-----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, PRc5WpjDwRJnpw+CcGUwA+jaP+3QFAZiDUDK1OS8HDzvdv/eVWQQlOBOwYnyAYIU O0BH3m0sPCfvOxoQSGPUwA== 0001047469-97-000434.txt : 19971014 0001047469-97-000434.hdr.sgml : 19971014 ACCESSION NUMBER: 0001047469-97-000434 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19971010 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI LITE INTERNATIONAL INC CENTRAL INDEX KEY: 0001033491 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 752239444 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33559 FILM NUMBER: 97694147 BUSINESS ADDRESS: STREET 1: 201 REGAL ROW CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146301963 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997 REGISTRATION NO. 333-33559 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VARI-LITE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 3648 75-2239444 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) H. R. BRUTSCHE III PRESIDENT AND CHIEF EXECUTIVE OFFICER 201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: ALAN J. PERKINS JEFFREY A. CHAPMAN GARDERE & WYNNE, L.L.P. VINSON & ELKINS L.L.P. 1601 ELM STREET, SUITE 3000 2001 ROSS AVENUE, SUITE 3700 DALLAS, TEXAS 75201 DALLAS, TEXAS 75201 (214) 999-3000 (214) 220-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION DATED OCTOBER 10, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2,000,000 SHARES [LOGO] VARI-LITE INTERNATIONAL COMMON STOCK -------------- All of the 2,000,000 shares of common stock, par value $0.10 per share (the "Common Stock"), offered hereby are being sold by Vari-Lite International, Inc. (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $11.50 and $13.50 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "LITE." ------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS PRICE TO UNDERWRITING TO PUBLIC DISCOUNT(1) COMPANY(2) Per Share......................................... $ $ $ Total(3).......................................... $ $ $
(1) The Company and the Selling Stockholders (as hereinafter defined) have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses of $725,000, which are payable by the Company. (3) Certain stockholders of the Company (the "Selling Stockholders") have granted the Underwriters a 45-day option to purchase up to 300,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Selling Stockholders" and "Underwriting." ------------------- The Common Stock is offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them and subject to certain conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders, in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1997. A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. THE DATE OF THIS PROSPECTUS IS , 1997. Vari-Lite International, Inc. provides high technology, creativity and service to the world of entertainment production. Vari-Lite International twice has received Emmy-Registered Trademark- Awards for Outstanding Achievement in Engineering by the National Academy of Television Arts and Sciences for its contribution to television lighting. Since 1990 six Tony-Registered Trademark- Awards have been awarded to [Picture of the Company's products in use] designers using VARI*LITE-Registered Trademark- equipment on Broadway stages. Five Emmy-Registered Trademark- Awards have been awarded to designers using VARI*LITE-Registered Trademark- equipment on network television broadcasts. [Picture of [Picture of Emmy Award] Tony Award]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." [INSIDE GATE] [Picture of man at Artisan-Registered Trademark- console controlling lights.] Entertainment production is a global, [Picture from The Rolling Stones Voodoo multi-billion dollar industry. Lounge Tour] concert touring theatre television and film corporate events and an increasing variety of commercial and recreational environments. Vari-Lite International is in business concert touring to meet the demanding artistic, technical and logistic requirements of its clients in each of these markets and satisfy the expectations of an evermore discerning public.
[INSIDE COVER] In 1981, Vari-Lite International revolutionized television and film the professional entertainment lighting industry [Picture of stage of Academy by inventing the VARI*LITE-Registered Trademark- Award Telecast] The 63rd system, the first automated lighting system that Annual Academy Award Telecast allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. A global distribution network and an excellent reputation for service and reliability has led to the use of the VARI*LITE-Registered Trademark- system in virtually every form of entertainment lighting. corporate events [Picture of Whirlpool Product Launch] Whirlpool Product Launch theatre [Picture of stage of Show Boat production] Livent, Inc. brings Show Boat to Broadway [Continuation of picture from The Rolling Stones opera Voodoo Lounge Tour] [Picture of stage of "Trista and Isalde" production] "Trista and Isalde" The Los Angeles Opera "Voodoo Lounge Tour" The Rolling Stones
PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) REFLECTS THE REINCORPORATION ("REINCORPORATION") OF THE COMPANY AS A DELAWARE CORPORATION PURSUANT TO A MERGER OF VARI-LITE INTERNATIONAL, INC., A TEXAS CORPORATION ("VARI-LITE TEXAS"), INTO THE COMPANY, WHICH WILL BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING AND IN WHICH THE SHARES OF CLASS A AND CLASS B COMMON STOCK OF VARI-LITE TEXAS WILL BE CONVERTED INTO SHARES OF THE COMPANY'S COMMON STOCK ON A 3.76368-FOR-ONE BASIS AND (B) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION UNLESS SPECIFICALLY PROVIDED OTHERWISE. ALL REFERENCES TO THE COMPANY IN THIS PROSPECTUS REFER TO VARI-LITE INTERNATIONAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE. THE COMPANY The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring , theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its long-standing collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990 and have won five Emmy-Registered Trademark- Awards for network television broadcast lighting design. The Company won an Emmy-Registered Trademark- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Fleetwood Mac, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Garth Brooks, Mary Chapin Carpenter, Wynona Judd, Barbra Streisand, Diana Ross, Whitney Houston, Celine Dion, Sheryl Crow, Pearl Jam, Aerosmith, Bush and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, RAGTIME, SHOW BOAT, RENT, LORD OF THE DANCE, CAROUSEL, SMOKEY JOE'S CAFE, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE and OLIVER. 3 - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-Registered Trademark- Awards, Tony-Registered Trademark- Awards, Grammy Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, LATE NIGHT WITH CONAN O'BRIEN, VIBE, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies CONTACT, FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Microsoft, Compaq, IBM, Sony, Sprint, Nike, Reebok, Oldsmobile, Ford, Lincoln, BMW, Upjohn, Glaxo, Whirlpool and Gillette, among others. - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark-automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaires simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include (i) maintaining its commitment to innovation, (ii) expanding its worldwide distribution capabilities and (iii) continuing to offer value-added complementary services. The Company's predecessor, Vari-Lite Texas, was incorporated in 1988 in the State of Texas as a holding company to own Showco, Inc. ("Showco"), which began operations in 1970, and Vari-Lite, Inc. ("Vari-Lite"), which began operations in 1981. Immediately prior to the consummation of the Offering, the Company was reincorporated in the State of Delaware. The Company's principal executive offices are located at 201 Regal Row, Dallas, Texas 75247 and its telephone number is (214) 630-1963. 4 THE OFFERING Common Stock offered by the Company......... 2,000,000 shares Common Stock to be outstanding after the Offering................................... 7,800,003 shares(1) Use of Proceeds............................. The net proceeds will be used to repay indebtedness under the Company's Credit Agreement (as hereinafter defined). See "Use of Proceeds." Nasdaq National Market symbol............... "LITE"
- ------- (1) Excludes 547,400 shares of Common Stock issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants with an exercise price of $11.53 per share. See "Management--Employee Benefit Plans--Omnibus Plan" and "Shares Eligible for Future Sale." RISK FACTORS The risk factors that an investor should consider include, but are not limited to: (i) fluctuations in operating results and seasonality; (ii) ability to introduce new products; technological changes; (iii) reliance on intellectual property; (iv) capitalized litigation costs; (v) dependence on entertainment industry; (vi) competition; (vii) dependence on management; (viii) risks of acquisitions; (ix) foreign exchange risk; international trade risk; (x) dependence on key suppliers; (xi) dependence on manufacturing facility; (xii) control of the Company by existing stockholders; (xiii) lack of prior public market; possible volatility of stock price; determination of offering price; (xiv) effect of certain charter and by-law provisions; (xv) dilution; and (xvi) shares eligible for future sale. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED JUNE YEARS ENDED SEPTEMBER 30, 30, ----------------------------------------------------- ---------------------- 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- 1996 --------- ----------- (UNAUDITED) INCOME STATEMENT DATA: Revenue: Rental revenues........................... $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Products sales and service revenues....... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- ----------- --------- Total revenues.......................... 31,132 35,253 53,812 74,910 77,138 53,431 66,895 Gross profit................................ 19,088 20,645 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense................................... 13,343 13,170 19,181 28,163 30,077 22,230 24,855 Research and development expense............ 1,948 2,347 3,033 3,283 4,404 2,947 4,872 Operating income............................ 3,797 5,128 8,539 10,539 8,449 4,386 7,643 Interest expense (net)...................... 1,675 1,606 1,805 2,788 3,092 2,437 2,694 Income before extraordinary loss............ $ 1,349 $ 2,269 $ 4,334 $ 4,714 $ 3,119 $ 1,136 $ 2,956 Net income per share(1)..................... $ 0.23 $ 0.39 $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 Weighted average shares outstanding......... 5,801 5,773 5,772 5,814 5,912 5,928 5,819 PRO FORMA DATA(2): Income before extraordinary loss............ $ 4,258 $ 3,847 Net income per share........................ $ 0.54 $ 0.49 Weighted average shares outstanding......... 7,912 7,819 OTHER DATA: EBITDA(3)................................... $ 8,084 $ 10,230 $ 14,620 $ 19,161 $ 18,517 $ 11,928 $ 16,287 Net cash provided by operations............. 6,950 7,879 10,937 14,513 8,531 3,286 11,972 Net cash used in investing activities....... (5,443) (10,789) (18,924) (20,641) (12,432) (9,125) (20,389) Net cash provided by (used in) financing activities................................ (949) 2,094 9,355 7,307 2,564 3,061 7,634 Capital expenditures........................ 5,503 11,050 13,566 20,748 12,587 9,125 20,518
JUNE 30, 1997 ------------------------ AS ACTUAL ADJUSTED(4) --------- ------------- BALANCE SHEET DATA: Total assets.......................................................................... $ 92,614 $ 92,614 Total debt............................................................................ 45,361 22,836 Stockholders' equity.................................................................. 27,420 49,945
- ------- (1) Net income per share in fiscal 1994 includes an extraordinary loss from early extinguishment of debt of $0.13 per share. (2) Pro forma data gives effect to the Offering and the application of the proceeds therefrom to repay the Company's outstanding borrowings under the Credit Agreement at the beginning of the periods presented, assuming the repayment of $22.5 million of debt at weighted average interest rates of 8.69% and 8.83% for the fiscal year ended September 30, 1996 and the nine-month period ended June 30, 1997, respectively. See "Use of Proceeds." (3) EBITDA is calculated herein as income before income taxes plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. (4) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed Offering price of $12.50 per share and the anticipated application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "WILL," "COULD," "MAY" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO MANAGEMENT OR THE COMPANY, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF MANAGEMENT WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED IN THIS PROSPECTUS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. FLUCTUATIONS IN OPERATING RESULTS AND SEASONALITY The Company has experienced and is expected to continue to experience significant fluctuations in its quarterly operating results, both between different quarters within the same fiscal year and with respect to the same quarter between different fiscal years. These fluctuations arise from several factors, including the timing and dollar value of sales-type leases with customers, the dependence of the Company on concert tours, which are unpredictable in timing and duration, the introduction of new products and general economic conditions both domestically and internationally. Revenue from concert touring accounted for 48.5%, 38.2%, 33.0%, 31.0% and 30.9% of the Company's total revenue for the fiscal years ended September 30, 1994, 1995 and 1996 and for the nine months ended June 30, 1996 and 1997, respectively. The Company's expenses are based, in part, on its expectations as to future revenue and, as a result, net income for a given period could be disproportionately affected by a reduction in revenue. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in the winter months. Because of the possibilities of significant fluctuations, results for any quarter may not be indicative of results that may be achieved in a full year. While the Company expects to experience growth in revenue and profit, there can be no assurance that the Company's historical levels of revenue or profits will be sustained, particularly on a quarterly basis. Furthermore, there can be no assurance that the concert touring market on which the Company is dependent will continue to emphasize lighting as an important element of concert shows or that the Company's current or future products will continue to be used by concert touring customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Fluctuations and Seasonality." ABILITY TO INTRODUCE NEW PRODUCTS; TECHNOLOGICAL CHANGES The Company's past success has depended, and its future growth will depend, in large part, on its ability to enhance and develop new features for its existing products, to develop new technology, to introduce new products to meet changing customer requirements and to adapt to evolving technology. There can be no assurance that the Company will successfully develop such new technology, enhancements, features or new products or that the Company's products will continue to achieve market acceptance. Any delay in or failure to complete development of such technology, enhancements, features or new products, or any failure of the Company's products to continue to achieve market acceptance, could have a material adverse effect on the Company. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies uncompetitive or obsolete. In 1996, the Company introduced its Irideon-Registered Trademark- interior lighting product line, including the AR5-TM- luminaire and the Composer-Registered Trademark- control system. In 1998, the Company anticipates introducing its high brightness, multi-feature VL7-TM- spot luminaire. There can be no assurance that these products will gain market acceptance or satisfactory revenue growth or profitability. 7 RELIANCE ON INTELLECTUAL PROPERTY The Company generally relies on a combination of patent, trade secret, copyright and trademark laws, contracts and technical measures to establish and protect its proprietary rights in its products and technologies. However, the Company believes that such measures provide only limited protection, and there is no assurance that such measures will be adequate to prevent misappropriation. As of August 31, 1997, the Company had more than 25 United States patents, more than 10 applications for United States patents pending with respect to certain elements of its hardware and software and more than 20 United States registered trademarks. As of August 31, 1997, the Company had more than 110 foreign patents and more than 100 applications for foreign patents pending. The expiration dates of the Company's patents range from 2001 to 2014 for its United States patents and 1998 to 2020 for its foreign patents. There can be no assurance that any patents will be issued from the applications pending or, if patents are issued, that the claims allowed under such patents or other patents of the Company will be sufficiently broad to deter or prohibit others from marketing similar products. Revenues generated in countries in which the Company has limited or no patent protection may be adversely affected by sales of products by competitors utilizing the Company's United States patented technology. Although the Company takes precautions to protect its trade secrets, it may be possible for unauthorized third parties to copy portions of the Company's technology or to obtain and use information that the Company regards as proprietary. Furthermore, the laws of certain countries in which the Company's products are or may be distributed do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. In addition, there can be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. Any failure by the Company to protect its intellectual property, including any failure to prevail in the High End Lawsuit (as hereinafter defined), could have a material adverse effect on the Company. Significant and protracted litigation may be necessary to protect the Company's intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement. The Company believes that its products do not infringe any existing third-party proprietary rights; however, there can be no assurance that third-party claims alleging infringement will not be asserted against the Company in the future. If infringement is alleged, the Company could be required to discontinue the use of certain processes, to cease the manufacture, use and rental or sale of infringing products, to incur significant litigation damages, costs and expenses and to either develop non-infringing technology or obtain licenses to use the alleged infringing technology. There can be no assurance that the Company would be able to develop such alternative technologies or to obtain such licenses on terms commercially acceptable to the Company, if at all. Any infringement claims could have a material adverse effect on the Company. See "Business--Intellectual Property." CAPITALIZED LITIGATION COSTS The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit ($3.0 million as of August 31, 1997, and an estimated additional $1.1 million through consummation of the trial), a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. There can be no assurance that the Company will not be required to expense its costs relating to the High End Lawsuit. Furthermore, the defendant has asserted as a counterclaim that the Company has used the Company's patents to violate the antitrust laws. Although the Company believes such counterclaim is without merit and intends to vigorously contest such counterclaim, if the defendant were to receive a judgment in its favor with respect to such counterclaim, the Company could be held liable for the defendant's damages which could be substantial. See "Business--Legal Proceedings." 8 DEPENDENCE ON ENTERTAINMENT INDUSTRY Revenues from the concert touring, theatre, television and film markets accounted for 81.5%, 71.7%, 72.0%, 70.2% and 71.4%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and for the nine months ended June 30, 1996 and 1997, respectively. Generally, the amounts spent on entertainment by the general public are discretionary and may be adversely affected by general economic conditions. A significant reduction in the amounts spent on entertainment by the general public could have a material adverse effect on the Company. COMPETITION There is significant competition in many of the Company's markets, based primarily on product capability, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and customer service and support. In the Company's rental businesses, there are a number of competitors, particularly in the concert touring market. The Company competes in some cases with companies that are larger or have greater development, marketing and financial resources than the Company. There can be no assurance that the Company will be able to compete successfully in its markets or that competitive pressures will not have a material adverse effect on the Company. See "Business--Competition." DEPENDENCE ON MANAGEMENT The success of the Company's business is highly dependent upon the Company's President and Chief Executive Officer, H.R. Brutsche III, and the Company's Chief Science Officer, James M. Bornhorst. The loss of the services of either of such individuals could have a material adverse effect on the Company, and there can be no assurance that the Company will be able to retain the services of such individuals. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled managerial, operational, technical, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, assimilating and retaining the personnel it requires to develop, manufacture and market its products or expand its operations. See "Business--Employees" and "Management." RISKS OF ACQUISITIONS The Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. The Company currently has no agreements or understandings with respect to any potential acquisitions. FOREIGN EXCHANGE RISK; INTERNATIONAL TRADE RISK International revenues accounted for 37.0%, 46.9%, 49.3%, 48.4% and 48.7%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1996 and 1997, respectively. Although the Company has offices, distributors, dealers and sales representatives in more than 20 foreign countries, substantially all of the Company's foreign revenue was generated by its offices in England and Japan. In addition, the Company purchases certain components used in its products from manufacturers located in foreign countries. As a result, the Company's operations may be adversely affected by fluctuations of the value of the U.S. dollar against foreign currencies, political instability resulting in the disruption of trade with foreign countries, the imposition of additional regulations relating to imports or duties, taxes and other charges, longer payment cycles, difficulties in receivables collection and restrictions on the transfer of funds. The Company has historically hedged its currency fluctuation risk by borrowing in British 9 pounds sterling and Japanese yen under the Credit Agreement, a portion of which will be repaid with the net proceeds of the Offering. The Company may enter into additional transactions in the future to hedge such risks; however there can be no assurance that the Company will enter into such additional transactions or that any such transactions will effectively hedge the Company's currency risk. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DEPENDENCE ON KEY SUPPLIERS The Company has frequently worked in concert with certain of its key suppliers to design and develop new technologies which have been incorporated into its products and is dependent upon such suppliers for many important components used in the Company's automated lighting systems. The Company generally purchases these components pursuant to purchase orders and has no guaranteed supply arrangements with such suppliers. Some of these suppliers, including Optical Coating Laboratory, Inc. and Philips Lighting Company, are critical to the Company's continued uninterrupted production because they provide custom-designed components. Major delivery delays, significant changes in the prices and other purchase terms presently available to the Company or termination of the Company's relationship with any supplier of such components could materially adversely affect the Company. There can be no assurance that the Company's suppliers will continue to be able and willing to meet the Company's requirements for its key components, including the ability to purchase such components on a timely basis and at prices and on other purchase terms deemed reasonable by the Company. DEPENDENCE ON MANUFACTURING FACILITY The Company's principal manufacturing facility is located in Dallas, Texas. The Company is dependent on this facility and a disruption of the Company's manufacturing operations could have a material adverse effect on the Company. Such disruption could result from various factors, including human error or a natural disaster such as a tornado, fire or flood. CONTROL OF THE COMPANY BY EXISTING STOCKHOLDERS Upon consummation of the Offering, the Company's directors, officers and employees will beneficially own approximately 47% of the outstanding Common Stock. The holders of a majority of the outstanding Common Stock can elect all of the directors of the Company and can approve, delay or prevent certain fundamental corporate transactions, including mergers, consolidations and the sale of substantially all of the Company's assets. For so long as these stockholders own a significant percentage of the Common Stock, they will retain substantial influence over the affairs of the Company which may result in decisions that are not in the best interest of all stockholders of the Company. These factors, along with the factors described in "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws," may also have the effect of delaying or preventing a change in management or voting control of the Company. See "Principal Stockholders." LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that after the Offering an active public market for the Common Stock will develop or be sustained or that any market that may develop for the Common Stock will be liquid. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including quarterly variations in operating results and the liquidity of the market for the Common Stock. The Offering price for the Common Stock offered hereby was determined by negotiation between the Company and the Underwriters and may not be indicative of the prices at which the Common Stock will trade after the Offering. There can be no assurance that the market price of the Common Stock after the Offering will not fall below the Offering price. See "Underwriting." 10 EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS The Company's Certificate of Incorporation and By-Laws include provisions that may have the effect of discouraging proposals by third parties to acquire a controlling interest in the Company, which could deprive stockholders of the opportunity to consider an offer they would otherwise accept. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws." DILUTION Based on an assumed Offering price of $12.50 per share, new investors purchasing the Common Stock offered hereby will experience immediate dilution in net tangible book value of approximately $6.60 per share. In addition, the future exercise of stock options and warrants would result in further dilution. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have 7,800,003 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately 5,696,592 of such shares will have been held for more than one year as of the date of this Prospectus and may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subject to the volume, manner of sale and other limitations of Rule 144. The Company and certain stockholders who will collectively own 5,778,111 shares of Common Stock immediately following the Offering, and the holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed not to sell or otherwise transfer any shares of Common Stock for a period of 180 days after the effective date of the Offering without the prior written consent of A.G. Edwards & Sons, Inc. Upon completion of the Offering, the Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan (as hereinafter defined) and the ESOP (as hereinafter defined). See "Shares Eligible for Future Sale" and "Underwriting." 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company in the Offering, after deducting the estimated underwriting discount and estimated Offering expenses to be paid by the Company, are estimated to be $22.5 million, assuming an Offering price of $12.50 per share. The Company will not receive any proceeds from the sale of shares of Common Stock if the Underwriters exercise their over-allotment option. See "Underwriting." The Company intends to use the net proceeds of the Offering to repay indebtedness of approximately $22.5 million under the Company's multicurrency credit agreement, dated March 31, 1994, as amended (the "Credit Agreement"), which will allow the Company to reborrow funds under the Credit Agreement to purchase and construct additional rental equipment, to expand its domestic and international distribution channels, to pursue potential acquisitions of complementary businesses and for other general corporate purposes. The Company currently has no agreements or understandings with respect to potential acquisitions. As of August 31, 1997, approximately $42.5 million was outstanding under the Credit Agreement (based on currency exchange rates as of such date). The Credit Agreement provides for U.S. dollar denominated revolving credit and term credit facilities in the amount of $23.0 million and $20.5 million, respectively, British pounds sterling denominated revolving credit and term credit facilities in the amount of $4.9 million and $6.3 million (U.S. dollar equivalents as of August 31, 1997), respectively, and Japanese yen denominated revolving credit and term credit facilities in the amount of $6.0 million and $1.2 million (U.S. dollar equivalents as of August 31, 1997), respectively. The U.S. dollar denominated revolving credit facility bears interest at the prime rate of Brown Brothers Harriman & Co., agent under the Credit Agreement ("BBH"), plus 1.0% (9.50% as of August 31, 1997). The British pounds sterling denominated revolving credit facility bears interest at a rate determined by reference to the London interbank offered rate ("LIBOR") for deposits in British pounds sterling plus 2.0% (9.13% as of August 31, 1997). The Japanese yen denominated revolving credit facility bears interest at a rate determined by reference to the "Euroyen TIBOR" rate on the Bloomberg Financial Markets service at "TIBOEY" plus 3.5% (4.06% as of August 31, 1997). The U.S. dollar denominated term loan bears interest at either BBH's prime rate plus 1.0% (9.50% as of August 31, 1997) or a rate determined by reference to LIBOR for deposits in U.S. dollars plus 3.5% (9.31% as of August 31, 1997). The British pounds sterling denominated term loan bears interest at a rate determined by reference to LIBOR for deposits in British pounds sterling plus 2.0% (8.44% as of August 31, 1997). The Japanese yen denominated term loan bears interest at a rate determined by reference to the Tokyo interbank offered rate for deposits in Japanese yen plus 2.5% (3.15% as of August 31, 1997). Mandatory payments of principal are due and payable quarterly on each term loan and interest is payable monthly or on the last day of any eurocurrency interest period. The entire outstanding principal balance of the term loans and the revolving credit facilities is due and payable in full on June 30, 2001. Until April 1, 1998, a prepayment penalty equal to 0.25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risk; International Trade Risk" and Note E of "Notes to Consolidated Financial Statements." DIVIDEND POLICY The Company paid dividends of approximately $0.6 million with respect to each of the 1994, 1995, 1996 and 1997 fiscal years. The Company does not anticipate paying any other cash dividends on the Common Stock in the foreseeable future and anticipates that future earnings will be retained to finance operations and expansion. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon the Company's earnings levels, capital requirements and financial condition and such other factors the Board of Directors deems relevant. In addition, the Credit Agreement limits the amount of dividends that may be paid by the Company in any fiscal year to 30% of net income (as defined in the Credit Agreement) for such fiscal year. 12 DILUTION The net tangible book value attributable to the Company's Common Stock at June 30, 1997 was $23.5 million ($4.06 per share). "Net tangible book value per share" represents the Company's total tangible assets less total liabilities divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 2,000,000 shares of Common Stock to be sold by the Company in the Offering (at an assumed Offering price of $12.50 per share), and after deducting the estimated underwriting discount and expenses of the Offering to be paid by the Company, and the application of the net proceeds as set forth under "Use of Proceeds," the Company's net tangible book value as of June 30, 1997, would have been $46.1 million ($5.90 per share), representing an immediate increase of $1.84 in net tangible book value per share to existing stockholders and an immediate dilution of $6.60 in net tangible book value per share to new investors purchasing shares in the Offering. The following table illustrates this dilution per share of Common Stock: Assumed Offering price per share..................................... $ 12.50 Net tangible book value per share at June 30, 1997................. $ 4.06 Increase per share attributable to new investors................... 1.84 --------- Pro forma net tangible book value per share after the Offering....... 5.90 --------- Dilution of net tangible book value per share to new investors(1).... $ 6.60 --------- ---------
- ------- (1) Excludes 242,233 shares issuable upon exercise of warrants with an exercise price of $11.53 per share. To the extent any of these warrants are exercised, new investors would suffer further dilution. See "Shares Eligible for Future Sale." The following table sets forth, on a pro forma basis as of June 30, 1997, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company and the total cash consideration and average price per share paid to the Company (based upon an assumed Offering price of $12.50 per share for new investors):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- -------------------------- PRICE PER NUMBER(1) PERCENT AMOUNT PERCENT SHARE ------------ ----------- ------------- ----------- ----------- Existing stockholders................................. 5,800,003 74.4% $ 3,929,000 13.6% $ 0.68 New investors......................................... 2,000,000 25.6% 25,000,000 86.4% $ 12.50 ------------ ----- ------------- ----- 7,800,003 100.0% $ 28,929,000 100.0% ------------ ----- ------------- ----- ------------ ----- ------------- -----
- ------- (1) Excludes 547,400 shares issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants at an exercise price of $11.53 per share. To the extent any of these options or warrants are exercised, new investors would suffer further dilution. See "Management-- Employee Benefit Plans--Omnibus Plan" and "Shares Eligible for Future Sale." 13 CAPITALIZATION The following table sets forth the Company's capitalization at June 30, 1997 (a) on a historical basis and (b) as adjusted to give effect to the sale by the Company of 2,000,000 shares of Common Stock offered hereby at an assumed Offering price of $12.50 per share and the application of the net proceeds therefrom as described in "Use of Proceeds." The data set forth below should be read in conjunction with the other financial information presented elsewhere in this Prospectus.
