash surrender value. To the extent that the Cumulative Unreimbursed Premiums exceed the net cash surrender value of the Policy, Owner shall be solely responsible for repayment of same to Employer. VI. TERMINATION OF AGREEMENT This Agreement shall terminate upon the occurrence of any one of the following events: A. Termination of Insured's directorship with Employer for any reason; B. Delivery by Owner to Employer of Owner's request, at any time, to receive a release of the Assignment from Employer and agreement by Owner to pay the premiums; C. Owner's failure to reimburse Employer upon 30 days' written notice from Employer for Owner's proportionate share of premiums to Employer, if any, as mutually agreed upon by Owner and Employer pursuant to Article II; or D. Death of Insured. Upon termination of this Agreement, Owner shall have a 90-day option to pay to Employer an amount equal to the aggregate of the Cumulative Unreimbursed Premiums and receive a release of the Assignment from Employer. Employer agrees that Owner may obtain this amount from the Policy by effectuating a policy loan or a withdrawal or by partial surrender of the Policy, as long as Employer receives reimbursement of the full amount of the Cumulative Unreimbursed Premiums. To assure that Employer will receive its entire interest, Employer may request that Owner provide Employer with collateral which is satisfactory to Employer, in its sole discretion. Alternatively, if Insured is to perform future services for Employer and if Insured is entitled to receive deferred compensation for these services pursuant to a separate agreement or agreements between Insured and Employer, then Employer shall have the right under this Agreement to release to Owner its interest in all or any portion of such compensation in partial or complete satisfaction of that deferred payment obligation. Nothing herein shall be construed to represent an ownership right or interest of Owner or Insured in or to any particular asset of Employer, nor shall Owner or Insured be deemed to be in constructive receipt of such amount. Owner does not have any right to a release of the Assignment by Employer without reimbursement, and may not anticipate, pledge, assign, hypothecate or, in any manner, exercise rights, ownership or control over any such right or interest. Should Owner (or his assignees) fail to exercise one of these options within the prescribed 90-day period, the Policy will be surrendered to Insurer and the proceeds distributed between Employer and Owner as prescribed by Article V. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 3 VII. OWNER'S ASSIGNMENT RIGHTS Owner may, at any time, assign to any individual, trust or other organization all of his right, title and interest in the Policy and all of his rights, options, privileges and duties created under this Agreement. VIII. STATUS OF AGREEMENT AS ERISA PLAN This Agreement, together with the Policy and the Assignment attached hereto, constitutes an employee welfare benefit plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). IX. NAMED FIDUCIARY Employer is hereby designated the "Named Fiduciary" as defined in Section 402(a)(2) of ERISA until resignation or removal by Employer's Board of Directors. The business address of Employer is 201 Regal Row, Dallas, Texas 75247. The Named Fiduciary is hereby granted sole and absolute authority to manage, control and administer the Agreement and to make all benefit entitlement determinations under the Agreement. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Agreement, including the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under the Agreement. The Named Fiduciary shall effect such allocation of its responsibilities by delivering to Employer a written instrument signed by it that specifies the nature and extent of the responsibilities allocated, including if appropriate the designation of persons who ar not named fiduciaries to carry out fiduciary responsibilities under this Agreement. All documents related to the Agreement shall be retained by the Named Fiduciary and made available for examination at the above address. A copy of the Agreement, Assignment and Policy have been provided to Owner upon the execution of this Agreement. X. FUNDING The funding policy for the Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XI. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments under this Agreement shall be in accordance with the provisions of Articles II through V, herein. XII. CLAIMS PROCEDURE If Owner or his beneficiary ("Claimant") fails to receive benefits to which he believes he is entitled under this Agreement, such person may file with the Named Fiduciary, at the address noted above, a written claim for such benefits. If a claim for benefits is denied, the Claimant may within 60 days following such denial, file with the Named Fiduciary a written claim objecting to the denial of such benefits. The Claimant or its representative may review the Agreement and any other documents which relate to the claim and may submit written comments to the Named Fiduciary. The Named Fiduciary shall render SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 4 a written decision concerning the claim not later than 90 days after receipt of such claim. If the claim is denied, in whole or in part, such decision shall include (a) the reason or reasons for the denial; (b) a reference to the Agreement provisions constituting the basis of the denial; (c) a description of any additional material or information necessary for the Claimant to perfect his claim; (d) an explanation as to why such information or material is necessary; and (e) an explanation of the Agreement's appeal procedure. The claim shall be deemed to be denied if no response is received by the end of the review period. The Claimant may file with the Named Fiduciary a written notice of appeal of the Named Fiduciary's decision not later than 60 days after receiving the Named Fiduciary's written decision. The Named Fiduciary shall render a written decision on the appeal not later than 60 days after the appeal. Such decision shall include the specific reasons for the decision, including a reference to the Agreement's specific provisions where appropriate. The Named Fiduciary may extend the foregoing 90-day and 60-day periods during which it must respond to the Claimant by up to an additional 90 and 60 days respectively, if special circumstances beyond its control so require; provided that notice of such extension is given to the Claimant prior to the expiration of the initial 90-day or 60-day period, as the case may be. XIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any premium waived shall be considered for all purposes of this Agreement as having been paid by Owner. XIV. AMENDMENT This Agreement may be amended at any time and from time to time by a written instrument executed by Employer, Owner and Insured, and, if appropriate, their respective heirs, successors, personal representatives and assignees. XV. AGREEMENT BINDING UPON PARTIES This Agreement shall bind Employer, Owner and Insured, and their respective heirs, successors, personal representatives and assignees. XVI. INSURER NOT A PARTY TO AGREEMENT Insurer is not responsible for the legal or tax validity or effect of this Agreement. Further, Insurer shall not be deemed a party to this Agreement but will respect the rights of the Parties as herein developed upon receiving an executed copy of this Agreement. Insurer shall not be responsible to account for the actual premium contributions of the Parties hereunder but shall rely solely upon the written declarations of the Parties in any distributions or settlement of the Policy's lifetime or death values. Payment or other performance of its contractual obligations in accordance with the Policy provisions shall fully discharge Insurer from any and all liability. SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 5 XVII. CONTROLLING STATE LAW This Agreement shall be subject to and construed under the laws of the State of Texas, to the extent not preempted by ERISA. This Split-Dollar Life Insurance Agreement is executed and effective as of the date first above written. INSURED: /s/ James H. Clark, Jr. ----------------------------------------- James H. Clark, Jr. OWNER: /s/ James Howard Cullum Clark ----------------------------------------- James Howard Cullum Clark EMPLOYER: VARI-LITE HOLDINGS, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President - Finance SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 6 INSURER: John Hancock Mutual Life Insurance Company POLICY: Modified Premium Whole Life Policy; Policy Number 67127330 INSURED: James H. Clark, Jr. OWNER: James Howard Cullum Clark EMPLOYER: Vari-Lite Holdings, Inc. This Split-Dollar Life Insurance Agreement was recorded by Insurer on August 22, 1997. John Hancock Mutual Life Insurance Company By: /s/ Bob Shin --------------------------------------- Name: /s/ Bob Shin ------------------------------------- Title: Secretary ------------------------------------ SPLIT-DOLLAR LIFE INSURANCE AGREEMENT Page 7 EX-10.19 12 EXHIBIT 10.19 AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT This AMENDED AND RESTATED SPLIT-DOLLAR LIFE INSURANCE AGREEMENT is made and effective as of the 12th day of October, 1995, by and between Vari-Lite Holdings, Inc. ("Employer"), James Howard Cullum Clark ("Owner"), and James H.Clark, Jr. ("Insured"). W I T N E S S E T H: WHEREAS, Insured has served on the Board of Directors of Employer and has contributed substantially to the success of Employer; and WHEREAS, Employer desired for Insured to continue to serve on its Board of Directors; and WHEREAS, to retain the services of Insured, Employer assisted him in establishing and maintaining an adequate life insurance program; and WHEREAS, Employer and Insured entered into a split-dollar life insurance agreement effective as of December 12, 1990 (the "Agreement") to define their respective rights, duties and obligations regarding a $2,000,000 face amount whole life insurance policy with supplemental insurance option, policy number 8592938 (the "Policy"), issued to James H. Clark, Jr. as owner and insured by Massachusetts Mutual Life Insurance Company (the "Insurer") insuring the life of Insured, a copy of which is attached hereto as Exhibit A; and WHEREAS, the face amount of the Policy was subsequently reduced to $1,200,000; and WHEREAS, pursuant to the Agreement, Employer made the entire premium payment to Insurer and Insured recognized as taxable income each year an amount equal to the economic benefit received by Insured during that year and Employer and Insured recognized and acknowledged the interest of Employer in the benefits and values of the Policy to the extent of the premium payments made by Employer to Insurer; and WHEREAS, Employer desires to continue assisting Insured in maintaining an adequate insurance program; and WHEREAS, Insured has assigned all his ownership, rights and interests in the Policy to James Howard Cullum Clark; and WHEREAS, Employer, Insured and Owner desire to amend and restate the Agreement in order to (i) restate the rights, duties and obligations of Employer, Insured and Owner relative to the Policy and the Agreement, (ii) provide for the reimbursement by Owner each year to Employer of a portion of the annual premium payment made by Employer equaL to the economic benefit received by Insured during that year, and (iii) confirm the limited policy security rights specifically granted in the Policy to Employer as collateral; NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants herein contained, the parties hereto agree as follows: I. BENEFICIARY DESIGNATION RIGHTS Owner may designate a beneficiary or beneficiaries to receive any proceeds payable under the Policy on death of Insured which are in excess of Employer's share of such proceeds, as determined by this Agreement. II. PREMIUM PAYMENT METHOD Each year, Employer agrees to forward the full amount of the annual premium due under the Policy for that year to Insurer on the date such premium is due until the occurrence of a termination event under Article VI. Each year, Owner agrees that he will pay to Employer, as partial reimbursement by Owner to Employer of the annual premium for the Policy, an amount equal to the economic benefit received by Insured during that tax year. The amount payable by Owner may be paid to Employer by payroll deduction or according to any other method which is agreeable to the parties. Alternatively, if Employer and Owner agree that Employer shall pay to Insurer or that Owner shall reimburse to Employer some amount other than the amount stated in this Article II, the rights of Employer and Owner under the Policy shall be adjusted accordingly. If Employer is not reimbursed by Owner for a year for the full amount of the entire economic benefit received by Insured during that year, the economic benefit to the extent not reimbursed shall be reported by Employer as taxable income for that year to Insured. III. OWNER'S RETAINED INCIDENTS OF OWNERSHIP Except as to the limited policy security rights specifically granted Employer in the Assignment of Life Insurance Policy as Collateral in the form attached hereto as Exhibit B (the "Assignment") and as provided in Article VI, Owner retains all incidents of ownership in the Policy (including the right to surrender or cancel the Policy and the right to borrow against the Policy). Owner is required to apply all dividends declared on the Policy to purchase paid-up insurance on the life of Insured. Owner agrees not to terminate or alter this dividend option without the consent of Employer. Owner's right to borrow against the Policy shall be limited to an amount equal to the maximum loan value reduced by the Cumulative Unreimbursed Premiums (as defined in Article IV) paid or advanced by Employer under Article II. 2 Owner's right to withdraw from the Policy's cash value under the Policy's partial surrender provisions shall be limited to the "partial surrender value" of the Policy, reduced by the Cumulative Unreimbursed Premiums. For purposes of this paragraph, "partial surrender value" of the Policy means the cash value of the Policy less any indebtedness and the cost of insurance until the next annual premium due date. IV. DIVISION OF POLICY DEATH PROCEEDS Division of the death proceeds of the Policy shall be made as follows: A. Employer shall be entitled to an amount equal to the cumulative premiums paid to Insurer by Employer less the amount of aggregate reimbursements paid to Employer by Owner under Article II (the "Cumulative Unreimbursed Premiums"). The beneficiary or beneficiaries designated by Owner in accordance with Article I shall be entitled to any remainder of such proceeds. B. If any interest is due upon the death proceeds under the terms of the Policy, Owner and Employer shall share such interest in the same manner that their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest. C. If, upon the death of Insured, there is a refund of unearned premiums under the Policy provisions, then, in such event, any refund shall be apportioned as follows: 1. Where Owner (or his assignee) has contributed to the Policy premium at the last required premium interval, the refund of unearned premiums shall be divided between Employer and Owner (or his assignee) as their respective share of the premium payment shall bear to the total premium for such interval. 2. Where Owner (or his assignee) has not contributed to the premium at the last premium interval, the refund of unearned premium shall be refunded in total to Employer. V. DIVISION OF THE NET CASH SURRENDER VALUE Division of the net cash surrender value of the Policy prior to death of Insured shall be made as follows: Employer shall be entitled to an amount equal to the Cumulative Unreimbursed Premiums. Owner shall be entitled to any remainder of such net cash surrender value. To the extent that the Cumulative Unreimbursed Premiums exceed the net cash surrender value of the Policy, Owner shall be solely responsible for repayment of same to Employer. 3 VI. TERMINATION OF AGREEMENT This Agreement shall terminate upon the occurrence of any one of the following events: A. Termination of both Insured's Consulting Agreement (the "Consulting Agreement") with Employer dated as of July 1, 1995 in accordance with its terms and Insured's directorship with Employer for any reason; B. Delivery by Owner to Employer of Owner's request, at any time, to receive a release of the Assignment from Employer and agreement by Owner to pay the premiums; C. Owner's failure to reimburse Employer upon 30 days' written notice from Employer for Owner's proportionate share of premiums to Employer, if any, as mutually agreed upon by Owner and Employer pursuant to Article II; D. Death of Insured; or E. Breach of the terms of this Agreement by Employer. Except as provided below with respect to a breach of this Agreement by Employer, upon termination of this Agreement, Owner shall have a 90-day option to pay to Employer an amount equal to the Cumulative Unreimbursed Premiums and receive a release of the Assignment from Employer. Employer agrees that Owner may obtain this amount from the New Policy by effectuating a policy loan or a withdrawal or by partial surrender of the New Policy, as long as Employer receives reimbursement of the full amount of the Cumulative Unreimbursed Premiums. To assure that Employer will receive its entire interest, Employer may request that Owner provide Employer with collateral which is satisfactory to Employer, in its sole discretion. Alternatively, if Insured is to perform future services for Employer and if Insured is entitled to receive deferred compensation for these services pursuant to a separate agreement or agreements between Insured and Employer, then Employer shall have the right under this Agreement to release to Owner its interest in all or any portion of such compensation in partial or complete satisfaction of that deferred payment obligation. If this Agreement is terminated (i) on account of a breach of this Agreement by Employer, (ii) in connection with the retirement by Insured from his directorship and consulting relationship with Employer on or after age 60, or (iii) in connection with a "change of control" of Employer as defined in Section 6(e) of the Consulting Agreement, Employer shall waive its right to repayment of the Cumulative Unreimbursed Premiums paid as of the termination date. Within 30 days of such termination date, Employer shall release the Assignment and Owner shall become the sole and absolute owner of the Policy. Owner may thereafter elect to continue to keep the Policy in effect by paying the 4 premiums thereon, or alternatively, may elect to surrender the Policy pursuant to the terms thereof. If Employer does not release the Assignment of the Policy within this 30-day period, the Assignment will automatically terminate pursuant to the terms hereof. Nothing herein shall be construed to represent an ownership right or interest of Owner or Insured in or to any particular asset of Employer, nor shall Owner or Insured be deemed to be in constructive receipt of such amount. Owner does not have any right to a release of the Assignment by Employer without reimbursement of the Cumulative Unreimbursed Premiums but, instead, such right shall vest solely with the Employer. Owner may not anticipate, pledge, assign, hypothecate or, in any manner, exercise rights, ownership or control over this interest of Employer. Should Owner (or his assignees) fail to exercise one of these options within the prescribed 90-day period, the Policy will be surrendered to Insurer and the proceeds distributed between Employer and Owner as prescribed by Article V. VII. OWNER'S ASSIGNMENT RIGHTS Owner may, at any time, assign to any individual, trust or other organization all of his right, title and interest in the Policy and all of his rights, options, privileges and duties created under this Agreement. VIII. STATUS OF AGREEMENT AS ERISA PLAN This Agreement, together with the Policy and the Assignment attached hereto, constitutes an employee welfare benefit plan as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). IX. NAMED FIDUCIARY Employer is hereby designated the "Named Fiduciary" as defined in Section 402(a)(2) of ERISA until resignation or removal by Employer's Board of Directors. The business address of Employer is 201 Regal Row, Dallas, Texas 75247. The Named Fiduciary is hereby granted sole and absolute authority to manage, control and administer the Agreement and to make all benefit entitlement determinations under the Agreement. The Named Fiduciary may allocate to others certain aspects of the management and operation responsibilities of the Agreement, including the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under the Agreement. The Named Fiduciary shall effect such allocation of its responsibilities by delivering to Employer a written instrument signed by it that specifies the nature and extent of the responsibilities allocated, including if appropriate the designation of persons who are not named fiduciaries to carry out fiduciary responsibilities under this Agreement. 5 All documents related to the Agreement shall be retained by the Named Fiduciary and made available for examination at the above address. Copies of the Agreement, Assignment and Policy have been provided to Owner upon the execution of this Agreement. X. FUNDING The funding policy for the Agreement shall be to maintain the Policy in force by paying, when due, all premiums required. XI. BASIS OF PREMIUM PAYMENTS AND BENEFITS Payments under this Agreement shall be in accordance with the provisions of Articles II through V, herein. XII. CLAIMS PROCEDURE If Owner or his beneficiary ("Claimant") fails to receive benefits to which he believes he is entitled under this Agreement, such person may file with the Named Fiduciary, at the address noted above, a written claim for such benefits. If a claim for benefits is denied, the Claimant may within 60 days following such denial, file with the Named Fiduciary a written claim objecting to the denial of such benefits. The Claimant or his representative may review the Agreement and any other documents which relate to the claim and may submit written comments to the Named Fiduciary. The Named Fiduciary shall render a written decision concerning the claim not later than 90 days after receipt of such claim. If the claim is denied, in whole or in part, such decision shall include (a) the reason or reasons for the denial; (b) a reference to the Agreement provisions constituting the basis of the denial; (c) a description of any additional material or information necessary for the Claimant to perfect his claim; (d) an explanation as to why such information or material is necessary; and (e) an explanation of the Agreement's appeal procedure. The claim shall be deemed to be denied if no response is received by the end of the review period. The Claimant may file with the Named Fiduciary a written notice of appeal of the Named Fiduciary's decision not later than 60 days after receiving the Named Fiduciary's written decision. The Named Fiduciary shall render a written decision on the appeal not later than 60 days after the appeal. Such decision shall include the specific reasons for the decision, including a reference to the Agreement's specific provisions where appropriate. The Named Fiduciary may extend the foregoing 90-day and 60-day periods during which it must respond to the Claimant by up to an additional 90 and 60 days respectively, if special circumstances beyond its control so require; provided that notice of such extension 6 is given to the Claimant prior to the expiration of the initial 90-day or 60-day period, as the case may be. XIII. PREMIUM WAIVER If the Policy contains a premium waiver provision, any premium waived shall be considered for all purposes of this Agreement as having been paid by Owner. XIV. AMENDMENT This Agreement may be amended at any time and from time to time by a written instrument executed by Employer, Owner and Insured, and, if appropriate, their respective heirs, successors, personal representatives and assignees. XV. AGREEMENT BINDING UPON PARTIES This Agreement shall bind Employer, Owner and Insured, and their respective heirs, successors, personal representatives and assignees. XVI. INSURER NOT A PARTY TO AGREEMENT Insurer is not responsible for the legal or tax validity or effect of this Agreement. Further, Insurer shall not be deemed a party to this Agreement but will respect the rights of the parties as herein developed upon receiving an executed copy of this Agreement. Insurer shall not be responsible to account for the actual premium contributions of the parties hereunder but shall rely solely upon the written declarations of the parties in any distributions or settlement of the Policy's lifetime or death values. Payment or other performance of its contractual obligations in accordance with the Policy provisions shall fully discharge Insurer from any and all liability. XVII. CONTROLLING STATE LAW This Agreement shall be subject to and construed under the laws of the State of Texas, to the extent not preempted by ERISA. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] 7 This Amended and Restated Split-Dollar Life Insurance Agreement is executed and effective as of the date first above written. INSURED: /s/ James H. Clark, Jr. -------------------------------------------- James H. Clark, Jr. OWNER: /s/ James Howard Cullum Clark -------------------------------------------- James Howard Cullum Clark EMPLOYER: VARI-LITE HOLDINGS, INC. By: /s/ Michael P. Herman --------------------------------------- Michael P. Herman Vice President--Finance 8 INSURER: Massachusetts Mutual Life Insurance Company POLICY: Whole Life Policy with Supplemental Insurance Option; Policy Number 8592938 INSURED: James H. Clark, Jr. OWNER: James Howard Cullum Clark EMPLOYER: Vari-Lite Holdings, Inc. EFFECTIVE DATE: December 12, 1990 This Amended and Restates Split-Dollar Life Insurance Agreement was recorded by Insurer on August 12, 1997. By: /s/ Cheryl M. Foster ---------------------------------- Name: Cheryl M. Foster -------------------------------- Title: Assistant Secretary ------------------------------- 9 EX-10.20 13 EXHIBIT 10.20 VARI-LITE INTERNATIONAL, INC. 1997 OMNIBUS PLAN 1. PURPOSES OF THE PLAN The Vari-Lite International, Inc. 1997 Omnibus Plan (the "Plan") maintained by Vari-Lite International, Inc. (the "Company") is intended to promote the growth and general prosperity of the Company and its Subsidiaries by offering incentives to its key employees and non-employee directors who are primarily responsible for the growth of the Company and its Subsidiaries and to attract and retain qualified employees and non-employee directors and thereby benefit its stockholders based on the growth of the Company. Awards granted under the Plan may be (a) stock options ("Options") which may be designated as (i) Nonqualified Stock Options ("NQSOs") not intended to qualify as Incentive Stock Options ("ISOs") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) ISOs; (b) stock appreciation rights ("SARs"); (c) restricted stock awards ("Restricted Stock"); (d) performance awards ("Performance Awards"); or (e) other forms of stock-based incentive awards, as hereinafter defined (collectively, the "Awards"). For purposes of the Plan, "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain, and "Subsidiaries" means more than one of any such corporations. 2. SHARES OF STOCK SUBJECT TO THE PLAN The Awards may be granted with respect to Class B Common Stock, $0.10 par value of the Company (the "Common Stock"). Shares delivered upon exercise of the Awards, at the election of the Committee (as hereinafter defined in Section 3), may be Common Stock that is authorized but previously unissued or stock reacquired by the Company or both. Subject to the provisions of Section 15, the maximum number of shares of Common Stock with respect to which the Awards may be granted under the Plan, including to any individual employee, shall not exceed 212,558. Any shares subject to an Award under the Plan, which Award for any reason expires or is terminated unexercised as to such shares, shall again be available for the grant of other Awards under the Plan; provided, however, that forfeited Common Stock or other securities shall not be available for further Awards if the Participant (as hereinafter defined in Section 4) has realized any benefits of ownership from such Common Stock. 3. ADMINISTRATION Except as provided in the following sentence, the Plan shall be administered by a committee (the "Committee") composed of not less than two members of the Board of Directors of the Company (the "Board"), each of whom shall, unless determined otherwise by the Board, qualify as both outside directors within the meaning of Prop. Treas. Reg. Section 1.162-27(e)(3) and non-employee directors within the meaning of Item 404 of Regulation S-K of the Securities Act of 1933, as amended. The entire Board shall grant Awards to members of the Committee and perform the functions of the Committee under the Plan related to such Awards. If a Committee has not been appointed by the Board, the functions of the Committee provided for herein shall be performed by the entire Board. Subject to the provisions of the Plan, the Committee shall have full discretion and the exclusive power to (i) select the employees and non-employee directors who will participate in the Plan and to grant Awards to such employees and non-employee directors, (ii) determine the time at which such Awards shall be granted and any terms and conditions with respect to such Awards as shall not be inconsistent with the provisions of the Plan, and (iii) resolve all questions relating to the administration of the Plan. The interpretation of and application by the Committee of any provision of the Plan shall be final and conclusive. The Committee, in its sole discretion, may establish such rules and guidelines relating to the Plan as it may deem desirable. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. The Committee shall keep minutes of its actions under the Plan. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Awards granted hereunder. 4. ELIGIBILITY The employees who shall be eligible to participate in the Plan shall be officers, management and such other key employees of the Company and its Subsidiaries as the Committee may from time to time determine. Non-employee directors of the Company or of any Subsidiary shall also be eligible to participate in the Plan. An employee or non-employee director who has been granted an Award in one year shall not necessarily be entitled to be granted an Award in any subsequent year. An individual who is granted an Award under the Plan shall be referred to herein as a "Participant." 2 5. STOCK OPTIONS The Committee may grant Options, as follows, which shall be evidenced by a stock option agreement and may be designated as (i) NQSOs or (ii) ISOs: (a) NQSOS. (i) A NQSO is a right to purchase a specified number of shares of Common Stock during such time as the Committee may determine, not to exceed ten years, at a price determined by the Committee that, unless deemed otherwise by the Committee, is not less than the fair market value of the Common Stock on the date the option is granted. (ii) The exercise price of the Common Stock subject to the NQSO may be paid in cash. At the discretion of the Committee, the exercise price may also be paid by the tender of Common Stock or through a combination of Common Stock and cash or through such other means as the Committee determines are consistent with the Plan's purpose and applicable law. No fractional shares of Common Stock will be issued or accepted. (iii) Without limiting the foregoing, to the extent permitted by law (including relevant state law), (A) the Committee may agree to accept, as full or partial payment of the exercise price of Common Stock issued upon the exercise of the NQSO, a promissory note of the Participant exercising the NQSO evidencing the person's obligation to make future cash payments to the Company, which promissory note shall be payable as determined by the Committee (but in no event later than five years after the date thereof), shall be secured by a pledge of the shares of Common Stock purchased and shall bear interest at a rate established by the Committee and (B) the Committee may permit the Participant exercising the NQSO, either on a selective or aggregate basis, to simultaneously exercise the NQSO and sell the shares of Common Stock acquired, pursuant to a brokerage or similar arrangement approved in advance by the Committee, and use the proceeds from sale as payment of the exercise price of such Common Stock. (b) ISOS. (i) An ISO is an Award in the form of an Option to purchase Common Stock that complies with the requirements of Code Section 422 or any successor section. No ISO may be granted under the Plan to a non-employee director. (ii) The aggregate fair market value (determined at the time of the grant of the ISO) of the shares of Common Stock subject to ISOs granted under 3 this Plan and all incentive stock option plans of the Company or its Subsidiaries which are exercisable by one employee for the first time during a particular calendar year shall not exceed $100,000. For this purpose, the fair market value (determined at the respective date of grant of each ISO) of the Common Stock purchasable by exercise of an ISO (or an installment thereof) shall be counted against the $100,000 annual limitation for an employee only for the calendar year such stock is first purchasable under the terms of the ISO. To the extent that ISOs granted to an employee exceed the limitation set forth in the preceding sentences, ISOs granted last shall be treated as NQSOs. (iii) No ISO may be exercisable more than: (A) in the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company and its Subsidiaries on the date the ISO is granted (a "Ten Percent Stockholder"), five years after the date the ISO is granted; and (B) in the case of an employee who is not a Ten Percent Stockholder and in the case of a non-employee director, ten years after the date the ISO is granted. (iv) The exercise price of any ISO shall be determined by the Committee and shall be not less than: (A) in the case of an employee who is a Ten Percent Stockholder, not less than 110 percent of the fair market value of the Common Stock subject to the ISO on the date the ISO is granted; and (B) in the case of an employee who is not a Ten Percent Stockholder and in the case of a non-employee director, the fair market value of the Common Stock subject to the ISO on the date the ISO is granted. (v) The Committee may provide that the exercise price under an ISO may be paid by one or more of the methods available for paying the exercise price of an NQSO. 4 6. STOCK APPRECIATION RIGHTS (i) An SAR is a right to receive, upon surrender of the right, but without payment, an amount payable in cash. (ii) The amount payable with respect to each SAR shall be equal in value to the applicable percentage of the excess, if any, of the fair market value of a share of Common Stock on the exercise date over the exercise price of the SAR. The exercise price of the SAR shall be determined by the Committee and shall not be less than the fair market value of a share of Common Stock on the date the SAR is granted. (iii) In the case of an SAR granted in tandem with an ISO to an employee who is a Ten Percent Stockholder, the amount payable with respect to each SAR shall be equal in value to the applicable percentage of the excess, if any, of the fair market value of a share of Common Stock on the exercise date over the exercise price of the SAR, which exercise price shall not be less than 110% of the fair market value of a share of Common Stock on the date the SAR is granted. (iv) The applicable percentage and exercise price shall be established by the Committee at the time the SAR is granted. 7. RESTRICTED STOCK Restricted Stock is Common Stock of the Company that is issued to a Participant at a price determined by the Committee, which price per share may not be less than par value of the Common Stock, and is subject to restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine. 8. PERFORMANCE AWARDS A Performance Award granted under the Plan (i) may be denominated or payable in cash, Common Stock (including without limitation, Restricted Stock), other securities or other Awards and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan and any applicable Award agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. 5 9. OTHER STOCK-BASED INCENTIVE AWARDS The Committee may from time to time grant Awards under this Plan that provide the Participant with the right to purchase Common Stock or that are valued by reference to the fair market value of the Common Stock (including, but not limited to, phantom securities or dividend equivalents). Such Awards shall be in a form determined by the Committee (and may include terms contingent upon a change of control of the Company); provided that such Awards shall not be inconsistent with the terms and purposes of the Plan. The Committee will determine the price of any such Award and may accept any lawful consideration. 10. EXERCISE OF OPTIONS The Committee may provide for the exercise of Options in installments and upon such terms, conditions and restrictions as it may determine. The Committee may provide for termination of an Option in the case of termination of employment or directorship or any other reason. An Option granted hereunder shall be exercisable, in whole or in part, only by written notice delivered in person or by mail to the Secretary of the Company at its principal office, specifying the number of shares of Common Stock to be purchased and accompanied by payment thereof and otherwise in accordance with the stock option agreement pursuant to which the Option was granted. For purposes of this Plan, the fair market value of a share of the Common Stock shall be (i) if the Common Stock is traded on an established securities market, the closing price of such Common Stock for the day before the Option is granted, except for the exercise price of the initial Options to be granted under the Plan which will be granted contingent on the Company's completion of its initial public offering at an exercise price equal to the initial public offering price, and (ii) if the Common Stock is not so traded, an amount determined by the Committee in good faith and based on such factors as it deems relevant to such determination. 11. RIGHTS IN EVENT OF DEATH OR DISABILITY If a Participant dies or becomes disabled (within the meaning of Code Section 22(e)(3)) prior to termination of his right to exercise an Option in accordance with the provisions of his stock option agreement without having totally exercised the Option, the stock option agreement may provide that the Option may be exercised, to the extent of the shares with respect to which the Option could have been exercised by the Participant on the date of his death or disability, by (i) the Participant's estate or by the person who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of the Participant or (ii) the Participant or his personal representative in the event of the Participant's disability, 6 provided the Option is exercised prior to the date of its expiration or not more than six months from the date of the Participant's death or disability, whichever first occurs. The date of disability of a Participant shall be determined by the Committee. 12. AWARD AGREEMENTS Each Award granted under the Plan shall be evidenced by an Award agreement between the employee or non-employee director to whom the Award is granted and the Company, setting forth the number of shares of Common Stock, SARs or units subject to the Award and such other terms and conditions applicable to the Award not inconsistent with the Plan as the Committee may deem appropriate. The Award agreement for an Option shall also be referred to as a stock option agreement. 13. TAX WITHHOLDING The Committee may establish such rules and procedures as it considers desirable in order to satisfy any obligation of the Company to withhold federal income taxes or other taxes with respect to any Award made under the Plan. Such rules and procedures may provide (i) in the case of Awards paid in shares of Common Stock, that the person receiving the Award may satisfy the withholding obligation by instructing the Company to withhold shares of Common Stock otherwise issuable upon exercise of such Award in order to satisfy such withholding obligation and (ii) in the case of an Award paid in cash, that the withholding obligation shall be satisfied by withholding the applicable amount and paying the net amount in cash to the Participant. 14. CHANGE OF CONTROL For the purpose of the Plan, a "Change of Control" shall be deemed to have occurred if (i) the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation are owned in the aggregate by the former stockholders of the Company; (ii) the Company sells all or substantially all of its assets to another corporation, which is not a wholly-owned subsidiary of the Company; (iii) any person or group within the meaning of the Securities Exchange Act of 1934, as amended, acquires (together with voting securities of the Company held by such person or group) 30% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record) pursuant to any transaction or combination of transactions; (iv) there is a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting 7 requirements; or (v) the individuals who, at the beginning of any period of twelve consecutive months, constituted the Board cease, for any reason, to constitute at least a majority thereof, unless the nomination for election or re-election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an initial public offering of the Company's capital stock or the issuance of capital stock by the Company approved by a vote of at least two-thirds of the directors then in office. In the event a Change of Control occurs, then, notwithstanding any provision of the Plan or of any provisions of any Award agreements entered into between the Company and any Participant to the contrary, all Awards that have not expired and which are then held by any Participant (or the person or persons to whom any deceased Participant's rights have been transferred) shall, as of such Change of Control, become fully and immediately vested and exercisable and may be exercised for the remaining term of such Awards. 15. DILUTION OR OTHER ADJUSTMENT If the Company is a party to any merger or consolidation, or undergoes any merger, consolidation, separation, reorganization, liquidation or the like, the Committee shall have the power to make arrangements, which shall be binding upon the holders of unexpired Awards, for the substitution of new Awards for, or the assumption by another corporation of, any unexpired Awards then outstanding hereunder. In addition, in the event of a reclassification, stock split, combination of shares, separation (including a spin-off), dividend on shares of the Common Stock payable in stock or other similar change in capitalization or in corporate structure, the Committee shall conclusively determine the appropriate adjustment in (i) the exercise prices of outstanding Options and SARs, (ii) the number and kind of shares or other securities as to which outstanding Awards shall be exercisable and (iii) the aggregate number of shares with respect to which Awards may be granted under the Plan. 16. TRANSFERABILITY No Award granted under this Plan shall be sold, pledged, assigned or transferred other than by will or the laws of descent and distribution, and except as provided in Section 11, Awards shall be exercisable during the Participant's lifetime only by the Participant. 8 17. AMENDMENT OR TERMINATION The Committee may at any time amend, suspend or terminate the Plan; provided, however, that (i) no change in any Awards previously granted may be made without the consent of the holder thereof and (ii) no amendment (other than an amendment authorized by Section 15) may be made increasing the aggregate number of shares of the Common Stock with respect to which Awards may be granted or changing the class of employees eligible to receive Awards hereunder, without the approval of the holders of a majority of the outstanding voting shares of the Company. 18. GENERAL PROVISIONS No Award may be exercised by a Participant if such exercise, and the receipt of cash or stock thereunder, would be, in the opinion of counsel selected by the Company, contrary to law or the regulations of any duly constituted authority having jurisdiction over the Plan. A bona fide leave of absence approved by a duly constituted officer of the Company or any of its Subsidiaries shall not be considered interruption or termination of service of any Participant for any purposes of the Plan or Awards granted thereunder, except that no Awards may be granted to a Participant while he is on a bona fide leave of absence. No Participant shall have any rights as a stockholder with respect to any shares subject to Awards granted to him under the Plan prior to the date as of which he is actually recorded as the holder of such shares upon the stock records of the Company. Nothing contained in the Plan or in Awards granted thereunder shall confer upon any employee or non-employee director any right to (i) continue in the employ of the Company or any of its Subsidiaries or continue serving on the Board or (ii) interfere in any way with the right of the Company or any of its Subsidiaries to terminate his employment or service on the Board at any time. Any Award agreement may provide that stock issued upon exercise of any Awards may be subject to such restrictions, including, without limitation, restrictions as to transferability and restrictions constituting substantial risks of forfeiture as the Committee may determine at the time such Award is granted. 19. EFFECTIVE DATE The Plan shall become effective on the date of its adoption by the Board, subject to approval of the Plan by the holders of a majority of the outstanding voting shares of the Company within 12 months after the date of the Plan's adoption by the Board. In the event of the failure to obtain such stockholder approval, the Plan shall 9 be null and void and the Company shall have no liability thereunder. No Award granted under the Plan shall be exercisable until such stockholder approval has been obtained. 20. TERMINATION No Award may be granted under the Plan on or after the date which is ten years following the effective date specified in Section 19, but Awards previously granted may be exercised in accordance with their terms. 21. GOVERNING LAW The Plan and all Award agreements shall be construed and enforced in accordance with an governed by the laws of the State of Texas. 10 VARI-LITE INTERNATIONAL, INC. INCENTIVE STOCK OPTION AGREEMENT This Agreement, dated as of _______, 199____, is by and between Vari-Lite International, Inc. (the "Company") and _____________________ (the "Optionee"). WITNESSETH: WHEREAS, pursuant to the Vari-Lite International, Inc. 1997 Omnibus Plan (the "Plan"), the Company has determined that its interests will be advanced by providing an incentive to the Optionee to acquire a proprietary interest in the Company and, as a stockholder, to share in its success, with added incentive to work effectively for and in the Company's interest; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereby agree as follows: SECTION 1 GRANT The Company hereby grants to the Optionee, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option (the "Option") to purchase _____________ shares of authorized but unissued Class B Common Stock, $0.10 par value ("Common Stock"), of the Company on the terms and conditions herein set forth in this Agreement. This Option is intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION 2 PRICE The exercise price of the shares of Common Stock subject to this Option shall be equal to the fair market value of the shares on the date of the grant or $__________ per share. SECTION 3 WHEN EXERCISABLE The Option may be exercised by the Optionee, in whole or part, at any time and from time to time within a period of _____ years from the day and year first written above. The Option may not be exercised prior to one year from the date of this Agreement. Thereafter, the Option shall be exercisable only as follows: (a) Percentage of Total Shares Subject to Vesting Vesting Date Expiration Date ------------------ ------------ --------------- 20% 40% 60% 80% 100% (b) At any time after five years from the date of this Agreement, the Option shall be exercisable in full except to the extent that it has already been exercised. SECTION 4 HOW EXERCISABLE Subject to such administrative regulations as the committee of the Board of Directors of the Company (the "Board") appointed to administer the Plan (the "Committee") may from time to time adopt, the Optionee or beneficiary shall, in order to exercise this Option: (a) give written notice to the Committee of the exercise price and the number of shares which he will purchase and furnish an undertaking to make payment of such exercise price in United States dollars before issuance of such shares; or (b) give written notice to the Committee of the exercise price and the number of shares for which he is requesting approval from the Committee to tender other shares of Common Stock in exchange for Option shares. If a Committee has not been appointed by the Board to administer the Plan, for purposes of this Agreement, "Committee" shall mean the entire Board. Any notice shall include an undertaking to furnish or execute such documents as the Committee in its discretion shall deem necessary (i) to evidence such exercise, in whole or in part, of the Option, (ii) to determine whether registration is then required under the Securities Act of 1933, as amended, or any other law, as then in effect, and (iii) to comply with or satisfy the requirements of the Securities Act of 1933, as amended, or any other law, as then in effect. In addition, if an exercise under paragraph (b) above is requested, the notice shall include an undertaking to tender to the Company (i) promptly after receipt of denial by the Committee of the paragraph (b) request, full payment in United States dollars of the Option exercise price for the shares being purchased hereunder or (ii) promptly after receipt of approval by the Committee of exercise of this Option or portion thereof by payment of Common Stock, full payment in Common Stock in exchange for the shares being purchased hereunder. 