-----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, Gx0CUx3rV+v9VMwjl4PLd5OO1aQ+PfMuwClXnlR0EPnu7XxlGq5SdDE/ltt07eHL OslyJB+U4d/oX/udFTB7vw== 0000912057-01-001613.txt : 20010123 0000912057-01-001613.hdr.sgml : 20010123 ACCESSION NUMBER: 0000912057-01-001613 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20010116 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: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23159 FILM NUMBER: 1509645 BUSINESS ADDRESS: STREET 1: 201 REGAL ROW CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146301963 10-K 1 a2034323z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23159 ------------------------ VARI-LITE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2239444 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 REGAL ROW, DALLAS, TEXAS 75247 (Address of principal executive (Zip Code) offices)
Registrant's telephone number including area code: (214) 630-1963 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates of the registrant on January 10, 2001 was $7,442,552. As of that date, 7,800,003 shares of the registrant's Common Stock were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Certain information required by Part III of this Annual Report on Form 10-K is incorporated by reference from the registrant's definitive proxy statement for its annual meeting of stockholders to be held on March 2, 2001. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
PAGE -------- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 9 Item 4. Submission of Matters to a Vote of Security Holders......... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 11 Item 6. Selected Consolidated Financial Data........................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 22 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 22 PART III Item 10. Directors and Executive Officers of the Registrant.......... 23 Item 11. Executive Compensation...................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 23 Item 13. Certain Relationships and Related Transactions.............. 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 24 SIGNATURES............................................................ 30 INDEX TO FINANCIAL STATEMENTS......................................... F-1
2 PART I ITEM 1. BUSINESS GENERAL The Company is a leading worldwide designer, manufacturer and distributor of automated lighting systems. The Company provides automated lighting and other related equipment and production services primarily to the entertainment industry, serving markets such as concert touring, theater, television and film and corporate events. The Company sells and rents its VARI*LITE-Registered Trademark- automated lighting systems through its own domestic and international offices, rental associates and worldwide independent dealers. Historically, the Company has only rented its VARI*LITE-Registered Trademark- products rather than offering products for sale, however, the Company began selling certain VARI*LITE-Registered Trademark- products in fiscal 2000. The Company is also a leader in providing complementary products and services to the entertainment industry, including conventional lighting equipment, and design and production management services for conventions, business meetings and special events. Prior to the sale of its concert sound reinforcement business in November 2000, the Company was also a leading provider of concert sound reinforcement systems primarily to the concert touring market. The Company's predecessor was incorporated in 1988 in the State of Texas as a holding company for operations, which began in 1981 and was reincorporated in the State of Delaware in 1997. The Company's principal executive offices are located at 201 Regal Row, Dallas, Texas 75247 and its telephone number is (214) 630-1963. PRODUCTS AND SERVICES VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING PRODUCTS. The Company designs, manufactures and distributes an extensive line of integrated automated lighting systems, including light fixtures, or "luminaires," control consoles and support equipment, and provides system operators and maintenance services. To accommodate users who prefer to operate the Company's lighting systems independently, the Company also conducts extensive training programs. Historically, the Company had only rented its VARI*LITE-Registered Trademark- products through its rental offices rather than offering products for sale. However, as a result of the emergence of competing products along with the increased demand of certain customers to own rather than rent the products, the Company began selling certain VARI*LITE-Registered Trademark- products in fiscal 2000. SERIES 200-TM- SYSTEM. The Company's VL2C-TM- spot luminaire, VL4-TM- wash luminaire and Artisan-Registered Trademark-Plus and mini-Artisan-Registered Trademark-2 control consoles constitute the Company's Series 200-TM- system. Spot luminaires create a hard-edged, crisp beam which can be used for precisely focused illumination and visual effects, as well as for projecting custom light images and designs through the use of "gobos", designs etched into a piece of glass or cut into a piece of metal through which a light beam is directed to create an image. The VL2C-TM- spot luminaire can change light color in one-tenth of a second and can produce more than 120 separate light colors through the use of the Company's patented color changing system. In designing the Series 200-TM- system, the Company patented a number of features which it believes makes the Company's light systems superior to those of its competitors. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaires simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The VL4-TM- wash luminaire projects a dispersed soft-edge light beam for even illumination of objects and areas. The VL4-TM- luminaire's patented color changing system allows the user to select 30 preset and 3 160 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-TM- luminaire features precisely timed control of light intensity, including the ability to instantaneously turn the light fixture on and off. Continuous adjustment of diffusion and beam angle provides enhanced control of the beam shape. In 1991, Vari-Lite, Inc ("Vari-Lite") was awarded its first Primetime Emmy-Registered Trademark- award for engineering the Series 200 system. SERIES 300-TM- SYSTEM. The Company developed its Series 300-TM- automated lighting system principally to satisfy the demands of the theater 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 appeals to major concert touring clients who want to rent large systems. The Series 300 system includes the VL5-TM-, VL5Arc-TM- and VL5B-TM- wash luminaires, the VL6-TM-, VL6B-TM-, VL7-TM- and VL7B-TM- spot luminaires, and the VLM-TM- automated moving mirror, as well as the Artisan-Registered Trademark-Plus, mini-Artisan-Registered Trademark-2, Virtuoso-TM- and Virtuoso DX-TM- control consoles. The VL5-TM- luminaire is lighter than the VL4-TM- luminaire, and its cold-mirror reflector both eliminates the need for noisy cooling fans and reduces the amount of heat the lights emit onto the stage. Color changes for the VL5-TM- are controlled by a system that allows color cross-fades in as little as seven-tenths of a second and interchangeable lenses work with an internal diffusing mechanism to provide a wide variety of beam sizes and shapes. The VL5Arc-TM- luminaire has a brighter bulb than the VL5-TM- luminaire. In 1994, Vari-Lite was awarded its second Primetime Emmy-Registered Trademark- award for engineering for the VL5-TM- wash luminaire. The VL6-TM- spot luminaire is the companion to the VL5-TM- wash luminaire, and has two interchangeable 12-position wheels of dichroic color filters and gobos for split second color and image changes and multi-color beams. The VL6B-TM- spot luminaire adds a 3:1 zoom optics system and rotating gobos to the VL6-TM- luminaire. The VL7-TM- spot luminaire has a revolutionary collection optics system that produces a bright beam and provides an 8:1 zoom. Other features of the VL7-TM- fixture include full color spectrum crossfades with unparalleled precision and repeatability via the unique CVF-TM- System, strobe, image morphing and fixed and rotating gobos. The VL7B-TM- spot luminaire adds a four frame shuttering system to the VL7-TM- fixture. The VLM-TM- automated moving mirror is a dual-sided highly reflective Lexan-Registered Trademark- polycarbonate mirror panel. With its ability to both pan and tilt 360 degrees, the VLM-TM- automated moving mirror can be used to augment the effects produced by VARI*LITE-Registered Trademark- wash and spot luminaires, or it can be used with conventional lights to create limited beam motion at a very low cost. SERIES 2200-TM- SPOT LUMINAIRES. The VL2201-TM- spot luminaire was designed based on the VL6B-TM- spot luminaire with a more industry standard configuration and interface. The VL2201-TM- luminaire features an upper enclosure that houses the control electronics, as well as a power factor corrected arc power supply for the lamp. The VL2201-TM- luminaire supports a wide variety of colors and gobos with two 11 position wheels for interchangeable dichroic color and gobo selections, as well as a five position rotating gobo wheel for gobos or effects. A 3:1 zoom optics system and a programmable iris combine to create a wide variety of beam sizes. The luminaire features full field dimming, strobe effects and smooth, repeatable motion. The VL2202-TM- spot luminaire enjoys all of the same features as the VL2201-TM- luminaire, in the same configuration, with a 700 watt lamp producing twice the light output of the VL2201-TM- fixture. Both of these spot luminaires are small, lightweight and virtually silent. SERIES 2400-TM- WASH LUMINAIRES. The VL2416-TM- wash luminaire is based on the Emmy-Registered Trademark- award winning VL5-TM- luminaire with a more industry standard configuration and interface. The VL2416-TM- luminaire includes an upper enclosure that houses the control electronics, as well as a power factor corrected arc power supply for the lamp. It features a 1200 watt arc lamp and an innovative zoomable beam spreading optics system that can provide a field from 5 to 55 degrees. A rotatable, indexable front lens assembly that accepts standard PAR 64 lenses can be used for many unique beam effects. The DICHRO*TUNE-TM- radial color changer employs enhanced dichroic color filters to produce smooth, full spectrum color crossfades as well as very quick color changes. An internal douser allows intensity control as well as strobe effects. The VL2402-TM- wash luminaire is identical in configuration and size to the 4 VL2202-TM- spot luminaire. It features an upper enclosure that houses the control electronics as well as a power factor corrected arc power supply for the 700 watt lamp. The VL2402-TM- luminaire includes three color wheels for smooth, full spectrum color crossfades, as well as a fixed color wheel for rapid, "snap" color changes. It also features the same zoomable beam spreading optics for beam control as the VL2416-TM- wash luminaire. Smooth dimming and strobe effects are also provided. All of the VL 2200-TM- and VL 2400-TM- luminaires will operate from the various line voltages around the world. These luminaires, like all of the Company's other luminaires are compatible with the industry standard DMX-512 digital protocol and, as such, can be operated from DMX-512 control consoles, as well as the Company's more sophisticated, higher performance proprietary control consoles which use a high speed, bi-directional communications protocol. LIGHTING CONTROL SYSTEMS. The Company's control console, the Artisan-Registered Trademark- Plus, is used to operate all of the Company's Series 200-TM- and Series 300-TM- 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 console which has substantially the same capabilities as the Artisan-Registered Trademark- Plus console. The mini-Artisan-Registered Trademark- 2 console is used either as the primary console where space is limited or as a backup system when the Artisan-Registered Trademark- Plus console is used as the primary console. The Company's newest control system, featuring the Virtuoso-TM- control console offers much expanded control over VARI-LITE-Registered Trademark- luminaires, DMX automated lights and conventional fixtures. The system is capable of controlling up to 2,000 luminaires with up to 10,000 cues per channel, depending on the types of luminaires in the system. The system includes an advanced, 3-D graphical interface that allows users to have a real-time view of system status and performance. The 3-D graphical interface can also be used to program cues while the luminaires are off-line to maximize programming efficiency in busy production environments or for pre-production work before the actual lighting system is available. The Virtuoso-TM- system comprises a sophisticated computer network allowing for multiple consoles to be connected and programmed simultaneously, a major advantage in very large productions and when time is very limited. Advance fiber optic connections are provided for maximum system performance. The latest product in the Company's Virtuoso-TM- product line, introducted in 2000, is the Virtuoso DX-TM- console. The Virtuoso DX-TM- console offers all of the performance and features as the original Virtuoso DX-TM- console in a much smaller, less expensive platform. The Virtuoso DX-TM- console connects directly into the Virtuoso-TM- system with either traditional network wiring or with the same advanced fiber optics used in the original console. The Virtuoso DX-TM- console also offers the additional advantage of outputing 8 universes of DMX-512 control directly from the console. This allows the console to be used with equal ease with VARI-LITE-Registered Trademark- luminaires, DMX automated lights or conventional fixures. The Virtuoso DX-TM- console was developed as the primary control console to be sold with the Company's luminaires and has also become a very popular console in the Company's rental business. Another member of the Virtuoso-TM- product line is the Company's Visionary 3D-TM- software package. This software allows users to create actual Virtuoso-TM- cues and showfiles, using the 3-D graphical interface, without the presence of a console or lighting system, using only their personal computers. These showfiles can then be transported to the Virtuoso-TM- or Virtuoso DX-TM- console for use with the lighting system. This software has also become a popular training aid for those learning to use the Virtuoso-TM- system. OTHER PRODUCTS AND SERVICES. The Company provides trained personnel to operate its automated lighting systems and offers training courses, maintenance and other support services to customers. The Company maintains training facilities in its Dallas, New York, Los Angeles, Tokyo and London offices, where it trains both its own personnel and customers who find it more efficient to have their personnel operate and maintain the VARI*LITE-Registered Trademark- equipment. In addition to luminaires and control consoles, the Company rents related equipment required to operate the Company's systems, such as power and control signal distribution equipment, dimmers and cables. The Company also developed a unique stackable, plastic injection-molded storage case for 5 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. COMPLEMENTARY BUSINESSES CONVENTIONAL LIGHTING PRODUCTS. The Company offers conventional lighting and rigging equipment, including numerous types of luminaires and control consoles, large search lights, automatic gel scrollers, trusses, motors, dimmers and smoke machines. CORPORATE MEETINGS AND SPECIAL EVENTS. The Company, through its IGNITION! Creative Group, Inc. ("Ignition") subsidiary, provides design and production management services to businesses for conventions, business meetings and special events. The Company provides concept development, scenery, lighting, sound, special effects, scripting, media production and entertainment production for such events. The Company also rented sound reinforcement systems, provided custom stage and stage set design and construction services and sold architectural lighting systems until the sale of those businesses in November 2000, December 1998 and October 1998, respectively. MARKETING, SALES AND DISTRIBUTION The Company markets its products and services to the entertainment industry, including concert touring, theater, television and film and corporate events markets. Depending on the circumstances, the Company solicits business from lighting and set designers and consultants, artist managers, producers, production managers and production companies, promoters, corporations and business associations. The Company believes that its quality products, reputation for innovation, customer relationships, worldwide distribution and excellent service are the keys to its success. No customer has accounted for more than 10% of the Company's revenues for at least the last three fiscal years. In 1998, the Company began to emphasize its full-service strategy by expanding the products and services it offers to include a more extensive selection of conventional lighting products and related production services. This effort is designed to accommodate the comprehensive lighting needs of the Company's rental customers by offering "one-stop" shopping. VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING PRODUCTS. Historically, the Company had only rented its VARI*LITE-Registered Trademark- products rather than offering the products for sale. The initial decision to distribute the Company's products through a rental network was largely driven by the demands of the Company's primary customers at the time--the concert touring market. In addition, the rental only strategy provided the Company with a higher level of quality control over its rental products, which require trained operators and maintenance personnel. The Company also believed renting had enabled it to better protect its intellectual property and generate revenue from each product over an extended time period. However, as a result of the emergence of competing automated lighting products, along with the increased demand of certain customers to own rather to rent the products, the Company began selling certain VARI*LITE-Registered Trademark- products in fiscal 2000. The Company markets its automated lighting systems and services in the United States through both Company-owned offices located in Dallas, New York, Los Angeles, Nashville, Orlando, Las Vegas and Chicago and independent dealers and rental associates. Each Company-owned office is strategically located to take advantage of specific market segments. For example, the New York office targets the theater market, the Nashville office targets the country music, television and concert touring markets, the Los Angeles office targets the television, film and concert touring market, and the Orlando, Las Vegas, and Chicago offices target the corporate events market. The independent dealers focus on specific geographic 6 markets and rental associates tend to rent to all market segments. The Company's international distribution system comprises Company-owned locations in London and Tokyo, as well as, independent dealers and rental associates over 25 cities in North America, Europe and Asia. Prior to fiscal 2000, in order to satisfy customers who wanted to purchase the Company's lighting systems, the Company offered sales-type leases. Under the typical sales-type lease, the customer rented 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 was normally responsible for maintaining the equipment under these arrangements, but often entered into a maintenance agreement with the Company. CONVENTIONAL LIGHTING PRODUCTS AND PRODUCTION SERVICES. The Company's conventional lighting operations and production services were integrated into the Company's operations in 1998 to improve the Company's position as a full-service provider. These operations rely heavily on the Company's reputation for quality and service, which is enhanced by its high visibility projects and customers. The Company reinforces this reputation by advertising in trade and specialty magazines. Although most of the Company's conventional lighting contracts are procured through a bidding process, the Company believes that competition in this industry is based on expertise, quality, price and full service capabilities. CORPORATE MEETINGS AND SPECIAL EVENTS. The Company sells its design and production management services to corporate meeting planners and sales and marketing executives. In-house salespeople seek requests for proposals through cold calls, sales letters and professional mailings and, to a lesser extent, through advertising in trade publications. Upon receiving an invitation to submit a proposal, the Company assembles a project team which develops concepts and designs for a multi-media presentation to the potential client. RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY The Company's proprietary technology and development of innovative products that meet the needs of its customers have enabled it to expand the applications for its technology to new products and markets. From time to time, the Company collaborates with unaffiliated entities to supplement and complement its internal research and development activities. The Company's research and development group consists of over 40 engineers, technicians and related personnel. These internal capabilities enable the Company to continually improve existing products, design new products and develop new technology to meet the needs of its customers. In the fiscal years ended September 30, 1998, 1999 and 2000, the Company's research and development expenditures totaled $6.7 million, $5.6 million and $5.2 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. The Company had registered and received more than 45 domestic patents and more than 220 foreign patents in several different countries and territories. In addition, the Company had more than five patent applications pending in the United States on automated lighting technology and more than 30 patent applications pending worldwide. The Company's patents cover the basic concepts, control software, control hardware and features unique to each of the Company's VARI*LITE-Registered Trademark- luminaire models. The Company believes that its patents provide it with a substantial competitive advantage in the automated lighting industry, and the Company's ability to compete in the future will depend in part on maintaining its technological advantage over its competitors. The Company has obtained trademark protection in the United States and numerous foreign countries on various names, including, among others, VARI*LITE-Registered Trademark-, Artisan-Registered Trademark-, Virtuoso-TM-, Virtuoso DX-TM-, Visionary 3D-TM-, ArtisanVLQ-TM-, Series 200-TM-, Series 300-TM-, VL2C-TM-, VL4-TM-, VL5-TM-, VL5Arc-TM-, 7 VL5B-TM-, VL6-TM-, VL6B-TM-, VL7-TM-, VL7B-TM-, VL2200-TM-, VL2201-TM-, VL2202-TM-, VL2400-TM-, VL2402-TM-, VL2416-TM-, VLM-TM-, VARI*IMAGE-TM-, DICHRO*TUNE-TM- and DICHRO*WHEEL-TM-. MANUFACTURING The Company's manufacturing facilities are located in Dallas, Texas. The Company's manufacturing process principally consists of procuring, inspecting and assembling components custom-made by others to the Company's specifications. The Company generally provides its suppliers with specifications for its components and pays for all tooling used in their production. The Company emphasizes the quality and reliability of its products and, accordingly, submits all finished products to rigorous testing both at the time they are manufactured and when they are returned to the Company at the termination of each rental agreement. The Company has frequently worked in concert with certain of its key suppliers to design and develop new technologies which have been incorporated into the Company's products specifically to meet its requirements. As a result, although most components and raw materials used by the Company are available from more than one supplier, many important components for the Company's lighting systems are provided by one vendor and are custom-designed (often jointly by the Company and its vendors). The Company attempts to maintain adequate inventories of these components and, based on its experience, does not anticipate problems obtaining sufficient supplies in the foreseeable future. The loss of any supplier that is the sole vendor of a component would delay the Company's manufacturing schedules and possibly force the Company to purchase new tooling, but the Company believes substitute suppliers can be found for all components of all of its products. EQUIPMENT INVENTORY MANAGEMENT The Company uses an inventory control and management system to locate its rental equipment at all times anywhere in the world. Each piece of equipment is serialized for identification purposes. Equipment utilization is centrally monitored at the Company's headquarters to determine, which products are in highest demand in various geographic markets and whether certain equipment should be relocated to increase utilization and revenue, whether product shortages that require the production of additional units exist, whether current pricing is at the appropriate level, and whether excess quantities exist that may be sold. The maximum utilization rates of the Company's equipment are affected by production scheduling requirements of the customers' various markets. Utilization rates are also impacted by the quantity of inventory, maintenance requirements and shipping time. The Company's inventory control system helps the Company optimize its utilization rates in light of these factors in order to satisfy customer requirements, maximize revenue and optimize equipment levels. 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., Martin Gruppen A/S and Production Resource Group, PLC. Of these competitors, only Production Resource Group, PLC rents equipment, while the others sell equipment to other rental companies. The Company's rental operations compete with a number of lighting rental companies. The Company competes primarily on the basis of product capabilities, quality, reliability, price, worldwide distribution, full service capabilities, brand name recognition, reputation, customer service and support. The VARI*LITE-Registered Trademark- brand name has been recognized for years as the preeminent brand name for automated lighting. The 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. 8 EMPLOYEES The Company has 397 full-time employees. In addition, the Company has 168 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. FINANCIAL INFORMATION Financial information regarding segments and operations by geographic area is set forth in Note B and Note M of the notes to consolidated financial statements. ITEM 2. PROPERTIES The Company leases all of its facilities, including four facilities comprising approximately 120,200 square feet in Dallas, Texas under leases that expire in April 2003. The Dallas facilities contain the Company's executive offices, manufacturing, warehouse, maintenance, research and development facilities and training center. The executive offices and warehouse space of Vari-Lite Production Services, Ltd. ("London") are located in London, England in one facility comprising approximately 57,000 square feet and the associated lease expires in April 2010. The executive offices of Vari-Lite Asia, Inc. ("Vari-Lite Asia"), as well as its technical center, are located in Tokyo in two leased facilities aggregating approximately 23,300 square feet, the terms of which expire in February 2003 and November 2004. The Company also leases office and warehouse space in New York and Los Angeles of 35,300 and 58,000 square feet, respectively, with lease term expirations of August 2010 and April 2004, respectively. In addition, the Company leases sales offices in Chicago, Las Vegas, Nashville and Orlando. The Company believes it maintains generally adequate insurance with respect to its properties. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In November 1998, the Company brought suit in the United States District Court for the Eastern District of Texas asserting a number of claims of infringement of several of its patents by Martin Gruppen A/S and Martin Professional A/S (collectively "Martin") seeking monetary damages and injunctive relief to prevent future patent infringement. In July 1999, the court entered a preliminary injunction prohibiting Martin from making, using, leasing or offering for sale or lease in the United States, or importing into the United States, certain products. In August 2000, the Company negotiated a settlement with Martin, the terms of which included a cash payment of $5.0 million to the Company and authorization for Martin to continue to sell all existing products that were subject to the Company's patents. At the request of the Company and Martin, the lawsuit was dismissed by the court in September 2000. In November 1999, Coemar S.p.A. and Clay Paky S.p.A. filed separate lawsuits against the Company in the United States Distict Court for the Southern District of New York. The suits were transferred to the United States District Court for the Northern District of Texas on July 12, 2000. The lawsuits seek declarations from the court that a certain patent of the Company is invalid, unenforceable, and/or not infringed by Coemar S.p.A. and Clay Paky S.p.A. In December 2000, the Company negotiated a settlement with Coemar S.p.A. and Clay Paky S.p.A, the specific terms of which are confidential, but included a cash settlement paid to the Company and authorization for Coemar S.p.A and Clay Paky S.p.A to continue to sell all existing products that were subject to the Company's patents. The lawsuits are currently stayed pending Coemar S.p.A and Clay Paky S.p.A's compliance with settlement terms. 9 In November 1999, SGM Elettronica, s.r.l. and Studio Due s.r.l. each filed a lawsuit against the Company in the United States District Court for the Southern District of New York. Both lawsuits sought declarations from the court that a certain patent of the Company is invalid, unenforceable, and/or not infringed by SGM Elettronica, s.r.l. nor Studio Due s.r.l. The lawsuit was dismissed by the court for lack of subject matter juridiction on July 12, 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the Nasdaq National Market under the symbol "LITE." The Company consummated its initial public offering of Common Stock on October 16, 1997. The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the Common Stock as reported by the Nasdaq National Market:
PRICE RANGE ------------------- HIGH LOW -------- -------- FISCAL YEAR 1999 First Quarter............................................. $4.750 $2.000 Second Quarter............................................ $4.250 $2.625 Third Quarter............................................. $2.813 $2.000 Fourth Quarter............................................ $2.125 $0.875 FISCAL YEAR 2000 First Quarter............................................. $1.688 $0.938 Second Quarter............................................ $4.000 $0.938 Third Quarter............................................. $2.750 $0.875 Fourth Quarter............................................ $1.500 $0.688 FISCAL YEAR 2001 First Quarter............................................. $2.500 $0.625 Second Quarter (through January 10, 2001)................. $1.625 $0.750
There were 70 stockholders of record of Common Stock on January 10, 2001. The Company has not paid, and does not anticipate paying in the foreseeable future, any cash dividends and expects that future earnings will be retained to finance operations and expansion. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon the Company's earnings levels, capital requirements and financial condition and such other factors the Board of Directors deems relevant. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the Company as of and for each of the five fiscal years in the period ended September 30, 2000, have been derived from the audited consolidated financial statements of the Company. This data should be read in conjunction with the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes thereto included elsewhere in this report.
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Rental revenues........................................... $ 60,291 $ 66,095 $ 73,235 $ 78,520 $ 76,366 Product sales and service revenues........................ 16,847 24,563 15,141 13,012 17,322 -------- -------- -------- -------- -------- Total revenues.......................................... 77,138 90,658 88,376 91,532 93,688 Rental costs.............................................. 23,462 26,746 33,172 39,557 35,990 Product sales and service costs........................... 10,746 13,301 10,472 7,393 10,881 -------- -------- -------- -------- -------- Gross profit.............................................. 42,930 50,611 44,732 44,582 46,817 Selling, general and administrative expense............... 29,878 32,779 35,014 38,224 37,102 Research and development expense.......................... 4,404 6,657 6,690 5,586 5,152 Impairment of assets...................................... -- -- 3,542 -- 3,850 Restructuring costs....................................... -- -- 1,080 600 -- Gains on lawsuit settlement and sale of lease............. -- -- -- -- (3,993) -------- -------- -------- -------- -------- Operating income (loss)................................... 8,648 11,175 (1,594) 172 4,706 Interest expense (net).................................... 3,291 3,930 2,881 4,540 5,180 -------- -------- -------- -------- -------- Income (loss) before taxes, extraordinary loss and cumulative effect of change in accounting principle..... 5,357 7,245 (4,475) (4,368) (474) Income taxes (benefit).................................... 2,238 2,916 (1,785) (1,725) (187) -------- -------- -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of change in accounting principle................ 3,119 4,329 (2,690) (2,643) (287) Extraordinary loss from early extinguishment of debt...... -- -- (737) -- -- Cumulative effect of change in accounting principle....... -- -- (195) -- -- -------- -------- -------- -------- -------- Net income (loss)......................................... $ 3,119 $ 4,329 $ (3,622) $ (2,643) $ (287) ======== ======== ======== ======== ======== Net income (loss) per basic share......................... $ 0.54 $ 0.75 $ (0.47) $ (0.34) $ (0.04) Net income (loss) per diluted share....................... $ 0.53 $ 0.74 $ (0.47) $ (0.34) $ (0.04) Cash dividends per share(1)............................... $ 0.11 $ 0.18 $ -- $ -- $ -- Weighted average basic shares outstanding................. 5,813 5,799 7,712 7,800 7,800 Weighted average diluted shares outstanding............... 5,912 5,819 7,712 7,800 7,800 OTHER DATA: EBITDA(2)................................................... $ 18,716 $ 22,838 $ 11,984 $ 15,538 $ 18,547 Net cash provided by operations............................. 7,925 15,237 6,474 8,494 9,653 Net cash provided (used) by investing activities............ (11,826) (23,071) (27,576) (10,040) 4,314 Net cash provided (used) by financing activities............ 2,564 8,346 23,673 (2,181) (10,284) Capital expenditures........................................ 11,981 23,212 25,841 12,914 3,980
AS OF SEPTEMBER 30, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Total assets................................................ $78,581 $96,704 $114,627 $107,700 $94,703 Total debt.................................................. 37,349 46,242 50,333 48,050 37,735 Stockholders' equity........................................ 24,538 27,541 44,704 43,235 41,748
- ------------------------------ (1) The Company does not anticipate paying any cash dividends on the Common Stock for the foreseeable future and anticipates that future earnings will be retained to finance operations and expansion. See "Market for Registrant's Common Equity and Related Stockholder Matters." (2) EBITDA is calculated herein as income before income taxes, extraordinary loss and cumulative effect of change in accounting principle plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading worldwide designer, manufacturer and distributor of automated lighting systems. The Company provides automated lighting and other related equipment and production services primarily to the entertainment industry, serving markets such as concert touring, theater, television and film and corporate events. The Company sells and rents its VARI*LITE-Registered Trademark- automated lighting systems through its own domestic and international offices, rental associates and worldwide independent dealers. Historically, the Company has only rented its VARI*LITE-Registered Trademark- products rather than offering products for sale, however, the Company began selling certain VARI*LITE-Registered Trademark- products in fiscal 2000. The Company is also a leader in providing complementary products and services to the entertainment industry, including conventional lighting equipment, and design and production management services for conventions, business meetings and special events. Prior to the sale of its concert sound reinforcement business in November 2000, the Company was also a leading provider of concert sound reinforcement systems primarily to the concert touring market. The Company's rental revenues are generated from the rental of VARI*LITE-Registered Trademark- automated lighting systems and conventional lighting equipment, and through November 2000 still included the rental of concert sound reinforcement systems. Product sales and services revenues are derived from the sale of VARI*LITE-Registered Trademark- automated lighting equipment and design and production management services. Rental revenues were $73.2 million, $78.5 million and $76.4 million or 82.9%, 85.8% and 81.5% of total revenues during fiscal 1998, 1999 and 2000, 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 conventional lighting equipment and, prior to the sale of the business in November 2000, concert sound reinforcement systems. The Company's rental revenues are recorded as earned over the term of each contract. 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 Company generates sales revenue from the sale of VARI*LITE-Registered Trademark- automated lighting equipment as well as its design and production management services to corporations and business associations for conventions, business meetings and special events. Through the first quarter of 1999, the Company generated sales revenue from its custom stage and stage set design and construction service and from the sale of architectural automated lighting systems. During fiscal 1998, the Company made a strategic decision to dispose of its architectural lighting product line. As a result of this decision, its architectural lighting assets were written down to their net realizable values, resulting in a charge of $3.5 million for the impairment of these assets in fiscal 1998. On October 30, 1998, the Company sold substantially all of its architectural assets for their net book value. During fiscal 1998, the Company's architectural lighting product line experienced operating losses of $1.7 million and operating income of $0.2 million in 1999. On December 31, 1998, the Company sold substantially all of the assets of Brilliant Stages, Ltd., ("Brilliant Stages") one of the Company's European subsidiaries, which incurred an operating loss of $0.5 million in fiscal 1998 and experienced break even operating results in 1999. 13 The following table reflects the percentages of total revenues by market:
YEARS ENDED SEPTEMBER 30, ------------------------------ 1998 1999 2000 -------- -------- -------- Concert Touring........................................ 35.0% 31.3% 27.6% Theatre................................................ 18.2 13.1 10.0 Television and Film.................................... 15.5 20.9 21.8 Corporate Events....................................... 23.2 26.9 26.1 Dealer Sales........................................... -- 1.7 11.9 Other.................................................. 8.1 6.1 2.6 ----- ----- ----- Total Revenue...................................... 100.0% 100.0% 100.0% ===== ===== =====
Although the Company expects revenues earned from concert touring (primarily rental revenues) to continue to represent a significant percentage of the Company's total revenues, from fiscal 1998 to fiscal 2000 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 and the increase in revenues from product sales. The Company has experienced fluctuations in its concert touring revenues because of the unpredictable nature of the timing and duration of such tours and expects such fluctuations to continue in the future. Revenues earned from the theater market decreased from fiscal 1998 through fiscal 2000 primarily as a result of a decrease in sales-type leases to this market segment. The Company anticipates revenue from the theater market will continue to fluctuate with the development of new theatrical productions and the cloning of productions. Revenues earned from the television and film market have increased from fiscal 1998 to fiscal 2000 as a result of the expanding worldwide television market and the need to meet additional programming requirements. In addition, the Company has experienced an increase in revenues from the corporate events market as a result of an increasing number of companies that have exhibited the desire to create entertainment-like productions. The increase in dealer sales from fiscal 1998 to fiscal 2000 is the result of the Company's strategic decision to begin selling VARI*LITE-Registered Trademark- products in fiscal 2000. The following table reflects the Company's geographic region revenues as a percentage of total revenues (see Note M of the "Notes to Consolidated Financial Statements"):
1998 1999 2000 -------- -------- -------- North America.......................................... 54.3% 52.0% 60.9% Europe................................................. 34.6 35.3 28.0 Asia................................................... 11.1 12.7 11.1 ----- ----- ----- Total Revenue...................................... 100.0% 100.0% 100.0% ===== ===== =====
The majority of European and Asian revenues are denominated in British pounds sterling and Japanese yen, respectively. The Company has offices in London and Tokyo. Prior to their sale in July and October 2000, the Company also had offices in Brussels, Paris, Madrid, Stockholm and Amsterdam. Fluctuations in foreign currencies have impacted, and will continue to impact, the Company's consolidated results of operations due to the translation of foreign currencies into U.S. dollars. The Company has typically maintained foreign currency borrowings to act as an economic hedge against fluctuations in British pounds sterling and Japanese yen. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 14 RESULTS OF OPERATIONS The following table sets forth the percentages of total revenues (or as percentages of a component of total revenues as shown) represented by certain consolidated income statement data and other data for the indicated periods:
YEARS ENDED SEPTEMBER 30, ------------------------------ 1998 1999 2000 -------- -------- -------- Income Statement Data: Rental revenues........................................... 82.9% 85.8% 81.5% Product sales and service revenues........................ 17.1 14.2 18.5 ----- ----- ----- Total revenues.......................................... 100.0 100.0 100.0 Rental costs.............................................. 37.5 43.2 38.4 Product sales and service costs........................... 11.9 8.1 11.6 ----- ----- ----- Gross margin.............................................. 50.6 48.7 50.0 Selling, general and administrative expense............... 39.6 41.7 39.6 Research and development expense.......................... 7.6 6.1 5.5 Impairment of assets...................................... 4.0 -- 4.1 Restructuring costs....................................... 1.2 0.7 -- Gains on lawsuit settlement and sale of lease............. -- -- (4.2) ----- ----- ----- Operating income (loss)................................... (1.8) 0.2 5.0 Interest expense (net).................................... 3.3 5.0 5.5 ----- ----- ----- Loss before income taxes, extraordinary item and cumulative effect of change in accounting principle..... (5.1) (4.8) (0.5) Income tax benefit........................................ (2.0) (1.9) (0.2) ----- ----- ----- Loss before extraordinary item and cumulative effect of change in accounting principle.......................... (3.1) (2.9) (0.3) Extraordinary loss........................................ (0.8) -- -- Cumulative effect of change in accounting principle....... (0.2) -- -- ----- ----- ----- Net loss.................................................. (4.1)% (2.9)% (0.3)% ===== ===== ===== Other Data: Rental revenues........................................... 100.0% 100.0% 100.0% Rental costs.............................................. 45.3 50.4 47.1 ----- ----- ----- Rental gross margin....................................... 54.7% 49.6% 52.9% ===== ===== ===== Product sales and service revenues........................ 100.0% 100.0% 100.0% Product sales and service costs........................... 69.2 56.8 62.8 ----- ----- ----- Product sales and service gross margin.................... 30.8% 43.2% 37.2% ===== ===== ===== EBITDA(1)................................................. 13.6% 17.0% 19.8%
- ------------------------ (1) EBITDA is calculated herein as income before income taxes, extraordinary loss and cumulative effect of change in accounting principle plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. 15 FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1999 REVENUES. Total revenues increased 2.4%, or $2.2 million, to $93.7 million in fiscal 2000, compared to $91.5 million in fiscal 1999. The revenue increase was attributable primarily to the factors set forth below. RENTAL REVENUES. Rental revenues decreased 2.7%, or $2.1 million, to $76.4 million in fiscal 2000, compared to $78.5 million in fiscal 1999. This decrease was primarily due to a decrease in the revenues earned by the Company's European and Asian rental operations, partially offset by increased revenues from the Company's North American rental operations. PRODUCT SALES AND SERVICES REVENUES. Product sales and services revenues increased 33.1%, or $4.3 million, to $17.3 million in fiscal 2000, compared to $13.0 million in fiscal 1999. This increase was primarily due to sales of new and used VARI*LITE-Registered Trademark- automated lighting equipment which increased $3.6 million to $10.4 million for fiscal 2000 compared to $6.8 million in fiscal 1999 RENTAL COSTS. Rental costs decreased 9.0%, or $3.6 million, to $36.0 million in fiscal 2000, compared to $39.6 million in fiscal 1999. Rental costs as a percentage of rental revenues decreased to 47.1% in fiscal 2000, from 50.4% in fiscal 1999. The decrease in rental costs as a percentage of total rental revenues was primarily due to improvement in rental prices and general reductions in variable operating costs. PRODUCT SALES AND SERVICES COSTS. Product sales and services costs increased 47.2%, or $3.5 million, to $10.9 million in fiscal 2000, compared to $7.4 million in fiscal 1999. Product sales and services costs as a percentage of product sales and services revenues increased to 62.8% in fiscal 2000, from 56.8% in fiscal 1999. The increase in product sales and services costs as a percentage of the related revenues was primarily the result of a decrease in revenues from sales-type leases which have historically had a lower cost of sales compared to product sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense decreased 2.9%, or $1.1 million, to $37.1 million in fiscal 2000, compared to $38.2 million in fiscal 1999. This expense as a percentage of total revenues decreased to 39.6% in fiscal 2000 from 41.7% in fiscal 1999. This decrease was primarily due to lower overhead costs as a result of the Company's restructuring efforts. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense decreased 7.8%, or $0.4 million, to $5.2 million in fiscal 2000, compared to $5.6 million in fiscal 1999. This expense as a percentage of total revenues decreased to 5.5% in fiscal 2000, from 6.1% in fiscal 1999. This decrease was primarily the result of a decrease in employee related costs as a result of employee terminations from the restructuring of the Company in fiscal 1999. IMPAIRMENT OF ASSETS. In June and October 2000, the Company made a strategic decision to sell a portion of its European operations. As a result, these European assets were written down to their net realizable value, resulting in a pre-tax charge of $3.9 million for fiscal 2000. GAINS ON LAWSUIT SETTLEMENT AND SALE OF LEASE. In August 2000, the Company settled a patent infringement lawsuit for $5.0 million which resulted in a net gain of $1.7 million and also negotiated the sale of a building lease in New York which resulted in a net gain of $2.3 million. RESTRUCTURING COSTS. In 1999, the Company recorded a $0.6 million pretax charge for the estimated costs of restructuring the Company's operations. The charge includes severance payments and other costs associated with the termination of approximately 15 employees. The charge also includes costs associated with terminating leases and the write off of the net book value of leasehold improvements associated with the closing of two offices. INTEREST EXPENSE. Interest expense increased 14.1%, or $0.7 million, to $5.2 million in fiscal 2000, compared to $4.5 million in fiscal 1999. This increase was due to higher interest rates in fiscal 2000. 16 INCOME TAXES. The effective tax rate in fiscal 2000 and 1999 was 39.5%. FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1998 REVENUES. Total revenues increased 3.6%, or $3.1 million, to $91.5 million in fiscal 1999, compared to $88.4 million in fiscal 1998. The revenue increase was attributable primarily to the factors set forth below. RENTAL REVENUES. Rental revenues increased 7.2%, or $5.3 million, to $78.5 million in fiscal 1999, compared to $73.2 million in fiscal 1998. This increase was primarily due to the acquisition of several of the Company's European distributors in fiscal 1998. Prior to acquiring each distributor, the Company received and recognized approximately one-half of the rental revenue earned by the distributor in accordance with the terms of the distributor agreement. After acquiring each distributor, the Company's results reflect all of the revenues the distributor would have earned. PRODUCT SALES AND SERVICES REVENUES. Product sales and services revenues decreased 14.1%, or $2.1 million, to $13.0 million in fiscal 1999, compared to $15.1 million in fiscal 1998. This decrease was primarily due to the sale of the Company's architectural automated lighting product line in October 1998 and substantially all of the assets of Brilliant Stages in December 1998. Offsetting these decreases were increases in revenues from sales-type lease revenues which increased as a result of the conversion of several North American dealers from a monthly rental arrangement to a fully paid long term lease program. Revenues from sales-type leases increased $3.5 million, to $4.7 million for fiscal 1999 compared to $1.2 million for fiscal 1998. RENTAL COSTS. Rental costs increased 19.3%, or $6.4 million, to $39.6 million in fiscal 1999, compared to $33.2 million in fiscal 1998. Rental costs as a percentage of rental revenues increased to 50.4% in fiscal 1999, from 45.3% in fiscal 1998. The increase in rental costs as a percentage of total rental revenues was primarily due to increased costs associated with the higher level of conventional equipment rentals which has a higher cost associated with it than automated equipment, pricing pressures from competitors and the inclusion of all of the costs of the operations of the European distributors that were acquired in fiscal 1998. Prior to acquiring each distributor, the Company's rental costs associated with distributor rental revenues were almost exclusively the depreciation on the equipment assigned to the distributor. After acquiring the distributor, the Company's results reflect all of the additional rental costs incurred from operating the business previously operated by the distributor. PRODUCT SALES AND SERVICES COSTS. Product sales and services costs decreased 29.4%, or $3.1 million, to $7.4 million in fiscal 1999, compared to $10.5 million in fiscal 1998. Product sales and services costs as a percentage of product sales and services revenues decreased to 56.8% in fiscal 1999, from 69.2% in fiscal 1998. The decrease in product sales and services costs as a percentage of the related revenues was primarily the result of the sale of the Company's architectural automated lighting product line in October 1998 and the sale of substantially all of the assets of Brilliant Stages in December 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 9.2%, or $3.2 million, to $38.2 million in fiscal 1999, compared to $35.0 million in fiscal 1998. This increase resulted primarily from the additional administrative costs associated with the acquisition of certain of the Company's European distributors in fiscal 1998. This expense as a percentage of total revenues increased to 41.7% in fiscal 1999 from 39.6% in fiscal 1998. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense decreased 16.5%, or $1.1 million, to $5.6 million in fiscal 1999, compared to $6.7 million in fiscal 1998. This expense as a percentage of total revenues decreased to 6.1% in fiscal 1999, from 7.6% in fiscal 1998. This decrease was primarily the result of a decrease in employee-related costs as a result of employee terminations from the restructuring of the Company in fiscal 1998. IMPAIRMENT OF ASSETS. In October 1998, the Company made a strategic decision to dispose of its architectural automated product line. As a result, the Company's architectural lighting assets were written down to their net realizable value, resulting in a pre-tax charge of $3.5 million during the period ended September 30, 1998. 17 RESTRUCTURING COSTS. In 1999, the Company recorded a $0.6 million pretax charge for the estimated costs of restructuring the Company's operations. The charge includes severance payments and other costs associated with the termination of approximately 15 employees. The charge also includes the cost associated with terminating leases and the write off of the net book value of leasehold improvements associated with the closing of two offices. In 1998, the Company recorded a pretax charge of $1.1 million for the estimated costs of restructuring the Company's operations. The costs included the cost of employee terminations and were comprised of primarily severance payments and other employee related costs associated with terminating the employment of approximately 75 people. INTEREST EXPENSE. Interest expense increased 57.6%, or $1.6 million, to $4.5 million in fiscal 1999, compared to $2.9 million in fiscal 1998. This increase was due to higher interest rates. EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was recorded in fiscal 1998, net of $0.4 million of tax benefit, relating to the early extinguishment of debt under the Company's old credit facility. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In fiscal 1998, the Company recorded a cumulative effect of change in accounting principle loss of $0.2 million, net of $0.1 million of tax benefit, relating to start-up costs that had previously been capitalized. INCOME TAXES. Effective tax rates in fiscal 1999 and 1998 were 39.5% and 39.9%, respectively. QUARTERLY FLUCTUATIONS AND SEASONALITY The following table sets forth certain quarterly income statement data and EBITDA for each of the Company's last three fiscal years, which were derived from unaudited financial statements of the Company. In the opinion of the Company's management, this income statement data contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.