JUNE 30, 1997 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt.............................. $ 7,768 $ 7,768 --------- ----------- --------- ----------- Long-term debt, net of current portion.................................................... $ 37,593 $ 15,068 Stockholders' equity(1): Preferred Stock, $0.10 par value; 10,000,000 shares authorized, no shares issued and outstanding; no shares issued and outstanding as adjusted............................. $ -- $ -- Common Stock, $0.10 par value; 40,000,000 shares authorized, 5,800,003 shares issued and outstanding; 7,800,003 shares issued and outstanding as adjusted...................... 580 780 Additional paid-in capital.............................................................. 3,162 25,487 Stockholder notes receivable............................................................ (186) (186) Stock purchase warrants................................................................. 600 600 Cumulative foreign currency translation adjustment...................................... 1,137 1,137 Retained earnings....................................................................... 22,127 22,127 --------- ----------- Total stockholders' equity............................................................ 27,420 49,945 --------- ----------- Total capitalization.................................................................. $ 72,781 $ 72,781 --------- ----------- --------- -----------
- ------- (1) Excludes exercise price to be paid in connection with the issuance of 547,400 shares of Common Stock issuable upon exercise of options to be granted effective concurrently with consummation of the Offering at an exercise price equal to the Offering price and 242,233 shares of Common Stock issuable upon exercise of warrants with an exercise price of $11.53 per share. 14 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected consolidated financial data for the Company as of and for each of the five fiscal years in the period ended September 30, 1996 and for the nine-month period ended June 30, 1997 have been derived from the audited consolidated financial statements of the Company. The selected consolidated financial data for the nine-month period ended June 30, 1996 have been derived from the unaudited consolidated financial statements of the Company which, in the opinion of the Company's management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for the nine-month period ended June 30, 1997 are not necessarily indicative of results that may be expected for the full year. This data should be read in conjunction with the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED JUNE YEARS ENDED SEPTEMBER 30, 30, ----------------------------------------------------- ------------------------ 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ----------- ----------- (UNAUDITED) INCOME STATEMENT DATA: Revenue: Rental revenues.............................. $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Products sales and service revenues.......... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- ----------- ----------- Total revenues............................. 31,132 35,253 53,812 74,910 77,138 53,431 66,895 Rental costs................................... 10,395 12,320 18,775 26,288 26,425 18,267 22,115 Product sales and service costs................ 1,649 2,288 4,284 6,637 7,783 5,601 7,410 --------- --------- --------- --------- --------- ----------- ----------- Gross profit................................... 19,088 20,645 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense.... 13,343 13,170 19,181 28,163 30,077 22,230 24,855 Research and development expense............... 1,948 2,347 3,033 3,283 4,404 2,947 4,872 --------- --------- --------- --------- --------- ----------- ----------- Operating income............................... 3,797 5,128 8,539 10,539 8,449 4,386 7,643 Interest expense (net)......................... 1,675 1,606 1,805 2,788 3,092 2,437 2,694 --------- --------- --------- --------- --------- ----------- ----------- Income before taxes and extraordinary loss..... 2,122 3,522 6,734 7,751 5,357 1,949 4,949 Income taxes................................... 773 1,253 2,400 3,037 2,238 813 1,993 --------- --------- --------- --------- --------- ----------- ----------- Income before extraordinary loss............... 1,349 2,269 4,334 4,714 3,119 1,136 2,956 Extraordinary loss from early extinguishment of debt (net of tax of $389).................... -- -- 756 -- -- -- -- --------- --------- --------- --------- --------- ----------- ----------- Net income..................................... $ 1,349 $ 2,269 $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 --------- --------- --------- --------- --------- ----------- ----------- --------- --------- --------- --------- --------- ----------- ----------- Net income per share........................... $ 0.23 $ 0.39 $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 Cash dividends per share(1).................... $ 0.05 $ 0.05 $ 0.05 $ 0.10 $ 0.11 $ 0.10 $ 0.10 Weighted average shares outstanding............ 5,801 5,773 5,772 5,814 5,912 5,928 5,819 OTHER DATA: EBITDA(2)...................................... $ 8,084 $ 10,230 $ 14,620 $ 19,161 $ 18,517 $ 11,928 $ 16,287 Net cash provided by operations................ 6,950 7,879 10,937 14,513 8,531 3,286 11,972 Net cash used in investing activities.......... (5,443) (10,789) (18,924) (20,641) (12,432) (9,125) (20,389) Net cash provided by (used in) financing activities................................... (949) 2,094 9,355 7,307 2,564 3,061 7,634 Capital expenditures........................... 5,503 11,050 13,566 20,748 12,587 9,125 20,518 SEPTEMBER 30, ----------------------------------------------------- JUNE 30, 1992 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- ----------- BALANCE SHEET DATA: Total assets................................... $ 30,607 $ 37,626 $ 57,223 $ 73,465 $ 78,581 $ 92,614 Total debt..................................... 13,574 16,648 27,497 34,870 37,349 45,361 Stockholders' equity........................... 11,085 13,302 16,631 21,329 24,538 27,420
- --------- (1) After the Offering, the Company does not anticipate paying any cash dividends on the Common Stock for the foreseeable future and anticipates that future earnings will be retained to finance future operations and expansion. See "Dividend Policy." (2) EBITDA is calculated herein as income before income taxes plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine-month periods ended June 30, 1996 and 1997. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. GENERAL The Company is a leading designer and manufacturer of automated lighting systems and products which are marketed exclusively through its domestic and international facilities and an independent distributor network. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems and other products and provides services to the entertainment industry, including markets such as concert touring, theatre, television and film and corporate events. In addition, the Company sells its Irideon-Registered Trademark- automated lighting systems for use in a wide variety of architectural applications. The Company's revenues are generated through the rental of lighting and sound systems and equipment, and through sales of related products and services and architectural lighting systems. Rental revenues include revenues generated from leases of VARI*LITE-Registered Trademark- automated lighting systems, concert sound systems and conventional lighting equipment. Revenues from product sales and services include custom stage construction and stage set design services, design and production management services and the sale of Irideon-Registered Trademark- automated lighting systems and related products. Rental revenues were $47.6 million, $65.9 million and $65.7 million or 88.5%, 87.9% and 85.2% of total revenues during fiscal 1994, 1995 and 1996, respectively. The majority of the Company's rental revenues are earned from the rental of VARI*LITE-Registered Trademark- automated lighting systems, with the remainder from the rental of concert sound systems and conventional lighting equipment. The Company's rental revenues are recorded as earned over the term of each contract except for revenues from sales-type leases which are recorded and typically paid at the inception of the lease. Sales-type leases are long-term leases for the Company's VARI*LITE-Registered Trademark- automated lighting systems and are accounted for as sales for financial accounting purposes. Revenues from sales-type leases were $4.4 million, $9.9 million and $4.5 million during fiscal 1994, 1995 and 1996, respectively. Because sales-type lease revenues are recorded in their entirety at the inception of the lease, wide variations in revenues and earnings in any given quarter can occur. Rental costs consist of direct costs of maintaining, supporting and delivering the rental equipment and the depreciation costs of the capital expenditures incurred to manufacture or purchase the rental equipment. The Company depreciates rental equipment over periods of five to ten years. The direct costs associated with sales-type leases include the net book value of the equipment rented which is expensed in its entirety at the inception of the lease. The Company generates sales revenue from its custom stage construction and stage set design services, design and production management services to corporations and business associations for conventions, business meetings and special events and sales of Irideon-Registered Trademark- automated lighting systems. The Company first introduced its Irideon-Registered Trademark- lighting system in 1993 and revenues from the Irideon-Registered Trademark- product line have increased from $0.8 million in fiscal 1994 to $2.6 million in fiscal 1996, and $3.3 million for nine-month period ended June 30, 1997. During fiscal 1994, 1995 and 1996, and for the nine-month period ended June 30,1997, the Company's Irideon-Registered Trademark- product line experienced operating losses of $0.1 million, $0.9 million, $1.2 million and $0.9 million, respectively, due to start-up costs. To date, the gross margin percentage of Irideon-Registered Trademark- products has been lower than those of the Company's rental business. Although the gross margin percentage of Irideon-Registered Trademark- products is expected to improve, it is expected to remain below that of the Company's rental business. 16 The following table reflects the percentages of total revenues by market:
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Concert Touring............................................... 48.5% 38.2% 33.0% 31.0% 30.9% Theatre....................................................... 19.3 20.6 22.7 20.9 25.1 Television and Film........................................... 13.7 12.9 16.3 18.3 15.4 Corporate Events.............................................. 11.1 14.0 12.2 13.9 12.8 Other......................................................... 7.4 14.3 15.8 15.9 15.8 --------- --------- --------- --------- --------- Total Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Although the Company expects revenues earned from concert touring (primarily rental revenues) to continue to represent a significant percentage of the Company's total revenues, during the past three fiscal years, concert touring revenues have decreased as a percentage of the Company's total revenues due to an increase in rental revenues generated from the Company's other customer markets. The Company has experienced fluctuations in its concert touring revenues because of the unpredictable nature of the timing and duration of such tours and expects such fluctuations to continue in the future. The following table reflects the Company's geographic region revenues as a percentage of total revenues (see Note J of the "Notes to Consolidated Financial Statements"):
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- North America................................................. 63.0% 53.1% 50.7% 51.6% 51.3% Europe........................................................ 23.7 33.8 34.5 34.3 34.7 Asia.......................................................... 13.3 13.1 14.8 14.1 14.0 --------- --------- --------- --------- --------- Total Revenues.............................................. 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The majority of European and Asian revenues are denominated in British pounds sterling and Japanese yen, respectively. The increase in European revenues in fiscal 1995 primarily resulted from the VLEH acquisition (as hereinafter defined) for approximately $6.0 million on March 31, 1994. The acquired companies provided lighting services and custom stage construction and stage set design services and included the Company's London, England VARI*LITE-Registered Trademark- distributor. The VLEH acquisition was accounted for by the Company using the purchase method of accounting. In addition to London, the Company has offices in Tokyo, Hong Kong and Madrid. The Company anticipates that foreign revenues will remain a significant part of the Company's total revenues as the demand for entertainment in foreign markets continues to increase. Fluctuations in foreign currencies have impacted, and will continue to impact, the Company's consolidated results of operations due to the translation of foreign currencies into U.S. dollars. The Company maintains foreign currency borrowings to act as an economic hedge against fluctuations in British pounds sterling and Japanese yen. See "Risk Factors--Foreign Exchange Risk; International Trade Risk" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 17 RESULTS OF OPERATIONS The following table sets forth the percentages of total revenues represented by certain income statement data and other data for the indicated periods:
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Rental revenues....................................................... 88.5% 87.9% 85.2% 84.9% 84.0% Product sales and service revenues.................................... 11.5 12.1 14.8 15.1 16.0 --------- --------- --------- --------- --------- Total revenues...................................................... 100.0 100.0 100.0 100.0 100.0 Rental costs.......................................................... 34.9 35.1 34.3 34.2 33.1 Product sales and service costs....................................... 8.0 8.9 10.1 10.5 11.0 --------- --------- --------- --------- --------- Gross margin.......................................................... 57.1 56.0 55.6 55.3 55.9 Selling, general and administrative expense........................... 35.6 37.5 39.0 41.6 37.2 Research and development expense...................................... 5.6 4.4 5.7 5.5 7.3 --------- --------- --------- --------- --------- Operating income...................................................... 15.9 14.1 10.9 8.2 11.4 Interest expense (net)................................................ 3.4 3.7 4.0 4.6 4.0 --------- --------- --------- --------- --------- Income before taxes and extraordinary loss............................ 12.5 10.4 6.9 3.6 7.4 Incomes taxes......................................................... 4.5 4.1 2.9 1.5 3.0 --------- --------- --------- --------- --------- Income before extraordinary loss...................................... 8.0 6.3 4.0 2.1 4.4 Extraordinary loss.................................................... 1.4 -- -- -- -- --------- --------- --------- --------- --------- Net income............................................................ 6.6% 6.3% 4.0% 2.1% 4.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER DATA: Rental revenues....................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Rental costs.......................................................... 39.4 39.9 40.2 40.2 39.3 --------- --------- --------- --------- --------- Rental gross margin................................................... 60.6% 60.1% 59.8% 59.8% 60.7% Product sales and service revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% Product sales and service costs....................................... 69.2 73.4 68.3 69.6 69.3 --------- --------- --------- --------- --------- Product sales and service gross margin................................ 30.8% 26.6% 31.7% 30.4% 30.7% EBITDA................................................................ 27.2% 25.6% 24.0% 22.3% 24.3%
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996 REVENUES. Total revenues increased 25.2%, or $13.5 million, to $66.9 million in the nine-month period ended June 30, 1997, compared to $53.4 million in the nine-month period ended June 30, 1996. The revenue increase was attributable primarily to the factors set forth below. Rental revenues increased 23.8%, or $10.8 million, to $56.2 million in the nine-month period ended June 30, 1997, compared to $45.4 million in the nine-month period ended June 30, 1996. This increase was primarily the result of an overall increase in concert touring revenues due to an improved concert touring market during the nine-month period ended June 30, 1997 compared to the nine-month period ended June 30, 1996. As a result, the Company experienced increased rental revenues from both automated lighting systems and sound systems, as well as from other related products and services. Rental revenues from sales-type leases accounted for approximately 34.1%, or $3.7 million, of the increase in rental revenues in the nine-month period ended June 30, 1997, compared with the nine-month period ended June 30, 1996. The increase in sales-type lease revenues was primarily due to significant leases with a new theatrical production and an amusement park. 18 Product sales and service revenues increased 32.9%, or $2.7 million, to $10.7 million in the nine-month period ended June 30, 1997, compared to $8.0 million in the nine-month period ended June 30, 1996. This increase was primarily due to sales of the Company's Irideon-Registered Trademark- automated lighting products which increased 123.2%, or $1.8 million, to $3.3 million in the nine-month period ended June 30, 1997, compared to $1.5 million in the nine-month period ended June 30, 1996. The remainder of the increase was primarily attributable to the increase in revenues from stage construction services as a result of increased concert touring activity. RENTAL COSTS. Rental costs increased 21.1%, or $3.8 million, to $22.1 million in the nine-month period ended June 30, 1997, compared to $18.3 million in the nine-month period ended June 30, 1996. Rental costs as a percentage of rental revenues decreased to 39.3% in the nine-month period ended June 30, 1997, from 40.2% in the nine-month period ended June 30, 1996. The decrease in rental costs as a percentage of total rental revenues was primarily due to higher utilization of the Company's rental equipment and increased leverage of fixed costs during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. Also contributing to this decrease was a decrease in sales-type lease costs as a percentage of sales-type lease rental revenues in the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. The decrease in sales-type lease costs was due to the leasing of older equipment during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 32.3%, or $1.8 million, to $7.4 million in the nine-month period ended June 30, 1997, compared to $5.6 million in the nine-month period ended June 30, 1996. Product sales and service costs as a percentage of product sales and service revenues decreased to 69.3% in the nine-month period ended June 30, 1997, from 69.6% in the nine-month period ended June 30, 1996. The decrease in product sales and service costs as a percentage of the related revenues was primarily due to the Irideon-Registered Trademark- product line, which experienced improved production efficiencies and an increase in direct sales. Partially offsetting this decrease was an increase in product sales and service costs for the Company's custom stage construction business that was subcontracted to others by the Company during the 1997 period, compared to the 1996 period. Product sales and service costs associated with subcontracted services are generally higher than costs associated with services provided directly by the Company. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 11.8%, or $2.7 million, to $24.9 million in the nine-month period ended June 30, 1997, compared to $22.2 million in the nine-month period ended June 30, 1996. This increase resulted primarily from payroll and related costs to support the Company's continued growth. This expense as a percentage of total revenues decreased to 37.2% in the nine-month period ended June 30, 1997, from 41.6% in the nine-month period ended June 30, 1996, due to costs incurred during fiscal year 1996 resulting from increases in personnel and improvements in information systems in anticipation of growth which occurred in fiscal 1997. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 65.3%, or $2.0 million, to $4.9 million in the nine-month period ended June 30, 1997, compared to $2.9 million in the nine-month period ended June 30, 1996. This expense as a percentage of total revenues increased to 7.3% in the nine-month period ended June 30, 1997, from 5.5% in the nine-month period ended June 30, 1996. These increases were primarily the result of an increase in the employee-related costs associated with adding research and development engineers during fiscal 1996 and the nine-month period ended June 30, 1997. INTEREST EXPENSE. Interest expense increased 10.5%, or $0.3 million, to $2.7 million in the nine-month period ended June 30, 1997, compared to $2.4 million in the nine-month period ended June 30, 1996. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures. INCOME TAXES. Effective tax rates in the nine-month periods ended June 30, 1997 and 1996 were 40.3% and 41.7%, respectively. 19 FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 REVENUES. Total revenues increased 3.0%, or $2.2 million, to $77.1 million in fiscal 1996, compared to $74.9 million in fiscal 1995. The revenue increase was attributable primarily to the factors set forth below. Rental revenues decreased $0.2 million to $65.7 million in fiscal 1996, compared to $65.9 million in fiscal 1995. This decrease was primarily the result of a 54.2%, or $5.4 million, decrease in rental revenues from sales-type leases, which decreased to $4.5 million in fiscal 1996, compared to $9.9 million in fiscal 1995, primarily due to large, one-time sales-type leases to one major casino and to several major cloned touring theatrical productions in fiscal 1995. Additionally, the Company experienced an overall decrease in concert touring revenues in fiscal 1996 as a result of a downturn in the concert touring market compared with fiscal 1995. These decreases were offset by increased rental revenues earned from the Company's VARI*LITE-Registered Trademark- automated lighting systems as more of these products were available for rental as a result of fiscal 1995 capital expenditures, and an increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 26.0%, or $2.4 million, to $11.4 million in fiscal 1996, compared to $9.0 million in fiscal 1995. Product sales and service revenues increased as a percentage of total revenues to 14.8% in fiscal 1996, from 12.1% in fiscal 1995. This increase in revenue was primarily due to sales of Irideon-Registered Trademark- automated lighting products which increased 180.9%, or $1.7 million, to $2.6 million in fiscal 1996, compared to $0.9 million in fiscal 1995. RENTAL COSTS. Rental costs increased 0.5%, or $0.1 million, to $26.4 million in fiscal 1996, compared to $26.3 million in fiscal 1995. Rental costs as a percentage of rental revenues increased to 40.2% in fiscal 1996, from 39.9% in fiscal 1995. This increase was primarily the result of increased sales-type lease costs as a percentage of sales-type lease rental revenues in fiscal 1996, compared to fiscal 1995, due to the leasing of newer equipment during fiscal 1996, compared to fiscal 1995. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 17.3%, or $1.2 million, to $7.8 million in fiscal 1996 compared to $6.6 million in fiscal 1995. Product sales and service costs as a percentage of product sales and service revenues decreased from 73.4% in fiscal 1995 to 68.3% in fiscal 1996. The decrease in these costs as a percentage of their related revenues was primarily the result of operating improvements in the Company's custom stage construction business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 6.8%, or $1.9 million, to $30.1 million in fiscal 1996, compared to $28.2 million in fiscal 1995. This expense as a percentage of total revenues increased to 39.0% in fiscal 1996 from 37.5% in fiscal 1995. These increases primarily resulted from increased payroll and related costs and depreciation expense associated with increases in personnel and improvements in information systems necessitated by the Company's continued growth. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 34.1%, or $1.1 million, to $4.4 million in fiscal 1996, compared to $3.3 million in fiscal 1995. This expense as a percentage of total revenues increased to 5.7% in fiscal 1996, from 4.4% in fiscal 1995. These increases were primarily the result of an increase in the employee-related costs associated with adding 16 research and development engineers during fiscal 1996. INTEREST EXPENSE. Interest expense increased 10.9%, or $0.3 million, to $3.1 million in fiscal 1996, compared to $2.8 million in fiscal 1995. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures in fiscal 1995 and 1996. INCOME TAXES. Effective tax rates in fiscal 1996 and 1995 were 41.7% and 39.2%, respectively. FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 REVENUES. Total revenues increased 39.2%, or $21.1 million, to $74.9 million in fiscal 1995, compared to $53.8 million in fiscal 1994. Approximately 56.2% of the growth in total revenues, or $11.9 million, was attributable to revenues generated from Vari-Lite Europe Holdings Limited ("VLEH"), the Company's London, England based subsidiary which was formed to acquire three companies on March 31, 1994 (the "VLEH acquisition"). As a result, only six months of VLEH's operations were included in fiscal 1994. Also during fiscal 20 1995, the Company earned $8.9 million, or approximately 11.9% of total revenues, from the rental of automated lighting and sound systems and other lighting products and services used on the Rolling Stones Voodoo Lounge tour. Rental revenues increased 38.3%, or $18.3 million, to $65.9 million in fiscal 1995, compared to $47.6 million in fiscal 1994. Approximately 48.1% of the growth in rental revenues, or $8.8 million, was attributable to an increase in revenues from the VLEH acquisition. Rental revenues from sales-type leases accounted for approximately 30.0%, or $5.5 million, of the increase in rental revenues from fiscal 1994 to fiscal 1995. The increase in sales-type lease revenues was primarily due to one major casino installation and an increase in the cloning of several major touring theatrical productions in fiscal 1995. The remainder of the increase in rental revenues was primarily due to revenues earned from the Rolling Stones Voodoo Lounge tour and an overall increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 46.2%, or $2.8 million, to $9.0 million in fiscal 1995, compared to $6.2 million in fiscal 1994. Product sales and service revenues increased as a percentage of total revenues to 12.1% in fiscal 1995, from 11.5% in fiscal 1994. These increases were primarily attributable to the VLEH acquisition. RENTAL COSTS. Rental costs increased 40.0%, or $7.5 million, to $26.3 million in fiscal 1995, compared to $18.8 million in fiscal 1994. Rental costs as a percentage of rental revenues increased to 39.9% in fiscal 1995, from 39.4% in fiscal 1994. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 54.9%, or $2.3 million, to $6.6 million in fiscal 1995, compared to $4.3 million in fiscal 1994. Product sales and service costs as a percentage of product sales and service revenues increased to 73.4% in fiscal 1995 from to 69.2% in fiscal 1994. These increases were primarily the result of higher than anticipated costs to construct custom stages and design stage sets for customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 46.8%, or $9.0 million, to $28.2 million in fiscal 1995, compared to $19.2 million in fiscal 1994. This expense as a percentage of total revenues increased to 37.5% in fiscal 1995 from 35.6% in fiscal 1994. These increases were partially due to the non-recurring costs in fiscal 1995 associated with the VLEH acquisition and an increase in consulting and employee benefit expenses in fiscal 1995 as a result of the Company's initiatives to improve its human resource and process management. During fiscal 1995, the Company established the ESOP and Equivalence Plan (as hereinafter defined) and accrued contributions to them of an aggregate of $0.8 million. These increases were also partially due to unusually high design modification costs in fiscal 1995 to improve performance of certain rental equipment and costs to make certain VARI*LITE-Registered Trademark- products compliant with international safety regulations. The remainder of the increases in selling, general and administrative expense resulted primarily from payroll and related costs in fiscal 1995 to support continued growth. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 8.2%, or $0.3 million, to $3.3 million in fiscal 1995, compared to $3.0 million in fiscal 1994. This increase was primarily attributable to costs incurred during fiscal 1995 in connection with the development of the Company's Irideon-Registered Trademark- products. This expense as a percentage of revenues decreased to 4.4% in fiscal 1995, from 5.6% in fiscal 1994. INTEREST EXPENSE. Interest expense increased 54.5%, or $1.0 million, to $2.8 million in fiscal 1995, compared to $1.8 million in fiscal 1994. This increase was attributable to additional long-term borrowings incurred by the Company to fund the VLEH acquisition and other capital expenditures primarily associated with an increase in rental assets. INCOME TAXES. Effective tax rates in fiscal 1995 and 1994 were 39.2% and 35.6%, respectively. The increase in the effective tax rate in fiscal 1995 was primarily due to increased earnings from the Company's subsidiary in Japan, which are taxed at a higher rate than the Company's other earnings, and increased earnings in certain states in which the Company is subject to state income tax. EXTRAORDINARY LOSS. During fiscal 1994, the Company entered into the Credit Agreement, the proceeds of which were used to refinance outstanding indebtedness under then existing credit facilities, to fund the VLEH 21 acquisition and to build rental equipment. The Company incurred prepayment penalties, net of taxes, of $0.8 million relating to the early extinguishment of the existing debt. See "--Liquidity and Capital Resources." QUARTERLY FLUCTUATIONS AND SEASONALITY The following table sets forth certain income statement data and EBITDA for each of the Company's last 15 quarters, which were derived from unaudited financial statements of the Company. In the opinion of the Company's management, this income statement data contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.