2 The Committee shall advise the Optionee (or beneficiary, if applicable) in writing, within 20 business days after receipt by the Committee of notice of exercise by the Optionee (or beneficiary), whether the Committee approves the exchange of Common Stock for Option stock being purchased. The Company must receive full payment in United States dollars or the appropriate number of shares of Common Stock, whichever applies, of the Option exercise price within five business days after the date of the Committee's notice, unless the Committee extends the time of payment. If the Committee approves payment by the Optionee by tendering shares of Common Stock, the Committee may also, upon confirming that the Optionee owns the number of additional shares being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being tendered upon the exercise and return to the Optionee (or not require surrender of) the certificate for the shares being tendered upon the exercise. If the Optionee does not elect or is denied the right to exercise the Option by tendering shares of Common Stock, the Committee may permit the Optionee to exercise the Option by delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the Option exercise price; provided that the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. SECTION 5 TRANSFER This Option shall not be transferable by the Optionee in any way other than by will and the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by him. Any other attempted assignment, transfer, pledge, hypothecation or other disposition of the Option shall be void and have no effect unless in accordance with the terms set forth herein. SECTION 6 TERMINATION OF OPTION (a) Upon termination of employment with the Company and its Subsidiaries of the Optionee for any reason other than death, disability (as defined in Paragraph (c) of this Section 6) or "cause" (as defined in Paragraph (b) of this Section 6), whether by reason of resignation or discharge, the Option shall terminate on the earlier of (i) the date of its expiration under Section 3 or (ii) three months from the date on which the Optionee's employment terminated. (b) If the Company terminates the employment of the Optionee for "cause", the Option shall terminate on the date his employment is terminated. For purposes of this Agreement, the Optionee's employment shall be deemed terminated for "cause" if his employment terminates for 3 (i) willful violation by the Optionee of any rule or regulation that may be established from time to time for the conduct of the Company's business, (ii) failure or inability by the Optionee for any reason to devote his full business time to the Company's business, (iii) gross neglect by the Optionee of the interests of the Company, (iv) breach of fiduciary duty by the Optionee involving personal profit, (v) willful violation by the Optionee of any law, rule or regulation (other than traffic violations or similar minor offenses), or (vi) material breach by the Optionee of any provision of an agreement between Optionee and the Company or its Subsidiaries (as defined in Section 1 of the Plan). (c) The Option shall terminate on the earlier of (i) the date of its expiration under Section 3 or (ii) six months from the date of the Optionee's permanent disability, provided: (i) the Optionee at the time of his disability was in the employ of the Company or any of its Subsidiaries and (ii) the Optionee was entitled to exercise a portion or all of the Option on the day immediately prior to his disability. For purposes of this Agreement, "disability" shall have the meaning set forth in Code Section 22(e)(3). (d) If the Optionee dies (i) while he is employed by the Company or any of its Subsidiaries, or (ii) after termination of employment but within the period provided in Paragraph (a) or (c) of this Section 6, the person or persons to whom the Optionee's rights are transferred by will or the laws of descent and distribution may exercise that portion of the Option that is exercisable at the time of death for a period ending on the earlier of (i) the date of its expiration under Section 3 or (ii) six months after the date of death. SECTION 7 WITHHOLDING TAXES The Company shall have the right to retain and withhold from any payment, under the Option, any amount that is to be withheld or otherwise deducted and paid with respect to such payment. SECTION 8 ADJUSTMENTS TO OPTION (a) Subject to any required action by the Committee and the Company's stockholders, the number of shares provided for in the Option and the exercise price per share thereof may be proportionately adjusted as determined by the Committee for any increase or decrease in the number of issued shares of the Company resulting from the payment of a share dividend, a share split or any transaction which is a "corporate transaction" (as defined in the Treasury regulations promulgated under or applicable to Code Section 424). (b) In the event of a Change of Control (as defined in Section 14 of the Plan), any and all outstanding Options not fully vested shall automatically vest in full and shall be immediately exercisable. The date on which such accelerated vesting and immediate exercisability shall occur shall be the date of the occurrence of the Change of Control. 4 (c) In the event of a change in the Company's shares which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be shares within the meaning of the Plan. (d) Except as herein before expressly provided in Paragraphs (a) and (b) of this Section 8, the Optionee shall have no rights by reason of any subdivision or consolidation of shares of any class or payment of any share dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, consolidation or spin-off of assets or stock of another corporation, and any issuance by the Company of shares of any class, or securities convertible into shares of any class, shall not affect the Option, and no adjustment by reason thereof shall be made with respect to the number or exercise price of the Company's shares subject to the Option. The grant of the Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 9 IMPACT ON OTHER BENEFITS The value of the Option (either on the date of grant of the Option or at the time the shares are vested) shall not be includable as compensation or earnings to the Optionee for purposes of any other benefit plan offered by the Company. SECTION 10 ADMINISTRATION The Committee shall have full authority and discretion (subject only to the express provisions of the Plan) to decide all matters relating to the administration and interpretation of the Plan and this Agreement. All such Committee determinations shall be final, conclusive and binding upon the Company, the Optionee and any and all interested parties. SECTION 11 AGREEMENT TO CONTINUE IN EMPLOYMENT Nothing in the Plan or this Agreement shall confer on the Optionee any right to continue in the employ of the Company or any of its Subsidiaries or interfere in any way with the right of the Company or any of its Subsidiaries to terminate his employment. 5 SECTION 12 SUBJECT TO PLAN; AMENDMENT(S) This Agreement and the grant and exercise thereof are subject to the terms of the Plan, as amended, which is incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, this Option is subject to any rules and regulations promulgated pursuant to the Plan, now or hereinafter in effect. Except as provided in Sections 14 and 15 of the Plan and Section 8 of this Agreement, this Option may not in any way be amended or terminated without the Optionee's written consent. SECTION 13 FORCE AND EFFECT The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. SECTION 14 GOVERNING LAW This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas. IN WITNESS THEREOF, the parties have signed this Agreement as of the date first above written. VARI-LITE INTERNATIONAL, INC. By: ---------------------------------- H.R. Brutsche III, President ---------------------------------- Optionee 6 VARI-LITE INTERNATIONAL, INC. NONQUALIFIED STOCK OPTION AGREEMENT This Agreement, dated as of _______, 199____, is by and between Vari-Lite International, Inc. (the "Company") and _____________________ (the "Optionee"). WITNESSETH: WHEREAS, pursuant to the Vari-Lite International, Inc. 1997 Omnibus Plan (the "Plan"), the Company has determined that its interests will be advanced by providing an incentive to the Optionee to acquire a proprietary interest in the Company and, as a stockholder, to share in its success, with added incentive to work effectively for and in the Company's interest; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereby agree as follows: SECTION 1 GRANT The Company hereby grants to the Optionee, as a matter of separate agreement and not in lieu of salary or any other compensation for services, the right and option (the "Option") to purchase _____________ shares of authorized but unissued Class B Common Stock, $0.10 par value ("Common Stock"), of the Company on the terms and conditions herein set forth in this Agreement. This Option is not intended to constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION 2 PRICE The exercise price of the shares of Common Stock subject to this Option shall be equal to the fair market value of the shares on the date of the grant or $__________ per share. SECTION 3 WHEN EXERCISABLE The Option may be exercised by the Optionee, in whole or part, at any time and from time to time within a period of _____ years from the day and year first written above. The Option may not be exercised prior to one year from the date of this Agreement. Thereafter, the Option shall be exercisable only as follows: (a) Percentage of Total Shares Subject to Vesting Vesting Date Expiration Date ------------------ ------------ --------------- 20% 40% 60% 80% 100% (b) At any time after five years from the date of this Agreement, the Option shall be exercisable in full except to the extent that it has already been exercised. SECTION 4 HOW EXERCISABLE Subject to such administrative regulations as the committee of the Board of Directors of the Company (the "Board") appointed to administer the Plan (the "Committee") may from time to time adopt, the Optionee or beneficiary shall, in order to exercise this Option: (a) give written notice to the Committee of the exercise price and the number of shares which he will purchase and furnish an undertaking to make payment of such exercise price in United States dollars before issuance of such shares; or (b) give written notice to the Committee of the exercise price and the number of shares for which he is requesting approval from the Committee to tender other shares of Common Stock in exchange for Option shares. If a Committee has not been appointed by the Board to administer the Plan, for purposes of this Agreement, "Committee" shall mean the entire Board. Any notice shall include an undertaking to furnish or execute such documents as the Committee in its discretion shall deem necessary (i) to evidence such exercise, in whole or in part, of the Option, (ii) to determine whether registration is then required under the Securities Act of 1933, as amended, or any other law, as then in effect, and (iii) to comply with or satisfy the requirements of the Securities Act of 1933, as amended, or any other law, as then in effect. In addition, if an exercise under paragraph (b) above is requested, the notice shall include an undertaking to tender to the Company (i) promptly after receipt of denial by the Committee of the paragraph (b) request, full payment in United States dollars of the Option exercise price for the shares being purchased hereunder or (ii) promptly after receipt of approval by the Committee of exercise of this Option or portion thereof by payment of Common Stock, full payment in Common Stock in exchange for the shares being purchased hereunder. 2 The Committee shall advise the Optionee (or beneficiary, if applicable) in writing, within 20 business days after receipt by the Committee of notice of exercise by the Optionee (or beneficiary), whether the Committee approves the exchange of Common Stock for Option stock being purchased. The Company must receive full payment in United States dollars or the appropriate number of shares of Common Stock, whichever applies, of the Option exercise price within five business days after the date of the Committee's notice, unless the Committee extends the time of payment. If the Committee approves payment by the Optionee by tendering shares of Common Stock, the Committee may also, upon confirming that the Optionee owns the number of additional shares being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being tendered upon the exercise and return to the Optionee (or not require surrender of) the certificate for the shares being tendered upon the exercise. If the Optionee does not elect or is denied the right to exercise the Option by tendering shares of Common Stock, the Committee may permit the Optionee to exercise the Option by delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the Option exercise price; provided that the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. SECTION 5 TRANSFER This Option shall not be transferable by the Optionee in any way other than by will and the laws of descent and distribution. During the lifetime of the Optionee, this Option shall be exercisable only by him. Any other attempted assignment, transfer, pledge, hypothecation or other disposition of the Option shall be void and have no effect unless in accordance with the terms set forth herein. SECTION 6 TERMINATION OF OPTION (a) Upon termination of employment or service as a director with the Company and its Subsidiaries of the Optionee for any reason other than death, disability (as defined in Paragraph (c) of this Section 6) or "cause" (as defined in Paragraph (b) of this Section 6), whether by reason of resignation or discharge, the Option shall terminate on the earlier of (i) the date of its expiration under Section 3 or (ii) three months from the date on which the Optionee's employment or service as a director terminated. 3 (b) If the Company terminates the employment or directorship of the Optionee for "cause," the Option shall terminate on the date his employment or directorship is terminated. For purposes of this Agreement, the Optionee's employment or directorship shall be deemed terminated for "cause" if his employment or directorship terminates for (i) willful violation by the Optionee of any rule or regulation that may be established from time to time for the conduct of the Company's business, (ii) failure or inability by the Optionee for any reason to devote his full business time to the Company's business, (iii) gross neglect by the Optionee of the interests of the Company, (iv) breach of fiduciary duty involving personal profit, (v) willful violation by the Optionee of any law, rule or regulation (other than traffic violations or similar minor offenses), or (vi) material breach by the Optionee of any provision of an agreement between Optionee and the Company or its Subsidiaries (as defined in Section 1 of the Plan). (c) The Option shall terminate on the earlier of (i) the date of its expiration under Section 3 or (ii) six months from the date of the Optionee's permanent disability, provided: (i) the Optionee at the time of his disability was in the employ or serving as a director of the Company or any of its Subsidiaries and (ii) the Optionee was entitled to exercise a portion or all of the Option on the day immediately prior to his disability. For purposes of this Agreement, "disability" shall have the meaning set forth in Code Section 22(e)(3). (d) If the Optionee dies (i) while he is employed by or serving as a director of the Company or any of its Subsidiaries, or (ii) after termination of employment or directorship but within the period provided in Paragraph (a) or (c) of this Section 6, the person or persons to whom the Optionee's rights are transferred by will or the laws of descent and distribution may exercise that portion of the Option that is exercisable at the time of death for a period ending on the earlier of (i) the date of its expiration under Section 3 or (ii) six months after the date of death. SECTION 7 WITHHOLDING TAXES The Company shall have the right to retain and withhold from any payment, under the Option, any amount that is to be withheld or otherwise deducted and paid with respect to such payment. At its discretion, the Company may require the Optionee, if he receives shares under a nonqualified stock option grant, to reimburse the Company for any taxes that are required to be withheld by the Company, and may withhold any distribution in whole or in part until the Company is so reimbursed. In lieu thereof, the Company shall have the right to withhold from any other cash amounts due (or to become due) to the Optionee an amount equal to such taxes required to be withheld by the Company to reimburse the Company for any such taxes, or the Company may retain and withhold a number of shares of Common Stock having a market value not less than the amount of such taxes and cancel (in whole or in part) any shares of Common Stock so withheld in order to reimburse the Company for any such taxes. 4 SECTION 8 ADJUSTMENTS TO OPTION (a) Subject to any required action by the Committee and the Company's stockholders, the number of shares provided for in the Option and the exercise price per share thereof may be proportionately adjusted as determined by the Committee for any increase or decrease in the number of issued shares of the Company resulting from the payment of a share dividend, a share split or any transaction which is a "corporate transaction" (as defined in the Treasury regulations promulgated under or applicable to Code Section 424). (b) In the event of a Change of Control (as defined in Section 14 of the Plan), any and all outstanding Options not fully vested shall automatically vest in full and shall be immediately exercisable. The date on which such accelerated vesting and immediate exercisability shall occur shall be the date of the occurrence of the Change of Control. (c) In the event of a change in the Company's shares which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be shares within the meaning of the Plan. (d) Except as herein before expressly provided in Paragraphs (a) and (b) of this Section 8, the Optionee shall have no rights by reason of any subdivision or consolidation of shares of any class or payment of any share dividend or any other increase or decrease in the number of shares of any class or by reason of any dissolution, liquidation, merger, consolidation or spin-off of assets or stock of another corporation, and any issuance by the Company of shares of any class, or securities convertible into shares of any class, shall not affect the Option, and no adjustment by reason thereof shall be made with respect to the number or exercise price of the Company's shares subject to the Option. The grant of the Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 9 IMPACT ON OTHER BENEFITS The value of the Option (either on the date of grant of the Option or at the time the shares are vested) shall not be includable as compensation or earnings to the Optionee for purposes of any other benefit plan offered by the Company. 5 SECTION 10 ADMINISTRATION The Committee shall have full authority and discretion (subject only to the express provisions of the Plan) to decide all matters relating to the administration and interpretation of the Plan and this Agreement. All such Committee determinations shall be final, conclusive and binding upon the Company, the Optionee and any and all interested parties. SECTION 11 AGREEMENT TO CONTINUE IN EMPLOYMENT OR SERVICE AS A DIRECTOR Nothing in the Plan or this Agreement shall confer on the Optionee any right to continue in the employ of the Company or any of its Subsidiaries or in the service of the Company as a director or interfere in any way with the right of the Company or any of its Subsidiaries to terminate his employment or directorship at any time. SECTION 12 SUBJECT TO PLAN: AMENDMENT(S) This Agreement and the grant and exercise thereof are subject to the terms of the Plan, as amended, which is incorporated herein by reference and made a part hereof, but the terms of the Plan shall not be considered an enlargement of any benefits under this Agreement. In addition, this Option is subject to any rules and regulations promulgated pursuant to the Plan, now or hereinafter in effect. Except as provided in Sections 14 and 15 of the Plan and Section 8 of this Agreement, this Option may not in any way be amended or terminated without the Optionee's written consent. SECTION 13 FORCE AND EFFECT The various provisions of this Agreement are severable in their entirety. Any determination of invalidity or unenforceability of any one provision shall have no effect on the continuing force and effect of the remaining provisions. SECTION 14 GOVERNING LAW This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas. 6 IN WITNESS THEREOF, the parties have signed this Agreement as of the date first above written. VARI-LITE INTERNATIONAL, INC. By: ----------------------------------- H.R. Brutsche III, President ----------------------------------- Optionee 7 EX-10.22 14 EXHIBIT 10.22 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED, EFFECTIVE JANUARY 1, 1996) TABLE OF CONTENTS ----------------- Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii Alphabetical Listing of Definitions. . . . . . . . . . . . . . . . . . . . . .vi Employees' Stock Equivalence Plan. . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I: DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II: EMPLOYEE PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE III: EMPLOYER AWARDS AND PARTICIPANT FORFEITURES. . . . . . . . . . 12 ARTICLE IV: TERMINATION OF SERVICE - PARTICIPANT VESTING. . . . . . . . . . 16 ARTICLE V: TIME AND METHOD OF PAYMENT OF BENEFITS . . . . . . . . . . . . . 18 ARTICLE VI: EMPLOYER ADMINISTRATIVE PROVISIONS. . . . . . . . . . . . . . . 20 ARTICLE VII: PARTICIPANT ADMINISTRATIVE PROVISIONS. . . . . . . . . . . . . 22 ARTICLE VIII: STOCK COMPENSATION COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . . . . . . 26 ARTICLE IX: MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE X: AMENDMENT AND TERMINATION. . . . . . . . . . . . . . . . . . . . 33 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE i INDEX Page ---- ARTICLE I: DEFINITIONS Sec. 1.01. Account................................................. 3 Sec. 1.02. Accounting Date......................................... 3 Sec. 1.03. Beneficiary............................................. 3 Sec. 1.04. Board of Directors...................................... 3 Sec. 1.05. Committee............................................... 3 Sec. 1.06. Company................................................. 3 Sec. 1.07. Compensation............................................ 3 Sec. 1.08. Disability.............................................. 4 Sec. 1.09. Effective Date.......................................... 4 Sec. 1.10. Eligible Employee....................................... 4 Sec. 1.11. Employee................................................ 4 Sec. 1.12. Employer................................................ 4 Sec. 1.13. Employer Securities..................................... 5 Sec. 1.14. ESOP.................................................... 5 Sec. 1.15. Forfeiture.............................................. 5 Sec. 1.16. Former Participant...................................... 5 Sec. 1.17. Hour of Service......................................... 5 Sec. 1.18. Late Retirement Date.................................... 6 Sec. 1.19 Normal Retirement Age................................... 6 Sec. 1.20. Participant............................................. 6 Sec. 1.21. Plan.................................................... 7 Sec. 1.22. Plan Administrator...................................... 7 Sec. 1.23. Plan Entry Date......................................... 7 Sec. 1.24. Plan Year............................................... 7 Sec. 1.25. Related Employer........................................ 7 Sec. 1.26. Retirement.............................................. 7 Sec. 1.27. Separation from Service................................. 7 Sec. 1.28. Service................................................. 8 Sec. 1.29. Stock Equivalence Unit.................................. 8 Sec. 1.30. Valuation Date.......................................... 8 Sec. 1.31. Vested.................................................. 8 ARTICLE II: EMPLOYEE PARTICIPANTS Sec. 2.01. Participation........................................... 9 Sec. 2.02. Year of Service - Participation......................... 9 Sec. 2.03. Break in Service - Participation........................ 9 Sec. 2.04. Participation upon Re-Employment........................ 9 Sec. 2.05. Ineligibility to Become a Participant................... 9 Sec. 2.06. Continuance as a Participant............................ 10 Sec. 2.07. Employment by Employer; Service with Newly Acquired Entities; Records of Employer.......................... 10 Sec. 2.08. Election Not to Participate............................. 11 ARTICLE III: EMPLOYER AWARDS AND PARTICIPANT FORFEITURES Sec. 3.01. Amount.................................................. 12 Sec. 3.02. Determination of Awards................................. 12 Sec. 3.03. Time of Crediting of Awards............................. 12 Sec. 3.04. Crediting to Accounts................................... 12 Sec. 3.05. Credit of Benefit....................................... 13 Sec. 3.06. Payment of Dividends.................................... 13 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE ii Sec. 3.07. Dilution Provisions..................................... 14 Sec. 3.08. Forfeiture.............................................. 14 Sec. 3.09. Determination of Fair Market Value...................... 14 Sec. 3.10. Substitute Awards....................................... 14 Sec. 3.11. Voting and Dividend Rights.............................. 14 Sec. 3.12. No Effect on Corporate Powers........................... 14 Sec. 3.13. No Claim or Right....................................... 15 ARTICLE IV: TERMINATION OF SERVICE - PARTICIPANT VESTING Sec. 4.01. Normal Retirement Age................................... 16 Sec. 4.02. Participant Disability or Death......................... 16 Sec. 4.03. Vesting Schedule........................................ 16 Sec. 4.04. Year of Service - Vesting............................... 16 Sec. 4.05. Break in Service - Vesting.............................. 16 Sec. 4.06. Included Years of Service - Vesting..................... 17 Sec. 4.07. Forfeiture Occurs....................................... 17 ARTICLE V: TIME AND METHOD OF PAYMENT OF BENEFITS Sec. 5.01. Terms and Conditions.................................... 18 Sec. 5.02. Conversion of Stock Equivalence Units; Payment of Appreciated Value...................................... 19 ARTICLE VI: EMPLOYER ADMINISTRATIVE PROVISIONS Sec. 6.01. Information to Committee................................ 20 Sec. 6.02. No Liability............................................ 20 Sec. 6.03. Indemnity of Certain Fiduciaries........................ 20 Sec. 6.04. Amendment to Vesting Schedule........................... 20 Sec. 6.05. Applicable Law.......................................... 21 ARTICLE VII: PARTICIPANT ADMINISTRATIVE PROVISIONS Sec. 7.01. Beneficiary Designation................................. 22 Sec. 7.02. No Beneficiary Designation.............................. 22 Sec. 7.03. Personal Data to Committee.............................. 