QUARTERS ENDED ------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 FISCAL YEAR ----------- -------- -------- ------------ ----------- (IN THOUSANDS) FISCAL 1998 Total Revenues.......................... $22,519 $19,227 $22,529 $24,101 $88,376 EBITDA.................................. 6,067 3,139 4,107 (1,329) 11,984 Operating income (loss)................. 2,842 (123) 670 (4,983) (1,594) FISCAL 1999 Total Revenues.......................... $25,248 $23,170 $20,066 $23,048 $91,532 EBITDA.................................. 5,339 4,415 3,073 2,711 15,538 Operating income (loss)................. 1,466 347 (661) (980) 172 FISCAL 2000 Total Revenues.......................... $27,679 $20,719 $21,509 $23,781 $93,688 EBITDA.................................. 6,938 2,714 4,004 4,891 18,547 Operating income (loss)................. 3,315 (838) 502 1,727 4,706
EBITDA is calculated herein as income before income taxes, extraordinary loss and cumulative effect of change in accounting principle plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principles as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. 18 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 product sales, the dependence of the Company on concert tours, which are unpredictable in timing and duration, the introduction of new products and general economic conditions both domestically and internationally. Because of the possibilities of significant fluctuations, results for any quarter may not be indicative of results that may be achieved in a full year. EBITDA and operating loss for the quarter ended September 30, 1998, include charges totaling $4.6 million for the write-down of impaired architectural lighting assets to their net realizable value and employee termination and lease cancellation costs associated with restructuring the Company's operations. EBITDA and operating loss for the quarter ended September 30, 1999, include charges totaling $0.6 million for employee termination costs associated with restructuring the Company's operations. EBITDA and operating income for the quarter ended June 30, 2000, includes charges totaling $0.7 million for the impairment of assets used in the Company's Madrid, Spain operations which were sold. EBITDA and operating loss for the quarter ended September 30, 2000, includes total gains on the settlement of the patent infringement lawsuit and the sale of a building lease in New York of $4.0 million partially offset by charges totaling $3.2 million for the impairment of assets used in the Company's continental European operations which were sold. 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 $6.5 million, $8.5 million and $9.7 million during fiscal 1998, 1999 and 2000, respectively. On October 21, 1997, the Company consummated the initial public offering of its common stock and used the net proceeds of approximately $21.3 million to repay its outstanding indebtedness. On December 19, 1997, the Company entered into a $50.0 million multicurrency revolving credit facility (the "Old Credit Facility") and canceled its existing credit facility. As a result of the cancellation, the Company expensed deferred financing costs of $0.7 million (net of tax benefit of $0.4 million), which have been reflected in the consolidated statements of income as an extraordinary loss. Borrowings under the Old Credit Facility were $32.2 million at September 30, 2000. Subsequent to September 30, 2000, the Company used proceeds of $22.2 million from the sale of the Company's sound reinforcement business, the sale of the Company's continental European rental operations and the funding of the London Bank Loan (hereinafter defined) to reduce borrowings under the Old Credit Facility to $10.0 million. On December 29, 2000, Vari-Lite entered into a three-year $24.5 million credit facility (the "New Credit Facility") which includes a $12.0 million term loan (the "Term Loan"), a $5.0 million revolving credit facility (the "Revolver") and a $3.0 million term commitment to fund capital expenditures (the "Capital Expenditure Loan"). The Revolver and the Capital Expenditure Loan commitments will increase to $7.5 million and $5.0 million, respectively, by January 15, 2002, if the Company achieves specified financial performance. The Term Loan and Capital Expenditure Loan amortize over 84 months (subject to a balloon payment on termination of the New Credit Facility as discussed below). Borrowings under the Revolver are subject to availability under a borrowing base of eligible inventory and accounts receivable (as defined in the New Credit Facility). Initially, all outstanding borrowings under the New Credit Facility bear interest at the lender's base rate or LIBOR, plus a rate margin of .75% and 2.50%, respectively. Beginning on January 15, 2002, all outstanding balances under the New Credit Facility will bear interest at the lender's base rate or LIBOR plus a rate margin ranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). The New Credit Facility is guaranteed by the Company and is secured by all of the stock and substantially all of the assets of Vari-Lite and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused 19 portion of the Revolver. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The New Credit Facility terminates on December 31, 2003. Upon termination of the New Credit Facility, the entire outstanding indebtedness thereunder becomes due and payable in full. On November 23, 2000, the Company entered into a British pounds sterling 4.0 million (USD 5.8 million) term loan with a United Kingdom bank (the "London Bank Loan"). The loan, which accrues interest at the rate of 9.1% per annum and amortizes over 48 months, is secured by all of the assets of the Company's London operations. Other terms of the loan include certain financial covenants, limitations on capital expenditures and intercompany payments and the guarantee of the Company. The Company typically hedged a portion of its currency fluctuation risk by borrowing foreign currencies under the Old Credit Facility. Cash generated from the Company's European and Asian operations is typically denominated in the local currencies of these foreign offices and is used to pay expenses incurred in those currencies and service the foreign currency borrowings. The London Bank Loan is serviced by cash generated from the Company's London operations and serves as an economic hedge for net cash generated from those operations. This would not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." In the future, the Company may use other financial instruments to hedge its foreign currency fluctuation risk. Prior to fiscal 1999, the Company had funded the costs to manufacture automated lighting equipment to be rented to certain distributors with advances made by the distributors under the terms of the Company's distributorship agreements. The distributors typically advanced to the Company an amount equal to the cost to manufacture the equipment, and entered into agreements whereby the distributors had the exclusive right to sublease the lighting equipment within defined territories. Borrowings by the Company under these agreements, which were secured by liens against the applicable equipment, were repaid by the Company through future rentals due from the distributors under the terms of their distributorship agreements. Outstanding borrowings from distributors at September 30, 1998, 1999 and 2000 were approximately $1.2 million, $0.3 million and zero, respectively. All amounts advanced by distributors are accounted for by the Company as short-term debt. The Company has borrowed money to purchase computer equipment, office furniture and fixtures and conventional lighting equipment. These loans typically amortize over three years and bear interest at various rates ranging from 1.6% to 9.3%. Proceeds received under this type of financing were approximately $2.0 million, $1.4 million and $2.9 million for fiscal 1998, 1999 and 2000, respectively, and borrowings outstanding at September 30, 1998, 1999 and 2000 were approximately $3.2 million, $2.6 million and $3.8 million, respectively. In fiscal 2000, the Company also borrowed $1.9 million to purchase computer equipment and office furniture and fixtures through capitalized leases which bear interest at a rates from 2.3% to 10.35%. At September 30, 2000, the outstanding borrowings were $1.7 million. The Company uses customer advances to fund short-term working capital and immediate capital expenditure needs for specific contracts. As of September 30, 1998, 1999 and 2000, the Company had unearned revenue related to customer advances of approximately $1.7 million, $2.6 million and $3.3 million, respectively. The Company did not pay dividends in fiscal 1998, 1999 and 2000 and does not anticipate paying any additional cash dividends for the foreseeable future. The Company's business requires significant capital expenditures. Capital expenditures for fiscal 1998, 1999 and 2000 were approximately $25.8 million, $12.9 million and $4.0 million, respectively, of which 20 approximately $22.6 million, $11.2 million and $2.6 million were for rental equipment inventories. The majority of the Company's revenues are generated through equipment rentals and, as such, the Company must maintain a significant amount of rental equipment to meet customer demands. Total rental equipment inventories increased from approximately $90.1 million at the beginning of fiscal 1996 to $123.2 million at September 30, 2000. This increase primarily consisted of automated lighting equipment, including new products, additional inventory of existing products and the replacement of equipment sold or otherwise disposed. Inventory included in current assets consists primarily of raw materials, finished goods and spare parts inventory for the Company's automated lighting equipment. Raw materials represented 87%, 90% and 90% of total inventory at September 30, 1998, 1999 and 2000, respectively. The Company had a working capital surplus of $6.2 million at September 30, 1998, a working capital deficit of approximately $0.2 million at September 30, 1999 and $2.1 million at September 30, 2000. The Company has historically maintained working capital deficits since the bulk of its revenue generating assets are classified as long-term assets rather than current assets. The working capital surplus in 1998 was primarily the result of the refinancing of the Company's senior bank debt which resulted in more of he Company's debt being classified as long-term. Management believes that cash flow generated from operations and borrowing capacity under the New Credit Facility will be sufficient to meet the Company's anticipated operating cash and capital expenditure needs for the next twelve months. Because the Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, the success of the Company to market, sell and support products, the level of competition, the success of the Company's research and development programs, the Company's 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. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements" as that phrase is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "anticipate," "believe," "estimate," "expect," "will," "could," "may" and similar expressions, as they relate to management or the Company, are intended to identify forward-looking statements. Such statements reflect the current views of management with respect to future events and are subject to certain risks, uncertainties and assumptions, including without limitation the following as they relate to the Company: fluctuations in operating results and seasonality; the success of the Company to market, sell and support products sold; technological changes; reliance on intellectual property; dependence on entertainment industry; competition; dependence on management; foreign exchange risk; international trade risk; and dependence on key suppliers and dependence on manufacturing facility. 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. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk primarily due to fluctuations in interest rates and foreign currency. As of September 30, 2000, with all other variables held constant, a hypothetical one percentage point increase in interest rates would result in an increase in interest expense of approximately $0.3 million. The Company has typically hedged a portion of its currency fluctuation risk by borrowing foreign currencies under the Old Credit Facility. Cash generated from the Company's European and Asian operations is typically denominated in the local currencies of these foreign offices and is used to pay expenses incurred in those currencies and service the foreign currency borrowings. The London Bank Loan is serviced by cash generated from the Company's UK operations and serves as an economic hedge for net cash generated from these operations. This would not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." In the future, the Company may use other financial instruments to hedge its foreign currency fluctuation risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries which are required by this Item 8 are listed in Part IV, Item 14(a) of this report. Such consolidated financial statements are included herein beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 22 PART III Certain information required by Part III is omitted from this Report on the basis that the registrant will file a definitive proxy statement pursuant to Regulation 14A for its annual meeting of shareholders to be held on March 2, 2001 (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Report of the Compensation Committee and Omnibus Committee on Executive Compensation, the Report of the Audit Committee or the Stock Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors and executive officers required by this item is incorporated by reference to the sections entitled "Election of Directors" and "Management--Executive Officers" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the section entitled "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the section entitled "Outstanding Capital Stock" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements The Financial Statements listed below are filed as part of this Annual Report on Form 10-K. (b) Financial Statement Schedule
SCHEDULE DESCRIPTION PAGE - -------- ----------- -------- II Valuation and Qualifying Accounts........................... S-1
The auditors' report with respect to the above-listed financial statement schedule appears on page F-2 of this report. All other financial statements and schedules not listed are omitted either because they are not applicable or not required, or the required information is included in the consolidated financial statements. (c) Reports on Form 8-K A Form 8-K was filed on November 13, 2000 reporting on the sale of a portion of the Company's European operations. A Form 8-K was filed December 4, 2000 reporting on the sale of Showco, Inc. (d) Exhibits
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 No. 333-33559) 3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 No. 333-33559) 3.3 Certificate of Desigation of Rights, Preferences and Privileges of Series A Junior Participating Preferred Stock, Dated September 22, 1999 (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 4.1 Form of certificate representing shares of the Company's Common Stock (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 No. 333-33559) 4.2 Warrant Agreement, dated as of July 31, 1996, among the Company, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank Texas (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1 No. 333-33559) 4.3 Supplement, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company and Chase Bank of Texas, N.A. (incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 4.4 Amendment No. 1, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company and Brown Brothers Harriman & Co. (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999)
24
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 4.5 Amendment No. 1, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company and Suntrust Bank, Atlanta (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 4.6 Amendment No. 1, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company and Comerica Bank-Texas (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 4.7 Amendment No. 1, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company and The First National Bank of Chicago (as successor to NBD Bank) (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 4.8 Supplement, dated as of August 31, 1999, to the Warrant Agreement, dated as of July 31, 1996, between the Company, Brown Brothers Harriman & Co., the First National Bank of Chicago as successor to NBD Bank, Suntrust Bank, Comerica Bank-Texas, and Chase Bank of Texas, N.A. (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 10.1 Employment Agreement, dated as of July 1, 1995, between the Company and H.R. Brutsche III (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.2 Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Company and H.R. Brutsche III (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.3 Consulting Agreement, dated as of July 1, 1995, between the Company and J. Anthony Smith (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.4 Consulting Agreement, dated as of July 1, 1995, between the Company and John D. Maxson (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.5 Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Company and John D. Maxson (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.6 Consulting Agreement, dated as of July 1, 1995, between the Company and James H. Clark, Jr. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.7 Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and H. R. Brutsche III (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.8 Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and John D. Maxson (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.9 Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and James H. Clark, Jr. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 No. 333-33559)
25
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.10 Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and J. Anthony Smith (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.11 Compensation Continuation Agreement, dated as of March 31, 1994, among the Company, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.12 Compensation Continuation Agreement, dated as of March 31, 1994, among the Company, Vari-Lite, Inc., Showco, Inc. and John D. Maxson (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.13 Compensation Continuation Agreement, dated as of March 31, 1994, among the Company, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.14 Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.15 Split-Dollar Agreement, dated as of October 12, 1995, among the Company, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.16 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Company, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.17 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Company, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.18 Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Company, James Howard Cullum Clark and James H. Clark, Jr. (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.19 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Company, James Howard Cullum Clark and James H. Clark, Jr. (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.20 Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement) (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.21 Vari-Lite International, Inc. Employees' Stock Ownership Plan (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.22 Vari-Lite International, Inc. Employees' Stock Equivalence Plan (incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.23 Vari-Lite International, Inc. Annual Incentive Plan (as amended and restated) (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 No. 333-33559)
26
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.24 Employment Agreement, dated as of August 28, 1995, by and between the Company and James E. Kinnu (incorporated by reference to Exhibit 10.34 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.25 Severance Agreement, dated as of September 30, 1996, by and between the Company and James E. Kinnu (incorporated by reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.26 Ground Lease, dated as of December 21, 1995, among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., IGNITION! Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc. (incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.27 Guaranty, dated as of December 21, 1995, by the Company (incorporated by reference to Exhibit 10.37 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.28 Form of Indemnification Agreement with Directors and Officers (incorporated by reference to Exhibit 10.38 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.29 Agreement and Plan of Merger, dated as of August 27, 1997, between the Company and Vari-Lite Texas (incorporated by reference to Exhibit 10.39 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.30 International Swap Dealers Association, Inc. Master Agreement, dated as of November 23, 1993, between the Company and Brown Brothers, Harriman & Co. (along with confirmation of Interest Rate Swap Transaction) (incorporated by reference to Exhibit 10.40 to the Company's Registration Statement on Form S-1 No. 333- 33559) 10.31 International Swap Dealers Association, Inc. Master Agreement, dated as of September 13, 1996, between Vari-Lite, Inc. and SunTrust Bank, Atlanta (along with confirmations of Interest Rate Transactions) (incorporated by reference to Exhibit 10.41 to the Company's Registration Statement on Form S-1 No. 333-33559) 10.32 Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the other banks thereunder (incorporated by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended September 30, 1997) 10.33 Amendment No.1, dated April 24, 1998 to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the other banks thereunder (incorporated by reference 10.33 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998) 10.34 Amendment No. 2, dated July 31, 1998 to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the other banks thereunder (incorporated by reference to Exhibit 10.34 to the Company's Quarterly Report for the quarterly period ended June 30, 1998) 10.35 Amendment No. 3, dated December 15, 1998 to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the other banks thereunder (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 10.36 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and H.R. Brutsche III (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999)
27
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.37 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and John D. Maxson (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 10.38 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and James H. Clark, Jr. (incorporated by reference to Exhibit 10.38 to the Company's Quarterly Report for the quarterly period ended December 31, 1998) 10.39 Amendment No. 1, effective November 2, 1998, to the Deferred Compensation Agreement, dated as of July 1, 1995, between the Company and J. Anthony Smith (incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report for the quarterly period ended December 31, 1998) 10.40 Amendment No. 1, effective January 1, 1998, to the Vari-Lite International, Inc. Employees' Stock Ownership Plan dated September 27, 1995 (incorporated by reference to Exhibit 10.40 to the Company's Quarterly Report for the quarterly period ended March 31, 1999) 10.41 Amendment No. 1, effective January 1, 1998, to the Vari-Lite International, Inc. Employees' Stock Ownership Trust dated September 27, 1995 (incorporated by reference to Exhibit 10.41 to the Company's Quarterly Report for the quarterly period ended March 31, 1999) 10.42 Amendment No. 4, dated April 1, 1999, to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the banks thereunder (incorporated by reference to Exhibit 10.42 to the Company's Quarterly Report for the quarterly period ended March 31, 1999) 10.43 Temporary Waiver Agreement, dated August 12, 1999, to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the banks thereunder (incorporated by reference to Exhibit 10.43 to the Company's Quarterly Report for the quarterly period ended June 30, 1999) 10.44 Rights Agreement, dated September 27, 1999, by and between the Company and Chas Mellon Shareholder Services, L.L.C. (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed September 22, 1999) 10.45 Amendment No. 5, dated August 25, 1999, to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the banks thereunder (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 10.46 Amendment No. 6, dated January 11, 2000, to the Multicurrency Credit Agreement, dated as of December 19, 1997, among the Company and SunTrust Bank, Atlanta, as agent for the banks thereunder (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the year ended September 30, 1999) 10.47 Share Purchase Agreement, dated October 26, 2000, between Vari-Lite International, Inc. and First Events B.V. (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed November 13, 2000) 10.48 Asset Purchase Agreement, dated October 26, 2000, between Vari-Lite, Inc. and First Events B.V. (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K filed November 13, 2000)
28
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.49 Asset Transfer Agreement, dated November 17, 2000, by and among Vari-Lite International, Inc., Showco, Inc. and Clearsho, LLC (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed December 4, 2000) 10.50 Equity Purchase Agreement, dated November 17, 2000, by and among Vari-Lite International, Inc., Showco, Inc., Clair Brothers Audio Enterprises, Inc. and Clair Acquisition Corp. (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K filed December 4, 2000) *10.51 Financing Agreement, dated December 29, 2000, between Vari-Lite, Inc. and Firstar Bank, National Association *10.52 Security Agreement, dated December 29, 2000, between Vari-Lite, Inc. and Firstar Bank, National Association *10.53 Guaranty Agreement, dated December 29, 2000, made by the Company in favor of Firstar Bank, National Association *10.54 Patent, Trademark and License Security Agreement, dated December 29, 2000, between Vari-Lite, Inc. and Firstar Bank, National Association *10.55 Chattel Mortgage Facility Offer, dated November 9, 2000, between Vari-Lite Production Services, Ltd. and Barclays Mercantile Business Finance Limited *10.56 Mortgage, dated November 23, 2000, between Vari-Lite Production Services, Ltd. and Barclays Mercantile Business Finance Limited *10.57 Guarantee & Idemnity--Cross Border, dated November 23, 2000, between the Company and Barclays Mercantile Business Finance Limited on behalf of Vari-Lite Production Services, Ltd. *21.1 List of Company's Subsidiaries *23.1 Consent of Deloitte & Touche LLP *27.1 Financial Data Schedule
- ------------------------ * Filed herewith. 29 SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas and State of Texas on the 16th day of January, 2001. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. BRUTSCHE III ----------------------------------------- H.R. Brutsche III CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the 16th day of January, 2001. /s/ H.R. BRUTSCHE III Chariman of the Board and Chief Executive - -------------------------------------------- Officer (Principal Executive Officer) H.R. Brutsche III /s/ JEROME L. TROJAN III Vice President--Finance, Chief Financial - -------------------------------------------- Officer, Treasurer and Secretary (Principal Jerome L. Trojan III Financial and Accounting Officer) /s/ JAMES H. CLARK, JR. Director - -------------------------------------------- James H. Clark, Jr. /s/ JOHN D. MAXSON Director - -------------------------------------------- John D. Maxson /s/ JOHN R. RETTBERG Director - -------------------------------------------- John R. Rettberg /s/ J. ANTHONY SMITH Director - -------------------------------------------- J. Anthony Smith
30 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, 1999 and 2000...................................................... F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended September 30, 1998, 1999, and 2000.... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1999 and 2000............. F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1999 and 2000......................... F-6 Notes to Consolidated Financial Statements.................. F-7 The following financial statement supplementary schedule of the Registrant and its subsidiaries required to be included in Item 14(b) is listed below: Schedule II--Valuation and Qualifying Accounts.............. S-1
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders of Vari-Lite International, Inc. Dallas, Texas We have audited the accompanying consolidated balance sheets of Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") as of September 30, 1999 and 2000, and the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended September 30, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(b). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 at September 30, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Dallas, Texas December 12, 2000 (December 29, 2000 as to the fourth paragraphs of Notes E and Q) F-2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA)
1999 2000 -------- -------- ASSETS CURRENT ASSETS: Cash...................................................... $ 1,969 $ 4,315 Receivables, less allowance for doubtful accounts of $720 and $740................................................ 13,056 12,369 Inventory................................................. 6,586 13,695 Prepaid expense and other current assets.................. 1,715 1,352 -------- -------- TOTAL CURRENT ASSETS.................................... 23,326 31,731 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment.............................. 135,220 123,210 Machinery and tools....................................... 6,044 5,678 Furniture and fixtures.................................... 5,009 5,089 Office and computer equipment............................. 11,060 10,377 Work in progress and raw materials inventory.............. 3,040 680 -------- -------- 160,373 145,034 Less accumulated depreciation and amortization.......... 83,323 84,097 -------- -------- 77,050 60,937 OTHER ASSETS................................................ 7,324 2,035 -------- -------- TOTAL ASSETS............................................ $107,700 $ 94,703 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $ 11,855 $ 10,873 Unearned revenue.......................................... 2,606 3,272 Income taxes payable...................................... 440 82 Current portion of long-term obligations.................. 8,591 19,599 -------- -------- TOTAL CURRENT LIABILITIES............................... 23,492 33,826 LONG-TERM OBLIGATIONS....................................... 39,459 18,136 DEFERRED INCOME TAXES....................................... 1,514 993 -------- -------- TOTAL LIABILITIES....................................... 64,465 52,955 COMMITMENTS AND CONTINGENCIES (Note F and H)................ -- -- STOCKHOLDERS' EQUITY: Preferred Stock, $0.10 par value (10,000,000 shares authorized; no shares issued)........................... -- -- Common Stock, $0.10 par value (40,000,000 shares authorized; 7,845,167 shares issued; 7,800,003 shares outstanding)............................................ 785 785 Treasury Stock............................................ (186) (186) Additional paid-in capital................................ 25,026 25,026 Stockholder notes receivable.............................. (30) (19) Accumulated other comprehensive income (loss)--foreign currency translation adjustment......................... 892 (319) Retained earnings......................................... 16,748 16,461 -------- -------- TOTAL STOCKHOLDERS' EQUITY.............................. 43,235 41,748 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $107,700 $ 94,703 ======== ========
See notes to consolidated financial statements. F-3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA)
1998 1999 2000 --------- --------- --------- Rental revenues............................................. $ 73,235 $ 78,520 $ 76,366 Product sales and services revenues......................... 15,141 13,012 17,322 --------- --------- --------- TOTAL REVENUES............................................ 88,376 91,532 93,688 Rental cost................................................. 33,172 39,557 35,990 Product sales and services cost............................. 10,472 7,393 10,881 --------- --------- --------- TOTAL COST OF SALES....................................... 43,644 46,950 46,871 --------- --------- --------- GROSS PROFIT.............................................. 44,732 44,582 46,817 Selling, general and administrative expense................. 35,014 38,224 37,102 Research and development expense............................ 6,690 5,586 5,152 Impairment of assets........................................ 3,542 -- 3,850 Restructuring costs......................................... 1,080 600 -- Gains on lawsuit settlement and sale of lease............... -- -- (3,993) --------- --------- --------- TOTAL OPERATING EXPENSES.................................. 46,326 44,410 42,111 --------- --------- --------- OPERATING INCOME (LOSS)..................................... (1,594) 172 4,706 Interest expense (net)...................................... 2,881 4,540 5,180 --------- --------- --------- LOSS BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CHANGE IN ACCOUNTING PRINCIPLE...................................... (4,475) (4,368) (474) Income tax benefit.......................................... (1,785) (1,725) (187) --------- --------- --------- LOSS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................ (2,690) (2,643) (287) Extraordinary loss from early extinguishment of debt........ (737) -- -- Cumulative effect of change in accounting principle......... (195) -- -- --------- --------- --------- NET LOSS.................................................... (3,622) (2,643) (287) Other comprehensive income (loss)--foreign currency translation adjustment.................................... (591) 1,122 (1,211) --------- --------- --------- COMPREHENSIVE LOSS.......................................... $ (4,213) $ (1,521) $ (1,498) ========= ========= ========= WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING....... 7,712,332 7,800,003 7,800,003 ========= ========= ========= PER SHARE INFORMATION BASIC AND DILUTED: Loss before extraordinary loss and cumulative effect of change in accounting principle.......................... $ (0.35) $ (0.34) $ (0.04) Extraordinary loss........................................ $ (0.10) $ -- $ -- Cumulative effect of change in accounting principle....... $ (0.02) $ -- $ -- --------- --------- --------- Net loss.................................................. $ (0.47) $ (0.34) $ (0.04) ========= ========= =========
See notes to consolidated financial statements. F-4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL STOCKHOLDER -------------------- -------------------- ------------------- PAID-IN NOTES SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE --------- -------- --------- -------- -------- -------- ---------- ----------- BALANCE, OCTOBER 1, 1997............ -- $ -- 5,845,167 $585 (45,164) $(186) $ 3,344 $(176) Initial Public Offering............. 2,000,000 200 21,082 Payments on stockholder notes receivable........................ 94 Other comprehensive loss--foreign currency translation adjustment... Net loss............................ --------- ------ --------- ---- ------- ----- ------- ----- BALANCE, SEPTEMBER 30, 1998......... 7,845,167 785 (45,164) (186) 24,426 (82) Payments on stockholder notes receivable........................ 52 Revaluation of stock warrants....... 600 Other comprehensive income--foreign currency translation adjustment... Net loss............................ --------- ------ --------- ---- ------- ----- ------- ----- BALANCE, SEPTEMBER 30, 1999......... -- -- 7,845,167 785 (45,164) (186) 25,026 (30) Payments on stockholder notes receivable........................ 11 Other comprehensive loss--foreign currency translation adjustment... Net loss............................ --------- ------ --------- ---- ------- ----- ------- ----- BALANCE, SEPTEMBER 30, 2000......... -- $ -- 7,845,167 $785 (45,164) $(186) $25,026 $ (19) ========= ====== ========= ==== ======= ===== ======= ===== ACCUMULATED STOCK OTHER PURCHASE COMPREHENSIVE RETAINED WARRANTS INCOME (LOSS) EARNINGS TOTAL -------- ------------- -------- -------- BALANCE, OCTOBER 1, 1997............ $ 600 $ 361 $23,013 $27,541 Initial Public Offering............. 21,282 Payments on stockholder notes receivable........................ 94 Other comprehensive loss--foreign currency translation adjustment... (591) (591) Net loss............................ (3,622) (3,622) ----- ------- ------- ------- BALANCE, SEPTEMBER 30, 1998......... 600 (230) 19,391 44,704 Payments on stockholder notes receivable........................ 52 Revaluation of stock warrants....... (600) -- Other comprehensive income--foreign currency translation adjustment... 1,122 1,122 Net loss............................ (2,643) (2,643) ----- ------- ------- ------- BALANCE, SEPTEMBER 30, 1999......... -- 892 16,748 43,235 Payments on stockholder notes receivable........................ 11 Other comprehensive loss--foreign currency translation adjustment... (1,211) (1,211) Net loss............................ (287) (287) ----- ------- ------- ------- BALANCE, SEPTEMBER 30, 2000......... $ -- $ (319) $16,461 $41,748 ===== ======= ======= =======
See notes to consolidated financial statements. F-5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS)
1998 1999 2000 -------- -------- -------- Cash flows from operating activities: Net loss.................................................. $ (3,622) $ (2,643) $ (287) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................... 13,515 15,230 13,841 Amortization of note discount and deferred loan fees.... 83 136 453 Provision for doubtful accounts......................... 641 140 178 Extraordinary loss from early extinguishment of debt.... 737 -- -- Cumulative effect of change in accounting principle..... 195 -- -- Impairment of Assets.................................... 3,542 -- 3,850 Gain on sale of lease................................... -- -- (2,251) Deferred income taxes................................... (2,735) (2,194) (521) Gain on sale of equipment and other property............ (18) (159) (626) Gains on sale of Brilliant Stages and cancellation of land lease and loss on sale of Dubai................... -- (462) -- Net change in assets and liabilities: Accounts receivable................................... 1,758 268 (130) Inventory............................................. (3,561) (2,545) (6,852) Prepaid expenses...................................... 746 12 324 Other assets.......................................... (3,085) 1,668 2,583 Accounts payable, accrued liabilities and income taxes payable.............................................. (318) (1,869) (1,588) Unearned revenue...................................... (1,404) 912 679 -------- -------- -------- Net cash provided by operating activities............... 6,474 8,494 9,653 Cash flows from investing activities: Capital expenditures, including rental equipment.......... (25,841) (12,914) (3,980) Acquisition of European companies, net of cash acquired... (1,833) (1,192) -- Proceeds from sale of the Madrid operations and sale of lease................................................... -- -- 4,714 Proceeds from sale of Irideon, Brilliant Stages and Dubai assets and cancellation of land lease................... -- 3,666 -- Proceeds from sale of equipment........................... 98 400 3,580 -------- -------- -------- Net cash provided (used) by investing activities........ (27,576) (10,040) 4,314 Cash flows from financing activities: Proceeds from issuance of debt............................ 79,760 33,178 29,198 Principal payments on debt................................ (76,418) (34,765) (39,214) Proceeds from issuance of distributor advances............ 690 -- -- Principal payments on distributor advances................ (1,735) (646) (279) Proceeds from payments on stockholder notes receivable.... 94 52 11 Proceeds from public offering of common stock............. 21,282 -- -- -------- -------- -------- Net cash provided (used) by financing activities........ 23,673 (2,181) (10,284) Effect of exchange rate changes on cash and cash equivalents............................................... (595) 1,858 (1,337) -------- -------- -------- Net increase (decrease) during the year..................... 1,976 (1,869) 2,346 Cash, beginning of year..................................... 1,862 3,838 1,969 -------- -------- -------- Cash, end of year........................................... $ 3,838 $ 1,969 $ 4,315 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest expense............................ $ 2,732 $ 3,958 $ 5,459 Cash paid for income taxes................................ $ 1,313 $ 821 $ 427 Non-cash transactions: Warrants revalued....................................... $ -- $ (600) $ --
See notes to consolidated financial statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) NOTE A--ORGANIZATION: The Company is a leading worldwide designer, manufacturer and distributor of automated lighting systems. The Company provides automated lighting and other related equipment and production services primarily to the entertainment industry, servicing markets such as concert touring, theater, television and film and corporate events. The Company sells and rents its VARI*LITE(-Registered Trademark-) automated lighting systems through its own domestic and international offices, rental associates and worldwide independent dealers. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES The consolidated financial statements of Vari-Lite International, Inc. include the accounts of its wholly-owned subsidiaries which consist of operating and holding companies. The operating companies consist of Vari-Lite, Inc. ("Vari-Lite"), Showco, Inc. ("Showco"), IR Sub, Inc. (formerly Irideon, Inc.), IGNITION! Creative Group, Inc., BS, Ltd. (formerly Brilliant Stages, Ltd.), Vari-Lite Asia, Inc., Vari-Lite Hong Kong Limited, Vari-Lite Production Services, Ltd., ("VLPS London") Vari-Lite Production Services, SA. ("VLPS Madrid"), Vari-Lite Production Services, N.V. ("VLPS Brussels"), Vari-Lite Production Services, AB. ("VLPS Stockholm"), and Vari-Lite Production Services, SAS ("VLPS Paris"). The wholly-owned holding companies include Vari-Lite Europe Holdings Limited, Vari-Lite Europe International, B.V. ("VLI Europe") and Vari-Lite Production Services Europe, N.V. During 1998, the Company acquired two of its distributors for a total purchase price of approximately $3,160 which created approximately $1,000 of goodwill. In October 1998, the Company acquired the VARI-LITE(-Registered Trademark-) distribution rights and related assets of its French distributor for approximately $1,200, virtually all of which was recorded as goodwill. On October 30, 1998, the Company sold substantially all of the assets of its Irideon architectural automated lighting product line for its net book value, after writedown, of approximately $2,000 (see Note I). On December 31, 1998, the Company sold substantially all of the assets of Brilliant Stages, Ltd., one of the Company's European subsidiaries. On September 23, 1999, the Company sold substantially all of the assets of its Dubai operation. On June 30, 2000, the Company sold its entire interest in VLPS Madrid and the VARI*LITE(-Registered Trademark-) equipment used in the operations for a loss of $650. On October 26, 2000, the Company sold 100% of its interest in VLI Europe and 0.4% of its interest in VLPS Paris and all the VARI*LITE(-Registered Trademark-) lighting equipment used in those operations. VLI Europe owned 100% of VLPS Brussels, 99.6% of VLPS Paris and 100% of VLPS Stockholm. This transaction resulted in a pre-tax charge of $3,200 which included the write off of all the associated goodwill. 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. Certain reclassifications have been made to the September 30, 1998 and 1999 consolidated financial statements to conform to the presentation in the September 30, 2000 consolidated financial statements. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes certain indirect purchasing and handling costs incurred to acquire and manage inventory and certain overhead costs. Market for raw materials is based on replacement cost and for other inventory classifications on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. EQUIPMENT AND OTHER PROPERTY Equipment and other property are stated at cost or, in the case of capitalized leases, at the lower of the present value of future lease payments or the fair value of the equipment. Depreciation and amortization are provided on the straight-line method over the estimated useful lives ranging from three to ten years of the various classes of equipment and other property. LONG-LIVED ASSETS As required by Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of," the Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the assets' carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. OTHER ASSETS The Company capitalizes and includes in other assets deferred financing costs and the costs of acquiring patents and trademarks on its products. Deferred financing costs are amortized over the term of the related debt. Amortization on patents and trademarks is computed on the straight-line basis over the lives of the patents or trademarks or the period of expected benefit, if shorter. In addition, the Company capitalizes legal costs associated with the pursuit of third parties for infringement of certain of the Company's patents, copyrights and trademarks when the Company is successful, or management believes it will be successful, and that these costs will be recovered pursuant to SFAS No. 121. These costs are amortized over the lives of the applicable patents, copyrights and trademarks. GOODWILL Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible net assets of businesses acquired. Goodwill is amortized on a straight-line basis over periods not exceeding 25 years. The recoverability of carrying values of intangible assets is evaluated on a recurring basis. The primary indicators are current and forecasted profitability of the related acquired business. FOREIGN CURRENCY TRANSLATION In accordance with SFAS No. 52, "Foreign Currency Translation," the asset and liability accounts of the Company's non-U.S. subsidiaries are translated into U.S. dollars using rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at exchange rates which approximate the average rates prevailing during the year. The cumulative translation gains and losses are a component of comprehensive income and included in stockholders' equity. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) REVENUE RECOGNITION Revenues related to equipment rental and services are recognized as earned over the terms of the contracts. Revenues related to the sale of products are recognized upon shipment of the equipment. RESEARCH AND DEVELOPMENT Costs incurred in connection with the development of new products are considered research and development costs and are charged to operations as incurred. DERIVATIVE INSTRUMENTS Prior to fiscal year 1998, the Company had entered into an interest rate swap agreement to reduce the risks associated with variable interest rates. The interest rate swap agreement corresponded to a portion of the outstanding principal balance of the Company's line of credit. The Company recorded the amount paid or received pursuant to the swap agreement as an adjustment to interest expense, and the related payable or receivable to or from the counterparty as a liability or asset, respectively. In August 1999, the termination of the interest swap prior to the scheduled maturity resulted in a charge to expense for the amount of unamortized costs and payments required under the agreement. The Company terminated the interest rate swap agreement in August 1999 for $300 in cash from the counterparty. As a result, the Company recorded a gain for the amount of cash received in excess of the unamortized costs. The gain is included in selling, general and administrative expenses in the accompanying financial statements. FAIR VALUE OF FINANCIAL INSTRUMENTS In assessing the fair value of financial instruments at September 30, 1999 and 2000, the Company has used available market information and other valuation methodologies. Some judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amounts of cash, receivables, payables and long term obligations approximated fair value as of September 30, 1999 and 2000. EQUITY-BASED COMPENSATION SFAS No. 123 establishes a method of accounting whereby recognized option pricing models are used to estimate the fair value of equity based compensation, including options. The Company has elected, as provided by SFAS No. 123, not to recognize compensation expense for employee equity based compensation as calculated under SFAS No. 123, but will recognize any related expense in accordance with the provisions of APB Opinion No. 25. Disclosure of amounts required by SFAS 123 are included in Note G. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes," and files a consolidated federal income tax return. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Provision is made for deferred taxes relating to temporary differences in the recognition of income and expense for financial reporting and for income tax purposes. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) NET INCOME PER SHARE Net income per share is calculated by dividing net income by the weighted average shares outstanding for the applicable period. Common stock equivalents, including warrants and options, are included, to the extent considered dilutive, using the treasury stock method and are assumed to be outstanding for the full period in the period of issuance. Options to purchase 556,000, 736,100 and 657,900 shares of Common Stock at prices ranging from $13.20 to $1.125 were outstanding at September 30, 1998, 1999 and 2000, respectively. Warrants to purchase 242,233 shares of Common Stock at a price of $11.53 were outstanding at September 30, 1998. In addition, warrants to purchase 296,057 shares of Common Stock at a price of $3.75 were outstanding at September 30, 1999 and 2000. None of the options or warrants in 1998, 1999 and 2000 were included in the computation of diluted EPS as they were antidilutive. ACCOUNTING STANDARDS CHANGES In 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires that the costs of starting significant new operations be expensed as incurred. The Company's practice had been to record such costs as deferred charges and to amortize them over periods of not more than five years. The Company early adopted the SOP effective October 1, 1997 and recorded a pre-tax charge of $282 ($195 after taxes, or $0.02 per basic and diluted share) in the first quarter 1998 results as a cumulative effect of this accounting change. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." As amended by SFAS No. 137 and SFAS No. 138, the Statement is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective October 1, 2000. The adoption of SFAS No. 133 did not have a significant impact on the financial position or results of operations of the Company because the Company does not have significant derivative activity. SEGMENT REPORTING The Company operates in geographic segments located in North America, Europe and Asia. The Company markets its products and services to the entertainment industry, including the concert touring, theater, television and film and corporate events markets. Depending on the circumstances, the Company solicits business from lighting and set designers and consultants, artist managers, producers, production managers and production companies, promoters, corporations and business associations. No customer has accounted for more than 10% of the Company's revenues for at least the last three fiscal years. The Company does not rely on any major customer for a significant amount of its operation. See Note M for segment information. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) NOTE C--INVENTORY: Inventory consists of the following:
1999 2000 -------- -------- Raw materials.............................................. $5,941 $12,341 Work in progress........................................... 500 698 Finished goods............................................. 145 656 ------ ------- $6,586 $13,695 ====== =======
NOTE D--OTHER ASSETS: Other assets consist of the following:
1999 2000 -------- -------- Patents and trademarks..................................... $3,170 $ 263 Goodwill................................................... 2,482 -- Deferred financing costs................................... 900 778 Other, including sales-type lease receivables.............. 1,555 1,862 ------ ------- 8,107 2,903 Less accumulated amortization.............................. (783) (868) ------ ------- $7,324 $ 2,035 ====== =======
In fiscal 1999, patents and trademarks included amounts capitalized by the Company relating to patent infringement suits in which the Company is the plaintiff. In fiscal 2000, these amounts were written off against the proceeds received from the settlement (see Note F). NOTE E--LONG-TERM OBLIGATIONS: Long-term obligations expressed in U.S. dollars consist of the following:
1999 2000 -------- -------- Revolving lines of credit: U.S. dollars.......................................... 33,360 32,200 British pounds sterling............................... 7,330 -- Japanese yen.......................................... 2,587 -- French franc.......................................... 1,222 -- ------- ------- Total revolving lines of credit..................... 44,499 32,200 Advances from distributors................................ 279 -- Obligations under capital leases with interest at 2.3% to 10.35%, maturities through 2003......................... 647 1,692 Term loans with interest at 1.6% to 9.3%.................. 2,625 3,843 ------- ------- 48,050 37,735 Less current portion...................................... (8,591) (19,599) ------- ------- $39,459 $18,136 ======= =======
F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) Based on the total borrowings outstanding under the Old Credit Facility as of September 30, 1999 and 2000, the weighted average interest rates were 8.42% and 11.75%, respectively. On October 21, 1997, the Company consummated the initial public offering of its common stock and used the net proceeds of, approximately $21,300 to repay its outstanding indebtedness. On December 19, 1997, the Company entered into a $50,000 multicurrency revolving credit facility (the "Old Credit Facility") and canceled its existing credit facility. As a result of the cancellation, the Company expensed deferred financing costs of $737 (net of tax benefit of $481), which have been reflected in the consolidated statements of income as an extraordinary loss. Borrowings under the Old Credit Facility were $32,200 at September 30, 2000. Subsequent to September 30, 2000, the Company used proceeds of $22,200 from the sale of the Company's sound reinforcement business, the sale of the Company's continental European rental operations and the funding of the London Bank Loan (hereinafter defined) to reduce borrowings under the Old Credit Facility to $10,000. On December 29, 2000, Vari-Lite entered into a three-year $24,500 credit facility (the "New Credit Facility") which includes a $12,000 term loan (the "Term Loan"), a $5,000 revolving credit facility (the "Revolver") and a $3,000 term commitment to fund capital expenditures (the "Capital Expenditure Loan"). The Revolver and the Capital Expenditure Loan commitments will increase to $7,500 and $5,000, respectively, by January 15, 2002, if the Company achieves specified financial performance. The Term Loan and Capital Expenditure Loan amortize over 84 months (subject to a balloon payment on termination of the New Credit Facility as discussed below). Borrowings under the Revolver are subject to availability under a borrowing base of eligible inventory and accounts receivable (as defined in the New Credit Facility). Initially, all outstanding borrowings under the New Credit Facility bear interest at the lender's base rate or LIBOR, plus a rate margin of .75% and 2.50%, respectively. Beginning on January 15, 2002, all outstanding balances under the New Credit Facility will bear interest at the lender's base rate or LIBOR plus a rate margin ranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). The New Credit Facility is guaranteed by the Company and is secured by all of the stock and substantially all of the assets of Vari-Lite, and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused portion of the New Credit Facility. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The New Credit Facility terminates on December 31, 2003. Upon termination of the New Credit Facility, the entire outstanding indebtedness thereunder becomes due and payable in full. On November 23, 2000, the Company entered into a British pounds sterling 4,000 (USD 5,800) term loan with a United Kingdom bank (the "London Bank Loan"). The loan, which accrues interest at the rate of 9.1% per annum and amortizes over 48 months, is secured by all of the assets of the Company's London operations. Other terms of the loan include certain financial covenants, limitations on capital expenditures and intercompany payments and the guarantee of the Company. The Company typically hedged a portion of its currency fluctuation risk by borrowing foreign currencies under the Old Credit Facility. Cash generated from the Company's European and Asian operations is typically denominated in the local currencies of these foreign offices and is used to pay expenses incurred in those currencies and service the foreign currency borrowings. The London Bank Loan is serviced by cash generated from the Company's London operations and serves as an economic F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) hedge for net cash generated from those operations. This would not qualify for hedge accounting in accordance with SFAS No. 133. In the future, the Company may use other financial instruments to hedge its foreign currency fluctuation risk. As of September 30, 1998, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $24,200, which effectively changed the Company's variable LIBOR interest rate exposure on a substantial portion of its U.S. dollar borrowings to a fixed weighted average interest rate of 7.79%. In August 1999, the Company terminated the interest swap agreements for $300 in cash which was recorded as a gain and is included in selling, general and administrative expenses in the accompanying financial statements. In December 1997, the Company expensed deferred financing costs related to the prior debt facility of $737 (net of tax benefit of $481) due to the early extinguishment of debt, which have been reflected in the consolidated statements of income as an extraordinary loss for the year ended September 30, 1998. In 1999, the Company expensed a portion of the deferred financing costs related to the Old Credit Facility as a result of the modification in terms. The write-off of $271 is included in the interest expense in the accompanying financial statements. In connection with prior distributor agreements, the Company had received advances to provide the necessary funds for construction of the leased lighting systems (see Note H). The remaining balances outstanding under such borrowings at September 30, 1999 and 2000, were $279 and $0, respectively. As discussed in Notes E and Q, the Company entered into a new credit facility and as a result $15,063 has been reclassified to long-term obligations in accordance with SFAS No. 6 "Classification of Short-Term Obligations Expected to be Refinanced" Maturities of long-term obligations, including capital lease obligations, are approximately as follows at September 30, 2000:
2001........................................................ $19,599 2002........................................................ 5,028 2003........................................................ 11,196 2004........................................................ 1,450 2005........................................................ 462 ------- $37,735 =======
NOTE F--COMMITMENTS AND CONTINGENCIES: In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In November 1999, Coemar S.p.A. and Clay Paky S.p.A. filed separate lawsuits against the Company in the United States Distict Court for the Southern District of New York. The suits were transferred to the United States District Court for the Northern District of Texas on July 12, 2000. The lawsuits seek declarations from the court that a certain patent of the Company is invalid, unenforceable, and/or not infringed by Coemar S.p.A. and Clay Paky S.p.A. In December 2000, the Company negotiated a settlement with Coemar S.p.A. and Clay Paky S.p.A, the specific terms of which are confidential, but included a cash settlement paid to the Company and authorization for Coemar S.p.A and Clay Paky S.p.A to continue to F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) sell all existing products that were subject to the Company's patents. The lawsuits are currently stayed pending Coemar S.p.A and Clay Paky S.p.A's compliance with settlement terms. In November 1999, SGM Elettronica, s.r.l. and Studio Due, s.r.l. filed a lawsuit against the Company in the United States District Court for the Southern District of New York. The lawsuit sought declarations from the court that a certain patent of the Company is invalid, unenforceable, and/or not infringed by SGM Elettronica, s.r.l. nor Studio Due, s.r.1. The lawsuit was dismissed by the court for lack of subject matter juridiction on July 12, 2000. NOTE G--STOCKHOLDERS' EQUITY: On October 15, 1997, in conjunction with the Company's reincorporation in Delaware and an initial public offering, the Board of Directors of the Company created a new class of common stock and authorized 40,000,000 shares. As a result of the reincorporation, stockholders received 3.76368 shares of common stock for each share of the Company's Class A common stock and Class B common stock held by the stockholders. Share amounts and the weighted average shares outstanding for all periods presented give effect to the recapitalization of the common stock. In addition, the Company authorized 10,000,000 shares of preferred stock which the Company's Board of Directors may issue for such consideration and on such terms as it deems desirable, including voting and conversion rights that could adversely affect the holders of common stock. The Company filed a Registration Statement (Commission file no. 333-33559) for the public offering of 2,000,000 shares of common stock with the Securities and Exchange Commission, which became effective October 16, 1997. The shares were sold for $12.00 per share for an aggregate amount of $24,000. All of the shares sold were offered by the Company. The net offering proceeds to the Company of $21,282 was used to repay indebtedness under the Company's Credit Facility. On September 27, 1999, the Board of Directors approved the adoption of a Stockholders Rights Plan (the "Rights Plan"). The Rights Plan is designed to provide protection against coercive or unfair takeover tactics. Under the Rights Plan, the Company made a dividend distribution of one preferred stock purchase right for each share of common stock held of record as of September 27, 1999. Each right entitles the holder to buy one-one thousandth of a share of the Company's Series A Junior Participating Preferred Stock at an initial exercise price of $8.50. The Rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or announces a tender offer which would result in such a person or group beneficially owning 15% or more of the Company's common stock. At that time, each Right not owned by such person or group will entitle its holder to purchase, at the Rights then current exercise price, shares of the Company's common stock having a value of twice the Right's exercise price. The Rights are redeemable by the Company and expire on September 26, 2009. The Company adopted a fixed option plan during fiscal 1998 which issues stock options and reserves shares of common stock for issuance to executives, key employees and directors. No compensation cost has been recognized for the stock options which were issued at or above fair value at the date of grant in fiscal 1998, 1999 and 2000. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in fiscal 1998, 1999 and 2000 consistent with the provisions in SFAS No. 123, the Company's net loss and loss per share would have been as follows:
1998 1999 2000 -------- -------- -------- Net loss........................................... $(3,911) $(3,200) $ (745) Basic and diluted net loss per share............... $ (0.51) $ (0.41) $(0.10)
F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) The weighted-average fair value of the individual options granted during fiscal 1998, 1999 and 2000 was estimated at $4.44, $1.52 and $0.47, respectively, on the date of grant. The fair values were determined using a Black-Scholes option pricing model with the following assumptions for 1998, 1999 and 2000:
1998 1999 2000 -------- -------- -------- Dividend yield......................................... 0 0 0 Volatility............................................. 30% 30% 30% Risk-free interest rate................................ 6% 6% 6% Expected life.......................................... 5 yrs. 5 yrs. 5 yrs.