QUARTERS ENDED -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ FISCAL YEAR ----------- (IN THOUSANDS) Fiscal 1994 Total revenues.................................... $ 9,778 $ 9,591 $ 15,160 $ 19,283 $ 53,812 EBITDA............................................ 2,659 2,025 3,720 6,216 14,620 Operating income.................................. 1,321 633 2,019 4,566 8,539 Fiscal 1995 Total revenues.................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 $ 74,910 EBITDA............................................ 6,224 4,027 4,495 4,415 19,161 Operating income.................................. 4,267 1,951 2,284 2,037 10,539 Fiscal 1996 Total revenues.................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 $ 77,138 EBITDA............................................ 3,648 3,436 4,845 6,588 18,517 Operating income.................................. 1,186 915 2,285 4,063 8,449 Fiscal 1997 Total revenues.................................... $ 22,326 $ 22,384 $ 22,185 EBITDA............................................ 5,215 5,083 5,989 Operating income.................................. 2,424 2,265 2,954
As of October 15, 1997, the Company had not compiled its results of operations for the three-month period ended September 30, 1997. Nonetheless, the Company expects its EBITDA and operating income for such period to be lower than its EBITDA and operating income for the three-month period ended September 30, 1996, principally because it expects that revenues for the three-month period ended September 30, 1997 will not increase as compared to the three-month period ended September 30, 1996. The Company expects its total revenues, EBITDA and operating income for fiscal 1997 to increase as compared to fiscal 1996. The Company has experienced and is expected to continue to experience fluctuations in quarterly operating results, both between different quarters within the same fiscal year and with respect to the same quarter between different fiscal years. These fluctuations arise from several factors, including the timing and dollar value of sales-type leases with customers, the dependence of the Company on concert tours, which are unpredictable in timing and duration, the introduction of new products and general economic conditions both domestically and internationally. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in winter months. Because of the possibilities of significant fluctuations, results for any quarter may not be indicative of results that may be achieved in a full year. While the Company expects to experience growth in its revenues and profits, there can be no assurance that the Company's historical levels of revenues or profits will be sustained, particularly on a quarterly basis. See "Risk Factors--Fluctuations in Operating Results and Seasonality." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations and capital expenditures with cash flow from operations, bank borrowings and advances from distributors and customers. The Company's operating activities generated cash flow of approximately $10.9 million, $14.5 million, $8.5 million and $12.0 million during fiscal 1994, 1995 and 1996 and for the nine months ended June 30, 1997, respectively. 22 The Company intends to use the net proceeds of the Offering to repay indebtedness under the Credit Agreement. As of August 31, 1997, approximately $42.5 million was outstanding under the Credit Agreement (based on currency exchange rates as of August 31, 1997). The Company incurs a commitment fee equal to 0.5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all of the Company's assets, except those pledged to distributors, are pledged as collateral under the Credit Agreement. The Company expects to obtain a new credit facility after completion of the Offering. The Credit Agreement places limitations on the ability of the Company to (i) pay stockholder distributions in excess of 30% of net income for a fiscal year; (ii) make capital expenditures in excess of $3.0 million with respect to Showco for fiscal 1998 and $2.0 million for each fiscal year thereafter; (iii) incur indebtedness, other than certain indebtedness set forth in the Credit Agreement including, among others, (a) indebtedness for the purchase or lease of capital assets not to exceed $2.0 million per fiscal year or $4.0 million outstanding at any time and (b) indebtedness representing advances from distributors and subdistributors not in excess of $10.0 million outstanding at any time; (iv) make certain loans or investments, other than intercompany loans or investments or the purchase of cash equivalents; (v) sell substantially all of its assets; and (vi) purchase its securities, other than the warrants issued to the banks in connection with the Credit Agreement, the Common Stock issuable in connection with the exercise of such warrants and Common Stock from employees whose employment has terminated. In addition, the Credit Agreement contains compliance covenants, including requirements that the Company achieve certain financial ratios or tests, including, among others, (i) a fixed charge ratio (ratio of EBITDA (as defined in the Credit Agreement) to fixed charges) of at least 2.50 to 1.00 until October 30, 1997 and at least 2.75 to 1.00 from October 31, 1997 until April 29, 1999, which increases from time to time throughout the term of the Credit Agreement to 3.50 to 1.00 after March 31, 2001; (ii) an earnings ratio (ratio of EBIT (as defined in the Credit Agreement) to interest expense) of at least 2.25 to 1.00 through March 30, 1998, which increases from time to time throughout the term of the Credit Agreement to 4.00 to 1.00 after March 31, 2001; (iii) tangible net worth (as defined in the Credit Agreement) of at least $16.5 million plus 60% of the net income of each fiscal year after fiscal 1996 and 60% of the net proceeds of any public offering; (iv) a leverage ratio (ratio of liabilities to tangible net worth) of less than 3.60 to 1.00, which decreases from time to time throughout the term of the Credit Agreement to 2.00 to 1.00 after October 31, 2000; (v) a capital expenditure coverage ratio (ratio of EBITDA to capital expenditures) of at least 0.90 to 1.00 until February 27, 1998, which increases from time to time throughout the term of the Credit Agreement to 1.50 to 1.00 after May 31, 2001; and (vi) a total debt to cash flow ratio of less than 2.50 to 1.00, which decreases to 2.00 to 1.00 after October 31, 1998. The Company has hedged a portion of its currency fluctuation risk by borrowing in British pounds sterling and Japanese yen under the Credit Agreement. Cash generated from the Company's England and Japan offices is typically denominated in British pounds sterling and Japanese yen, respectively, and is used to pay expenses incurred in these currencies and service the foreign currency borrowings. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risks; International Trade Risk," "Use of Proceeds" and Note E of "Notes to Consolidated Financial Statements." The Company has funded the costs to manufacture automated lighting equipment to be rented to certain distributors with advances made by the distributors under the terms of the Company's distributorship agreements. The distributors typically advance to the Company an amount equal to the cost to manufacture the equipment, and enter into agreements whereby the distributors have the exclusive right to sublease the lighting equipment within defined territories. Borrowings by the Company under these agreements, which are secured by liens against the applicable equipment, are repaid by the Company through future rentals due from the distributors under the terms of their distributorship agreements and bear interest at various rates ranging up to 10.25% annually. Proceeds received under these distributorship agreements were approximately $1.0 million, $2.2 million, $1.7 million and $0.6 million for fiscal 1994, 1995 and 1996 and for the nine-month period ended June 30, 1997, respectively, and outstanding borrowings from distributors at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $2.1 million, $2.9 million, $2.8 million and $2.1 million, respectively. All 23 amounts advanced by distributors are accounted for by the Company as short-term debt. See "Business-- Marketing, Sales and Distribution." The Company has borrowed money to purchase computer equipment and office furniture and fixtures. These loans typically amortize over three years and bear interest at various rates ranging from 8.25% to 10.40%. Proceeds received under this type of financing were approximately $0.2 million, $1.6 million, $1.8 million and $1.1 million for fiscal 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, respectively, and borrowings outstanding at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $0.7 million, $1.7 million, $2.8 million and $3.0 million, respectively. The Company has also used customer advances to fund short-term working capital and immediate capital expenditure needs for specific contracts. As of September 30, 1994, 1995 and 1996 and June 30, 1997, the Company had unearned revenue related to customer advances of approximately $1.3 million, $1.6 million, $2.2 million and $2.5 million, respectively. Dividends paid to stockholders totaled approximately $0.6 million with respect to each of fiscal 1994, 1995, 1996 and 1997. The Company does not anticipate paying any additional cash dividends after the consummation of the Offering. See "Dividend Policy." The Company's business requires significant capital expenditures. Capital expenditures for fiscal 1994, 1995 and 1996 were approximately $13.6 million, $20.7 million and $12.6 million, respectively, of which approximately $12.2 million, $18.0 million and $10.2 million were for rental equipment inventories. The majority of the Company's revenues are generated through the rental of automated lighting and concert sound systems and, as such, the Company must maintain a significant amount of rental equipment to meet customer demands. Total rental equipment inventories increased from approximately $47.6 million at the beginning of fiscal 1994 to $102.5 million at June 30, 1997. This increase primarily consisted of automated lighting equipment, including new products, additional inventory of existing products and the replacement of equipment leased under sales-type leases. The Company's management anticipates capital expenditures of approximately $23.0 million during fiscal 1997, primarily for expansion of rental inventories. Inventory included in current assets consists primarily of raw materials and finished goods for the Company's Irideon-Registered Trademark- products and spare parts inventory for the Company's VARI*LITE-Registered Trademark- automated lighting equipment. Raw materials represented 38.1%, 83.4% and 88.6% of total inventory at September 30, 1995 and 1996 and June 30, 1997, respectively. The fluctuation in raw materials as a percentage of total inventory was caused primarily by changes in the timing of the manufacturing of Irideon-Registered Trademark- products which are manufactured as orders are received. The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to remain ahead of its competitors. In fiscal 1995 and 1996, the Company invested approximately $2.2 million constructing a wide-area network throughout the United States and implementing Oracle financial and manufacturing applications. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. The Company had a working capital deficit of approximately $2.0 million, $4.8 million, $0.6 million and $1.3 million at September 30, 1994, 1995 and 1996, and June 30, 1997, respectively. The Company has historically maintained working capital deficits since the bulk of its revenue generating assets are classified as long-term assets rather than current assets. In December 1995, the Company entered into a lease with an unaffiliated developer which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million. The Company is leasing this land for an initial term of five years, with six five-year renewal options. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3.6 million paid by the developer to acquire the land. The Company has the right to obligate the developer to construct a building on the land that the Company would lease for a term that would be identical to the land lease. The Company has an option to purchase the property at the end of the initial lease term or at any time during the renewal terms for its original cost. The Company intends to cause the developer to construct a 233,000 square foot facility where it will consolidate all of its Dallas, Texas operations in fiscal 2000. The land 24 lease is, and the facility lease (if any) will be, accounted for as operating leases for financial reporting purposes. See "Business--Properties" and Note G of the "Notes to Consolidated Financial Statements." The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit (approximately $3.0 million as of August 31, 1997, and an estimated additional $1.1 million through consummation of the trial). Unless the Company receives a judgment in this litigation that at least one of its patents has been infringed and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. See "Risk Factors--Capitalized Litigation Costs" and "Business--Litigation." Management believes that cash flow generated from operations, combined with the net proceeds from the Offering and borrowing capacity under the Credit Agreement (after giving effect to the application of the proceeds of the Offering) should be sufficient to fund its anticipated operating needs and capital expenditures for at least twelve months after the date of the Offering. However, because the Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, the level of competition, the success of the Company's research and development programs, the ability to achieve competitive and technological advances and general and economic conditions and other factors beyond the Company's control, there can be no assurance that sufficient capital resources will be available to fund the expected expansion of its business beyond such period. INFLATION The Company has generally been able to offset cost increases with increases in the rental rates and sales prices charged for its products and services. Accordingly, the Company does not believe that inflation has had a material effect on its results of operations to date. However, there can be no assurance that the Company's business will not be adversely affected by inflation in the future. 25 BUSINESS GENERAL The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its long-standing collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990 and have won five Emmy-Registered Trademark- Awards for network television broadcast lighting design. The Company won an Emmy-Registered Trademark- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Fleetwood Mac, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Garth Brooks, Mary Chapin Carpenter, Wynona Judd, Barbra Streisand, Diana Ross, Whitney Houston, Celine Dion, Sheryl Crow, Pearl Jam, Aerosmith, Bush and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, RAGTIME, SHOW BOAT, RENT, LORD OF THE DANCE, CAROUSEL, SMOKEY JOE'S CAFE, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE and OLIVER. - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-Registered Trademark- Awards, Tony-Registered Trademark- Awards, Grammy Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, LATE NIGHT WITH CONAN O'BRIEN, VIBE, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies CONTACT, FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Microsoft, Compaq, IBM, Sony, Sprint, Nike, Reebok, Oldsmobile, Ford, Lincoln, BMW, Upjohn, Glaxo, Whirlpool and Gillette, among others. 26 - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark- automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaires simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. INDUSTRY The Company believes that the entertainment industry is an international, multi-billion dollar industry. Lighting plays an integral role in the entertainment industry, providing illumination of concert, theatre, television and film performers, as well as creating special effects to augment a performance. In general, the Company believes that approximately 10% of total revenues (in the case of concert touring and theatre) or of total production budgets (in the case of television, film and corporate events) are spent on lighting and sound. The Company further believes that lighting and sound are critical elements in determining the quality of a production and, therefore, end-users consider quality an important factor in selecting vendors. The Company believes that its industry leadership position results in large part from its reputation in the entertainment community for innovative, high performance products and quality service. In the early 1980's, the concert touring market was the first to recognize that automated lighting could be used not only to augment a performance but also as an additional source of entertainment. According to an industry source, the concert touring market in North America has grown at an annual rate of approximately 6% over the past nine years, as measured by major headliner arena ticket sales. The Company believes that the international concert touring market will grow at a faster rate because it is at an earlier stage in its development. The theatre market, as measured by the North American live theatre box office receipts, has grown by an annual rate of approximately 11% over the last ten years according to VARIETY. More importantly, touring shows, for which the Company's automated lighting systems are ideally suited, accounted for 60% of the total market in 1996 compared to 52% in 1986. The Company believes that the North American and international theatre markets continue to represent a significant opportunity for the Company. Although the Company currently derives less than 20% of its revenue from the television and film markets, these markets are the largest markets in which the Company participates. The Company believes that it is the leading provider of automated lighting systems for television special events, such as award shows, and intends to target a broader spectrum of television and film productions in the future. In recent years, lighting designers have begun to utilize entertainment lighting in new settings such as corporate events, restaurants, casinos, cruise ships and retail settings. The Company has broadened the application of its existing technologies and developed new technologies and products to address this demand, such as the Company's Irideon-Registered Trademark- product line for architectural use. The Company expects the demand for entertainment lighting in both existing and new settings to increase in the future. 27 STRATEGY The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include: - MAINTAINING ITS COMMITMENT TO INNOVATION. The Company expects to remain committed to research and development. By continuing to develop leading edge, innovative technologies for use in multiple proprietary automated lighting products with novel and versatile features, the Company expects to maintain its leadership positions in existing markets and create demand for its products in new markets. - EXPANDING ITS WORLDWIDE DISTRIBUTION CAPABILITIES. The Company intends to continue leveraging its position as an industry leader in automated lighting by expanding its domestic and international distribution channels by opening new offices, affiliating with additional independent distributors and acquiring complementary businesses. The Company intends to increase its focus as a full-service provider of quality products and services by further expanding and diversifying its worldwide inventory and distribution system, improving its extensive education and training programs and continuing to emphasize customer service. The Company expects to significantly amplify its recent efforts to offer a full range of lighting services and products, including conventional lighting products, in order to compete effectively for all of its customers' lighting needs. - CONTINUING TO OFFER VALUE-ADDED COMPLEMENTARY SERVICES. The Company intends to continue providing complementary sound, conventional lighting, custom stage construction and stage set design services, and design and production management services, thereby offering comprehensive solutions to its customers' needs and leveraging its customer relationships to maximize revenue. PRODUCTS AND SERVICES AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company designs, manufactures and markets an extensive line of integrated automated lighting systems, including light fixtures, or "luminaires," control consoles and support equipment, and provides system operators and maintenance services. To accommodate users who prefer to operate the Company's lighting systems independently, the Company also conducts extensive training programs. The Company rents rather than sells its VARI*LITE-Registered Trademark- automated lighting systems. VL1-TM- LUMINAIRE. The Company's initial product, the revolutionary VL1-TM- luminaire, was the first automated luminaire using a dichroic filter color changing system, thereby becoming the first compact, easily transportable light capable of the real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. The VL1-TM- luminaire was introduced in 1981 and remained in service until 1996. SERIES 200-TM- SYSTEM. The Company's VL2C-Registered Trademark- spot luminaire, VL4-Registered Trademark- wash luminaire and Artisan-Registered Trademark- Plus and mini-Artisan-Registered Trademark- 2 control consoles constitute the Company's Series 200-TM- system. Spot luminaires create a hard- edged, crisp beam which can be used for precisely focused illumination and visual effects, as well as for projecting custom light images such as faces and designs through the use of "gobos", designs etched into a piece of glass or cut into a piece of metal through which a light beam is directed to create an image. The VL2C-Registered Trademark- spot luminaire can change light color in one-tenth of a second and can produce more than 120 separate light colors through the use of the Company's patented color changing system. In designing the Series 200-TM- system, the Company patented a number of features which it believes makes the Company's light systems superior to those of its competitors. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and a computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaires simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. 28 The VL4-Registered Trademark- wash luminaire projects a dispersed soft-edge light beam for even illumination of objects and areas. The VL4-Registered Trademark- luminaire's patented color changing system allows the user to select 30 preset and 160 programmable colors from thousands of available colors and to change these colors in less than three-tenths of a second, or program the system for timed color cross-fades. In addition, the VL4-Registered Trademark-luminaire features precisely timed control of light intensity, including the ability to instantaneously turn the light fixture on and off. Continuous adjustment of diffusion and beam angle provides enhanced control of the beam shape. SERIES 300-TM- SYSTEM. The Company developed its Series 300-TM- automated lighting system principally to satisfy the demands of the theatre and television and film markets for virtually silent, light weight automated lighting products with sophisticated color changing features. The Company's Series 300-TM- system, including the VL5-Registered Trademark- wash luminaire (including the VL5Arc-TM- and VL5B-TM- luminaires), the VL6-Registered Trademark- spot luminaire and the VLM-TM- automated moving mirror, as well as the Artisan-Registered Trademark- Plus and mini-Artisan-Registered Trademark- 2 control consoles, also appeals to major concert touring clients who want to rent large systems. The VL5-Registered Trademark- luminaire is lighter than the VL4-Registered Trademark- luminaire, and its cold-mirror reflector both eliminates the need for noisy cooling fans and reduces the amount of heat the lights emit onto the stage. Color changes for the VL5-Registered Trademark- are controlled by a system that allows color cross-fades in as little as seven-tenths of a second and interchangeable lenses work with an internal diffusing mechanism to provide a wide variety of beam sizes and shapes. The VL6-Registered Trademark- spot luminaire is the companion to the VL5-Registered Trademark- wash luminaire, and has two interchangeable 12-position wheels of dichroic color filters and gobos for split second color and image changes and multi-color beams. The VL5Arc-TM- luminaire, which won the "Product of the Year/ Lighting" for 1996, awarded by Lighting Dimensions magazine, has a brighter bulb than the VL5-Registered Trademark- luminaire and an innovative fluid-filled variable lens (patent pending) which allows beam size control. The VLM-TM- automated moving mirror is a dual-sided highly reflective Lexan-Registered Trademark- polycarbonate mirror panel. With its ability to both pan and tilt 360 degrees, the VLM-TM- automated moving mirror can be used to augment the effects produced by VARI*LITE-Registered Trademark- wash and spot luminaires, or it can be used with conventional lights to create limited beam motion at a very low cost. The Company's VL5-Registered Trademark- wash luminaires and VL6-Registered Trademark- spot luminaires are compatible with the industry-standard DMX 512 digital protocol and, as such, can be operated by DMX 512 control consoles, unlike the Company's other products which require the more sophisticated, higher performance of the Company's proprietary control consoles which use a high speed, bi-directional communications protocol. ARTISAN-REGISTERED TRADEMARK- CONTROL SYSTEMS. The Company's primary control console, the Artisan-Registered Trademark- Plus, is used to operate all of the Company's VARI*LITE-Registered Trademark- products. It provides control of up to 1,000 luminaires, dimmers and other equipment with up to 1,000 cues per channel, allowing the operator to control each luminaire or to store and play back preset cues. The Company also rents the smaller, less expensive mini-Artisan-Registered Trademark- 2 control console which has substantially the same capabilities as the Artisan-Registered Trademark- Plus control console, but requires longer programming time. Accordingly, the mini-Artisan-Registered Trademark- 2 control console is often used either where space is limited or as a back-up system to the Artisan-Registered Trademark- Plus control console. OTHER PRODUCTS AND SERVICES. The Company provides trained personnel to operate its automated lighting systems and offers training courses, maintenance and other support services to customers. The Company considers these services to be of critical importance to its business. The Company maintains extensive, custom-designed training facilities in its Dallas, Texas and London, England offices, where it trains both its own personnel and customers who find it more efficient to have their own personnel operate and maintain the VARI*LITE-Registered Trademark- equipment. The Company also provides smaller training facilities in its New York, Los Angeles and Tokyo offices. In addition to luminaires and control consoles, the Company rents related equipment required to operate the Company's systems, such as power and control signal distribution equipment, dimmers and cables. The Company has also developed a unique stackable, plastic injection-molded storage case for transporting its equipment. The Company's cases are custom-designed to protect VARI*LITE-Registered Trademark- equipment and last longer than the industry-standard carpet covered wood or laminate cases. These cases are also significantly lighter than other cases, thereby reducing transportation costs. 29 AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION VL1-TM- 1981 The original VARI*LITE-Registered Trademark- spot luminaire. Rendered obsolete in most markets by subsequent VARI*LITE-Registered Trademark- products. VL2C-Registered 1986 A high intensity spot luminaire using an arc light bulb. Trademark- Favored by concert, television and theatrical lighting designers due to its beam quality, motion control, bright colors and wide range of color choices. VL4-Registered 1988 A wash luminaire using an arc light bulb and featuring a Trademark- high speed douser. The brightness and precisely timed control of light intensity and beam size appeal to concert, theatre and television and film clients. VL5-Registered 1992 A lighter, less expensive version of the VL4-Registered Trademark- Trademark- wash luminaire using a tungsten light bulb. Silent operation, compactness and lighter weight appeal to theatrical, concert, television and film and corporate events users. Lower cost attracts both major concert touring clients wanting to lease larger systems and entry level concert touring clients with budgetary constraints. VL5Arc-TM- 1997 A VL5-Registered Trademark- luminaire utilizing a 600 watt arc source for very high brightness and a beam control device. Used in productions where high brightness is required. VL5B-TM- 1995 A VL5-Registered Trademark- luminaire with a color system designed for the television and theatre markets with an enhanced pastel range. VL6-Registered 1994 A compact, virtually silent spot luminaire which is the Trademark- companion to the VL5-Registered Trademark- wash luminaire. The brightness, small size and low cost of this luminaire appeal to all lighting disciplines, especially theatrical and television and film users as well as corporate events. VL7-TM- 1998 A high brightness, multi-feature spot luminaire. Expected to (projected) service all markets. VLM-TM- 1994 An automated dual-sided moving mirror able to pan and tilt 360 degrees. Appeals to both large and entry level concert touring clients. Artisan-Registered 1986 A computerized console required to control most of the Trademark- Plus Company's luminaires. Uses a proprietary communications protocol which allows the operator more functionality, efficiency and control of lighting effects than the industry standard DMX 512 protocol. Mini-Artisan-Registered 1994 A smaller, less expensive console designed to operate the Trademark- 2 Company's luminaires. Often used as a back-up console to the Artisan-Registered Trademark- Plus console.
30 AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. In 1993, the Company began to apply its existing automated lighting technologies to create its Irideon-Registered Trademark-products for the architectural lighting industry. Through its subsidiary Irideon, Inc. ("Irideon"), the Company sells Irideon-Registered Trademark- automated lighting products, even though it continues to rent all of its non-architectural products. AR500 LUMINAIRE-TM-. The AR500-TM- weather-proof wash luminaire is the Company's first product designed specifically for exterior illumination of objects such as monuments, bridges and commercial buildings. Like the Company's other products, the AR500-TM- luminaire uses the Company's patented color changing system to produce smooth color cross-fades through virtually the entire color spectrum. Various lenses permit the light beam size to be altered and a douser provides the ability to dim beam intensity. Lighting Dimensions Magazine named the AR500-TM- luminaire the "Product of the Year/Lighting, Architectural Category" in 1993. Since its introduction, the Company has sold over 1,300 AR500-TM- luminaires. AR5-TM- LUMINAIRE. In 1996, the Company began selling interior architectural automated lights for use in permanent architectural installations. The AR5-TM- wash luminaire, which is the first product in a planned family of products for interior applications, uses new dichroic filter coatings, many plastic components and a newly-developed light source. These features make this product attractive to lighting and interior designers because it is less expensive than the Company's VARI*LITE-Registered Trademark- products and does not require trained operators after the initial set-up. The AR5-TM- wash luminaire was named "Product of the Year/Lighting, Architectural Category" in 1995 by Lighting Dimensions magazine and in 1996 won "Best New Product of the Year" at Lightfair International. COMPOSER-REGISTERED TRADEMARK- CONTROL SYSTEM. The AR500-TM- and AR5-TM- luminaires both are operated with the Composer-Registered Trademark-control system. The Composer-Registered Trademark- is a Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer. After programming has been completed, the personal computer can be removed and lighting cues or sequences can be activated via an internal clock or from wall switches. The Composer-Registered Trademark- control system is DMX compatible which, among other things, allows it to operate products manufactured by others. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION AR500-TM- 1993 A weather-proof wash luminaire with the capability to change beam color, size or intensity. The first automated luminaire designed specifically for outdoor uses such as building exteriors and landmarks and has the "UL-Registered Trademark-" rating for "wet" location. AR5-TM- 1996 An automated wash luminaire designed for architectural applications such as restaurants, casinos, retail stores, corporate showrooms and shopping malls. Composer-Registered 1996 The control system used to operate Irideon-Registered Trademark- Trademark- architectural luminaires. A Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer with playback via an internal clock or wall switches, thereby eliminating the need for trained operators after initial set-up.