22 Sec. 7.04. Address for Notification................................ 23 Sec. 7.05. Assignment or Alienation................................ 23 Sec. 7.06. Litigation Against the Plan............................. 24 Sec. 7.07. Appeal Procedure for Denial of Benefits................. 24 ARTICLE VIII: STOCK COMPENSATION COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS Sec. 8.01. Members' Compensation, Expenses......................... 26 Sec. 8.02. Term.................................................... 26 Sec. 8.03. Powers.................................................. 26 Sec. 8.04. General................................................. 26 Sec. 8.05. Manner of Action........................................ 27 Sec. 8.06. Authorized Representative............................... 27 Sec. 8.07. Interested Member....................................... 27 Sec. 8.08. Individual Accounts..................................... 27 Sec. 8.09. Value of Participant's Account.......................... 27 Sec. 8.10. Adjustments of Participants' Accounts................... 28 Sec. 8.11. Account Charged......................................... 28 Sec. 8.12. Unclaimed Account Procedure............................. 28 Sec. 8.13. Records and Statements.................................. 28 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE iii Sec. 8.14. Valuation of Accounts................................... 28 Sec. 8.15. Withholding for and Payment of Taxes.................... 28 ARTICLE IX: MISCELLANEOUS Sec. 9.01. Evidence................................................ 30 Sec. 9.02. No Responsibility for Employer Action................... 30 Sec. 9.03. Fiduciaries Not Insurers................................ 30 Sec. 9.04. Waiver of Notice........................................ 30 Sec. 9.05. Successors.............................................. 30 Sec. 9.06. Word Usage.............................................. 30 Sec. 9.07. State Law............................................... 31 Sec. 9.08. Employment Not Guaranteed............................... 31 Sec. 9.09. Severability............................................ 31 Sec. 9.10. Contrary Provisions..................................... 31 Sec. 9.11. Notice to Employees..................................... 31 Sec. 9.12. Agreement of Participants............................... 31 Sec. 9.13. Action by Employers..................................... 31 Sec. 9.14. Adoption of the Plan by a Related Employer.............. 31 Sec. 9.15. Disassociation of Any Employer from Plan................ 32 Sec. 9.16. Company Voting Rights................................... 32 ARTICLE X: AMENDMENT AND TERMINATION Sec. 10.01. Amendment by Company.................................... 33 Sec. 10.02. Effective Date of Amendment............................. 33 Sec. 10.03. Discontinuance.......................................... 33 Sec. 10.04. Full Vesting on Termination............................. 33 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE iv ALPHABETICAL LISTING OF DEFINITIONS DEFINITION SEC.# - ---------- ----- Account............................... 1.01 Accounting Date....................... 1.02 Beneficiary........................... 1.03 Board of Directors.................... 1.04 Committee............................. 1.05 Company............................... 1.06 Compensation.......................... 1.07 Disability............................ 1.08 Effective Date........................ 1.09 Eligible Employee..................... 1.10 Employee.............................. 1.11 Employer.............................. 1.12 Employer Securities................... 1.13 Employment Commencement Date.......... 2.02 ESOP.................................. 1.14 Forfeiture............................ 1.15 DEFINITION SEC.# - ---------- ----- Former Participant.................... 1.16 Hour of Service....................... 1.17 Late Retirement Date.................. 1.18 Normal Retirement Age................. 1.19 Participant........................... 1.20 Plan.................................. 1.21 Plan Administrator.................... 1.22 Plan Entry Date....................... 1.23 Plan Year............................. 1.24 Related Employer...................... 1.25 Retirement............................ 1.26 Separation From Service............... 1.27 Service............................... 1.28 Stock Equivalence Unit................ 1.29 Valuation Date........................ 1.30 Vested................................ 1.31 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE vi VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED, EFFECTIVE JANUARY 1, 1996) VARI-LITE INTERNATIONAL, INC. (formerly VARI-LITE HOLDINGS, INC.), a corporation organized under the laws of the State of Texas pursuant to articles of incorporation filed with the Secretary of State of the State of Texas, established the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN on September 27, 1995, to be effective on January 1, 1995 for the benefit of certain Employees (and their Beneficiaries) of an Employer domiciled outside of the United States of America. The VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN, as amended and restated, shall be known as the VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN, effective January 1, 1996. It is intended that the Plan continue to be (1) a nonqualified employee retirement plan known as a phantom stock plan under United States tax laws and (2) a plan maintained outside of the United States primarily for the benefit of persons, substantially all of whom are nonresident aliens, thereby satisfying the exception from the application to the Plan of the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), provided in ERISA Section 4(b)(4). PURPOSES: The purposes of this Plan are as follows: (1) to reward Eligible Employees of an Employer domiciled outside of the United States for their loyal and faithful service and to provide such Employees with an opportunity to share in the growth and appreciation of the Company; (2) to further the long-term growth in earnings of the Company by offering long-term incentives in addition to current compensation to those Employees of an Employer domiciled outside of the United States who will be largely responsible for such growth; (3) to induce Employees of an Employer domiciled outside of the United States to remain in the employ of the Employer; and (4) to encourage Employees of an Employer domiciled outside of the United States to secure or increase on reasonable terms their beneficial interests in the Company. The benefits provided by this Plan will be in addition to the benefits such Employees are entitled to receive under any other announced programs of the Company (or an Employer). The original Plan, known as VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN, was adopted on September 25, 1997, effective January 1, 1995. The VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN is a substitution and amendment of the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN, in restated form. There is no cost to an Employee to participate in the Plan. A participating Employee will be eligible to receive "Units" credited to his Account established in the Plan. As "Units" are VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 1 credited to a Participant's Account, such Participant receives a contractual right that such Units will be "cashed out" in the future. No actual shares of stock are set aside. The value of each Unit will be equal in value to one (1) share of common stock of VARI-LITE INTERNATIONAL, INC. on the date such Unit is credited to a Participant's Account. Participants will share in the appreciation and depreciation of the Units credited to his Account. The number of Units to be contributed, if any, will be determined each Plan Year by the Board of Directors of the Company. Benefits ultimately available to Participants depends on the performance of VARI-LITE INTERNATIONAL, INC. as reflected in the value of its stock. WITNESSETH: WHEREAS, VARI-LITE HOLDINGS, INC., established the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (the "PLAN") on September 27, 1995, effective January 1, 1995, for the administration and distribution of awards made by the Company for the purpose of providing retirement benefits for Eligible Employees (and their Beneficiaries) employed by an Employer domiciled outside of the United States that adopts the Plan (hereinafter referred to as an "Employer"); WHEREAS, VARI-LITE HOLDINGS, INC. changed its name to VARI-LITE INTERNATIONAL, INC., effective December 27, 1995; WHEREAS, VARI-LITE INTERNATIONAL, INC. pursuant to Section 10.01 of the PLAN hereby amends the PLAN, in restated form, effective January 1, 1996; WHEREAS, VARI-LITE INTERNATIONAL, INC. hereby changes the name of the PLAN to be known as the VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN, effective January 1, 1996; WHEREAS, the provisions of the PLAN, as restated effective January 1, 1996, apply solely to an Employee whose employment with an Employer terminates on or after the Effective Date of the Plan. If an Employee's employment with an Employer terminates prior to the Effective Date, that Employee is not entitled to benefits under the Plan; WHEREAS, VARI-LITE INTERNATIONAL, INC. continues this Plan to give Employees of an Employer the opportunity to participate in the Company's success and provide an incentive to Employees to take an active interest in the profitability of the Company and his productivity because all Employees have an impact on the Company's success as reflected in the value of the common stock of VARI-LITE INTERNATIONAL, INC.; NOW, THEREFORE, the Company establishes the following terms and conditions: VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 2 ARTICLE I DEFINITIONS Sec. 1.01. ACCOUNT. "Account" means the separate Account which the Committee establishes and maintains for a Participant under the Plan and which is increased by the fair market value of Stock Equivalence Units credited to his Account, and increased (or decreased) by his share in the appreciation (or depreciation) of such Units. Sec. 1.02. ACCOUNTING DATE. "Accounting Date" is the last day of the Plan Year, and such additional date or dates determined from time to time by the Committee. Sec. 1.03. BENEFICIARY. "Beneficiary" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Committee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's or the Committee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan. Sec. 1.04. BOARD OF DIRECTORS. "Board of Directors" means the Board of Directors of the Company, as from time to time constituted. Sec. 1.05. COMMITTEE. "Committee" means the committee of the Board of Directors, which members are appointed by the Board of Directors, as from time to time constituted. Sec. 1.06. COMPANY. "Company" means VARI-LITE INTERNATIONAL, INC. or its successor. The tax identification number for the Company is as follows: 75-2239444. Sec. 1.07. COMPENSATION. Any references in this Plan to "Compensation" is a reference to the definition in this Section 1.07, as converted into the equivalency of United States currency, unless the Plan reference specifies a modification to this definition. The Committee will take into account only Compensation actually paid for the relevant period. (A) GENERAL DEFINITION OF COMPENSATION. "Compensation" means the Participant's base salary (whether or not paid in cash) for personal services actually rendered in the course of employment with the Employer but only to the extent includible in the gross income of the Participant pursuant to the tax laws of the country of the Participant's domicile. This definition of Compensation excludes bonuses and overtime paid to Employees. Notwithstanding the provisions of this paragraph, the definition of Compensation shall be modified, if applicable, pursuant to the tax laws of the country where the Participant is domiciled. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 3 (B) DEFINITION OF COMPENSATION FOR CREDITING PURPOSES. To determine a Participant's share of Units to be credited to his Account under Section 3.04(B) hereof, Compensation means the general definition of Compensation described in Section 1.07(A) hereof, as converted into the equivalency of United States currency, but excludes (1) reimbursements or other expense allowances, (2) fringe benefits (cash and non-cash), (3) moving expenses, and (4) deferred compensation and welfare benefits unless otherwise required under applicable laws of the country where the Participant is domiciled. (C) COMPENSATION DOLLAR LIMITATION. For any Plan Year Committee must take into account only the first One Hundred Fifty Thousand United States Dollars ($150,000) (or such other amount currently applicable for the same period as the Plan Year under the ESOP, as adjusted, or as otherwise provided by the Committee, which may be higher or lower) of any Participant's Compensation during any Plan Year. Sec. 1.08. DISABILITY. "Disability" means total and permanent disability, the physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder, which renders the Participant incapable of engaging in his usual and customary occupation. The total and permanent disability of a Participant shall be determined by a physician, selected by the Committee, in accordance with uniform medical principles consistently applied, upon the basis of such evidence, as the physician deems necessary and desirable. The Plan considers a Participant disabled on the date the Committee determines the Participant satisfies the definition of Disability. Notwithstanding any provision herein, the Committee may require a Participant to submit to another physical examination performed by a physician selected by the Committee in order to confirm Disability. Sec. 1.09. EFFECTIVE DATE. "Effective Date" of the Plan is January 1, 1995. Sec. 1.10. ELIGIBLE EMPLOYEE. Each Employee becomes an "Eligible Employee," and thereby eligible to participate in the Plan, on the Plan Entry Date coincident with or immediately following the later of the date on which he completes one (1) Year of Service-Participation or has attained age twenty-one (21). For purposes of an Employee's eligibility, the Plan takes into account all of his Years of Service-Participation with an Employer or Related Employer. Notwithstanding the provisions of this paragraph, the Committee, in its sole discretion, may otherwise determine the criteria and date on which an Employee becomes an Eligible Employee. Sec. 1.11. EMPLOYEE. "Employee" means any employee of an Employer which has adopted this Plan. Sec. 1.12. EMPLOYER. "Employer" means any foreign subsidiary of the Company domiciled outside of the United States of America who has adopted this Plan pursuant to Section 9.14 hereof. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 4 Sec. 1.13. EMPLOYER SECURITIES. "Employer Securities" means the same class or classes of common stock issued by the Company held in the ESOP as of any date. Sec. 1.14. ESOP. "ESOP" means the Vari-Lite International, Inc. Employees' Stock Ownership Plan, and any amendments thereto. Sec. 1.15. FORFEITURE. "Forfeiture" refers to the amount of a Participant's Account which is not Vested. Sec. 1.16. FORMER PARTICIPANT. "Former Participant" means a person who has been a Participant but has ceased to be a Participant for any reason. Sec. 1.17. HOUR OF SERVICE. "Hour of Service" means: (a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, regardless of when paid; (b) Each Hour of Service for back pay, regardless of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and (c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee or for which the Employee is entitled to payment (regardless of whether the employment relationship is terminated) for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including Disability), layoff, jury duty or military duty. The Committee will credit no more than five hundred and one (501) Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Committee credits Hours of Service under this paragraph in a manner consistent with the provisions as set forth under the ESOP. The Committee will not credit an Hour of Service under more than one of the above paragraphs. A computation period for purposes of this Section 1.17 is the Plan Year, Year of Service- VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 5 Participation or Year Service-Vesting period, Break in Service period or other period, as determined under the Plan provision for which the Committee is measuring an Employee's Hours of Service. The Committee will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. If the Company maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as Service with an Employer. (A) METHOD OF CREDITING HOURS OF SERVICE. The Committee will credit every Employee with Hours of Service on the basis of the "actual" method. For purposes of the Plan, "actual" method means the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer. (B) MATERNITY OR PATERNITY LEAVE. Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, unless otherwise required under applicable law of the jurisdiction in which the Eligible Employee or Participant is domiciled, the Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of eight (8) hours per day during the absence period. The Committee will credit only the number (not exceeding five hundred and one (501)) of Hours of Service necessary to prevent an Employee's Break in Service. The Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Committee credits these Hours of Service to the immediately following computation period. If local law of the jurisdiction in which the Employee is domiciled requires different procedures for maternity or paternity leave, the Committee will apply such local law with respect to those affected Employees. Sec. 1.18. LATE RETIREMENT DATE. "Late Retirement Date" means the date of termination of an Employee's Service with the Employer for any reason other than death or Disability where the termination occurs subsequent to the Employee's Normal Retirement Date. Sec. 1.19 NORMAL RETIREMENT AGE. "Normal Retirement Age" is sixty-five (65) years of age. Sec. 1.20. PARTICIPANT. "Participant" is an Eligible Employee who becomes a Participant in accordance with the provisions of Section 2.01 hereof. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 6 Sec. 1.21. PLAN. "Plan" means the nonqualified employee phantom stock retirement plan established by the Company in the form of this Agreement, designated as the VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN. The Company has designated this Plan to be a (1) phantom stock plan under which Stock Equivalence Units will be credited to the Accounts of Participants in the Plan and (2) a plan maintained outside of the United States primarily for the benefit of persons, substantially all of whom are nonresident aliens, thereby satisfying the exception from the application to the Plan of the provisions of ERISA, provided in ERISA Section 4(b)(4). Sec. 1.22. PLAN ADMINISTRATOR. "Plan Administrator" is the Company unless the Company designates another person or entity, including the Committee, to hold the position of Plan Administrator. In addition to its other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under any applicable law. Sec. 1.23. PLAN ENTRY DATE. "Plan Entry Date" means the Effective Date and every January 1, April 1, July 1, and October 1 after the Effective Date. Sec. 1.24. PLAN YEAR. "Plan Year" means a twelve (12) consecutive month period beginning on January 1 of each year and ending on the following December 31. Sec. 1.25. RELATED EMPLOYER. "Related Employer" means a member of a controlled group of corporations (as defined and interpreted under the ESOP), trades or businesses (whether or not incorporated) which are under common control (as defined and interpreted under the ESOP) or an affiliated service group (as defined and interpreted under the ESOP) which includes the Company, which is domiciled outside of the United States. The term "Employer" includes all Related Employers for purposes of crediting Hours of Service, determining Years of Service-Participation and Years of Service-Vesting and Breaks in Service under Articles II and IV hereof, the definitions of Employee, Compensation, and for any other purpose required by a Plan provision or applicable law. Only a Related Employer described in this Section may adopt this Plan and only an Employee employed by an Employer described in Section 1.12 hereof is eligible to participate in this Plan. Sec. 1.26. RETIREMENT. "Retirement" means a Participant's Separation from Service with an Employer at or after attaining Normal Retirement Age. Sec. 1.27. SEPARATION FROM SERVICE. "Separation from Service," "Separates from Service," or "Separated from Service" means the Employee no longer has an employment relationship with the Employer. PAGE 7 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) Sec. 1.28. SERVICE. "Service" means any period of time the Employee is in the employ of an Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer. Sec. 1.29 STOCK EQUIVALENCE UNIT. "Stock Equivalence Unit" or "Unit" means amounts awarded under this Plan by the Company in the form of units which shall be credited pursuant to Section 3.05 to an Account to be maintained for each Participant. Each Unit shall be equal to the fair market value (as converted into the equivalency of United States currency) of one share of Employer Securities on the date such Unit is credited to a Participant's Account. No actual shares of Employer Securities shall be set aside or credited under this Plan. Sec. 1.30. VALUATION DATE. "Valuation Date" means each date on which each Participant's Account is adjusted under Sections 8.09 and 8.10 hereof. Sec. 1.31. VESTED. "Vested" refers to the portion of a Participant's Account which is nonforfeitable for any reason. END OF ARTICLE I PAGE 8 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) ARTICLE II EMPLOYEE PARTICIPANTS Sec. 2.01. PARTICIPATION. Unless otherwise determined by the Committee, each Eligible Employee becomes a Participant in the Plan on the Plan Entry Date (if employed on such date) immediately following the date on which he became an Eligible Employee. Sec. 2.02. YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Section 2.01 hereof, the Plan takes into account all of his Years of Service-Participation with an Employer or Related Employer. "Year of Service-Participation" means an eligibility computation period during which the Employee completes not less than one thousand (1,000) Hours of Service. The initial eligibility computation period is the first twelve (12) consecutive month period measured from the Employee's Employment Commencement Date. The Plan measures the subsequent periods by reference to the Plan Year, beginning with the Plan Year which includes the first anniversary of the Employee's Employment Commencement Date. "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for an Employer or Related Employer. Sec. 2.03. BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the Plan, the Plan does not apply any Break in Service rule. Sec. 2.04. PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment terminates shall re-enter the Plan as a Participant on the date of his re-employment with an Employer. An Employee who satisfies the Plan's eligibility conditions but who terminates employment with the Employer prior to becoming a Participant will become a Participant on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his reemployment. Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with the provisions of Section 2.01 hereof. Sec. 2.05. INELIGIBILITY TO BECOME A PARTICIPANT. Notwithstanding the provisions of Section 2.01 hereof, and unless otherwise required or prohibited under the local law of the jurisdiction of the Eligible Employee's domicile, any Eligible Employee shall not be eligible and shall not become a Participant, and any Employee who is a Participant shall cease to be eligible to be a Participant, if: (a) Such Employee is or becomes a member of a collective bargaining unit if retirement benefits covering such unit was the subject of good faith bargaining and coverage under this Plan was not agreed to under such bargaining; PAGE 9 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) (b) Such Employee is employed by a Related Employer that is not an adopting Employer or is excluded from participation by the terms of the Employer's adoption agreement; (c) Such individual is not on the payroll of an Employer; or (d) The date the Employee elects not to participate in the Plan, pursuant to Section 2.08 hereof. Sec. 2.06. CONTINUANCE AS A PARTICIPANT. Notwithstanding any other provision herein, a Participant shall continue as a Participant until whichever of the following dates first occurs: (a) The date of such Participant's death; (b) The date the Participant ceases to be an Employee; (c) The date the Participant becomes ineligible to participate in the Plan, pursuant to Section 2.05 hereof; or (d) The date the Participant elects not to participate in the Plan, pursuant to Section 2.08 hereof. After an individual ceases to be a Participant, his Account shall continue to be held pursuant to the terms of the Plan, and shall share in the appreciation or depreciation of his Account pending distribution pursuant to Article V hereof. Sec. 2.07. EMPLOYMENT BY EMPLOYER; SERVICE WITH NEWLY ACQUIRED ENTITIES; RECORDS OF EMPLOYER. Notwithstanding any other provision herein, this provision applies as follows: (a) In the event the Company or an Employer has or shall acquire the control of any foreign organization by the purchase of assets or stock, merger, amalgamation, consolidation or any other similar event, the Board of Directors may direct to what extent, if any, employment by such organization shall be deemed to be employment by the Employer, and, in connection therewith, may specify a special Plan Entry Date. (b) The personnel records of the Company or the Employer or any Related Employer shall be conclusive evidence for the purpose of determining the period of employment of any and all Employees. PAGE 10 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) Sec. 2.08. ELECTION NOT TO PARTICIPATE. An Eligible Employee, or any present Participant, may elect not to participate in the Plan or enter into an agreement with the Committee not to participate in the Plan. For an election to be effective for a particular Plan Year, the Employee or Participant must either (1) file the election in writing with the Committee not later than thirty (30) days prior to the beginning of that Plan Year unless accepted by the Committee at a different time or (2) enter into an agreement with the Committee which provides that the Employee or Participant shall not participate in the Plan (collectively referred to herein as "election"). The Committee will not credit any Stock Equivalence Units under the Plan for the Employee or for the Participant for the Plan Year for which the election is effective, nor for any succeeding Plan Year. Subject to the following provisions, the Employee or Participant may re-elect to participate in the Plan unless the election provides otherwise. After an Employee's or Participant's election not to participate has been effective for at least two (2) Plan Years, unless the agreement between the Employee and Committee provides otherwise, the Employee or Participant may re-elect to participate in the Plan for any Plan Year and subsequent Plan Years. If the Employee or Participant is permitted to enter or re-enter the Plan, he may re-elect to participate in the Plan by filing his election in writing with the Committee not later than thirty (30) days prior to the beginning of the Plan Year for which his election is to be effective. An Employee or Participant who re-elects to participate may not again elect not to participate in the Plan. The Committee must furnish an Employee or a Participant any form required for purposes of an election under this Section 2.08. An election timely filed is effective for the entire Plan Year. A Participant who elects not to participate in the Plan may not receive a distribution of his Account attributable thereto except as provided under Article V hereof. For each Plan Year for which a Participant's election not to participate is effective, his Account, if any, continues to share in adjustments under Section 8.10 hereof. The Employee or the Participant receives vesting credit under Article IV hereof for each included Year of Service-Vesting during the period the election not to participate is effective. END OF ARTICLE II PAGE 11 VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) ARTICLE III EMPLOYER AWARDS AND PARTICIPANT FORFEITURES Sec. 3.01. AMOUNT. For each Plan Year, the Company may award such Stock Equivalence Units as the Board of Directors may from time to time deem advisable. The maximum number of Units that may be awarded each Plan Year under this Plan shall be set by the Board of Directors. If any Units awarded under this Plan shall be forfeited or canceled, such Units may again be awarded under the Plan. Sec. 3.02. DETERMINATION OF AWARDS. The Company, by action of its Board of Directors, determines the number of Stock Equivalence Units to be credited to the Plan, if any, each Plan Year. Sec. 3.03. TIME OF CREDITING OF AWARDS. The Company shall credit all Stock Equivalence Units awarded to Participants during the Plan Year within sixty (60) days of the date of its Board of Directors' resolution authorizing such award or within a reasonable time thereafter. Sec. 3.04. CREDITING TO ACCOUNTS. (A) STOCK EQUIVALENCE UNIT ACCOUNT. The Account of each Participant shall be credited by his allocable share (determined under the Plan) of (i) the Stock Equivalence Units (including fractional Units) awarded by the Company and (ii) Participant Forfeitures of Stock Equivalence Units. Such award shall be credited in whole Units and fractional Units based on the then fair market value of Employer Securities as determined in United States currency. All fractional Units shall be computed at least to the nearest one-one hundredth (1/100th) of a Unit (i.e., at least two places to the right of the decimal). (B) CREDITING PROCEDURES. Accounts shall be adjusted in accordance with the following: (1) COMPANY AWARDS. Company awards for the Plan Year shall be credited, as designated by the Company or required by applicable law, to the Account of each Participant. The Committee will credit each Company award for a Plan Year to each Participant who satisfies the conditions of Section 3.05 hereof for that Plan Year. The Committee will make this credit in the same ratio that each such Participant's Compensation for the Plan Year bears to the total Compensation for all such Participants for that Plan Year. (2) FORFEITURES. Except as provided herein, Forfeitures occurring during a Plan Year shall be credited to the Account of each Participant. The VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 12 Committee will credit Forfeitures for a Plan Year to each Participant who satisfies the conditions of Section 3.05 hereof for that Plan Year. Forfeitures shall be credited according to the ratio that the Compensation for the Plan Year of each such Participant bears to the total Compensation of all such Participants for that Plan Year. In making a credit of Forfeitures under this provision, the Committee will base Forfeitures of Stock Equivalence Units upon the fair market value of such Units as of the Accounting Date of the Forfeitures. The Company, however, in its sole discretion, may apply such Forfeitures to reduce Company awards in future Plan Years or to pay administrative expenses of the Plan. Sec. 3.05. CREDIT OF BENEFIT. The Committee will determine the crediting of benefits (Company awards and Participant Forfeitures) on the basis of the Plan Year. (A) COMPENSATION TAKEN INTO ACCOUNT. In crediting a Company award or Participant Forfeiture to a Participant's Account, the Committee will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant. (B) HOURS OF SERVICE REQUIREMENT. The Committee will not credit any portion of a Company award or Participant Forfeitures, if any, for a Plan Year to any Participant's Account if the Participant does not complete a minimum of one thousand (1,000) Hours of Service during the Plan Year, unless the Participant terminates employment during the Plan Year because of death or Disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. (C) EMPLOYMENT REQUIREMENT. If the conditions of Section 3.05(B) hereof are satisfied and the Participant Separates from Service during a Plan Year and is not employed by an Employer on the last day of the Plan Year, such Participant will not share in the credit of Company awards and Participant Forfeitures, if any, for that Plan Year unless the Participant Separates from Service because of death or Disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. Sec. 3.06. PAYMENT OF DIVIDENDS. Subject to the provisions of Section 3.11 hereof, at the same time that any cash dividends are paid on Employer Securities, a similar amount per share may be credited in Units to each Participant's Account in respect of every Stock Equivalence Unit with which he has been credited. For purposes of crediting Units under this Section 3.06, the value of each Unit shall be the fair market value of the Units as of the trading date immediately preceding the date the dividends are paid if the Employer Securities are publicly traded on an established securities market; otherwise, the fair market value of the Units shall be determined as of the Accounting Date immediately preceding the date the dividends are paid, or such other method of valuation as the Committee shall determine from time to time. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 13 Sec. 3.07. DILUTION PROVISIONS. Subject to the provisions of Section 3.11 hereof, in the event the dividends declared on Employer Securities are payable in shares of Employer Securities or in the event of a stock split, the number of Stock Equivalence Units credited to a Participant's Account may be adjusted by adding thereto the number of additional Units which would have been distributed thereon if the Participant had held outstanding shares of Employer Securities on the date fixed for determining shareholders entitled to receive such stock dividend or split. In the event of any change other than as specified in this paragraph in the number or kind of outstanding shares of Employer Securities or of any stock or other securities into which the Employer Securities shall have been changed or for which it shall have been exchanged by reason of recapitalization, merger, consolidation, spin-off, reorganization, combination or exchange of shares or other similar corporate change, if the Company determines that such change equitably requires an adjustment in the number of Stock Equivalence Units or other modifications in this Plan, such adjustment shall be made. Sec. 3.08. FORFEITURE. In the event of the Participant's Separation from Service other than through death, Disability or Normal Retirement Age, he shall forfeit all right, title, and interest to the value of Stock Equivalence Units credited to his Account which are not Vested pursuant to Section 4.03 hereof. Sec. 3.09. DETERMINATION OF FAIR MARKET VALUE. The fair market value of each Stock Equivalence Unit shall be equal to the closing price of one share of Employer Securities on the day immediately preceding any Conversion Date (as defined in Section 5.02(A) hereof) if the Employer Securities are publicly traded on an established securities market, or if the Employer Securities are not publicly traded, the price determined by the Committee as of the Accounting Date coincident with or immediately following the Conversion Date. Sec. 3.10. SUBSTITUTE AWARDS. The Committee may substitute restricted stock grants or other forms of awards for Stock Equivalence Units if in the opinion of the Company such substitution would result in more favorable tax consequences to the Participants or the Company or for other reasons which, in the opinion of the Company, make such substitution desirable. Sec. 3.11. VOTING AND DIVIDEND RIGHTS. No Participant shall be entitled to any voting rights nor be entitled to receive any dividends with respect to Stock Equivalence Units credited to his Account, unless the Board of Directors provides otherwise. Sec. 3.12. NO EFFECT ON CORPORATE POWERS. The presence of outstanding Stock Equivalence Units awarded under this Plan shall not affect in any manner the Company's (or any Employer's) right or power to make, authorize or consummate (1) any or all adjustments, recapitalizations, reorganizations or other changes in the capital structure of the Company (or any VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 14 Employer) or its business; (2) any merger or consolidation of the Company (or any Employer); (3) any issue by the Company (or any Employer) of debt securities or preferred or preference stock which would rank above the common stock of the Company (or any Employer); (4) the dissolution or liquidation of the Company (or any Employer); (5) any sale, transfer or assignment of all or any part of the assets or business of the Company (or any Employer); or (6) any other corporate act or proceeding, whether of a similar character or otherwise. Sec. 3.13. NO CLAIM OR RIGHT. No Employee, Participant or other person shall have any claim or right to be granted an award of Stock Equivalence Units under the Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any Employee any right to be retained in the employ of the Company or any Employer. END OF ARTICLE III VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 15 ARTICLE IV TERMINATION OF SERVICE - PARTICIPANT VESTING Sec. 4.01. NORMAL RETIREMENT AGE. A Participant who remains in the employ of the Employer after attaining Normal Retirement Age shall continue to participate in the Plan until his Late Retirement Date. A Participant's Account is one hundred percent (100%) Vested upon and after his attaining Normal Retirement Age (if employed by an Employer on or after that date). Sec. 4.02. PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with the Employer terminates as a result of death or Disability, the Participant's Account will be one hundred percent (100%) Vested. Sec. 4.03. VESTING SCHEDULE. Except as provided in Sections 4.01, 4.02 and 8.12 hereof, for each Year of Service-Vesting, a Participant's Nonforfeitable Percentage of his Account equals the percentage in the following vesting schedule: Percent of Years of Service-Vesting Nonforfeitable With the Employer Account ----------------- ------- Less than 3 years . . . . . . . . . . . . . . . . . . . . None 3 years, but less than 4. . . . . . . . . . . . . . . . . 30% 4 years, but less than 5. . . . . . . . . . . . . . . . . 40% 5 years, but less than 6. . . . . . . . . . . . . . . . . 60% 6 years, but less than 7. . . . . . . . . . . . . . . . . 80% 7 years or more . . . . . . . . . . . . . . . . . . . . . . 100% Sec. 4.04. YEAR OF SERVICE - VESTING For purposes of vesting under Section 4.03 hereof, Year of Service-Vesting means any Plan Year during which an Employee completes not less than one thousand (1,000) Hours of Service. Sec. 4.05. BREAK IN SERVICE - VESTING For purposes of this Article IV, a Participant incurs a "Break in Service" if during any Plan Year he does not complete more than five hundred (500) Hours of Service, unless he does not complete more than five hundred (500) Hours of Service because of any of the following: (1) he is transferred; (2) he is on an approved leave of absence which does not exceed eighteen (18) months and he returns to employment with the Employer immediately following the leave of absence; (3) he is temporarily laid off and he returns to employment with the Employer immediately following the temporary layoff; or (4) he is in the service in the armed forces of his country, and he returns to employment with the VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 16 Employer within ninety (90) days after termination of military service without being employed somewhere else. Solely for the purpose of determining whether an Employee has incurred a Break in Service, if the Employee is absent from Service because of her pregnancy, the birth of the Employee's child, the Employee's receipt of a child through adoption, or the Employee's caring for the child immediately after birth or adoption, the Employee shall be entitled to the Hours of Service that he would have received but for that absence for one (1) year after the absence began. Eight (8) Hours of Service shall be credited for each day of such absence. However, no more than a total of five hundred one (501) hours can be credited. The five-hundred one (501) hours shall be credited to the Plan Year in which the absence first begins if such hours prevent a Break in Service in that period; otherwise, the five hundred one (501) hours shall be credited to the next Plan Year. In the event that the local law of the domicile of a Participant or Participants under the Plan requires a different result in regard to the break in service-vesting rules, the Committee shall apply such local law as to those affected participants. Sec. 4.06. INCLUDED YEARS OF SERVICE - VESTING (A) INCLUDED YEARS OF SERVICE. For purposes of determining Years of Service-Vesting under Section 4.04 hereof, the Plan takes into account all Years of Service-Vesting an Employee completes with the Employer or a Related Employer, except for any Year of Service before a Break in Service if the number of consecutive Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of the Years of Service-Vesting prior to the Break in Service. This exception applies only if the Participant is not Vested in his Account at the time he has a Break in Service. The aggregate number of Years of Service-Vesting before a Break in Service does not include any Years of Service-Vesting not required to be taken into account under this exception by reason of any prior Break in Service. (B) FORFEITURE BREAK IN SERVICE. For the sole purpose of determining a Participant's Vested percentage of his Account which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service-Vesting after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs five (5) consecutive Breaks in Service. Sec. 4.07. FORFEITURE OCCURS. A Participant's Forfeiture, if any, of his Account occurs under the Plan as of the last day of the Plan Year in which the Participant first incurs a Forfeiture Break in Service. The Committee determines the percentage of a Participant's Account Forfeiture, if any, under this Section 4.07 solely by reference to the vesting schedule of Section 4.03 hereof and the provisions of Sections 4.01 and 4.02 hereof, to the extent they are applicable. A Participant will not forfeit any portion of his Account for any other reason or cause except as expressly provided by this Section 4.07 or as provided under Sections 3.08 and 8.12 hereof. END OF ARTICLE IV VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 17 ARTICLE V TIME AND METHOD OF PAYMENT OF BENEFITS Sec. 5.01. TERMS AND CONDITIONS. Subject to the express provisions of this Plan, the Committee shall have complete authority, in its discretion, to determine the extent and the terms and conditions under which Stock Equivalence Units may be converted in the event of the death or Disability of the Participant or in the event the Participant attains Normal Retirement Age or otherwise Separates from Service. However, all Stock Equivalence Units awarded under this Plan shall be subject to the following express terms and conditions and to such other terms and conditions which, in the reasonable judgment of the Board of Directors or the Committee, are not inconsistent with the following, and which the Board of Directors or the Committee, in its sole discretion, deems appropriate: (A) NON-TRANSFERABILITY. No Stock Equivalence Units awarded under this Plan shall be transferable other than by the Last Will and Testament of the Participant or by the laws of descent and distribution of the country of the Participant's domicile. During the lifetime of the holder, Stock Equivalence Units may be converted only by the holder (or the holder's legal representative in the event the holder becomes disabled). (B) REORGANIZATIONS. The number of Stock Equivalence Units granted under this Plan may be adjusted to reflect, as deemed appropriate by the Board of Directors, any change in the number or kind of outstanding Employer Securities as contemplated in Section 3.07 hereof. (C) NO RIGHTS AS A STOCKHOLDER. A holder of Stock Equivalence Units shall not have any dividend or voting rights or any other rights of a stockholder of the Company or any Employer with respect to any Stock Equivalence Units, unless otherwise provided by the Board of Directors. (D) PAYMENT ON STOCK EQUIVALENCE UNITS. The Stock Equivalence Units awarded under the Plan may be converted at such times and in such amounts in accordance with Section 5.02(A) hereof. Upon conversion of the Stock Equivalence Units, the holder shall be entitled to receive an amount determined and payable as provided in Section 5.02(B) hereof. (E) ADEQUATE CASH RESERVES. All amounts payable by the Company with respect to Stock Equivalence Units shall be subject to the Company having cash reserves which are adequate, in the sole determination of the Board of Directors to satisfy the Company's obligations under this Plan. Should the Board of Directors determine that cash reserves are inadequate to make any payment due under the Plan, such payment shall be made on such subsequent payment date that cash reserves are determined to be adequate. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 18 Sec. 5.02. CONVERSION OF STOCK EQUIVALENCE UNITS; PAYMENT OF APPRECIATED VALUE. (A) CONVERSION. A Participant's Vested Stock Equivalence Units credited to his Account may be converted only by the Committee for payment pursuant to Section 5.02(B) hereof upon: either his death or Disability or Separation from Service upon or after his attainment of Normal Retirement Age or separation from Service for any other reason (the "Conversion Date"). (B) AMOUNT PAYABLE. Upon conversion of Stock Equivalence Units by the Committee for payment to the Participant in accordance with the terms of this Plan, the Participant shall be entitled to receive the value of his Account as hereinafter provided. The value of a Participant's Account shall be determined by multiplying the number of Units, including fractional Units, credited to his Account as of any date, whether attributable to contributions, dividends or other adjustments, by the value of the Units as of such date. Such value shall be determined by converting the value of such Stock Equivalence Units to reflect a value of such Stock Equivalence Units in United States currency. At the Company's election, the Company shall pay to such Participant the amount specified above in either: (i) five (5) substantially equal annual installments; or (ii) a single lump sum cash payment determined as of the Conversion Date or Accounting Date, whichever is applicable under Section 3.09 hereof. Amounts payable by the Company shall be made to the Participant in the currency of the Company. Subject to the adequacy of cash reserves, as provided in Section 5.01(E) hereof, the payments made pursuant to this Section shall commence no later than sixty (60) days following the end of the Company's fiscal year following the date of conversion pursuant to Section 5.02(A) or as soon as administratively practicable following the end of such fiscal year. Payments made by the Company to a Participant shall be subject to such conditions as deemed advisable by the Company and Committee to permit compliance by the Company and the Employer with applicable tax withholding laws. END OF ARTICLE V VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 19 ARTICLE VI EMPLOYER ADMINISTRATIVE PROVISIONS Sec. 6.01. INFORMATION TO COMMITTEE. The Employer must supply current information to the Committee as to the name, date of birth, date of employment, annual Compensation, leaves of absence, Years of Service-Participation, Years of Service-Vesting and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Company or the Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the Committee are conclusive as to all persons. Sec. 6.02. NO LIABILITY. The Company assumes no obligation or responsibility to any Employee, Former Participant, Participant or Beneficiary for any act of, or failure to act, on the part of its Committee (unless the Company is the Committee) or the Plan Administrator (unless the Company is the Plan Administrator). Sec. 6.03. INDEMNITY OF CERTAIN FIDUCIARIES. The Company indemnifies and saves harmless the Plan Administrator, Committee, and the members of the Committee, and each of them, from and against any and all loss resulting from liability to which the Plan Administrator, the Committee, or the members of the Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Plan, including all court costs and other expenses reasonably incurred in their defense, in case the Company fails to provide such defense. The indemnification provisions of this Section 6.03 do not relieve the Plan Administrator, or any Committee member from any liability he may have under applicable law for breach of a fiduciary duty. In the case of any Committee member, the indemnification provisions of this Section 6.03 do not relieve such member from any liability, to the extent that a court of competent jurisdiction from which no appeal can be taken, enters a final judgment that the Committee member's actions or omissions were the result of gross negligence or willful misconduct. The Plan Administrator, the Committee members, and the Company may execute a letter agreement further delineating the indemnification agreement of this Section 6.03, provided the letter agreement is consistent with and does not violate applicable law. The indemnification provisions of this Section 6.03 extend to any other fiduciary solely to the extent provided by a letter agreement executed by such person and the Company. Sec. 6.04. AMENDMENT TO VESTING SCHEDULE. Though the Company reserves the right to amend the vesting schedule of Section 4.03 hereof at any time, the Committee will not apply the amended schedule to reduce the Nonforfeitable percentage of any Participant's Account (determined as of the later of the date the Company adopts the amendment, or the date the amendment becomes effective) to a percentage less than the Vested percentage computed under VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 20 the Plan without regard to the amendment. An amended vesting schedule will apply to a Participant only if the Participant receives credit for at least one (1) Hour of Service after the new schedule becomes effective. If the Company makes a permissible amendment to the vesting schedule, each Participant having at least three (3) Years of Service-Vesting with the Employer may elect to have the percentage of his Vested Account computed under the Plan without regard to the amendment. The Participant must file his election with the Committee within sixty (60) days of the latest of (1) the Company's adoption of the amendment; (2) the effective date of the amendment; or (3) his receipt of a copy of the amendment. The Committee as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. The election described in this Section 6.04 does not apply to a Participant if the amended vesting schedule provides for vesting at least as rapid at all times as the vesting schedule in effect prior to the amendment. For purposes of this Section 6.04, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Vested percentage of a Participant's rights to his Account. Sec. 6.05. APPLICABLE LAW. The Company, the Board of Directors, each Employer, the Committee, and the Plan Administrator will follow and apply the laws of the United States of America in regard to all aspects of the Plan, unless otherwise required by the local laws of any applicable jurisdiction. END OF ARTICLE VI VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 21 ARTICLE VII PARTICIPANT ADMINISTRATIVE PROVISIONS Sec. 7.01. BENEFICIARY DESIGNATION. Any Participant from time to time may designate, in writing, any person or persons contingently or successively to whom the Committee will pay the Vested portion of his Account in the event of his death, and the Participant may designate the form and method. The Committee will prescribe the form for the written designation of Beneficiary and upon the Participant's filing the form with the Committee, the form effectively revokes all designations filed prior to that date by the same Participant. Sec. 7.02. NO BENEFICIARY DESIGNATION. Unless otherwise required by applicable law, if a Participant fails to name a Beneficiary in accordance with Section 7.01 hereof, or if the Beneficiary named by a Participant predeceases him, or if the Beneficiary designation is invalid or void, the Committee will pay the Participant's Vested Account in the following order of priority to: (a) The Participant's surviving spouse; (b) The Participant's surviving children, including adopted children, in equal shares; (c) The Participant's surviving parents, in equal shares; or (d) The Participant's estate. If the Beneficiary does not predecease the Participant, but dies prior to distribution of the Participant's entire Vested Account, the Committee will pay the remaining Vested Account to the Beneficiary's estate unless the Participant's Beneficiary designation provides otherwise. Sec. 7.03. PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a deceased Participant must furnish to the Committee such evidence, data or information as the Company or the Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Committee, provided the Committee advises each Participant of the effect of his failure to comply with its request. Any adjustment required by reason of lack of proof or the misstatement of the ages of persons entitled to benefits hereunder, by the Participant or otherwise, shall be in such manner as the Company or the Committee deems equitable. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 22 Any notice or information which according to the terms of the Plan or the rules of the Committee must be filed with the Committee, shall be deemed so filed if addressed and either delivered in person or mailed, postage fully prepaid, to the Committee. If mailed, any such notice or information shall be addressed to the Committee Chairman c/o VARI-LITE INTERNATIONAL, INC. and mailed to its corporate headquarters address. Whenever a provision herein requires that a Participant (or the Participant's Beneficiary) give notice to the Committee within a specified number of days or by a certain date, and the last day of such period, or such date falls on a Saturday, Sunday, or Company holiday, the Participant (or the Participant's Beneficiary) will be deemed in compliance with such provision if notice is delivered in person to the Committee or is mailed, properly addressed, postage prepaid, and postmarked on or before the business day next following such Saturday, Sunday or Company holiday. The Committee may, in its sole discretion, modify or waive any specified requirement notice; provided, however, that such modification or waiver must be administratively feasible, must be in the best interest of the Participant, and must be made on the basis of rules of the Committee which are applied uniformly to all Participants. Sec. 7.04. ADDRESS FOR NOTIFICATION. Each Participant, each Beneficiary of a deceased Participant and other person entitled to benefits hereunder must file with the Committee from time to time, in writing, his mailing address and any change of mailing address. Any communication, statement or notice addressed to a Participant, Former Participant, or Beneficiary, at his last mailing address filed with the Committee, or as shown on the records of the Company or the Employer, binds the Participant, Former Participant, or Beneficiary, for all purposes of this Plan. Any check representing payment hereunder and any communication addressed to a Participant, Former Participant, an Employee, a former Employee, or Beneficiary, at such person's last address filed with the Committee, or if no such address has been filed, then at such person's last address as indicated on the records of the Company or the Employer, shall be deemed to have been delivered to such person on the date on which such check or communication is deposited, postage prepaid, in the mail. If the Committee, for any reason, is in doubt as to whether payments are being received by the person entitled thereto, it shall, by registered mail addressed to the person concerned, at his address last known to the Committee, notify such person that all unmailed and future payments shall be henceforth withheld until he provides the Committee with evidence of his existence and his proper mailing address. Sec. 7.05. ASSIGNMENT OR ALIENATION. A Participant, Former Participant, or Beneficiary may not anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Committee will not recognize any such anticipation, assignment or alienation. A benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 23 Sec. 7.06. LITIGATION AGAINST THE PLAN. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of applicable law or to enforce any provisions of applicable law or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan. Sec. 7.07. APPEAL PROCEDURE FOR DENIAL OF BENEFITS. A Participant, Former Participant, or a Beneficiary ("Claimant") may file with the Committee a written claim for benefits, if the Participant, Former Participant, or Beneficiary determines the distribution procedures of the Plan have not provided him his proper Vested Account. The Committee must render a decision on the claim within sixty (60) days of the Claimant's written claim for benefits. The Plan Administrator must provide adequate notice in writing to the Claimant whose claim for benefits under the Plan the Committee has denied. The Plan Administrator's notice to the Claimant must set forth: (a) The specific reason for the denial; (b) Specific references to pertinent Plan provisions on which the Committee based its denial; (c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and (d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Committee within seventy-five (75) days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Committee in writing within the seventy-five (75) day period will render the Committee's determination final, binding and conclusive. If the Claimant should appeal to the Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. At the hearing (or prior thereto upon five (5) business days written notice to the Committee), the Claimant, or his duly authorized representative, may review Plan documents in the possession of the Plan Administrator which are pertinent to the claim. Either the Claimant, Committee, or Plan Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceeding shall be furnished to all parties by the court reporter. The full expense of any court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. The Committee will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Committee must advise the Claimant of its decision within sixty (60) days of the Claimant's written request for review, unless special VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 24 circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day limit unfeasible, but in no event may the Committee render a decision respecting a denial for a claim for benefits later than one hundred-twenty (120) days after its receipt of a request for review. The Committee's notice of denial of benefits must identify the name of each member of the Committee and the name and address of the Committee member to whom the Claimant may forward his appeal. END OF ARTICLE VII VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 25 ARTICLE VIII STOCK COMPENSATION COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS Sec. 8.01. MEMBERS' COMPENSATION, EXPENSES. The Company may appoint a Committee to administer the Plan, the members of which may or may not be a Participant in the Plan, or which may be the Plan Administrator acting alone. In the absence of a Committee appointment, the Plan Administrator assumes the powers, duties and responsibilities of the Committee. The members of the Committee may serve for reasonable compensation for services as such, but the Company will pay all expenses of the Committee, except to the extent the Plan properly pays for such expenses. Sec. 8.02. TERM. Each member of the Committee serves until the appointment of his successor. Sec. 8.03. POWERS. The Committee is empowered to satisfy and operate the Plan in accordance with the terms of the Plan and applicable law. The Committee will follow and apply the laws of the United States of America unless otherwise required to apply local law of the applicable jurisdiction. In case of a vacancy in the membership of the Committee, the remaining members of the Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Committee pending the filling of the vacancy. Sec. 8.04. GENERAL. The Committee has, without limitation, the following powers and duties: (a) To select a Secretary, who need not be a member of the Committee; (b) To determine eligibility of an Employee for all benefits under the Plan, the value of a Participant's Account and the Vested percentage of each Participant's Account; (c) To adopt rules of procedure and regulations and guidelines necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Plan; (d) To construe and enforce the terms of the Plan and the rules and regulations it adopts, including interpretation of the Plan documents and documents related to the Plan's operation; (e) To credit Stock Equivalence Units under the Plan; VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 26 (f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan; (g) To furnish the Company or any Employer with information which the Company or the Employer may require for tax or other purposes; (h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; and (i) To construe and interpret the Plan and the rules and regulations adopted and to answer all questions arising in the administration, interpretation and application of the Plan document and documents related to the Plan's operation. The Committee shall not violate the terms of the Plan or applicable law. All decisions, determinations, directions, interpretations, and applications of the Plan by the Committee in good faith shall be final and binding upon all persons, including (but not limited to) the Company, any Employer, and all Participants, Former Participants, and Beneficiaries unless in violation of the Plan or applicable law. Sec. 8.05. MANNER OF ACTION. The decision of a majority of the members of the Committee appointed and qualified controls. Sec. 8.06. AUTHORIZED REPRESENTATIVE. The Committee may authorize any one of its members, or its Secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The Committee must evidence this authority by an instrument signed by all members. Sec. 8.07. INTERESTED MEMBER. No member of the Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Committee. Sec. 8.08. INDIVIDUAL ACCOUNTS. The Committee will maintain a separate Account in the name of each Participant to reflect the Stock Equivalence Units credited to each Participant under the Plan. Sec. 8.09. VALUE OF PARTICIPANT'S ACCOUNT. The value of each Participant's Account shall be determined by multiplying the number of Units credited to that Participant's Account by the current fair market value, as determined at Section 3.09 hereof, of each Unit. VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 27 Sec. 8.10. ADJUSTMENTS OF PARTICIPANTS' ACCOUNTS. A "Valuation Date" under this Plan is each Accounting Date and if the Employer Securities are publicly traded on an established securities market, the day preceding any Conversion Date, in addition to each interim valuation date determined under Section 8.14 hereof. As of each Valuation Date, the Committee must adjust Accounts to reflect appreciation or depreciation since the last Valuation Date. The valuation period is the period beginning the day after the last Valuation Date and ending on the current Valuation Date. The Committee will credit the Company awards and Participant Forfeitures, if any, in accordance with Article III hereof. Sec. 8.11. ACCOUNT CHARGED. The Committee shall charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made. Sec. 8.12. UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require the Committee, the Employer, or the Company to search for, or to ascertain the whereabouts of, any Participant or Beneficiary. The Committee, by certified or registered mail addressed to his last known address of record with the Committee, the Company, or the Employer, shall notify any Participant or Beneficiary, that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section 8.12. If the Participant or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the Committee within six (6) months from the date of mailing of the notice, the Committee shall treat the Participant's or Beneficiary's unclaimed payable Account as forfeited and shall reallocate and use the amount of the unclaimed payable Account to reduce the Company's award for the Plan Year in which the Forfeiture occurs. Sec. 8.13. RECORDS AND STATEMENTS. The records of the Committee pertaining to the Plan shall be open to the inspection of the Plan Administrator, the Company and any Employer at all reasonable times and may be audited from time to time by any person or persons as the Plan Administrator, Company, any Employer or Committee may specify in writing. The Committee shall furnish the Plan Administrator, Company, or any Employer with whatever information relating to the Plan, the Plan Administrator, Company, any Employer or Committee considers necessary. Sec. 8.14. VALUATION OF ACCOUNTS. The Committee must value the Accounts of the Participants as of each Accounting Date, and the Committee also must value such Accounts on such other dates, as determined by the Company or the Committee. If a Valuation Date would otherwise occur on a Saturday, Sunday, or holiday, then the Valuation Date shall mean the preceding business day. Sec. 8.15. WITHHOLDING FOR AND PAYMENT OF TAXES. If any Stock Equivalence Units credited to the Plan, or any benefits payable under the Plan, shall become liable for the payment of any estate, inheritance, income, or other tax, charge or assessment, which in VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 28 the Committee's or Company's opinion the Company shall or may be required to pay, the Company shall have full power and authority to pay or withhold such tax, charge or assessment out of any moneys or other property in its hands for the account of the person whose interest hereunder are liable for such tax. The Company or Committee, prior to making any payment to any Beneficiary hereunder, may require such releases or other documents from any lawful taxing authority and may require such indemnity from such Beneficiary as the Company or Committee shall deem necessary for its protection. END OF ARTICLE VIII VARI-LITE INTERNATIONAL, INC EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) PAGE 29 ARTICLE IX MISCELLANEOUS Sec. 9.01. EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. The Company, any Employer and the Committee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence. Sec. 9.02. NO RESPONSIBILITY FOR EMPLOYER ACTION. The Committee does not have any obligation or responsibility with respect to any action required by the Plan to be taken by any Employer, the Company, any Participant, Former Participant, or Eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. The Committee need not inquire into or be responsible for any action or failure to act on the part of the others, or on the part of any other person who has any responsibility regarding the management, administration or operation of the Plan, whether by the express terms of the Plan or by a separate agreement authorized by the Plan or by the provisions of applicable law. Any action required of a corporate Employer must be by its board of directors or its designate. Sec. 9.03. FIDUCIARIES NOT INSURERS. The Committee, the Plan Administrator, the Company, and all Employers in no way guarantee the Plan from loss or depreciation. Neither any Employer nor the Company guarantee the payment of any money which may be or becomes due to any person from the Plan. Sec. 9.04. WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive the notice, unless applicable law specifically or impliedly prohibits such a waiver. Sec. 9.05. SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Company and each Employer, their successors and assigns, and upon the Committee, the Plan Administrator and their successors. Sec. 9.06. WORD USAGE. Words used in the masculine also apply to the feminine and neuter where applicable, and wherever the context of the Plan dictates, the plural includes the singular and the singular includes the plural. Whenever a noun, or pronoun in lieu thereof, is used in this Plan in plural form and there may be only one person within the scope of the word so used, or in singular form and there be more than one (1) person within the scope of the word so used, such word, or pronoun used in lieu thereof, shall have a singular or plural meaning, as PAGE 30 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) the case may be. The words "herein," "hereof," and "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan, not to any particular provision or Section. Article and Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of the Plan. Sec. 9.07. STATE LAW. Texas law and the laws of the United States of America will determine all questions arising with respect to the provisions of this Plan, such as (but not limited to) the execution, construction, administration and enforcement of the Plan, except to the extent superseded by other applicable law. Sec. 9.08. EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or any modification or amendment to the Plan, or in the creation of any Account, or the payment of any benefit, gives any Employee, Participant, Former Participant, or any Beneficiary any right to continue employment, any legal or equitable right against any Employer, the Company, or the Employee of any Employer, or its agents or employees, or against the Plan Administrator, or Committee, except as expressly provided by the Plan, applicable law, or by a separate agreement. Sec. 9.09. SEVERABILITY. Notwithstanding any provision contained in the Plan to the contrary, the provisions of this Plan shall be deemed severable and the validity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions thereof. Sec. 9.10. CONTRARY PROVISIONS. The provisions of this Article IX shall govern notwithstanding anything contained in the Plan to the contrary. Sec. 9.11. NOTICE TO EMPLOYEES. Notice of the Plan and of any amendments thereto, of eligibility of each Employee, and notice of such other matters as may be required by law or this instrument, shall be given by the Employer to the Employees in such form as the Committee may deem appropriate and reasonable and in conformity to lawful requirements. Sec. 9.12. AGREEMENT OF PARTICIPANTS. Each Participant, by becoming such, for himself or herself, and such Participant's heirs, executors, administrators, legal representatives and Beneficiaries, ipso facto, approves and agrees to be bound by the provisions of this Plan. Sec. 9.13. ACTION BY EMPLOYERS. Any written action herein permitted or required to be taken by an Employer shall be by resolution of its board of directors (or other governing body thereof) or by written instrument executed by a person or group of persons who has been authorizd by resolution of its board of directors (or other governing body thereof) as having authority to take such action. Sec. 9.14. ADOPTION OF THE PLAN BY A RELATED EMPLOYER. Any business enterprise which on or after the Effective Date is or becomes a Related Employer as PAGE 31 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) defined at Section 1.25 hereof may adopt this Plan, effective as of the date indicated in its instrument of adoption, if (1) the Company permits the Related Employer to adopt the Plan and (2) such Related Employer executes an instrument in writing duly authorized by it adopting this Plan and delivers a copy thereof to the Committee. Throughout this Plan, a distinction is purposely drawn between rights and obligations of the Company and rights and obligations of an Employer. The rights and obligations specified as belonging to the Company shall belong only to it, including but not limited to, appointment of the Committee and amendment or termination of the Plan. A Related Employer's instrument of adoption may provide for the following: (1) making such changes with respect to the Plan as are approved by the Committee, and (2) the designation of the name of the Plan with respect to its Employees. An Employer may withdraw from this Plan without affecting any other Employer. If an Employer withdraws or its participation is terminated by the Board of Directors, such Employer may, in its sole discretion, adopt for its Employees alone and independent of this Plan its own plan with respect to itself and its Participants (a) METHOD OF ADOPTING THE PLAN BY A RELATED EMPLOYER. In order to adopt the Plan, the board of directors (or other governing body thereof) of the adopting Related Employer must approve a resolution expressly adopting the Plan for the benefit of its Employees and the requirements set forth above must be satisfied. (b) TRANSMITTAL OF RESOLUTION. Upon the Company's request, a certified copy of the adopting Related Employer's resolution shall be transmitted to the Company and approval of the Board of Directors of the Company shall be deemed to constitute the adoption of the Plan by the adopting Related Employer as of the date specified in such adopting Related Employer's resolution or other agreement. Sec. 9.15. DISASSOCIATION OF ANY EMPLOYER FROM PLAN. Any Employer may withdraw from the provisions of this Plan at any time upon the expiration of thirty (30) days after deliver of written notice of its intent to do so to the Committee and the Company, and shall thereupon cease to be a party to this Plan. Withdrawal from the Plan by an Employer shall not affect the continued operation of the Plan with respect to the Company and other Employers. Sec. 9.16. COMPANY VOTING RIGHTS. Notwithstanding any other provisions of the Plan, the Company shall retain the right to direct the voting of any shares of Company stock held in trust by reason of this Plan. The Company shall be entitled to direct the Trustee of the VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE TRUST as to the voting of any Company stock held. END OF ARTICLE IX PAGE 32 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) ARTICLE X AMENDMENT AND TERMINATION Sec. 10.01. AMENDMENT BY COMPANY. The Company, by action of its Board of Directors, has the right at any time and from time to time to amend this Plan in any manner it deems necessary or advisable. The Company may not make any amendment which affects the rights, duties or responsibilities of the Plan Administrator or the Committee without the written consent of the affected Plan Administrator or the affected member of the Committee. The Company must make all amendments in writing. Sec. 10.02. EFFECTIVE DATE OF AMENDMENT. Any such amendment shall become effective as provided therein upon its execution. Sec. 10.03. DISCONTINUANCE. The Company, by action of its Board of Directors, has the right, at any time, to suspend or discontinue its awards under the Plan. The Company, by action of its Board of Directors, has the right to terminate, at any time, this Plan. The Plan will terminate upon the first to occur of the following: (a) The date terminated by action of the Company; (b) The dissolution or merger of the Company, unless the successor makes provision to continue the Plan, in which event the successor must substitute itself as the Company under this Plan. Sec. 10.04. FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, an affected Participant's right to his Account shall be one hundred percent (100%) Vested. END OF ARTICLE X PAGE 33 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) IN WITNESS WHEREOF, the Company has executed this Amended and Restated Plan in multiple copies in Dallas, Dallas County, Texas, on the 17th day of September, 1997, to be effective the 1st day of January, 1996. "COMPANY" VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. Brutsche III -------------------------------------- Title: President ----------------------------------- Print Name: H.R. Brutsche III ------------------------------ PAGE 34 VARI-LITE INTERNATIONAL, INC. EMPLOYEES' STOCK EQUIVALENCE PLAN (AS AMENDED AND RESTATED) EX-10.23 15 EXHIBIT 10.23 VARI-LITE HOLDINGS, INC. ANNUAL INCENTIVE COMPENSATION PLAN OCTOBER 1, 1994 VARI-LITE HOLDINGS, INC. ANNUAL INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS Page ---- ARTICLE I - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 a. "Base Salary" . . . . . . . . . . . . . . . . . . . . . . . 1 b. "Board" . . . . . . . . . . . . . . . . . . . . . . . . . . 1 c. "Committee" . . . . . . . . . . . . . . . . . . . . . . . . 1 d. "Company" . . . . . . . . . . . . . . . . . . . . . . . . . 1 e. "Department". . . . . . . . . . . . . . . . . . . . . . . . 1 f. "Discretionary Award" . . . . . . . . . . . . . . . . . . . 1 g. "Formula Derived Award" . . . . . . . . . . . . . . . . . . 1 h. "Incentive Award" . . . . . . . . . . . . . . . . . . . . . 2 i. "Operating Income". . . . . . . . . . . . . . . . . . . . . 2 j. "Participant" . . . . . . . . . . . . . . . . . . . . . . . 2 k. "Plan". . . . . . . . . . . . . . . . . . . . . . . . . . . 2 l. "Plan Year" . . . . . . . . . . . . . . . . . . . . . . . . 2 m. "Team". . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II - ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III - INCENTIVE AWARDS . . . . . . . . . . . . . . . . . . . . . . 2 3.1 Formula Derived Awards . . . . . . . . . . . . . . . . . . . . . 2 3.2 Discretionary Awards . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE IV - PERFORMANCE MEASUREMENT AND AWARD DETERMINATION . . . . . . . 3 4.1 Procedure for Measuring Company Performance. . . . . . . . . . . 3 4.2 Basis of Formula Derived Awards. . . . . . . . . . . . . . . . . 3 4.3 Effect of Level of Attainment of Company Performance . . . . . . 4 4.4 Procedure for Measuring Subsidiary Performance . . . . . . . . . 4 4.5 Effect of Level of Attainment of Subsidiary Performance. . . . . 5 4.6 Procedure for Measuring Department Performance . . . . . . . . . 5 4.7 Effect of Level of Attainment of Department Performance. . . . . 5 4.8 Procedure for Measuring Team Performance . . . . . . . . . . . . 5 4.9 Effect of Level of Attainment of Team Performance. . . . . . . . 5 4.10 Procedure for Measuring Individual Performance . . . . . . . . . 5 4.11 Effect of Individual Performance Rating. . . . . . . . . . . . . 6 4.12 Calculation of Formula Derived Award . . . . . . . . . . . . . . 6 -i- ARTICLE V - PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Form and Timing. . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 New Participants . . . . . . . . . . . . . . . . . . . . . . . . 7 5.3 Termination Due to Death, Total Disability, or Retirement. . . . 7 ARTICLE VI - ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . 7 6.1 Authority to Administer. . . . . . . . . . . . . . . . . . . . . 7 6.2 Amendment of the Plan. . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE VII - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 8 7.1 No Right of Continued Employment . . . . . . . . . . . . . . . . 8 7.2 No Right of Assignment . . . . . . . . . . . . . . . . . . . . . 8 7.3 Withholding for Taxes. . . . . . . . . . . . . . . . . . . . . . 8 7.4 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 8 -ii- VARI-LITE HOLDINGS, INC. ANNUAL INCENTIVE COMPENSATION PLAN This Plan is executed as of June 13, 1995 by Vari-Lite Holdings, Inc. (the "Company") to be effective as of October 1, 1994. W I T N E S S E T H: WHEREAS, the Company desires to provide a financial incentive to its employees to continue in its employ and share in its success based on the achievement of predetermined strategic goals of the Company; and WHEREAS, the Company believes that adoption of the Vari-Lite Holdings, Inc. Annual Incentive Compensation Plan (hereinafter referred to as the "Plan") will provide that incentive to its employees; NOW, THEREFORE, in consideration of the premises and the covenants herein contained, the Company hereby adopts the Plan as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. Unless by the context hereof a different meaning is clearly indicated, whenever used in the Plan, the following words shall have the meanings hereinafter set forth: a. "Base Salary" means the Participant's base compensation for the Plan Year without regard to any bonus, commission, overtime, or any other form of compensation paid to him by the Company or its subsidiaries during the Plan Year. b. "Board" means the board of directors of the Company. c. "Committee" means the committee appointed by the Board to administer the Plan, or in the absence of a committee, means the entire Board. d. "Company" means Vari-Lite Holdings, Inc. e. "Department" means any department of the Company or its subsidiaries, with a defined management group, for which performance measures under this Plan are applied. f. "Discretionary Award" means the portion, if any, of a Participant's Incentive Award for a Plan Year that is not determined by defined objective performance criteria. g. "Formula Derived Award" means the portion, if any, of a Participant's Incentive Award for a Plan Year that is determined by defined objective performance criteria. h. "Incentive Award" means the total of a Participant's Formula Derived Award and Discretionary Award for any Plan Year. i. "Operating Income" means earnings before interest, taxes, incentive compensation payments under the Plan and extraordinary items (as determined by the Executive Committee of the Board). j. "Participant" means an eligible employee of the Company or a subsidiary of the Company under Article II hereof. k. "Plan" means the "Vari-Lite Holdings, Inc. Annual Incentive Compensation Plan" herein described, as the same may be amended from time to time. l. "Plan Year" means the Company's fiscal year, October 1 through September 30. The first Plan Year of the Plan shall be the period from October 1, 1994 through September 30, 1995. m. "Team" means a group of individuals assigned a specific project during a Plan Year for which performance measures under this Plan are applied. 1.2 GENDER AND NUMBER. Except as otherwise indicated by the context, any masculine terminology used herein also includes the feminine and neuter, and vice versa, and the definition of any term in a singular shall also include the plural, and vice versa. ARTICLE II ELIGIBILITY 2.1 ELIGIBILITY. All full-time employees of the Company and its subsidiaries (approved by the Committee) shall participate in the Plan for a Plan Year. If an employee commences full-time employment with the Company or an approved subsidiary during a Plan Year, he shall not be considered an eligible employee for that Plan Year unless his full-time employment commencement date with the Company or that subsidiary occurs on or before June 30 of that Plan Year. For purposes of this Plan, an employee shall be considered a full-time employee if he is scheduled to work a minimum of 30 hours a week throughout the Plan Year and is thereby entitled to coverage under the Showco/Vari-Lite Welfare Benefit Plan. ARTICLE III INCENTIVE AWARDS 3.1 FORMULA DERIVED AWARDS. Each Plan Year each Participant shall have the opportunity to earn a specified percentage of his Base Salary for that Plan Year as a Formula Derived Award. The range of percentage of Base Salary that a Participant may earn as a Formula Derived Award for a Plan Year is specified in Section 4.3 and is determined by that Participant's level of responsibility -2- and potential impact on Company performance, as reflected by the highest tier into which he is categorized for that Plan Year under the following schedule: Tier 1 - Chairman of the Board, President & Chief Executive Officer Tier 1.5 - Chief Operating Officer (if different from Chief Executive Officer) Tier 2 - Senior Executives (U.S. Grades G, R, C, D) (U.K. Grade PC) Tier 3 - Vice Presidents (U.S. Grade RS) (U.K. Grades TC, BT) Tier 4 - Middle Management (U.S. Grades S, M, U, E, J,) (U.K. Grades TT, GM) Tier 5 - Supervisory Employees (U.S. Grades P, Z, R.E.M., TW, TP) (U.K. Grades EJ, SR, AL, TO, JN) Tier 6 - All other employees (U.S. Grades TE, CC, K, TR, A, PF)(U.K. Grades LZ, N, CH, B, E, TB) 3.2 DISCRETIONARY AWARDS. In addition to Formula Derived Awards that may be earned by Participants for each Plan Year, the Committee may, in its sole and absolute discretion, award a discretionary bonus to any Participant for that Plan Year. The Committee may determine to make Discretionary Awards for a Plan Year regardless of whether the Company attains the threshold level of its Operating Income goal for that Plan Year. ARTICLE IV PERFORMANCE MEASUREMENT AND AWARD DETERMINATION 4.1 PROCEDURE FOR MEASURING COMPANY PERFORMANCE. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the Operating Income goal of the Company for that Plan Year and the threshold, target, and maximum levels of attainment of that goal. No Participant shall be deemed to have earned a Formula Derived Award for a Plan Year unless the Company attains at least the threshold level of Operating Income established for that Plan Year. 4.2 BASIS OF FORMULA DERIVED AWARDS. The Plan is based on the premises that Incentive Awards should focus attention on the interests of shareholders, reflect the positions of employment and levels of responsibility of Participants with the Company, and provide rewards consistent with competitive practices. The Formula Derived Award a Participant may earn for a Plan Year may be based solely on attainment by the Company of its Operating Income goal for that Plan Year or may be based in part on attainment by the Company of that Operating Income goal and in part on the attainment of performance measures established by the Committee for that Plan Year based on subsidiary, Department, Team or individual performance, or a combination thereof. The relative weight placed on each performance measure (I.E., Company, subsidiary, Department, Team or -3- individual performance) by the Committee may vary for any Participant based on his position with the Company, or its subsidiaries and Departments. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the performance measures that shall be used for that Plan Year to determine the Formula Derived Award for each Participant. If a Participant's Formula Derived Award for a Plan Year is to be based on a combination of Company, subsidiary, Department, Team and individual performance measures, the Committee shall also determine the weight assigned to each performance measure which shall be reflective of the relative importance of each such performance measure in evaluating the performance of that Participant. Generally, it is expected that the potential Formula Derived Awards of subsidiary, Department and Team Participants will be weighted more heavily on subsidiary, Department and Team performance and less on Company performance. The potential Formula Derived Awards of senior executives will be weighted more on Company performance. 4.3 EFFECT OF LEVEL OF ATTAINMENT OF COMPANY PERFORMANCE. The schedule below reflects the maximum percentage of Base Salary a Participant may earn as a Formula Derived Award for a Plan Year based on the level of attainment by the Company of its Operating Income goal for that Plan Year. TIER THRESHOLD TARGET MAXIMUM ---- --------- ------ ------- 1 11.25% 22.50% 45.00% 1.5 10.00 20.00 40.00 2 7.50 15.00 30.00 3 5.00 10.00 20.00 4 3.75 7.50 15.00 5 2.00 4.00 8.00 6 1.25 2.50 5.00 If the level of attainment by the Company of its Operating Income goal for a Plan Year is between the threshold and the target level or between the target and the maximum level established for that Plan Year, the maximum percentage of Base Salary that each Participant may earn as a Formula Derived Award for that Plan Year under the above schedule shall be interpolated. For example, if the Operating Income of the Company for a Plan Year is equal to the threshold level established for that Plan Year, the Formula Derived Award for a Tier 3 Participant for that Plan Year shall not exceed 5% of his Base Salary for that Plan Year. If the actual Operating Income of the Company for a Plan Year is equal to a level halfway between the threshold and target level for that Plan Year, the Formula Derived Award for a Tier 3 Participant for that Plan Year shall not exceed 7.5% of his Base Salary for that Plan Year. 4.4 PROCEDURE FOR MEASURING SUBSIDIARY PERFORMANCE. The performance of a subsidiary of the Company for a Plan Year shall be based on that subsidiary's Operating Income for that Plan Year. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning -4- October 1, 1994, the Committee shall determine the Operating Income goal of each subsidiary for that Plan Year. 4.5 EFFECT OF LEVEL OF ATTAINMENT OF SUBSIDIARY PERFORMANCE. If a subsidiary does not attain at least 50% of its Operating Income goal for a Plan Year, each Participant who has a portion of his potential Formula Derived Award for that Plan Year based on that subsidiary's performance will not earn that portion of his Formula Derived Award for that Plan Year. If the subsidiary attains at least 50% of its Operating Income goal for a Plan Year, each Participant who has a portion of his potential Formula Derived Award for that Plan Year based on that subsidiary's performance will earn the same percentage (but not in excess of 100%) of that portion of his potential Formula Derived Award. 4.6 PROCEDURE FOR MEASURING DEPARTMENT PERFORMANCE. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the performance measures for each Department for that Plan Year. 4.7 EFFECT OF LEVEL OF ATTAINMENT OF DEPARTMENT PERFORMANCE. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the levels of performance that each Department must attain for a Plan Year in order for a Participant to earn a specified percentage of that portion, if any, of his potential Formula Derived Award based on that Department's performance for that Plan Year. 4.8 PROCEDURE FOR MEASURING TEAM PERFORMANCE. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the performance measures for each Team for that Plan Year. 4.9 EFFECT OF LEVEL OF ATTAINMENT OF TEAM PERFORMANCE. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, the Committee shall determine the levels of performance that each Team must attain for a Plan Year in order for a Participant to earn a specified percentage of that portion, if any, of his potential Formula Derived Award based on that Team's performance for that Plan Year. 4.10 PROCEDURE FOR MEASURING INDIVIDUAL PERFORMANCE. Individual performance of a Participant for a Plan Year shall be based on the rating he receives pursuant to his annual performance review for that Plan Year. Prior to the beginning of each Plan Year, commencing with the Plan Year beginning October 1, 1994, each Participant in conjunction with his supervisors shall develop performance objectives for that Plan Year. Each Participant's supervisors shall conduct an annual performance review of the Participant and shall rate him based on his accomplishment of his performance objectives for that Plan Year. The rating of a Participant shall be determined by his supervisors acting in their sole discretion. A Participant may appeal the rating he receives from his supervisors in accordance with established procedures of the Company. In all cases, the final decision belongs to the Company. -5- 4.11 EFFECT OF INDIVIDUAL PERFORMANCE RATING. If a Participant has a portion of his potential Formula Derived Award for a Plan Year based on his individual performance rating for that Plan Year, the percentage of that portion of his potential Formula Derived Award that he will earn based on his performance rating is determined as follows: Performance Rating Percentage ------------------ ---------- Less than 2 0% 2 50% 3 75% 4 and higher 100% If his performance rating is between 2 and 4, the percentage will be interpolated. By way of example, if a Participant's performance rating for a Plan Year is 2.5, the percentage of that portion of his potential Formula Derived Award that he will earn based on his performance rating will be 62.5% (I.E., 2.5 divided by 4.0). 4.12 CALCULATION OF FORMULA DERIVED AWARD. The table below illustrates how the potential Formula Derived Award for a Participant is determined for a Plan Year. The weight for each performance measure for the Plan Year is stated in the first column which is multiplied by that Participant's Base Salary for that Plan Year. That product is then multiplied by the percentage obtained from the schedule in Section 4.3 based on his category of employment and the Operating Income of the Company for that Plan Year. Finally, that new product is multiplied by the percentage determined under Sections 4.3, 4.5, 4.7, 4.9 or 4.11, whichever is applicable, based on the level of attainment of that specific performance measure. For purposes of illustration, (i) the Participant is a Tier 2 employee, (ii) 80% of his potential Formula Derived Award is based on Company performance and 20% of his potential Formula Derived Award is based on subsidiary performance, (iii) the Company attains the threshold level of its Operating Income goal for the Plan Year, (iv) the subsidiary attains 50% of its Operating Income goal for that Plan Year and (v) his Base Salary is $100,000 for that Plan Year. The actual Formula Derived Award earned by that Participant for that Plan Year shall be calculated as follows: BASE % of BASE PERCENT FORMULA DERIVED PERFORMANCE MEASURE WEIGHT SALARY SALARY EARNED AWARD - ------------------- ------ ------ --------- ------- --------------- Company 80% $100,000 7.5% 100% $6,000 Subsidiary 20% 100,000 7.5% 50% 750 Department 0% N/A N/A N/A 0 Team 0% N/A N/A N/A 0 Individual 0% N/A N/A N/A 0 ------ $6,750 -6- ARTICLE V PAYMENTS 5.1 FORM AND TIMING. The Company shall make payment of the Incentive Award amount earned by each Participant for a Plan Year to such Participant in cash no later than 90 days after the end of that Plan Year (the "Payout Date"). Unless a Participant's full-time employment terminates due to death, total disability or retirement at or after age 65, the Participant must be employed as a full-time employee by the Company or one of its subsidiaries on the Payout Date for a Plan Year to be entitled to receive payment of his Incentive Award for that Plan Year. 5.2 NEW PARTICIPANTS. If an employee becomes a Participant after the commencement of a Plan Year, the Incentive Award amount earned by that Participant for that Plan Year, if any, will be prorated to reflect the actual length of the Participant's service during that Plan Year. 5.3 TERMINATION DUE TO DEATH, TOTAL DISABILITY, OR RETIREMENT. If the full-time employment of a Participant with the Company and its subsidiaries terminates during a Plan Year due to death, total disability, or retirement at or after age 65 and after he has been employed by the Company or a subsidiary for at least six months during that Plan Year, the Incentive Award amount earned by that Participant for that Plan Year, if any, will be prorated to reflect the actual length of the Participant's service with the Company and its subsidiaries during that Plan Year. If a Participant dies during a Plan Year, payment of the Incentive Award amount, if any, will be made to the Participant's estate. The Committee shall determine in its sole discretion whether a Participant is totally disabled. ARTICLE VI ADMINISTRATIVE PROVISIONS 6.1 AUTHORITY TO ADMINISTER. The Committee shall have responsibility for administration of the Plan. The Committee shall have full authority to determine performance measures and awards, eligibility, and participation, interpret the Plan's provisions, set rules, and administer the Plan. The Committee may delegate administrative responsibilities as it deems appropriate. Any and all matters involving the Plan, including but not limited to disputes involving Participants and their beneficiaries, shall be referred to the Committee. The Committee shall have the exclusive discretionary authority to construe the terms of the Plan and determine eligibility for all benefits hereunder. Any such determinations or interpretations of the Plan adopted by the Committee shall be final and conclusive and shall bind all Participants. 6.2 AMENDMENT OF THE PLAN. The Committee may terminate, amend, or modify the Plan prior to September 30 of any Plan Year for subsequent Plan Years, provided that no such termination, amendment, or modification of the Plan shall adversely affect the rights of any Participant to Incentive Awards earned, but unpaid, under the Plan. If federal regulations enacted during a Plan Year negate the validity of the performance measures established under the Plan for that Plan Year, the Plan shall be amended by the Committee to reflect such regulatory requirements. -7- ARTICLE VII GENERAL PROVISIONS 7.1 NO RIGHT OF CONTINUED EMPLOYMENT. Nothing contained in the Plan shall give any Participant the right to be retained in the employment of the Company or any of its subsidiaries or affect the right of the Company or any subsidiary to dismiss any Participant, or shall be deemed to be a contract of employment. The receipt by a Participant of an Incentive Award for any Plan Year shall not guarantee that Participant the right to receive an Incentive Award for any subsequent Plan Year. 7.2 NO RIGHT OF ASSIGNMENT. No right or interest of any Participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy. 7.3 WITHHOLDING FOR TAXES. The Company shall have the right to deduct from all amounts paid under this Plan any taxes required by law to be withheld with respect to such payments. 7.4 GOVERNING LAW. All questions pertaining to the construction, regulation, validity, and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Company has caused this Plan to be executed effective as of October 1, 1994. VARI-LITE HOLDINGS, INC. By: /s/ H.R. Brutsche III ---------------------------- H.R. Brutsche III, President -8- EX-10.24 16 EXHIBIT 10.24 AMENDMENT NO. 1 TO THE VARI LITE INTERNATIONAL, INC. ANNUAL INCENTIVE COMPENSATION PLAN (As Revised and Restated Effective October 1, 1995) This Amendment No. 1 is executed and effective as of October 1, 1996 by Vari-Lite International, Inc. (the "Company"). W I T N E S S E T H : WHEREAS, the Company desired to provide a financial incentive to its employees to continue in its employ and share in its success based on the achievement of predetermined strategic goals of the Company and adopted the Vari-Lite Holdings, Inc. Annual Incentive Compensation Plan, effective October 1, 1994 (hereinafter referred to as the "Plan"); and WHEREAS, the Company changed its name from "Vari-Lite Holdings, Inc." to "Vari-Lite International, Inc." effective December 27, 1995 and revised and restated the Plan effective October 1, 1995; and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, in consideration of the premises and the covenants herein contained, the Company hereby amends the Plan in the following respects: Section 3.1 of the Plan is hereby amended to read as follows: 3.1 FORMULA DERIVED AWARDS. Each Plan Year each Participant shall have the opportunity to earn a specified percentage of his Base Salary for that Plan Year as a Formula Derived Award. The range of percentage of Base Salary that a Participant may earn as a Formula Derived Award for a Plan Year is specified in Section 4.3 and is determined by that Participant's level of responsibility and potential impact on Company performance, as reflected by the highest tier into which he is categorized for that Plan Year under the following schedule: Tier 1 - Chairman of the Board, President & Chief Executive Officer Tier 1.5 - Chief Operating Officer (if different from Chief Executive Officer) Tier 2 - Senior Executives (U.S. Grades G, R, C, D) (U.K. Grade PC) Tier 3 - Vice Presidents (U.S. Grade RS) (U.K. Grades TC, BT) (Hong Kong Grade RM) (Spanish Grade BJ) Tier 4 - Middle Management (U.S. Grades S, M, U, E, J,) (U.K. Grades TT, GM) (Spanish Grades EJ, GM) Tier 5 - Supervisory Employees (U.S. Grades P, Z, R.E.M., TW, TP) (U.K. Grades EJ, SR, AL, TO, JN) (Hong Kong Grades VG, WJ) (Spanish Grade LZ) Tier 6 - All other employees (U.S. Grades TE, CC, K, TR, A, PF) (U.K. Grades LZ, N, CH, B, E, TB) (Hong Kong Grades GB, BM) IN WITNESS WHEREOF, the Company has caused this Amendment No. 1 to be executed as of the day and year first above written. VARI-LITE INTERNATIONAL, INC. By:/s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III, President EX-10.38 17 EXHIBIT 10.38 INDEMNIFICATION AGREEMENT This Agreement, dated as of _____________ _____, 1997, is by and between Vari-Lite International, Inc., a Delaware corporation (the "Corporation"), and ______________ ("Indemnitee"). WITNESSETH: WHEREAS, the Corporation desires to have qualified persons serving as directors and officers of the Corporation and its subsidiaries who are willing to make decisions that in their judgment are in the Corporation's best interest without any undue threat of personal liability; and WHEREAS, the Corporation is contemplating an initial public offering of its common stock (the "Offering"); and WHEREAS, in connection with the Offering, the Corporation will merge with Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), with the Corporation being the surviving corporation (the "Reincorporation"), and, among other things, all officers and directors of Vari-Lite Texas will become officers and directors of the Corporation and each subsidiary of Vari-Lite Texas will become a subsidiary of the Corporation; and WHEREAS, upon consummation of the Reincorporation, Indemnitee will serve as an officer and/or director of the Corporation and/or one or more of its subsidiaries; and WHEREAS, the Certificate of Incorporation of the Corporation requires the Corporation (a) to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding") (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer, employee, or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (all of such persons being hereinafter referred to as a "Corporate Functionary"), against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such Proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, and (b) to indemnify any person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Corporate Functionary against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such Proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Court of Chancery shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such Losses which the Court of Chancery shall deem proper; and WHEREAS, the Corporation desires to grant to Indemnitee the maximum indemnification permitted by law; and WHEREAS, developments with respect to the terms and availability of directors' and officers' liability insurance and with respect to the application, amendment, and enforcement of statutory, charter, and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to persons intended to be protected thereunder; and WHEREAS, in order to resolve such questions and thereby induce Indemnitee to serve and continue serving as a director and/or officer of the Corporation and/or its subsidiaries, the Corporation has determined and agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's agreement to serve and continue serving as a director and/or officer of the Corporation and/or its subsidiaries, the parties hereto agree as follows: 1. EFFECTIVENESS OF AGREEMENT. This Agreement is expressly contingent on the consummation of the Reincorporation and the Offering and shall have no legal force or effect until such time as both events shall have taken place. In addition, effective as of the consummation of the Reincorporation and the Offering, any indemnification agreement by and between Indemnitee and Vari-Lite Texas or any subsidiary of Vari-Lite Texas, will be terminated and superseded in all respects by this Agreement and shall have no further force or effect. 