Under the plan, the total number of stock options that may be granted is 1,200,000. The price of the options granted pursuant to the plan will be equal to the fair market value of the common stock on the date of grant. The options vest over a two month to five year period and expire after ten years from the date of grant.
1998 1999 2000 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED -AVERAGE -AVERAGE -AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE (000) PRICE (000) PRICE (000) PRICE -------- -------- -------- -------- -------- -------- Outstanding-Beginning of year.................... -- $ -- 556 $ 12.00 736 $ 4.58 Granted.......................................... 576 12.00 651 3.07 77 1.38 Exercised........................................ -- -- -- -- -- -- Forfeited........................................ (20) 12.00 (74) (7.91) (155) (3.08) Canceled or expired.............................. -- -- (397) (11.87) -- -- --- ---- ---- Outstanding-End of year.......................... 556 12.00 736 4.58 658 4.56 === ==== ==== Exercisable-End of year.......................... 8 13.20 33 12.61 195 5.97 === ==== ====
At September 30, 2000, exercise prices, number of options outstanding and remaining contractual life are shown in the following table:
OUTSTANDING EXERCISABLE ----------------------- ----------- REMAINING NUMBER CONTRACTUAL NUMBER EXERCISE PRICE (000) LIFE (YEARS) (000) - -------------- -------- ------------ ----------- $1.125...................................................... 130 8.90 26 $1.375...................................................... 77 9.19 -- $ 3.75...................................................... 329 7.27 112 $12.00...................................................... 80 7.04 32 $13.20...................................................... 42 2.04 25
On November 28, 1998, the Company cancelled options to acquire 12,000 shares of Common Stock at $7.875, 6,000 shares of Common Stock at $11.875 and 378,700 shares of Common Stock at $12.00. The Company simultaneously issued options to acquired 396,700 shares of Common Stock at $3.75 per share which was above the fair market value on the date of grant. In July 1996, in connection with an amendment to the Company's Credit Facility, the Company issued warrants to purchase up to 242,233 shares of Common Stock at an exercise price based on the Company's F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) earnings as defined in the warrant agreement ($11.53 per share). These warrants were valued at $600 and recorded in stockholders' equity. The terms of the warrants also provide for registration rights and adjustments to the price and number of shares in certain circumstances. In August 1999, as part of an amendment to the Company's Credit Facility, the Company issued additional warrants to purchase 53,824 shares of Common Stock at $3.75 per share. These warrants were assigned no value. The amendment also repriced the warrants to purchase 242,233 shares from a price of $11.53 per share to $3.75 per share. In connection with the repricing, the value of the warrants was written off to additional paid in capital. The warrants expire on December 31, 2004 and as of September 30, 2000, no warrants had been exercised. NOTE H--LEASES: AS LESSOR As lessor, the Company has agreements whereby it has leased certain lighting equipment to various distributors. These agreements are accounted for as operating leases. Under the terms of these agreements, these distributors have the exclusive right for a specified time period to market the lighting equipment by subrental within defined territories. The distributors' lease payments to the Company are based on a pre-determined percentage of the gross rental revenue received by the distributors from their subrental of the lighting equipment and amounted to approximately $2,693, $1,253 and $517 for the years ended September 30, 1998, 1999, and 2000, respectively. The lighting equipment under these leasing arrangements had a net book value of approximately $6,594 and $3,850 at September 30, 1998 and 1999, respectively, and $0 at September 30, 2000 as a result of termination of the agreements. 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 payments throughout the term of the lease. The Company recorded revenues of $1,154, $4,665 and $1,222 and cost of products and services of $369, $1,674 and $683 for the years ended September 30, 1998, 1999 and 2000, respectively, related to sales-type leases. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) AS LESSEE The Company leases certain computers and equipment. The following is a summary of assets held under capital leases:
1999 2000 -------- -------- Computers and equipment under capital leases................ $4,070 $3,664 Less accumulated depreciation............................... (3,263) (3,360) ------ ------ Property under capital leases, net.......................... $ 807 $ 304 ====== ======
The Company also leases manufacturing facilities and office space. The future minimum lease payments as of September 30, 2000, including those which relate to capital leases which are included in long-term obligations, are as follows:
CAPITAL OPERATING -------- --------- 2001....................................................... $ 906 $1,406 2002....................................................... 836 1,354 2003....................................................... 136 1,166 2004....................................................... -- 782 2005....................................................... -- 514 Thereafter................................................. -- 1,874 ----- ------ Total minimum lease payments............................... 1,878 $7,096 ====== Less amount representing interest.......................... (186) ----- Present value of net minimum lease payments................ 1,692 Less current portion....................................... (777) ----- Long-term lease obligations................................ $ 915 =====
Rental expense for the years ended September 30, 1998, 1999 and 2000 was $2,809, $3,100 and $3,405, respectively. In December 1995, the Company entered into a lease with an unaffiliated developer for land. Rent expense under this lease was $388 and $99 for the years ended September 30, 1998 and 1999. In December 1998, the lease was canceled as a result of the sale of the land by the lessor, resulting in a gain to the Company of approximately $500 which is included in selling, general and administrative expense in the accompanying financial statements. NOTE I--IMPAIRMENT OF ASSETS: On October 26, 2000, the Company sold 100% of its interest in VLI Europe and 0.4% of its interest in VLPS Paris. VLI Europe owned 100% of VLPS Brussels, 99.6% of VLPS Paris, and 100% of VLPS Stockholm and all the VARI*LITE-Registered Trademark- lighting equipment used in those operations. This transaction resulted in a pre-tax charge of $3,200 which was recorded as an asset impairment in the fourth quarter of fiscal year 2000. On June 30, 2000 the Company sold its entire interest in VLPS Madrid and the VARI*LITE-Registered Trademark- equipment used in the operations resulting in a pre-tax charge of $650 which was recorded as an asset impairment in the third quarter of fiscal year 2000. During 1998, the Company made a strategic decision to F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) dispose of its architectural automated lighting product line. As a result of this decision, the assets were written down to their net realizable value in accordance with SFAS No. 121. This resulted in a pre-tax charge of $3,542 (or $2,179 after taxes, $0.28 per basic and diluted share). On October 30, 1998, the Company sold substantially all of the architectural automated lighting assets for their net book value. NOTE J--RESTRUCTURING COSTS: In the fourth quarter of fiscal 1999, the Company recorded a pretax charge of $600 (or $369 after taxes, $0.05 per basic and diluted share) for the estimated costs of restructuring certain of the Company's operations. The charge includes severance payments and other costs associated with the termination of approximately 15 employees. The charge also included the cost associated with terminating leases and the write off of the net book value of leasehold improvements associated with the closing of two offices. Communication of the employee terminations and office closings occurred prior to September 30, 1999 and severance payments were completed by the end of fiscal 2000. In the fourth quarter of fiscal 1998, the Company recorded a pretax charge of $1,080 (or $664 after taxes, $0.09 per basic and diluted share) for the estimated costs of restructuring the Company's operations. The costs were comprised primarily of severance payments and other employee related costs associated with terminating the employment of approximately 75 people. The following represents a rollforward of the restructuring accrual which is included in accounts payable and accrued expenses in the accompanying financial statements: Balance at September 30, 1998............................... $1,080 Severance payments to employees............................. (977) Legal fees.................................................. (54) Other....................................................... (9) Restructuring accrual recorded.............................. 600 ------ Balance at September 30, 1999............................... 640 Severance payments to employees............................. (563) Legal fees.................................................. -- Other....................................................... (77) ------ Balance at September 30, 2000............................... $ -- ======
F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) NOTE K--INCOME TAXES: The provision (benefit) for income taxes consists of the following:
1998 1999 2000 -------- -------- -------- Current: U.S. Federal..................................... $ -- $ -- $ -- State............................................ 33 8 4 International.................................... 917 461 330 Deferred: U.S. Federal..................................... (2,244) (1,608) (494) State............................................ (264) (262) (44) International.................................... (807) (324) 17 ------- ------- ----- Income tax benefit................................. (2,365) (1,725) (187) Less: Deferred income taxes related to extraordinary losses......................................... (452) -- -- Deferred income taxes related to cumulative effect of change in accounting principle....... (128) -- -- ------- ------- ----- Income tax benefit excluding income taxes related to extraordinary losses and cumulative effect of change in accounting principle................... $(1,785) $(1,725) $(187) ======= ======= =====
A reconciliation of income taxes computed at the U.S. Federal statutory tax rate to the provision for income taxes is as follows:
1998 1999 2000 -------- -------- -------- Income tax benefit at U.S. Federal statutory rate............................................. $(2,036) $(1,485) $(161) International taxes................................ (167) (126) (47) State taxes........................................ (240) (131) (24) Foreign and general business tax credits........... -- -- -- Other.............................................. 78 17 45 ------- ------- ----- $(2,365) $(1,725) $(187) ======= ======= =====
Deferred income taxes reflect the net tax effects of deductible temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) tax purposes. The tax effects of significant items comprising the Company's net deferred income taxes consists of the following:
1999 2000 -------- -------- Deferred tax asset Foreign tax credit carryover............................. $ 2,615 $2,159 Net operating loss carryover............................. 6,890 4,031 Alternative minimum tax credit carryover................. 507 507 General business credits................................. 636 636 Accrued impairment costs--sale of European Operations.... -- 1,221 Other tax asset items.................................... 1,213 455 Deferred tax liability Depreciation............................................. (12,270) (9,463) Other tax liability items................................ (561) (282) ------- ------ Total...................................................... (970) (736) Less: Valuation allowance.................................. (544) (257) ------- ------ Net deferred income taxes.................................. $(1,514) $ (993) ======= ======
For tax purposes, the Company has approximately $2,159 of foreign tax credits that expire in 2001 through 2002 and a net loss carryover of $10,894 that will expire in 2011 through 2019. In addition, approximately $507 of alternative minimum tax credits (which do not expire) are available to offset future regular tax liability. The benefit of this tax credit carryforward has been recognized for financial statement purposes as part of deferred taxes. In fiscal 1999 and 2000, there was a valuation allowance of $544 and $257, respectively, related to foreign tax credits. International income taxes relate to the Company's operations in England, Japan, Belgium, Sweden, Spain, France and Hong Kong, as well as to withholding taxes on revenue generated by the Company's foreign distributors. NOTE L--EMPLOYEE BENEFIT PLANS: The Company has a defined contribution 401(k) plan in which substantially all its U.S. employees can elect to be participants. Under the terms of the 401(k) plan, employees can defer up to 20% of their earnings up to the permitted maximum as defined by IRS regulations. The Company matches 50% of the employee's contribution up to 5% of the employee's earnings during the plan year. During the years ended September 30, 1998, 1999 and 2000, the Company's cost to match employee contributions was approximately $274, $310 and $320, respectively. Substantially all employees of the Company's London-based operations may elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a defined contribution plan under which employees may contribute up to 3% of their base salaries. The Company makes contributions at a rate of 200% of the employee contributions, with additional contributions made for certain key employees. The Company incurred costs of $231, $208 and $154, representing matching contributions for the years ended September 30, 1998, 1999 and 2000, 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 F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) 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 cash to the ESOP as determined by the Board of Directors or a committee thereof. Participants' interests in the ESOP are distributed in the form of cash or stock upon normal retirement, disability, death or at a specific time after any other termination of employment. The Company adopted an employee stock equivalence plan ("ESEP") for the Company's non-U.S. subsidiaries, effective January 1, 1995, in which its employees are eligible to participate after completing one year of service, attaining age twenty-one and for London-based employees, participating in the VLEH Pension Plan. Each year the Company may make discretionary contributions of stock to the ESEP as determined by the Board of Directors or a committee thereof. Participants' interests in the ESEP are distributed in the form of cash upon normal retirement, disability, death or at a specific time after any other termination of employment. Subsequent to the end of fiscal 2000, the Company terminated the ESEP. In 1998, the Company accrued $250 and subsequently in 1999 made a cash contribution to the Trustee who in turn purchased 91,000 shares on the open market. In 1999, the Company accrued $250 and subsequently in 2000 made a cash contribution to the Trustee who in turn purchased 183,000 shares on the open market. In 2000, the Company has accrued $250 for contribution to the ESOP and ESEP and has subsequently purchased 42,495 shares on the open market with $183 remaining to be funded. NOTE M--SEGMENT INFORMATION: In 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the reporting by public business enterprises of information about product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operational segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision maker is considered to be the Company's Chief Operating Officer ("COO"). The COO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product lines for purposes of making operating decisions and assessing financial performance. The Company has three reportable segments: North America, Europe and Asia, which are organized, managed and analyzed geographically and operate in one F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) industry segment. Information about the Company's operations by geographic segment for the fiscal years ended September 30, 1998, 1999 and 2000 is presented below:
NORTH AMERICA ASIA EUROPE INTERCOMPANY TOTAL SEPTEMBER 30, 1998: -------- -------- -------- ------------ -------- Net Revenues from unaffiliated customers.... $47,953 $ 9,858 $30,565 $ -- $88,376 Intersegment sales.......................... 6,039 -- -- (6,039) -- ------- ------- ------- ------- ------- Total net revenues........................ 53,992 9,858 30,565 (6,039) 88,376 Operating income (loss)..................... (1,821) 1,384 (1,157) -- (1,594) Depreciation and amortization............... 10,506 157 2,915 -- 13,578 Total assets................................ 99,409 5,599 17,265 (7,646) 114,627 SEPTEMBER 30, 1999: Net Revenues from unaffiliated customers.... $47,598 $11,668 $32,266 $ -- $91,532 Intersegment sales.......................... 20,065 -- -- (20,065) -- ------- ------- ------- ------- ------- Total net revenues........................ 67,663 11,668 32,266 (20,065) 91,532 Operating income (loss)..................... 816 1,306 (1,950) -- 172 Depreciation and amortization............... 12,421 139 2,806 -- 15,366 Total assets................................ 93,747 7,585 15,386 (9,018) 107,700 SEPTEMBER 30, 2000: Net Revenues from unaffiliated customers.... $57,004 $10,430 $26,254 $ -- $93,688 Intersegment sales.......................... 19,668 251 1,139 (21,058) -- ------- ------- ------- ------- ------- Total net revenues........................ 76,672 10,681 27,393 (21,058) 93,688 Operating income (loss)..................... 4,057 (8) 657 -- 4,706 Depreciation and amortization............... 11,654 182 2,005 -- 13,841 Total assets................................ 76,671 8,157 16,222 (6,347) 94,703
NOTE N--RELATED PARTY TRANSACTIONS: Certain directors provided consulting services to the Company and received fees totaling approximately $241 for each of the years ended September 30, 1998, 1999 and 2000. At September 30, 1999 and 2000, the Company had notes receivable from stockholders totaling $30 and $19, respectively, related to common stock purchases. The notes bear interest at 9.75% and are collateralized by 16,937 shares of common stock as of September 30, 2000. These notes are due on December 31, 2000. The Company received from certain stockholders of the Company $2,303, $51 and $10 in the years ended September 30, 1998, 1999 and 2000, respectively, for the rental of automated lighting products and other services. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) NOTE O--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the years ended September 30, 1998, 1999 and 2000:
YEAR ENDED SEPTEMBER 30, 1998 ------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Total revenues.................................... $22,519 $19,227 $22,529 $24,101 Operating income (loss)........................... 2,842 (123) 670 (4,983) Net income (loss)................................. 326 (421) 0 (3,527) Net income (loss) per basic and diluted share..... 0.04 (0.05) 0.00 (0.46) Common stock price per share High............................................ 13.125 12.688 10.000 6.375 Low............................................. 11.750 11.375 5.750 2.000
YEAR ENDED SEPTEMBER 30, 1999 ------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Total revenues.................................... $25,248 $23,170 $20,066 $23,048 Operating income (loss)........................... 1,466 347 (661) (980) Net income (loss)................................. 242 (409) (1,100) (1,376) Net income (loss) per basic and diluted share..... 0.03 (0.05) (0.14) (0.18) Common stock price per share High............................................ 4.750 4.250 2.813 2.125 Low............................................. 2.000 2.625 2.000 0.875
YEAR ENDED SEPTEMBER 30, 2000 ------------------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ Total revenues.................................... $27,679 $20,719 $21,509 $23,781 Operating income (loss)........................... 3,315 (838) 502 1,727 Net income (loss)................................. 1,272 (1,241) (392) 74 Net income (loss) per basic and diluted share..... 0.16 (0.16) (0.05) 0.01 Common stock price per share High............................................ 1.688 4.000 2.750 1.500 Low............................................. 0.938 0.938 0.875 0.688
The Company early adopted SOP 98-5 in the first quarter of 1998 and recorded a pre-tax charge of $282 as a cumulative effect of change in accounting principle. The operating loss for the quarter ended September 30, 1998, includes charges totaling $4,600 for the write-down of impaired architectural automated lighting assets to their net realizable value and employee termination costs associated with restructuring the Company's operations. The operating loss for the quarter ended September 30, 1999, includes charges totaling $600 for employee termination costs associated with restructuring the Company's operations. The operating loss for the quarter ended June 30, 2000, includes a $650 write-down of VLPS Madrid assets to their net realizable value. The operating income for the quarter ended September 30, 2000, includes gains on the settlement of the patent infringement lawsuit and the sale of a building lease in New F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) York of $4,000 partially offset by charges of $3,200 for the impairment of assets used in the Company's continental European operations. NOTE P--PRO FORMA FINANCIAL STATEMENTS (UNAUDITED): Pro forma adjustments to the condensed consolidated statement of operations for the years ended September 30, 1999 and 2000 reflect adjustments to eliminate the results of the continental European operations and Showco due to the sale of these businesses (see Notes I and Q) and the reduction of interest expense as a result of the decrease in debt. The Pro Forma Financial Statements are presented for informational purposes only and do not purport to be indicative of the results of operations that actually would have been achieved had the disposition been consummated on the financial statement date or for any future period.
1999 2000 -------- -------- Total revenues.............................................. 70,025 71,294 Total cost of sales......................................... 34,834 34,687 ------- -------- Gross profit................................................ 35,191 36,607 Operating expenses.......................................... 37,472 35,805 Gains on lawsuit settlement and sale of lease............... -- (3,993) ------- -------- Total operating expenses.................................... 37,472 31,812 ------- -------- Operating income............................................ (2,281) 4,795 Interest expense (net)...................................... 2,939 3,215 ------- -------- Income (loss) before income taxes........................... (5,220) 1,580 Income tax expense (benefit)................................ (2,062) 624 ------- -------- Net income (loss)........................................... $(3,158) $ 956 ======= ========
NOTE Q--SUBSEQUENT EVENTS: On October 26, 2000, the Company sold 100% of its interest in VLI Europe and 0.4% of its interest in VLPS Paris and all of the VARI*LITE equipment used in those operations. VLI Europe owned 100% of VLPS Brussels, 99.6% of VLPS Paris and 100% of VLPS Stockholm. This transaction resulted in a pre-tax charge of $3,200 which was recorded as an asset impairment in the fourth quarter of fiscal year 2000. On November 17, 2000, the Company transferred substantially all of the assets of Showco to Clearsho, Inc. ("Clearsho"), which assumed certain of Showco's contract liabilities, in exchange for the sole membership interest in Clearsho. On November 17, 2000, Showco sold 100% of its interest in Clearsho which resulted in a net pre-tax gain of $7,100. On November 23, 2000, the Company entered into a British pounds sterling 4,000 (USD 5,800) term loan with a United Kingdom bank. The loan, which accrues interest at the rate of 9.1% per annum and amortizes over 48 months, is secured by all of the assets of the Company's London operations. Other terms of the loan include certain financial covenants, limitations on capital expenditures and intercompany payments and the guarantee of the Company. On December 29, 2000, Vari-Lite entered into a three-year $24,500 credit facility which includes a $12,000 term loan, a $5,000 revolving credit facility and a $3,000 term commitment to fund capital expenditures. The Revolver and the Capital Expenditure Loan commitments will increase to $7,500 and F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS EXCEPT SHARE DATA) $5,000, respectively, by January 15, 2002, if the Company achieves specified financial performance. The Term Loan and Capital Expenditure Loan amortize over 84 months (subject to a balloon payment on termination of the New Credit Facility as discussed below). Borrowings under the Revolver are subject to availability under a borrowing base of eligible inventory and accounts receivable (as defined in the New Credit Facility). Initially, all outstanding borrowings under the New Credit Facility bear interest at the lender's base rate or LIBOR, plus a rate margin of .75% and 2.50%, respectively. Beginning on January 15, 2002, all outstanding balances under the New Credit Facility will bear interest at the lender's base rate or LIBOR plus a rate margin ranging from 0.25% to 0.75% or 2.00% to 2.50%, respectively, based upon the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in the New Credit Facility). The New Credit Facility is guaranteed by the Company and is secured by all of the stock and substantially all of the assets of Vari-Lite, and a pledge of 65% of the outstanding capital stock of the Company's foreign subsidiaries. A commitment fee of 0.25% is charged on the average daily unused portion of the New Credit Facility. The New Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the New Credit Facility places limitations on annual capital expenditures and on the ability to incur additional indebtedness, make certain loans or investments, sell assets, pay dividends or reacquire the Company's stock. The New Credit Facility terminates on December 31, 2003. Upon termination of the New Credit Facility, the entire outstanding indebtedness thereunder becomes due and payable in full. F-25 SCHEDULE II VARI-LITE INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1999 AND 2000 (IN THOUSANDS OF DOLLARS)
CHARGED TO WRITE-OFFS BEGINNING COSTS AND AND DISCOUNTS ENDING DESCRIPTION BALANCE EXPENSES ALLOWED BALANCE - ----------- --------- ---------- ------------- -------- September 30, 1998 Allowances deducted from assets to which they apply Allowance for doubtful accounts................... 450 641 (191) 900 Allowance for excess and obsolete inventory....... 409 15 -- 424 Allowance for foreign tax credits................. 544 -- -- 544 September 30, 1999 Allowances deducted from assets to which they apply Allowance for doubtful accounts................... 900 140 (320) 720 Allowance for excess and obsolete inventory....... 424 200 -- 624 Allowance for foreign tax credits................. 544 -- -- 544 September 30, 2000 Allowances deducted from assets to which they apply Allowance for doubtful accounts................... 720 178 (158) 740 Allowance for excess and obsolete inventory....... 624 -- (232) 392 Allowance for foreign tax credits................. 544 -- (287) 257
S-1 EX-10.51 2 a2034323zex-10_51.txt EXHIBIT 10.51 U.S. $24,500,000 FINANCING AGREEMENT dated as of December 29, 2000 between FIRSTAR BANK, NATIONAL ASSOCIATION as Bank and VARI-LITE, INC. as Borrower Table OF CONTENTS
Section Page - ------- ---- 1. CAPITALIZED TERMS...........................................................................................1 1.1 Defined Terms........................................................................................1 1.2 Accounting Terms....................................................................................15 2. LOANS AND OTHER FINANCIAL ACCOMMODATIONS...................................................................15 2.1 Total Facility......................................................................................15 2.2 Revolving Loan Facility.............................................................................15 2.3 Term Loan A Facility................................................................................16 2.4 CapEx Term Loan Facility............................................................................16 2.5 Voluntary Prepayments...............................................................................17 2.6 Disbursement of Loans...............................................................................18 2.7 Procedure for Advancing Revolving Loans.............................................................18 2.8 Procedure for Advancing CapEx Term Loans............................................................18 2.9 No Limitation on Liens..............................................................................18 2.10 Deficiency.........................................................................................19 2.11 Voluntary Reduction of Total Facility..............................................................19 2.12 Advance Rates and Sublimits........................................................................19 3. INTEREST CHARGES; MINIMUM LOAN CHARGE; FEES; MANDATORY PREPAYMENT..........................................20 3.1 Interest on Loans...................................................................................20 3.2 Inability to Determine LIBOR Base Rate..............................................................22 3.3 LIBOR Unlawful, etc.................................................................................22 3.4 LIBOR Indemnity.....................................................................................23 3.5 Increased Costs - Capital Adequacy..................................................................23 3.6 Closing Fee.........................................................................................23 3.7 Unused Facility Fee.................................................................................23 3.8 Mandatory Prepayment................................................................................24 3.9 Interest Rate Protection............................................................................24 3.10 Calculation of Certain Charges.....................................................................24 3.11 Charging Loan Account..............................................................................24 3.12 Maximum Rate.......................................................................................24 4. MONTHLY ACCOUNTINGS........................................................................................25 5. SECURITY...................................................................................................25 5.1 Security Agreement..................................................................................25 5.2 Patent Assignment...................................................................................25 5.3 Pledges.............................................................................................25 5.4 Landlord Waiver.....................................................................................26 5.5 Guaranty............................................................................................26
5.6 Subordination Agreements............................................................................26 6. DELIVERIES PRIOR TO DISBURSEMENT; FURTHER ASSURANCES.......................................................26 7. RECEIVABLES; COLLECTION OF RECEIVABLES; DISPUTED RECEIVABLES...............................................26 7.1 Representations and Warranties Regarding Receivables................................................26 7.2 Disputes and Claims Regarding Receivables...........................................................27 7.3 Locked Box..........................................................................................27 7.4 Special Account.....................................................................................28 7.5 Crediting of Remittances............................................................................28 7.6 Costs of Collection.................................................................................29 8. EXAMINATION OF COLLATERAL AND THE PREMISES; REPORTING......................................................29 8.1 Maintenance of Books and Records....................................................................29 8.2 Access and Inspection...............................................................................29 8.3 Reporting Regarding Receivables.....................................................................29 8.4 Reporting Regarding Inventory.......................................................................30 8.5 Monthly Financial Statements........................................................................31 8.6 Annual Projections..................................................................................31 8.7 Certified Quarterly Financial Statements............................................................31 8.8 Audited Annual Financial Statements.................................................................31 8.9 Management Reports..................................................................................32 8.10 Financial Certificate..............................................................................32 8.11 Public Filings.....................................................................................32 8.12 Monthly Reporting Regarding Inventory and Equipment................................................32 8.13 Additional Monthly Reporting.......................................................................32 9. WARRANTIES, REPRESENTATIONS AND COVENANTS..................................................................33 9.1 Organization, Etc...................................................................................33 9.2 Due Authorization, Validity, Etc....................................................................33 9.3 No Violation........................................................................................33 9.4 Use of Loan Proceeds................................................................................34 9.5 Management; Ownership of Assets, Licenses, Patents, Etc.............................................34 9.6 Indebtedness........................................................................................34 9.7 Title to Property; No Liens.........................................................................34 9.8 Restrictions; Labor Disputes; Collective Bargaining Agreements, Etc.................................34 9.9 No Violation of Law; Hazardous Materials............................................................35 9.10 Absence of Default.................................................................................35 9.11 Accuracy of Financials; No Material Changes........................................................35 9.12 Pension Plans......................................................................................36 9.13 Taxes and Other Charges............................................................................36 9.14 No Litigation......................................................................................36 9.15 No Brokerage Fee...................................................................................37 9.16 Affiliates.........................................................................................37 9.17 Capitalization; Warrants, Etc......................................................................37 9.18 Noncompetition Agreements..........................................................................37 9.19 Deposit and Other Accounts.........................................................................37
ii 9.20 Solvency...........................................................................................37 9.21 Full Disclosure....................................................................................38 9.22 Casualties.........................................................................................38 9.23 Real Property and Leases...........................................................................38 9.24 Insurance Policies.................................................................................38 9.25 Consents...........................................................................................38 9.26 Updating Representations and Warranties............................................................38 10. COVENANTS.................................................................................................39 10.1 Payment of Certain Expenses........................................................................39 10.2 Notice of Litigation...............................................................................39 10.3 Notice of ERISA Events.............................................................................39 10.4 Notice of Labor Disputes and Collective Bargaining Agreements......................................39 10.5 Compliance with Laws, Etc..........................................................................40 10.6 Notice of Violations of Law, Tax Assessments.......................................................40 10.7 Compliance with Other Agreements...................................................................40 10.8 Notice of Violations of Certain Agreements.........................................................40 10.9 Notice of Customer Defaults........................................................................40 10.10 Taxes and Charges.................................................................................40 10.11 Indebtedness; Guaranties..........................................................................41 10.12 Title to Property; No Liens.......................................................................41 10.13 Restrictions; Labor Disputes, Etc.................................................................41 10.14 Pension Plans.....................................................................................42 10.15 Solvency..........................................................................................42 10.16 Property Insurance................................................................................42 10.17 Liability Insurance...............................................................................42 10.18 Deposit Accounts..................................................................................43 10.19 Merger, Etc.......................................................................................43 10.20 Investments.......................................................................................43 10.21 Dividends.........................................................................................43 10.22 Redemption of Stock...............................................................................43 10.23 Stock Rights......................................................................................43 10.24 Change in Business................................................................................43 10.25 Affiliate Transactions............................................................................44 10.26 Withdrawals From Accounts.........................................................................44 10.27 Sale of Assets....................................................................................44 10.28 Consignments, Etc.................................................................................44 10.29 Change in Management or Business..................................................................44 10.30 Claims Against Collateral.........................................................................44 10.31 Judgments.........................................................................................45 10.32 Filed Jurisdictions...............................................................................45 10.33 Financial Covenants...............................................................................45 10.34 Good Standing Certificate.........................................................................45 10.35 Director's Fees...................................................................................45 10.36 Chattel Paper.....................................................................................45 10.37 Intercompany Loans................................................................................45
iii 11. EFFECTIVE DATE; TERMINATION...............................................................................46 11.1 Effective Date and Termination Date................................................................46 11.2 Termination by Bank................................................................................46 11.3 Voluntary Termination..............................................................................46 11.4 Acceleration Upon Termination......................................................................47 11.5 Borrowers Remain Liable............................................................................47 12. EVENTS OF DEFAULT.........................................................................................47 13. BANK'S RIGHTS AND REMEDIES................................................................................49 13.1 Acceleration, Etc..................................................................................49 13.2 Fees and Expenses..................................................................................49 14. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS................................................................50 14.1 Release of Collateral..............................................................................50 14.2 Waivers and Amendments in Writing..................................................................50 14.3 Assignment.........................................................................................50 15. MISCELLANEOUS.............................................................................................50 15.1 Severability.......................................................................................50 15.2 Governing Law......................................................................................50 15.3 WAIVER OF JURISDICTION.............................................................................51 15.4 Survival of Representations and Warranties.........................................................51 15.5 Evidence of Loans..................................................................................51 15.6 Bank's Ability Regarding Collateral and Premises...................................................51 15.7 Application of Payments, Etc.......................................................................52 15.8 Fees and Expenses..................................................................................52 15.9 Notices............................................................................................53 15.10 Indemnification...................................................................................53 15.11 Use of Bank's Discretion..........................................................................54 15.12 Equitable Relief..................................................................................54 15.13 Entire Agreement..................................................................................54 15.14 Headings..........................................................................................55 15.15 WAIVER OF JURY TRIAL..............................................................................55 15.16 Confession of Judgment............................................................................55
iv EXHIBITS EXHIBIT A - Form of Security Agreement EXHIBIT B - Form of Vari-Lite Patent, Trademark and License Security Agreement EXHIBIT C - Form of Guaranty EXHIBIT D - Form of Pledge Agreement EXHIBIT E - Form of Landlord Waiver EXHIBIT F - [RESERVED] EXHIBIT G-1 - Deliveries Prior to Disbursement EXHIBIT G-2 CapEx Deliveries Prior to Disbursement EXHIBIT H - Form of Borrowing Base Certificate EXHIBIT I - Form of Chief Financial Officer's Certificate EXHIBIT J - Financial Covenants EXHIBIT K - Form of Certificate of Secretary EXHIBIT L - Form of Signature Authorization Letter EXHIBIT M - Form of Accountant's Access Letter EXHIBIT N - Form of Accountant's Representation Letter EXHIBIT O - Form of Certificate of Chief Financial Officer EXHIBIT P - Form of Disbursement Direction Letter EXHIBIT Q - Evidence of Insurance EXHIBIT R - Form of Advertising Permission Letter EXHIBIT S - [RESERVED] EXHIBIT T - Form of Capital Expenditure Term Loan Installment Payment Schedule EXHIBIT U - Form of Subordination Agreement v SCHEDULES Schedule 1 - Licenses, Patents, Trademarks, Etc. Schedule 2 - Indebtedness Schedule 3 - Permitted Liens Schedule 4 - Restrictions, Orders, Collective Bargaining Agreements, Etc. Schedule 5 - Violations of Law Schedule 6 - Pension Plan Liability Schedule 7 - Taxes and Other Charges Schedule 8 - Litigation Schedule 9 - Affiliates Schedule 10 - Capitalization Schedule 11 - Deposit and Other Accounts Schedule 12 - Leases Schedule 13 - Insurance Policies Schedule 14 - Investments Schedule 15 - Intercompany Loans Schedule 16 - Leased Premises Schedule 17 - Filed Locations Schedule 18 - Noncompetition Agreements vi FINANCING AGREEMENT THIS FINANCING AGREEMENT (this "Agreement") among FIRSTAR BANK, NATIONAL ASSOCIATION, a national banking association ("Bank"), and VARI-LITE, INC., a Delaware corporation (together with its successors and assigns, the "Borrower") covering the terms upon which Bank will make loans and/or advances to Borrower, is as follows: 1. CAPITALIZED TERMS. Certain capitalized terms used herein are defined in this SECTION 1. 1.1 Defined Terms. Whenever the following terms (whether or not underscored) are used herein, they shall be defined as follows (such meanings to be equally applicable to the singular and plural forms thereof): "ADDITIONAL FEE" shall have the meaning ascribed thereto in SECTION 3.5 hereof. "AFFILIATE" of any Person shall mean (a) any Person who or which is a director, managing general partner or officer of such Person, or (b) any other Person who or which, directly or indirectly, beneficially owns ten percent (10%) or more of the voting stock of, or partnership interests, membership interests or other similar equity interests in, such Person, or (c) any other Person in which any Person described in CLAUSE (a), (b) or (c) above owns, directly or indirectly, a ten percent (10%) or greater equity interest. Without limiting the foregoing, for purposes of this Agreement, (w) all of Borrower's officers, shareholders, directors, parent corporations, subsidiary corporations, joint venturers and partners, (x) each member of the immediate family (as defined in Item 404) of the Persons described in CLAUSE (w), (y) each Person as to which any of the Persons described in CLAUSE (w) or any member of the immediate family (as defined in Item 404 of Regulation SK promulgated pursuant to the Securities Act of 1933, as amended) of any such Persons is a director, managing general partner, or officer, and (z) each Person in which any of the Persons described in CLAUSE (w) or any member of the immediate family (as defined in Item 404) of any such Persons owns, directly or indirectly, a ten percent (10%) or greater equity interest, shall at all times be deemed to be an Affiliate of each Borrower. "APPLICABLE INTEREST RATE" means, with respect to any Loans, the Applicable LIBOR Rate or the Applicable Prime Rate, as the case may be. "APPLICABLE LIBOR RATE" means, with respect to any Loans, the LIBOR Rate PLUS the Applicable LIBOR Rate Margin then in effect with respect to such Loans. "APPLICABLE LIBOR RATE MARGIN" means (i) from the Effective Date through and excluding January 15, 2002 (the "Initial Interest Rate Period"), a rate equal to (A) 2.50% per annum with respect to Revolving Loans, and (B) 2.50% per annum with respect to the Term Loan A and the CapEx Term Loans (collectively, the "Term Loans"), and (ii) thereafter, so long as no Event of Default shall have occurred and be continuing, a per annum rate which shall adjust as of each Applicable Margin Adjustment Date based on the Leverage Ratio for the most recent four (4) fiscal quarters preceding such Applicable Margin Adjustment Date, as determined by the Bank from the quarterly reports and annual reports required by SECTION 8.7 and SECTION 8.8, respectively, in accordance with the following table:
- ---------------------------------------------------------------------------------------------------------------- Applicable LIBOR Applicable LIBOR Leverage Ratio Rate Margin for Rate Margin for Revolving Loans Term Loans - ---------------------------------------------------------------------------------------------------------------- Greater than or equal to 2.5 to 1 2.50% 2.50% - ---------------------------------------------------------------------------------------------------------------- Greater than or equal to 2.0 to 1 but less than 2.25% 2.25% 2.5 to 1 - ---------------------------------------------------------------------------------------------------------------- Less than or equal to 2.0 to 1 2.00% 2.00% - ----------------------------------------------------------------------------------------------------------------
"APPLICABLE MARGIN ADJUSTMENT DATE" means, (a) January 15, 2002 (the "Initial Applicable Margin Adjustment Date") and (b) thereafter, the first day of the first month following receipt by Bank of the financial statements required to be delivered under SECTION 8.7 hereof for each fiscal quarter of International. "APPLICABLE PRIME RATE" means, with respect to any Loans, the Prime Rate PLUS the Applicable Prime Rate Margin then in effect with respect to such Loans. "APPLICABLE PRIME RATE MARGIN" means (i) during the Initial Interest Rate Period, a rate equal to (A) 0.75% per annum with respect to Revolving Loans, and (B) 0.75% per annum with respect to the Term Loans and (ii) thereafter, so long as no Event of Default shall have occurred and be continuing, a per annum rate which shall adjust as of each Applicable Margin Adjustment Date based on the Leverage Ratio for the most recent four (4) fiscal quarters preceding such Applicable Margin Adjustment Date, as determined by the Bank from the quarterly reports and annual reports required by SECTION 8.7 and SECTION 8.8, respectively, in accordance with the following table:
Applicable Prime Applicable Prime Rate Margin for Rate Margin for Leverage Ratio Revolving Loans Term Loans - ------------------------------------------------------------------------------------------------------------------ Greater than or equal to 2.5 to 1 0.75% 0.75% - ------------------------------------------------------------------------------------------------------------------ Greater than or equal to 2.0 to 1 but less than 0.50% 0.50% to 2.5 to 1 - ------------------------------------------------------------------------------------------------------------------ Less than or equal to 2.0 to 1 0.25% 0.25% - ------------------------------------------------------------------------------------------------------------------