COMPLEMENTARY BUSINESSES The Company is a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set 31 design services, and design and production management services for conventions, business meetings and special events. CONCERT SOUND SYSTEMS. The Company's Showco subsidiary rents concert sound systems and provides related services almost exclusively to the worldwide concert touring market. Its clients have included The Rolling Stones, KISS, Janet Jackson, Eric Clapton, Paul McCartney, Genesis, Phil Collins, the Beach Boys, James Taylor, Willie Nelson, Alanis Morissette, Reba McEntire, Vince Gill, Alan Jackson, Moody Blues, Bob Seger, the Cranberries, INXS, Stone Temple Pilots and Smashing Pumpkins. The Company's PRISM-Registered Trademark- sound system was introduced in 1986 as the first large scale concert sound system engineered as a totally integrated system specifically for use in concert touring. The proprietary, scalable PRISM-Registered Trademark- system can be used in any venue from smaller theatres to stadiums and is easier to assemble, disassemble and transport than competitive sound systems. The quality of the PRISM-Registered Trademark- sound system is evidenced by the numerous awards Showco has received, including awards from Mix Magazine for "Outstanding Institutional Achievement--Sound Reinforcement Company of the Year" in 1988, 1991 through 1993 and 1997 (for which it was also nominated in 1994 through 1996) and for "Outstanding Technical Achievement--Sound Reinforcement Product of the Year" (for the PRISM-Registered Trademark- Digital Control System) in 1990, the Performance Readers Poll for "Sound Company of the Year" in 1988, 1989 and 1991 and Live Sound! "Instrumental Tin Ear Award--International Touring Company of the Year" in 1995. Since 1987, three different Showco sound engineers have won Mix Magazine's "Sound Engineer of the Year" award. CONVENTIONAL LIGHTING PRODUCTS. Through its subsidiaries, Theatre Projects Lighting Services Limited ("Theatre Projects"), which was acquired in 1994, and Vari-Lite, the Company offers conventional lighting equipment, including numerous types of luminaires and control consoles, large search lights, automatic gel scrollers, trusses, dimmers and smoke machines, to London's West End theatre market and the United Kingdom and European theatre touring markets, as well as to concert touring artists worldwide and to businesses for corporate events. The Company has rented equipment to such West End theatre productions as CATS, PHANTOM OF THE OPERA, SUNSET BOULEVARD and JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and to performers such as The Rolling Stones, Paul McCartney, Phil Collins, Vince Gill, Mary Chapin Carpenter and Torvill and Dean, among others. The Company is also very active in the special events market, providing services to numerous events for the British royalty. In the corporate event market, the Company has provided its conventional lighting products to numerous annual shareholder meetings and new product launches. STAGES AND STAGE SETS. Through its Brilliant Stages Limited ("Brilliant Stages") subsidiary, which was acquired in 1994, the Company sells custom stage and stage set design and construction services to the international concert touring, theatre and industrial trade show and corporate events markets. The Company's welded aluminum stages are designed using CAD software and are constructed to facilitate rapid assembly, disassembly and loading in a semi-trailer for efficient transportation. The Company is noted for high-tech stages and stage sets that include distinctive hydraulic components and sophisticated electronic effects, such as the stages and stage sets designed and built for the Rolling Stones Voodoo Lounge tour in 1995 and the Rolling Stones Bridges to Babylon Tour '97, and has provided stages and stage sets to other concert tour customers such as Pink Floyd, Elton John, Tina Turner, U2, Metallica, Peter Gabriel and Phil Collins, and to trade shows for Whirlpool, Smirnoff, Fuji Television and Philips, among others. The Company has also provided services to such theatre productions as JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and LES MISERABLES. CORPORATE MEETINGS AND SPECIAL EVENTS. The Company, through its IGNITION! Creative Group, Inc. ("Ignition") subsidiary, provides design and production management services to businesses for conventions, business meetings, new product launches and special events. The Company provides concept development, scenery, lighting, sound, special effects, scripting, media production, sound and entertainment production for such events. Clients of the Company for these services include Mary Kay Cosmetics, Inc., Kawasaki Motor Corp., U.S.A., Warner/Elektra/Atlantic Records, The Hong Kong Trade Development Council and EXCEL Communications, Inc. 32 MARKETING, SALES AND DISTRIBUTION The Company markets its products and services to the entertainment industry, including concert touring, theatre, television and film and corporate events markets, as well as to the architectural market. Depending on the circumstances, the Company solicits business from lighting and set designers and consultants, sound engineers, artist managers, producers, production managers and production companies, promoters, architects, corporations and business associations. The Company believes that its customer relationships, reputation for innovative, quality products, worldwide distribution and excellent service are the keys to its success. The Rolling Stones represented 11.9% of the Company's revenues in fiscal 1995. No other customer has accounted for more than 10% of the Company's revenues for at least the last three fiscal years. AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company rents rather than sells its VARI*LITE-Registered Trademark-automated lighting products. In addition to providing the Company with a higher level of quality control over its rental products, which require trained operators and maintenance personnel, the Company believes renting has enabled it to better protect its intellectual property and generate revenues from each product over an extended time period. In order to compete effectively, the Company relies heavily on its reputation as an innovative industry leader and strives to develop strong relationships with lighting designers and other individuals who recommend lighting products to end-users. The Company markets its automated lighting systems and services in the United States through Company-owned offices in Dallas, New York, Los Angeles, Nashville, Orlando, Las Vegas and Chicago and an independent distributor system. Each Company-owned office targets a specific market segment. For example, the New York office targets the theatre market, the Nashville office targets the country music, television and concert markets, the Los Angeles office targets the television and film market and the Orlando, Las Vegas and Chicago offices target the corporate events market. The independent distributors focus on specific geographic markets and tend to rent to all market segments. The Company's international distribution system comprises Company-owned locations in London, Tokyo, Hong Kong and Madrid, as well as, at August 31, 1997, independent distributors in Australia, Austria, Belgium, France, Germany, Korea, Singapore and Sweden and 27 independent dealers in 36 cities in the United States, Puerto Rico, Mexico, Canada, the United Kingdom and five other countries in Europe. The Company has two basic types of distribution arrangements: independent distributors and independent dealers. Under the first arrangement, the distributor advances the Company the funds needed to build the lighting systems to be rented by that distributor. Although the distributor is solely responsible for renting the equipment and providing support services to end-users, rental revenues are split on a predetermined basis between the Company and the distributor, with the distributor retaining the Company's share until the distributor's advances to the Company have been repaid. Distributors are required to undergo four weeks of intensive training in operation and maintenance of the Company's lighting systems. Under the second arrangement, independent dealers rent the less expensive Series 300-TM- systems from the Company generally for fixed lease payments over a five-year term and bear the entire risk of renting the lighting systems to end-users in regional markets. In order to satisfy customers who wanted to purchase the Company's lighting systems, in 1989 the Company began entering into sales-type leases. Under the typical sales-type lease, the customer rents the Company's equipment for either a five- or a ten-year term, with unlimited one-year renewal options, for a lump sum payment at the commencement of the term, plus a nominal renewal option exercise price. The customer is normally responsible for maintaining the equipment under these arrangements, but often enters into a maintenance agreement with the Company. As of August 31, 1997, the Company had entered into over 50 sales-type leases with customers such as the Ringling Brothers and Barnum & Bailey Circus, the Las Vegas Hilton, Mirage and MGM Grand hotels in Las Vegas, the Lyric Opera in Chicago, The San Francisco Opera, Busch Gardens in Florida, the Mel Tillis Theater in Branson, Missouri and the Aladdin touring ice show. 33 Recently, the Company has begun to further emphasize its full-service strategy by expanding its capability to offer conventional lighting products. This effort is designed to increase the Company's revenues from the rental of all VARI*LITE-Registered Trademark- products. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. The Company sells its architectural lighting products primarily through a worldwide network of independent sales representatives and distributors, but also directly, to lighting designers who recommend lighting equipment for architectural applications such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. CONVENTIONAL LIGHTING PRODUCTS. The Company's conventional lighting operations, which have historically operated independently from the VARI*LITE-Registered Trademark- product operations, maintain internal marketing and distribution departments and rely heavily on the Company's established reputation for quality and service, which is enhanced by its high visibility projects and customers. The Company reinforces this reputation by advertising in trade and specialty magazines. Although most of the Company's conventional lighting contracts are procured through a bidding process, the Company believes that competition in this industry is based on expertise, quality and price. The Company has recently begun to integrate these operations with those of its VARI*LITE-Registered Trademark- products in order to improve its position as a full-service provider. CONCERT SOUND SYSTEMS. The Company markets its concert sound equipment directly to end-users worldwide. Showco develops personal relationships with artist managers, sound engineers, production managers and event producers and relies on its reputation for superior quality and service to attract customers. STAGES AND STAGE SETS. The Company markets its custom stage construction and stage set design services principally to production companies and set and lighting designers. The Company relies on a bidding process to award almost all contracts, but the Company believes its reputation for quickly producing quality products with sophisticated high technology motion and other features is the key element to its marketing success. Although the Company relies to some degree on the trade press for publicity, it engages in very little advertising. CORPORATE MEETINGS AND SPECIAL EVENTS. The Company sells its design and production management services to corporate meeting planners and sales and marketing executives. In-house salespeople seek requests for proposals through cold calls, sales letters and professional mailings and, to a lesser extent, through advertising in trade publications. Upon receiving an invitation to submit a proposal, the Company assembles a project team which develops concepts and designs for a multi-media presentation to the potential client. RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY Since 1970, the Company and its predecessors have continually developed proprietary products that serve the entertainment industry. The Company's proprietary technology and development of innovative products that meet the needs of its customers have enabled it to expand the applications for its technology to new products and markets. From time to time, the Company collaborates with unaffiliated entities to supplement and complement its internal research and development activities. As of August 31, 1997, the Company's research and development group consisted of over 65 engineers. These internal capabilities enable the Company to continually improve existing products, design new products and develop new technology to meet the needs of its customers. In the fiscal years ended September 30, 1994, 1995 and 1996, the Company's research and development expenditures totaled $3.0 million, $3.3 million and $4.4 million, respectively. The Company's extensive research and development efforts have produced a number of leading-edge technological developments in the automated lighting industry. When appropriate, the Company seeks patent protection for its products, particularly in its automated lighting business. As of August 31, 1997, the Company had registered and received more than 25 domestic patents and more than 110 foreign patents in several different countries and territories. In addition, the Company had more than 10 patent applications pending in the United States on automated lighting technology and more than 100 patent applications pending worldwide. 34 The Company's patents cover the basic concepts, control software, control hardware and features unique to each of the Company's VARI*LITE-Registered Trademark- luminaire models. The Company believes that its patents provide it with a substantial competitive advantage in the automated lighting industry, and the Company's ability to compete in the future will depend in part on maintaining its technological advantage over its competitors. See "Risk Factors--Reliance on Intellectual Property." The Company has obtained trademark protection in the United States and numerous foreign countries on various names, including, among others, VARI*LITE-Registered Trademark-, Artisan-Registered Trademark- Plus, Mini-Artisan-Registered Trademark- 2, Series 100-TM-, Series 200-TM-, VL1-TM-, VL2C-Registered Trademark-, VL4-Registered Trademark-, VL5-Registered Trademark-, VL5Arc-TM-, VL5B-TM-, VL6-Registered Trademark-, Showco-TM-, PRISM-Registered Trademark-, Irideon-Registered Trademark-, AR500-TM-, AR5-TM- and Composer-Registered Trademark-. MANUFACTURING With the exception of the Company's stage construction business, which is based in London, England, the Company's manufacturing facilities are located in Dallas, Texas. The Company's manufacturing process principally consists of procuring, inspecting and assembling components custom-made by others to the Company's specifications. The Company generally provides its suppliers with specifications for its components and pays for all tooling used in their production. The Company emphasizes the quality and reliability of its products and, accordingly, submits all finished products to rigorous testing both at the time they are manufactured and when they are returned to the Company at the termination of each rental agreement. In North America, compliance is certified by Underwriters Laboratories, Inc.-Registered Trademark- and the Canadian Standards Association. In the European Union, the CE mark signifies compliance with standards for Electromagnetic Compatibility and Low Voltage Directives and the TUV Rheinland GS Safety Mark signifies safety compliance. The Company builds all new equipment and is retrofitting certain existing equipment to be in compliance with these standards and marks. The Company has frequently worked in concert with certain of its key suppliers to design and develop new technologies which have been incorporated into the Company's products specifically to meet its requirements. As a result, although most components and raw materials used by the Company are available from more than one supplier, many important components for the Company's lighting systems are provided by one vendor and are custom-designed (often jointly by the Company and its vendors). The Company attempts to maintain adequate inventories of these components and, based on its experience, does not anticipate problems obtaining sufficient supplies in the foreseeable future. The loss of any supplier that is the sole vendor of a component would delay the Company's manufacturing schedules and possibly force the Company to purchase new tooling, but the Company believes substitute suppliers can be found for all components of all of its products. See "Risk Factors-- Dependence on Key Suppliers." EQUIPMENT INVENTORY MANAGEMENT The Company uses an inventory control and management system to locate its rental equipment at all times anywhere in the world. Each piece of equipment is serialized for identification purposes. Equipment utilization is centrally monitored at the Company's headquarters to determine (i) which products are in highest demand in various geographic markets and whether certain equipment should be relocated to increase utilization and revenue, (ii) whether product shortages that require the production of additional units exist and (iii) whether current pricing is at the appropriate level. The maximum utilization rates of the Company equipment are affected by production scheduling requirements of the concert touring, theatre, television and film and corporate events markets. Utilization rates are also limited by the need for maintenance, service and shipping time. The Company's inventory control system helps the Company optimize its utilization rates in light of these factors in order to satisfy customer requirements and maximize revenue. 35 MANAGEMENT INFORMATION SYSTEMS The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to compete successfully. In fiscal 1995 and 1996, the Company invested approximately $2.2 million constructing a wide-area network throughout the United States and implementing Oracle financial and manufacturing applications. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. COMPETITION Each of the Company's businesses is highly competitive. In its automated lighting business, the Company primarily competes with Coemar SPA, Clay Paky SPA, High End Systems, Inc. ("High End"), Light & Sound Design, Ltd. and Martin Gruppen A/S. Of these competitors, only Light & Sound Design, Ltd. manufactures and rents equipment, while the others sell equipment to other rental companies. In the theatre, television and film, concert touring and corporate event markets, the Company competes with a number of conventional lighting rental companies, who also purchase automated lighting equipment from others. The Company competes primarily on the basis of product capabilities, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and customer service and support. The VARI*LITE-Registered Trademark- brand name has been recognized for years as the preeminent brand name for automated lighting. The Company has several national concert sound competitors, the most significant of which is Clair Brothers Audio. However, other companies such as Maryland Sound Industries, Inc., Audio Analysts USA, Inc., dB Sound, Inc. and Southern California Sound Image, Inc. compete effectively by offering less sophisticated equipment at lower prices. The Company competes in this business principally on product capabilities, quality and reliability, price, brand name recognition, reputation and customer service. The Company's custom stage construction and stage set design business competes principally in the United Kingdom and to a lesser extent in the United States. The primary factors affecting competition in this market include reputation for quality and the ability to quickly design and build sophisticated state-of-the-art stages and stage sets. The market for design and production management services is highly competitive and fragmented, including hundreds of free lance producers and designers. Competition in this industry is based primarily on personal relationships and creativity. PROPERTIES The Company leases all of its facilities, including five facilities comprising approximately 153,000 square feet in Dallas, Texas under leases that expire in April 1999, but can be extended until at least April 2000. The Dallas facilities contain the Company's executive offices, manufacturing, warehouse, maintenance, advanced technologies and research and development facilities and training center. The executive offices, warehouse and manufacturing space of Vari-Lite Europe Limited ("Vari-Lite Europe"), Theatre Projects and Brilliant Stages are located in London, England in two facilities with approximately 71,500 square feet that are leased through January 1998 and March 2010. The executive offices of Vari-Lite Asia, Inc. ("Vari-Lite Asia"), as well as its Technical Center, are located in Tokyo in two leased facilities aggregating approximately 10,300 square feet, the terms of which expire in February 1999 and October 2000. In addition, the Company leases sales offices in Chicago, Hong Kong, Madrid, Las Vegas, Los Angeles, Nashville, New York and Orlando. The Company believes it maintains generally adequate insurance with respect to its properties. In December 1995, the Company entered into a lease with an unaffiliated developer which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million. The Company is leasing this land for an initial term of five years, with six five-year renewal options. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3.6 million paid by the developer to acquire the land. The Company has the right to obligate the developer to construct a building on the land that the Company would lease for a term that would be identical to the land lease. The Company has an option to purchase the property at the end of the initial term or at any time during 36 the renewal terms for its original cost. The Company intends to cause the developer to construct a 233,000 square foot facility where it will consolidate all of its Dallas, Texas operations in fiscal 2000. The land lease is, and the facility lease (if any) will be, accounted for as operating leases for financial reporting purposes. See Note G of the "Notes to Consolidated Financial Statements." LEGAL PROCEEDINGS In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In August 1995, the Company brought suit asserting a number of claims of infringement of several of its patents by High End in the Northern District of Texas seeking monetary damages and injunctive relief to prevent future patent infringement (the "High End Lawsuit"). The Company also sought a temporary restraining order for alleged trade secrets violations, which the court denied. High End has denied the Company's claims and has counterclaimed seeking to have certain of the Company's patents declared invalid and alleging that the Company's claims are frivolous and that the Company has violated federal antitrust laws. The Company believes High End's counterclaims are without merit. Discovery in this matter is proceeding and trial is currently scheduled for February 1998. The Company has capitalized and expects to continue to capitalize its costs relating to this lawsuit ($3.0 million as of August 31, 1997 and an estimated additional $1.1 million through consummation of the trial). Unless the Company receives a judgment in this litigation that High End has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as a non-cash expense in the period that the judgment is rendered. EMPLOYEES As of August 31, 1997, the Company had 459 full-time employees. In addition, the Company had 201 part-time and temporary employees. None of the Company's employees is a party to any collective bargaining agreement and the Company has never experienced a work stoppage. The Company considers its relations with its employees to be good. 37 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the executive officers and directors of the Company.
NAME AGE POSITION - ---------------------------------- --- ------------------------------------------------------------------------ H. R. Brutsche III(1) 52 Chairman of the Board, President and Chief Executive Officer of the Company Michael P. Herman 54 Vice President-Finance, Chief Financial Officer and Secretary of the Company James H. Clark, Jr.(1)(2) 61 Director of the Company John D. Maxson(1) 57 Director of the Company and Chairman of the Board of Showco and Ignition J. Anthony Smith(3) 52 Director of the Company C. Vincent Prothro(2)(3)(4) 55 Director of the Company John R. Rettberg(2)(3)(4) 60 Director of the Company Keizo Akimoto 63 President and Representative Director of Vari-Lite Asia David W. Alley 52 Executive Vice President--International Operations and Director of Vari-Lite James P. Bates 51 Vice President--Information Technology and Chief Information Officer of the Company James M. Bornhorst 51 Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology and Director of Vari-Lite Richard W. Bratcher, Jr. 37 President, Chief Executive Officer and Director of Showco Brian L. Croft 59 Managing Director of VLEH Robert V. Dungan 45 Vice President, General Manager and Director of Irideon Loren J. Haas 39 Executive Vice President--North American Operations of Vari-Lite Janis C. Pestinger 46 Vice President--Administration and Assistant Secretary of the Company T. Clay Powers 38 Vice President--Product Development and Manufacturing of Vari-Lite and Director of Showco J. Scott Thompson 45 President, Chief Executive Officer and Director of Ignition
- ------- (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee (4) Member of the Omnibus Plan Committee H.R. BRUTSCHE III is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Brutsche has served as Chairman of the Board, President and Chief Executive Officer of the Company and its predecessors since 1980. Mr. Brutsche also serves as Chairman of the Board of VLEH, Vari-Lite Europe, Brilliant Stages and Theatre Projects and as President and Chief Executive Officer of Vari-Lite and Irideon. MICHAEL P. HERMAN joined the Company in June 1993 as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer. In January 1997, Mr. Herman ceased acting as Treasurer of the Company. Mr. Herman also serves as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer of Vari-Lite, Irideon, 38 Showco and Ignition. From May 1991 to May 1993, Mr. Herman was the Vice President--Finance and Chief Financial Officer of Barry's Cameras, Inc., a chain of retail camera and video stores. JAMES H. CLARK, JR. has been a director of the Company and its predecessors since 1978. Mr. Clark serves as Chairman of the Company's Executive Committee and Audit Committee and is a director of all of the Company's subsidiaries. Mr. Clark has been the Managing General Partner of Clark Partnership, Ltd., an investment and venture capital partnership, since 1988, and serves as Chairman of the Board of Texas Freezer Co. Mr. Clark's son is married to Mr. Prothro's daughter. JOHN D. MAXSON is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Maxson has served as Chairman of the Board of Showco for approximately 25 years and as Chairman of Ignition since its inception in September 1994. J. ANTHONY SMITH has been a director of the Company and its predecessors since 1981. Mr. Smith also serves as a director of all of the Company's subsidiaries. Mr. Smith has been the Managing Director of each of Hit & Run Music (Publishing) Limited, an international independent music publisher, and Hit & Run Music Limited, a professional manager of musicians, for over 20 years, and the Managing Director of Ives Street Developments Limited, a property management company, for six years. C. VINCENT PROTHRO has been a director of the Company since April 1996. Mr. Prothro has been Chairman of the Board of Dallas Semiconductor Corporation, a manufacturer of electronic chips and chip-based subsystems, since 1984 and its Chief Executive Officer and President since 1989. Mr. Prothro is also a general partner of Southwest Enterprise Associates, L.P., a venture capital fund. Mr. Prothro's daughter is married to Mr. Clark's son. JOHN R. RETTBERG has been a director of the Company since April 1996 and serves as Chairman of the Company's Compensation Committee and Omnibus Committee. Mr. Rettberg currently serves as a consultant to the Northrop Grumman Corporation ("Northrop Grumman"), an advanced technology company operating primarily in the fields of aircraft and military electronics design, development and manufacturing. Mr. Rettberg has served in this capacity since his retirement from Northrup Grumman on January 1, 1995. Mr. Rettberg joined Northrop Grumman in 1962 and, prior to his retirement, was Corporate Vice President and Treasurer. Mr. Rettberg is also a director of J.P. Morgan Investment Mgmt., a manager of mutual funds. KEIZO AKIMOTO joined Vari-Lite Asia at its inception in 1984 and has been its Representative Director (equivalent of chief executive officer) since 1985 and its President since 1992. DAVID W. ALLEY has been Executive Vice President--International Operations of Vari-Lite since February 1995 and has been a director of Vari-Lite since March 1987 and of each of VLEH and Vari-Lite Asia since October 1994. From December 1993 to February 1995, Mr. Alley served as Vice President-East and West Coast Operations of Vari-Lite and as its Vice President-West Coast Operations from June 1990 until December 1993. Mr. Alley has held various other positions with Vari-Lite and Showco since 1981. JAMES P. BATES has been the Vice President--Information Technology and Chief Information Officer of the Company since September 1996. Prior to that time since 1989, Mr. Bates held various positions with DSC Communications Corp., most recently serving as Director of Applications Systems Implementation. JAMES M. BORNHORST has been the Vice President and Chief Science Officer of the Company and the Vice President--Advanced Technology of Vari-Lite since October 1995 and a director of Vari-Lite since its inception. Prior to October 1995, Mr. Bornhorst served as Vice President--Engineering of Vari-Lite since 1983 and has been employed since 1972 in various other capacities with Showco and Vari-Lite. RICHARD W. BRATCHER, JR. has been the President and Chief Executive Officer and a director of Showco since July 1996. He served as Vice President and General Manager of Showco from August 1993 until July 1996 and as its shop manager of Showco from August 1987 until August 1993. Mr. Bratcher has also served in various other capacities with Showco since 1983. BRIAN L. CROFT has been the Managing Director of VLEH and Vari-Lite Europe since the formation of VLEH and its acquisition of Vari-Lite Europe in March 1994. From 1989 until its acquisition by the Company in 39 March 1994, Mr. Croft was the General Manager and a director of Vari-Lite Europe, Ltd., which was then an independent VARI*LITE-Registered Trademark- distributor and a subsidiary of the Samuelson Group plc. ROBERT V. DUNGAN has served as Vice President and General Manager of Irideon since its inception in September 1994 and as a director of Irideon since January 1996. From January 1993 to September 1994, Mr. Dungan served as Vice President-Products Group of Vari-Lite and served as its Operations Manager from 1988 until January 1993. He has also served in various other capacities with Vari-Lite since 1983. LOREN J. HAAS has been the Executive Vice President--North American Operations of Vari-Lite since February 1995. From October 1992 until February 1995, Mr. Haas was General Manager--Dallas of Vari-Lite and was its Marketing Manager from December 1990 until October 1992. Mr. Haas has served in various other capacities with Vari-Lite since 1987. JANIS C. PESTINGER has been Vice President--Administration and Assistant Secretary of the Company since November 1996 and May 1993, respectively. Ms. Pestinger also has served as Vice President--Administration of Vari-Lite since December 1993 and for more than three years prior to that as its Risk and Benefits Manager. Ms. Pestinger has served in various other positions with Vari-Lite and Showco since 1979. T. CLAY POWERS has been the Vice President--Product Development and Manufacturing of Vari-Lite since July 1996. Prior to that he served as the President and Chief Executive Officer of Showco since April 1992. Mr. Powers also has served as a director of Showco since December 1990. From January 1991 to April 1992, Mr. Powers served as Vice President and General Manager of Showco and from January 1990 to January 1991 Mr. Powers served as its Vice President--Internal Operations. Mr. Powers has served in various other capacities with Showco since 1982. J. SCOTT THOMPSON has served as President and Chief Executive Officer of Ignition since October 1994 and as a director of Ignition and its predecessor since January 1992. Prior to October 1994, Mr. Thompson was a Vice President of Showco since 1987 and served in various capacities with Showco since 1978. Except for Mr. Brutsche, all executive officers serve at the discretion of the Board of Directors. See "Management--Employment Agreements." BOARD OF DIRECTORS DIRECTOR CLASSES. The Board of Directors is comprised of two Class I Directors (Messrs. Maxson and Prothro), two Class II Directors (Messrs. Clark and Rettberg) and two Class III Directors (Messrs. Brutsche and Smith). The terms of the Class I, Class II and Class III directors will expire at the annual meetings of stockholders of the Company held in 1998, 1999 and 2000, respectively. At each of those annual meetings and thereafter, directors will be elected for a three-year term to succeed the directors of the class whose terms are then to expire. DIRECTOR COMPENSATION. Each director who is not an employee of the Company or any of its subsidiaries is paid an annual fee of $20,000, plus $1,000 for each meeting of the Board of Directors or a Committee of the Board of Directors attended. The Company also pays all transportation and lodging costs for directors to attend meetings of the Board of Directors and its Committees. Each of Messrs. Clark, Maxson and Smith also receives $10,000 annually plus $250 per meeting for serving as a director of Vari-Lite, $5,000 annually plus $62.50 per meeting for serving as a director of VLEH, $4,000 annually plus $125 per meeting for serving as a director of Showco, $4,000 annually plus $62.50 per meeting for serving as a director of each of Vari-Lite Europe and Theatre Projects, $3,000 annually plus $125 per meeting for serving as a director of each of Vari-Lite Asia, Ignition and Irideon and $3,000 annually plus $62.50 per meeting for serving as a director of Brilliant Stages. As of July 1, 1995, the Company entered into a Deferred Compensation Agreement ("Deferred Compensation Agreement") with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with each of Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after 40 the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. Each of Messrs. Clark, Maxson and Smith (each a "Consultant") also has entered into a Consulting Agreement with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson each receives an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more life insurance policies (collectively "Policies" and individually "Policy") pursuant to split-dollar agreements (the "Split-Dollar Agreements") with the Company. The Split-Dollar Agreements each provides for sharing the costs and benefits of the Policy between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. An irrevocable trust created or an individual designated by Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, who is the owner of the Policy (the "Owner") reimburses the Company for the portion of the premium attributable to the death benefit protection of each Policy (the "P.S. 58 Cost"). The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policy that is subject to such Split-Dollar Agreement. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee and an Omnibus Committee. The Executive Committee is composed of Messrs. Clark, Maxson and Brutsche, with Mr. Clark serving as Chairman. The Executive Committee has the authority, between meetings of the Board of Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must be approved by the entire Board. The Audit Committee is composed of Messrs. Clark, Prothro and Rettberg, with Mr. Clark serving as Chairman. The Audit Committee is responsible for (a) reviewing the scope of, and the fees for, the annual audit, (b) reviewing with the independent auditors the Company's accounting practices and policies, (c) reviewing with the independent auditors their final report, (d) reviewing with internal and independent auditors overall accounting and financial controls and (e) being available to the independent auditors for consultation purposes. The Compensation Committee is composed of Messrs. Smith, Prothro and Rettberg, with Mr. Rettberg serving as Chairman. With the exception of granting awards under the Omnibus Plan and Annual Incentive Plan (as hereinafter defined), the Compensation Committee determines the compensation of the officers of the Company and performs other similar functions. 41 The Omnibus Committee is composed of Messrs. Prothro and Rettberg, with Mr. Rettberg serving as Chairman. The Omnibus Committee administers the Omnibus Plan and the Annual Incentive Plan, including the determination of eligibility and the granting of awards under such plans. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to the Company's chief executive officer and its four other most highly compensated executive officers and a former executive officer of the Company for services rendered for the fiscal year ended September 30, 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