2. INDEMNITY FOR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee to the full extent of all Losses (as hereinafter defined) in connection with any threatened, pending, or completed Proceeding (other than an action by or in the right of the Corporation and/or its subsidiaries) to which Indemnitee was or is a party or is threatened to be made a party by reason of the fact that he is or was a Corporate Functionary, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 3. INDEMNITY FOR ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify Indemnitee to the extent of all Losses in connection with the defense or settlement of any threatened, pending, or completed Proceeding by or in the right of the Corporation and/or its subsidiaries to procure a judgment in its favor to which Indemnitee was or is a party or is threatened to be made a party by reason of the fact that Indemnitee is or was a Corporate Functionary, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation and/or any of its subsidiaries, unless and only to the extent that the Court of Chancery or the court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability and in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Losses which the Court of Chancery or such other court shall deem proper. 4. EXPENSES RELATED TO A PROCEEDING. If Indemnitee is, by reason of the fact that Indemnitee is a Corporate Functionary, a party to and is successful, on the merits or otherwise, in defense of any Proceeding, or in defense of any claim, issue, or matter therein, Indemnitee shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him (and not paid, reimbursed, or advanced by others) in connection therewith. 2 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director or officer of the Corporation and/or any of its subsidiaries, and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending, or completed Proceeding or investigation that could lead to such a Proceeding, by reason of the fact that Indemnitee was serving in any capacity referred to herein. 6. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of notice of any claim against Indemnitee or the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the assertion of any such claim or the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability under this Agreement unless such delay in notification actually prejudiced the Corporation (and then only to the extent the Corporation was actually prejudiced thereby) and, in addition, the Corporation shall not be relieved from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such Proceeding as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation will be entitled to participate therein at its own expense. (b) Except as otherwise provided below, to the extent that it may wish, the Corporation, jointly with any other indemnifying party similarly notified, will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election so to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other fees or expenses subsequently actually and reasonably incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action, or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in (ii) above. (c) The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without the Corporation's written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Corporation nor Indemnitee will unreasonably withhold consent to any proposed settlement. 7. ADVANCES OF EXPENSES. Expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee that are subject to indemnification under this Agreement (and not paid, reimbursed, or advanced by others) shall be paid or reimbursed by the Corporation in advance of the final disposition of the Proceeding within 10 days after the Corporation receives a written request by Indemnitee accompanied by substantiating documentation of such expenses and a written undertaking by or on behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately determined that he is not entitled to be indemnified by the Corporation hereunder or that such expenses do not constitute Losses. The 3 written undertaking described above must be an unlimited general obligation of Indemnitee but shall not be secured. Such undertaking shall be without reference to the financial ability of Indemnitee to make repayment. 8. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION: PROCEDURE UPON APPLICATION. Upon the written request of Indemnitee to be indemnified pursuant to this Agreement (other than pursuant to Section 7 hereof), the Corporation shall cause the Reviewing Party (as hereinafter defined) to determine, within 45 days, whether or not the Indemnitee has met the relevant standards for indemnification required by this Agreement. The termination of a Proceeding by judgment, order, settlement, or conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not of itself create a presumption that Indemnitee did not meet the requirements for indemnification required by this Agreement. If a determination of indemnification is to be made by Independent Legal Counsel (as hereinafter defined), such Independent Legal Counsel shall render its written opinion to the Corporation and Indemnitee as to what extent Indemnitee will be permitted to be indemnified. The Corporation shall pay the reasonable fees of Independent Legal Counsel and indemnify and hold harmless Indemnitee against any and all reasonable expenses (including attorneys' fees), claims, liabilities, and damages arising out of or relating to the engagement of Independent Legal Counsel pursuant hereto and the written opinion of such Independent Legal Counsel. 9. DEFINITIONS. The following terms shall, for all purposes of this Agreement, have the indicated meanings: (a) "Reviewing Party" means (i) a majority of directors of the Corporation who at the time of voting upon a determination of indemnification are not parties to the Proceeding with respect to which Indemnitee is seeking indemnification, even though less than a quorum, (ii) Independent Legal Counsel selected by a majority of directors who at the time of selecting such Independent Legal Counsel are not parties to the Proceeding with respect to which Indemnitee is seeking indemnification, or (iii) the stockholders of the Corporation. (b) "Independent Legal Counsel" shall mean an attorney, selected in accordance with the provisions of Section 9(a) hereof, who shall not have otherwise performed services for Indemnitee, the Corporation, any person that controls the Corporation, or any of the directors of the Corporation, within five years preceding the time of such selection (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who has been sanctioned or censured for ethical violations of applicable standards of professional conduct. (c) "Losses" shall mean any and all expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by Indemnitee after realization of or giving effect to all insurance, bonding, indemnification, and other payments or recoveries actually received by or for the benefit of Indemnitee, directly or indirectly, or to which Indemnitee may be entitled, directly or indirectly. 10. ENFORCEABILITY. The right to indemnification or payment, reimbursement, or advancement of expenses as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. 4 Neither the failure of the Corporation (including its Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances, because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation (including its Board of Directors or Independent Legal Counsel) that Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 11. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for a portion of Losses, but not for the total amount thereof, the Corporation shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an event subject to indemnification hereunder or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him (and not paid, reimbursed, or advance by others) in connection with such Proceeding, issue, or matter, as the case may be. 12. REPAYMENT OF EXPENSES. Indemnitee shall reimburse the Corporation for all reasonable expenses paid by the Corporation in defending any Proceeding against Indemnitee if and only to the extent that it shall be ultimately determined that Indemnitee is not entitled to be indemnified by the Corporation for such expenses under the provisions of this Agreement or that such expenses do not constitute Losses. 13. CONSIDERATION. The Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Corporation hereby in order to induce Indemnitee to serve and continue serving as an officer and/or a director of the Corporation and/or any of its subsidiaries, and acknowledges that Indemnitee is relying upon this Agreement in serving in such capacities. 14. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and payment, reimbursement, and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any other agreement, vote of stockholders, as a matter of law, or otherwise, but any indemnification of Indemnitee pursuant to the Certificate of Incorporation or By-Laws of the Corporation is limited to Losses. 15. SUBROGATION. If a payment is made under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of such Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights. 16. SEVERABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision thereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereto. 17. NOTICE. Any notice, consent, or other communication to be given under this Agreement by either party to the other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service, or (d) delivered by telex or facsimile transmission to the address set forth beneath the signature of the parties below, or at such other address as may be designated by the parties from time to time in accordance with this Section. Notices delivered 5 personally, by overnight express delivery service, or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 18. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION; REIMBURSEMENT. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. (b) This Agreement shall be binding upon and inure to the benefit of Indemnitee and his heirs, executors, administrators, personal representatives, and assigns, and upon the Corporation and its successors and assigns. (c) No amendment, modification, termination, or cancellation of this Agreement shall be effective unless made in writing and signed by both parties hereto. (d) If Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Corporation shall reimburse Indemnitee for all reasonable fees (including attorneys' fees) and expenses actually and reasonably incurred in bringing and pursuing such action. (e) Words of any gender used in this Agreement shall be held and construed to include any other gender. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the date first above written. VARI-LITE INTERNATIONAL, INC. By: --------------------------------------------- H.R. Brutsche III, President Address of Vari-Lite International, Inc.: 201 Regal Row Dallas, Texas 75247 Fax: (214) 630-5867 --------------------------------------------- --------------------------------------------- Address of Indemnitee: --------------------------------------------- --------------------------------------------- 6 EX-10.39 18 EXHIBIT 10.39 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger is executed as of August 27, 1997, by and between Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), and Vari-Lite International, Inc., a Delaware corporation ("Vari-Lite Delaware"). WITNESSETH: WHEREAS, the authorized capital stock of Vari-Lite Delaware consists of 40,000,000 shares of Common Stock, $0.10 par value ("Vari-Lite Delaware Common Stock"), of which 100 shares are issued and outstanding and owned by H.R. Brutsche III, and 10,000,000 shares of Preferred Stock, $0.10 par value, none of which are issued and outstanding; and WHEREAS, the authorized capital stock of Vari-Lite Texas consists of (a) 2,000,000 shares of Class A Common Stock, $0.10 par value ("Vari-Lite Texas Class A Common Stock"), of which 200,000 are issued and outstanding and (b) 8,000,000 shares of Class B Common Stock, $0.10 par value ("Vari-Lite Texas Class B Common Stock" and together with Vari-Lite Texas Class A Common Stock, "Vari-Lite Texas Common Stock"), of which (i) 1,405,406 shares are issued and outstanding, (ii) 212,558 shares are reserved for issuance in connection with awards that may be granted under the Vari-Lite International, Inc. 1997 Omnibus Plan ("Omnibus Plan"), and (iii) 64,361 shares are reserved for issuance upon the exercise of outstanding warrants to purchase Vari-Lite Texas Class B Common Stock (collectively "Warrants"); and WHEREAS, the respective boards of directors of Vari-Lite Texas and Vari-Lite Delaware deem it to be desirable and in the best interests of the respective corporations and their respective shareholders that the two corporations merge into a single corporation (the "Merger"), and, pursuant to resolutions duly adopted, such boards of directors have approved and adopted this Agreement and have directed that this Agreement be submitted to the respective shareholders of Vari-Lite Texas and Vari-Lite Delaware for approval and adoption; and WHEREAS, the sole stockholder of Vari-Lite Delaware has approved and adopted this Agreement and the Merger in accordance with the requirements of the Delaware General Corporation Law; NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements and covenants contained herein, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1. MERGER. In accordance with the provisions of the Texas Business Corporation Act and the Delaware General Corporation Law at the Effective Time (defined below) of the Merger, Vari-Lite Texas shall be merged into Vari-Lite Delaware, which shall be the surviving corporation (in its capacity as such surviving corporation Vari-Lite Delaware is hereinafter sometimes referred to as the "Surviving Corporation," and Vari-Lite Texas and Vari-Lite Delaware are hereinafter sometimes referred to collectively as the "Constituent Corporations"), and as such Vari-Lite Delaware shall continue to be governed by the laws of the State of Delaware. 1.2. EFFECTIVE TIME. The Merger shall become effective on such date as a Certificate of Merger, executed, adopted and approved in accordance with the Delaware General Corporation Law, shall have been filed with the Secretary of State of Delaware. The time when the Merger shall become effective is herein called the "Effective Time." The action described above shall be conclusive evidence, for all purposes of this Agreement, of compliance with all conditions precedent. 1.3. CONTINUATION OF CORPORATE EXISTENCE. Except as may otherwise be set forth herein, at the Effective Time, the corporate existence and identity of Vari-Lite Delaware, with all its purposes, powers, franchises, privileges, rights and immunities shall continue under the laws of the State of Delaware, unaffected and unimpaired by the Merger, and the corporate existence and identity of Vari-Lite Texas, with all its purposes, powers, franchises, privileges, rights and immunities, shall be merged with and into Vari-Lite Delaware and the Surviving Corporation shall be vested fully therewith, and the separate corporate existence and identity of Vari-Lite Texas shall thereafter cease, except to the extent continued by applicable law. At the Effective Time, the Surviving Corporation shall have the following rights and obligations: (a) The Surviving Corporation shall have all the rights, privileges, immunities and powers, including without limitation the rights and obligations of Vari-Lite Texas under the Omnibus Plan and the Warrants, and shall be subject to all of the duties and liabilities, of a corporation organized under the laws of the State of Delaware. (b) The Surviving Corporation shall succeed to, without other transfer, and shall possess and enjoy, all of the rights, privileges, immunities, powers, purposes and franchises, of both a public and private nature, of the Constituent Corporations, and all property, real, personal and mixed, and all debts due to either of the Constituent Corporations on whatever account, and all other choses in action, and every other interest of or belonging to either of the Constituent Corporations shall be deemed to be transferred to and vested in the Surviving Corporation without further act or deed, and shall thereafter be the property of the Surviving Corporation as they were of the respective Constituent Corporations, and the title to any real estate vested by deed or otherwise in either of said Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. (c) The Surviving Corporation shall thenceforth be responsible and liable for all debts, liabilities, obligations and duties of either of the Constituent Corporations, and any claim existing or action or proceeding pending by or against either Constituent Corporation may be prosecuted as if the Merger had not occurred, or the Surviving Corporation may be substituted in its place. Neither the rights of creditors nor any liens upon the property of either Constituent Corporation shall be impaired by the Merger. 1.4. ADDITIONAL ACTIONS. If at any time the Surviving Corporation shall deem or be advised that any further transfers, assignments, conveyances, assurances in law or other acts or things are necessary or desirable to vest or confirm in the Surviving Corporation title to any property or assets of either of the Constituent Corporations, each Constituent Corporation and its proper officers and directors shall execute and deliver any and all such proper transfers, assignments, conveyances and assurances in law and shall do all other acts and things as are necessary or proper to vest or confirm title to such property and assets in the Surviving Corporation and to otherwise carry out the purposes and intent of this Agreement. ARTICLE II CORPORATE GOVERNANCE 2.1. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of Vari-Lite Delaware in effect at the Effective Time shall constitute the Certificate of Incorporation of the Surviving Corporation until amended, altered or repealed in the manner provided by law. 2.2. BY-LAWS. The By-Laws of Vari-Lite Delaware in effect at the Effective Time shall be the By-Laws of the Surviving Corporation, until amended, altered or repealed. 2.3. DIRECTORS. The directors of Vari-Lite Delaware at the Effective Time shall be the directors of the Surviving Corporation and shall hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation until the end of their respective stated terms of office or until their respective successors are elected and qualified. 2.4. OFFICERS. The officers of Vari-Lite Delaware at the Effective Time shall be the officers of the Surviving Corporation and shall hold office subject to the By-Laws of the Surviving Corporation. ARTICLE III TREATMENT OF CAPITAL STOCK 3.1. CONVERSION OF CAPITAL STOCK. At the Effective Time, the manner of converting the issued capital stock of the Constituent Corporations shall be as follows: (a) Except as provided in Section 3.2, each share of Vari-Lite Texas Common Stock which is outstanding immediately prior to the Effective Time shall, at the Effective Time, by virtue of the Merger and without action on the part of the holder thereof, be converted into 3.76368 shares of Vari- Lite Delaware Common Stock. (b) Each share of Vari-Lite Texas Common Stock held by Vari-Lite Texas in its treasury immediately prior to the Effective Time shall, at the Effective Time, by virtue of the Merger and without any further action, be converted into 3.76368 shares of Vari-Lite Delaware Common Stock and remain held in the treasury of Vari-Lite Delaware. (c) Each share of Vari-Lite Delaware Common Stock outstanding immediately prior to the Effective Time shall, at the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and returned to the status of authorized but unissued stock of the Surviving Corporation. (d) No fractional shares of Vari-Lite Delaware Common Stock and no certificates or scrip certificates therefor shall be issued, and any fractions of shares of Vari-Lite Delaware Common Stock that a shareholder would otherwise be entitled to receive shall be rounded upward or downward to the nearest whole share without compensation or adjustment of any kind. (e) All of the shares of Vari-Lite Delaware Common Stock, when delivered pursuant to the provisions of this Agreement, shall be validly issued, fully paid and nonassessable. (f) If any stock certificate evidencing shares of Vari-Lite Delaware Common Stock is requested to be issued in a name other than that in which the surrendered certificate evidencing shares of Vari-Lite Texas Common Stock is registered, it shall be a condition of such issuance that the surrendered stock certificate shall be properly endorsed in blank or otherwise in proper form for transfer and that the person requesting such exchange pay to the Surviving Corporation any applicable transfer or other taxes or establish to the satisfaction of the Surviving Corporation that any such tax has been paid or is not payable. 3.2 DISSENTING SHARES. To the extent that appraisal rights are available under the Texas Business Corporation Act, shares of Vari-Lite Texas Common Stock that are issued and outstanding immediately prior to the Effective Time and that have not been voted for approval and adoption of this Agreement and the Merger and with respect to which appraisal rights have been properly demanded in accordance with the applicable provisions of the Texas Business Corporation Act ("Dissenting Shares") shall not be converted into shares of Vari-Lite Delaware Common Stock in the manner provided for in Section 3.1 at or after the Effective Time unless and until the holder of such shares withdraws his demand for such appraisal (in accordance with the applicable provisions of the Texas Business Corporation Act) or becomes ineligible for such appraisal. If a holder of Dissenting Shares withdraws his demand for such appraisal (in accordance with the applicable provisions of the Texas Business Corporation Act) or becomes ineligible for such appraisal, then, as of the Effective Time or the occurrence of such event, whichever later occurs, such holder's Dissenting Shares shall cease to be Dissenting Shares and shall be converted into shares of Vari-Lite Delaware Common Stock in the manner provided for in Section 3.1. After the Effective Time, the Surviving Corporation will comply with its statutory obligations to holders of Dissenting Shares. ARTICLE IV TERMINATION; MISCELLANEOUS 4.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether or not approved by the shareholders of the Constituent Corporations, by mutual agreement of the Boards of Directors of the Constituent Corporations. 4.2. AMENDMENT; MODIFICATION. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of Vari-Lite Texas and Vari-Lite Delaware at any time prior to the Effective Time, without shareholder approval. 4.3. COUNTERPARTS. This Agreement may be executed by the parties hereto in counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE HEREOF] IN WITNESS WHEREOF, the Constituent Corporations have executed this Agreement as of the date first above written. VARI-LITE INTERNATIONAL, INC. (a Texas corporation) By:/s/ H.R. Brutsche III ----------------------------------------- H.R. Brutsche III, Chairman of the Board, Chief Executive Officer and President VARI-LITE INTERNATIONAL, INC. (a Delaware corporation) By:/s/ H.R. Brutsche III ----------------------------------------- H.R. Brutsche III, Chairman of the Board, Chief Executive Officer, and President EX-21.1 19 EXHIBIT 21.1 EXHIBIT 21.1 List of Subsidiaries of Vari-Lite International, Inc. Name Jurisdiction of Incorporation Owner - ---- ----------------------------- ----- Vari-Lite, Inc. Delaware Vari-Lite International, Inc. Vari-Lite Asia, Inc. Japan Vari-Lite International, Inc. Vari-Lite Hong Kong, Ltd. Hong Kong Vari-Lite International, Inc. Vari-Lite Europe Holdings, Ltd. United Kingdom Vari-Lite International, Inc. Concert Production Lighting, Inc. Delaware Vari-Lite International, Inc. Showco, Inc. Delaware Vari-Lite International, Inc. IGNITION! Creative Group, Inc. Delaware Vari-Lite International, Inc. Irideon, Inc. Delaware Vari-Lite International, Inc. Irideon, Ltd. United Kingdom Irideon, Inc. Vari-Lite Europe, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. Vari-Lite Spain, S.A. Spain Vari-Lite Europe Holdings, Ltd. Theatre Projects Lighting Services, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. Brilliant Stages, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd.
EX-23.1 20 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Vari-Lite International, Inc. and Subsidiaries on Form S-1 of our report dated August 27, 1997 (October , 1997, as to the first paragraph of Note F) on the consolidated financial statements, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our firm under the heading "Experts" in such Prospectus, which is part of this Registration Statement. Dallas, Texas October , 1997 ------------------- The consolidated financial statements of Vari-Lite International, Inc. and Subsidiaries appearing in the above Prospectus are presented to give effect to the Company's reincorporation in Delaware and related recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. On the effective date of the Registration Statement, the above consent is in the form that we will sign upon the effectiveness of such events assuming that, from August 27, 1997 to the effective date of such events, no other material events have occurred which would affect the consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas September 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----