2 "ATTORNEYS' FEES" shall mean the reasonable fees for services (and costs and expenses related thereto) of all attorneys (and all paralegals and other staff employed by such attorneys) employed by Bank from time to time in connection with any matter whatsoever related to or arising out of the transactions contemplated hereunder. "BORROWING BASE CERTIFICATE" shall have the meaning ascribed thereto in SECTION 8.3(b) hereof. "BORROWING BASE DEFICIENCY" shall mean any failure of the Revolving Loan Availability to be greater than or equal to zero (0) dollars. "BUSINESS DAY" shall mean any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in Cincinnati, Ohio or Dallas, Texas. "CALCULATED TERMINATION AMOUNT" shall mean the dollar amount equal to the sum of (x) the unpaid principal and accrued and unpaid interest due on all Term Loans on the Voluntary Termination Date, PLUS (y) the daily average outstanding principal balance of the Revolving Loans for the period of 365 days immediately preceding the Voluntary Termination Date (or such lesser period of time if the Voluntary Termination Date occurs before December 29, 2001) PLUS (z) the sum of all voluntary prepayments of the Term Loans to the extent such prepayments are made from proceeds of loans provided to Borrower from an institutional third party lender. "CAPEX ADJUSTMENT DATE" shall mean January 15, 2002; PROVIDED, HOWEVER, the maximum amount of the CapEx Term Loan Facility shall not increase on such date from Three Million Dollars ($3,000,000) to Five Million Dollars ($5,000,000) unless International shall have achieved consolidated EBITDA of at least Fourteen Million Five Hundred Thousand Dollars ($14,500,000) for International's fiscal year ended September 30, 2001, (the "EBITDA Threshold"). "CAPEX TERM LOAN" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "CAPEX TERM LOAN AVAILABILITY" shall mean, as at any time, an amount not to exceed (i)(a) from and including the Effective Date through and excluding the CapEx Adjustment Date, Three Million Dollars ($3,000,000), and (b) SUBJECT TO the condition precedent of International meeting the EBITDA Threshold for its fiscal year ended September 30, 2001, from and including the CapEx Adjustment Date through and including September 30, 2002, Five Million Dollars ($5,000,000) LESS (ii) the aggregate original principal amount of all CapEx Term Loans made by the Bank hereunder. "CAPEX TERM LOAN FACILITY" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "CASUALTY LOSS" shall mean any of the following events with respect to any item of Collateral: (i) the actual total loss of the item or such loss as shall render repair of the item uneconomical, (ii) the item shall become lost, stolen, destroyed, damaged beyond repair or 3 permanently rendered unfit for use for any reason whatsoever, or (iii) the condemnation or taking, by exercise of the power of eminent domain or otherwise, of such item or confiscation of such item, or of so much of any such item as to render impractical or unreasonable the use of such item for substantially the same purposes for which such item was used immediately prior to such condemnation, taking or confiscation. "CHARGES" shall have the meaning ascribed thereto in SECTION 3.12 hereof. "COLLATERAL", "ACCOUNTS", "RECEIVABLES", "CHATTEL PAPER," "DEPOSIT ACCOUNTS", "GENERAL INTANGIBLES", "EQUIPMENT", "DOCUMENTS", "INVENTORY", "INVESTMENT PROPERTY", and "PROCEEDS" shall mean the "Collateral," "Accounts", "Chattel Paper," "Deposit Accounts", "Documents", "General Intangibles," "Equipment," "Inventory," "Investment Property," "Receivables", and "Proceeds" of Borrower, as defined in the Security Agreement. "CONTRACT" means a written agreement between a Borrower and any Person or an invoice pursuant to an open account or a written agreement of such Person, pursuant to or under which such Person shall be obligated to make payment to Borrower for the purchase, lease or use (including, but not limited to, licensing and related agreements) of Inventory and Equipment owned or leased by Borrower. "CONTROLLED GROUP" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code, as amended, or Section 4001 of ERISA, as amended. "DEFICIENCY" shall mean a Borrowing Base Deficiency. "EFFECTIVE DATE" shall mean December 29, 2000, or such later date as is mutually agreeable to the parties hereto. "ELIGIBLE INVENTORY" shall mean "Inventory" of a Borrower consisting of raw materials, finished goods or spare parts for sale, identified as "current assets" under GAAP on the balance sheet of Borrower, and located at 201 Regal Row, Dallas, Texas 75247 (the "Dallas Location") or at such other locations as are approved in writing by Bank in its discretion, provided that the owner and/or operator of the premises shall have executed and delivered to Bank a mortgagee, landlord, warehouseman or other similar waiver in form and substance satisfactory to Bank, in its discretion, and meeting all applicable specifications that Bank, in its discretion, deems to be Eligible Inventory, based on such credit and collateral considerations as Bank may deem appropriate. Without limitation on the foregoing, the following shall not be deemed Eligible Inventory: Inventory of Borrower (i) that is not readily saleable in Borrower's business (including without limitation Inventory for which reserves for obsolescence have been provided for in the financial statements or for which obsolescence reserves are anticipated), (ii) that is located outside the United States, (iii) that is not subject to the first priority security interest of Bank, (iv) that is subject to any trademark, trade name or licensing arrangement, or any law, rule or regulation, that could limit or impair the ability of Bank to promptly exercise any of its rights with respect thereto, (v) with respect to which insurance proceeds, if any, are not payable to Bank as mortgagee or loss payee, (vi) that has been in existence for more than one (1) 4 year or is otherwise considered slow-moving or obsolete by Bank, in its discretion, (vii) that is in the possession of any processor other than Borrower unless such processor shall have executed and delivered to Bank a processor consignment agreement or other similar agreement in form and substance satisfactory to Bank, in its discretion, (viii) that is in transit, (ix) with respect to which a Casualty Loss has been incurred, (x) that consists of general supplies or maintenance supplies, cartons, packaging, fuel, or, unless otherwise approved by Bank in writing, work in process, (xi) that is Rental Inventory, or (xii) as to which Bank, in its good faith discretion, deems to be ineligible based on any other credit and/or collateral considerations as Bank deems appropriate. "ELIGIBLE RECEIVABLES" shall mean those "Receivables" of Borrower which (i) arise out of sales or leases in the ordinary course of Borrower's business to a Person who is not an Affiliate of Borrower or otherwise controlled by Borrower or by an Affiliate of Borrower (unless such sale is guaranteed by a letter of credit, which is in form and substance satisfactory to Bank, in its discretion, which has been issued by a financial institution satisfactory to Bank, in its discretion, and which has been transferred or assigned to Bank as security for the Obligations), (ii) the terms of sale or lease of which are ordinary terms of Borrower and require payment in full within not more than ninety (90) days from the date of invoice or from the due date in any Contract providing for the lease of Rental Inventory, (iii) are not in dispute, (iv) do not violate any warranty with respect to Eligible Receivables set forth in SECTION 7.1 of this Agreement, (v) if Chattel Paper, conform strictly to representations, warranties and covenants set forth in this Agreement and in the other Loan Documents, or is otherwise acceptable to Bank in its discretion, and (vi) are not more than (A) with respect to Receivables owing from Investment Grade Account Debtors, one hundred twenty (120) days past the date of invoice thereof or from the due date in any Contract providing for the lease of Rental Inventory, or (B) with respect to Receivables owing from account debtors that are not Investment Grade Account Debtors, ninety (90) days past the date of invoice thereof or from the due date in any Contract providing for the lease of Rental Inventory; PROVIDED, HOWEVER, that no Receivable shall be an Eligible Receivable if (a) the account debtor or any parent company, subsidiary company, joint venturer or partner of the account debtor has filed or had filed against it a petition in bankruptcy or for reorganization, made an assignment for the benefit of creditors, or failed, suspended business operations, become insolvent or had or suffered a receiver or a trustee to be appointed for a significant portion of its assets or affairs, PROVIDED that Bank, in its discretion, may consider any Receivable created with respect to such account debtor to be an Eligible Receivable after such petition, assignment, failure, suspension, insolvency, sufferance, or appointment has been dismissed, ceases to exist or has otherwise been cured, (b) the account debtor is also a supplier to or creditor of Borrower, unless (i) such account debtor executes and delivers a Waiver of Rights to Counterclaim, Setoff and Defenses, in a form acceptable to Bank in its discretion, in favor of Bank, or (ii) with respect to an account debtor which has not executed and delivered such a Waiver of Rights to Counterclaim, Setoff and Defenses, the aggregate amount owed to Borrower by such account debtor exceeds the aggregate amount owed to such account debtor by Borrower, in which case the Receivable shall be an Eligible Receivable only to the extent of such excess, (c) the sale or lease is to an account debtor outside the United States and Canada (except for Quebec), unless the sale is (i) guaranteed by a letter of credit, which is in form and substance satisfactory to Bank, in its discretion, which has been issued by a financial institution satisfactory to Bank, in its discretion, and which has been transferred or assigned to Bank as security for the Obligations, (ii) guaranteed by a banker's acceptance satisfactory to Bank, in its discretion, or 5 (iii) on other terms acceptable to Bank, in its discretion, (d) twenty-five percent (25%) or more of the Receivables from the account debtor and its Affiliates are ineligible for any reason, without taking into consideration such Receivables that are ineligible (i) under clause (b)(ii) above, or (ii) by reason of the last sentence of this definition of "ELIGIBLE RECEIVABLES", (e) the account debtor is the federal or any state government or any agency or department thereof, unless with respect to such Receivable the Assignment of Claims Act or comparable state statute or regulation has been complied with or such compliance with respect to such Receivable has been specifically waived by Bank in writing, (f) the Receivable consists of finance charges (or if any portion of a Receivable consists of finance charges, only such portion shall be considered ineligible), interest on delinquent accounts, proceeds of consigned Inventory, employee or officer Receivables, service charges, or debit memoranda, (g) the Receivable arises from a contract which contains a prohibition of assignment of such Receivable and/or the proceeds thereof, (h) the Receivable is evidenced by a promissory note, (i) the Receivable is generated by a sale on approval, a bill and hold sale, a sale on consignment, or other type of conditional sale, (j) the Receivable is not subject to the first priority security interest of Bank, (k) the account debtor is located in West Virginia, unless Borrower shall have properly qualified to do business in West Virginia or shall have filed a Notice of Business Activities Report with the West Virginia Division of Taxation for the then current year, (l) the account debtor is located in New Jersey, unless Borrower shall have properly qualified to do business in New Jersey or shall have filed a Notice of Business Activities Report with the New Jersey Division of Taxation for the then current year, (m) the account debtor is located in Minnesota, unless Borrower shall have properly qualified to do business in Minnesota or shall have filed a Notice of Business Activities Report with the Minnesota Division of Taxation for the then current year, (n) the account debtor is located in any other jurisdiction which requires that Borrower, in order to sue any Person in such jurisdiction's courts, either (i) qualify to do business in such jurisdiction, or (ii) file a report with the taxation division of such jurisdiction for the then current year, unless Borrower shall have fulfilled either of such requirements for the then current year with respect to such jurisdiction, (o) the Receivable is a progress billing, (p) the account debtor has sold or is selling substantially all of its assets, (q) the account debtor is incompetent or has died, (r) Bank has received a check for payment of such Receivable which has been returned uncollected, (s) the Receivable arises from an invoice issued by Borrower prior to the shipment by Borrower of the goods covered by such invoice to the applicable account debtor, (t) Bank, in its good faith discretion, believes that the collection of such Receivable is insecure, or that such Receivable may not be paid by reason of the account debtor's financial inability to pay, or deems such Receivable to be ineligible based on such other credit and/or collateral considerations as Bank deems appropriate, (u) the account debtor has made advance payments, in which case the Receivable shall be an Eligible Receivable only to the extent of the excess of the amount of the Receivable over such advance payments, or (v) Borrower has recorded on its books and records an accrual for unreimbursable direct costs (including without limitation contract overruns, damaged property and unallowable expenses) or for general and administrative overabsorbtion, in either of which cases the Receivable shall be an Eligible Receivable only to the extent of the excess of the amount of the Receivable over such accrued amounts. In addition, and without limitation of the foregoing, (i) if any Receivables owed by a particular account debtor (other than Investment Grade Account Debtors) cause the aggregate amount of Receivables owed by that account debtor to exceed thirty percent (30%) of the aggregate amount of Borrower's Eligible Receivables or twenty percent (20%) of the aggregate amount of Borrower's aggregate Eligible Receivables, then such Receivables shall not 6 be Eligible Receivables to the extent of such excess, and (ii) if any Receivables owed by an Investment Grade Account Debtor cause the aggregate amount of Receivables owed by that account debtor to exceed fifty percent (50%) of the aggregate amount of Borrower's Eligible Receivables, then such Receivables shall not be Eligible Receivables to the extent of any such excess. "ENVIRONMENTAL COMPLIANCE RESERVE" shall mean all reserves which in the discretion of Bank, shall be established from time to time for amounts that are required to be expended in order for the Borrower or the Borrower's operations and property to comply with Environmental Laws or in order to correct any violation by Borrower or by Borrower's operations or property of Environmental Laws, or to remediate the presence of Hazardous Materials on, in or under such property or operations or emanating therefrom. "ENVIRONMENTAL LAWS" shall mean any and all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environmental or the release of any materials into the environment (including, without limitation, Hazardous Materials). "ERISA" shall have the meaning ascribed thereto in SECTION 9.12 hereof. "EURODOLLAR BUSINESS DAY" means any Business Day on which dealings in United States dollar deposits are carried out on the London interbank market and on which commercial banks are open for domestic and international business (including dealings in United States dollar deposits) in London, England. "EVENT OF DEFAULT" shall have the meaning ascribed thereto in SECTION 12 hereof. "FACILITY REDUCTION AMOUNT" shall have the meaning ascribed thereto in SECTION 2.11 hereof. "FACILITY REDUCTION NOTICE" shall have the meaning ascribed thereto in SECTION 2.11 hereof. "FILED LOCATIONS" shall mean the jurisdictions listed on SCHEDULE 18 attached hereto and incorporated herein and such other jurisdictions specified in writing by Bank, in which the Bank has filed financing statements under the applicable State's version of the Uniform Commercial Code and has a perfected, first priority lien on the Collateral, as the same may from time to time be updated by the Borrower with the written agreement of Bank. "FINANCIAL COVENANTS" shall have the meaning ascribed thereto in SECTION 10.33 hereof. "FINANCIALS" shall mean those financial statements delivered from time to time pursuant to SECTION 8.5, SECTION 8.6, SECTION 8.7 and SECTION 8.8 hereof and those financial statements attached to the Certificate of the Chief Financial Officer delivered to Bank on the Effective Date. 7 "HAZARDOUS MATERIAL" shall have the meaning ascribed thereto in SECTION 9.9 hereof. "IGNITION! CREATIVE GROUP, INC." shall mean Ignition! Creative Group, Inc., a Delaware corporation and a wholly-owned Subsidiary of International. "INDEBTEDNESS" shall mean all of Borrower's obligations and liabilities for the payment of money to any "Person" (as defined below), including, without limitation, all debts, claims for the payment of money and indebtedness, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under written or oral agreement, operation of law or otherwise. Indebtedness includes, without limiting the foregoing, (i) the "Obligations" (as defined below), (ii) obligations and liabilities for the payment of money of any Person secured by a lien, claim, encumbrance or security interest upon property owned by Borrower, even though Borrower has not assumed or become liable for the payment therefor, and (iii) obligations or liabilities for the payment of money created or arising under any lease of real or personal property, conditional sales contract or other title retention agreement with respect to property used and/or acquired by Borrower, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property. "INDEMNIFIED LIABILITIES" shall have the meaning ascribed thereto in SECTION 15.10 hereof. "INDEMNIFIED PARTY" shall have the meaning ascribed thereto in SECTION 15.10 hereof. "INITIAL INTEREST RATE PERIOD" means the period of time from and including the Effective Date through and excluding January 15, 2002. "INITIAL PERIOD" shall mean the period from and including the Effective Date until and excluding January 15, 2002. "INTERCOMPANY LOAN OBLIGATIONS" means, with respect to Borrower, the obligations of Borrower under Intercompany Loans advanced to Borrower. "INTERCOMPANY LOANS" means loans or advances to or from (i) Borrower, (ii) International, or (iii) a Subsidiary of Borrower or International, as the case may be, to or from any of the foregoing Persons. "INTEREST PERIOD" means, as to any LIBOR Rate Loan, the period commencing on and including the date such LIBOR Rate Loan is made (or on the effective date of Borrower's election to convert any Prime Rate Loan to a LIBOR Rate Loan in accordance with the provisions of this Agreement) and ending on and including the day which numerically corresponds to such date thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days thereafter as selected by Borrower in accordance with the provisions of this Agreement, and thereafter, each period commencing on the last day of the then preceding Interest Period for such LIBOR Loan and ending on and including the day which numerically corresponds to such date thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days thereafter (or, if such month 8 has no numerically corresponding day, on the last Business Day of such month) as selected by Borrower in accordance with the provisions of this Agreement, provided, however, that: (a) the first day of any Interest Period shall be a Eurodollar Business Day; (b) if any Interest Period would end on a day that shall not be a Eurodollar Business Day, such Interest Period shall be extended to the next succeeding Eurodollar Business Day unless such next succeeding Eurodollar Business Day would fall in the next calendar month, in which case, such Interest Period shall end on the next preceding Eurodollar Business Day; (c) no Interest Period shall extend beyond the Revolving Loan Termination Date; and (d) for each Term Loan, no Interest Period shall extend beyond the earliest scheduled maturity date of such Term Loan. "INTEREST RATE ELECTION NOTICE" has the meaning described in SECTION 3.1(c). "INTEREST RATE PROTECTION AGREEMENT" shall have the meaning ascribed thereto in SECTION 3.10 hereof. "INTERNATIONAL" shall mean Vari-Lite International, Inc., a Delaware corporation. "INTERNATIONAL GUARANTY" shall have the meaning ascribed thereto in SECTION 5.5 hereof. "INTERNATIONAL PLEDGE AGREEMENTS" shall have the meaning ascribed thereto in SECTION 5.3 hereof. "INVESTMENT GRADE ACCOUNT DEBTORS" shall mean any account debtor of Borrower that has a credit rating of at least BBB by Standard & Poor's Rating Service or the equivalent thereof by Moody's Investor Services, Inc. "LANDLORD WAIVER RESERVES" shall mean those amounts required to be paid by Bank to a landlord of a Leased Premises under the applicable Landlord Waiver. "LANDLORD WAIVERS" shall have the meaning ascribed thereto in SECTION 5.4 hereof. "LEASED PREMISES" shall mean the Leased Premises described in SCHEDULE 17 attached hereto. "LEVERAGE RATIO" shall mean the Leverage Ratio as described on EXHIBIT J hereto. "LIBOR BASE RATE" means, for any Interest Period with respect to any LIBOR Rate Loan, the per annum interest rate (rounded upward, if necessary, to the nearest next 1/100 of 1%) quoted to Bank or an Affiliate of Bank on an immediately available funds basis, at or about 11:00 a.m. (London time) on the date that is three (3) Eurodollar Business Days prior to 9 the first day of such Interest Period, for the offering by leading banks in the London interbank Eurodollar market of United States dollar deposits with Bank or such Affiliate for a period comparable in time to the duration of such Interest Period and in amounts comparable to the amount of such LIBOR Rate Loan as to which the LIBOR Base Rate is to be determined. If Bank shall be unable or shall otherwise fail to so obtain the LIBOR Base Rate, the LIBOR Base Rate shall be the average of those rates quoted on the REUTERS SCREEN "LIBOR" page for a period comparable to the applicable Interest Period (rounded upward, if necessary, to the nearest next 1/100 of 1%). "LIBOR RATE" means, for any Interest Period with respect to any LIBOR Loan, the per annum rate of interest calculated pursuant to the following formula (rounded up to the nearest 1/100th of 1%): LIBOR Base Rate ------------------------------ 1.00 - Reserve Percentage "LIBOR RATE LOAN" means any Loan for which interest is to be computed with reference to the LIBOR Rate. "LOAN DOCUMENTS" shall mean this Agreement and all other documents, instruments and agreements executed in connection herewith, as the same may be amended, supplemented or otherwise modified from time to time. "LOANS" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "LOCKED BOX" shall have the meaning ascribed thereto in SECTION 7.3 hereof. "MATERIAL ADVERSE EFFECT" shall mean the occurrence or existence of a material adverse effect on: (a) the business, property, assets, operations or condition, financial or otherwise, of Borrower or International; (b) the ability of Borrower to perform any of its payment or other Obligations under this Agreement or any of the other Loan Documents to which it is a party; (c) the legality, validity or enforceability of Borrower's Obligations under this Agreement or any of the other Loan Documents to which it is a party; or (d) the ability of Bank to exercise its rights and remedies with respect to, or otherwise to realize upon any of the Collateral, or any other security for the Obligations. "MAXIMUM RATE" shall have the meaning ascribed thereto in SECTION 3.12 hereof. "MULTIEMPLOYER PLAN" shall have the meaning set forth in Section 4001(a)(3) of ERISA. "OBLIGATIONS" shall mean the Loans and all other loans, advances, debts, liabilities, obligations, covenants and duties owing to Bank or any Affiliate of Bank from Borrower of any kind, present or future, whether or not evidenced by or arising out of this Agreement, any of the Loan Documents, or any other agreement, transaction, extension of credit, letter of credit, guaranty or indemnification or in any other manner, whether or not for the payment of money, whether direct or indirect (including acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired, and 10 including, without limitation, all interest, charges, expenses, fees and any other sums chargeable to Borrower in connection with any of the foregoing, and all Attorneys' Fees. "PATENT ASSIGNMENT" shall have the meaning ascribed thereto in SECTION 5.2 hereof. "PENSION PLAN" means a "pension plan", as such term is defined in Section 3(2) of ERISA, which is subject to title IV of ERISA (other than a Multiemployer Plan) and to which any Borrower or any corporation, trade or business that is, along with Borrower, a member of a Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding six (6) years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "PERMITTED INVESTMENTS" shall mean (i) short-term obligations of , or fully guaranteed by, the United States of America, (ii) commercial paper rated A-2 or better by Standard and Poor's Rating Services, a division of The McGraw Hill Companies, Inc., or P-2 or better by Moody's Investors Service, Inc., (iii) certificates of deposit issued by and time and demand deposits with commercial banks having capital and surplus in excess of $100,000,000; PROVIDED, HOWEVER, in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest, and (iv) advances to employees in the ordinary course of business to pay travel expenses and related costs. "PERMITTED LIENS" shall mean the liens and interests in favor of Bank granted in connection herewith and, to the extent reflected on the Borrower's books and records and not impairing the operations of Borrower or any performance hereunder or contemplated hereby: (i) liens arising by operation of law for taxes not yet due and payable; (ii) statutory liens of mechanics, materialmen, shippers, landlord liens and warehousemen for services or materials for which payment is not yet due; (iii) deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) liens, if any, specifically permitted by Bank from time to time in writing; (v) liens securing obligations under capitalized leases or purchase money Indebtedness permitted by SECTION 10.11(iv) on the property subject thereto, PROVIDED that (a) such capitalized leases and purchase money Indebtedness shall not be secured by any of the Collateral granted or mortgaged on the Effective Date, (b) any liens relating to such capitalized leases and purchase money Indebtedness shall not extend to cover any other property of Borrower other than the property so acquired, and (c) the principal amount (i.e., exclusive of interest, fees, expenses and other charges) of such capitalized leases and purchase money Indebtedness shall not exceed the value of the property so acquired at the time of such acquisition; (vi) liens for taxes, assessments and other similar charges to the extent payment thereof shall not at the time be required to be made in accordance with the provisions of SECTION 10.10; (vii) the following if the validity or amount thereof is being contested in good faith and by appropriate and lawful proceedings promptly initiated and diligently conducted of which the applicable Borrower has given prior notice to Bank and for which appropriate reserves (in Bank's good faith discretion) have been established and so long as levy and execution have been and continue to be stayed: claims of mechanics, materialmen, shippers, warehouseman, carriers and landlords; (viii) deposits made in the 11 ordinary course of business to secure bids, tenders and contracts in the ordinary course of Borrower's business; and (ix) as described on SCHEDULE 3 attached hereto. "PERMITTED PAYMENTS" means the following payments, regardless of whether classified as dividends, distributions or payments of Intercompany Loans: (i) payments to International in an amount not to exceed Inernational's consolidated tax liability attributable to the net income of Borrower in any fiscal year of Borrower, and (ii) so long as no Event of Default has occurred which is continuing: (a) payments of interest at a market rate to Vari-Lite Asia, Inc. on Intercompany Loans from Vari-Lite Asia, Inc. to Borrower, and (b) payments to International to cover certain employment, compensation, audits, director fees, legal and other overhead and administrative expenses not to exceed One Million Dollars ($1,000,000) in the aggregate in any fiscal year of Borrower. "PERSON" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or government or governmental entity. "PLAN" shall have the meaning ascribed thereto in SECTION 10.3 hereof. "PRIME RATE" shall mean the rate per annum announced by Bank from time to time as its "Prime Rate," such rate to be adjusted on the effective date of any change in the Prime Rate by Bank. "PRIME RATE LOAN" means any Loan for which interest is to be computed with reference to the Prime Rate. "RELATED PROPERTY" means with respect to any Receivable: (a) all of the Borrower's right, title and interest in and to all Contracts, purchase orders, agreements for lease or other agreements or documents that evidence, secure or otherwise relate to such Receivable; (b) all of the Borrower's interest in the merchandise (including returned merchandise), if any, relating to the sale or lease which gave rise to such Receivable; (c) all liens from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, and all property subject to such liens; (d) all UCC financing statements covering any collateral securing payment of such Receivable (to the extent of the interest of the purchaser or lessee in the related Receivable); (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; (f) all books and records evidencing or otherwise relating to any Receivables or any of the foregoing; (g) all collections with respect to, and other proceeds of, such Receivables and any of the property described above and f) all of Borrower's rights, title and interest (but not obligations) arising under the agreement for sale or lease. "REMITTANCES" shall have the meaning ascribed thereto in SECTION 7.3 hereof. "RENTAL INVENTORY " means "Inventory" of Borrower which is leased by or available for lease by Borrower to other Persons in the ordinary course of Borrower's business and is identified as "fixed assets" under GAAP on the balance sheet of Borrower. 12 "RESERVE AMOUNT" shall mean an amount determined by Bank, in its good faith discretion, as a reserve against Collateral values and potential or anticipated obligations of Borrower, including, without limitation, (i) tax liabilities and other obligations owing to governmental entities including all amounts referred to in SECTION 10.10 hereof, (ii) litigation liabilities, (iii) the Environmental Compliance Reserve, (iv) the anticipated costs and expenses relating to the liquidation of Collateral, (v) unpaid sales taxes, (vi) those reserve amounts as required to be held as reserves under generally accepted accounting principles, (vii) liabilities and other obligations owing by Borrower to any lessor of real property leased by Borrower or to any warehouseman and (viii) an amount equal to the Landlord Waiver Reserves. "REVOLVER ADJUSTMENT DATE" shall mean January 15, 2002; PROVIDED, HOWEVER, the maximum amount of the Revolving Loan Facility (subject, in each instance, to the Revolving Loan Borrowing Base) shall not increase on such date from Five Million Dollars ($5,000,000) to Seven Million Five Hundred Thousand Dollars ($7,500,000) unless International shall have achieved the EBITDA Threshold for International's fiscal year ended September 30, 2001. "REVOLVING LOAN AVAILABILITY" shall mean, as at any applicable date, an amount equal to the difference of: (i) (a) during the Initial Period, the lesser of (x) Five Million Dollars ($5,000,000), or (y) an amount equal to the Revolving Loan Borrowing Base then if effect, and (b) SUBJECT TO the condition precedent of International meeting the EBITDA Threshold for its fiscal year ended September 30, 2001, after the Initial Period, the lesser of (x) Seven Million Five Hundred Thousand Dollars ($7,500,000), or (y) an amount equal to the Revolving Loan Borrowing Base then in effect; LESS (ii) the then aggregate outstanding principal amount of all Revolving Loans. "REVOLVING LOAN BORROWING BASE" shall mean an amount equal as at any time to the sum of (i) up to eighty percent (80%) of the net amount of Borrower's Eligible Receivables (the "Eligible Receivables Advance Rate"), PLUS (ii) up to the lesser of (x) fifty percent (50%) of the value of Borrower's Eligible Inventory (the "Eligible Inventory Advance Rate"), or (y) Four Millions Dollars ($4,000,000), valued at the lower of cost or market value, determined on an "average cost" basis, consistently applied, minus (iii) the Reserve Amount then in effect. "REVOLVING LOAN FACILITY" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "REVOLVING LOANS" shall have the meaning ascribed thereto in SECTION 2.2 hereof. "SECURITY AGREEMENT" shall have the meaning ascribed thereto in SECTION 5.1 hereof. 13 "SOLVENT" shall mean, with respect to any Person, that (i) fair value of the property of the Person is, on the date of determination, greater than the total amount of liabilities (including contingent liabilities) of the Person as of that date, (ii) as of that date, the Person is able to pay all liabilities of the Person as those liabilities mature, and (iii) the Person does not have unreasonably small capital for the business in which it is engaged or for any business or transaction in which it is about to engage. In computing the amount of contingent liabilities at any time, it is intended that they be computed at the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability. "SPECIAL ACCOUNT" shall have the meaning ascribed thereto in SECTION 7.4 hereof. "SUBSIDIARY" shall mean any Person as to which another Person owns, directly or indirectly, at least fifty percent (50%) of the outstanding shares of capital stock or other interests (including, without limitation, membership interests) having ordinary voting power for the election of directors, officers, managers, trustees or other controlling Persons, or an equivalent controlling interest. "TERM LOAN A" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "TERM LOAN A FACILITY" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "TERM LOAN PAYMENTS" shall mean each of the monthly payments required to be made on the Term Loan A, as more fully set forth in SECTIONS 2.3 hereof. "TERM LOAN PRINCIPAL PAYMENT DATE" shall have the meaning ascribed thereto in SECTION 2.3 hereof. "TOTAL FACILITY" shall have the meaning ascribed thereto in SECTION 2.1 hereof. "UNUSED REVOLVING LOAN FACILITY AMOUNT" shall mean, for any period, the amount for such period by which: (i) (a) during the Initial Period Five Million Dollars ($5,000,000) and (b) thereafter, subject to International meeting the EBITDA Threshold for International's fiscal year ended September 30, 2001, Seven Million Five Hundred Thousand Dollars ($7,500,000), in each case as such amount may be reduced by the Facility Reduction Amount as provided for in SECTION 2.11 hereof, EXCEEDS (ii) the average of the aggregate outstanding principal amount of all Revolving Loans during such period. "VARI-LITE ASIA, INC." shall mean Vari-Lite Asia, Inc., a corporation formed under the laws of Japan and a wholly-owned Subsidiary of International. 14 "VARI-LITE EUROPE HOLDINGS, LIMITED" shall mean Vari-Lite Europe Holdings, Limited, a corporation formed under the laws of Great Britain and a wholly-owned Subsidiary of International. "VARI-LITE PRODUCTION SERVICES LIMITED" shall mean Vari-Lite Production Services Limited, a corporation formed under the laws of Great Britain and a wholly-owned Subsidiary of Vari-Lite Europe Holdings, Limited. "VOLUNTARY TERMINATION DATE" shall have the meaning ascribed thereto in SECTION 11.3 hereof. "WELFARE PLAN" shall mean a "welfare plan", as such term is defined in Section 3(1) of ERISA. 1.2 ACCOUNTING TERMS. Any accounting terms used in this Agreement which are not specifically defined shall have the meanings customarily given them in accordance with generally accepted accounting principles ("GAAP"). 2. LOANS AND OTHER FINANCIAL ACCOMMODATIONS. 2.1 TOTAL FACILITY. Bank will make up to a Twenty-Four Million Five Hundred Thousand Dollar ($24,500,000) total credit facility, as such amount may be reduced by the Facility Reduction Amount under SECTION 2.11 hereof (the "Total Facility") available to Borrower, subject to the terms and conditions of this Agreement and comprised of the following loans advanced or made under the following facilities (the "Loans"): (i) Revolving Loans (as hereinafter defined) to be advanced under the Revolving Loan facility (the "Revolving Loan Facility") in an amount not to exceed the Revolving Loan Borrowing Base, (ii) a term loan ("Term Loan A") to be advanced to Borrower under the Term Loan A facility (the "Term Loan A Facility"), and (iii) CapEx Term Loans (as hereinafter defined) to be advanced under the capital expenditure term loan facility to Borrower (the "CapEx Term Loan Facility"), all as more particularly described below. Notwithstanding any provision to the contrary set forth herein, in no event shall the Bank be required or have any obligation to advance Loans hereunder if any of the Borrower, International, or any guarantor of the Obligations shall have filed against it an involuntary petition in bankruptcy or for reorganization. 2.2 REVOLVING LOAN FACILITY. Until the termination of this Agreement pursuant to SECTION 11 and/or SECTION 13 hereof (the "Revolving Loan Termination Date"), revolving loans under the Revolving Loan Facility will be lent and relent from time to time (such loans being referred to collectively as the "Revolving Loans" and each of such loans being referred to individually as a "Revolving Loan"), in an amount not to exceed the Revolving Loan Borrowing Base. Notwithstanding the foregoing sentence, in no event shall Bank be obligated to make Revolving Loans if, either immediately 15 before or after giving effect to any such Revolving Loan, (y) a Deficiency has occurred or shall occur, or (z) an Event of Default has occurred or shall occur. 2.3 TERM LOAN A FACILITY. The Term Loan A under the Term Loan A Facility will be made to Borrower in the amount of Twelve Million Dollars ($12,000,000) on the Effective Date. The principal of Term Loan A shall be payable in eighty-four (84) consecutive monthly installments (each, a "Term Loan Payment"), commencing on the first day of February, 2001, and thereafter on the first day of each succeeding calendar month (each such date being referred to herein as a "Term Loan Principal Payment Date"). The principal amount of the Term Loan Payments shall be as follows: (a) One Hundred Forty-Two Thousand Eight Hundred Fifty-Seven Dollars ($142,857) on each of the first eighty-three (83) Term Loan Principal Payment Dates, and (b) One Hundred Forty-Two Thousand Eight Hundred Sixty-Nine Dollars ($142,869) on the eighty-fourth (84th) Term Loan Principal Payment Date; PROVIDED, HOWEVER, that notwithstanding the foregoing amortization schedule for the Term Loan, upon the effective date of any termination of this Agreement pursuant to SECTION 11 and/or SECTION 13 hereof, all amounts then outstanding under the Term Loan A shall become immediately due and payable without notice or demand. No repayment or prepayment of the Term Loan A by Borrower shall be reason for any relending or additional lending of the Term Loan A proceeds to Borrower. The principal of and interest on the Term Loan A shall, at Bank's option, be payable in accordance with the payment terms set forth in this Agreement by charging or increasing the Revolving Loan balance of Borrower. 2.4 CAPEX TERM LOAN FACILITY. Until the termination of this Agreement pursuant to SECTION 11 and/or SECTION 13 hereof, CapEx Term Loans under the CapEx Term Loan Facility will be lent to Borrower from time to time, in aggregate amounts UP TO THE LESSER OF (i) the CapEx Term Loan Availability on each such date, or (ii)(a) up to seventy-five percent (75%) of the cost of the equipment proposed to be purchased from third parties with the proceeds of the proposed CapEx Term Loan or to reimburse Borrower for up to seventy-five percent (75%) of the costs of purchases of equipment from third parties made during the immediately preceding fiscal quarter (in each instance excluding taxes, freight, installation costs and other similar add-on costs and charges) and (b) up to one hundred percent (100%) of Borrower's costs incurred in the manufacture of Rental Inventory manufactured directly by Borrower; PROVIDED, HOWEVER, that no more than one (1) CapEx Term Loan per calendar quarter may be advanced by Bank to Borrower. Each CapEx Term Loan hereunder shall be in the principal amount of Two Hundred Fifty Thousand Dollars ($250,000) or more. Borrower agrees that if it borrows CapEx Term Loans in an amount greater than the amounts provided under this SECTION 2.4, Borrower will repay the excess ON DEMAND. Each advance under the CapEx Term Loan Facility shall be repayable in installment payments of principal monthly (commencing on the first day of the first (1st) month after the month in which such advance was made and on the first day of each month thereafter) in an amount equal to 1/84th of the amount of the advance. At the time of each advance under the CapEx Term Loan Facility, Borrower shall furnish a "Capital Expenditure Term Loan Installment Payment Schedule" to Bank substantially in the form of EXHIBIT T attached hereto 16 and made a part hereof, with appropriate insertions, which shall set forth aggregate installment payments due thereafter on all Capital Expenditure Term Loan Facility advances. Notwithstanding any amortization schedule for advances made under the CapEx Term Loan Facility, upon the effective date of any termination of this Agreement under SECTION 11 or SECTION 13 hereof, all amounts then outstanding under the CapEx Term Loan Facility shall become immediately due and payable without notice or demand. Each Capital Expenditure Term Loan Payment Schedule shall not operate as a novation of any of the Obligations or nullify, discharge, or release any such Obligations or the continuing contractual relationship of the parties hereto in accordance with the provisions of this Agreement. Notwithstanding the terms of this Agreement, in no event shall Bank be obligated to make CapEx Term Loans if, either immediately before or after giving effect to any such CapEx Term Loan, (i) a Deficiency has occurred or shall occur, or (ii) an Event of Default has occurred or shall occur. No payment or prepayment of any CapEx Term Loan shall be reason for any relending or additional lending of CapEx Term Loan proceeds. Borrower hereby authorizes Bank, at Bank's option, to pay the principal of such Borrower CapEx Term Loans in accordance with the foregoing amortization schedule by charging or increasing the Revolving Loan balance of Borrower. 2.5 VOLUNTARY PREPAYMENTS. Borrower shall have the right to prepay at any time the Loans in whole or part without premium or penalty (except as provided in SECTION 3.4): Whenever the Borrower desires to prepay any part of the Capex Loans or Term Loan, it shall provide a prepayment notice to Bank at least two (2) Business Days prior to the date of prepayment of such Loans which are LIBOR Rate Loans and on or before 12:00 noon on the date of prepayment of such Loans which are Prime Rate Loans setting forth the following information: (x) the date, which shall be a Business Day, on which the proposed prepayment is to be made; (y) a statement indicating the application of the prepayment between Term Loan A and CapEx Term Loans which application must comply with the paragraph below; and (z) the total principal amount of such prepayment, which shall not be less than One Hundred Thousand Dollars ($100,000). All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made. All Term Loan prepayments permitted pursuant to this SECTION 2.5 shall be applied ratably to the Term Loan A and the CapEx Term Loans based on the amounts of such Loans outstanding and, after giving effect to the preceding clause, then in inverse order of the unpaid principal installments of such Loans. If the Borrower prepays a Loan but fails to specify the applicable Loan which the Borrower is prepaying, the prepayment shall be applied first to Revolving Loans which are Prime Rate Loans, then to Revolving Loans which 17 are LIBOR Rate Loans; PROVIDED that if no Revolving Loans are outstanding, first to the Term Loans which are Prime Rate Loans, then to Term Loans which are LIBOR Rate Loans. Any prepayment hereunder shall be subject to the Borrower's Obligation to indemnify the Banks under SECTION 3.4. 2.6 DISBURSEMENT OF LOANS. All disbursements of proceeds of the Loans requested by Borrower pursuant to SECTION 2.7 or SECTION 2.8 shall be effectuated by Bank's crediting Account No. 821652971. Such account is or will be structured and utilized as a controlled disbursement account; PROVIDED, HOWEVER, that Bank may at any time hereafter elect not to credit proceeds of the Loans to the aforedescribed controlled disbursement accounts but instead may establish a similar non-controlled disbursement account for Borrower at Bank and disburse proceeds of the Loans by crediting such non-controlled disbursement account of Borrower at Bank. 2.7 PROCEDURE FOR ADVANCING REVOLVING LOANS. Subject to the terms and conditions of this Agreement, Bank will, from time to time on any Business Day prior to the termination of this Agreement pursuant to SECTION 11 or SECTION 13 hereof, upon the oral or written request of Borrower therefor, advance Revolving Loans to Borrower's account described in SECTION 2.9 hereof; PROVIDED, HOWEVER, that so long as the controlled disbursement account for Borrower at Bank referred to in SECTION 2.6 is in place, Borrower shall be deemed to have requested a Revolving Loan each time a check drawn on such account by Borrower is presented to Bank for payment thereof. If Bank receives such a request from Borrower for a Revolving Loan prior to 12:00 noon, Cincinnati, Ohio time on a Business Day, Bank will advance such Revolving Loan on that same Business Day. If Bank receives such a request from Borrower for a Revolving Loan after 12:00 noon, Cincinnati, Ohio time on a Business Day, Bank will advance such requested Revolving Loan on the next Business Day. Notwithstanding anything in this Agreement to the contrary, Bank shall not be obligated to advance Loans if, either immediately before or after giving effect to any such Loan, (i) a Deficiency has occurred or shall occur, or (ii) an Event of Default has occurred or shall occur. 2.8 PROCEDURE FOR ADVANCING CAPEX TERM LOANS. Subject to the terms and conditions of this Agreement, Bank will from time to time prior to the termination of this Agreement pursuant to SECTION 11 or SECTION 13 hereof, advance CapEx Term Loans to Borrower's account described in SECTION 2.6 hereof. Borrower shall notify Bank in writing at least ten (10) Business Days prior to the Business Day on which the proposed CapEx Term Loan is to be made of its request for a CapEx Term Loan. On the date of each CapEx Term Loan, Bank will, so long as Borrower shall have satisfied each of the conditions set forth in EXHIBIT G-2 attached hereto and incorporated herein by reference in a manner satisfactory to Bank, advance the proceeds of such CapEx Term Loan to the account of Borrower described in SECTION 2.6. 2.9 NO LIMITATION ON LIENS. The limits on outstanding advances against the Revolving Loan Borrowing Base set forth in this Agreement are not intended and shall not be deemed to limit in any way Bank's 18 security interest in or lien on the Accounts, Chattel Paper, Related Property, Documents, Receivables, Inventory, Equipment, or any other collateral for the Obligations. 2.10 DEFICIENCY. If a Deficiency occurs, the Borrower shall immediately, without demand or notice, reduce the outstanding balance of the Loans made to Borrower so that such Deficiency shall no longer exist. 2.11 VOLUNTARY REDUCTION OF TOTAL FACILITY. Upon at least three (3) Business Days' prior written notice given to Bank (the "Facility Reduction Notice"), Borrower shall have the right, without premium or penalty, to permanently reduce the Total Facility by the amount (the "Facility Reduction Amount"), specifically stated in the Facility Reduction Notice, in increments of no less than One Hundred Thousand Dollars ($100,000). Upon receipt by Bank of a Facility Reduction Notice sent in accordance with the provisions of this Financing Agreement, (a) the Total Facility as defined in SECTION 2.1 will be reduced by the Facility Reduction Amount, (b) the amount appearing in subparagraph (i) of the definition of Unused Revolving Loan Facility Amount shall be reduced by the Facility Reduction Amount and (iii) the amount set forth in subparagraph (i)(a) or (b), as applicable, of the definition of Revolving Loan Availability shall be reduced by the Facility Reduction Amount. The Facility Reduction Notice may not be given if (a) an Event of Default has occurred or would be caused thereby or (b) a Deficiency exists or would be caused thereby. 2.12 ADVANCE RATES AND SUBLIMITS. (a) CHANGES. Borrower acknowledges that the Bank, from time to time, may do any one or more of the following in its discretion exercised in good faith: (i) decrease the dollar limits on outstanding advances against the Revolving Loan Borrowing Base or applicable to any one or more Inventory or Receivable advance sublimits or (ii) decrease the Eligible Receivables Advance Rate or the Eligible Inventory Advance Rate (collectively, the "Advance Rates") if one or more of the following events occur or conditions exists: (a) an Event of Default has occurred; (b) with regard to the Eligible Receivables Advance Rate, (1) the dilution percentage with respect to Borrower's Eligible Receivables (i.e., reductions in the amount of accounts receivable because of returns, discounts, price adjustments, credit memoranda, credits, contracts and other similar offsets) increases by an amount which the Bank, in good faith, has determined is material above that which existed as of the Effective Date, (2) the percentage of accounts receivable which are 90 days or more past the date of the original invoices applicable thereto increases, in comparison to the percentage of accounts receivable which are within 90 days from the date of the original invoices applicable thereto, by an amount which the Bank in good faith, determines is material, or (3) any material change occurs, determined by the Bank in good faith, from the Effective Date in respect of the credit rating or credit quality of Borrower's account debtors; or (c) with respect to the Eligible Inventory Advance Rate, there occurs a material change, as determined by the Bank in its discretion exercised in good faith, in the type, quantity, or quality of Borrower's Eligible Inventory as the same is constituted on the Effective Date. 19 (b) NOTICE. If, at any time, the Bank decreases any of the dollar limits on outstanding advances against the Revolving Loan Borrowing Base or the Advance Rates ("STATED ADVANCE RATE CHANGE"), the Bank will give Borrower five (5) days advance written notice of such Stated Advance Rate Change, unless an Event of Default then exists, in which case no such notice shall be required. Failure by Bank to so notify Borrower shall in no way affect Borrower's obligations under this Agreement and the other Loan Documents or Bank's rights and remedies hereunder or thereunder; PROVIDED, HOWEVER, prior to the occurrence of an Event of Default no payment by Borrower of any Deficiency resulting from an Advance Rate Change shall be due until Borrower receives such notice from Bank. 3. INTEREST CHARGES; MINIMUM LOAN CHARGE; FEES; MANDATORY PREPAYMENT. 3.1 INTEREST ON LOANS. The Borrower shall pay Bank interest on the average daily outstanding principal amount, if any, of Borrower's Loans and all other Obligations as selected and specified by the Borrower in an Interest Rate Election Notice furnished to the Bank in accordance with the provisions of SECTION 3.1(c), or as otherwise determined in accordance with the provisions of this SECTION 3.1. Notwithstanding the foregoing, the per annum rate of interest applicable at all times after the occurrence of an Event of Default shall be (i) for Revolving Loans, the greater of (x) the Prime Rate PLUS three percent (3%) or (y) the LIBOR Rate PLUS three percent (3.0%) and (ii) for Term Loans, the greater of (x) the Prime Rate PLUS three percent (3.0%) or (y) the LIBOR Rate PLUS three percent (3%) (the "Default Rate"). (a) PAYMENT OF INTEREST. Unpaid and accrued interest on all Prime Rate Loans shall be paid monthly in arrears, on the first (1st) day of each calendar month, commencing on February 1, 2000, and on the first (1st) day of each calendar month thereafter, and at maturity (whether by acceleration, declaration, extension or otherwise). Notwithstanding the foregoing, any and all unpaid and accrued interest on any Prime Rate Loan converted to a LIBOR Rate Loan or prepaid shall be paid immediately upon such conversion and/or prepayment, as appropriate. Unpaid and accrued interest on any LIBOR Rate Loan shall be paid on (i) the last Business Day of each Interest Period for each LIBOR Rate Loan which has an Interest Period of thirty (30), sixty (60) or ninety (90) days and (ii) on the ninetieth (90th) day and on the last Business Day of the Interest Period for each LIBOR Loan which has an Interest Period of One Hundred Eighty (180) days, and at maturity (whether by acceleration, declaration, extension or otherwise); PROVIDED, HOWEVER, that any and all unpaid and accrued interest on any LIBOR Rate Loan prepaid prior to expiration of the then current Interest Period for such LIBOR Rate Loan shall be paid immediately upon prepayment. (b) SELECTION OF RATE. From time to time as provided in this SECTION 3.1, by a proper and timely Interest Rate Election Notice furnished to Bank in accordance with the provisions of SECTION 3.1(c), the Borrower may select an Applicable Interest Rate or Applicable Interest Rates for any Loans to Borrower or may convert the Applicable Interest Rate and, when applicable, the Interest Period, for any existing Loan to Borrower to any other Applicable Interest Rate or, when applicable, any other Interest Period. Borrower's selection of an Applicable Interest Rate and/or an Interest Period, its election to convert an Applicable Interest 20 Rate and/or an Interest Period to another Applicable Interest Rate or Interest Period, and any other adjustments in an interest rate are subject to the following additional limitations: (1) Borrower shall not at any time select or change to an Interest Period that extends beyond the Revolving Loan Termination Date. (2) (A) no change from any Applicable LIBOR Rate to the corresponding Applicable Prime Rate shall become effective on a day other than a Business Day and on a day which is the last day of the then current Interest Period, (B) no change of an Interest Period shall become effective on a day other than the last day of the then current Interest Period, and (C) no change from any Applicable Prime Rate to the corresponding Applicable LIBOR Rate shall become effective on a day other than a day which is a Eurodollar Business Day; (3) any Applicable Interest Rate change for any Loan to be effective on a date on which any principal payment on account of such Loan is scheduled to be paid shall be made only after such payment shall have been made; (4) no more than six (6) LIBOR Rate Loans may be outstanding at any one time and no more than an aggregate principal amount of Six Million Dollars ($6,000,000) of LIBOR Loans with Interest Periods of One Hundred Eighty (180) days may be outstanding at any one time; (5) the first day of each Interest Period shall be a Eurodollar Business Day; and (6) if, as of the effective date of a selection, an Event of Default exists, Bank, in the exercise of its sole and absolute discretion, may elect that no such selection, election or adjustment shall be allowed. The minimum principal amount of a LIBOR Rate Loan shall be One Million Dollars ($1,000,000). If a request for a borrowing is not accompanied by an Interest Rate Election Notice or does not otherwise include a selection of an Applicable Interest Rate and, if applicable, an Interest Period, or if, after having made a selection of an Applicable Interest Rate and, if applicable, an Interest Period, the Borrower fails or is not otherwise entitled under the provisions of this Agreement to continue such Applicable Interest Rate or Interest Period, the Borrower shall be deemed to have selected the Applicable Prime Rate as the Applicable Interest Rate until such time as the Borrower has selected a different Applicable Interest Rate and specified an Interest Period in accordance with, and subject to, the provisions of this SECTION 3.1(c). (c) INTEREST RATE ELECTION NOTICE. Bank will not be obligated to make Loans, to convert the Applicable Interest Rate on Loans to another Interest Rate, or to change Interest Periods, unless Bank shall have received an irrevocable written or telephonic notice (an "Interest Rate Election Notice") from the Borrower specifying the following information: (1) the amount to be borrowed or converted; 21 (2) a selection of an Applicable Prime Rate or an Applicable LIBOR Rate; (3) the length of the Interest Period if the Applicable Interest Rate selected is an Applicable LIBOR Rate; and (4) the requested date on which such election is to be effective. Any telephonic notice must be confirmed in writing within three (3) Business Days. Each Interest Rate Election Notice must be received by the Bank not later than 2:00 p.m. (Eastern Time) on the Business Day of any requested borrowing or conversion in the case of a selection of the Prime Rate and not later than 2:00 p.m. (Eastern Time) on the third (3rd) Business Day before the effective date of any requested borrowing or conversion in the case of a selection of the LIBOR Rate. 3.2 INABILITY TO DETERMINE LIBOR BASE RATE. In the event that (i) the Bank shall have determined that, by reason of circumstances affecting the London interbank eurodollar market, adequate and reasonable means do not exist for ascertaining the LIBOR Base Rate for any requested Interest Period with respect to a Loan that the Borrower has requested to be made or to be converted to a LIBOR Rate Loan or (ii) the Bank shall determine that the LIBOR Base Rate for any requested Interest Period with respect to a Loan the Borrower has requested to be made or to be converted to a LIBOR Rate Loan does not adequately and fairly reflect the cost to the Bank of funding or converting such Loan, the Bank shall give telephonic or written notice of such determination to Borrower at least one (1) day prior to the proposed date for funding or converting such Loan. If such notice is given, any request for a LIBOR Rate Loan shall be made or converted to a Prime Rate Loan. Until such notice has been withdrawn by the Bank, Borrower shall not request that any Loan be made or converted to a LIBOR Rate Loan. 3.3 LIBOR UNLAWFUL, ETC. If applicable laws shall (i) make it unlawful for the Bank to fund through the purchase of dollar deposits with respect to any portion of the Loans based, or requested by Borrower to be based, on LIBOR or otherwise give effect to the Bank's obligations as contemplated under this Section with respect to the use of the LIBOR Rate, or (ii) shall impose on the Bank any costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of the Bank which includes deposits by reference to which the LIBOR Rate is determined as provided herein or a category of extensions of credit or other assets of the Bank which includes a LIBOR Rate, or (iii) shall impose on the Bank any restrictions on the amount of such a category of liabilities or assets which the Bank may hold, then, in each such case, the Bank may, by notice thereof to Borrower, terminate the LIBOR option. Any portion of the Loans subject thereto shall immediately bear interest thereafter at the Applicable Prime Rate. 22 3.4 LIBOR INDEMNITY. Borrower agrees to indemnify and reimburse Bank and to hold Bank harmless from any loss, cost (including administrative costs) or expense (including, without limitation, any such loss or expense arising from the reemployment of funds obtained by Bank to maintain any LIBOR Rate Loan or from fees payable to terminate the deposits from which such funds were obtained) which Bank actually sustains or incurs as a consequence of (a) a default by Borrower in payment when due of the principal amount of or interest on any LIBOR Rate Loan, (b) the failure of Borrower to make a borrowing under, or to convert the Applicable Interest Rate of, a Loan after Borrower has given a request for a borrowing or an Interest Rate Election Notice, (c) the failure of Borrower to make any prepayment of a LIBOR Rate Loan after Borrower has given notice of such intention to make such a prepayment, (d) the termination of the LIBOR option pursuant to SECTION 3.3, and/or (e) the making by Borrower of a prepayment of a LIBOR Rate Loan on a day which is not the last day of the Interest Period for such LIBOR Rate Loan. This SECTION 3.4 shall survive termination or expiration of this Agreement and payment of all Obligations. 