FISCAL 1996 ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) COMPENSATION($) - ---------------------------------------------------------- --------- ----------- --------------- ---------------- H. R. Brutsche III........................................ 433,008 48,713 167,000(1) 45,259(2) Chairman of the Board, President and Chief Executive Officer of the Company Keizo Akimoto............................................. 199,737(3) 19,495(3) -- 2,805(4) Representative Director of Vari-Lite Asia David W. Alley............................................ 154,500 11,513 -- 6,660(5) Executive Vice President--International Operations of Vari-Lite James M. Bornhorst........................................ 136,299 9,449 -- 6,374(6) Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology of Vari-Lite T. Clay Powers............................................ 126,267 10,500 -- 6,849(7) Vice President--Product Development and Manufacturing of Vari-Lite James E. Kinnu(8) ........................................ 350,016 35,002 -- --
- ------- (1) This amount was paid to Mr. Brutsche pursuant to the Deferred Compensation Agreement. See "Management--Board of Directors--Directors Compensation." (2) This amount includes $3,292 and $20,725 which were paid on behalf of Mr. Brutsche for the Policies pursuant to the Split-Dollar Agreements and for a term life insurance policy, respectively, maintained on the life of Mr. Brutsche; $13,817 which was paid to reimburse Mr. Brutsche for taxable income incurred with respect to the premiums paid on his behalf on the term life insurance policy; $4,620 which was contributed by the Company on behalf of Mr. Brutsche to the Company's 401(k) plan; and $2,805 worth of Common Stock held in the ESOP which was allocated to Mr. Brutsche. See "Management--Employment Agreements." (3) Calculated by applying the conversion rate of Japanese yen to U.S. dollars based on the exchange rate in effect at the end of each month during fiscal 1996. (4) This amount was contributed by the Company on behalf of Mr. Akimoto to the Equivalence Plan. (5) This amount includes $3,855 which was contributed by the Company on behalf of Mr. Alley to the Company's 401(k) plan and $2,805 worth of Common Stock held in the ESOP which was allocated to Mr. Alley. (6) This amount includes $3,756 which was contributed by the Company on behalf of Mr. Bornhorst to the Company's 401(k) plan and $2,618 worth of Common Stock held in the ESOP which was allocated to Mr. Bornhorst. (7) This amount includes $4,231 which was contributed by the Company on behalf of Mr. Powers to the Company's 401(k) plan and $2,618 worth of Common Stock held in the ESOP which was allocated to Mr. Powers. (8) Prior to his departure from the Company, effective September 30, 1996, Mr. Kinnu served as the Company's Senior Executive Vice President and Chief Operating Officer. 42 EMPLOYMENT AGREEMENTS As of July 1, 1995, the Company entered into an Employment Agreement (the "Brutsche Employment Agreement") with H. R. Brutsche III, Chairman of the Board, President and Chief Executive Officer of the Company. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. Mr. Brutsche may be terminated in the event of his death or permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If Mr. Brutsche is terminated because of his death, his estate will receive his salary through the end of the month in which his death occurs plus the prorated portion of any bonus due to him pursuant to the Annual Incentive Plan. If Mr. Brutsche is terminated because of his permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits he receives. If Mr. Brutsche is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. In addition to those provided for under the Brutsche Employment Agreement, Mr. Brutsche is eligible to receive certain other benefits. See "Management--Board of Directors--Director Compensation." The Company entered into an Employment Agreement (the "Kinnu Employment Agreement") with James E. Kinnu, the former Senior Executive Vice President and Chief Operating Officer of the Company, as of August 28, 1995. The Kinnu Employment Agreement had an initial term of three years and provided for Mr. Kinnu to receive an annual base salary of $350,000 and to participate in the Company's employee benefit plans. Pursuant to the Kinnu Employment Agreement, on September 10, 1995, Mr. Kinnu received an interest-free loan of $200,000 (the "Kinnu Loan") for a term of three years with the principal to be forgiven in equal amounts each month over the term of the Kinnu Employment Agreement, and reimbursement of relocation expenses of up to $25,000. Effective September 30, 1996, Mr. Kinnu was terminated by the Company without cause. In connection with his termination, the Company will continue to pay Mr. Kinnu as a consultant $350,000 per year until August 31, 1998, agreed to cancel and forgive the Kinnu Loan and acquired 37,637 shares of Common Stock in consideration for the forgiveness and cancellation of Mr. Kinnu's $132,900 principal amount indebtedness to the Company, which accrued interest at 8% per annum, matured on August 31, 1998 and was incurred by Mr. Kinnu to acquire such shares of Common Stock. EMPLOYEE BENEFIT PLANS OMNIBUS PLAN. In August 1997, the Company adopted the Vari-Lite International, Inc. 1997 Omnibus Plan (the "Omnibus Plan") to attract and retain qualified employees and non-employee directors. An aggregate of 800,000 shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications, has been authorized for issuance upon exercise of options or as bonus stock. In addition, stock appreciation rights ("SARs"), phantom stock, dividend equivalents or restricted or performance awards ("Awards") may be granted under the Omnibus Plan. The Omnibus Committee administers the Omnibus Plan and determines to whom Awards are to be granted and the terms and conditions, including the number of shares and the period of exercisability thereof. Awards may be granted to officers, management, other key employees and to non-employee directors of the Company or any of its present or future subsidiaries as determined by the Omnibus Committee, provided that any options to be granted to non-employee directors who are members of the Omnibus Committee must be granted by the entire Board of Directors of the Company. The Omnibus Plan authorizes the grant or issuance of both nonqualified stock options and incentive stock options, with the terms of each such option set forth in separate agreements. The Omnibus Plan requires that the exercise price for each stock option must be not less than 100% of the fair market value of the Common Stock at 43 the time the option is granted. No incentive stock option, however, may be granted to either a non-employee director or to an employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company unless the option price is at least 110% of the fair market value of the Common Stock at the date of grant. The fair market value of stock options that may be granted to an employee in any calendar year is not limited, but no employee may be granted incentive stock options that first become exercisable during a calendar year to purchase Common Stock with an aggregate fair market value (determined at the time of grant) in excess of $100,000. In addition, no grantee may be granted more than an aggregate of 800,000 shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications. SARs may be granted separately or in tandem with the grant of an option. Any performance awards may be denominated or payable in cash, Common Stock, other securities or other Awards and shall confer on the holder thereof the right to receive payments based upon the achievement of such performance goals and for such periods as the Omnibus Committee may establish. Bonus stock may be sold to the grantees at various prices (but not below par value) and made subject to such restrictions as may be determined by the Omnibus Committee. The Omnibus Committee may grant other Awards that provide the grantee with the right to purchase Common Stock or that are valued by reference to the fair market value of the Common Stock including, but not limited to, phantom securities or dividend equivalents. The exercise or purchase price for all options, restricted stock and other rights to acquire Common Stock, together with any applicable tax required to be withheld, may be paid in cash or, at the discretion of the Omnibus Committee, with shares of Common Stock owned by the grantee (or issuable upon exercise of the option), execution of a promissory note by the grantee or with other lawful consideration. The dates on which options or other Awards first become exercisable and on which they expire will be set forth in individual stock options or other agreements setting forth the terms of the Awards. Such agreements may provide that options and other awards expire upon termination of the grantee's status as an employee or director or for any other reason and may provide that such options continue to be exercisable following the grantee's death or disability by the grantee's estate or by the person who acquired the right to exercise the option by bequest or inheritance, or by the grantee or his representative in the event of the grantee's disability, provided the option is exercised prior to the earlier of the date of its expiration or six months after the date of the grantee's death or disability. In the event of a change of control (as defined in the Omnibus Plan) of the Company, all Awards that have not expired will become fully and immediately vested and exercisable and may be exercised for the remaining term of such Awards. No Award may be assigned or transferred by the grantee, except by will or the laws of intestate succession, although shares of Common Stock issued under the Omnibus Plan may be transferred if all applicable restrictions have lapsed. Amendments of the Omnibus Plan to change the class of persons eligible to be granted awards or increase the number of shares as to which options or bonus stock may be granted (except for adjustments resulting from stock splits and the like) require the approval of the Company's stockholders. In all other respects the Omnibus Plan can be amended, modified, suspended or terminated by the Omnibus Committee, unless such action would otherwise require stockholder approval as a matter of applicable law, regulation or rule. Amendments of the Omnibus Plan may not, without the consent of the grantee, affect such grantee's rights under an Award previously granted, unless the Award itself otherwise expressly so provides. The Omnibus Plan terminates 10 years from the date of its adoption by the Company's Board of Directors. Subject to and concurrently with consummation of the Offering, options to purchase 547,400 shares of Common Stock have been granted, with an exercise price equal to the Offering price, to directors, officers and Named Executive Officers of the Company, including options to purchase 75,000, 15,000, 20,000, 25,000, 25,000, 12,000, 12,000, 10,000, 4,800 and 4,800 shares of Common Stock granted to Messrs. Brutsche, Akimoto, Alley, Bornhorst, Powers, Clark, Maxson, Smith, Prothro and Rettberg, respectively. ESOP. The Company adopted the Vari-Lite International, Inc. Employees' Stock Ownership Plan (the "ESOP"), effective as of January 1, 1995, for the benefit of its employees and the employees of its participating subsidiaries (the Company and its participating subsidiaries are referred to herein as the "Employers") who are 44 at least 21 years of age, have completed at least one "year of service" (as defined in the ESOP) and are actively contributing to the Company's 401(k) plan. The ESOP is intended to be an eligible individual account stock bonus plan that qualifies under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and, subject to certain maximum provisions, allocates the Employers' discretionary contributions to each participating employee according to the ratio of such employee's total compensation to the aggregate amount of compensation received by all participants in the ESOP. The term "compensation" includes base salary paid during a plan year and cafeteria deferrals under Section 125 of the Code, but does not include reimbursements or other expenses, allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation, welfare benefits, bonuses, overtime pay or amounts deferred under a salary deferral arrangement under Section 401(k) of the Code. The Company intends, but is not required, to make annual contributions to the ESOP in the form of nonelective contributions and qualified matching contributions (as each is defined in the ESOP) consisting of shares of Common Stock, cash or a combination thereof. The ESOP provides for full distributions of employee account balances for normal and late retirements, disability and death and distributions of vested portions of employee accounts upon a separation of service (as defined in the ESOP). Generally, a participant's benefits under the ESOP will become vested 20% per year commencing upon completion of three years of service and be fully vested upon completion of seven years of service. The assets of the ESOP are held by Overton Bank and Trust, N.A., as trustee of The Vari-Lite International, Inc. Employees' Stock Ownership Trust, which Trust is intended to be exempt from taxation under Section 501(a) of the Code. The Company acts as Plan Administrator of the ESOP. EQUIVALENCE PLAN. The Company adopted The Vari-Lite International, Inc. Employees' Stock Equivalence Plan (the "Equivalence Plan"), effective as of January 1, 1995, for the benefit of certain employees of subsidiaries of the Company domiciled outside of the United States who are at least 21 years of age and have completed at least one "year of service" (as defined in the Equivalence Plan). The Equivalence Plan is intended to be a nonqualified employee retirement plan known as a phantom stock plan under United States tax laws. Employees participating in the Equivalence Plan are eligible to receive stock equivalence units ("Units") credited to their accounts along with the contractual right to receive the cash value of such Units in the future. No shares of stock will be distributed under the Equivalence Plan. The value of each Unit is equal to the fair market value of one share of Common Stock on the date such Unit is credited to a participant's account. Upon conversion of the Units in accordance with the terms of the Equivalence Plan, participants shall be entitled to receive, for each Unit converted, an amount equal to the fair market value of one share of Common Stock on the date of conversion. A holder of Units shall not have any dividend or voting rights or any other rights as a stockholder of the Company, unless otherwise provided by the Board of Directors of the Company. The number of Units awarded under the Equivalence Plan, if any, will be determined each year by the Compensation Committee. The Company's awards of Units under the Equivalence Plan shall be made, subject to certain maximum provisions, according to the ratio of each eligible employee's total compensation to the amount of total compensation received by all participants in the Equivalence Plan. The Equivalence Plan provides for full distributions of employee account balances upon the retirement, disability or death of an employee and distributions of vested percentages of employee accounts upon termination of employment for any other reason. Generally, a participant's benefits under the Equivalence Plan will fully vest upon his or her completion of seven years of service. The Company established an irrevocable grantor trust within the meaning of the Code (commonly referred to as a rabbi trust) to provide funding for benefit payments from the Equivalence Plan. Although the employers' contributions to the rabbi trust are generally irrevocable, the assets placed in the trust must remain subject to the claims of the employers' creditors. The rabbi trust provides the participants in the Equivalence Plan with additional security that they will receive benefits in the event of a change in the management of the Company. The assets of the Equivalence Plan are held by Bank of Butterfield International (Cayman) Ltd., as trustee of The Vari-Lite International, Inc. Equivalence Plan Trust, and the Company acts as Plan Administrator. 45 ANNUAL INCENTIVE PLAN. On June 13, 1995, the Company adopted the Vari-Lite International, Inc. Annual Incentive Plan (the "Annual Incentive Plan"), effective October 1, 1994, to provide annual bonuses to eligible employees. The Annual Incentive Plan has been amended and restated effective October 1, 1997. Any full-time employee who is employed by the Company or one of its subsidiaries (approved by the Omnibus Committee) on March 31 of a year shall be considered an eligible employee for that year. For purposes of the Annual Incentive Plan, an employee is considered a full-time employee (i) if he is scheduled to work a minimum of 30 hours per week throughout the year and (ii) in the case of an individual who is an employee of the Company or a United States subsidiary of the Company, he is entitled to coverage under the Showco/Vari-Lite Welfare Benefit Plan. Bonus amounts for a year may be granted based on predetermined targets ("formula derived awards") or in the discretion of the Omnibus Committee ("discretionary awards"), or a combination of both. The targets for each year are established by the Omnibus Committee and may be based solely on the Company's attaining its operating income goal for that year (as established by the Omnibus Committee) or may be based in part on the level of attainment by the Company of that operating income goal and in part on the level of attainment of performance measures established by the Omnibus Committee for that year based on subsidiary, department, team or individual performance, or a combination thereof as determined by the Omnibus Committee. The relative weight placed on each performance measure by the Omnibus Committee may vary for each eligible employee based on his position with the Company, or its subsidiaries, departments or teams. Each year each eligible employee shall have the opportunity to earn a specified percentage of his base salary (excluding any bonus, commission or overtime) for that year as a formula derived award. The range of percentage of base salary that a participant may earn as a formula derived award is specified in the Annual Incentive Plan and is determined by each eligible employee's level of responsibility and potential impact on the Company's performance. With respect to years that commenced prior to October 1, 1997, no eligible employee shall be deemed to have earned a formula derived award for a year unless the Company attains the threshold level (specified in the Annual Incentive Plan) of operating income established for that year. Discretionary awards are not limited. The Company shall make payment of all bonus amounts for a year, if any, to each eligible employee in cash no later than 90 days after the end of that year (the "Payout Date"). Unless an eligible employee's full-time employment terminates due to death, total disability or retirement at or after age 65, the employee must be employed by the Company or one of its subsidiaries as a full-time employee on the Payout Date for a year to be entitled to receive payment of his bonus, if any, for that year. If an eligible employee becomes eligible after the first day of the year or dies, retires at or after age 65 or becomes totally disabled during the year, after being employed by the Company for at least six months during that year, the bonus amount, if any, payable to him for that year shall be prorated to reflect the actual length of his service with the Company and its subsidiaries during that year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION At the beginning the fiscal year ended September 30, 1996, the Compensation Committee of the Company consisted of Messrs. Maxson, Clark and Brutsche. Mr. Brutsche is the Chairman of the Board, President and Chief Executive Officer of the Company. In May 1996, Messrs. Smith, Prothro and Rettberg replaced Messrs. Maxson, Clark and Brutsche on the Compensation Committee. As of July 1, 1995, the Company entered into the Brutsche Employment Agreement with Mr. Brutsche, Chairman of the Board, President and Chief Executive Officer of the Company. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. Mr. Brutsche may be terminated in the event of his death or permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If Mr. Brutsche is terminated because of his death, his estate will receive his salary through the end of the month in which his death occurs plus the prorated portion of any bonus due to him pursuant to the Annual 46 Incentive Plan. If Mr. Brutsche is terminated because of his permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits. If Mr. Brutsche is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. As of July 1, 1995, the Company entered into the Deferred Compensation Agreements with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. Messrs. Clark, Maxson and Smith also have entered into the Consulting Agreements with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson each receives an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more Policies pursuant to Split-Dollar Agreements with the Company. The Split-Dollar Agreements each provides for sharing the costs and benefits of the Policy between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. The Owner reimburses the Company for the P.S. 58 Cost. The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policy that is subject to such Split-Dollar Agreement. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. CERTAIN TRANSACTIONS In fiscal years 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, Philip D.C. Collins, who beneficially owns more than five percent of the Common Stock of the Company, paid the Company, $1.5 million, $0.9 million, $0 and $1.9 million, respectively, for the rental of automated lighting products and other services for use in his concert tours. Hit & Run Music Limited, a corporation owned by J. Anthony Smith, manages Mr. Collins. The Company believes that the terms of the above transactions were at least as favorable to the Company as those which could have been obtained in an arm's length transaction with an unaffiliated third party. In addition, certain directors of the Company receive deferred compensation and consulting payments. See "Management--Compensation Committee Interlocks and Inside Participation." 47 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock, as of September 15, 1997, by (a) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (b) each director of the Company, (c) each Named Executive Officer and (d) all executive officers and directors as a group. The Company believes that each of such stockholders has the sole voting and dispositive power over the shares held by such stockholder except as otherwise indicated. See "Risk Factors--Control of the Company by Existing Stockholders."
SHARES PERCENTAGE OF OUTSTANDING BENEFICIALLY OWNED COMMON STOCK BEFORE -------------------------------------- NAME THE OFFERING BEFORE OFFERING AFTER OFFERING(1) - ------------------------------------------------------ ------------------------ ----------------- ------------------- H. R. Brutsche III(2)................................. 743,997 12.8 9.5 James H. Clark, Jr.(3)(4)............................. 650,699 11.2 8.3 John D. Maxson(3)(5).................................. 743,187 12.8 9.5 C. Vincent Prothro.................................... -- -- -- John R. Rettberg...................................... -- -- -- J. Anthony Smith(6)................................... 811,540 14.0 10.4 Anthony G. Banks(6)................................... 811,532 14.0 10.4 Philip D.C. Collins(6)................................ 811,536 14.0 10.4 Michael J.C.C. Rutherford(6).......................... 811,532 14.0 10.4 Alice Spradley(7)..................................... 455,402 7.9 5.8 Keizo Akimoto......................................... -- -- -- David W. Alley(8)..................................... 38,447 * * James M. Bornhorst(9)................................. 221,636 3.8 2.8 T. Clay Powers(10).................................... 10,740 * * James E. Kinnu(11).................................... -- -- -- All officers and directors as a group (18 persons)(12)........................................ 3,335,623 57.5 42.8
- -------- * less than one percent (1) Assumes no shares are sold pursuant to any exercise of the Underwriters' over-allotment option. See "Selling Stockholders." (2) Includes 45,164 shares held by Brutsche Family Trust, a trust of which BBH serves as trustee, and 810 shares held by the ESOP for the benefit of Mr. Brutsche. Mr. Brutsche disclaims beneficial ownership of the shares held by Brutsche Family Trust. Mr. Brutsche's address is 201 Regal Row, Dallas, Texas 75247. (3) The address of Messrs. Clark and Maxson is 8117 Preston Road, Suite 220, Dallas, Texas 75225. (4) Includes 621,801 shares held by Clark Partnership, Ltd., a limited partnership of which Mr. Clark is the managing general partner, and 3,764 shares held by Mr. Clark's wife. Mr. Clark disclaims beneficial ownership of the shares owned by his wife. (5) Includes 53,542 shares held by Peggy Maxson 1996 Irrevocable Trust, a trust of which BBH serves as trustee. Mr. Maxson disclaims beneficial ownership of such shares. (6) The shares beneficially owned by Messrs. Banks, Collins, Rutherford and Smith include 414,336 shares, 414,336 shares, 414,336 shares and 414,340 shares held by Walbrook Trustees (Jersey) Ltd., Re: G45 ("G45"), Walbrook Trustees (Jersey) Ltd., Re: G46 ("G46"), Walbrook Trustees (Jersey) Ltd., Re: G47 ("G47") and Walbrook Trustees (Jersey) Ltd., Re: G48 ("G48"), respectively. G45, G46, G47 and G48 are the stockholders of Ashtray Music Ltd., a United Kingdom limited company. The 318,787 shares held by Ashtray Music Ltd. are included in the shares owned beneficially by each of Messrs. Banks, Collins, Rutherford and Smith. Except for 78,409 shares, 78,413 shares, 78,409 shares and 78,413 shares, which are owned by Messrs. Banks, Collins, Rutherford and Smith, respectively, Messrs. Banks, Collins, Rutherford and Smith disclaim beneficial ownership of all such shares. (7) Includes 56,192 shares held by The Walter & Alice Spradley Family Trust, 203,243 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #1, 56,192 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #2A and 139,775 shares held by The Walter & Alice Spradley Living Trust--Marital Trust #2B. Alice Spradley is the trustee of all of such trusts. Mrs. Spradley's address is 3131 McKinney Avenue, Suite 490, Dallas, Texas 75204. (8) Includes 810 shares held by the ESOP for the benefit of Mr. Alley. (9) Includes 693 shares held by the ESOP for the benefit of Mr. Bornhorst. (10) Includes 650 shares held by the ESOP for the benefit of Mr. Powers. (11) Effective September 30, 1996, Mr. Kinnu was terminated as the Company's Senior Executive Vice President and Chief Operating Officer. (12) Includes 5,912 shares held by the ESOP for the benefit of some of such persons. 48 SELLING STOCKHOLDERS The Selling Stockholders listed in the following table have granted to the several Underwriters options, exercisable within 45 days from the date of this Prospectus, to purchase up to 300,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." The respective number of shares of Common Stock subject to such options by each Selling Stockholder is set forth opposite his name. The amount beneficially owned by the Selling Stockholders prior to the Offering are as of September 15, 1997:
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE THE SHARES OFFERED OWNED AFTER THE OFFERING SUBJECT TO OFFERING(1) ---------------------- OVER-ALLOTMENT ---------------------- NAME NUMBER PERCENTAGE OPTIONS NUMBER PERCENTAGE - ---------------------------------------------------------------- --------- ----------- --------------- --------- ----------- David W. Alley(2)(3)............................................ 38,447 * 1,976 36,471 * Ashtray Music Ltd.(4)........................................... 318,787 5.5 26,728 292,059 3.7 Anthony G. Banks(4)............................................. 811,532 14.0 4,116 758,936 9.7 H.R. Brutsche III(2)(5)......................................... 743,997 12.8 39,972 704,025 9.0 Clark Partnership, Ltd.(6)...................................... 621,801 10.7 34,412 587,389 7.5 James H. Clark, Jr.(2)(6)(7).................................... 650,699 11.2 1,319 614,968 7.9 James H. Cullum Clark(7)........................................ 73,670 1.3 3,867 69,803 * Philip D.C. Collins(4)(8)....................................... 811,536 14.0 4,116 758,940 9.7 John Covington(9)(10)........................................... 80,514 1.4 4,205 76,309 * Brian L. Croft(2)............................................... 9,409 * 409 9,000 * Robert V. Dungan(2)(11)......................................... 9,833 * 494 9,339 * Robert W. Magruder(9)(12)....................................... 28,249 * 1,457 26,792 * John D. Maxson(2)(13)........................................... 743,187 12.8 39,536 700,840 9.0 Peggy Maxson 1996 Irrevocable Trust(13)......................... 53,542 * 2,811 50,731 * Howard Page(9)(14).............................................. 4,163 * 198 3,965 * Michael J.C.C. Rutherford(4).................................... 811,532 14.0 4,116 758,936 9.7 J. Anthony Smith(2)(4)(8)....................................... 811,540 14.0 4,116 758,944 9.7 The Walter & Alice Spradley Living Trust--Marital Trust #1...... 203,243 3.5 26,476 176,767 2.2 Brooks W. Taylor(9)(15)......................................... 80,538 1.4 4,205 76,333 * J. Scott Thompson(2)(16)........................................ 37,635 * 1,708 35,927 * Thomas Walsh(9)(17)............................................. 80,552 1.4 4,205 76,347 * Walbrook Trustees (Jersey) Ltd., Re: G45(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G46(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G47(4)..................... 733,123 12.6 21,752 684,643 8.8 Walbrook Trustees (Jersey) Ltd., Re: G48(4)..................... 733,127 12.6 21,752 684,647 8.8 Yale 1994 Trust................................................. 18,818 * 2,550 16,268 *
- -------- * less than one percent. (1) Assumes that the Underwriters' over-allotment option is exercised in full. (2) Executive officer or director of the Company. See "Management--Directors and Executive Officers." (3) Includes 810 shares held by the ESOP for the benefit of Mr. Alley. (4) The shares beneficially owned by Messrs. Banks, Collins, Rutherford and Smith include 414,336 shares, 414,336 shares, 414,336 shares and 414,340 shares held by G45, G46, G47 and G48, respectively. G45, G46, G47 and G48 are the stockholders of Ashtray Music Ltd., a United Kingdom limited company. The 318,787 shares held by Ashtray Music Ltd. are included in the shares owned beneficially by each of Messrs. Banks, Collins, Rutherford and Smith. Except for 78,409 shares, 78,413 shares, 78,409 shares and 78,413 shares, which are owned by Messrs. Banks, Collins, Rutherford and Smith, respectively, Messrs. Banks, Collins, Rutherford and Smith disclaim beneficial ownership of all such shares. (5) Includes 45,164 shares held by Brutsche Family Trust, a trust of which BBH serves as trustee, and 810 shares held by the ESOP for the benefit of Mr. Brutsche. Mr. Brutsche disclaims beneficial ownership of such shares. (6) The shares beneficially owned by Mr. Clark include 621,801 shares held by Clark Partnership, Ltd., a limited partnership of which Mr. Clark is the managing general partner, and 3,764 shares held by Mr. Clark's wife. Mr. Clark disclaims beneficial ownership of the shares held by his wife. (7) Mr. James H. Clark, Jr. is the father of Mr. James H. Cullum Clark. (8) Mr. Collins is a significant customer of the Company and Mr. Smith owns the corporation that manages Mr. Collins. See "Management--Certain Transactions." (9) Non-executive officer employee of the Company. (10) Includes 419 shares held by the ESOP for the benefit of Mr. Covington. (11) Includes 424 shares held by the ESOP for the benefit of Mr. Dungan. (12) Includes 503 shares held by the ESOP for the benefit of Mr. Magruder. (13) The shares of Common Stock held by Peggy Maxson 1996 Irrevocable Trust are beneficially owned by Mr. Maxson, who disclaims beneficial ownership of such shares. (14) Includes 399 shares held by the ESOP for the benefit of Mr. Page. (15) Includes 443 shares held by the ESOP for the benefit of Mr. Taylor. (16) Includes 480 shares held by the ESOP for the benefit of Mr. Thompson. (17) Includes 457 shares held by the ESOP for the benefit of Mr. Walsh. 49 DESCRIPTION OF CAPITAL STOCK The Company has authorized capital stock consisting of 40,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. At September 15, 1997, there were 5,800,003 shares of Common Stock outstanding, owned by 54 holders of record, and there were no shares of Preferred Stock outstanding. A total of 800,000 shares of Common Stock are reserved for issuance under the Omnibus Plan, and a total of 242,233 shares of Common Stock are reserved for issuance upon the exercise of outstanding warrants. See "Management--Omnibus Plan" and "Shares Eligible for Future Sale." Upon consummation of the Offering, 7,800,003 shares of Common Stock and no shares of Preferred Stock will be outstanding. COMMON STOCK All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby when issued and paid for will be, fully paid and nonassessable. All holders of Common Stock have full voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Votes may not be cumulated in the election of directors. Stockholders have no preemptive or subscription rights. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors from funds legally available therefor and are entitled, upon liquidation, to share ratably in all assets remaining after payment of liabilities. The rights of holders of Common Stock will be subject to any preferential rights of any Preferred Stock which may be issued in the future. The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. PREFERRED STOCK The Board of Directors of the Company is authorized (without any further action by the stockholders) to issue Preferred Stock in one or more series and to fix voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences. The Board of Directors may issue Preferred Stock for such consideration and on such terms as it deems desirable. Satisfaction of any dividend preferences of outstanding Preferred Stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of Directors of the Company, without stockholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the holders of Common Stock. The Company has no present intention to issue any shares of Preferred Stock. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS ANTI-TAKEOVER PROVISIONS. The Certificate of Incorporation and By-Laws contain certain provisions, in addition to the authorization of the Preferred Stock, that may reduce the likelihood of a change in management or voting control of the Company without the consent of the Company's Board of Directors. These provisions could have the effect of delaying, deterring or preventing tender offers or takeover attempts that some or a majority of the Company's stockholders might consider to be in the stockholders' best interest, including offers or attempts that might result in a premium over the market price for the Common Stock. The By-Laws of the Company can be amended by the stockholders of the Company only upon the affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company. Additionally, in the event of a change of control (as defined in the Omnibus Plan) of the Company, all awards under the Omnibus Plan that have not expired become fully and immediately vested and exercisable and may be exercised for the remaining terms of such awards. 50 STAGGERED BOARD OF DIRECTORS. The Certificate of Incorporation and By-Laws divide the Board of Directors into three classes that are elected to staggered three-year terms. The Company believes that a staggered Board of Directors will help assure the continuity and stability of the Company's Board of Directors and the Company's business strategies and policies. In addition, the staggered board provisions help ensure that the Company's Board of Directors, if confronted with an unsolicited proposal from a third party that has acquired a block of the voting stock of the Company, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all stockholders. The staggered board provisions could increase the likelihood that, in the event of a takeover of the Company, incumbent directors would retain their positions. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. REMOVAL OF DIRECTORS DURING THEIR TERMS. Under the Certificate of Incorporation and By-Laws, directors may be removed during their term of service only "for cause" and only by the affirmative vote of not less than 80% of the outstanding voting stock of the Company. As defined, "for cause" means: (i) commission of an act of fraud or embezzlement against the Company; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Company or its stockholders; or (iv) breach of fiduciary duty owed to the Company. The By-Laws also provide that vacant directorships may be filled by the Board of Directors. STOCKHOLDER ACTION. Unless limited by the Certificate of Incorporation of a corporation, the Delaware General Corporation Law permits stockholder action without a meeting, without prior notice and without a vote upon the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The Certificate of Incorporation and By-Laws prohibit stockholder action without a meeting. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. Additionally, the Certificate of Incorporation and By-Laws provide that meetings of the stockholders can only be called by the Chief Executive Officer, a majority of the Board of Directors or holders of not less than 50% of the outstanding voting stock of the Company. FAIR PRICE PROVISION. The Certificate of Incorporation includes a "fair price" provision that requires the affirmative vote of the holders of at least 80% of the outstanding voting stock of the Company to approve a merger with, or disposition of assets or the issuance of securities having a fair market value of $5.0 million or more to, an interested stockholder (as hereinafter defined), a liquidation proposed by an interested stockholder or the reclassification of the Company's securities or a similar transaction that increases the interested stockholder's proportionate ownership in the Company. An "interested stockholder" is anyone who owns or controls, directly, indirectly or together with others, 10% or more of the Company's voting stock. A transaction with an interested stockholder will not require stockholder approval if a majority of disinterested directors (as defined in the Certificate of Incorporation) approves the transaction or if the transaction involves the distribution to the stockholders of cash or other consideration that satisfies the "fair price" criteria set forth in the Certificate of Incorporation, which generally require that all stockholders receive equal treatment, an adequate price and adequate disclosure. The fair price provision of the Certificate of Incorporation may not be amended without the affirmative vote of at least 80% of the Company's outstanding voting stock. In addition, Section 203 of the Delaware General Corporation Law, much like the fair price provision described above, limits the ability of a corporation to enter into certain business combinations with an "interested stockholder" (generally defined as a person owning 15% or more of a corporation's outstanding voting stock) unless certain conditions are met. The Certificate of Incorporation, however, includes a provision electing not to be governed by Section 203. EVALUATION FACTORS. The Certificate of Incorporation contains a provision that allows the Board of Directors to evaluate factors other than the price offered when considering a proposed acquisition of the Company. The Certificate of Incorporation permits the Board of Directors to consider the social, legal and 51 economic effects of the proposed acquisition upon the Company's employees, suppliers, customers and the communities in which the Company operates. The Board of Directors can also consider any other factors it deems relevant, including not only the consideration offered in the proposed transaction relative to the market price of the Common Stock but also the value of the Company in a freely negotiated transaction and in relation to the estimate by the Board of Directors of the future value of the Company as an independent entity. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. STOCKHOLDER PROPOSALS AND NOMINATIONS. The Company's By-Laws provide that notice of proposed stockholder nominations for the election of directors must be given in writing to the Secretary of the Company at the principal executive offices of the Company not less than 75 days nor more than 85 days prior to the meeting at which directors are to be elected (or if fewer than 75 days' notice or prior public disclosure of the stockholders' meeting date is given or made by the Company, not later than the 10th day following the day on which the notice was mailed or such public disclosure was made). The By-Laws also provide that at an annual stockholders' meeting, and subject to any other applicable requirements, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors or by a stockholder who has given timely prior written notice to the Secretary of the Company of such stockholder's intention to bring such business before the meeting. For such stockholder's notice to be timely, it must be delivered to or mailed and received at the principal executive offices of the Company not later than the date that corresponds to 120 days prior to the date the Company's proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders. Such notice must contain certain information specified in the By-Laws. LIMITATIONS ON LIABILITY OF DIRECTORS. The Certificate of Incorporation limits the liability of directors to the extent allowed by the Delaware General Corporation Law. Specifically, directors will not be held liable to the Company or its stockholders for an act or omission in such capacity as a director, except for liability as a result of: (i) a breach of the duty of loyalty to the Company or its stockholders; (ii) actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) payment of an improper dividend or improper repurchase of the Company's stock under Section 174 of the Delaware General Corporation Law; or (iv) actions or omissions pursuant to which the director will receive an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of the Company unless the stockholder can demonstrate one of the specified bases for liability. This provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The Certificate of Incorporation does not eliminate the directors' duty of care. The inclusion of this provision in the Certificate of Incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise benefit the Company and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. INDEMNIFICATION. The Certificate of Incorporation and By-Laws provide that the Company is generally required to indemnify its directors and officers for all judgments, fines, settlements, legal fees and other expenses incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with the Company or another entity that the director or officer serves at the Company's request, subject to certain conditions, and to advance funds to its directors and officers to enable them to defend against such proceedings. To receive indemnification, the director or officer must have been successful in the legal proceeding or acted in good faith and in what was reasonably believed to be a lawful manner and in the Company's best interest. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. 52 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the current stockholders of the Company will own approximately 74% of the outstanding Common Stock (71% if the Underwriters' over-allotment option is exercised in full). The Company and certain stockholders who will collectively own shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed with A.G. Edwards & Sons, Inc. not to sell, grant any option to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Underwriting." Upon completion of the Offering, the Company will have 7,800,003 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in the Offering (2,300,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately 5,696,592 of such shares will have been held for more than one year as of the date of this Prospectus and (subject to the expiration or release from the 180-day lock-up agreements with A.G. Edwards & Sons, Inc.) may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Exchange Act, subject to the volume, manner of sale and other limitations of Rule 144. See "Underwriting." In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed between the later of the date on which "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an "affiliate" of the Company (as that term is defined in Rule 144), then the holder of such restricted shares (including an affiliate) is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of (a) 1% of the then-outstanding shares of Common Stock (78,000 shares upon completion of the Offering), and (b) the average weekly reported trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain notice and manner-of-sale requirements and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an affiliate of the Company (in general, a person who is not a director, officer or principal stockholder of the Company) during the three months prior to resale and who has beneficially owned such shares for at least two years is entitled to sell such restricted stock under Rule 144 without regard to the requirements discussed above, other than the manner-of-sale provisions. The Company is unable to estimate the number of shares that may be sold in the future by its stockholders since this will depend on the market price for the Common Stock, the personal circumstances of the stockholders and other factors. Any sale of substantial amounts of shares in the open market may significantly reduce the market price of the Common Stock offered hereby. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act may be relied upon with respect to the resale of shares of Common Stock originally purchased from the Company by its employees, directors and officers prior to the date the Company becomes subject to the reporting requirements of the Exchange Act pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. Shares of Common Stock issued in reliance on Rule 701 are "restricted shares" and, beginning 90 days after the Company becomes subject to the reporting requirements of the Exchange Act, may be sold by persons other than affiliates, subject to the provisions regarding manner-of-sale under Rule 144, and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. The Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan and the ESOP. After the effective date of such registration statements, shares owned pursuant to grants of Awards under the Omnibus Plan or issued pursuant to the ESOP will be available for resale in the public market without restriction by 53 persons who are not affiliates of the Company, and to the extent they are held by affiliates, pursuant to Rule 144, without observance of the holding period requirements. Effective with the consummation of the Offering, options to purchase a total of 547,400 shares of Common Stock will be granted under the Omnibus Plan, none of which will be exercisable in less than one year from the date of grant, and 42,944 shares will be owned by the ESOP. See "Risk Factors--Control of the Company by Existing Stockholders," "Management--Employee Benefit Plans--Omnibus Plan," "Management--Employee Benefits Plans--ESOP" and "Management-- Employee Benefits Plans--Equivalence Plan." In connection with an amendment to the Credit Agreement on July 31, 1996, the Company issued to certain members of its bank syndicate warrants to purchase an aggregate of 242,233 shares of Common Stock at an exercise price of $11.53 per share, all of which will remain outstanding after consummation of the Offering. The outstanding warrants can be exercised at any time and the underlying shares can be sold either pursuant to demand registration rights which are exercisable on the first anniversary of the consummation of the Offering and thereafter on an annual basis through December 31, 2004, or pursuant to piggyback registration rights which are exercisable at any time. UNDERWRITING The Underwriters named below have severally agreed with the Company subject to the terms and conditions of the Underwriting Agreement, to purchase the respective numbers of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITERS SHARES - ---------------------------------------------------------------------------------- ---------- A.G. Edwards & Sons, Inc.......................................................... EVEREN Securities, Inc............................................................ ---------- Total........................................................................... 2,000,000 ---------- ----------
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock, if any are purchased. The Company has been advised by A.G. Edwards & Sons, Inc. and EVEREN Securities, Inc., the Representatives of the several Underwriters (the "Representatives"), that the Underwriters propose to offer the Common Stock to the public at the Offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share and that the Underwriters and such dealers may reallow a discount of not in excess of $ per share to other dealers. The Offering price and the concession and discount to dealers may be changed by the Underwriters after the Offering. 54 In the Underwriting Agreement, the Selling Stockholders have granted the Underwriters options, expiring at the close of business on the 45th day subsequent to the date of this Prospectus, to purchase up to an aggregate of 300,000 additional shares of Common Stock at the Offering price, less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such options solely to cover over-allotments, if any, in the sale of the shares. To the extent the Underwriters exercise such options, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the option shares as the number of shares to be purchased by it shown in the table above bears to 2,000,000, and the Selling Stockholders will be obligated, pursuant to the options, to sell such shares to the Underwriters for which they will receive all of the proceeds. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The liability of each Selling Stockholder under this indemnity is limited to the amount of his proceeds. The Company and certain stockholders who collectively will own 5,778,111 shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase 242,233 shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock, other than the shares offered pursuant to this Prospectus, for a period of 180 days from the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Shares Eligible for Future Sale." In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company and the Selling Stockholders, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 300,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, A.G. Edwards & Sons, Inc., on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if it is undertaken, it may be discontinued at any time. The Representatives has informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The Offering price for the Common Stock was determined by negotiation between the Company and the Representatives. Among the factors considered in determining the Offering price was the history of and the prospects for the Company and the industry in which it operates, the past and present operating results of the Company and the trends of such results, the future prospects of the Company, an assessment of the Company's management, the general condition for the securities markets at the time of the Offering and the prices for similar securities of comparable companies. 55 LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Gardere & Wynne, L.L.P., Dallas, Texas. Certain legal matters pertaining to the Common Stock will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas. EXPERTS The consolidated financial statements of the Company as of September 30, 1995 and 1996 and for each of the three years in the period ended September 30, 1996, and as of June 30, 1997 and for the nine months in the period then ended, included in this Prospectus and the Registration Statement have been audited by Deloitte & Touche LLP, independent certified public accountants, as stated in their report thereon appearing herein, and have been so included in reliance upon the report of such firm given upon the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information concerning the Company and the Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, copies of which may be inspected at the Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, or copies of which may be obtained from the Commission at such office upon payment of the fees prescribed by the Commission or on the Internet at HTTP://WWW.SEC.GOV. The summaries in this Prospectus of additional information included in the Registration Statement or any exhibit thereto are qualified in their entirety by reference to such information or exhibit filed with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 56 INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of September 30, 1995 and 1996, and June 30, 1997...... F-3 Consolidated Statements of Income for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 (unaudited) and 1997.............. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1997.................... F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 (unaudited) and 1997.............. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders of Vari-Lite International, Inc. Dallas, Texas We have audited the accompanying consolidated balance sheets of Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") as of September 30, 1995 and 1996 and June 30, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996 and for the nine-month period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 1995 and 1996 and June 30, 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 and for the nine-month period ended June 30, 1997, in conformity with generally accepted accounting principles. Dallas, Texas August 27, 1997 (October , 1997, as to the first paragraph of Note F) The accompanying consolidated financial statements are presented to give effect to the Company's reincorporation in Delaware and related recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. The above opinion is in the form which will be signed by Deloitte & Touche LLP upon effectiveness of the above events, assuming that from August 27, 1997 to the effective date of such events, no other material events have occurred which would affect the accompanying consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas October 10, 1997 F-2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, -------------------- JUNE 30, 1995 1996 1997 --------- --------- ----------- CURRENT ASSETS: Cash........................................................................... $ 3,973 $ 2,633 $ 1,350 Receivables, less allowance for doubtful accounts of $495, $348 and $448....... 8,616 12,078 13,554 Inventory...................................................................... 2,013 2,395 2,996 Prepaid expense and other current assets....................................... 1,876 816 2,016 --------- --------- ----------- TOTAL CURRENT ASSETS......................................................... 16,478 17,922 19,916 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment................................................... 79,486 87,932 102,497 Machinery and tools............................................................ 1,591 2,179 2,149 Furniture and fixtures......................................................... 3,563 3,728 3,791 Office and computer equipment.................................................. 5,244 7,593 8,035 Work in progress and raw materials inventory................................... 3,759 3,259 6,806 --------- --------- ----------- 93,643 104,691 123,278 Less accumulated depreciation and amortization............................... 38,620 47,982 55,652 --------- --------- ----------- 55,023 56,709 67,626 OTHER ASSETS..................................................................... 1,964 3,950 5,072 --------- --------- ----------- TOTAL ASSETS................................................................. $ 73,465 $ 78,581 $ 92,614 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses.......................................... $ 10,361 $ 8,596 $ 10,833 Unearned revenue............................................................... 1,622 2,195 2,478 Income taxes payable........................................................... 857 350 105 Current portion of long-term obligations....................................... 8,477 7,427 7,768 --------- --------- ----------- TOTAL CURRENT LIABILITIES.................................................... 21,317 18,568 21,184 LONG-TERM OBLIGATIONS............................................................ 26,393 29,922 37,593 DEFERRED INCOME TAXES............................................................ 4,426 5,553 6,417 --------- --------- ----------- TOTAL LIABILITIES............................................................ 52,136 54,043 65,194 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $0.10 par value (10,000,000 shares authorized; no shares outstanding)................................................................. -- -- -- Common Stock, $0.10 par value (40,000,000 shares authorized; 5,813,687, 5,822,675 and 5,800,003 shares outstanding).................................. 581 583 585 Treasury Stock................................................................. -- (28) (186) Additional paid-in capital..................................................... 2,843 3,096 3,343 Stockholder notes receivable................................................... (399) (353) (186) Stock purchase warrants........................................................ 663 600 600 Cumulative foreign currency translation adjustment............................. 780 905 1,137 Retained earnings.............................................................. 16,861 19,735 22,127 --------- --------- ----------- TOTAL STOCKHOLDERS' EQUITY................................................... 21,329 24,538 27,420 --------- --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 73,465 $ 78,581 $ 92,614 --------- --------- ----------- --------- --------- -----------
See notes to consolidated financial statements. F-3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER FOR THE NINE MONTHS 30, ENDED JUNE 30, ------------------------------- ---------------------- 1994 1995 1996 1996 1997 --------- --------- --------- ----------- --------- (UNAUDITED) Rental revenues.......................................... $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,207 Product sales and services revenues...................... 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- ----------- --------- TOTAL REVENUES......................................... 53,812 74,910 77,138 53,431 66,895 Rental cost.............................................. 18,775 26,288 26,425 18,267 22,115 Product sales and services cost.......................... 4,284 6,637 7,783 5,601 7,410 --------- --------- --------- ----------- --------- TOTAL COST OF SALES.................................... 23,059 32,925 34,208 23,868 29,525 --------- --------- --------- ----------- --------- GROSS PROFIT........................................... 30,753 41,985 42,930 29,563 37,370 Selling, general and administrative expense.............. 19,181 28,163 30,077 22,230 24,855 Research and development expense......................... 3,033 3,283 4,404 2,947 4,872 --------- --------- --------- ----------- --------- TOTAL OPERATING EXPENSES............................... 22,214 31,446 34,481 25,177 29,727 --------- --------- --------- ----------- --------- OPERATING INCOME......................................... 8,539 10,539 8,449 4,386 7,643 Interest expense (net)................................... 1,805 2,788 3,092 2,437 2,694 --------- --------- --------- ----------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 6,734 7,751 5,357 1,949 4,949 Income taxes............................................. 2,400 3,037 2,238 813 1,993 --------- --------- --------- ----------- --------- INCOME BEFORE EXTRAORDINARY LOSS......................... 4,334 4,714 3,119 1,136 2,956 Extraordinary loss from early extinguishment of debt (net of tax of $389)........................................ 756 -- -- -- -- --------- --------- --------- ----------- --------- NET INCOME............................................... $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING...................... 5,771,648 5,814,014 5,911,983 5,928,266 5,818,571 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- NET INCOME PER SHARE..................................... $ 0.62 $ 0.81 $ 0.53 $ 0.19 $ 0.51 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- ---------
See notes to consolidated financial statements. F-4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL --------------------- --------------------- ---------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ---------- --------- ---------- --------- --------- ----------- ----------- BALANCE, OCTOBER 1, 1993............... -- $ -- 5,645,967 $ 564 -- $ -- $ 1,936 Dividends declared..................... Shares purchased and retired........... (1,709) -- (4) Shares issued.......................... 47,046 5 97 Net effect of translation adjustment... Adjust warrant valuation allowance..... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1994............ -- -- 5,691,304 569 -- -- 2,029 Dividends declared..................... Shares issued.......................... 90,328 9 322 Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 32,055 3 492 Net effect of translation adjustment... Adjust warrant valuation allowance..... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1995............ -- -- 5,813,687 581 -- -- 2,843 Dividends declared..................... Purchase of treasury stock............. (7,527) (28) Purchases of stock warrants............ Issuance of stock warrants............. Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 16,515 2 253 Net effect of translation adjustment... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1996............ -- -- 5,830,202 583 (7,527) (28) 3,096 Dividends declared..................... Purchase of treasury stock............. (37,637) (158) Payments on stockholder notes receivable........................... Issuance of stock to the ESOP and ESEP................................. 14,965 2 247 Net effect of translation adjustment... Net income............................. ---------- --------- ---------- --------- --------- ----- ----------- BALANCE, JUNE 30, 1997................. -- $ -- 5,845,167 $ 585 (45,164) $ (186) $ 3,343 ---------- --------- ---------- --------- --------- ----- ----------- ---------- --------- ---------- --------- --------- ----- ----------- CUMULATIVE FOREIGN STOCKHOLDER STOCK CURRENCY NOTES PURCHASE TRANSLATION RETAINED RECEIVABLE WARRANTS ADJUSTMENT EARNINGS TOTAL ------------- ----------- ----------- ----------- --------- BALANCE, OCTOBER 1, 1993............... $ -- $ 480 $ 651 $ 9,671 $ 13,302 Dividends declared..................... (315) (315) Shares purchased and retired........... (4) Shares issued.......................... (99) 3 Net effect of translation adjustment... 67 67 Adjust warrant valuation allowance..... 67 (67) -- Net income............................. 3,578 3,578 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1994............ (99) 547 718 12,867 16,631 Dividends declared..................... (604) (604) Shares issued.......................... (323) 8 Payments on stockholder notes receivable........................... 23 23 Issuance of stock to the ESOP and ESEP................................. 495 Net effect of translation adjustment... 62 62 Adjust warrant valuation allowance..... 116 (116) -- Net income............................. 4,714 4,714 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1995............ (399) 663 780 16,861 21,329 Dividends declared..................... (648) (648) Purchase of treasury stock............. (28) Purchases of stock warrants............ (663) 403 (260) Issuance of stock warrants............. 600 600 Payments on stockholder notes receivable........................... 46 46 Issuance of stock to the ESOP and ESEP................................. 255 Net effect of translation adjustment... 125 125 Net income............................. 3,119 3,119 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1996............ (353) 600 905 19,735 24,538 Dividends declared..................... (564) (564) Purchase of treasury stock............. (158) Payments on stockholder notes receivable........................... 167 167 Issuance of stock to the ESOP and ESEP................................. 249 Net effect of translation adjustment... 232 232 Net income............................. 2,956 2,956 ----- ----- ----------- ----------- --------- BALANCE, JUNE 30, 1997................. $ (186) $ 600 $ 1,137 $ 22,127 $ 27,420 ----- ----- ----------- ----------- --------- ----- ----- ----------- ----------- ---------
See notes to consolidated financial statements. F-5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER FOR THE NINE MONTHS 30, ENDED JUNE 30, ------------------------------- ---------------------- 1994 1995 1996 1996 1997 --------- --------- --------- ----------- --------- (UNAUDITED) Cash flows from operating activities: Net income....................................................... $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,956 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 5,876 8,436 9,869 7,393 8,490 Amortization of note discount and deferred loan fees........... 205 186 199 149 265 Extraordinary loss from the early extinguishment of debt....... 756 -- -- -- -- Provision for doubtful accounts................................ 67 334 348 103 94 Deferred income taxes.......................................... 958 702 1,127 (51) 864 Loss (gain) on sale of equipment and other property............ (53) (15) 42 -- (41) Cost of rental equipment sold under sales-type leases.......... -- 353 606 -- 1,515 Provisions for ESOP and ESEP contributions..................... -- 750 250 186 189 Net change in assets and liabilities: Accounts receivable.......................................... (2,823) (2,896) (3,396) (3,423) (1,570) Prepaid expenses............................................. (959) (15) 1,060 (394) (1,200) Inventory.................................................... -- (1,031) (382) (475) (601) Other assets................................................. (1,130) (370) (2,616) (1,880) (1,325) Accounts payable, accrued liabilities and income taxes payable.................................................... 3,543 3,079 (2,726) (1,823) 1,045 Unearned revenue............................................. 919 286 1,031 2,365 1,291 --------- --------- --------- ----------- --------- Net cash provided by operating activities.................... 10,937 14,513 8,531 3,286 11,972 Cash flows from investing activities: Capital expenditures, including rental equipment................. (13,566) (20,748) (12,587) (9,125) (20,518) VLEH acquisition................................................. (5,940) -- -- -- -- Proceeds from sale of equipment.................................. 582 107 155 -- 129 --------- --------- --------- ----------- --------- Net cash used in investing activities........................ (18,924) (20,641) (12,432) (9,125) (20,389) Cash flows from financing activities: Proceeds from issuance of debt................................... 25,800 10,998 28,204 12,476 16,967 Principal payments on debt....................................... (12,525) (3,926) (24,601) (8,869) (8,127) Proceeds from issuance of distributor advances................... 997 2,168 1,745 1,306 604 Principal payments on distributor advances....................... (4,200) (1,362) (1,894) (1,322) (1,254) Proceeds from payments on stockholder notes receivable........... -- 33 46 38 166 Proceeds from issuance of common stock........................... 102 -- -- -- -- Prepayment penalty from early extinguishment of debt............. (500) -- -- -- -- Purchase of common stock......................................... (4) -- -- -- -- Purchase of treasury stock....................................... -- -- (28) -- (158) Purchase of stock warrant........................................ -- -- (260) -- -- Dividends paid................................................... (315) (604) (648) (568) (564) --------- --------- --------- ----------- --------- Net cash provided by financing activities.................... 9,355 7,307 2,564 3,061 7,634 Effect on cash from foreign currency translation adjustment........ 99 (624) (3) 47 (500) --------- --------- --------- ----------- --------- Net increase (decrease) during the period.......................... 1,467 555 (1,340) (2,731) (1,283) Cash, beginning of period.......................................... 1,951 3,418 3,973 3,973 2,633 --------- --------- --------- ----------- --------- Cash, end of period................................................ $ 3,418 $ 3,973 $ 2,633 $ 1,242 $ 1,350 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Supplemental Cash Flow Information - ------------------------------------------------------------------- Cash paid for interest expense................................... $ 1,812 $ 2,905 $ 3,234 $ 2,564 $ 2,956 Cash paid for income taxes....................................... $ 1,111 $ 1,752 $ 1,528 $ 1,470 $ 1,765 Non-cash transactions: Acquisition of property under capital leases................... $ 302 $ -- $ -- $ -- $ -- Warrants issued................................................ $ -- $ -- $ 600 $ -- $ -- Warrant retired................................................ $ -- $ -- $ (403) $ -- $ --