3.5 INCREASED COSTS - CAPITAL ADEQUACY. In case of any change in law or governmental rules, regulations, guidelines or orders (or any interpretations thereof) or the introduction of new laws, regulations or guidelines regarding capital adequacy, capital maintenance or similar requirement or has the effect thereof (including a requirement which affects the manner in which Bank allocates capital resources to any of its commitments, including its commitments hereunder) and as a result of such change or introduction, in the opinion of Bank (in its discretion), the rate of return on Bank's capital as a consequence of its lending commitments hereunder is reduced to a level below that which Bank could have achieved but for such circumstances (taking into consideration Bank's policies with respect to capital adequacy and capital maintenance) by an amount deemed by Bank to be material, then and in each such case Bank may charge Borrower an additional fee which will compensate Bank for such reduction in the rate of return caused by such requirements ("Additional Fee"). In the event any Additional Fee is charged to Borrower by Bank under this SECTION 3.5, Borrower may prepay the Loans in full without payment of the termination fee under SECTION 11.3 so long as such prepayment in full is tendered to Bank within ninety (90) days following the date Bank either first imposed the Additional Fee or subsequently increased such Additional Fee for a reason other than a change in the balance of the Loans or the interest rates. 3.6 CLOSING FEE. The Borrower shall pay Bank a closing fee of One Hundred Twenty-Two Thousand Five Hundred Dollars ($122,500), payable on the Effective Date. 3.7 UNUSED FACILITY FEE. Borrower shall pay to the Bank, for the period from and including the Effective Date and continuing until the termination of this Agreement pursuant to SECTION 11 hereof, an unused facility fee computed at the rate of one-quarter of one percent (0.25%) per annum on the 23 Unused Revolving Loan Facility Amount, payable for each month (or, in the case of the first such payment, portion of the calendar month since the Effective Date) by Borrower monthly in arrears on the first day of the following calendar month, commencing on February 1, 2001, and on the date this Agreement shall have been terminated pursuant to SECTION 11 hereof. 3.8 MANDATORY PREPAYMENT. Borrower agrees that if International shall sell, lease, transfer or otherwise dispose of any of its assets other than in connection with the winding up or dissolution of Subsidiaries of International which are dormant, or sell, lease, transfer or otherwise dispose (a "Disposition") of all or substantially all of the shares of stock in or of assets owned by International Borrower, Vari-Lite Production Services Hong Kong Limited or Vari-Lite Hong Kong Limited, Borrower shall immediately make a prepayment to Bank in an amount equal to twenty-five percent (25%) of the after-tax proceeds received by International from such Disposition (each such amount being a "Mandatory Prepayment;" PROVIDED, HOWEVER, in no event shall International sell or dispose of any of the capital stock or substantially all of the assets of Vari-Lite Europe Holdings Limited, Vari-Lite Production Services Limited, or Vari-Lite Asia, Inc. Each Mandatory Prepayment shall be applied to the outstanding and accrued and unpaid interest of Term Loan A. 3.9 INTEREST RATE PROTECTION. Borrower may, at Borrower's cost, obtain and maintain interest rate protection acceptable to Bank, in its reasonable discretion, to protect against future increases in the Prime Rate or LIBOR Rate. 3.10 CALCULATION OF CERTAIN CHARGES. Accrued interest charges and the fees set forth in SECTION 3.7 shall be computed on the basis of a year of three hundred sixty (360) days and applied to actual days elapsed and shall be payable (a) as to Prime Rate Loans monthly to Bank on the first day of each month hereafter and (b) as to LIBOR Rate Loans on the dates as provided in SECTION 3.1(a) of this Agreement. All such interest charges and other fees hereunder shall be paid in arrears, except that the fees set forth in SECTION 3.5 shall be paid in accordance with such Section. 3.11 CHARGING LOAN ACCOUNT. Borrower hereby authorizes Bank, at Bank's option, to charge any account or charge or increase any Loan balance of Borrower at Bank for the payment or repayment of any interest or principal of the Loans or any fees, charges or other amounts due to Bank hereunder. Bank will notify Borrower promptly of any such charge or increase. 3.12 MAXIMUM RATE. If at any time the rate of interest computed in the manner provided in this SECTION 3 ("Applicable Rate"), together with all fees and charges as provided for herein or in any other Loan Document (collectively, the "Charges"), which are treated as interest under applicable law exceeds the maximum lawful rate (the "Maximum Rate") allowed under applicable law, the rate of interest payable hereunder, together with all Charges, shall be limited to the Maximum 24 Rate; PROVIDED, HOWEVER, that any subsequent reduction in the Prime Rate shall not reduce the Applicable Rate below the Maximum Rate until the total amount of interest earned hereunder, together with all Charges, equals the total amount of interest which would have accrued at the Applicable Rate if the Applicable Rate had at all times been in effect. If any payment hereunder, for any reason, results in Borrower having paid interest in excess of that permitted by applicable law, then all excess amounts theretofore collected by Bank shall be credited on the principal balance owing hereunder (or, if all sums owing hereunder have been paid in full, refunded to Borrower), and the amounts thereafter collectible hereunder shall immediately be deemed reduced, without the necessity of the execution of any new document, so as to comply with applicable law and permit the recovery of the fullest amount otherwise called for hereunder. 4. MONTHLY ACCOUNTINGS. Bank will provide Borrower monthly with a statement of advances, charges and payments made pursuant to this Agreement and such account rendered by Bank shall be presumptive evidence of the amount of the Obligations owing and unpaid by Borrower and, fifteen (15) Business Days after Bank shall have delivered such statement, shall be deemed binding as against Borrower unless such statement contains manifest errors or unless within said period of time Bank received a written notice from Borrower describing in detail any errors. 5. SECURITY. The Obligations shall be secured by the documents and collateral described in this SECTION 5 and the documents described in the Exhibits and Schedules to this Agreement, each of which are incorporated herein by reference. The following documents shall be in form and substance satisfactory to Bank and its counsel, and the Collateral and other assets and property covered thereby shall secure the Obligations in such order as may be determined by Bank in its sole discretion. 5.1 SECURITY AGREEMENT. The Obligations shall be secured by a security interest in all of Borrower's Collateral, pursuant to a Security Agreement executed by Borrower in substantially the form of EXHIBIT A attached hereto and incorporated herein by reference (the "Security Agreement"), and (ii) accompanying financing statements in form and substance suitable for filing under the applicable state(s) version(s) of the Uniform Commercial Code. 5.2 PATENT ASSIGNMENT. The Obligations shall be secured by an assignment of Borrower's interests in its patents, trademarks, licenses and related rights and interests, pursuant to a Patent, Trademark and License Security Agreement executed by Borrower in substantially the form attached hereto as EXHIBIT B and incorporated herein by reference (the "Patent Assignment"). 5.3 PLEDGES. The Obligations shall be secured by a pledge of (a) all of International's stock of each of Borrower and IGNITION! Creative Group, Inc., and (b) no less than sixty-five percent 25 (65%) of the stock held by International of Vari-Lite Europe Holdings Limited and Vari-Lite Asia, Inc., pursuant to a Pledge and Security Agreement(s) executed by International and delivered to Bank in substantially the form of EXHIBIT D attached hereto and incorporated herein by reference (collectively, the "Pledge Agreements"). 5.4 LANDLORD WAIVER. Each landlord with respect to any of the Leased Premises shall execute and deliver a Landlord Waiver in substantially the form attached hereto as EXHIBIT E (collectively, the "Landlord Waivers"), and incorporated herein by reference. 5.5 GUARANTY. The Obligations shall be unconditionally guaranteed by International (the "International Guaranty") pursuant to a Guaranty in substantially the form of EXHIBIT C attached hereto and incorporated herein by reference. 5.6 SUBORDINATION AGREEMENTS. The Obligations shall be secured by Subordination Agreements (the "Subordination Agreements") executed and delivered to Bank by each of International and Vari-Lite Asia, Inc. in substantially the form of EXHIBIT U attached hereto and incorporated herein by reference. 6. DELIVERIES PRIOR TO DISBURSEMENT; FURTHER ASSURANCES. Prior to the initial disbursement of proceeds of the Loans, Borrower shall have delivered to Bank all of the documents, instruments and other information and shall have satisfied all other conditions described in EXHIBIT G-1 attached hereto and incorporated herein by reference. Prior to the disbursement of proceeds of any CapEx Term Loan, Borrower shall have delivered to Bank all of the documents, instruments and other information and shall have satisfied all other conditions described in EXHIBIT G-2 attached hereto and incorporated herein by reference. Borrower agrees to execute and deliver or cause to be executed and delivered any and all further documents and instruments and to take any and all further actions as may be determined by Bank to be necessary or appropriate to the transactions contemplated herein. 7. RECEIVABLES; COLLECTION OF RECEIVABLES; DISPUTED RECEIVABLES. 7.1 REPRESENTATIONS AND WARRANTIES REGARDING RECEIVABLES. (a) Borrower agrees, represents and warrants that each Receivable and each invoice representing any such Receivable (other than proceeds of letters of credit, insurance proceeds, contract rights, instruments and documents not arising directly out of a sale or lease of goods or services) will cover a bona fide sale or lease of merchandise usually dealt in by Borrower, or the rendition by Borrower of related services or sale of related products to customers in the ordinary course of business, and will be for a liquidated amount maturing as stated in the schedule thereof and in the invoice or Contract covering said sale or lease, and Receivables constituting Eligible Receivables will not be subject to any offset, deduction, 26 counterclaim, lien or other condition. None of Borrower's invoices shall be backdated, postdated or redated, and Borrower shall not make any sales or enter into any Contracts with respect to Rental Inventory on extended dating or credit terms beyond that customary in Borrower's industry. If any warranty is breached as to any Receivable or as to the invoice representing any such Receivable, then Bank, in addition to its other rights and remedies hereunder, may deem ineligible any and all Receivables owing by that customer or account debtor; but Bank shall in all events retain its security interest in such Receivable, until all Obligations have been fully satisfied. Borrower shall notify Bank promptly upon, but in no event later than three (3) Business Days after Borrower's learning thereof, in the event any Eligible Receivable becomes ineligible for any reason other than the aging of such receivable and of the reasons for such ineligibility. 7.2 DISPUTES AND CLAIMS REGARDING RECEIVABLES. Borrower shall notify Bank promptly of each return or recovery of sold goods in excess of $100,000, and, on request, deliver the merchandise returned or recovered to Bank at a location or locations selected by Bank, in its sole discretion. Borrower shall also notify Bank promptly of all disputes and claims and settle or adjust them at no expense to Bank, but no discount, credit or allowance outside the ordinary course of business or adverse extension, compromise or settlement shall be granted to any customer or account debtor and no returns of merchandise outside the ordinary course of business shall be given, made or accepted by Borrower without Bank's prior written consent. 7.3 LOCKED BOX. Borrower shall rent a post office box at the U.S. Post Office which post office boxes bear the following addresses (or such other addresses as Bank may notify the applicable Borrower of from time to time (the "Locked Box")): Vari-Lite, Inc., P.O. 641845, Cincinnati, Ohio 45264-1845; Borrower shall notify all of its customers, lessees and account debtors to forward all remittances of every kind due Borrower ("Remittances") to the Locked Box (such notices to be in such form and substance as Bank may require from time to time), and immediately upon receipt thereof, Borrower shall deposit all other proceeds of Receivables or other Collateral into its Locked Box (or into its Special Account, as defined below). Bank shall have sole access to the Locked Box at all times, and Borrower shall take all action necessary to grant Bank such sole access. At no time shall Borrower remove any item from its Locked Box without Bank's prior written consent, and Borrower may not notify any customer, lessee or account debtor to pay any Remittance to any other place or address without Bank's prior written consent. If Borrower should neglect or refuse to notify any customer, lessee or account debtor to pay any Remittance to its Locked Box, Bank shall be entitled to make such notification. Borrower hereby grants to Bank an irrevocable power of attorney, coupled with an interest, to take in Borrower's name all action necessary (i) to grant Bank sole access to its Locked Box, (ii) to contact customers, lessees and account debtors to pay any Remittance to its Locked Box or for any other reason, and (iii) to endorse each Remittance delivered to a Locked Box for deposit to the Borrower's Special Account. 27 7.4 SPECIAL ACCOUNT. Upon collection of Remittances and other proceeds of Receivables, other Collateral and any other security for the Obligations from the Locked Box of Borrower, Bank shall, on the same day of such collection if such Remittances and other proceeds are deposited into such Locked Box at or prior to 12:00 noon, Cincinnati, Ohio time, or on the immediately following day if such Remittances and other proceeds are deposited into such Locked Box after 12:00 noon, Cincinnati, Ohio time, deposit the same into a corresponding account of Borrower at Bank, as follows: Account No. 821652963 at Bank (such account being herein referred to as a "Special Account,"). Any Remittance or other proceeds of Receivables, other Collateral or other security for the Obligations received by Borrower shall be deemed held by Borrower in trust and as fiduciary for Bank, and Borrower shall immediately deposit the same, in its original form, into its Locked Box or Special Account. Pending such deposit, Borrower agrees that it will not commingle any such Remittance or other proceeds of Receivables, other Collateral or any other security for the Obligations with any of Borrower's other funds or property, but will hold it separate and apart therefrom in trust and as fiduciary for Bank until deposit is made into the appropriate Locked Box or Special Account. All deposits to the Special Account shall be Bank's property and shall be subject only to the signing authority designated from time to time by Bank, and Borrower shall not have any interest therein or control thereover. Bank shall have sole access to the Special Account, and Borrower shall not have any access thereto. Bank shall have, and Borrower hereby grants to Bank, a security interest in all funds held in Borrower's Locked Box and Special Account as security for the Obligations. No Special Account will be subject to any deduction, set-off, banker's lien or any other right in favor of any person or entity other than Bank. Prior to the occurrence of an Event of Default, Deposits to the Special Account will be applied, FIRST, to all Obligations then due and owing; SECOND, to the principal and/or interest of the Revolving Loans; and THIRD, if the Revolving Loans have been repaid in full and absent any instruction to the contrary from the Borrower, to an interest bearing account of Borrower established with Bank. Upon the occurrence of an Event of Default deposits to the Special Account may be applied against the principal and/or interest of the Revolving Loans and/or other Obligations of the Borrower to Bank in such order and method of application as may be elected by Bank in its sole discretion. Borrower hereby indemnifies and holds Bank harmless from and against any loss or damage with respect to any Remittance deposited in Borrower's Special Account which is dishonored or returned for any reason. If any Remittance deposited in a Special Account is dishonored or returned unpaid for any reason, Bank, in its sole discretion, may charge the amount of such dishonored or returned Remittance directly against the Borrower and/or any account maintained by Borrower with Bank and such amount shall be deemed part of the Obligations hereunder. Bank shall not be liable for any loss or damage resulting from any error, omission, failure or negligence on the part of Bank under this Agreement, other than loss or damage determined by a court of competent jurisdiction after exhaustion of all appeals to be the consequences of Bank's gross negligence or willful misconduct. Borrower hereby agrees that it will not assert any claims or set-off rights against Bank solely as a result of Borrower's maintaining a Special Account with Bank. 7.5 CREDITING OF REMITTANCES. For the purpose of calculating interest, all Remittances and other proceeds of Receivables, other Collateral and any other security for the Obligations shall be credited to the 28 Borrower (conditional upon final collection) two (2) Business Days after Bank receives notice of deposit of the same into Borrower's Special Account; PROVIDED, HOWEVER, in the event that Bank receives notice of such deposit later than 12:00 noon Cincinnati, Ohio time on any Business Day, such Remittance deposited shall be credited to Borrower (conditional upon final collection) three (3) Business Days after such deposit. For the purpose of determining the aggregate loan availability hereunder, all such Remittances shall be credited on the Business Day on which Bank receives notice of such deposit into the Borrower's Special Account. From time to time, Bank may adopt such regulations and procedures as it may deem reasonable and appropriate with respect to the operation of the Special Account, the Locked Box and the services to be provided by Bank under this Agreement. 7.6 COSTS OF COLLECTION. All costs of collection of Borrower's Receivables, including Attorney's Fees, out-of-pocket expenses, administrative and record-keeping costs, and all service charges and costs related to the establishment and maintenance of the Locked Box and the Special Account, shall be the sole responsibility of Borrower, whether the same are incurred by Bank or Borrower, and Bank, in its sole discretion, may charge the same against Borrower and/or any account maintained by Borrower with Bank and the same shall be deemed part of the Obligations hereunder. 8. EXAMINATION OF COLLATERAL AND THE PREMISES; REPORTING. 8.1 MAINTENANCE OF BOOKS AND RECORDS. Borrower shall keep and maintain complete books of account, records and files with respect to its business in accordance with generally accepted accounting principles consistently applied and shall accurately and completely record all transactions therein. 8.2 ACCESS AND INSPECTION. Bank may at all reasonable times have access to and the right to examine and inspect all of Borrower's real and personal property, and access to and the right to inspect, audit and make extracts from all of Borrower's records, files and books of account, and Borrower shall execute and deliver at the request of Bank such instruments as may be necessary for Bank to obtain such information concerning the business of Borrower as Bank may require from any Person. Borrower shall furnish Bank with such statements and reports regarding Borrower's financial condition and the results of Borrower's operations, in addition to those hereinafter required, and such other information as Bank may reasonably request from time to time. Borrower shall permit Bank to discuss Borrower's financial matters with Borrower's officers and accountants (and hereby authorizes such officers and accountants to discuss Borrower's financial matters with Bank). 8.3 REPORTING REGARDING RECEIVABLES. (a) After the creation or acquisition of any Receivables, Borrower shall provide to Bank, as frequently as required by Bank, schedules in such form and substance and accompanied by such copies of original source and background documents (including, without 29 limitation, sales, credit and remittance journals) as Bank may require describing all Receivables created or acquired. (b) No later than thirty (30) days after the end of each month, the Borrower shall deliver to Bank a borrowing base certificate in the form of EXHIBIT H attached hereto and incorporated herein by reference (a "Borrowing Base Certificate"), reconciled to the financial statements required to be delivered pursuant to SECTION 8.5 hereof, and, together with the Borrowing Base Certificate, monthly reports of Borrower's sales, leases, credits to sales, credits to leases, or credit memoranda applicable to sales, leases, collections and non-cash charges (from whatever source, including, without limitation, sales and noncash journals or other credits to Receivables). (c) No later than thirty (30) days after the end of each month, or sooner if available, the Borrower shall deliver to Bank (i) monthly agings, broken down by invoice date, of accounts receivable, identifying which accounts receivable are attributable to sales and which are attributable to the rental of Rental Inventory and which are evidenced by Chattel Paper, reconciled to the Borrowing Base Certificate and Borrower's general ledger, and setting forth any changes in the reserves made for bad accounts or any extensions of the maturity of, refinancing of, or other changes in the terms of any accounts, and (ii) a statement describing in such detail as Bank shall require all Contracts for Rental Inventory providing for a term of four (4) or more months, together with such further information with respect thereto as Bank may require. No later than thirty (30) days after the end of each month, or sooner if available, the Borrower shall also deliver to Bank monthly agings of accounts payable listed by invoice date reconciled to Borrower's general ledger, together with such further information with respect thereto as Bank may require. 8.4 REPORTING REGARDING INVENTORY. (a) Borrower shall conduct a full and complete physical count of its Inventory at least annually or more frequently if Bank shall reasonably require, in a manner and in accordance with procedures approved by Borrower's independent certified public accountants and Bank, and shall promptly extend, price and summarize such physical counts and submit a report thereof to Bank. (b) Values shown on reports of Inventory shall be at the lower of cost or market value determined on a "first in first out" basis, consistently applied. (c) No later than thirty (30) days after the end of each month, or more frequently, if Bank shall so request, Borrower shall submit to Bank (i) a monthly Borrowing Base Certificate reporting the value of Borrower's Inventory, and (ii) an inventory report reconciled to the Borrowing Base Certificate for such month, Borrower's perpetual inventory records and its general ledger, broken down into such detail and with such categories as Bank shall require (including, but not limited to, a report indicating the type, location and amount of raw materials, evaporants, work-in-process and finished goods, and all other information deemed necessary by Bank to determine levels of that which is and is not Eligible Inventory). 30 8.5 MONTHLY FINANCIAL STATEMENTS. Promptly when available and in any event not later than thirty (30) days after the end of each month, Borrower shall furnish to Bank monthly statements, on a consolidated basis, showing International's consolidated financial condition and the results of International's operations for the periods covered by such statements in such detail as Bank may from time to time require, prepared in accordance with generally accepted accounting principles consistently applied and containing all disclosures required to fully and accurately present the consolidated financial position and results of operations of International and to make such statements not misleading under the circumstances. International will notify the Bank at least thirty (30) days prior to any change in its monthly accounting periods. 8.6 ANNUAL PROJECTIONS. No later than thirty (30) days prior to the end of International's fiscal years, Borrower shall furnish to Bank detailed projections, prepared on a consolidated basis, for the next fiscal year setting forth projected balance sheets, income statements, capital expenditures and debt repayment schedules for each fiscal quarter of such fiscal year and the projected balance sheet as of the end of each such fiscal quarter. Such projections shall be prepared in a manner consistent with the financial projections for International provided to Bank by Borrower prior to the Effective Date, PROVIDED that, except as provided in SECTION 9.11 below, Borrower makes no representations or warranties regarding such projections. 8.7 CERTIFIED QUARTERLY FINANCIAL STATEMENTS. Promptly when available and in any event not later than forty-five (45) days after the end of each quarter, Borrower shall furnish to Bank quarterly financial statements, on a consolidated basis, showing International's financial condition and results of International's operations for the periods of time covered by such statements in such detail as Bank may from time to time require, prepared in accordance with generally accepted accounting principles consistently applied and containing all disclosures required to fully and accurately present the financial position and results of International and to make such statements not misleading under the circumstances, and in each instance certified by the chief financial officer or other responsible officer of International as being filed with the Securities and Exchange Commission. Said statements shall include: (i) a comparison prepared by International of its projected financial position and results of operations of International provided for in SECTION 8.6 hereof with the actual financial position and results of operations of International and an explanation of any variations between them; and (ii) a comparison between actual calculated results and the covenanted results for each of the Financial Covenants contained in EXHIBIT I attached hereto and incorporated herein by reference. 8.8 AUDITED ANNUAL FINANCIAL STATEMENTS. Promptly when available and in any event not later than one hundred twenty (120) days after the end of Borrower's fiscal years, Borrower shall submit to Bank statements, prepared on a consolidated and consolidating basis, showing International's financial condition, the results of operations, a consolidated balance sheet and related statements of income, shareholders' 31 equity, and changes in the International's cash flows and financial position for the year then ended. Such statements shall be audited in accordance with generally accepted auditing standards by an independent certified public accountant acceptable to Bank and shall be prepared and presented in accordance with generally accepted accounting principles consistently applied. Such statements shall be delivered to Bank together with an audit report of such independent certified public accountant. Said statements shall be accompanied by: (i) a comparison prepared by International of the projected financial position and results of operations of International provided for in SECTION 8.6 hereof with the actual financial position and results of operations of International and an explanation of any variations between them; and (ii) a comparison between actual calculated results and the covenanted results for each of the Financial Covenants contained in EXHIBIT J. 8.9 MANAGEMENT REPORTS. Borrower shall furnish to Bank promptly upon receipt copies of all management letters and any other material reports provided by Borrower's and International's independent accountants. Borrower hereby authorizes Bank to communicate directly with Borrower's independent accountants to discuss Borrower's affairs, finances, accounts and such other matters as Bank deems necessary, PROVIDED that so long as no Event of Default has occurred, Bank shall provide Borrower with a reasonable opportunity to participate in any such communications. After the occurrence of an Event of Default, Bank shall be given notice of and the right to attend any meetings between Borrower and the independent accountants with respect to any such matters. 8.10 FINANCIAL CERTIFICATE. Borrower shall furnish to Bank, together with all materials required pursuant to SECTION 8.5 and SECTION 8.7 hereof, a certificate signed by the Chief Financial Officer of Borrower in the form of EXHIBIT I attached hereto. 8.11 PUBLIC FILINGS. Borrower shall furnish to Bank promptly upon any filing thereof by Borrower or by International with the Securities and Exchange Commission, any annual, periodic or special report or registration statement (without exhibits) generally available to the public. 8.12 MONTHLY REPORTING REGARDING INVENTORY AND EQUIPMENT. Borrower will deliver to Bank on a monthly basis a report (a) specifically identifying all Equipment and Inventory which is or reasonably anticipated to be at any location other than a Filed Jurisdiction for four (4) consecutive months or more and (b) listing each such location by street address, city, county and state. 8.13 ADDITIONAL MONTHLY REPORTING. Borrower will deliver to Bank on a monthly basis a report, identifying in form and detail satisfactory to Bank in its discretion, the following items to the extent there has been any change thereto from the Effective Date and as the same have been described on Schedules 9.5, 32 9.13, 9.17, 9.18, 9.19, 9.23 and 9.24 (a) all judgments, decrees or orders specifically binding on Borrower, (b) all collective bargaining agreements to which Borrower is a party or which is binding on Borrower, (c) any labor dispute, (d) all Affiliates of Borrower, (e) all noncompetition agreements restricting Borrower in any line of business with any Person, (f) all accounts maintained by Borrower with any bank, brokerage house or other financial institution, (g) all litigation which if adversely determined is likely to have a Material Adverse Effect, (h) all leases or agreements for the purchase of sale of real estate, and (i) patents, copyrights, trade names and trademarks. 9. WARRANTIES, REPRESENTATIONS AND COVENANTS. In order to induce Bank to enter into this Agreement and to make Loans hereunder, Borrower warrants, represents and covenants that, as of the Effective Date, and, to the extent not limited to the Effective Date, any date upon which a Loan is made hereunder and until the Obligations are fully paid, performed and satisfied, the representations, warranties and covenants set forth below are and shall remain true and correct. 9.1 ORGANIZATION, ETC. Borrower is and shall remain duly organized, validly existing and in good standing under the laws of the State of Delaware. International is and shall remain duly organized, validly existing and in good standing under the laws of the State of Delaware. Borrower is and shall remain qualified to do business and is and shall remain in good standing as a foreign corporation in each other jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect. Borrower has and shall maintain all requisite power and authority, corporate or otherwise, to conduct its business, to own its property and to execute, deliver and perform all of its obligations under this Agreement and each of the other Loan Documents to which it is a party. 9.2 DUE AUTHORIZATION, VALIDITY, ETC. This Agreement and each of the other Loan Documents have been duly executed and delivered and authorized by all requisite corporate, organizational or other action of Borrower, and each constitutes or will constitute, upon the due execution and delivery thereof, the legal, valid, and binding obligation of Borrower, enforceable in accordance with its respective terms. 9.3 NO VIOLATION. The execution, delivery and/or performance by Borrower of this Agreement and the other Loan Documents to which it is a party does not and will not (i) constitute a violation of any applicable law or a breach of any provision contained in Borrower's Articles/Certificate of Incorporation or Regulations/By-Laws or contained in any order of any court or other governmental agency or in any agreement, instrument or document to which Borrower is a party or by which Borrowers or any of Borrower's properties is bound or (ii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Borrowers' properties (other than in favor of Bank hereunder). 33 9.4 USE OF LOAN PROCEEDS. Borrower's uses of the proceeds of the Loans made by Bank to Borrower pursuant to this Agreement are, and will continue to be, legal and proper corporate uses (duly authorized by Borrower's Board of Directors), such uses do not and shall not violate any applicable laws or statutes as in effect as of the date hereof or hereafter, and the Loans are not and shall not be secured, directly or indirectly, by or used for the purpose of purchasing or carrying any margin stock or for any purpose which would violate either Regulation U, 12 C.F.R. Part 221, or Regulation X, 12 C.F.R. Part 224, promulgated by the Board of Governors of the Federal Reserve System. 9.5 MANAGEMENT; OWNERSHIP OF ASSETS, LICENSES, PATENTS, ETC. Borrower possesses, either alone or through the services of its Affiliates, and shall continue to possess active, full-time, professional management adequate to handle its affairs and adequate employees, assets, governmental approvals, permits, licenses, patents, copyrights, trademarks and trade names to continue to conduct its business in a manner substantially similar to the manner as heretofore conducted by it, and all patents, copyrights, trademarks and trade names on the Effective Date are described in SCHEDULE 1 attached hereto and incorporated herein by reference. 9.6 INDEBTEDNESS. Except for (i) Indebtedness disclosed in either the Financials delivered on or before the Effective Date or in SCHEDULE 2 or SCHEDULE 12 attached hereto and incorporated herein by reference, (ii) the Obligations, (iii) Indebtedness owing to trade creditors in the ordinary course of business, (iv) other Indebtedness permitted to be incurred or paid by Borrower pursuant to SECTION 10.11, and (v) Indebtedness which is subordinated to the prior payment and performance of the Obligations pursuant to a subordination agreement in form and substance satisfactory to Bank in its sole discretion, (vi) tax liabilities to the extent not inconsistent with SECTION 9.13 hereof, and (vii) obligations under operating leases, Borrower has no Indebtedness, and, except as otherwise set forth in SCHEDULE 2 attached hereto, has not guaranteed the obligations of any other Person. 9.7 TITLE TO PROPERTY; NO LIENS. Borrower has good, indefeasible and merchantable title to and ownership of, or leasehold interest in, all of its real and personal property, including, without limitation, its Collateral, and other security for the Obligations, free and clear of all liens, claims, security interests, assignments, mortgages, pledges and encumbrances, except Permitted Liens and except as described in SCHEDULE 3 attached hereto and incorporated herein by reference. 9.8 RESTRICTIONS; LABOR DISPUTES; COLLECTIVE BARGAINING AGREEMENTS, ETC. Except as described in SCHEDULE 4 attached hereto and incorporated herein by reference as of the Effective Date, Borrower is not a party or subject to any judgment, decree or order specifically binding upon Borrower. 34 9.9 NO VIOLATION OF LAW; HAZARDOUS MATERIALS. Except as described in SCHEDULE 5 attached hereto and incorporated herein by reference, Borrower is not in violation of any applicable statute, regulation or ordinance of any governmental entity (including, but not by way of limitation, any Environmental Law), the violation of which is likely to have a Material Adverse Effect. Without limiting the generality of the foregoing sentence, no Hazardous Material (a) is located on any real property owned or leased by Borrower except to the extent that such presence is maintained in full compliance with all applicable laws, or (b) has been discharged or is penetrating into any real property or surface or subsurface rivers or streams crossing or adjoining any real property owned or leased by Borrower or the aquifer underlying any real property owned or leased by Borrower except to the extent that such discharge or penetration does not violate any applicable law. "Hazardous Material" as used herein means any existing or future asbestos, polychlorinated byphenyls and petroleum products, solid wastes, ureaformaldehyde, discharges of sewer or effluent, paint containing lead and any other hazardous or toxic material, substance or waste which is defined, determined or identified by those or similar terms or is regulated as such under any such statute, law, ordinance, rule or regulation (whether now existing or hereafter promulgated) or any local, state or federal authority, or any judicial or administrative interpretation of any such statute, law, ordinance, rule or regulation, including but not limited to any material, substance or waste which is a hazardous substance within the meaning of 33 U.S.C. Section 1251 ET SEQ., as amended, or 42 U.S.C. Section 9601 ET SEQ., as amended, or a hazardous waste within the meaning of 42 U.S.C. Section 6901 ET SEQ., as amended). Borrower has made reasonably diligent inquiry with respect to environmental matters bearing upon the property owned, operated or leased by such Borrower and the operation of Borrower's business to be conducted on and after the Effective Date. All inventory manufactured and produced by Borrower has been and shall continue to be manufactured and produced in compliance with all applicable requirements of Sections 6, 7 and 12 of the Fair Labor Standards Act, as amended, and all regulations and orders of the United States Department of Labor. 9.10 ABSENCE OF DEFAULT. Borrower is not in default under (i) any note, indenture, loan agreement, mortgage, lease, or other similar agreement relating to the borrowing of monies or the incurring of indebtedness to which Borrower is a party or by which Borrower or any of its assets are bound, the default under which could have a Material Adverse Effect, or (ii) any agreement with any of its shareholders or other equity holders (whether present or contingent). 9.11 ACCURACY OF FINANCIALS; NO MATERIAL CHANGES. All Financials, other than projections delivered by Borrower to Bank prior to the Effective Date and projections delivered by Borrower to Bank under SECTION 8.6 of this Agreement, have been prepared in accordance with generally accepted accounting principles consistently applied and are true, correct and complete in all material respects, and fairly present Borrower's assets, liabilities and financial condition and results of operations and those of such other Persons described therein as of the date thereof. All projections delivered by Borrower to Bank have been prepared in good faith and are based on assumptions that management of Borrower considers reasonable and appropriate in light of the circumstances in effect at the time 35 of the delivery of such projections, and represent management's good faith estimate of the future financial performance of International on a consolidated basis. There are no omissions from such Financials (other than Projections) or other facts or circumstances not reflected in such Financials (other than Projections) which are or may be material. There has been no material and adverse change in Borrower's assets, liabilities or financial condition except as disclosed in Borrower's filings with the Securities and Exchange Commission since September 30, 1999; and Borrower's outstanding advances to any Person do not constitute any equity or long-term investment in any Person which is not reflected in the Financials. 9.12 PENSION PLANS. No "reportable event" or "prohibited transaction," as defined by the Employee Retirement Income Security Act of 1974 ("ERISA"), has occurred or is continuing as to any plan of Borrower or any Controlled Group member, which poses a threat of termination of such Pension Plans (or trusts related thereto) or the imposition of taxes or penalties against such Pension Plans (or trusts related thereto); neither Borrower nor any Controlled Group member has violated the tax qualification requirements contained in Section 401(a) of the Internal Revenue Code of 1986, as amended applicable to a Pension Plan, except for any violation that cannot be corrected through a voluntary correction program or done anything to create liability under the Multi-Employer Pension Plan Amendments Act; and except as set forth in SCHEDULE 6 attached hereto and incorporated herein by reference, neither Borrower nor any Controlled Group member has incurred any liability to the Pension Benefit Guaranty Corporation in connection with such Pension Plans. 9.13 TAXES AND OTHER CHARGES. Borrower has filed and shall file all federal, state and local tax returns and other reports which it is required by law to file, other than with respect to the tax deficiencies set forth in SCHEDULE 7 attached hereto and incorporated herein by reference, has paid as of the Effective Date, and will, except as allowed under SECTION 10.10 to this Agreement, pay all taxes, assessments and other similar charges that are due and payable has withheld all employee and similar taxes which it is required by law to withhold, and has maintained adequate reserves for the payment of all taxes and similar charges. No tax liens have been filed with respect to Borrower and no claims are being asserted with respect to any such taxes, assessments or charges (and no basis exists for any such claims), except to the extent contested in accordance with SECTION 10.10 of this Agreement. 9.14 NO LITIGATION. There is not any litigation, action or proceeding pending or, to the best of Borrower's knowledge (after due inquiry), threatened, against Borrower, which, if adversely determined, is likely to have a Material Adverse Effect. SCHEDULE 8 attached hereto and incorporated herein by reference correctly sets forth all litigation, actions and proceedings pending or, to the best of Borrower's knowledge (after due inquiry), threatened, against Borrower as of the Effective Date (none of which is likely to have a Material Adverse Effect). 36 9.15 NO BROKERAGE FEE. No brokerage, finder's or similar fee or commission is due to any party by reason of the Borrower entering into this Agreement or by reason of any of the transactions contemplated hereby, and Borrower shall indemnify and hold Bank harmless from all such fees and commissions. 9.16 AFFILIATES. All Persons who are Affiliates of Borrower as of the Effective Date are identified in Schedule 9 attached hereto and incorporated herein by reference. Except as set forth on SCHEDULE 9, neither International nor Borrower has any Subsidiaries. 9.17 CAPITALIZATION; WARRANTS, ETC. Each share of each Borrower's capital stock outstanding as of the Effective Date is duly authorized, validly issued, fully paid and nonassessable. Set forth in SCHEDULE 10 attached hereto and incorporated herein by reference is a complete and accurate description, as of the Effective Date, of all issued and outstanding shares of capital stock of International, of Borrower and of each Subsidiary of Borrower and International, and a complete and accurate list of all Persons who are record and beneficial owners of the capital stock of Borrower and of each Subsidiary of Borrower or Subsidiary of International. All warrants, puts, subscriptions, options, instruments and agreements under which any shares of capital stock of Borrower or each Subsidiary of International or of any Subsidiary thereof are or may be redeemed, retired, encumbered, bought, sold or issued are described in SCHEDULE 10 attached hereto. 9.18 NONCOMPETITION AGREEMENTS. Borrower is not subject to any contract or agreement containing a covenant not to compete restricting Borrower as of the Effective Date in any line of business with any Person, except as disclosed on SCHEDULE 18 hereto. 9.19 DEPOSIT AND OTHER ACCOUNTS. All of the accounts maintained by Borrower (other than with Bank) as of the Effective Date with any bank, brokerage house or other financial institution are set forth in SCHEDULE 11 attached hereto and incorporated herein by reference, and PROVIDED, HOWEVER, on and after February 1, 2001, the permitted balances of such accounts (not with Bank) shall be limited to (a) no more than One Hundred Thousand ($100,000) in the Wells Fargo Account No. 4759-613730 in Dallas, Texas and (b) with respect to all other accounts not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate. 9.20 SOLVENCY. Borrower will be Solvent after (i) receipt and application of the Loans in accordance with the terms of this Agreement and (ii) the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party. 37 9.21 FULL DISCLOSURE. No representation or warranty made by Borrower or any of its Affiliates, as the case may be, in this Agreement, or any Loan Document or other document furnished from time to time in connection herewith or therewith contains or will contain at the time such representation is made or such document is furnished, any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to Borrower or any of its respective officers, directors, shareholders, corporate management-level employees, parent company, or subsidiaries which has had or which could reasonably be expected in the future to have a Material Adverse Effect. 9.22 CASUALTIES. Neither the business nor the properties of Borrower is affected by any fire, explosion, accident, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other Casualty Loss (whether or not covered by insurance) which could have a Material Adverse Effect. 9.23 REAL PROPERTY AND LEASES. Except as described in SCHEDULE 12 attached hereto and incorporated herein by reference, as of the Effective Date Borrower owns no real property and is not a party to any lease, assignment, sublease, or other agreement relating to any real property or leasehold. 9.24 INSURANCE POLICIES. SCHEDULE 13 attached hereto and incorporated herein by reference correctly sets forth all of the insurance policies maintained by Borrower as of the Effective Date, including, without limitation, the carriers thereof, and the types of coverage (which coverage shall include environmental liability insurance) and insured amounts covered thereby. Borrower is in compliance with all requirements of such insurance and is in compliance with all insurance requirements set forth in any material purchase orders or other material agreements with its customers. 9.25 CONSENTS. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery and performance by Borrower of any Loan Document to which it is or will be a party. 9.26 UPDATING REPRESENTATIONS AND WARRANTIES. To the extent necessary to cause the representations and warranties set forth in this SECTION 9 and in SECTION 7.1 to remain true, complete and accurate as of the date hereof and as of each day on which a Loan is made hereunder, Borrower shall promptly update in writing any Schedules provided for in this SECTION 9 and in SECTION 7.1 upon learning of any circumstance which might make any such representation or warranty contained in this SECTION 9 and in SECTION 7.1 untrue. Such updating by Borrower shall be subject to the written consent and 38 approval of Bank. The requirement of Borrower to update any Schedule provided for herein shall not be and shall not be deemed by Bank a cure of any Event of Default occurring prior to any such update or existing at the time of any such update without the written waiver of such Event of Default by Bank. 10. COVENANTS. Until the Obligations are fully paid, performed and satisfied and this Agreement is terminated, Borrower will comply with each of the covenants set forth below in this SECTION 10. 10.1 PAYMENT OF CERTAIN EXPENSES. Borrower will pay to Bank immediately any and all fees, costs and expenses which Bank pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower, or any other Person on Borrower's behalf, by Bank of proceeds of Loans made by Bank to Borrower pursuant to this Agreement, and (ii) the depositing for collection by Bank of any check or item of payment received and/or delivered to Bank on account of the Obligations and reimburse Bank, immediately, for any claims asserted by any bank at which a blocked account is established for the deposit of proceeds of the Collateral in connection with such blocked account or any returned or uncollected checks received by such bank as proceeds of the Collateral. 10.2 NOTICE OF LITIGATION. Borrower will notify Bank in writing, promptly upon Borrower's learning thereof, of any litigation, suit or administrative proceeding which may have a Material Adverse Effect, whether or not the claim is considered by Borrower to be covered by insurance. Notwithstanding the foregoing sentence, to the extent any such litigation, suit or administrative proceeding seeks monetary damages or could subject Borrower to the payment any fines and/or other penalties, Borrower shall not be obligated to notify Bank thereof unless the damages sought or the potential fines and/or penalties involved are in an amount of Two Hundred Fifty Thousand Dollars ($250,000) or more. 10.3 NOTICE OF ERISA EVENTS. Borrower will notify Bank in writing (i) promptly upon the occurrence of any event described in Section 4043 of ERISA, other than a termination, partial termination or merger of a Pension Plan or a transfer of a Pension Plan's assets, and (ii) prior to any termination, partial termination or merger of a Pension Plan or a transfer of a Plan's assets. 