See notes to consolidated financial statements. F-6 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE A--ORGANIZATION: Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. On March 31, 1994, the Company formed Vari-Lite Europe Holdings Limited ("VLEH") to acquire the net assets, consisting primarily of equipment and property, and the operations of three London-based companies, which were in the business of providing lighting services and stage and stage set design and construction services. The total purchase price, including related acquisition and financing costs was approximately $6,000, which was funded with a portion of the proceeds from the Company's Credit Facility (see Note E). The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the tangible assets acquired and liabilities assumed based upon a determination of their fair values at the acquisition date. The results of operations of VLEH have been included in the consolidated financial statements since the date of the VLEH acquisition. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES The consolidated financial statements of Vari-Lite International, Inc. includes the accounts of its wholly-owned subsidiaries Vari-Lite, Inc., Showco, Inc., Irideon, Inc., IGNITION! Creative Group, Inc., Concert Production Lighting, Inc., Vari-Lite Asia, Inc. (a Japanese corporation), Vari-Lite Hong Kong Limited and VLEH and its subsidiaries. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from these estimates. INTERIM FINANCIAL STATEMENTS The consolidated statements of income, stockholders' equity and cash flows for the nine months ended June 30, 1996, have been prepared by the Company without audit. In the opinion of management, all adjustments (which included only normal, recurring adjustments) necessary to present fairly the results of operations and cash flows for the nine months ended June 30, 1996, have been made. The results of operations for the nine months ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. INTEREST RATE SWAP AGREEMENTS The Company uses interest rate swap agreements to reduce risks associated with variable interest rates and does not enter into such transactions for speculative or trading purposes. The net interest received or paid on interest rate swap agreements is reflected as income or expense of the relevant hedged position. Gains and losses resulting from the termination of interest rate swap agreements are recognized in the period of sale. F-7 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has certain financial instruments consisting primarily of cash, accounts and lease receivables, debt and long-term obligations and interest rate swap agreements. The carrying values of substantially all of the financial instruments approximate their respective fair values. INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. EQUIPMENT AND OTHER PROPERTY Equipment and other property are stated at cost or, in the case of capitalized leases, at the lower of the present value of future lease payments or the fair value of the equipment. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the various classes of equipment and other property. In 1996, management reevaluated the estimated useful lives of the Company's lighting equipment and accordingly lengthened the lives of certain lighting equipment to correspond with the anticipated revenue of the equipment. LONG-LIVED ASSETS As required by Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Long-Lived Assets," the Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the assets' carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairment losses have been identified by the Company. OTHER ASSETS The Company capitalizes and includes in other assets deferred financing costs and the costs of acquiring patents and trademarks on its products. Deferred financing costs are amortized over the term of the related debt. Amortization on patents and trademarks is computed on the straight-line basis over the lives of the patents or trademarks or the period of expected benefit. In addition, the Company capitalizes legal costs associated with the pursuit of third parties for infringement of certain of the Company's patents, copyrights and trademarks when the Company is successful, or management believes it will be successful, and that these costs will be recovered pursuant to SFAS No. 121. These costs are amortized over the lives of the applicable patents, copyrights and trademarks. REVENUE RECOGNITION Revenues related to equipment rental and services are recognized as earned over the terms of the contracts. Revenues from long-term leases classified as sales-type leases are recognized upon delivery and installation of the equipment. Revenues related to the sale of architectural products are recognized upon shipment of the equipment. In 1995, one customer accounted for 11.9% of the Company's revenues. No other customer accounted for more than 10% of the Company's revenues during any of the three years in the period ended September 30, 1996 or the nine months ended June 30, 1997. F-8 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) RESEARCH AND DEVELOPMENT Costs incurred in connection with the development of new products are considered research and development costs and are charged to operations as incurred. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes," and files a consolidated federal income tax return. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Provision is made for deferred taxes relating to temporary differences in the recognition of income and expense for financial reporting and for income tax purposes. FOREIGN CURRENCY TRANSLATION In accordance with SFAS No. 52, "Foreign Currency Translation," the asset and liability accounts of the Company's non-U.S. subsidiaries are translated into U.S. dollars using rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at exchange rates which approximate the average rates prevailing during the year. The cumulative translation gains and losses are included in stockholders' equity. NET INCOME PER SHARE Net income per share is calculated by dividing net income by the weighted average shares outstanding for the applicable period. Common stock equivalents, including warrants and options, are included, to the extent considered dilutive, using the treasury stock method and are assumed to be outstanding for the full period in the period of issuance. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("the FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for fiscal years ending after December 15, 1995. Management intends to implement only the disclosure requirements of such statement for employee stock- based compensation. However, the accounting provisions of this statement will be required to be implemented upon the future issuance of non-employee stock-based compensation. The Company does not believe that there will be a material impact to the historically reported net income per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. Implementation of SFAS No. 128 will have no effect on the Company's results of operations, financial position or cash flows but will require a change in the calculation of earnings per share. The Company does not believe that there will be a material impact to the reported amount of earnings per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 129, "Capital Structure," which is effective for financial statements for periods ending after December 15, 1997. Implementation of SFAS No. 129 will have no effect on the Company's results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. SFAS No. 130 will F-9 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) require that changes in the balances of items that are reported directly in a separate component of stockholders' equity (such as unrealized gains and losses and minimum pension liability adjustments) be added to net income to arrive at comprehensive income. Implementation of SFAS No. 130 will have no effect on the Company's results of operations, financial position or cash flows, but will require additional footnote disclosures presenting the Company's comprehensive income. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for financial statements for periods beginning after December 15, 1997. Implementation of SFAS No. 131 will have no effect on the Company's results of operations, financial position or cash flows, but may require a change in the disclosures regarding the Company's operating segments. OTHER Certain reclassifications have been made to the September 30, 1994, 1995 and 1996 and the June 30, 1996 consolidated financial statements to conform to the presentation in the June 30, 1997 consolidated financial statements. NOTE C--INVENTORY: Inventory consists of the following:
SEPTEMBER 30, JUNE 30, -------------------- ----------- 1995 1996 1997 --------- --------- ----------- Raw materials.................................................... $ 766 $ 1,998 $ 2,654 Work in progress................................................. 216 294 197 Finished goods................................................... 1,031 103 145 --------- --------- ----------- $ 2,013 $ 2,395 $ 2,996 --------- --------- ----------- --------- --------- -----------
NOTE D--OTHER ASSETS: Other assets consist of the following:
SEPTEMBER 30, JUNE 30, -------------------- ----------- 1995 1996 1997 --------- --------- ----------- Patents and trademarks........................................... $ 263 $ 2,355 $ 3,093 Deferred financing costs......................................... 947 1,432 1,436 Other, including sales-type lease receivables.................... 1,239 865 1,448 --------- --------- ----------- 2,449 4,652 5,977 Less accumulated amortization.................................... (485) (702) (905) --------- --------- ----------- $ 1,964 $ 3,950 $ 5,072 --------- --------- ----------- --------- --------- -----------
F-10 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE D--OTHER ASSETS: (CONTINUED) Included in the amount of patents and trademarks are amounts capitalized by the Company relating to the High End Lawsuit, a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company related to the High End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. NOTE E--LONG-TERM OBLIGATIONS: Long-term obligations expressed in U.S. dollars consist of the following:
SEPTEMBER 30, JUNE 30, -------------------- --------- 1995 1996 1997 --------- --------- --------- Credit Facility: Term loans: U.S. dollars............................................. $ 12,600 $ 20,000 $ 18,500 British pounds sterling.................................. 7,408 5,830 5,326 Japanese yen............................................. 1,805 1,284 1,064 Discount................................................. -- (600) (488) --------- --------- --------- Net term loans......................................... 21,813 26,514 24,402 Revolving lines of credit: U.S. dollars............................................. 7,000 2,184 10,200 British pounds sterling.................................. 1,346 3,052 4,328 Japanese yen............................................. -- -- 1,410 --------- --------- --------- Total revolving lines of credit........................ 8,346 5,236 15,938 Advances from distributors................................... 2,943 2,810 2,063 Obligations under capital leases with interest at 8.6% to 10.4%, maturities through 1999............................. 530 348 201 Other........................................................ 1,238 2,441 2,757 --------- --------- --------- 34,870 37,349 45,361 Less current portion......................................... (8,477) (7,427) (7,768) --------- --------- --------- $ 26,393 $ 29,922 $ 37,593 --------- --------- --------- --------- --------- ---------
F-11 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED) The Company's Credit Facility allows borrowings up to $28,000 under a revolving line of credit. The Company incurred prepayment penalties in 1994 of $756 (net of tax benefit of $389) relating to the early extinguishment of its prior debt facility, which was expensed in the consolidated statement of income as an extraordinary loss. Loans under the revolver may be drawn in U.S. dollars, British pounds sterling or Japanese yen, subject to their availability under the Credit Facility. Interest on the term loans and the revolvers is calculated as follows:
LOAN DENOMINATION INTEREST RATE - -------------------------------------------- -------------------------------------------- U.S. dollar term Prime rate plus 1% or LIBOR (for deposits in U.S. dollars) plus 3.5% Multicurrency revolver Prime rate plus 1% for U.S. dollar borrowings and Euroyen TIBOR plus 3.5% for Japanese yen borrowings British pounds sterling term LIBOR (for deposits in British pounds sterling) rate plus 2% British pounds sterling revolver LIBOR (for deposits in British pounds sterling) rate plus 2% Japanese yen term TIBOR rate plus 2.5%
Based on the outstanding amounts under the Credit Facility as of September 30, 1995 and 1996 and June 30, 1997, the weighted average interest rates were 10.35%, 8.69% and 8.83%, respectively. At September 30, 1996 and June 30, 1997, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $19,800 and $17,700, respectively, which effectively changes the Company's variable LIBOR interest rate exposure on substantially all of its U.S. dollar term borrowings to a fixed weighted average interest rate of 9.60%. The interest rate swap agreements mature on or before the maturity date of the related borrowings as follows:
SEPTEMBER 30, JUNE 30, 1996 1997 ------------- --------- Year one............................................................ $ 3,050 $ 3,800 Year two............................................................ 3,800 5,900 Year three.......................................................... 5,450 1,000 Year four........................................................... 1,000 7,000 Year five........................................................... 6,500 -- ------------- --------- $ 19,800 $ 17,700 ------------- --------- ------------- ---------
The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the other parties. Principal payments of approximately $852 under the multicurrency term loan are due quarterly and increase to $1,102 per quarter on September 30, 1997 through the remaining term of the loan. A lump sum payment of approximately $8,355 is due June 30, 2001. Interest on outstanding term loans is due quarterly. Principal amounts outstanding under the revolving line of credit are due June 30, 2001 and interest on outstanding amounts is due monthly. Until April 1, 1998, a prepayment penalty equal to 0.25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the Credit Facility places limitations on the ability to pay stockholder distributions, make capital expenditures, incur additional indebtedness, make certain loans or investments, sell F-12 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED) assets or reacquire the Company's stock. The Company incurs a commitment fee equal to 0.5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all of the Company's assets, except those pledged to distributors (described below), are pledged as collateral under the Credit Facility. In connection with certain distributor agreements, the Company has received advances to provide the necessary funds for construction of the leased lighting systems (see Note G). The remaining balances outstanding under such borrowings at September 30, 1995 and 1996, and June 30, 1997, were $2,943, $2,810 and $2,063, respectively. Equipment with a net book value of approximately $8,700 at June 30, 1997 ($7,500 at September 30, 1996) has been pledged to the distributors as collateral for such loans. The interest rate on substantially all the notes is variable and ranged from 3% to 7% for the years ended September 30, 1995 and 1996 and the nine months ended June 30, 1997. Substantially all the advances are nonrecourse and are repaid from the Company's portion of the rental revenue earned on the associated leases. Maturities of long-term obligations, including capital lease obligations, are approximately as follows:
SEPTEMBER JUNE 30, 30, 1996 1997 ------------ --------- Year one............................................................ $ 7,427 $ 7,768 Year two............................................................ 5,204 5,353 Year three.......................................................... 4,872 4,762 Year four........................................................... 4,225 27,478 Year five........................................................... 15,621 -- ------------ --------- $ 37,349 $ 45,361 ------------ --------- ------------ ---------
NOTE F--STOCKHOLDERS' EQUITY: On October , 1997, in conjunction with the Company's reincorporation in Delaware and an initial public offering, the Board of Directors of the Company created a new class of common stock and authorized 40,000,000 shares. As a result of the reincorporation, stockholders will receive 3.76368 shares of common stock for each share of the Company's Class A common stock and Class B common stock held by the stockholders. Share amounts and the weighted average shares outstanding for all periods presented give retroactive effect to the recapitalization of the common stock. In addition, the Company authorized 10,000,000 shares of preferred stock which the Company's Board of Directors may issue for such consideration and on such terms as it deems desirable, including with voting and conversion rights that could adversely affect the holders of common stock. In connection with a prior debt facility, the Company and a lender entered into a warrant purchase agreement, which granted the lender a warrant to purchase shares of Common Stock. The Company initially allocated $400 of the proceeds under this facility to the warrant and in subsequent years increased such warrant value to an amount equal to the warrant valuation (as defined). During 1996, the Company repurchased the warrant from the holder for $260. In July 1996, in connection with an amendment to the Company's Credit Facility, the Company issued warrants to purchase up to 242,233 shares of Common Stock at an exercise price based on the Company's earnings as defined in the warrant agreement ($11.53 per share). After December 31, 2001, and through the warrant expiration date of December 31, 2004, the warrant holders may put the shares of Common Stock issuable pursuant to the warrants back to the Company at the price specified in the warrant agreement. This put right will terminate upon the occurrence of certain events, including completion of this initial public offering. The terms of the warrants also provide for registration rights and adjustments to the price and number of shares in certain circumstances. As of September 30, 1996 and June 30, 1997, no warrants had been exercised. F-13 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: As lessor, the Company has agreements whereby it has leased certain lighting equipment to various distributors. These agreements are accounted for as operating leases. Under the terms of these agreements, these distributors have the exclusive right for a specified time period to market the lighting equipment by subrental within defined territories. The distributors' lease payments to the Company are based on a pre-determined percentage of the gross rental revenue received by the distributors from their subrental of the lighting equipment and amounted to approximately $2,864, $3,797, $4,893, $3,778 and $3,576 for the years ended September 30, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, respectively. The lighting equipment under these leasing arrangements had a net book value of approximately $7,552, $7,473 and $8,736 at September 30, 1995 and 1996, and June 30, 1997, respectively. The Company is also the lessor under sales-type leases. Leases classified as sales-type leases generally stipulate that all lease payments be made within 30 days of the commencement of the lease term; however, the Company has also entered into certain sales-type leases that allow for periodic payment throughout the term of the lease. The Company recorded revenues of $4,427, $9,914, $4,544, $2,318 and $6,009 and cost of products and services of $1,465, $3,422, $2,223, $1,023 and $2,054 for the years ended September 30, 1994, 1995 and 1996, and the nine months ended June 30, 1996 (unaudited) and 1997, respectively, related to sales-type leases. Equipment under leases which do not qualify as sales-type leases, including distributor leases and dealer leases, are accounted for as operating leases. Under dealer leases, dealers receive exclusive rights to subrent the Company's lighting equipment in a certain geographic area. The Company provides the lighting equipment to the dealers, who pay a monthly rental fee to the Company. Future minimum lease payments receivable, including those which relate to sales-type leases and are included in other assets, are as follows:
SALES-TYPE OPERATING ------------------------------ -------------------------- SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 1996 JUNE 30, 1997 1996 1997 --------------- ------------- ------------- ----------- Year one................................ $ 344 $ 181 $ 929 $ 1,798 Year two................................ 303 102 920 1,830 Year three.............................. 151 -- 785 1,577 Year four............................... -- -- 519 1,329 Year five............................... -- -- 209 1,089 Thereafter.............................. -- -- 20 19 ----- ----- ------ ----------- Total minimum lease payments............ 798 283 $ 3,382 $ 7,642 ------ ----------- ------ ----------- Less amount representing interest....... (105) (28) ----- ----- Present value of net minimum lease payments.............................. 693 255 Less current portion.................... (279) (177) ----- ----- Long-term lease receivables............. $ 414 $ 78 ----- ----- ----- -----
F-14 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) AS LESSEE The Company leases certain computers and equipment. The following is a summary of assets held under capital leases:
SEPTEMBER 30, JUNE 30, -------------------- --------- 1995 1996 1997 --------- --------- --------- Computers and equipment under capital leases............ $ 2,563 $ 2,563 $ 2,563 Less accumulated depreciation........................... (2,014) (2,144) (2,241) --------- --------- --------- Property under capital leases, net...................... $ 549 $ 419 $ 322 --------- --------- --------- --------- --------- ---------
The Company also leases manufacturing facilities and office space. The future minimum lease payments, including those which relate to capital leases and are included in long-term obligations, are as follows:
CAPITAL OPERATING ---------------------------- -------------------------- SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, 1996 1997 1996 1997 --------------- ----------- ------------- ----------- 1997....................................... $ 223 $ 136 $ 1,109 $ 1,132 1998....................................... 99 63 897 802 1999....................................... 44 -- 527 454 2000....................................... -- -- 400 243 2001....................................... -- -- -- -- ----- ----- ------ ----------- Total minimum lease payments............... 366 199 $ 2,933 $ 2,631 ------ ----------- ------ ----------- Less amount representing interest.......... (18) (14) ----- ----- Present value of net minimum lease payments................................. 348 185 Less current portion....................... (200) (134) ----- ----- Long-term lease obligations................ $ 148 $ 51 ----- ----- ----- -----
Rental expense for the years ended September 30, 1994, 1995 and 1996, and the nine months ended June 30, 1996 (unaudited) and 1997 was approximately $1,347, $1,957, $2,397, $1,760 and $1,956, respectively. In December 1995, the Company entered into a lease with an unaffiliated developer ("Lessor") for land to be used as the site for a new corporate facility. After the initial lease term ending in December 2000, the lease may be renewed for up to six additional five-year terms by agreement of the parties. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3,600 paid by the Lessor to acquire the land. In addition, the Company has an option to purchase the land at the end of the initial term or at any time during the renewal terms for a price equal to the Lessor's cost. Rent payable under the lease is based upon the $3,600 spent by the Lessor to acquire the land and the Lessor's cost of funds from time to time. At September 30, 1996 and June 30, 1997, the Company had an interest rate swap agreement with one of its primary lenders relating to a notional amount of $3,600, which effectively changes the Company's variable rent exposure on this lease to a fixed annual amount of $388. This interest rate swap F-15 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) agreement matures in October 2000. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the other party. Future minimum rental commitments and rent expense for the year ended September 30, 1996, and the nine months ended June 30, 1996 (unaudited) and 1997, have been included in the amounts above. NOTE H--INCOME TAXES: The provision for income taxes consists of the following:
SEPTEMBER 30, JUNE 30, ------------------------------- ------------------------ 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ------------- (UNAUDITED) Current: U.S. Federal................................................ $ 1,273 $ 1,289 $ 100 $ 87 $ 104 State....................................................... -- 217 54 46 3 International............................................... 169 829 957 731 976 Deferred: U.S. Federal................................................ 860 906 992 (50) 765 State....................................................... 20 217 135 (1) 145 International............................................... 78 (421) -- -- -- --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 1,993 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
A reconciliation of income taxes computed at the U.S. Federal statutory tax rate to the provision for income tax is as follows:
SEPTEMBER 30, JUNE 30, ------------------------------- ------------------------ 1994 1995 1996 1997 --------- --------- --------- 1996 --------- ------------- (UNAUDITED) Income tax expense at U.S. Federal statutory rate............. $ 2,289 $ 2,635 $ 1,821 $ 663 $ 1,683 Cumulative effect of change in accounting principle........... 90 -- -- -- -- International taxes........................................... 119 153 255 93 198 State taxes................................................... -- 434 189 69 94 Foreign and general business tax credits...................... (128) (300) (100) -- -- Other--primarily permanent differences........................ 30 115 73 (12) 18 --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 1,993 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
Deferred income taxes have been provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Deferred income taxes resulted principally from the use of accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes. In 1995 and 1996 and for the nine months ended June 30, 1996 (unaudited) and 1997, there was no valuation allowance at the beginning or end of the respective fiscal period. F-16 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE H--INCOME TAXES: (CONTINUED) For tax purposes, the Company has approximately $2,200 of foreign tax credits that expire in 1997 through 2001. In addition, approximately $507 of alternative minimum tax credits (which do not expire) is available to offset future regular tax liability. The benefit of this tax credit carryforward has been recognized for financial statement purposes as part of deferred taxes. International income taxes relate to the results of operations of the wholly-owned subsidiaries, Vari-Lite Asia, Inc., Vari-Lite Hong Kong Limited and VLEH, as well as to withholding taxes on revenue generated by the Company's foreign distributors. NOTE I--EMPLOYEE BENEFIT PLANS: The Company has a defined contribution 401(k) plan in which substantially all its U.S. employees can elect to be participants. Under the terms of the 401(k) plan, employees can defer up to 20% of their earnings up to the permitted maximum as defined by IRS regulations. The Company matches 50% of the employee's contribution up to 5% of the employee's earnings during the plan year. During the years ended September 30, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, the Company's cost to match employee contributions was approximately $150, $300, $242, $195 and $193, respectively. Substantially all employees of VLEH may elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a defined contribution plan under which employees may contribute up to 3% of their base salaries. The Company makes contributions at a rate of 200% of the employee contributions, with additional contributions made for certain key employees. The Company incurred costs of $46, $140, $156, $114 and $150, representing matching contributions for the years ended September 30, 1994, 1995 and 1996, and for the nine months ended June 30, 1996 (unaudited) and 1997, respectively. The Company adopted an employee stock ownership plan ("ESOP"), effective January 1, 1995, in which its U.S. employees are eligible to participate after completing one year of service, attaining age twenty-one and being a participant making elective deferrals in the Company's 401(k) Plan. Each year the Company may make discretionary contributions of stock to the ESOP as determined by the Board of Directors or a committee thereof. Participants' interests in the ESOP are distributed in the form of cash or stock upon normal retirement, disability, death or at a specific time after any other termination of employment. The Company adopted an employee stock equivalence plan ("ESEP") for the non-U.S. subsidiaries, effective January 1, 1995, in which its employees are eligible to participate after completing one year of service, attaining age twenty-one and for London-based employees, participating in the VLEH Pension Plan. Each year the Company may make discretionary contributions of stock to the ESEP as determined by the Board of Directors or a committee thereof. Participants' interests in the ESEP are distributed in the form of cash upon normal retirement, disability, death or at a specific time after any other termination of employment. The Company contributed to the ESOP and ESEP an aggregate of 48,570 and 14,965 shares of Common Stock for fiscal 1995 and 1996, respectively, which were valued at $750 and $250, respectively. Such shares are included as outstanding for purposes of calculating net income per share. Dividends on these shares have been recorded as a reduction to retained earnings. For contributions of Common Stock to the ESOP and ESEP for fiscal 1997, the Company has accrued $189 through June 30, 1997. F-17 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE J--OPERATIONS BY GEOGRAPHIC AREA: The income statement and balance sheet information by geographic area is summarized in the following table:
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ---------------------------------------------------- Net Revenues........................................ $ 37,903 $ 7,141 $ 12,744 $ (3,976) $ 53,812 Net Income.......................................... 3,280 51 247 -- 3,578 September 30, 1995 - ---------------------------------------------------- Net Revenues........................................ $ 43,443 $ 9,779 $ 25,337 $ (3,649) $ 74,910 Net Income.......................................... 3,381 773 560 -- 4,714 September 30, 1996 - ---------------------------------------------------- Net Revenues........................................ $ 45,253 $ 11,401 $ 26,584 $ (6,100) $ 77,138 Net Income.......................................... 1,590 1,153 376 -- 3,119 June 30, 1996 (unaudited) - ---------------------------------------------------- Net Revenues........................................ $ 31,824 $ 7,524 $ 18,313 $ (4,230) $ 53,431 Net Income.......................................... 584 560 (8) -- 1,136 June 30, 1997 - ---------------------------------------------------- Net Revenues........................................ $ 40,364 $ 9,336 $ 23,232 $ (6,037) $ 66,895 Net Income.......................................... 1,643 924 389 -- 2,956
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ---------------------------------------------------- Assets.............................................. $ 53,317 $ 5,349 $ 13,068 $ (14,511) $ 57,223 Liabilities......................................... 33,589 2,545 11,691 (7,233) 40,592 September 30, 1995 - ---------------------------------------------------- Assets.............................................. $ 69,180 $ 5,698 $ 15,591 ($ 17,004) $ 73,465 Liabilities......................................... 46,462 3,191 13,522 (11,039) 52,136 September 30, 1996 - ---------------------------------------------------- Assets.............................................. $ 70,060 $ 4,760 $ 13,529 ($ 9,768) $ 78,581 Liabilities......................................... 45,623 2,486 10,838 (4,904) 54,043 June 30, 1996 (unaudited) - ---------------------------------------------------- Assets.............................................. $ 69,076 $ 6,205 $ 15,440 $ (12,639) $ 78,082 Liabilities......................................... 46,542 3,330 12,947 (6,673) 56,146 June 30, 1997 - ---------------------------------------------------- Assets.............................................. $ 80,977 $ 5,297 17,768 $ (11,428) $ 92,614 Liabilities......................................... 55,496 1,808 14,454 (6,564) 65,194
F-18 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED AS TO THE NINE MONTHS ENDED JUNE 30, 1996) (IN THOUSANDS EXCEPT SHARE DATA) NOTE K--RELATED PARTY TRANSACTIONS: Certain directors provided consulting services to the Company and received fees totaling approximately $94, $144, $220, $165 and $165 for the years ended September 30, 1994 and 1995 and 1996 and for the nine months ended June 30, 1996 (unaudited) and 1997, respectively. At September 30, 1996 and June 30, 1997, the Company had notes receivable from stockholders totaling $353 and $186, respectively, related to common stock purchases. The notes bear interest at various rates, mature at various times, and are collateralized by 88,446 shares of common stock. The Company received from a stockholder of the Company $1,500, $900, $0 and $1,942 in the years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1997, respectively, for the rental of automated lighting products and other services. NOTE L--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the years ended September 30, 1995 and 1996, and the nine months ended June 30, 1997:
YEAR ENDED SEPTEMBER 30, 1995 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 Income before income taxes.................................... 3,670 1,277 1,533 1,271 Net income.................................................... 2,232 777 932 773 Net income per share.......................................... 0.38 0.14 0.16 0.13 YEAR ENDED SEPTEMBER 30, 1996 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 Income before income taxes.................................... 359 113 1,476 3,409 Net income.................................................... 209 66 861 1,983 Net income per share.......................................... 0.03 0.01 0.15 0.34 YEAR ENDED SEPTEMBER 30, 1997 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 22,326 $ 22,384 $ 22,185 Income before income taxes.................................... 1,551 1,372 2,026 Net income.................................................... 926 820 1,210 Net income per share.......................................... 0.16 0.14 0.21
F-19 [INSIDE BACK COVER] LOOKING AHEAD . . . Vari-Lite International has incorporated its [Picture of LAX VARI*LITE-Registered Trademark- technology into its new Building] Irideon-Registered Trademark- equipment for the architectural market. A growing product line of interior and exterior fixtures and control systems bring the trademark excellence of our stage and studio lighting systems to the spaces where we live, work and enjoy our lives. Long a Los Angeles landmark, the LAX Themed Building has been stunningly relit with Irideon-Registered Trademark- fixtures. [Picture of LAX Building] [Picture of VL6-TM- spot luminaire] [Picture of LAX Building] [Picture of VL5-TM- wash luminaire] [Picture of mini-Artisan-Registered Trademark-2 console] [Picture of engineer developing product] The compact virtually silent Series 300-TM- products Vari-Lite [VL6-TM- spot luminaire (top), VL5-TM- wash luminaire International has (middle), and mini-Artisan-Registered Trademark-2 console protected its (bottom)] have broadened the appeal of investment in VARI*LITE-Registered Trademark- products in many markets. research and - -C-Copyright 1997 Vari-Lite, Inc. All rights reserved. development with VARI*LITE-Registered Trademark- and an aggressive mini-Artisan-Registered Trademark- are registered trademarks intellectual of Vari-Lite, Inc. VL5-TM-, VL6-TM-, Series 300-TM- are property program. trademarks of Vari-Lite, Inc. Irideon-Registered Trademark- It has been is a registered trademark of Irideon, Inc. in the U.S. and granted more than other countries. The Vari-Lite International Globe is a 25 U.S. patents trademark of Vari-Lite International, Inc. and more than 110 Emmy-Registered Trademark- and the Emmy Statuette are foreign patents. registered trademarks of ATAS/NATAS. Tony-Registered Trademark- is a registered trademark of The American Theater Wing and The League of American Theaters and Producers, Inc. Vari-Lite, Inc. products are protected by patents granted and pending in the U.S. and other countries.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 Use of Proceeds........................................................... 12 Dividend Policy........................................................... 12 Dilution.................................................................. 13 Capitalization............................................................ 14 Selected Consolidated Financial Data...................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 16 Business.................................................................. 26 Management................................................................ 38 Principal Stockholders.................................................... 48 Selling Stockholders...................................................... 49 Description of Capital Stock.............................................. 50 Shares Eligible for Future Sale........................................... 53 Underwriting.............................................................. 54 Legal Matters............................................................. 56 Experts................................................................... 56 Additional Information.................................................... 56 Index to Consolidated Financial Statements................................ F-1
------------------- UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,000,000 SHARES [LOGO] VARI-LITE INTERNATIONAL COMMON STOCK ----------------- PROSPECTUS ----------------- A.G. EDWARDS & SONS, INC. EVEREN SECURITIES, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses to be paid by the Company in connection with the offering described in this Registration Statement will be as follows. All of the amounts except the SEC registration fee, the NASD fee and the Nasdaq National Market listing fee are estimates.