10.4 NOTICE OF LABOR DISPUTES AND COLLECTIVE BARGAINING AGREEMENTS. Borrower will notify Bank in writing, promptly upon Borrower's learning thereof, of (i) any labor dispute to which it may become a party and which may have a Material Adverse Effect, (ii) any strikes or walkouts relating to any of its plants or other facilities, and (iii) the entering into any collective bargaining agreement by Borrower or by which Borrower is bound or the expiration of any collective bargaining agreement to which Borrower is a party or by which Borrower is bound. 39 10.5 COMPLIANCE WITH LAWS, ETC. Borrower will comply with the requirements of all applicable laws, statutes, regulations, rules or ordinances of any governmental entity, or of any agency thereof (including, but not limited to, all Environmental Laws), the noncompliance with which is likely to have a Material Adverse Effect. 10.6 NOTICE OF VIOLATIONS OF LAW, TAX ASSESSMENTS. Borrower will notify Bank in writing, promptly upon Borrower's learning thereof, of (i) any violation by Borrower of any law, statute, regulation, rule or ordinance of any governmental entity, or of any agency thereof, the violation of which may have a Material Adverse Effect, and (ii) any federal, state or local tax assessment of any failure by Borrower to pay when applicable to Borrower in excess of Twenty-Five Thousand Dollars ($25,000). 10.7 COMPLIANCE WITH OTHER AGREEMENTS. Borrower will comply with the provisions of (i) each note, indenture, loan agreement, mortgage, lease, deed or other similar agreement to which Borrower is a party or by which Borrower is bound, the noncompliance with which is likely to have a Material Adverse Effect, and (ii) all agreements with any of its shareholders or other equity holders (whether present or contingent). 10.8 NOTICE OF VIOLATIONS OF CERTAIN AGREEMENTS. Borrower will notify Bank in writing, promptly upon the occurrence thereof, of Borrower's default under any note, indenture, loan agreement, mortgage, material lease (including without limitation any lease agreement), deed or other similar agreement to which Borrower is a party or by which Borrower is bound with respect to a payment obligation in the amount of Two Hundred Fifty Thousand Dollars ($250,000) or more. 10.9 NOTICE OF CUSTOMER DEFAULTS. Borrower will notify Bank in writing, promptly upon the occurrence thereof, of any default by any obligor under any note or other evidence of debt payable to Borrower having outstanding indebtedness thereunder or relating thereto (or face amount in the case of any letter of credit) of One Hundred Thousand Dollars ($100,000) or more. 10.10 TAXES AND CHARGES. Borrower will (i) file all federal, state and local tax returns and other reports which it is required by law to file, (ii) pay all taxes, assessments and other similar charges that are due and payable; PROVIDED, HOWEVER, that no such taxes, assessments or charges need be paid during such period as they are being contested in good faith by Borrower, in appropriate proceedings promptly commenced and diligently prosecuted, if adequate reserves in accordance with generally accepted accounting principles have been set aside on Borrower's books, and the continuance of such contest shall neither result in any part of the Collateral or any other property of Borrower being made the subject of any proceeding in foreclosure, or of any levy or 40 execution, which shall not have been stayed or dismissed, or the subject of any seizure or other loss, nor prevent Bank from acquiring a perfected first priority security interest in the Collateral after the Effective Date or with respect to future advances hereunder; and PROVIDED, FURTHER, that Borrower will promptly pay such tax when the dispute is finally settled, (iii) withhold all employee and similar taxes which it is required by law to withhold, and (iv) maintain adequate reserves for the payment of all taxes and similar charges. 10.11 INDEBTEDNESS; GUARANTIES. Borrower will not incur or pay any Indebtedness other than (i) the Obligations, (ii) subject to the terms of any applicable subordination agreement, Indebtedness reflected in the Financials delivered on or before the Effective Date or described in SCHEDULE 2 or SCHEDULE 12 attached hereto, (iii) Indebtedness owing to trade creditors in the ordinary course of business, (iv) Indebtedness in respect of capitalized leases and purchase money Indebtedness so long as the aggregate amount of such Indebtedness incurred by Borrower (x) during its fiscal year ending September 30, 2001 does not exceed the amount of Zero Dollars ($0) and (y), thereafter, in any fiscal year of the Borrower does not exceed One Million Dollars ($1,000,000), and PROVIDED FURTHER, that at no time shall the aggregate amount of all purchase money Indebtedness (excluding that described in clause (ii) hereof) exceed Three Million Dollars ($3,000,000), (v) Indebtedness in respect of taxes, assessments or governmental charges to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of SECTION 10.10, (vi) Indebtedness which is subordinated to the prior payment and performance of the Obligations pursuant to a subordination agreement in form and substance satisfactory to Bank, in its sole discretion, but only so long as the payment of any such Indebtedness would not violate the terms of the applicable subordination agreement), (vii) operating leases, and (viii) Intercompany Loans to Borrower from International and Vari-Lite Asia, Inc., PROVIDED that no Indebtedness otherwise permitted to be incurred shall be permitted to be incurred if, after giving effect to the incurrence thereof, any Event of Default shall have occurred. No Borrower will guarantee the obligations of any other Person except as set forth on SCHEDULE 2 or SCHEDULE 15 attached hereto. 10.12 TITLE TO PROPERTY; NO LIENS. Borrower will continue to maintain good, indefeasible and merchantable title to and ownership of, or interest (leasehold or otherwise) in, all of its real and personal property, including, without limitation, the Collateral and other security for the Obligations, free and clear of all liens, claims, security interests, assignments, mortgages, pledges and encumbrances, except Permitted Liens and except as described on SCHEDULE 3 attached hereto and incorporated herein by reference or as permitted under SECTION 10.27 hereto. 10.13 RESTRICTIONS; LABOR DISPUTES, ETC. Borrower will not become a party or subject to any charge, restriction, judgment, decree or order, which could have a Material Adverse Effect. 41 10.14 PENSION PLANS. Borrower will not permit any "reportable event" or "prohibited transaction," as defined by ERISA, to occur or to continue as to any Pension Plan of Borrower or any Controlled Group member, which poses a threat of (i) termination of such Pension Plans (or trusts related thereto) or (ii) the imposition of taxes or penalties against such Pension Plans (or trusts related thereto); Borrower will not violate, or permit any Controlled Group member to violate, the tax qualification requirements contained in Section 401(a) of the Internal Revenue Code of 1986, as amended, applicable to any Pension Plan or do anything to create liability to Borrower or any Controlled Group Member under the Multi-Employer Pension Plan Amendments Act; and except as set forth on SCHEDULE 6 attached hereto and incorporated herein by reference, Borrower will not incur, or permit any Controlled Group member to incur, any liability to the Pension Benefit Guaranty Corporation in connection with such plans. 10.15 SOLVENCY. Borrower will continue to be, and will cause each of its Subsidiaries (if any), Persons of which such Borrower is a Subsidiary, and any guarantors of the Obligations to continue to be, Solvent. 10.16 PROPERTY INSURANCE. (a) Borrower will insure all of its real and personal property, including, without limitation, the Collateral, and any other security for the Obligations, in Bank's name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as Bank shall specify in amounts and under policies by insurers acceptable to Bank. (b) The policies or a certificate thereof signed by the insurer evidencing that such insurance coverage is in effect for periods of not less than one (1) year shall be delivered to Bank within five (5) Business Days after the issuance of the policies to Borrower and after each renewal thereof. (c) All premiums thereon shall be paid by the Borrower monthly in advance; each such policy shall name only Bank as mortgagee under a New York Standard Mortgage clause or other similar clause acceptable to Bank; each policy shall contain a lender's loss payable clause acceptable to Bank naming only Bank as loss payee thereunder and shall provide that such policy may not be amended or cancelled without thirty (30) days prior written notice to Bank; and if the Borrower fails to do so, Bank may (but shall not be required to) procure such insurance and charge the cost to Borrower's account as part of the Obligations payable on demand and secured by the Collateral and any other security for the Obligations. 10.17 LIABILITY INSURANCE. Borrower will, at all times, maintain in full force and effect such liability insurance with respect to its activities and business interruption, product liability and other insurance as may be reasonably required by Bank, such insurance to be provided by insurer(s) acceptable to Bank, and if requested by Bank such insurance shall name Bank as an additional insured. 42 10.18 DEPOSIT ACCOUNTS. Borrower will consider maintaining throughout the term of this Agreement all of Borrower's depository, disbursement, trust, payroll and other account relationships with Bank and not alter existing account relationships which bear on the creditworthiness of Borrower and/or the pricing of the Loans or this credit arrangement or such other account relationships. Borrower hereby agrees that it will not assert any claims or set off rights against Bank solely as a result of Borrower's maintaining any account relationship with Bank or any Affiliate of Bank. 10.19 MERGER, ETC. Borrower will not merge or consolidate or form a joint venture or partnership with or acquire any other Person. 10.20 INVESTMENTS. Other than as disclosed in SCHEDULE 14 attached hereto and incorporated by reference herein, Permitted Investments, or as permitted in SECTION 10.37 hereof, Borrower will not make any investment in the securities of any Person. 10.21 DIVIDENDS. Borrower will not declare or pay cash or stock dividends upon any of Borrower's stock (including, without limitation, any preferred stock now or hereafter issued by Borrower) or make any distributions of Borrower's assets; PROVIDED, HOWEVER, Borrower may make Permitted Payments. 10.22 REDEMPTION OF STOCK. Borrower will not voluntarily or pursuant to any contractual or other obligations redeem, retire, purchase, repurchase or otherwise acquire, directly or indirectly, or exercise any call rights relating to, any of Borrower's capital stock or any other equity securities now or hereafter issued by Borrower (including, without limitation, any warrants for stock of Borrower). 10.23 STOCK RIGHTS. Borrower will not change the rights or obligations associated with, or the terms of any class of stock of such Borrower or issue any new class of stock of Borrower without Bank's prior written consent. 10.24 CHANGE IN BUSINESS. Borrower will not engage in any business other than the design, manufacture and distribution of automated lighting systems and related equipment. 43 10.25 AFFILIATE TRANSACTIONS. Except to the extent permitted under SECTIONS 10.21 AND 10.37 hereof, Borrower will not enter into, or be a party to, any transaction with any of Borrower's Affiliates, except in the ordinary course of business, pursuant to the reasonable requirements of Borrower's business, and upon fair and reasonable terms which are fully disclosed to Bank and are no less favorable to Borrower than Borrower could obtain in a comparable arm's length transaction with a Person not a Borrower's Affiliate. 10.26 WITHDRAWALS FROM ACCOUNTS. Except in connection with transactions otherwise permitted herein, Borrower will not make deposits to or withdrawals from any of Borrower's deposit accounts for the benefit of any of its Affiliates. 10.27 SALE OF ASSETS. Borrower will not sell, lease or otherwise dispose of or transfer, whether by sale, merger, consolidation, liquidation, dissolution, or otherwise, any of its assets, including, without limitation, the Collateral and other security for the Obligations, except for (i) the sale of Inventory (other than Rental Inventory) in the ordinary course of business, and (ii) the sale of Rental Inventory as long as within sixty (60) days following the date of any such sale Borrower applies the portion of the proceeds of such sale in the amount equal to the net book value of the Rental Inventory sold either (x) to acquire or manufacture replacement Rental Inventory or (y) to make a prepayment of Term Loan A (subject to the Indemnification provision of SECTION 3.4 of this Agreement); and (iii) the sale of any other assets not referred to in clauses (i) or (ii) with an aggregate net book value of Two Hundred Fifty Thousand Dollars ($250,000) in any fiscal year of Borrower. 10.28 CONSIGNMENTS, ETC. Borrower will not make a sale to any customer on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment or any other repurchase or return basis. 10.29 CHANGE IN MANAGEMENT OR BUSINESS. Borrower will not permit to occur any seizure, vesting or intervention by or under the authority of any government by which Borrower's management is displaced or its authority in the conduct of its business is materially curtailed. 10.30 CLAIMS AGAINST COLLATERAL. Borrower will not permit to occur any attachment or distraint of any of the Collateral, or other security for the Obligations and will not permit any of the Collateral, or other security for the Obligations to become subject, at any time, to any mandatory court order or other legal process. 44 10.31 JUDGMENTS. Borrower will not permit any judgment or any number of judgments in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate to be rendered against it unless such judgment is paid within thirty (30) days of the date such judgment becomes final and non-appealable (without violating any other covenants herein) or such judgment is otherwise bonded in a manner and on terms satisfactory to Bank. 10.32 FILED JURISDICTIONS. Borrower will not cause or allow any of its Inventory or Equipment to be removed from and remain outside of any Filed Jurisdiction for four (4) or more consecutive months without first providing Bank with notice as required under SECTION 8.12 hereof. 10.33 FINANCIAL COVENANTS. The Borrower will comply with all of the financial covenants contained in EXHIBIT J (the "Financial Covenants") attached hereto and incorporated herein by reference. 10.34 GOOD STANDING CERTIFICATE. Upon Bank's request therefor, Borrower will furnish to Bank a certificate from the Secretary of State of the state of incorporation of Borrower indicating that Borrower is in good standing as a corporation under the laws of such state and certificates indicating that Borrower is qualified to do business under the laws of all states and jurisdictions where the failure to be so qualified would have a Material Adverse Effect. 10.35 DIRECTOR'S FEES. Borrower will not pay any director's fees to any member of Borrower's Board of Directors in excess of Fifteen Thousand Dollars ($15,000) annually. 10.36 CHATTEL PAPER. Borrower shall not create or allow to exist Chattel Paper in electronic form. All Chattel Paper created on or after February 1, 2001 will bear the legend, clearly printed at the top or in the margin thereof, "THIS CHATTEL PAPER IS PLEDGED TO FIRSTAR BANK, NATIONAL ASSOCIATION AND ITS SUCCESSORS AND ASSIGNS". 10.37 INTERCOMPANY LOANS. There are no Intercompany Loans payable to Borrower as of the Effective Date except as set forth on SCHEDULE 15 attached hereto, and Borrower shall not make Intercompany Loans except (i) as are set forth on SCHEDULE 15 attached hereto and (ii) additional Loans to International and its Subsidiaries not to exceed at any time the principal amount of One Million Dollars (US $1,000,000); PROVIDED, Borrower will not repay Intercompany Loans except for Permitted Payments. 45 11. EFFECTIVE DATE; TERMINATION. 11.1 EFFECTIVE DATE AND TERMINATION DATE. This Agreement shall be effective on the date upon which all of the conditions set forth herein and in EXHIBIT G-1 attached hereto have been fully satisfied in a manner satisfactory to Bank and upon which the initial Loans have been made by Bank to Borrower. Unless otherwise terminated or extended in accordance with the provisions of this SECTION 11, this Agreement shall terminate on December 31, 2003. 11.2 TERMINATION BY BANK. Recourse to security will not be required at any time. Borrower waives presentment and protest of any instrument and notice thereof, notice of default and all other notices to which Borrower might otherwise be entitled. This Agreement may be extended by Bank, in its sole discretion, for successive one (1) year periods. Borrower may request a one (1) year extension of this Agreement by giving Bank its written request for such extension not earlier than one hundred twenty (120) days and not later than ninety (90) days prior to the date on which this Agreement is to terminate. In such event, Bank may, in its sole discretion, elect to so extend this Agreement by giving Borrower written notice of its election to so extend this Agreement no later than sixty (60) days of the date of which this Agreement is to terminate. If Borrower has not received the notice as set forth in the immediately preceding sentence, this Agreement shall terminate on December 31 of the applicable calendar year. 11.3 VOLUNTARY TERMINATION. Borrower may terminate this Agreement by giving Bank notice of the date on which this Agreement is to terminate ("Voluntary Termination Date"), which date must be not earlier than ten (10) Business Days before the Voluntary Termination Date and by paying, on such Voluntary Termination Date (i) as compensation to Bank for loss of bargain with respect to the credit advanced hereunder, and not as a penalty, a termination fee in amounts as set forth below:
Voluntary Termination Date Termination Fee -------------------------- ---------------- On or before December 31, 2001 2% of the Calculated Termination Amount as of such date Between January 1, 2002 1% of the Calculated Termination Amount as of and December 31, 2002 (inclusive) such date Between January 1, 2003 .5% of the Calculated Termination Amount as of and September 30, 2003 (inclusive) such date
and (ii) all of the other Obligations (including, but not limited to, the fees described in SECTION 3.7 and SECTION 3.8 hereof). Notwithstanding the foregoing provisions of this 46 SECTION 11.3, in the event that (a) Borrower terminates this Agreement (i) in accordance with this SECTION 11.3 and refinances the Loans with credit made available by the conventional Commercial Lending Department of Bank, or (ii) in response to an Additional Fee being charged to Borrower by Bank so long as the conditions set forth in SECTION 3.5 shall have been satisfied, or (b) Bank is acquired by another financial institution, no termination fee shall be due and owing by Borrower. Moreover, notwithstanding the foregoing provisions of this SECTION 11.3, in the event that the Borrower terminates this Agreement in accordance with this SECTION 11.3 in connection with a sale or transfer of all or substantially all of the stock or assets of International or the Borrower to a third party prior to September 30, 2003, then the termination fee payable by the Borrower upon such a termination will equal 0.5% of the Calculated Termination Amount. 11.4 ACCELERATION UPON TERMINATION. Upon the effective date of termination, all of Borrower's Obligations to Bank shall become immediately due and payable without notice or demand. If this Agreement is terminated upon the occurrence or during the continuance of an Event of Default, the Obligations shall include an amount equal to the termination fee and the fees described in SECTION 3.7 and SECTION 3.8 hereof which would be payable by Borrower if Borrowers had terminated this Agreement pursuant to SECTION 11.3 as of the last day of the month in which Bank terminates this Agreement, said amounts to compensate Bank for loss of bargain with respect to the credit advanced hereunder, and not as a penalty. 11.5 BORROWERS REMAIN LIABLE. Notwithstanding any termination, until all of the Obligations have been fully performed, paid and satisfied, Borrower shall remain liable for the full and prompt performance and payment of the Obligations and the indemnification set forth in SECTION 15.10, and Bank shall retain all of its rights and privileges hereunder, including, without limitation, the retention of its interest in and to all of the Collateral and any other security for the Obligations. 12. EVENTS OF DEFAULT. Each of the following shall constitute an "Event of Default" hereunder: (a) Borrower shall fail to pay, (i) when due (whether by demand or otherwise), any portion of the principal or interest of any of the Obligations owing from Borrower to Bank, including, without limitation, any Deficiency other than a Deficiency resulting from an Advance Rate Change, (ii) within three (3) Business Days of when due (whether by demand or otherwise) any other Obligations owing under the terms of this Agreement other than a Deficiency resulting from an Advance Rate Change, and (iii) immediately upon delivery of written notice in accordance with SECTION 2.12(b), any Deficiency owing with respect to an Advance Rate Change. (b) Borrower or International shall commit any breach of this Agreement (other than under SECTION 8, SECTION 10.1, SECTION 10.11 through SECTION 10.33, or SECTION 10.35 through SECTION 10.37 hereof; 47 (c) Borrower shall commit any breach of any provision of this Agreement other than those provisions identified in SECTION 12(a) or SECTION 12(b) of this Agreement and Borrower shall not have cured such breach within fifteen (15) Business Days after the occurrence of such breach; (d) any representation or warranty made by the Borrower herein, in connection with this Agreement, in connection with any transaction relating to this Agreement or in any of the other Loan Documents, is, or becomes, untrue or misleading in any material respect (except for any such representation or warranty (or portion thereof) that is qualified by reference to a specific materiality standard, in which case such representation or warranty must be and remain true and accurate in all respects); (e) any representation or warranty made by any guarantor of the Obligations herein or in any other Loan Document to which it is a party is, or becomes, untrue or misleading in any material respect (except for any such representation or warranty (or portion thereof) that is qualified by reference to a specific materiality standard, in which case such representation or warranty must be and remain true and accurate in all respects); (f) International, Borrower or any guarantor of the Obligations, as the case may be, shall: (i) fail to be Solvent, (ii) become generally unable to pay its debts as they become due, (iii) make an assignment for the benefit of creditors, or (iv) call a meeting of creditors for the composition of debts; (g) (i) there shall be filed by or against International, Borrower or any guarantor of the Obligations, as the case may be, a petition in bankruptcy or for reorganization which shall continue undischarged or undismissed for a period of forty-five (45) consecutive days to the extent any such filing is involuntary, (ii) a custodian, receiver or agent shall be appointed or authorized to take charge of any of their respective properties, or (iii) International, Borrower or any guarantor of the Obligations shall dissolve for any reason; (h) there shall occur any event which has or may have a Material Adverse Effect; (i) any guarantor of the Obligations shall be in default under its guaranty of the Obligations or demand is made on any such guarantor thereunder; (j) Borrower, International or any guarantor of the Obligations shall be in default under any other agreement to which it is a party providing for the borrowing of money in the amount equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000) and such default continues beyond any applicable cure or grace periods provided for in such agreement; (k) any guarantor of the Obligations dies, denies its obligation to guarantee any then existing Obligations or attempts to limit or terminate its obligation to guarantee any future Obligations (including, without limitation, any future advance by Bank to a Borrower); 48 (l) there shall occur a Casualty Loss with respect to the Collateral or other security for the Obligations which is not covered by insurance (exclusive of any deductible) and which is greater than Two Hundred Fifty Thousand Dollars ($250,000); (m) the audit report required pursuant to SECTION 8.7 is not an unqualified audit report, unless the reason for qualification is not material to Borrower's financial condition in Bank's sole opinion; (n) a contribution failure occurs with respect to any Pension Plan, Multiemployer Plan or Welfare Plan sufficient to give rise to a lien under Section 302(f) of ERISA; (o) there shall have been instituted against Borrower any criminal proceedings for which forfeiture of any asset or assets with a net book value equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000) is a potential penalty; (p) International or Borrower or any Subsidiary of International or Borrower shall default in the due performance and observance of any covenant or agreement contained in any Loan Document (other than this Agreement) beyond any applicable grace period to which it is a party; or (q) International shall fail to own one hundred percent (100%) of the voting stock of each of the Borrower, Vari-Lite Europe Holdings, Limited or Vari-Lite Asia, Inc. 13. BANK'S RIGHTS AND REMEDIES. 13.1 ACCELERATION, ETC. Upon the occurrence of any Event of Default, in addition to all other rights and remedies provided herein or available at law or in equity, Bank may, without further notice or demand, declare the Loans and all other Obligations to be immediately due and payable (except that with respect to any Event of Default under SECTION 12(f) OR (g), such acceleration of the Loans shall be automatic), and, to the extent that the maximum amount of the Total Facility has not yet been used or fully drawn on by Borrower, terminate the undrawn balance of same, and Bank shall have all rights to realize upon the Collateral and any other security for the Obligations set forth in the documents providing for such security as described in SECTION 5 hereof, the terms of which are incorporated herein by reference as if set forth herein in full, and as otherwise provided by applicable law. Bank's rights and remedies under this Agreement shall be cumulative and not exclusive of any other right or remedy which Bank may have. 13.2 FEES AND EXPENSES. Borrower shall pay to Bank, immediately and as part of the Obligations, all costs and expenses, including court costs, Attorneys' Fees and costs of sale, incurred by Bank in exercising any of its rights or remedies hereunder. 49 14. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS. 14.1 RELEASE OF COLLATERAL. Bank's rights with respect to the Collateral and other security for the Obligations and its liens thereon and security interest therein shall continue unimpaired, and Borrower shall remain obligated in accordance with the terms hereof, notwithstanding the release or substitution of any Collateral or other security for the Obligations at any time(s), or any rights or interests therein, or any delay, extension of time, renewal, compromise or other indulgence granted by Bank in reference to any Obligations, and Borrower hereby waives all notice of the same. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 14.2 WAIVERS AND AMENDMENTS IN WRITING. Failure by Bank to exercise any right, remedy or option under this Agreement or any supplement hereto or in any other agreement between Borrower and Bank or delay by Bank in exercising the same shall not operate as a waiver by Bank of its right to exercise any such right, remedy or option. No waiver by Bank shall be effective unless it is in writing and then only to the extent specifically stated. This Agreement cannot be changed or terminated orally. 14.3 ASSIGNMENT. Bank shall have the right to assign this Agreement. Borrower may not assign, transfer or otherwise dispose of any of its rights or obligations hereunder or under any of the other Loan Documents to which it is a party, by operation of law or otherwise, and any such assignment, transfer or other disposition without Bank's written consent shall be void. All of the rights, privileges, remedies and options given to Bank hereunder shall inure to the benefit of Bank's successors and assigns, and all the terms, conditions, covenants, provisions and warranties herein shall inure to the benefit of and bind the representatives, successors and assigns of each Borrower and Bank, respectively. 15. MISCELLANEOUS. 15.1 SEVERABILITY. Each provision of this Agreement shall be interpreted in such manner as to be valid under applicable law, but if any provision hereof shall be invalid under applicable law, such provision shall be ineffective to the extent of such invalidity, without invalidating the remainder of such provision or the remaining provisions hereof. 15.2 GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED AND ACCEPTED AT AND SHALL BE DEEMED TO HAVE BEEN MADE AT CLEVELAND, OHIO. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF OHIO. For purposes of any action or proceeding involving this Agreement, Borrower hereby expressly submits to the nonexclusive jurisdiction of all federal and state courts located in the State of Ohio and consents 50 that it may be served with any process or paper by registered mail or by personal service within or without the State of Ohio in accordance with applicable law, provided a reasonable time for appearance is allowed. 15.3 WAIVER OF JURISDICTION. AS A SPECIFICALLY BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO BORROWERS, BORROWER AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT, ITS VALIDITY OR PERFORMANCE, AT THE SOLE OPTION OF BANK, ITS SUCCESSORS AND ASSIGNS, AND WITHOUT LIMITATION ON THE ABILITY OF BANK, ITS SUCCESSORS AND ASSIGNS, TO EXERCISE ALL RIGHTS AS TO THE COLLATERAL AND OTHER SECURITY FOR THE OBLIGATIONS OR INITIATE AND PROSECUTE IN ANY APPLICABLE JURISDICTION ACTIONS RELATED TO REPAYMENT OF THE OBLIGATIONS, SHALL BE INITIATED AND PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS AT CLEVELAND, OHIO. BANK AND BORROWER EACH CONSENTS TO AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT CLEVELAND, OHIO HAVING JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO BORROWER AND BANK AT THEIR RESPECTIVE ADDRESSES SET FORTH IN SECTION 15.9 BELOW OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE STATE OF OHIO. BORROWER WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITable RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. 15.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower covenants, warrants and represents that all of Borrower's representations and warranties contained in this Agreement are true at this time, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, and shall remain true until the Obligations are fully performed, paid and satisfied, subject to such changes as may not be prohibited hereby, do not constitute Events of Default hereunder, and have been consented to by Bank in writing. 15.5 EVIDENCE OF LOANS. Each loan or advance made by Bank to Borrower pursuant to this Agreement may or may not (at Bank's sole discretion) be evidenced by notes or other instruments issued or made by Borrower to Bank. Where such loans or advances are not so evidenced, such loans and advances shall be evidenced solely by entries upon Bank's books and records. 15.6 BANK'S ABILITY REGARDING COLLATERAL AND PREMISES. All of the Obligations shall constitute one loan secured by all security as described in SECTION 5 above and by all other security now and from time to time hereafter 51 granted by Borrower to Bank. Bank may, in its sole discretion, (i) exchange, enforce, waive or release any such security or portion thereof, (ii) apply such security and direct the order or manner of sale thereof as Bank may, from time to time, determine and (iii) settle, compromise, collect or otherwise liquidate any such security in any manner following the occurrence of any Event of Default without affecting or impairing its right to take any other further action with respect to any security or any part thereof. 15.7 APPLICATION OF PAYMENTS, ETC. Bank shall have the continuing right to apply or reverse and reapply any payments to any portion of the Obligations. To the extent Borrower makes a payment or payments to Bank or Bank receives any payment or proceeds of the Collateral or any other security for Borrower's benefit, which payment(s) or proceeds or any part thereof are subsequently voided, invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment or proceeds received, the Obligations or part thereof intended to be satisfied shall be revived and shall continue in full force and effect, as if such payment or proceeds had not been received by Bank. 15.8 FEES AND EXPENSES. Borrower shall reimburse Bank for all costs, fees, expenses and liabilities incurred by Bank or for which Bank becomes obligated in connection with or arising out of: (i) the negotiation, preparation, closing and enforcement of this Agreement, any amendment hereof and any agreements, documents and instruments in any way relating hereto and any of Bank's rights hereunder; (ii) any loans or advances made by Bank hereunder; (iii) any transaction contemplated by this Agreement; (iv) any inspection and/or audit and/or verification (the "Audit Fees") of the Collateral, and/or other security for the Obligations and/or Borrower (Bank currently charges an auditing fee of Seven Hundred Fifty Dollars ($750) per diem based on an eight (8) hour day plus out-of-pocket expenses per auditor or field examiner for the services of its auditors and field examiners, and a potentially greater amount if the auditor is not a Bank employee), PROVIDED, HOWEVER, that unless an Event of Default has occurred or is occurring or Bank in its reasonable discretion believes or has cause to believe that Borrower has committed or is committing fraud, the aggregate amount of Audit Fees payable by Borrower to Bank in each fiscal quarter of Borrower shall not exceed Seven Thousand Five Hundred Dollars ($7,500.00); (v) any liability under Section 3505 of the Internal Revenue Code and all other local, state and federal statutes of similar import; and (vi) costs of settlement incurred by Bank after the occurrence of an Event of Default (a) in enforcing any Obligation or in foreclosing against the Collateral or exercising or enforcing any other right or remedy available by reason of such Event of Default, (b) in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding, (c) in commencing, defending or intervening in any litigation or in filing a petition, complaint, answer, motion or other pleadings in any legal proceeding relating to Borrower and related to or arising out of the transactions contemplated hereby or by any of the Loan Documents, (d) in taking any other action in or with respect to any suit or proceeding (whether in bankruptcy or otherwise), (e) in protecting, preserving, collecting, leasing, selling, taking possession of, or liquidating any of the Collateral, (f) attempting to enforce or enforcing any lien 52 on or security interest in any of the Collateral or any other rights under the Loan Documents or (g) in meeting with Borrower to discuss such Event of Default and the course of action to be taken in connection therewith; the foregoing to include, without limitation, Attorneys' Fees and fees of other professionals, all lien search and title search fees, all title insurance premiums, all filing and recording fees and all travel expenses. All of the foregoing shall be part of the Obligations, payable upon demand, and secured by the Collateral and other security for the Obligations described in SECTION 5 above. The Obligations described under this SECTION 15.8 shall survive any termination of this Agreement. 15.9 NOTICES. Any notice required, permitted or contemplated hereunder shall be in writing and addressed to the party to be notified at the address set forth below or at such other address as each party may designate for itself from time to time by notice hereunder, and shall be deemed validly given (i) three (3) days following deposit in the U.S. mails, with proper postage prepaid, or (ii) the next business day after such notice was delivered to a regularly scheduled overnight delivery carrier with delivery fees either prepaid or an arrangement, satisfactory with such carrier, made for the payment thereof, or (iii) upon receipt of notice given by telecopy, mailgram, telegram, telex or personal delivery: To Bank: Firstar Bank, National Association 425 Walnut Street Cincinnati, OH 45202 Attention: Steven Kieffner, Executive Vice President Telephone No: 513/632-4204 Telecopy No: 513/632/2040 To Borrower: Vari-Lite, Inc. 201 Regal Row Dallas, Texas 75247 Attention: Chief Financial Officer Telephone No: (214) 819-3244 Telecopy No: (214) 630-5867 15.10 INDEMNIFICATION. In consideration of the execution and delivery of this Agreement by Bank and the extension of the commitments hereunder, Borrower hereby, jointly and severally, indemnifies, exonerates and holds Bank and each of its officers, directors, employees and agents (collectively the "INDEMNIFIED PARTIES" and, individually, an "INDEMNIFIED PARTY") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities, damages, and expenses actually incurred in connection therewith (irrespective of whether such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to, or as a direct or indirect result of: 53 (a) any transaction financed or to be financed in whole or in part or directly or indirectly with the proceeds of any Loan; (b) the entering into and performance of this Agreement and the other Loan Documents by any of the Indemnified Parties; (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by Borrower of all or any portion of the stock or all or substantially all the assets of any Person, whether or not Bank is party thereto; and (d) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by Borrower of any Hazardous Material (including, without limitation, any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, or any other federal, state, local or other statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability or standards on conduct concerning, any Hazardous Material), regardless of whether or not caused by, or within the control of, Borrower; except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of Indemnified Party's gross negligence or willful misconduct or breach by such Indemnified Party of its obligations under the Loan Documents, and if and to the extent that the foregoing undertaking may be unenforceable for any reason, Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law, except as aforesaid to the extent not payable by reason of the Indemnified Party's gross negligence or willful misconduct or breach of such obligations. The Obligations described under this SECTION 15.10 shall survive any termination of this Agreement. 15.11 USE OF BANK'S DISCRETION. Wherever in this Agreement or in any Related Document reference is made to use of or exercise by Bank of its discretion, such provision shall mean the sole and absolute discretion of Bank. 15.12 EQUITable RELIEF. Borrower recognizes that, in the event Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement or any of the other Loan Documents, any remedy of law may prove to be inadequate relief to Bank; therefore, Borrower agrees that Bank, if Bank so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 15.13 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties with respect to its subject matter and supersedes all previous understandings, written or oral, in respect thereof. 54 15.14 HEADINGS. Section headings in this Agreement are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 15.15 WAIVER OF JURY TRIAL. AS A SPECIFICALLY BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO BORROWERS, BORROWER AND BANK EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT AND/OR THE CONDUCT OF THE RELATIONSHIP BETWEEN BANK AND BORROWER. 15.16 CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any attorney-at-law to appear for Borrower in any action upon or in connection with this Agreement at any time after the Loans and/or other Obligations become due, as herein provided, in any court in or of the State of Ohio or elsewhere, and waives the issuance and service of process with respect thereto, and irrevocably authorizes and empowers any such attorney-at-law to confess judgment in favor of Bank against Borrower, the amount due thereon or hereon, plus interest as herein provided, and all costs of collection, and waives and releases all errors in said proceedings and judgments and all rights of appeal from the judgment rendered. Borrower agrees and consents that the attorney confessing judgment on behalf of Borrower may also be counsel to the Bank or any of Bank's Affiliates, waives any conflict of interest which might otherwise arise, and consents to Bank paying such confessing attorney a reasonable legal fee or allowing such attorney's reasonable fees to be paid from the proceeds of collection of the Loans and/or Obligations or proceeds of Collateral, or any other security for the Loans and the other Obligations. [Remainder of Page Intentionally Left Blank] 55 IN WITNESS WHEREOF, this Agreement has been duly executed by each Borrower as of the 29th day of December, 2000. WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. Signed and acknowledged VARI-LITE, INC. in the presence of: - ------------------------- By: Name: ------------------------------- -------------------- Jerome L. Trojan III, - ------------------------- Vice President-Finance and Name:-------------------- Chief Financial Officer 56 STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) The foregoing instrument was acknowledged before me this 29th day of, December, 2000, by Jerome L. Trojan III, Vice President-Finance and CFO of Vari-Lite, Inc., an ________ corporation, on behalf of the corporation. ------------------------------ Notary Public STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) The foregoing instrument was acknowledged before me this ___ day of _____________, _______, by _______________, [Vice President] of Vari-Lite, Inc., an ________ corporation, on behalf of the corporation. ------------------------------ Notary Public Accepted at Cleveland, Ohio, as of _________________. FIRSTAR BANK, NATIONAL ASSOCIATION By: --------------------------- Name: ---------------------- Title: ---------------------- 57 EX-10.52 3 a2034323zex-10_52.txt EXHIBIT 10.52 EXECUTION COPY SECURITY AGREEMENT THIS SECURITY AGREEMENT (this "Agreement") between FIRSTAR BANK, NATIONAL ASSOCIATION, a national banking association ("Bank"), and VARI-LITE, INC., a Delaware corporation ("Borrower"), is as follows: 1. Definitions. Whenever the following terms are used herein, they shall be defined as follows: (A) Any capitalized term not defined herein shall have the meaning ascribed thereto in the Financing Agreement of even date herewith among Borrower and Bank, (as the same may hereafter be amended, supplemented, amended and restated, renewed or otherwise modified from time to time the "Financing Agreement"), unless the context requires otherwise. (B) "Account", "Chattel Paper", "Deposit Account", "Document", "General Intangible", "Goods", "Instrument", and "Proceeds", have the meanings as set forth in Ohio Revised Code Sections 1309.01-1309.50 inclusive, including any amendments thereof and any substitutions therefor, which definitions are hereby incorporated by reference as though fully rewritten herein. (C) "Account Debtor" means the Person who is obligated on a Receivable. (D) "Receivables" means: (1) any account receivable, Account, Chattel Paper, Document, or Instrument owned, acquired, or received by a Person, (2) any other indebtedness owed to or receivable owned, acquired, or received by a Person of whatever kind and however evidenced, and (3) any right, title, and interest in a Person's Goods which were sold, leased, or furnished by that Person and gave rise to either (a) or (b) above, or both of them. This includes, without limitation, (a) any rights of stoppage in transit of a Person's sold, leased, or furnished Goods, (b) any rights to reclaim a Person's sold, leased, or furnished Goods, and (c) any rights a Person has in such sold, leased, or furnished Goods that have been returned to or repossessed by that Person, and (4) any and all Related Property. (E) "Receivable Collection Account" means a commercial Deposit Account which may be maintained by Borrower with Bank in the name of the Bank, without liability by Bank to pay interest thereon, from which account Bank shall have the exclusive right to withdraw funds until all Obligations are paid, performed, and observed in full. (F) "Cash Security" means all cash, Instruments, Deposit Accounts, and other cash equivalents, whether matured or unmatured, whether collected or in the process of collection, upon which Company presently has or may hereafter have any claim, that are presently or may hereafter be existing or maintained with, issued by, drawn upon, or in the possession of Bank. (G) "Collateral" shall mean (i) all of Borrower's "Accounts", "Chattel Paper", "Deposit Accounts", "Documents", "Equipment", "General Intangibles", "Instruments", "Inventory", "Cash Security", "Investment Property", "Receivables" and "Proceeds" (all as defined herein); (ii) all proceeds including, without limitation, proceeds of any insurance policies, and all products of all of Borrower's Equipment, Cash Security, Accounts, Chattel Paper, Deposit Accounts, Documents, General Intangibles, Instruments, Inventory, Investment Property and Receivables; (iii) all of Borrower's books and records related to any of the foregoing; (iv) all of Borrower's rights, title and interest in and to all cash, bank accounts, deposits and similar sums, whether maintained with Bank, an Affiliate of Bank or any other entity; and (v) all of the foregoing, whether now owned or existing or hereafter acquired or arising, or in which Borrower now has or hereafter acquires any rights; PROVIDED, HOWEVER, Collateral shall not include any assets of the Borrower which are subject to purchase money liens permitted pursuant to Section 10.11 and Section 10.12 of the Financing Agreement. (H) "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment and fixtures, including, without limitation, tangible personal property not otherwise described herein, furniture, machinery, vehicles (including, but not by way of limitation, the vehicles identified on EXHIBIT A attached hereto), computers and associated hardware and equipment and trade fixtures, together with any and all attachments, accessions, parts and appurtenances thereto, substitutions therefor and replacements thereof. (I) "Event of Default" shall mean any of the events listed in PARAGRAPH 9 of this Agreement. (J) "General Intangibles" shall mean all general intangibles as set forth in Ohio Revised Code Sections 1309.01-1309.50, including, but not limited to, all choses in action, causes of action and all other intangible personal property of Borrower of every kind and nature (other than Receivables), now owned and hereafter acquired, including, without limitation, corporate or other business records, inventions, designs, patents, patent applications, service marks, service mark applications, service names, trademarks, trademark applications, 2 trade names, trade secrets, goodwill, registrations, copyrights, all intellectual property used by Borrower in the operation of computers and associated hardware and other equipment, licenses, franchises, customer lists, tax refunds, tax refund claims, pension plan refunds and reversions, rights and claims against carriers and shippers, rights to indemnification, mineral rights, and possessory and revisionary interests in and rights to Inventory, Goods and Equipment. (K) "Inventory" shall mean and include all of Borrower's now owned and hereafter acquired inventory, Rental Inventory, goods, merchandise and other personal property furnished under any contract of service or intended for sale, rental or lease, including, without limitation, all farm products, all product and sales catalogs and literature, raw materials, minerals, work-in-process, finished goods and materials and supplies of any kind, nature or description which are used or consumed in Borrower's business or are or might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or finishing of such Goods, merchandise and other personal property and all documents of title or documents representing the same. (L) "Investment Property" shall mean "investment property" as defined in the Uniform Commercial Code as adopted in the State of Ohio. (M) "Related Property" means with respect to any Receivable: (a) all of the Borrower's right, title and interest in and to all Contracts, purchase orders, agreements for lease or other agreements or documents that evidence, secure or otherwise relate to such Receivable; (b) all of the Borrower's interest in the merchandise (including returned merchandise), if any, relating to the sale or lease which gave rise to such Receivable; (c) all liens from time to time purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, and all property subject to such liens; (d) all UCC financing statements covering any collateral securing payment of such Receivable (to the extent of the interest of the purchaser or lessee in the related Receivable); (e) all guarantees and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise; (f) all books and records evidencing or otherwise relating to any Receivables or any of the foregoing; (g) all collections with respect to, and other proceeds of, such Receivables and any of the property described above and (h) all of Borrower's rights, title and interest (but not obligations) arising under any agreement for sale or lease. (N) "Rental Inventory" shall mean all of Borrower's now owned or hereafter acquired Inventory which is leased or available for lease by Borrower to other Persons in the ordinary course of Borrower's business and is identified as "fixed assets" under GAAP on the balance sheet of Borrower. (O) Any accounting terms used in this Agreement which are not specifically defined shall have the meanings customarily given them in accordance with generally accepted accounting principles. All other terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings provided for by the applicable state's version of the Uniform Commercial Code (the "Code") to the extent the same are defined therein. 3 2. GRANT OF SECURITY; SET-OFF AND RELATED MATTERS. As security for the Obligations, Borrower hereby grants, pledges and assigns to Bank a security interest in all of the Collateral. All moneys, securities and other properties of Borrower and the proceeds thereof now or hereafter held or received by Bank from or for the account of Borrower, including any and all deposits (general or special), account balances and credits of Borrower with Bank at any time existing, shall be deemed Collateral hereunder and held as security for the Obligations and may be set-off and applied against any Obligations, and Borrower further authorizes Bank's Affiliates to pay or deliver to Bank any deposits or other sums credited by or due from Bank's Affiliates to Borrower for application against any Obligation, at any time upon the occurrence of any Event of Default and without further notice to Borrower (such notice being expressly waived) and without any necessity on Bank's part to resort to other security or sources of reimbursement for the Obligations. The rights given to Bank hereunder are cumulative with Bank's other rights and remedies, including other rights of set-off. Bank will promptly notify Borrower of Bank's receipt of such funds for application against the Obligations, but failure to do so will not affect the validity or enforceability thereof. Bank may give notice of the above grant of security interest and assignment of the aforesaid deposits and other sums, and authorization to, and make any suitable arrangements with, any such Affiliate of Bank for effectuation thereof, and Borrower hereby irrevocably appoints Bank as its attorney to collect any and all such deposits or other sums to the extent any such payment is not made to Bank by such Affiliate. 3. PERFECTION AND PROTECTION OF SECURITY INTEREST; DUTY OF CARE. (A) Until all Obligations have been fully and irrevocably satisfied and the Financing Agreement has been terminated, this Agreement and Bank's security interest in the Collateral, and all proceeds and products thereof, shall continue in full force and effect. Until the termination of this Agreement, Borrower shall not permit any lien, claim or encumbrance (other than Permitted Liens and those set forth on the date hereof in SCHEDULE 3 to the Financing Agreement) to remain against any of the Collateral and Borrower shall perform any and all steps requested by Bank to create, perfect, maintain and protect Bank's security interest in the Collateral, including, without limitation, executing and filing financing and continuation statements in form and substance satisfactory to Bank, maintaining a perpetual inventory and complete and accurate stock records, delivering to Bank warehouse receipts covering that portion of the Collateral located in warehouses and for which warehouse receipts are issued, transferring Inventory to warehouses approved by Bank placing notations on Borrower's books of account and on Chattel Paper held by Borrower to disclose Bank's security interest therein, taking such other steps as deemed necessary by Bank to protect Bank's interest in the Inventory and delivering to Bank all letters of credit on which Borrower is named as a beneficiary. Bank may file one or more financing statements disclosing Bank's security interest under this Agreement without Borrower's signature appearing thereon and Borrower shall pay the costs of, or incidental to, any recording or filing of any financing statements concerning the Collateral. Borrower agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. If any Equipment or Inventory is in the possession or control of any warehouseman or any of Borrower's agents or processors, Borrower shall notify such warehousemen, agents or processors of Bank's security interest therein and upon Bank's request, instruct them to hold all such Equipment and Inventory for Bank's account and subject to Bank's instructions. Borrower shall pay or cause to be paid all taxes, assessments and governmental charges levied or assessed or imposed upon or with respect 4 to the Collateral or any part thereof; PROVIDED, HOWEVER, that no such taxes, assessments or governmental charges need be paid during such period as they are being contested in good faith by Borrower, in appropriate proceedings promptly commenced and diligently prosecuted, if adequate reserves in accordance with generally accepted accounting principles have been set aside on Borrower's books, and the continuance of such contest shall neither result in any part of the Collateral or any other property of Borrower being made the subject of any proceeding in foreclosure, or of any levy or execution, which shall not have been stayed or dismissed, or the subject of any seizure or other loss nor prevent Bank from acquiring and/or maintaining a perfected first priority security interest in the Collateral after the Closing Date or with respect to future advances under the Financing Agreement; and PROVIDED, FURTHER, that Borrower will promptly pay such tax, assessment or charge when the dispute is finally settled. If Borrower fails to pay such taxes, assessments and governmental charges, Bank may (but shall not be required to) pay the same and charge the cost to Borrower's account as part of the Obligations payable on demand and secured by the Collateral. In order to protect or perfect the security interest which Bank is granted hereunder, Bank may, in its sole discretion, discharge any lien or encumbrance or bond on the Collateral, pay any insurance, maintain guards, pay any service bureau and obtain any record and charge the same to Borrower's account as an advance hereunder and part of the Obligations, payable on demand and secured by the Collateral. Bank may notify Borrower's customers, lessees, or account debtors, at any time and from time to time, that the Receivables have been assigned to Bank and of Bank's security interest therein, and if Bank shall desire that Borrower's customers or account debtors make payment directly to Bank, Bank, as Borrower's irrevocable attorney-in-fact, shall be entitled to notify such customers and account debtors to make payments directly to Bank in Bank's name and to such address as Bank may designate. Borrower understands and agrees that Bank has no obligation whatsoever to, but at its sole discretion may, take any steps to collect any of Borrower's Receivables, and that all costs of collection and other expenses incurred in connection therewith shall be charged to Borrower's account. (B) Bank shall have no duty of care with respect to the Collateral except that Bank shall exercise reasonable care with respect to the Collateral in Bank's custody, but shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which Bank accords its own property, or if Bank takes such action with respect to the Collateral as Borrower shall request in writing, but no failure to comply with any such request nor any omission to do any such act requested by Borrower shall be deemed a failure to exercise reasonable care, nor shall Bank's failure to take steps to preserve rights against any parties or property be deemed to be failure to exercise reasonable care with respect to the Collateral in Bank's custody. 4. BANK AS BORROWER'S ATTORNEY. Borrower hereby appoints Bank, or any other Person whom Bank may designate, as Borrower's attorney, with power: to send requests for verification of Receivables to customers, lessees or account debtors; to sign and endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security in payment of Receivables or from the sale or lease of Inventory or Equipment or that may otherwise come into Bank's possession; to sign Borrower's name on any invoice, lease, Chattel Paper or bill of lading relating to any Receivable, on drafts against customers, on schedules and assignments of Receivables, on notices of assignment, financing statements and other public records, on verifications of accounts and on notices to customers; to 5 collect, enforce, compromise, settle and adjust all Receivables and take other actions with respect thereto as Bank determines in its sole discretion; to give receipts in Borrower's name and to perform such other acts in connection with the Receivables as Bank in its sole discretion may determine to be appropriate; to notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Bank, which may be a post office box opened by Bank for such purpose or any other address, at Bank's sole discretion; to receive, open and dispose of all mail addressed to Borrower; and to do all things necessary to perfect Bank's security interest in the Collateral, to preserve and protect the Collateral and to otherwise carry out this Agreement; all at the cost of Borrower, and Borrower hereby ratifies and approves all acts of such attorney other than any such acts which constitute gross negligence or willful misconduct. Neither Bank nor the attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than for such acts, omissions, errors or mistakes that constitute gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable until the Obligations have been fully and irrevocably satisfied and this Agreement terminated, whichever shall later occur. Borrower agrees to execute and deliver promptly to Bank all instruments necessary or appropriate, as determined in Bank's sole discretion, to further Bank's exercise of the rights and powers granted it in this PARAGRAPH 4. 5. EXAMINATION OF COLLATERAL AND RECORDS. Bank shall at all times thereafter have access to and the right to examine and inspect the Collateral and all of Borrower's books and records relating thereto. 6. WARRANTIES AND REPRESENTATIONS. Borrower warrants and represents that: (A) Borrower has full power and authority to enter into this Agreement and to grant Bank the security interest in the Collateral in accordance herewith, the grant of the security interest in the Collateral by Borrower in the manner and for the purposes contemplated herein has been duly authorized by all requisite corporate action, and this Agreement has been duly executed and delivered; (B) The execution, delivery and/or performance by Borrower of this Agreement will not (i) constitute a violation of any applicable law or a breach of any provision contained in Borrower's Certificate of Incorporation or By-laws or contained in any agreement, indenture or undertaking or under any order of any court or other governmental agency or in any agreement, instrument or document to which Borrower is a party or by which Borrower or any of its assets or properties is bound or (ii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Borrower's assets or properties (other than in favor of Bank hereunder); (C)(i) The principal place of business of Borrower and the office where its chief executive offices and accounting offices are located on the date hereof, is set forth on EXHIBIT B attached hereto, (ii) the office where Borrower keeps its records concerning the Receivables and General Intangibles is at the location set forth on EXHIBIT C attached hereto, (iii) Borrower's registered office in the Borrower's state of incorporation is at the location set forth on EXHIBIT D attached hereto, (iv) all of Borrower's Inventory (other than Rental Inventory which is in the possession of Borrower's customers pursuant to rental agreements entered into in the normal course of Borrower's business), Equipment and other tangible Collateral are on the date hereof, at the locations set forth on EXHIBIT E attached hereto, (v) all other locations of Borrower's on the date hereof, other offices and places of business during the five (5) years prior to the date hereof are set forth on EXHIBIT F attached hereto and (vi) all trade names, assumed names, fictitious names and other names used by Borrower during the five (5) years prior to the date hereof are set forth on EXHIBIT G attached hereto; (D) Borrower has executed UCC financing 6 statements, containing sufficient legal descriptions of the Collateral and otherwise in form and substance sufficient for filing in every Filing Jurisdiction necessary to perfect Bank's security interest in the Collateral, and Borrower hereby irrevocably authorizes Bank to file the same; and (E) Borrower has good, indefeasible and merchantable title to and ownership of the Collateral, free and clear of all liens, claims, security interests and encumbrances whatsoever, except for Permitted Liens and those set forth on the date hereof in SCHEDULE 3 to the Financing Agreement. 7. COVENANTS. Until the Obligations are fully paid, performed and satisfied and this Agreement is terminated, Borrower covenants that it shall: (A) Defend in good faith the Collateral against the claims and demands of all persons; (B) Advise Bank in writing, at least thirty (30) days prior thereto, of any change in Borrower's principal place of business, registered office or other places of business, or the opening of any new places of business, or any change in Borrower's name or the adoption by Borrower of trade names, assumed names or fictitious names, and, in such event, Borrower shall promptly execute and deliver to Bank (and Borrower agrees that Bank may execute and deliver the same as Borrower's irrevocable attorney-in-fact) new UCC financing statements describing the Collateral specified herein and otherwise in form and substance sufficient for recordation wherever necessary or appropriate, as determined in Bank's sole discretion, to perfect or continue perfected Bank's security interest in the Collateral based upon such new places of business or registered offices or changes in or adoption of names, and Borrower shall pay all filing and recording fees and taxes in connection with the filing or recordation of such financing statements and shall immediately reimburse Bank therefor if Bank pays the same; (C) Notify Bank in writing within fifteen (15) Business Days of the creation of any Receivables (to the extent such Receivables constitute Eligible Receivables) with respect to which the account debtor is the United States of America or any state, city, county or other governmental authority or any department, agency or instrumentality of any of them, or any foreign government or instrumentality thereof or any business which is located in a foreign country; (D) Mark its books and records of Receivables to indicate the security interest granted to Bank hereunder; (E) Maintain the Equipment necessary for the operation of Borrower's business in good operating condition and repair in all material respects, make all necessary replacements thereof so that the value and operating efficiency thereof shall at all times be maintained and preserved in all material respects, and immediately upon demand therefor by Bank, deliver to Bank any and all evidences of ownership of the Equipment (including, without limitation, certificates of title and applications for title); and if Borrower fails to keep and maintain the Equipment in good operating condition and repair or to make necessary replacements thereof, Bank may (but shall not be required to) so maintain, repair or replace all or any part of the Equipment and charge the cost thereof to Borrower's account as part of the Obligations payable on demand and secured by the Collateral; (F) Insure the Collateral in Bank's name against loss or damage by fire, theft, burglary, pilferage, loss in transit and such other hazards as Bank shall specify in amounts and under policies by insurers acceptable to Bank, and the policies or a certificate thereof signed by the insurer evidencing that such insurance coverage is in effect for periods of not less than one (1) year shall be delivered to Bank within five (5) Business Days after the issuance of the policies to Borrower and after each renewal thereof and all premiums thereon shall be paid by Borrower monthly in advance; each such policy shall name Bank (and no other party) as mortgagee under a New York Standard Mortgage clause or other similar clause acceptable to Bank, shall contain a lender's loss payable clause acceptable to Bank and shall provide that such policy may not be amended or canceled without thirty (30) days prior written notice to Bank; and if Borrower fails to do so, Bank may (but shall not be required 7 to) procure such insurance and charge the cost to Borrower's account as part of the Obligations payable on demand and secured by the Collateral, and other security for the Obligations; (G) Not permit any part of the Collateral (except for Inventory in the ordinary course of business) or any of the records concerning the same to be removed from the locations referred to in PARAGRAPH 6(C) above or any other location at which any of the same may hereafter be located and shall not move or change its principal place of business, registered office or other place of businesses, or open new places of business, or change its name or adopt trade names, assumed names or fictitious names, without notification to Bank as provided in PARAGRAPH 7(B) above; (H) Not permit any of the Equipment to be sold, transferred or otherwise disposed of or to become a fixture to real property not mortgaged to Bank or an accession to other personal property not constituting part of the Collateral except as otherwise permitted under SECTION 10.27 of the Financing Agreement; and (I) Not, except for Permitted Liens and except as otherwise provided herein, in the Financing Agreement or in the ordinary course of Borrower's business, encumber, pledge, mortgage, grant a security interest in, assign, sell, lease or otherwise dispose of or transfer, whether by sale, merger, consolidation, liquidation, dissolution or otherwise, any of the Collateral. 8. TERM. This Agreement shall terminate on the later to occur of (i) the full and irrevocable performance, payment and satisfaction of the Obligations and (ii) the termination of the Financing Agreement. 9. EVENTS OF DEFAULT. The occurrence of any Event of Default under the Financing Agreement shall constitute an Event of Default hereunder, PROVIDED, that Borrower's failure to comply with SECTION 7(C) and SECTION 7(F) above shall not constitute an Event of Default unless such failure continues for twenty (20) consecutive days. 10. BANK'S RIGHTS AND REMEDIES. (A) If any Event of Default shall occur, Bank shall have, in addition to all other rights provided herein, in the Financing Agreement and the other Loan Documents and available at law and in equity, the rights and remedies of a secured party under the Code, and further, Bank may, without notice, demand or legal process of any kind (except as may be required by law), all of which Borrower waives, at any time or times, take physical possession of the Collateral and maintain such possession on Borrower's premises at no cost to Bank, convert raw materials Inventory to work-in-process Inventory, convert work-in-process Inventory to finished goods Inventory, or remove the Collateral, or any part thereof, to such other place(s) as Bank may desire, or Borrower shall, upon Bank's demand, at Borrower's own cost and expense, assemble the Collateral and make it available to Bank, at a place convenient to Bank, and Bank may sell and deliver any or all Collateral held by or for Bank at public or private sale(s), for cash, upon credit or otherwise, at such prices and upon such terms as Bank deems advisable, at Bank's sole discretion, and may postpone or adjourn any sale of the Collateral from time to time by an announcement at the time and place of sale or by announcement at the time and place of such postponed or adjourned sale, without being required to give a new notice of sale. Borrower agrees that Bank has no obligation to preserve rights to the Collateral against prior parties. Borrower acknowledges that portions of the Collateral could be difficult to preserve and dispose of and further subject to complex maintenance and management. Accordingly, Bank shall have the widest possible latitude to preserve and protect the Collateral and Bank's security interest 8 therein, and Bank, at its sole option, shall have the unqualified right to appoint a receiver, without notice or hearing, for the preservation, possession, protection and disposition of all or part of the Collateral and the collection and protection for Bank of any proceeds of use or disposition of the Collateral and to do any other thing and exercise any other right or remedy which Bank may, with or without judicial process, do or exercise. Any requirement of reasonable notice shall be met if such notice is mailed postage prepaid to Borrower at its address as set forth herein at least five (5) days before the time of sale or other disposition. The proceeds of sale shall be applied first to all costs and expenses of sale, including Attorneys' Fees (as defined in the Financing Agreement), and second to the payment (in whatever order Bank elects) of all Obligations. Bank will return any excess to Borrower and Borrower shall remain liable to Bank for any deficiency. Bank's rights and remedies under this Agreement shall be cumulative and not exclusive of any other right or remedy which Bank may have. (B) Borrower shall pay to Bank, on demand and as part of the Obligations, all costs and expenses, including court costs, Attorneys' Fees and costs of sale, incurred by Bank in exercising any of its rights or remedies hereunder. 11. WAIVER; AMENDMENTS; SUCCESSORS AND ASSIGNS. (A) Any and all of Bank's rights with respect to the Collateral and the security interest granted hereunder shall continue unimpaired, notwithstanding the release or substitution of any Collateral at any time(s), or of any rights or interests therein, or any delay, extension of time, renewal, compromise or other indulgence granted by Bank in reference to any Obligations, and Borrower hereby waives all notice of any such delay, extension, release, substitution, renewal, compromise or other indulgence. (B) Failure by Bank to exercise any right, remedy or option under this Agreement or any present or future supplement hereto or in any other agreement between Borrower and Bank or delay by Bank in exercising the same will not operate as a waiver by Bank of its right to exercise any such right, remedy or option. No waiver by Bank will be effective unless it is in writing and then only to the extent specifically stated. (C) This Agreement cannot be changed or terminated orally. (D) Bank shall have the right to assign this Agreement. Borrower may not assign, transfer or otherwise dispose of any of its rights or obligations hereunder, by operation of law or otherwise, and any such assignment, transfer or other disposition without Bank's prior written consent shall be void. All of the rights, privileges, remedies and options given to Bank hereunder shall inure to the benefit of Bank's successors and assigns, and all the terms, conditions, covenants, provisions and warranties of this Agreement shall inure to the benefit of and shall bind the representatives, successors and assigns of Borrower and Bank, respectively. 12. MISCELLANEOUS. (A) Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be 9 ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. (B) This Agreement has been delivered and accepted at and shall be deemed to have been made at Cleveland, Ohio. This Agreement shall be interpreted and the rights and liabilities of the parties hereto determined in accordance with the internal laws of the State of Ohio and all other laws of mandatory application. (C) AS A SPECIFICALLY BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND TO EXTEND CREDIT TO BORROWER AND ICG, BORROWER AGREES THAT ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT, ITS VALIDITY OR PERFORMANCE, AT THE OPTION OF BANK, ITS SUCCESSORS AND ASSIGNS, AND WITHOUT LIMITATION ON THE ABILITY OF BANK, ITS SUCCESSORS AND ASSIGNS, TO EXERCISE ALL RIGHTS AS TO THE COLLATERAL, THE PREMISES AND OTHER SECURITY FOR THE OBLIGATIONS OR TO INITIATE AND PROSECUTE IN ANY APPLICABLE JURISDICTION ACTIONS RELATED TO REPAYMENT OF THE OBLIGATIONS, SHALL BE INITIATED AND PROSECUTED AS TO ALL PARTIES AND THEIR SUCCESSORS AND ASSIGNS AT CLEVELAND, OHIO. BANK AND BORROWER EACH CONSENTS TO AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER ITS PERSON BY ANY COURT SITUATED AT CLEVELAND, OHIO HAVING JURISDICTION OVER THE SUBJECT MATTER, WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO BORROWER AND BANK AT THEIR RESPECTIVE ADDRESSES AS SET FORTH IN SUBPARAGRAPH (H) BELOW OR AS OTHERWISE PROVIDED UNDER THE LAWS OF THE STATE OF OHIO. BORROWER WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. (D) AS A SPECIFICALLY BARGAINED INDUCEMENT FOR BANK TO ENTER INTO THIS AGREEMENT AND TO EXTEND CREDIT TO BORROWER, BORROWER AND BANK EACH WAIVES TRIAL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT AND/OR THE CONDUCT OF THE RELATIONSHIP BETWEEN BANK AND BORROWER. (E) Borrower covenants, warrants and represents to Bank that all of Borrower's representations and warranties contained in this Agreement are true at this time, shall survive the execution and delivery hereof and shall remain true until the Obligations are fully performed, paid and satisfied, subject to such changes as may not be prohibited hereby or do not constitute Events of Default hereunder. (F) All of the Obligations shall constitute one loan secured by Bank's security interest in the Collateral and by all other security interests, mortgages, liens, claims and encumbrances now and from time to time hereafter granted by Borrower to Bank. Bank may, in 10 its sole discretion, (i) exchange, enforce, waive or release any such security or portion thereof, (ii) apply such security and direct the order or manner of sale thereof as Bank may, from time to time, determine, and (iii) settle, compromise, collect or otherwise liquidate any such security in any manner following the occurrence of any Event of Default without affecting or impairing its right to take any other further action with respect to any security or any part thereof. (G) Borrower shall reimburse Bank for all reasonable Attorneys' Fees and for all costs, fees, expenses and liabilities incurred by Bank or for which Bank becomes obligated in connection with or arising out of (i) the negotiation and preparation of this Agreement, any amendment hereof, and any agreements, documents and instruments in any way relating hereto, (ii) the enforcement by Bank of any of its rights hereunder, (iii) any transaction contemplated by this Agreement, (iv) any inspection and/or audit and/or verification (the "Audit Fees") of the Collateral and/or Borrower (Bank currently charges Seven Hundred Fifty Dollars ($750) per diem based on an eight (8) hour day (plus out-of-pocket expenses) per auditor or field examiner for the services of its auditors or field examiners and a potentially greater amount if the auditor is not a Bank employee), PROVIDED, HOWEVER, that unless an Event of Default has occurred or is occurring or Bank in its reasonable discretion believes or has cause to believe that Borrower has committed or is committing fraud, the aggregate amount of Audit Fees payable by Borrower to Bank in each fiscal quarter of Borrower shall not exceed Seven Thousand Five Hundred Dollars ($7,500.00) and (v) meeting to discuss any Event of Default and the course of action to be taken in connection therewith; the foregoing to include, without limitation, all fees for the employment of professionals, all lien search and title search fees, all filing and recording fees and all travel expenses. All of the foregoing shall be part of the Obligations, payable upon demand, and secured by the Collateral. (H) Any notice or notification required, permitted or contemplated hereunder shall be in writing, shall be addressed to the party to be notified at the address set forth below or at such other address as each party may designate for itself from time to time by notice hereunder, and shall be deemed to have been validly served, given or delivered (i) three (3) days following deposit in the United States mails, with proper postage prepaid, or (ii) the next Business Day after such notice was delivered to a regularly scheduled overnight delivery carrier with delivery fees either prepaid or an arrangement, satisfactory with such carrier, made for the payment of such fees, or (iii) upon receipt of notice given by telecopy, mailgram, telegram, telex or personal delivery: To Bank: Firstar Bank, National Association 425 Walnut Street Cincinnati, Ohio 45202 Attention: Steven C. Kieffner Telecopy No: (513) 632-2040 To Borrower: Vari-Lite, Inc. 201 Regal Row Dallas, Texas 75247 Attention: Chief Financial Officer Telecopy No: (214) 630-5867 11 (I) Borrower recognizes that, in the event Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to Bank; therefore, Borrower agrees that Bank, if Bank so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 12 IN WITNESS WHEREOF, this Agreement has been duly executed by Borrower as of the 29th day of December, 2000. Signed and acknowledged VARI-LITE, INC. in the presence of: - ------------------------- --------------------------- Name: By: Jerome L. Trojan III -------------------- Its: Vice President-Finance and CFO - ------------------------- Name: -------------------- 13 STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) The foregoing instrument was acknowledged before me this 29th day of December, 2000, by Jerome L. Trojan III, Vice President-Finance and CFO of Vari-Lite, Inc., a ________________ corporation, on behalf of the corporation. ------------------------------ Notary Public Accepted at Cleveland, Ohio as of December 29, 2000. FIRSTAR BANK, NATIONAL ASSOCIATION By: --------------------------------- ---------------, ---------------- 14 EXHIBIT A TITLED VEHICLES EXHIBIT B CHIEF EXECUTIVE OFFICE Chief Executive Office: Principal Place of Business: EXHIBIT C LOCATION OF RECORDS Location of Records: EXHIBIT D REGISTERED OFFICE Registered Office: EXHIBIT E LOCATIONS OF TANGIBLE COLLATERAL INVENTORY LOCATION ADDRESS EXHIBIT F FORMER LOCATIONS EXHIBIT G FORMER NAMES; TRADE NAMES I. Former Names II. Trade Names EX-10.53 4 a2034323zex-10_53.txt EXHIBIT 10.53 GUARANTY--VARI-LITE INTERNATIONAL, INC. GUARANTY, dated as of December 29, 2000, made by VARI-LITE INTERNATIONAL, INC., a corporation organized and existing under the laws of the State of Delaware (the "Guarantor"), in favor of FIRSTAR BANK, NATIONAL ASSOCIATION, a national banking association ("Bank"). PRELIMINARY STATEMENT. Bank has entered into a Financing Agreement dated as of the date hereof (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Financing Agreement") with Vari-Lite, Inc., a corporation organized and existing under the laws of the State of Delaware ("Borrower") and a wholly-owned Subsidiary of Guarantor. It is a condition precedent to the making of Loans by Bank under the Financing Agreement that the Guarantor shall have executed and delivered this Guaranty. NOW, THEREFORE, in consideration of the premises and in order to induce Bank to make Loans under the Financing Agreement, the Guarantor hereby agrees as follows. SECTION 1. GUARANTY. The Guarantor hereby unconditionally guarantees the full and prompt payment when due, whether upon the occurrence of an Event of Default or earlier, by reason of acceleration or otherwise, and at all times thereafter of (i) all of the indebtedness, liabilities and obligations of every kind and nature of the Borrower to Bank, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, joint or several, now or hereafter existing, or due or to become due, and howsoever owned, held or acquired by Bank, whether through discount, overdraft, purchase, direct loan or as collateral or otherwise, (ii) all of the Borrower's indebtedness, liabilities and obligations under the Financing Agreement and each other Loan Document, and (iii) all expenses (including Attorneys' Fees) incurred by Bank in enforcing any rights under this Guaranty (all such indebtedness, liabilities, obligations and expenses being collectively referred to herein as the "Obligations"). SECTION 2. GUARANTY ABSOLUTE. The Guarantor guarantees that the Obligations will be paid strictly in accordance with the terms of the Financing Agreement and each other Loan Document, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of Bank with respect thereto. The liability of the Guarantor under this Guaranty shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of any of the Financing Agreement, the Loan Documents or any other agreement or instrument evidencing all or any part of the Obligations; (ii) the absence of any attempt to collect the Obligations from the Borrower or any guarantor or other action to enforce the same; (iii) the waiver or consent by Bank with respect to any provision of any document evidencing the Obligations, or any part thereof, or any other agreement now or hereafter executed by the Borrower and delivered to Bank and any modification thereof; (iv) failure by Bank to take any steps to perfect and maintain its security interest in, or preserve its rights to, any security or collateral for the Obligations; (v) Bank's election in any proceeding instituted under Chapter 11 of Title 11 of the United States Code (11 U.S.C. Section 101 et seq.) (the "Bankruptcy Code"), of the application of Section 1111(b)(2) of the Bankruptcy Code; (vi) any borrowing or grant of a security interest under Section 364 of the Bankruptcy Code; or (vii) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. SECTION 3. WAIVER. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of receivership or bankruptcy of the Borrower, protest or notice with respect to the Obligations and all demands whatsoever, and covenants that this Guaranty will not be discharged, except by complete performance of the Obligations contained herein. Upon any Event of Default as provided in the Financing Agreement or any other instrument or document evidencing all or any part of the Obligations, Bank may, at its election, proceed directly and at once, without notice, against the Guarantor to collect and recover the full amount or any portion of the Obligations, without first proceeding against the Borrower or any other Person or against any security or collateral for the Obligations. Bank shall have the exclusive right to determine the application of payments and credits, if any, from the Guarantor, the Borrower or from any other Person on account of the Obligations or of any other liability of the Guarantor to Bank. SECTION 4. AUTHORIZATION. Bank is hereby authorized, without notice or demand and without affecting the liability of the Guarantor hereunder, from time to time, to (i) renew, extend, accelerate or otherwise change the time for payment of, or other terms relating to, the Obligations, or otherwise modify, amend or change the terms of any promissory note or other agreement, document or instrument now or hereafter executed by the Borrower and delivered to Bank; (ii) accept partial payments on the Obligations; (iii) take and hold security or collateral for the payment of this Guaranty, any other guarantees of the Obligations or other liabilities of the Borrower and the Obligations guaranteed hereby, and exchange, enforce, waive and release any such security or collateral; (iv) apply such security or collateral and direct the order or manner of sale thereof as in its sole discretion it may determine; and (v) settle, release, compromise, collect or otherwise liquidate the Obligations and any security or collateral therefor in any manner, without affecting or impairing the obligations of the Guarantor hereunder. At any time upon the occurrence and during the continuation of an Event of Default, Bank may, in its sole discretion, without notice to the Guarantor and regardless of the acceptance of any security or collateral for the payment hereof, appropriate and apply toward the 2 payment of the Obligations (i) any indebtedness due or to become due from Bank to the Guarantor, and (ii) any moneys, credits or other property belonging to the Guarantor, at any time held by or coming into the possession of Bank. SECTION 5. SUBROGATION. The Guarantor shall have no right of subrogation and hereby waives any right to enforce any remedy which Bank now has or may hereafter have against the Borrower or any endorser or any other guarantor of all or any part of the Obligations, and the Guarantor hereby waives any benefit of, and any right to participate in, any security or collateral given to Bank to secure payment of the Obligations or any other liability of the Borrower to Bank. The Guarantor further agrees that any and all claims of the Guarantor against the Borrower or any endorser or any other guarantor of all or any part of the Obligations, or against any of their respective properties, arising by reason of any payment by the Guarantor to Bank pursuant to the provisions hereof or otherwise, shall be subordinate and subject in right of payment to the prior payment, in full, of all principal and interest, all reasonable costs of collection (including Attorneys' Fees) and any other liabilities or obligations owing to Bank by the Borrower which may arise either with respect to or on any note, instrument, document, item, agreement or other writing heretofore, now or hereafter delivered to Bank. The Guarantor also waives all setoffs and counterclaims and all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance of this Guaranty. The Guarantor further waives all notices of the existence, creation or incurring of new or additional indebtedness, arising either from additional loans extended to the Borrower or otherwise, and also waives all notices that the principal amount, or any portion thereof, and/or any interest on any instrument or document evidencing all or any part of the Obligations is due, notices of any and all proceedings to collect from the maker, any endorser or any other guarantor of all or any part of the Obligations, or from anyone else, and, to the extent permitted by law, notices of exchange, sale, surrender or other handling of any security or collateral given to Bank to secure payment of the Obligations. SECTION 6. FINANCIAL CONDITION OF BORROWER. The Guarantor hereby assumes responsibility for keeping itself informed of the financial condition of the Borrower and of all circumstances bearing upon the risk of nonpayment of the Obligations or any part thereof that diligent inquiry would reveal and the Guarantor hereby agrees that Bank shall not have any duty to advise the Guarantor of information known to Bank regarding such condition or any such circumstances. In the event Bank, in its sole discretion, undertakes at any time or from time to time to provide any such information to the Guarantor, Bank shall not be under any obligation (i) to undertake any investigation not a part of its regular business routine, (ii) to disclose any information which, pursuant to accepted or reasonable commercial finance practices, Bank wishes to maintain confidential or (iii) to make any other or future disclosures of such information or any other information to the Guarantor. SECTION 7. MARSHALLING OF ASSETS. The Guarantor consents and agrees that Bank shall not be under any obligation to marshal any assets in favor of the Guarantor or against or in payment of any or all of the Obligations. The Guarantor further agrees that, to the extent that the Borrower makes a payment or payments to Bank, or Bank receives any proceeds of collateral, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to the Borrower, its estate, 3 trustee, receiver or any other party, including, without limitation, the Guarantor, under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the Obligations or part thereof which have been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date such initial payment, reduction or satisfaction occurred. SECTION 8. REPRESENTATIONS AND WARRANTIES; INCUMBENCY; COVENANTS. (a) The Guarantor hereby represents and warrants that (i) the Guarantor is a corporation duly organized and existing in good standing and has full power and authority to make and deliver this Guaranty; (ii) the execution, delivery and performance of this Guaranty by the Guarantor have been duly authorized by all necessary action of its directors and shareholders and do not and will not violate the provisions of, or constitute a default under, any presently applicable law or its By-Laws or any agreement presently binding on it; (iii) this Guaranty has been duly executed and delivered by the authorized officers of the Guarantor and constitutes its lawful, binding and legally enforceable obligation (subject to the United States Bankruptcy Code and other similar laws generally affecting the enforcement of creditors' rights and general principles of equity); (iv) the authorization, execution, delivery and performance of this Guaranty do not require notification to, registration with, or consent or approval by, any federal, state or local regulatory body or administrative agency; (v) the authorized capital stock of the Guarantor consists of 40,000,000 of common shares ("Common Stock") of which 7,800,003 shares are outstanding on the date of this Agreement and 10,000,000 preferred shares of which no shares are issued and outstanding, and each outstanding share of Common Stock is duly authorized, validly issued, fully paid and nonassessable; and (vi) there are no actions, suits or proceedings pending or threatened against or affecting the Guarantor, or any of its properties, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, if adversely determined, may (A) call into question the legality, validity or enforceability of this Guaranty or any Loan Document, or (B) have a material adverse effect on the condition, financial or otherwise, operations, properties or prospects of the Guarantor. (b) The Guarantor shall deliver to Bank, concurrently with the execution of this Guaranty, (i) a certificate executed by an authorized officer of the Guarantor certifying (A) the resolutions of the Board of Directors of the Guarantor authorizing the execution, performance and delivery of this Guaranty, (B) the names and signatures of the officers of the Guarantor executing or attesting to this Guaranty, and (C) as true, correct, complete and in full force and effect, without amendment or revocation as of the date hereof, the Guarantor's Certificate of Incorporation and By-Laws, (ii) the Guarantor's Certificate of Incorporation, certified by the Secretary of State of Delaware and (iii) a good standing certificate for the Guarantor issued by the Secretary of State of Texas. (c) The Guarantor shall execute and deliver, and shall cause its Subsidiaries to execute and deliver, to Bank such Subordination Agreements as may be requested by Bank in form and substance satisfactory to Bank in its discretion regarding the subordination by Guarantor and each of its Subsidiaries, as the case may be, of loans by Guarantor or its Subsidiaries to Borrower. 4 (d) The Guarantor hereby represents and warrants that there exists no restrictions, by agreement, operation of law or otherwise, which prevent or restrict the ability of Guarantor to make investments, equity or capital contributions, advances or loans to Vari-Lite Europe Holdings, Limited or of Vari-Lite Europe Holdings, Limited to make dividends, distributions, or repayment of loans or capital contributions to Guarantor. SECTION 9. NEGATIVE COVENANTS. The Guarantor covenants and agrees that, so long as any part of the Obligations shall remain unpaid or the Financing Agreement remains in effect, the Guarantor will not, without the prior written consent of Bank: (a) LIENS, ETC. Except as permitted by the Financing Agreement, create or suffer to exist any lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, in each case to secure any Indebtedness of any Person; (b) SALES, ETC. OF ASSETS. Sell, lease, transfer or otherwise dispose of any of its assets other than in connection with the winding up or dissolution of Subsidiaries of the Guarantor which are dormant; or sell, lease, transfer or otherwise dispose of all or substantially all of its shares of stock in or of assets owned by Borrower, Vari-Lite Production Services Limited, Vari-Lite Europe Holdings Limited or Vari-Lite Asia, Inc. (c) CHANGE IN NATURE OF BUSINESS. Make any material change in the nature of its business as carried on at the date of this Agreement. (d) UNCALLED CAPITAL. Have any uncalled capital with respect to its investment in or ownership of the equity of Vari-Lite Europe Holdings, Limited. SECTION 10. AMENDMENTS, ETC. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor therefrom shall in any event be effective unless the same shall be in writing and signed by Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 11. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be in writing and, if to the Guarantor, mailed or delivered to it, addressed to it at Vari-Lite International, Inc., 201 Regal Row, Dallas, Texas 75247, Attn: Chief Financial Officer, if to Bank, mailed or delivered to it, addressed to it at the address of Bank specified in the Financing Agreement, or as to each party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, be effective upon the earlier of (i) receipt by the party so notified, or (ii) forty-eight (48) hours following deposit in the mails, addressed as aforesaid. 5 SECTION 12. NO WAIVER; REMEDIES. No failure on the part of Bank to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof, and no single or partial exercise by Bank of any right or remedy shall preclude any other or further exercise thereof or the exercise of any other right; nor shall any modification, amendment or waiver of any of the provisions of this Guaranty be binding upon Bank, except as expressly set forth in a writing duly signed and delivered by an authorized officer or agent of Bank on behalf of Bank. Bank's failure at any time or times hereafter to require strict performance by the Borrower or the Guarantor of any of the provisions, warranties, terms and conditions contained in any promissory note, security agreement, agreement, guaranty, instrument or document now or at any time or times hereafter executed by the Borrower or the Guarantor and delivered to Bank shall not waive, affect or diminish any right of Bank at any time or times hereafter to demand strict performance thereof and such right shall not be deemed to have been waived by any act or knowledge of Bank, its agents, officers or employees, unless such waiver is contained in an instrument in writing signed by an officer or agent of Bank and directed to the Borrower specifying such waiver. No waiver by Bank of any default or Event of Default shall operate as a waiver of any other default or the same default or Event of Default on a future occasion, and no action by Bank permitted hereunder shall in any way affect or impair Bank's rights or the obligations of the Guarantor under this Guaranty. Any determination by a court of competent jurisdiction of the amount of any principal and/or interest owing by the Borrower to Bank shall be conclusive and binding on the Guarantor irrespective of whether the Guarantor was a party to the suit or action in which such determination was made. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 13. RIGHT OF SET-OFF. At any time upon the occurrence and during the continuation of an Event of Default, Bank is hereby authorized at any time and from time to time without notice to Guarantor to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Bank to or for the credit or the account of the Guarantor against any and all of the obligations of the Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not Bank shall have made any demand under this Guaranty and although such obligations of the Guarantor may be contingent and no Event of Default shall have occurred. Bank agrees promptly to notify the Guarantor after any such set-off and application made by Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set off) which Bank may have. SECTION 14. CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until payment in full of the Obligations and the termination of all of Bank's obligations arising under the Financing Agreement and all other amounts payable under this Guaranty, (ii) be binding upon the Guarantor, its successors and assigns, and (iii) inure to the benefit of and be enforceable by Bank and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), Bank may assign or otherwise transfer any portion of the Borrower's Indebtedness to Bank held by it to any other person or entity, and such other person or entity shall thereupon become vested with all the rights in respect of such Indebtedness granted to Bank herein or otherwise. 6 SECTION 15. GOVERNING LAW. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of Ohio, without regard to principles of conflict of laws. SECTION 16. WAIVER OF JURY TRIAL. THE GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS. SECTION 17. WAIVER OF JURISDICTION. THE GUARANTOR HEREBY AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN CUYAHOGA COUNTY, OHIO. THE GUARANTOR CONSENTS THAT ALL SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO GUARANTOR AND BANK AT THEIR ADDRESSES SET FORTH IN SECTION 11 HEREOF AND SECTION 15.9 OF THE FINANCING AGREEMENT, RESPECTIVELY, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) BUSINESS DAYS AFTER THE SAME SHALL HAVE BEEN DEPOSITED IN THE U.S., POSTAGE PREPAID. THE GUARANTOR WAIVES ANY OBJECTION TO JURISDICTION OVER THE PERSON OR, TO THE EXTENT OF COMPLIANCE WITH THE IMMEDIATELY PRECEDING SENTENCE, SUFFICIENCY OF PROCESS OR SERVICE UPON IT. SECTION 18. CAPITALIZED TERMS. Capitalized terms not otherwise defined herein are used herein with the meanings ascribed to such terms in the Financing Agreement. SECTION 19. CONFESSION OF JUDGMENT. The Guarantor hereby irrevocably authorizes and empowers any attorney-at-law to appear for the Guarantor in any action upon or in connection with this Guaranty at any time after the Loans and/or other Obligations become due, as herein provided, in any court in or of the State of Ohio or elsewhere, and waives the issuance and service of process with respect thereto, and irrevocably authorizes and empowers any such attorney-at-law to confess judgment in favor of Bank against the Guarantor, the amount due thereon or hereon, plus interest as herein provided, and all costs of collection, and waives and releases all errors in said proceedings and judgments and all rights of appeal from the judgment rendered. Guarantor agrees and consents that the attorney confessing judgment on behalf of Guarantor may also be counsel to Bank or any of Bank's Affiliates, waives any conflict of interest which might otherwise arise, and consents to Bank paying such confessing attorney a reasonable legal fee or allowing such attorney's reasonable fees to be paid from the proceeds of collection of the Loans and/or Obligations or proceeds of any Collateral or any other security for the Loans and the other Obligations. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] 7 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. VARI-LITE INTERNATIONAL, INC. ------------------------------------- Name: Jerome L. Trojan III Title: Vice President-Finance and CFO EX-10.54 5 a2034323zex-10_54.txt EXHIBIT 10.54 PATENT, TRADEMARK AND LICENSE SECURITY AGREEMENT THIS PATENT, TRADEMARK AND LICENSE SECURITY AGREEMENT ("Agreement") is made by VARI-LITE, INC., a Delaware corporation having its principal office and place of business at 201 Regal Row, Dallas, Texas 75247 ("Grantor"), in favor of FIRSTAR BANK, NATIONAL ASSOCIATION, a national banking association whose address is 425 Walnut Street, Cincinnati, Ohio 45202 ("Grantee"): W I T N E S S E T H: WHEREAS, Grantor and Grantee are parties to a certain Financing Agreement of even date herewith (as the same may hereafter be amended, supplemented, amended and restated, renewed or otherwise modified from time to time, the "Financing Agreement"), which Financing Agreement provides (i) for the Grantee to, from time to time, extend credit to or for the account of Grantor and (ii) for the grant by Grantor to Grantee of a security interest in certain of Grantor's assets, including, without limitation, its patents, patent applications, service marks, service mark applications, service names, trademarks, trademark applications, service names, trademarks, trademark applications, trade names, goodwill and licenses; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor agrees as follows: 1. INCORPORATION OF FINANCING AGREEMENT. The Financing Agreement and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. 2. SECURITY INTEREST IN PATENTS. To secure the complete and timely satisfaction of all of the "Obligations" (as defined in the Financing Agreement), Grantor hereby grants and conveys to Grantee a lien and security interest in all of the Grantor's right, title and interest in and to all of its now owned or existing and filed and hereafter acquired or arising and filed: (A) patents and patent applications, including, without limitation, the inventions and improvements described and claimed therein, and those patents listed on SCHEDULE A, attached hereto and made a part hereof, and (a) the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (b) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world (all of the foregoing patents and applications, together with the items described in clauses (a)-(d), are sometimes hereinafter individually and/or collectively referred to as the "Patents"); and (B) license agreements with any other party, whether Grantor is a licensor or licensee under any such license agreement, including, without limitation, the licenses listed on SCHEDULE C attached hereto and made a part hereof, and the right to prepare for sale, sell and advertise for sale, all "Inventory" (as defined in the Financing Agreement) now or hereafter owned by Grantor and now or hereafter covered by such licenses (all of the foregoing is hereinafter referred to collectively as the "Licenses"). 3. SECURITY INTEREST IN TRADEMARK AND GOODWILL. To secure the complete and timely satisfaction of all of the "Obligations" (as defined in the Financing Agreement), Grantor hereby grants and conveys to Grantee a lien and security interest in all of the Grantor's right, title and interest in and to all of its now owned or existing and filed and hereafter acquired or arising and filed: (A) trademarks, trademark registrations, trade names and trademark applications, service marks, service mark registrations, service names and service mark applications, including, without limitation, the trademarks, trademark registrations, trade names and trademark applications, service marks, service mark registrations, service names and service mark applications listed on SCHEDULE B, attached hereto and made a part thereof, and (a) renewals thereof, (b) all income, royalties, damages and payments now and hereafter due and/or payable with respect thereto, including, without limitation, damages and payment for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world (all of the foregoing trademarks, service marks, trademark and service mark registrations, trade names, service names and applications, together with the items described in clauses (a)-(d), are sometimes hereinafter individually and/or collectively referred to as the "Trademarks"); and (B) the goodwill of Grantor's business, including, but not by way of limitation, such goodwill connected with and symbolized by the Trademarks. 4. RESTRICTIONS ON FUTURE ASSIGNMENTS. Grantor agrees that until the Obligations shall have been satisfied in full and the Financing Agreement shall have been terminated, Grantor will not, without Grantee's prior written consent, enter into any agreement relating to the Patents, Trademarks or Licenses (for example, a license agreement) and Grantor further agrees that it will not take any action, or permit any action to be taken by others subject to its control, including licensees, or fail to take any action which would affect the validity or enforcement of the rights transferred to Grantee under this Agreement. 5. NEW PATENTS, TRADEMARKS, AND LICENSES. Grantor represents and warrants that the Patents, Trademarks and Licenses listed on SCHEDULES A, B AND C, respectively, constitute all of the patents, service marks, trademarks, applications and licenses now owned by Grantor. If, before the Obligations shall have been satisfied in full, Grantor shall (i) obtain rights to any new patentable inventions, trademarks, trademark registrations, trade names, service marks, service mark registrations, service names, or licenses, or (ii) become entitled to the benefit of any patent, service mark or trademark application, service mark, service mark registration, trademark, trademark registration, or license renewal, or patent for any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto and Grantor shall give to Grantee prompt written notice thereof. Grantor hereby authorizes Grantee as attorney in fact to modify this Agreement by amending SCHEDULES A, B AND/OR C, as applicable, to include any future patents, patent applications, service marks, service mark registrations, service mark applications, service names, trademarks, trademark registrations, trademark applications, trade names and licenses which are Patents, Trademarks or Licenses, as applicable, under PARAGRAPHS 2 AND 3 above or under this PARAGRAPH 5, and to file or refile this Agreement with the United States Patent and Trademark Office. 6. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants to and agrees with Grantee that: (i) The Patents and Trademarks are subsisting and have not been adjudged invalid or unenforceable, in whole or in part; (ii) Each of the Patents and Trademarks is valid and enforceable; (iii) Grantor is the owner of the Patents and Trademarks and has the power and authority to make, and will continue to have authority to perform, this Agreement according to its terms; (iv) This Agreement does not violate and is not in contravention of any other agreement to which Grantor is a party or any judgment or decree by which Grantor is bound and does not require any consent under any other agreement to which Grantor is a party or by which Grantor is bound. Upon the occurrence of and during the continuance of an Event of Default, Grantor hereby authorizes the Commissioner of Patents and Trademarks to issue any and all Patents on said inventions and any and all certificates of registration on all Trademarks to Grantee as assignee of Grantor's entire interest; (v) There has been no prior sale, pledge, encumbrance, assignment or other transfer or disposition of any of the Patents, Trademarks or Licenses or any part thereof and the same are free from all liens, charges and encumbrances of any kind, including but not limited to licenses, shop rights and covenants not to sue third persons, other than Permitted Liens (as defined in the Financing Agreement); and (vi) The Licenses are valid and binding agreements enforceable according to their terms. Each of the Licenses is in full force and effect and has not been amended or abrogated and there is no default under any of the Licenses. 7. TERMS. The term of the security interests granted herein shall extend until the earlier of (i) the expiration of each of the respective Patents, Trademarks and Licenses assigned hereunder, or (ii) the Obligations have been paid in full and the Financing Agreement has been terminated. 8. CONTINGENT ASSIGNMENT. The Grantor has executed in blank and delivered to the Grantee an assignment of federally registered trademarks in substantially the form of EXHIBIT 1 hereto (the "Assignment of Trademarks") and an assignment of federally registered patents in substantially the form of Exhibit 2 hereto (the "Assignment of Patents"). The Grantor hereby authorizes the Grantee to complete as assignee and record with the United States Patent and Trademark Office the Assignment of Trademarks and the Assignment of Patents upon the occurrence and during the continuance of an Event of Default and the proper exercise of the Grantee's remedies under this Agreement. 9. DUTIES OF GRANTOR. Grantor shall have the duty to (i) prosecute diligently any patent application of the Patents made by it and any trademark or service mark application of the Trademarks made by it pending as of the date hereof or thereafter until the Obligations shall have been paid in full, (ii) make application on unpatented but patentable inventions and on trademarks and service marks, as appropriate to the extent the making of such application is consistent with past practices of Grantor and unless the officers of Grantor reasonably determine in their best business judgment that the application is not in the best interests of the Grantor, and (iii) preserve and maintain all of its rights in patent applications and patents of the Patents and in trademark applications, trademarks, trademark registrations, service mark applications, service marks, and service mark registrations of the Trademarks. Any expenses incurred in connection with such applications shall be borne by Grantor. Grantor shall not abandon any right to file a Patent application or Trademark application, or any pending Patent application, Trademark application, Patent, or Trademark without the consent of Grantee. 10. FINANCING STATEMENTS; DOCUMENTS. At the request of Grantee, Grantor will join with Grantee in executing one or more financing statements pursuant to the Ohio version of the Uniform Commercial Code in form satisfactory to Grantee and will pay the costs of filing and/or recording this Agreement and all financing, continuation and termination statements in all public offices where filing or recording is deemed necessary or desirable by Grantee. Grantor will execute and deliver to Grantee from time to time such supplemental assignments or other instruments, including, but not by way of limitation, additional assignments to be filed with the United States Patent and Trademark Office, as Grantee may require for the purpose of confirming Grantee's interest in the Patents, Trademarks and Licenses. 11. GRANTEE'S RIGHT TO SUE. Upon the occurrence of an Event of Default (as defined in the Financing Agreement), Grantee shall have the same rights, if any, as Grantor has, but shall in no way be obligated, to bring suit in its own name to enforce the Licenses and the Patents and Trademarks, and any licenses thereunder, and, if Grantee shall commence any such suit, Grantor shall, at the request of Grantee, do any and all lawful acts and execute any and all proper documents required by Grantee in aid of such enforcement and Grantor shall promptly, upon demand and as a part of the Obligations, reimburse and indemnify Grantee for all costs and expenses incurred by Grantee in the exercise of its rights under this PARAGRAPH 11. 12. WAIVERS. No course of dealing between Grantor and Grantee nor any failure to exercise nor any delay in exercising, on the part of Grantee, any right, power or privilege hereunder or under the Financing Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 13. SEVERABILITY. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 14. MODIFICATION. This Agreement cannot be altered, amended or modified in any way, except as specifically provided in PARAGRAPH 5 hereof or by a writing signed by the parties hereto. 15. CUMULATIVE REMEDIES; EFFECT ON FINANCING AGREEMENT. All of Grantee's rights and remedies with respect to the Patents, Trademarks and Licenses, whether established hereby or by the Financing Agreement or any other Loan Document, or by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Grantor acknowledges and agrees that this Agreement is not intended to limit or restrict in any way the rights and remedies of Grantee under Financing Agreement but rather is intended to facilitate the exercise of such rights and remedies. 16. BINDING EFFECT; BENEFITS. This Agreement shall be binding upon the Grantor and its respective successors and assigns, and shall inure to the benefit of Grantee, its successors and assigns. 17. GOVERNING LAW. This Agreement has been delivered and accepted in Cleveland, Ohio, and shall be governed by and construed in accordance with the local laws of the State of Ohio. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.] IN WITNESS WHEREOF, VARI-LITE, INC., by its duly authorized officer, has executed this Agreement as of the 29th day of December, 2000. Signed and acknowledged VARI-LITE, INC. in the presence of: ------------------------------ - ---------------------- Name: Jerome L. Trojan III Name: Title: Vice President-Finance and CFO ----------------- - ---------------------- Name: ----------------- STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) The foregoing Patent, Trademark and License Security Agreement was executed and acknowledged before me this 29th day of December, 2000, by Jerome L. Trojan III, the Vice President-Finance and CFO of VARI-LITE, INC., a Delaware corporation, on behalf of the corporation. ------------------------------ Notary Public Accepted at Cleveland, Ohio, as of December 29, 2000. FIRSTAR BANK, NATIONAL ASSOCIATION By: ------------------------------- Paul W. Patrick, Vice President SCHEDULE A (Patents) SCHEDULE B (Trademarks) SCHEDULE C (License Agreements) EXHIBIT 1 ASSIGNMENT OF TRADEMARKS AND SERVICE MARKS (U.S.) WHEREAS, Vari-Lite, Inc., a corporation organized and existing under the laws of the State of Delaware, having a place of business at 201 Regal Row, Dallas, Texas 75247 (the "Assignor"), has adopted and used and is using the trademarks (the "Trademarks") identified on the ANNEX hereto, and is the owner of the registrations of and pending registration applications for such Trademarks in the United States Patent and Trademark Office identified on such ANNEX; and WHEREAS, _________________________, a ___________ organized and existing under the laws of the State of ___________, having a place of business at _________________________________ (the "Assignee"), is desirous of acquiring the Trademarks and the registrations thereof and registration applications therefor; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the Assignor does hereby assign, sell and transfer unto the Assignee all right, title and interest in and to the Trademarks, together with (a) the registrations of and registration applications for the Trademarks, (b) the goodwill of the business symbolized by and associated with the Trademarks and the registrations thereof, and (c) the right to sue and recover for, and the right to profits or damages due or accrued arising out of or in connection with, any and all past, present or future infringements or dilution of or damage or injury to the Trademarks or the registrations thereof or such associated goodwill. This Assignment of Trademarks and Service Marks (U.S.) is intended to and shall take effect as a sealed instrument at such time as the Assignee shall complete this instrument by inserting its name in the second paragraph above and signing its acceptance of this Assignment of Trademarks and Service Marks (U.S.) below. IN WITNESS WHEREOF, the Assignor, by its duly authorized officer, has executed this assignment, as an instrument under seal, on this 29th day of December, 2000. VARI-LITE, INC. ----------------------------------- Name: Jerome L. Trojan III Title: Vice President-Finance and CFO The foregoing assignment of the Trademarks and the registration thereof and registration applications therefor by the Assignor to the Assignee is hereby accepted as of the _____ day of __________,_____. [Assignee] ---------------------------------------- By: ------------------------------------- Title: ---------------------------------- STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) On this the 29th day of December, 2000, before me appeared Jerome L. trojan III, the person who signed this instrument, who acknowledged that he is the Vice President-Finance and CFO of Vari-Lite, Inc. and that being duly authorized (s)he signed such instrument as a free act on behalf of Vari-Lite, Inc. ---------------------------------------- Notary Public [Seal] My commission expires: ------------------ ANNEX Trademark Registrations-- or United States Patent and Trademark Office Service Mark Registration No. Registration Date - ------------ ---------------- ----------------- [List chronologically in ascending numerical order] Trademark Registrations-- or United States Patent and Trademark Office Service Mark Serial No. Filing Date - ------------ ---------- ----------- [List chronologically in ascending numerical order] EXHIBIT 2 ASSIGNMENT OF PATENTS (U.S.) WHEREAS, VARI-LITE, INC., a corporation organized and existing under the laws of the State of Delaware, having a place of business at 201 Regal Row, Dallas, Texas 75247 (the "Assignor"), has adopted and used and is using the patents (the "Patents") identified on the ANNEX hereto, and is the owner of the registrations of and pending registration applications for such Patents in the United States Patent and Trademark Office identified on such ANNEX; and WHEREAS, _________________________, a ___________ organized and existing under the laws of the State of ___________, having a place of business at _________________________________ (the "Assignee"), is desirous of acquiring the Patents and the registrations thereof and registration applications therefor; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, the Assignor does hereby assign, sell and transfer unto the Assignee all right, title and interest in and to the Patents, together with (a) the registrations of and registration applications for the Patents, (b) the goodwill of the business symbolized by and associated with the Patents and the registrations thereof, and (c) the right to sue and recover for, and the right to profits or damages due or accrued arising out of or in connection with, any and all past, present or future infringements or dilution of or damage or injury to the Patents or the registrations thereof or such associated goodwill. This Assignment of Patents (U.S.) is intended to and shall take effect as a sealed instrument at such time as the Assignee shall complete this instrument by inserting its name in the second paragraph above and signing its acceptance of this Assignment of Patents (U.S.) below. IN WITNESS WHEREOF, the Assignor, by its duly authorized officer, has executed this assignment, as an instrument under seal, on this 29th day of December, 2000. VARI-LITE, INC. -------------------------- Name: Jerome L. Trojan III Title: Vice President-Finance and CFO The foregoing assignment of the Patents and the registration thereof and registration applications therefor by the Assignor to the Assignee is hereby accepted as of the _____ day of __________, 200__. [Assignee] ------------------------------ By: --------------------------- Title: ------------------------ STATE OF OHIO ) ) ss: COUNTY OF CUYAHOGA ) On this the 29th day of December, 2000, before me appeared Jerome L. Trojan III the person who signed this instrument, who acknowledged that he is the Vice President-Finance and CFO of Vari-Lite, Inc. and that being duly authorized he signed such instrument as a free act on behalf of Vari-Lite, Inc. ------------------------------------------- Notary Public [Seal] My commission expires: --------------------- ANNEX Registrations-- United States Patent and Trademark Office Patents Registration No. Registration Date - ------- ---------------- ----------------- [List chronologically in ascending numerical order] Registrations-- United States Patent and Trademark Office Patents Serial No. Filing Date - ------- ---------- ----------- [List chronologically in ascending numerical order] EX-10.55 6 a2034323zex-10_55.txt EXHIBIT 10.55 Vari-Lite Production Services Limited 20-22 Fairway Drive Greenford Middlesex UB6 8PW 09 November 2000 RE: CHATTEL MORTGAGE FACILITY OFFER 1). Assets will be as detailed in the original Henry Butcher valuation. All additions and deletions have been covered to our satisfaction in the final asset register appended to the master documentation. The Chattel Mortgage loan to Estimated Restricted Resale Value ratio is to be a maximum of 75% and the maximum loan value at inception (pound) 4,000,000. The asset schedule provided satisfies this condition at inception point. 2). Loan to Value Maintenance Clause @ 75%. 3). Maximum funding term of 48 months. 4). Pricing - Barclays Mercantile require a return of 2.50% over appropriate fixed or linked funds. Fixed treasury rate for 48 months is 6.55% for drawdown 31/10/00. Hence gross yield will be 9.05%. 5). Fees - An arrangement fee of 0.75% of the facility will be deducted from funds released on completion. The Henry Butcher Valuation fee of (pound) 13,125 plus Vat will be charged separately. Barclays Mercantile have settled this bill in the interim on behalf of Vari-Lite. This will represent the maximum level of fees required to complete the asset purchase and all accompanying paperwork. 6). Full payment Guarantee of Vari-Lite International Inc. in favour of Vari-Lite Production services Ltd. This document will be prepared by Barclays Mercantile internal Solicitors and will require sign off by either Vari-Lite's internal Solicitor or an external Solicitor within the state of Dallas, Texas. 7). Inter company Loan of(pound)2.125m provided by Vari-Lite Inc. to Vari-Lite Production Services Ltd to be postponed via standard BMBF documentation. 8). UK legal representatives for Vari-Lite will hold to the order of Barclays Mercantile the following documents : Bill of Sale for the schedule of assets Vari-Lite Inc. to Vari Lite Production Services Ltd. Appropriate wording from U.S. Attorney that the title chain is free of any charges or encumbrances. Appropriate wording from U.S. Attorney or U.S. Auditors to confirm that the new (pound) 4,000,000 Barclays Mercantile chattel mortgage will formally replace the current inter company lease charge and does not breach any US Banking covenants. 9). Barclays Mercantile will register a charge over the assets with Companies House via Chattel Mortgage documentation. 10). Barclays Mercantile will register an Assignment and Charge over sub-let income. This security will only be invoked on the occurrence of a default event which is continuing or unwaived. 11). Barclays Mercantile will lodge a Debenture charge over all additional fixed assets. This is intended to capture the stock of spare parts which is continually being exhausted and replenished. 12). Barclays Mercantile will require an audit of the sub-hire agreements to be carried out four monthly from inception. 13). Barclays Bank to be the sole UK clearing Bank. 14). Cross Default Clause between Barclays Bank and Barclays Mercantile. 15). Negative Pledge from Vari-Lite Production Services Limited. 16). New Capital Expenditure to be capped at (pound)350k for the year to 29/09/00 and at (pound)650k for the year to 29/09/01. Capital expenditure for subsequent years to be agreed in line with business performance, full financial review process and covenant compliance. 17). Ratcheted Net Tangible Asset covenant of(pound)500k per annum for financial year ends 29/09/01, 29/09/02 and 29/09/03. 18). Minimum Debt Service Ratio of 160% in Audited Accounts. 19). Confirmation from Jerry Trojan that ongoing technical support from VL Inc and access to any software will be uninhibited by the sale of assets to VLPS (UK) Ltd. 20). The process of Bar Coding the assets subject to the Barclays Mercantile chattel mortgage needs to be completed post deal inception and within a reasonable period of time. A sufficient level of completeness has been achieved in order to complete drawdown. 21). The premises at 20-22 Fairway Drive, Greenford are subject to a lease arrangement. Your Landlord has refused to provide a standard waiver in respect to the assets which are the subject of the securities and charges detailed within this Offer Letter. Any instance of non-payment of monies due in respect to the lease of these premises which is unremedied, shall be deemed a default event to the primary mortgage facility. 22). In respect of `21' above, an amount equivalent to one quarterly lease payment will be held to the order of Barclays Mercantile in a Barclays Bank `Re' account. This payment will be made to the landlord under our instruction to ensure the landlord has no right of distraint over the assets subject to this offer letter. Any interest which accrues on the balance held, will be credited to Vari-Lite Production Services Limited. The monies held will be released to Vari-Lite Production Services upon receipt of a satisfactorily completed waiver from the Landlord to the premises. OFFER LETTER DATED 09/11/00 TERMS AND CONDITIONS 1). LOAN TO VALUE MAINTENANCE CLAUSE The aggregate value of assets (as determined from time to time by Barclays Mercantile or, at the expense of the Borrower, by professional valuers acceptable to BM on such bases and assumptions as BM may in its discretion require) charged to BM under the chattel mortgage. Remedies to bring the loan value to 75% can be the introduction of additional unencumbered assets deemed suitable for purpose by BM, or a partial payment made to the chattel mortgage to reduce the balance outstanding. ERRP MEANS ESTIMATED RESTRICTED RESALE PRICE AS CONFIRMED WITHIN THE HENRY BUTCHER ASSET VALUATION DATED 13/04/00. 2). NEGATIVE PLEDGE The Borrower shall not create or agree to create or permit to subsist (other than in favour of Barclays Mercantile) any Encumbrance. 3). CAPITAL EXPENDITURE RESTRICTION No acquisition of capital assets in excess of the stated limits without the express consent of Barclays Mercantile. 4). RATCHETED NTA The adjusted net worth at any time during each period set out below shall not fall below the amount set out as follows: Completion to 29/09/01 (pound)2,125,000 30/09/01 to 29/09/02 (pound)2,625,000 39/09/02 to 29/09/03 (pound)3,125,000 Should profits be retained in the year to 29/09/00, then the above figures will be adjusted upwards. Base figure is any retained profits plus postponed loan of (pound)2,125,000 plus (pound)500,000 for each of the three subsequent years. ADJUSTED NET WORTH MEANS: A). THE TOTAL AMOUNT OF THE POSTPONED INTER-COMPANY LOANS B). EXCLUDE ANY NOTIONAL PROFIT OR GAIN DERIVED FROM ONE GROUP COMPANY TO ANOTHER C). DEDUCT ANY DIVIDEND OR DISTRIBUTION PAID OR PROPOSED TO BE PAID BY THE BORROWER SINCE COMPLETION DATE. D). ADD OR SUBTRACT ACCUMULATED PROFIT OR LOSS AFTER INTEREST AND PROVISION FOR TAX. E). TAKE ACCOUNT OF ANY SUBSCRIPTIONS IN CASH FOR SHARE CAPITAL OR REDEMPTIONS OF SHARE CAPITAL SINCE THE COMPLETION DATE. The base point for the Net Worth calculation is to be the amount of Paid Up or Issued Share Capital, plus the aggregate amount of reserves (including postponed loans) within the balance sheet of Vari-Lite Production Services Limited. 5). DEBT SERVICE RATIO The ratio of Cash Flow to Debt Service for each accounting period shown in the latest audited financial statements shall not fall below 160% calculated in accordance with generally accepted UK accounting principles consistently applied: CASH FLOW MEANS: THE CONSOLIDATED NET INCOME FIGURE AFTER: a). DEDUCTING AMOUNTS PAID IN RESPECT OF CORPORATION TAX (INCLUDING ADVANCE CORPORATION TAX) b). ADDING AMOUNTS CHARGED IN RESPECT OF DEPRECIATION c). ADDING AMOUNTS CHARGED IN RESPECT OF AMORTISATION OF KNOW-HOW AND OTHER INTANGIBLES d). DEDUCTING ANY INCREASE (OR ADDING ANY DECREASE) IN WORKING CAPITAL NOT INCLUDING CASH e). DEDUCTING AMOUNTS PAID IN RESPECT OF CAPITAL EXPENDITURE f). DEDUCTING AMOUNTS OF ALL DIVIDENDS OR DISTRIBUTION OF ANY KIND IN CASH PAID IN RESPECT OF THE SHARE CAPITAL. DEBT SERVICE MEANS: a). THE AGGREGATE AMOUNT OF INTEREST PAID OR CAPITALISED UNDER ALL BORROWINGS PLUS b). THE PRINCIPAL AMOUNT OF ALL BORROWINGS REPAID WITHIN THE RELEVANT TESTING PERIOD. WORKING CAPITAL MEANS: a). THE AGGREGATE OF ALL CURRENT ASSETS LESS THE AGGREGATE OF ALL CURRENT LIABILITIES (AFTER DEDUCTING THE AMOUNT OF ALL SHORT TERM BORROWINGS, OVERDRAFT AND THE CURRENT PORTION OF LONG TERM DEBT. OFFER LETTER DATED 09/11/00 TERMS AND CONDITIONS 6). TESTING OF FINANCIAL COVENANTS The Financial Covenants shall be tested by reference to the most recent audited accounts of Vari-Lite Production Services (UK) Limited. The first formal test will be undertaken on the Audited Accounts to year end 30/09/01. Notwithstanding the foregoing The Financial Covenants are to be satisfied at all times and the Borrower shall if so required by Barclays Mercantile from time to time provide evidence of such satisfaction acceptable to Barclays Mercantile. 7). AUDITED ACCOUNTS Copies of audited accounts, including a balance sheet and profit and loss, as soon as they are available and not later than 180 days from the end of its financial year end. 8). MANAGEMENT ACCOUNTS Unaudited quarterly management accounts, including a balance sheet and profit and loss, are required as soon as they are available and not more than 30 days after the relevant accounting period. 9). CHANGE OF BUSINESS No Relevant party will make any material change in the scope or nature of its activity. Our willingness to provide these facilities is upon the condition that, in our opinion, there is no adverse change in your financial circumstances before we purchase the equipment. As we play no part in selecting equipment for use in your business or appropriate suppliers, we recommend that you review the equipment you have selected to assess whether it needs to be and is Year 2000 compliant. If it is not, or if you are unsure, you should contact the supplier or manufacturer for any specific advice, warranties or maintenance and support you may consider appropriate. This offer is valid for a period of fourteen days from today; nevertheless we reserve the right to revise our terms should monetary, economic or taxation conditions change before we purchase the equipment. We welcome the opportunity to be of service to you. Please signify your acceptance of the above terms by signing and returning the enclosed additional copy of this letter. Yours sincerely David Roberts Branch Manager For and on behalf of Vari-Lite Production Services Limited ----------------------------- Authorised to sign EX-10.56 7 a2034323zex-10_56.txt EXHIBIT 10.56 MORTGAGE (FIXED) PARTIES This mortgage is made between the Borrower named below and BARCLAYS MERCANTILE BUSINESS FINANCE LIMITED ("the Lender" which expression shall include the Lender's successors and assigns and any company for which the Lender may be acting as agent) of Churchill Plaza, Churchill Way, Basingstoke, Hampshire RG21 7GP. DATE AND 1.1 The date of this mortgage is 23 November 2000 DEFINITIONS In this mortgage the following expressions have the meanings respectively set out against them:- "Borrower": VARI-LITE PRODUCTION SERVICES LIMITED of 20-22 Fairway Drive, Greenford, Middlesex UB6 8PW (registered England No. 2876045); "Goods": the goods, particulars of which are set out in the Schedule to this mortgage together with all component parts, accessories, improvements and renewals and all books, manuals, handbooks, technical data, drawings, schedules and other documentation and any amendments to them belonging to the Goods; "Loan": L4,000,000 or the balance for the time being outstanding; "Offer Letter": Offer Letter means the letter dated 9th November 2000 from the Lender to the Borrower offering a L4,000,000 Chattel Mortgage Facility; "Instalment Dates": the day of each month in each year in which the Loan is outstanding the first Instalment Date being 22 December 2000; "Instalments": 48 monthly payments of L99,486.22 payable on the Instalment Dates; "Base Rate": Finance House Base Rate as from time to time published in the Financial Times or other newspaper or, in default of such publication whilst any sum is outstanding under this mortgage, such alternative equivalent base rate as shall be agreed between the parties or, in default of agreement, settled by the President for the time being of the Institute of Chartered Accountants in England and Wales or his nominee acting as an expert; "Termination the balance of unpaid Instalments Sum": less a rebate of interest calculated by the Lender for early repayment; "Insurances": all policies and contracts of insurance taken out or to be taken out in respect of the Goods, including all claims and benefits arising under them and returns of premium; "Security any mortgage, charge, pledge, Lien or Interest": other encumbrance; "Total Loss": total loss whether actual or constructive or compromised or agreed or arranged with the insurers of the Goods; "Default any of the events stated in clause 9 Events": below; "Working Day": any day, except Saturdays, on which the clearing banks in the City of London are (or would be but for strike, lockout or other stoppage, affecting particular banks or banks generally) open during banking hours. INTERPRETATION 1.2 In this mortgage the masculine includes the feminine and the neuter, and the singular includes the plural. If the Borrower is two or more persons, that expression includes all such persons (and each of them) and their liability under this mortgage is joint and several. The rights and obligations of the Borrower hereunder are personal to the Borrower and shall not be capable of being assigned or transferred CONSTRUCTION 1.3 The marginal notes are for ease of reference only and do not affect the construction of this mortgage. Any reference in this deed to a statutory provision shall be construed as a reference to that provision as from time to time amended or re-enacted. The benefit of this deed and the security created hereby shall enure for the benefit of the Lender's successors and assigns and any company for which the Lender may be acting as agent. OFFER LETTER 1.4 The terms of the Offer Letter shall apply to this mortgage and shall be incorporated herein. In the event of any conflict or inconsistency as between the Offer Letter and this mortgage, the terms of the Offer Letter shall prevail. INSTALMENTS 2.1 The Borrower shall pay to the Lender on the Instalment Dates the Instalments which comprise repayments of principal and payments of interest. INTEREST 2.2. If the Borrower does not make payment of any Instalment on the relevant Instalment Date or any other sum payable under this mortgage within 10 days of the Lender's demand, the Borrower shall pay interest to the Lender if demanded by the Lender at the rate of Finance House Base Rate plus 5% per annum calculated on a day to day basis from the due date to the date of receipt by the Lender both before and after judgement. EARLY SETTLEMENT 2.3. As an alternative to payment of Instalments the Lender will accept the Termination Sum in full settlement of the Loan with interest. NON-WORKING DAY 2.4 Any amount payable to the Lender on a day which is not a Working Day will be payable on the preceding Working Day. SUMS SECURED 3. This mortgage secures to the Lender repayment of the Loan, the payment of interest on the Loan and the payment from time to time of all other sums due from the Borrower to the Lender on any account whatsoever. If a Default Event occurs all amounts secured by this mortgage shall become immediately due and payable. The Borrower covenants to pay all such monies to the Lender. COSTS 4. Any legal or other costs, charges or expenses payable by the Borrower to the Lender under the provisions of this mortgage are payable by the Borrower to the Lender with value added tax thereon (if any). Legal Costs are payable on a full indemnity basis as between solicitor and own client. WARRANTIES BY 5. The Borrower warrants to the Lender that the BORROWER Borrower:- (i) lawfully owns and is in possession of the Goods and that it and the Insurances are free of any Security Interest (other than any Security Interest created or subsisting with the written consent of the Lender); (ii) is not subject to any prohibition or restriction of its right or ability to enter into this mortgage; (iii) has power by its memorandum of association and has taken all corporate action necessary to enter into this mortgage; (iv) has not suffered or there have not occurred any Default Events which are unremedied. MORTGAGE 6. The Borrower hereby mortgages and charges with full title guarantee to the Lender all its right, title and interest in the Goods as security for all sums payable by the Borrower to the Lender, as referred to in clause 3 above. UNDERTAKINGS BY 7. The Borrower:- BORROWER (i) shall at its own expense keep the Goods in good working order and condition; (ii) shall not use or permit the Goods to be used in contravention of any statute or regulation or for any purpose for which they are not designed or reasonably suitable and shall take all reasonable steps to ensure that the use and operation of the Goods is by skilled personnel and is without risks to health and safety; (iii) shall not (except with the consent of the Lender) sell, transfer, demise, let on hire or otherwise part with possession of the Goods or create or allow to arise any Security Interest in the Goods; (iv) shall maintain all records, logs and other records required by the manufacturers of the the Goods; (v) shall replace any component, part or item of the Goods where necessary provided that such replacement is of at least equivalent value and condition when compared to the original; (vi) shall cause any alterations to the Goods that are from time to time required by law to be made at the Borrower's expense, but shall not otherwise alter the Goods otherwise than by way of improvement; (vii) shall notify the Lender within 24 hours following:- (a) demand of the whereabouts of the Goods; (b) any occurrence as a result of which the Goods are or are likely to become a Total Loss; (c) the occurrence of any of the Default Events referred to in clause 9(ii) to (viii) below inclusive; (viii) shall permit any person authorised by the Lender at all reasonable times upon at least 24 hours notice (unless a Default Event is continuing unremedied or unwaived in which case no notice will be required) to inspect the Goods and permit or procure the granting of permission for such person to enter any land or premises where the Goods may be situated; (ix) shall pay on demand to the Lender with interest all its costs and expenses incurred in:- (a) the advance of the Loan and the acceptance and registration of this mortgage; (b) the preservation of the Lender's security in the Goods; (c) the exercise by the Lender of any of its powers under this mortgage and in ascertaining the whereabouts and/or safekeeping of the Goods; (d) any legal proceedings instituted by the Lender under this mortgage. INSURANCES 8.1 The Insurances shall be effected and maintained by the Borrower at all times while any amount is secured by this mortgage and shall be endorsed with a note of the Lender's interest. RISKS INSURED 8.2 The Insurances shall be all insurable risks cover under policies, on terms, subject only to exclusions and/or an excess approved by the Lender and with insurers acceptable to the Lender. SUM INSURED 8.3 The Goods shall be insured for their market value as agreed by the parties or, failing agreement, as determined, at the expense of the Borrower, by a valuer acceptable to the parties. PREMIUMS 8.4 The Borrower shall pay punctually all premiums payable by the Borrower in respect of the Insurances and, on request, produce receipts or other proof of payment to the Lender. APPLICATION OF 8.5 The Lender may elect to require the Borrower to INSURANCE PROCEEDS apply any proceeds of the Insurances received by it in making good the loss, repairing the damage, or satisfying the liability in respect of which the claim was made or in satisfaction of any amount secured by this mortgage and pending such election such proceeds shall be held in trust for the Lender. INSURANCE 8.6 The Borrower shall not use and shall not allow the WARRANTIES Goods to be used other than in conformity with the terms of the Insurances, including any express or implied warranties, without the prior written consent of the insurers and without paying any extra premium required. LENDER MAY INSURE 8.7 If the Borrower fails to effect or maintain the Insurances, the Lender may effect such Insurances at the Borrower's expense to be reimbursed to the Lender on demand with interest. DEFAULT EVENTS 9. The following are the Default Events:- (i) the Borrower does not pay any sum of money secured by this mortgage within 10 days of the due date for payment (unless the Lender elects in its absolute discretion to accept late payment); (ii) the Borrower enters into or attempts to enter into a composition or arrangement with its creditors or any of them; (iii) a receiver or administrative receiver is appointed of the Borrower's assets or any of them or a meeting, whether formal or informal, is called of the Borrower's creditors or any of them; (iv) the petition for the appointment to the Borrower of an administrator is presented or the Borrower goes into liquidation, except for a voluntary liquidation for the purpose of amalgamation or reconstruction on terms previously approved by the Lender in writing; (v) the levy against the Goods of any distress or execution which is not paid out within 10 Working Days of written request so requiring from the Lender to the Borrower; (vi) any of the warranties in clause 5 above proves to be incorrect, inaccurate or misleading in any material respect; (vii) the Goods are a Total Loss; (viii) the Borrower is unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986; (ix) the Lender's Security is in the Lender's reasonable opinion in jeopardy in any material respect; (x) any company in the Barclays PLC group withdraws any facility or demands payment as a result of a default by the Borrower; (xi) the Borrower fails to comply with any of its obligations, covenants or undertakings contained in this deed (other than those relating to the payment of money) and such default (if in the opinion of the Lender it is capable of remedy) is not remedied to the Lender's satisfaction within 10 days after the occurrence of such failure. LENDER'S POWERS 10.1 On the occurrence of a Default Event the Lender may, at any time on the date of the occurrence or any subsequent date, without prejudice to any powers available to a Mortgagee by law, do any of the following by itself or by such agents as it thinks fit and without prior notice to the Borrower:- (i) take possession of the Goods severing them from any land or other goods (but subject to the rights of the hirer under any hire agreement), if necessary, the Borrower reimbursing the Lender any expense incurred or damage suffered on demand with interest; (ii) move the Goods to a safe place; (iii) discharge, settle or take or defend any proceedings in respect of any claims incurred in connection with the Goods or the Insurances and collect on the Insurances and give any good receipts required; (iv) pending sale, insure, maintain, repair, operate, hire out or otherwise use the Goods (but subject to the rights of the hirer under any hire agreement); (v) sell the Goods by public auction or private sale, without advertisement and at such place, at such time and on such terms as the Lender may determine; (vi) do all such other acts and things as may be considered to be necessary for any of the matters or powers aforesaid. Section 103 of the Law of Property Act 1925 shall not apply to this security or any sale made by virtue hereof. LENDER NOT LIABLE 10.2 The Lender shall not be answerable for any loss occasioned by sale by it of the Goods under this mortgage or any postponement of sale. LENDER'S RECEIPT 10.3 On any sale of the Goods the Lender's receipt for the purchase money shall effectively discharge the purchaser. The purchaser shall not be bound to enquire whether the Lender's power of sale has arisen or is exercisable and shall not be concerned as to how the proceeds of sale are applied. APPLICATION 10.4 All monies received by the Lender in respect of:- (i) sale of the Goods and/or (ii) proceeds of the Insurances which the Lender, in its sole discretion, elects not to release to the Borrower for application by it in accordance with clause 8.5 above; shall be applied as follows:- FIRST in payment or reimbursement to the Lender of all costs and expenses incurred by it in connection with this mortgage and the exercise of its powers hereunder; SECONDLY in payment of any accrued but unpaid interest in connection with this mortgage; THIRDLY in repayment or reduction of the Loan; FOURTHLY in payment of any surplus to the Borrower. ATTORNEY 11. The Borrower hereby irrevocably appoints the Lender as its attorney with full power to substitute any other person, for the Borrower and in the Borrower's name to sign, seal, deliver and otherwise perfect any deed, assurance or agreement and do anything which may be required for any purpose under or in connection with this mortgage. WAIVER 12. The Lender's rights and powers under this mortgage shall not be prejudiced or affected by delay or omission on the Lender's part. If the Lender, on occasion expressly or impliedly waives any of its rights or powers, such waiver shall not prevent the Lender from subsequently acting strictly in accordance with such rights and powers. FURTHER ASSURANCES 13. The Borrower shall at its own expense sign, seal, deliver and otherwise perfect any deed, assurance or agreement and do anything the Lender may require to perfect or protect the security constituted by this mortgage. NOTICES 14. Any notice served under this mortgage shall be sufficiently served if sent by pre-paid letter post to the respective addresses above (or such changed address as one party may notify to the other) and proof of dispatch shall be conclusive evidence of receipt by the addressee in due course of transmission. CONSOLIDATION 15. If the Lender has from the Borrower security over any other property of the Borrower, the Borrower may not redeem such security or the security constituted by this mortgage alone without the prior written consent of the Lender. Section 93 of the Law of Property Act 1925 (which restricts the consolidation of mortgages) shall not apply to the security constituted by this mortgage. LAW 16. This mortgage shall be governed by the laws of England. SEVERANCE 17. Each of the provisions of this deed is severable and distinct from the others and if at any time one or more of such provisions is or becomes invalid illegal or unenforceable, the validity legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. IN WITNESS of which this deed was executed and is delivered on and takes effect from the day and year first before written. SCHEDULE - THE GOODS -------------------- THE COMMON SEAL of the Borrower was affixed to this deed in the presence of:- or (where no company seal is affixed) Executed as a deed by the Borrower acting by:- Director Director/Secretary EX-10.57 8 a2034323zex-10_57.txt EXHIBIT 10.57 GUARANTEE & INDEMNITY - CROSS BORDER (ALL MONIES) Dated: 23 November 2000 In this deed:- "the guarantor" is VARI-LITE INTERNATIONAL INC. (a company having IRS identification number 75-2239444) of 201 Regal Row, Dallas, Texas, 75247 USA "the company" is BARCLAYS MERCANTILE BUSINESS FINANCE LIMITED (a company registered in England, company number 898129) whose registered office is at Churchill Plaza, Churchill Way, Basingstoke, Hampshire, RG21 7GP "the customer" is VARI-LITE PRODUCTION SERVICES LIMITED (a company registered in England, company number 2876045) of 20-22 Fairway Drive, Greenford, Middlesex UB6 8PW 1.1 In this deed the masculine includes the feminine and the neuter and the singular includes the plural and vice versa. 1.2 Where there are two or more guarantors for the same obligation (whether by this deed or otherwise) the liability of such guarantors shall be joint and several. 1.3 If more than one person is specified or referred to above as the customer, the word customer shall be construed in this deed as referring to and including each such person. 1.4 The headings are for ease of reference and do not affect the construction of this deed. 2.1 The guarantor unconditionally and irrevocably hereby undertakes to the company that the guarantor will within seven days of demand in writing made to the guarantor pay or discharge to the company all monies and liabilities which shall for the time being (and whether on or at any time after such demand) be due, owing or incurred to the company by the customer whether actually or contingently and whether solely or jointly with any other person and whether as principal or surety and including interest thereon, and in respect thereof to pay the legal and other costs and expenses of the company with value added tax (if any) thereon. 2.2 In addition to and without prejudice to clause 2.1 above, the guarantor unconditionally and irrevocably hereby undertakes to indemnify and keep the company indemnified against any loss or damages and the legal and other costs and expenses with value added tax (if any) thereon suffered or incurred by the company as a result of the failure of the customer to meet any of its liabilities or perform any of its obligations to the company guaranteed hereunder. 2.3 The maximum amount ultimately enforceable under this deed shall not exceed Four Million Pounds ((pound)4,000,000). 3.1 This deed shall not be considered as satisfied by any intermediate payment or satisfaction of the whole or any part of any sum or sums of money due, owing or incurred to the company, but shall be a continuing security and shall extend to cover any sum or sums of money which shall for the time being be comprised in the indebtedness of the customer to the company hereby secured. 3.2 The guarantee and indemnity comprised in this deed shall be binding as a continuing security on the guarantor until the date which is 30 days after the company shall have received from the guarantor (or the executor or administrator of a deceased guarantor) notice to discontinue it in respect of contracts that may be entered into between the customer and the company after such date of discontinuance, but, notwithstanding such discontinuance, the guarantor shall remain liable under this deed in respect of all contracts entered into between the customer and the company dated prior to such date of discontinuance until all obligations under or in respect of such contracts have been performed. 3.3 The guarantor undertakes to give the company notice in respect of any customer which is a subsidiary (as defined by Section 736 of the Companies Act 1985 or any amendment or re-enactment thereof) of the guarantor forthwith on such customer ceasing to be its subsidiary. 3.4 To be validly given any notice from the guarantor to the company must be in writing and addressed to the company at its registered address stated below, marked for the attention of the company secretary. 4. The liability hereunder of the guarantor shall be as a primary obligor (as between the guarantor and the company) and not merely as a surety and (without prejudice to the generality of the foregoing) shall not be impaired or discharged by reason of any time or other indulgence granted by the company to the customer or by reason of any arrangement entered into or composition agreed by the company modifying (by operation of law or otherwise) the rights and remedies of the company or of any omission on the part of the company to enforce any of its rights against the customer or by the withdrawal by the company of any facilities from the customer. 5. The company shall be at liberty without thereby affecting its rights under this deed at any time and from time to time, at its absolute discretion, to release, discharge, compound with or otherwise vary or agree to vary any other securities held or to be held by the company for the liabilities or obligations of the customer or the liability of the guarantor under this deed or to make any other arrangements with any one or more guarantor and no such release, discharge, composition, variation, agreement or arrangement shall prejudice or in any way affect the rights and remedies of the company against any other guarantor. 6. The guarantor shall rank in any insolvency in respect of any sum paid hereunder by it and in respect of any other rights which may accrue howsoever to it in respect of any sum so paid and be entitled to enforce the same only after all sums hereby secured have been paid. 7. Any security for the time being held by the guarantor from the customer in respect of this deed shall be held in trust for the company as security for the liability of the guarantor hereunder. 8. This deed shall be in addition to any other guarantee or other security for the customer which the company may now or hereafter hold. 9. For purposes of the liability of the guarantor under this deed every sum of money which may now be or which hereafter may become due or owing to the company by the customer or would have become so due or owing were it not for the appointment of an administrator, receiver, administrative receiver or liquidator of the business or assets of the customer or any part thereof or is deemed to become so due on such appointment shall be deemed to continue due and owing until actually paid to the company notwithstanding the intervening insolvency or winding up of the customer. 10. Any money received hereunder may be placed and kept to the credit of a suspense account for so long as the company thinks fit without any obligation in the meantime to apply the same or any part thereof in or towards discharge of any moneys or liabilities due, owing or incurred by the customer to it. Notwithstanding any such payment in the event of any proceedings in or analogous to bankruptcy, liquidation, composition or arrangement the company may prove for and agree to accept any dividend or composition in respect of the whole or any part of such money and liabilities in the same manner as if this deed had not been executed. 11.1 The execution of this deed by any body corporate named as guarantor shall constitute a warranty that the execution of and performance of this deed is within the powers of such body corporate and constitutes an enforceable liability of that body corporate. 11.2 No defect in the execution of this deed by any guarantor shall affect the liability of any other guarantor. 12. A certificate by the Secretary or other officer of the company as to the monies and liabilities for the time being due and not paid or discharged on first demand made by the company on the customer shall, in the absence of manifest error, be conclusive evidence against the guarantor and the customer in any legal proceedings. 13.1 If under any applicable law and whether pursuant to a judgement being made or registered against the guarantor or for any other reason, any payment under or in connection with this deed is made or falls to be satisfied in a currency (the "other currency") other than sterling, then to the extent that the payment (when converted into sterling at the rate of exchange on the date of payment or, if it is not practicable for the company to purchase sterling with the other currency on the date of payment, at the rate of exchange as soon thereafter as it is practicable for the company to do so or, in the case of the guarantor's liquidation, bankruptcy or analogous process at the rate of exchange on the latest date permitted by applicable law for the determination of liabilities in such liquidation, bankruptcy or analogous process) actually received by the company falls short of the amount due under the terms of this deed the guarantor shall, as a separate and independent obligation, indemnify and hold the company harmless against the amount of such shortfall. 13.2 For the purpose of this clause "rate of exchange" means the rate at which the company is able on the relevant date to purchase sterling with the other currency, and shall take into account any premium and other costs of exchange. 14. All payments hereunder shall be made without set-off or counter-claim and free and clear of and without deduction or withholding for or on account of any present or future taxes, levies, imposts, duties or other charges of any nature whatsoever. If the guarantor should be compelled by law to deduct or withhold such taxes, it shall pay such additional amounts to the company as may be necessary in order that the actual amount received by the company after deduction or withholding (and after deduction of an amount equal to any additional taxes or other charges required to be deducted or withheld as a consequence of the payment of such additional amount) shall equal the amount that would have been received if such deduction or withholding were not required. If the guarantor shall make any deduction or withholding from any amount paid hereunder, it shall upon request forthwith supply the company with official receipts or other evidence acceptable to the company establishing payment of such deducted or withheld amounts by the guarantor to the appropriate taxing or other authority. 15. Each provision in this deed shall be construed as a separate provision and, if part or the entirety of any provision is held by any court of competent jurisdiction to be unenforceable or unenforceable in respect of one or more of several customers, such unenforceability shall have no effect upon and shall not impair the validity, enforceability or legality of the remaining parts of such provision or of any other provision contained in this deed or its validity, enforceability or legality in respect of any other customer. 16.1 This deed shall be governed by and construed in accordance with the law of England. 16.2 The guarantor hereby submits to the non-exclusive jurisdiction of the High Court of Justice in London and, without prejudice to the generality of the foregoing, agrees that the company may take proceedings against the guarantor in any jurisdiction it considers fit. 16.3 The taking of proceedings in any one jurisdiction shall not preclude the taking of proceedings in any other jurisdiction whether concurrently or not. 16.4 The guarantor waives any objection which it may have now or at any time in the future to the taking of proceedings in any jurisdiction or that such proceedings are brought in an inconvenient forum. 17. The guarantor hereby appoint the customer to be the guarantor's agent to accept on the guarantor's behalf any demand under this deed or service of proceedings commenced in England and will at all times maintain an agent in England to accept service of demands and/or proceedings on the guarantor's behalf. IN WITNESS whereof this deed was entered into the day and year first before written. EITHER The Common Seal of Vari-Lite International Inc has been affixed to this deed in the presence of:- Director Secretary ----------------------------- Signature(s) confirmed by OR Signed by............................ and ................................. for and on behalf of Vari-Lite International Inc pursuant to a resolution of the Board of Directors (a certified copy of which is annexed hereto) I/we/each of us hereby acknowledge(s) receipt of a copy of the above guarantee. ............................. .............................. EX-21.1 9 a2034323zex-21_1.txt 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. Concert Production Lighting, Inc. Delaware Vari-Lite International, Inc. Woosch, Inc. Delaware Vari-Lite International, Inc. IGNITION! Creative Group, Inc. Delaware Vari-Lite International, Inc. Vari-Lite Europe Holdings, Ltd. United Kingdom Vari-Lite International, Inc. Vari-Lite Production Services, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. Theatre Projects Lighting Services, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. B. S. Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. Irideon, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. VLPS, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd. Vari-Lite Production Services Europe, NV Belgium Vari-Lite International, Inc. Vari-Lite Asia, Inc. Japan Vari-Lite International, Inc. Vari-Lite Production Services Hong Kong Limited Hong Kong Vari-Lite International, Inc. Vari-Lite Hong Kong, Ltd. Hong Kong Vari-Lite International, Inc.
EX-23.1 10 a2034323zex-23_1.txt EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-71823 of Vari-Lite International, Inc. on Form S-8 of our report dated December 12, 2000, (December 29, 2000, as to the fourth paragraphs of Notes E and Q) appearing in this Annual Report on Form 10-K of Vari-Lite International, Inc. for the year ended September 30, 2000. Dallas, Texas January 15, 2001 EX-27.1 11 a2034323zex-27_1.txt EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND 2000 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 2000 OF VARI-LITE INTERNATIONAL, INC. AS SET FORTH IN THIS FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 12-MOS SEP-30-1999 SEP-30-2000 OCT-01-1998 OCT-01-1999 SEP-30-1999 SEP-30-2000 1,969 4,315 0 0 13,776 13,109 (720) (740) 6,586 13,695 23,326 31,731 160,373 145,034 83,323 84,097 107,700 94,703 23,492 33,026 39,459 18,136 785 785 0 0 0 0 42,450 40,963 107,700 94,703 13,012 17,322 91,532 93,688 7,393 10,881 46,950 46,871 44,410 42,111 720 740 4,540 5,180 (4,368) (474) (1,725) (187) (2,643) (287) 0 0 0 0 0 0 (2,643) (287) (0.34) (0.04) (0.34) (0.04)
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