ITEM AMOUNT - ---------------------------------------------------------------------------------- ---------- SEC registration fee.............................................................. $ 9,410 NASD fee.......................................................................... 3,605 Nasdaq National Market listing fee................................................ 37,000 Legal fees and expenses........................................................... 200,000 Accounting fees and expenses...................................................... 200,000 Printing expenses................................................................. 100,000 Fees and expenses for qualification under state securities laws (including legal fees)........................................................................... 5,000 Transfer agent's and registrar's fees and expenses................................ 20,000 Miscellaneous..................................................................... 149,985 ---------- Total........................................................................... $ 725,000* ---------- ----------
- ------- * None of this amount is to be borne by the Selling Stockholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant is incorporated under the laws of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person against expenses, fines and settlements actually and reasonably incurred by any such person in connection with a threatened, pending or completed action, suit or proceeding in which he is involved by reason of the fact that he is or was a director, officer, employee or agent of such corporation, provided that (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. If the action or suit is by or in the name of the corporation, the corporation may indemnify any such person against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit is brought determines upon application that, despite the adjudication of liability but in light of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. As permitted by the Delaware General Corporation Law, the Certificate of Incorporation provides that the directors and officers of the Registrant shall be indemnified by the Registrant against certain liabilities that those persons may incur in their capacities as directors or officers. The Certificate of Incorporation eliminates the liability of directors of the Registrant, under certain circumstances, to the maximum extent permitted by the Delaware General Corporation Law. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws" included in the Prospectus. II-1 The Company has entered into Indemnification Agreements with the directors and officers of the Company and its subsidiaries pursuant to which the Company has agreed to indemnify such individuals to the fullest extent authorized by the Delaware General Corporation Law. The Underwriting Agreement filed as Exhibit 1.1 hereto contains reciprocal agreements of indemnity between the Registrant and the Underwriters as to certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), and in certain circumstances provides for indemnification of the Registrant's directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since August 31, 1994 the Registrant has issued and sold the following securities (all such amounts having been adjusted to reflect the reincorporation of the Registrant as a Delaware corporation pursuant to a merger with Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), which will be effected immediately prior to the consummation of the Offering and pursuant to which the two classes of Common Stock of Vari-Lite Texas will be converted into the Registrant's Common Stock on a 3.76368-for-one basis) without registration under the Securities Act (none of which sales were underwritten): On September 28, 1994, the Registrant issued 18,818 shares of Common Stock at a purchase price of $2.49 per share to Michael P. Herman, an officer and employee of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On March 31, 1995, the Registrant issued 9,409 shares of Common Stock at a purchase price of $3.40 per share to Brian L. Croft, an officer and employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 15, 1995, the Registrant issued 3,764, 3,764, 7,527, 9,409, 9,409, 9,409 and 37,637 shares of Common Stock at a purchase price of $3.69 per share to Richard W. Bratcher, Jr., Howard Page, T. Clay Powers, Loren J. Haas, Janis C. Pestinger, J. Scott Thompson and James E. Kinnu, respectively. Mr. Kinnu was an officer and employee of the Registrant. Messrs. Powers, Thompson, Bratcher and Haas and Ms. Pestinger are officers and employees of subsidiaries of the Registrant and Mr. Page is an employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 29, 1995, the Registrant issued 32,055 shares to Overton Bank and Trust, N.A., as trustee of the Vari-Lite International, Inc. Employees' Stock Ownership Plan ("ESOP"), as the Registrant's discretionary contribution in the amount of $494,995.26, or $15.44 per share, to the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On July 31, 1996, the Registrant issued warrants to purchase 242,233 shares of Common Stock at an exercise price of $11.53 per share (determined on September 30, 1996) to certain members of the Company's bank syndicate. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 30, 1996, the Registrant issued 16,082 shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the Vari-Lite International, Inc. Employees' Stock Equivalence Plan ("ESEP"), as the Registrant's discretionary contribution in the amount of $248,340.35, or $15.44 per share, to the ESEP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 30, 1996, the Registrant issued 433 shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's additional discretionary contribution in the amount of $6,683.63, or $15.44 per share, II-2 to the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued 10,456 shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's discretionary contribution in the amount of $174,652.86, or $16.70 per share, to the ESOP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued 4,509 shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the ESEP, as the Registrant's discretionary contribution in the amount of $75,318.26, or $16.70 per share, to the ESEP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant 3.2 -- By-Laws of the Registrant 4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas 5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith
II-3 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft 10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III 10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III 10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson 10.18 -- Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. 10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. 10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement) 10.21 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan 10.22 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.23 -- Vari-Lite International, Inc. Annual Incentive Plan (as amended and restated) 10.24 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.25 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.26 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas
II-4 10.30 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.31 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.32 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas *10.33 -- Amendment No. 9 to Credit Agreement, dated as of September 30, 1997, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.35 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.36 -- Ground Lease, dated as of December 21, 1995, among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., Ignition! Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc. 10.37 -- Guaranty, dated as of December 21, 1995, by the Registrant 10.38 -- Form of Indemnification Agreement with Directors and Officers 10.39 -- Agreement and Plan of Merger, dated as of August 27, 1997, between the Registrant and Vari-Lite Texas *10.40 -- International Swap Dealers Association, Inc. Master Agreement, dated as of November 23, 1993, between the Registrant and Brown Brothers, Harriman & Co. (along with confirmation of Interest Rate Swap Transaction) *10.41 -- International Swap Dealers Association, Inc. Master Agreement, dated as of September 13, 1996, between Vari-Lite, Inc. and SunTrust Bank, Atlanta (along with confirmations of Interest Rate Transactions) 21.1 -- List of Registrant's Subsidiaries *23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney 27.1 -- Financial Data Schedule
- ------- * Filed herewith Unless otherwise indicated, all exhibits were previously filed. (b) Financial Statement Schedules Not applicable ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that II-5 a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes to provide to the representatives of the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the representatives of the underwriters to permit prompt delivery to each purchaser. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas and State of Texas on the 10th day of October, 1997. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. BRUTSCHE III ----------------------------------------- H.R. Brutsche III CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities indicated on the 10th day of October, 1997. NAME TITLE - ------------------------------ ----------------------------------------------- /s/ H.R. BRUTSCHE III Chairman of the Board, President and Chief - ------------------------------ Executive Officer (Principal Executive H.R. Brutsche III Officer) * Vice President--Finance, Chief Financial - ------------------------------ Officer and Secretary (Principal Financial Michael P. Herman and Accounting Officer) * - ------------------------------ Director James H. Clark, Jr. * - ------------------------------ Director John D. Maxson * - ------------------------------ Director C. Vincent Prothro * - ------------------------------ Director John R. Rettberg * - ------------------------------ Director J. Anthony Smith *By: /s/ H.R. BRUTSCHE III ------------------------- H.R. Brutsche III ATTORNEY-IN-FACT II-7 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ 1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant 3.2 -- By-Laws of the Registrant 4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas 5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft 10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III 10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III
10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson 10.18 -- Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. 10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. 10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement) 10.21 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan 10.22 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.23 -- Vari-Lite International, Inc. Annual Incentive Plan (as amended and restated) 10.24 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.25 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.26 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.30 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.31 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.32 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas *10.33 -- Amendment No. 9 to Credit Agreement, dated as of September 30, 1997, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.35 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.36 -- Ground Lease, dated as of December 21, 1995, among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., Ignition! Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc.
10.37 -- Guaranty, dated as of December 21, 1995, by the Registrant 10.38 -- Form of Indemnification Agreement with Directors and Officers 10.39 -- Agreement and Plan of Merger, dated as of August 27, 1997, between the Registrant and Vari-Lite Texas *10.40 -- International Swap Dealers Association, Inc. Master Agreement, dated as of November 23, 1993, between the Registrant and Brown Brothers, Harriman & Co. (along with confirmation of Interest Rate Swap Transaction) *10.41 -- International Swap Dealers Association, Inc. Master Agreement, dated as of September 13, 1996, between Vari-Lite, Inc. and SunTrust Bank, Atlanta (along with confirmations of Interest Rate Transactions) 21.1 -- List of Registrant's Subsidiaries *23.1 -- Consent of Deloitte & Touche LLP 23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney 27.1 -- Financial Data Schedule
- ------- * Filed herewith Unless otherwise indicated, all exhibits were previously filed. EX-10.23 2 EXHIBIT 10.23 VARI-LITE INTERNATIONAL, INC. ANNUAL INCENTIVE COMPENSATION PLAN AS REVISED AND RESTATED EFFECTIVE OCTOBER 1, 1997 VARI-LITE INTERNATIONAL, INC. ANNUAL INCENTIVE COMPENSATION PLAN TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1 a. "Base Salary". . . . . . . . . . . . . . . . . . . . . . . 1 b. "Board". . . . . . . . . . . . . . . . . . . . . . . . . . 1 c. "Committee". . . . . . . . . . . . . . . . . . . . . . . . 1 d. "Company". . . . . . . . . . . . . . . . . . . . . . . . . 2 e. "Department" . . . . . . . . . . . . . . . . . . . . . . . 2 f. "Discretionary Award". . . . . . . . . . . . . . . . . . . 2 g. "Formula Derived Award". . . . . . . . . . . . . . . . . . 2 h. "Incentive Award". . . . . . . . . . . . . . . . . . . . . 2 i. "Operating Income" . . . . . . . . . . . . . . . . . . . . 2 j. "Performance Measures" . . . . . . . . . . . . . . . . . . 2 k. "Participant". . . . . . . . . . . . . . . . . . . . . . . 2 l. "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 m. "Plan Year". . . . . . . . . . . . . . . . . . . . . . . . 2 n. "Team" . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III INCENTIVE AWARDS. . . . . . . . . . . . . . . . . . . . . . . . 3 3.1 Formula Derived Awards. . . . . . . . . . . . . . . . . . . . . 3 3.2 Discretionary Awards. . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE IV PERFORMANCE MEASUREMENT AND AWARD DETERMINATION . . . . . . . . 4 4.1 Basis of Formula Derived Awards . . . . . . . . . . . . . . . . 4 4.2 Procedure for Measuring Company Performance . . . . . . . . . . 4 4.3 Procedure for Measuring Subsidiary Performance. . . . . . . . . 4 4.4 Procedure for Measuring Department Performance. . . . . . . . . 5 4.5 Procedure for Measuring Team Performance. . . . . . . . . . . . 5 4.6 Procedure for Measuring Individual Performance. . . . . . . . . 5 4.7 Effect of Level of Attainment of Performance Measures . . . . . 5 4.8 Effect of Individual Performance Rating . . . . . . . . . . . . 6 4.9 Calculation of Formula Derived Award. . . . . . . . . . . . . . 6 -i- ARTICLE V PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5.1 Form and Timing . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 New Participants. . . . . . . . . . . . . . . . . . . . . . . . 7 5.3 Termination Due to Death, Total Disability, or Retirement . . . 7 ARTICLE VI ADMINISTRATIVE PROVISIONS . . . . . . . . . . . . . . . . . . . 7 6.1 Authority to Administer . . . . . . . . . . . . . . . . . . . . 7 6.2 Amendment of the Plan . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VII GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 8 7.1 No Right of Continued Employment. . . . . . . . . . . . . . . . 8 7.2 No Right of Assignment. . . . . . . . . . . . . . . . . . . . . 8 7.3 Withholding for Taxes . . . . . . . . . . . . . . . . . . . . . 8 7.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 8 -ii- VARI-LITE INTERNATIONAL, INC. ANNUAL INCENTIVE COMPENSATION PLAN (AS REVISED AND RESTATED EFFECTIVE OCTOBER 1, 1997) This Plan is executed and effective as of October 1, 1997 unless specifically provided otherwise by Vari-Lite International, Inc. (the "Company"). W I T N E S S E T H: WHEREAS, the Company desired to provide a financial incentive to its employees to continue in its employ and share in its success based on the achievement of predetermined strategic goals of the Company and adopted the Vari-Lite Holdings, Inc. Annual Incentive Compensation Plan, effective October 1, 1994 (hereinafter referred to as the "Plan"); and WHEREAS, the Company changed its name from "Vari-Lite Holdings, Inc." to "Vari-Lite International, Inc.," effective December 27, 1995; and WHEREAS, the Company changed the name of the Plan to "Vari-Lite International, Inc. Annual Incentive Compensation Plan" effective December 27, 1995; and WHEREAS, the Company believes that continuation of the Plan will provide that incentive to its employees; and WHEREAS, the Company desires to revise and restate the Plan effective October 1, 1997; NOW, THEREFORE, in consideration of the premises and the covenants herein contained, the Company hereby adopts the revised and restated Plan as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. Unless by the context hereof a different meaning is clearly indicated, whenever used in the Plan, the following words shall have the meanings hereinafter set forth: a. "Base Salary" means the Participant's base compensation for the Plan Year without regard to any bonus, commission, overtime, or any other form of compensation paid to him by the Company or its subsidiaries during the Plan Year. b. "Board" means the board of directors of the Company. c. "Committee" means the committee appointed by the Board to administer the Plan, or in the absence of a committee, means the entire Board. d. "Company" means Vari-Lite International, Inc. e. "Department" means any department of the Company or its subsidiaries, with a defined management group, for which performance measures under this Plan are applied. f. "Discretionary Award" means the portion, if any, of a Participant's Incentive Award for a Plan Year that is not determined by defined objective performance criteria. g. "Formula Derived Award" means the portion, if any, of a Participant's Incentive Award for a Plan Year that is determined by defined objective performance criteria. h. "Incentive Award" means the total of a Participant's Formula Derived Award and Discretionary Award for any Plan Year. i. "Operating Income" means earnings before interest, taxes, incentive compensation payments under the Plan and extraordinary items (as determined by the Executive Committee of the Board). j. "Performance Measures" means those criteria as determined by the Committee at a Company, subsidiary, Department, Team or individual level that have been determined to be directly linked to the Company's success and against which actual performance will be measured. k. "Participant" means an eligible employee of the Company or a subsidiary of the Company under Article II hereof. l. "Plan" means the Vari-Lite International, Inc. Annual Incentive Compensation Plan herein described, as the same may be amended from time to time. m. "Plan Year" means the Company's fiscal year, October 1 through September 30. n. "Team" means a group of individuals assigned a specific project during a Plan Year for which performance measures under this Plan are applied. 1.2 GENDER AND NUMBER. Except as otherwise indicated by the context, any masculine terminology used herein also includes the feminine and neuter, and vice versa, and the definition of any term in a singular shall also include the plural, and vice versa. -2- ARTICLE II ELIGIBILITY 2.1 ELIGIBILITY. All full-time employees of the Company and its subsidiaries (approved by the Committee) shall participate in the Plan for a Plan Year. If an employee commences full-time employment with the Company or an approved subsidiary during a Plan Year, he shall not be considered an eligible employee for that Plan Year unless his full-time employment commencement date with the Company or that subsidiary occurs on or before April 1 of that Plan Year. For purposes of this Plan, an employee shall be considered a full-time employee (i) if he is scheduled to work a minimum of 30 hours per week throughout the Plan Year and (ii) in the case of an individual who is an employee of the Company or a United States subsidiary of the Company, he is entitled to coverage under the Showco/Vari-Lite Welfare Benefit Plan. ARTICLE III INCENTIVE AWARDS 3.1 FORMULA DERIVED AWARDS. Each Plan Year each Participant shall have the opportunity to earn a specified percentage of his Base Salary for that Plan Year as a Formula Derived Award. The range of percentage of Base Salary that a Participant may earn as a Formula Derived Award for a Plan Year is specified in Section 4.7 and is determined by that Participant's level of responsibility and potential impact on Company, subsidiary, Department, Team or individual performance, as reflected by the highest tier into which he is categorized for that Plan Year under the following schedule: Tier 1 - Chairman of the Board, President & Chief Executive Officer Tier 1.5 - Chief Operating Officer (if different from Chief Executive Officer) Tier 2 - Senior Executives (U.S. Grades G, R, C, D) (U.K. Grade PC) Tier 3 - Vice Presidents (U.S. Grade RS) (U.K. Grades TC, BT) Tier 4 - Middle Management (U.S. Grades S, M, U, E, J,) (U.K. Grades TT, GM) Tier 5 - Supervisory Employees (U.S. Grades P, Z, R.E.M., TW, TP) (U.K. Grades EJ, SR, AL, TO, JN) Tier 6 - All other employees (U.S. Grades TE, CC, K, TR, A, PF) (U.K. Grades LZ, N, CH, B, E, TB) 3.2 DISCRETIONARY AWARDS. In addition to Formula Derived Awards that may be earned by Participants for each Plan Year, the Committee may, in its sole and absolute discretion, -3- award a discretionary bonus to any Participant for that Plan Year. The Committee may determine to make Discretionary Awards for a Plan Year regardless of whether the threshold levels of the Performance Measures are attained for that Plan Year. ARTICLE IV PERFORMANCE MEASUREMENT AND AWARD DETERMINATION 4.1 BASIS OF FORMULA DERIVED AWARDS. The Plan is based on the premises that Incentive Awards should focus attention on the interests of stockholders, reflect the positions of employment and levels of responsibility of Participants with the Company, and provide rewards consistent with competitive practices. The Formula Derived Award a Participant may earn for a Plan Year may be determined based on one of the following: attainment by the Company of its Operating Income goal for that Plan Year; in part on attainment by the Company of that Operating Income goal and in part on the attainment of one or more Performance Measures established by the Committee for that Plan Year based on subsidiary, Department, Team or individual performance, or a combination thereof; or solely on subsidiary, Department, Team or individual performance or a combination thereof. The relative weight placed on each Performance Measure (I.E., Company, subsidiary, Department, Team or individual performance) by the Committee may vary for any Participant based on his position with the Company, or its subsidiaries and Departments. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, the Committee shall determine the Performance Measures that shall be used for that Plan Year to determine the Formula Derived Award for each Participant. If a Participant's Formula Derived Award for a Plan Year is to be based on a combination of Company, subsidiary, Department, Team and individual Performance Measures, the Committee shall also determine the weight assigned to each Performance Measure which shall be reflective of the relative importance of each such Performance Measure in evaluating the performance of that Participant. Generally, it is expected that the potential Formula Derived Awards of subsidiary, Department and Team Participants will be weighted more heavily on subsidiary, Department and Team performance and less on Company performance. The potential Formula Derived Awards of senior executives will be weighted more on Company performance. 4.2 PROCEDURE FOR MEASURING COMPANY PERFORMANCE. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, the Committee shall determine the Operating Income goal of the Company for that Plan Year and the threshold, target, and maximum levels of attainment of that goal for that Plan Year. 4.3 PROCEDURE FOR MEASURING SUBSIDIARY PERFORMANCE. The performance of a subsidiary of the Company for a Plan Year shall be based on that subsidiary's Operating Income for that Plan Year. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, the Committee shall determine the Operating Income goal of each -4- subsidiary for that Plan Year and the threshold, target and maximum levels of attainment of that goal for that Plan Year. 4.4 PROCEDURE FOR MEASURING DEPARTMENT PERFORMANCE. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, the Committee shall determine the Performance Measures for each Department for that Plan Year, and the threshold, target and maximum levels of attainment of those measures for that Plan Year. 4.5 PROCEDURE FOR MEASURING TEAM PERFORMANCE. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, the Committee shall determine the Performance Measures for each Team for that Plan Year, and the threshold, target, and maximum levels of attainment of those measures for that Plan Year. 4.6 PROCEDURE FOR MEASURING INDIVIDUAL PERFORMANCE. Individual performance of a Participant for a Plan Year shall be based on the rating he receives pursuant to his annual performance review for that Plan Year. Prior to the beginning of each Plan Year, or as soon as administratively practicable thereafter, each Participant in conjunction with his supervisors shall develop performance objectives for that Plan Year. Each Participant's supervisors shall conduct an annual performance review of the Participant and shall rate him based on his accomplishment of his performance objectives for that Plan Year. The rating of a Participant shall be determined by his supervisors acting in their sole discretion. A Participant may appeal the rating he receives from his supervisors in accordance with established procedures of the Company. In all cases, the final decision belongs to the Committee. 4.7 EFFECT OF LEVEL OF ATTAINMENT OF PERFORMANCE MEASURES. The schedule below reflects the maximum percentage of Base Salary a Participant may earn as a Formula Derived Award for a Plan Year based on the level of attainment of the Company Operating Income, the subsidiary operating income, the Department Performance Measures, the Team Performance Measures or the individual Performance Measures goal for that Plan Year. TIER THRESHOLD TARGET MAXIMUM ---- --------- ------ ------- 1 11.25% 22.50% 45.00% 1.5 10.00 20.00 40.00 2 7.50 15.00 30.00 3 5.00 10.00 20.00 4 3.75 7.50 15.00 5 2.00 4.00 8.00 6 1.25 2.50 5.00 If the level of attainment of the Performance Measures for a Plan Year is between the threshold and the target level or between the target and the maximum level established for that Plan Year, the maximum percentage of Base Salary that each Participant may earn as a Formula Derived Award for that Plan Year under the above schedule shall be interpolated. For example, if the -5- Operating Income of the Company for a Plan Year is equal to the threshold level established for that Plan Year, the Formula Derived Award for a Tier 3 Participant for that Plan Year shall not exceed 5% of his Base Salary for that Plan Year. If the actual Operating Income of the Company for a Plan Year is equal to a level halfway between the threshold and target level for that Plan Year, the Formula Derived Award for a Tier 3 Participant for that Plan Year shall not exceed 7.5% of his Base Salary for that Plan Year. 4.8 EFFECT OF INDIVIDUAL PERFORMANCE RATING. If a Participant has a portion of his potential Formula Derived Award for a Plan Year based on his individual performance rating for that Plan Year, the percentage of that portion of his potential Formula Derived Award that he will earn based on his performance rating is determined as follows: Performance Rating Percentage ------------------ ---------- Less than 2 0% 2 50% 3 75% 4 and higher 100% If his performance rating is between 2 and 4, the percentage will be interpolated. By way of example, if a Participant's performance rating for a Plan Year is 2.5, the percentage of that portion of his potential Formula Derived Award that he will earn based on his performance rating will be 62.5% (I.E., 2.5 divided by 4.0). 4.9 CALCULATION OF FORMULA DERIVED AWARD. The table below illustrates how the potential Formula Derived Award for a Participant is determined for a Plan Year. The weight for each Performance Measure for the Plan Year is stated in the first column which is multiplied by that Participant's Base Salary for that Plan Year. That product is then multiplied by the percentage obtained from the schedule in Section 4.7 based on his category of employment and the level of attainment of the Participant's Performance Measures for that Plan Year. Finally, that new product is multiplied by the percentage determined under Sections 4.7 or 4.8, whichever is applicable, based on the level of attainment of that specific Performance Measure. For purposes of illustration, (i) the Participant is a Tier 2 employee, (ii) 80% of his potential Formula Derived Award is based on subsidiary performance and 20% of his potential Formula Derived Award is based on individual performance, (iii) the subsidiary attains the threshold level of its Operating Income goal for the Plan Year, (iv) the Participant receives a performance rating of 4 for the Plan Year and (v) his Base Salary is $100,000 for that Plan Year. The actual Formula Derived Award earned by that Participant for that Plan Year shall be calculated as follows: -6- FORMULA PERFORMANCE BASE % OF BASE PERCENT DERIVED MEASURE WEIGHT SALARY SALARY EARNED AWARD - ------- ------ ------ ------ ------ ----- Company 0% N/A N/A N/A 0 Subsidiary 80% 100,000 7.5% 100% 6,000 Department 0% N/A N/A N/A 0 Team 0% N/A N/A N/A 0 Individual 20% 100,000 7.5% 100% 1,500 ------ $7,500 ARTICLE V PAYMENTS 5.1 FORM AND TIMING. The Company shall make payment of the Incentive Award amount earned by each Participant for a Plan Year to such Participant in cash no later than 90 days after the end of that Plan Year (the "Payout Date"). Unless a Participant's full-time employment terminates due to death, total disability or retirement at or after age 65, the Participant must be employed as a full-time employee by the Company or one of its subsidiaries on the Payout Date for a Plan Year to be entitled to receive payment of his Incentive Award for that Plan Year. 5.2 NEW PARTICIPANTS. If an employee becomes a Participant after the commencement of a Plan Year, the Incentive Award amount earned by that Participant for that Plan Year, if any, will be prorated to reflect the actual length of the Participant's service during that Plan Year. 5.3 TERMINATION DUE TO DEATH, TOTAL DISABILITY, OR RETIREMENT. If the full-time employment of a Participant with the Company and its subsidiaries terminates during a Plan Year due to death, total disability, or retirement at or after age 65 and after he has been employed by the Company or a subsidiary for at least six months during that Plan Year, the Incentive Award amount earned by that Participant for that Plan Year, if any, will be prorated to reflect the actual length of the Participant's service with the Company and its subsidiaries during that Plan Year. If a Participant dies during a Plan Year, payment of the Incentive Award amount, if any, will be made to the Participant's estate. The Committee shall determine in its sole discretion whether a Participant is totally disabled. ARTICLE VI ADMINISTRATIVE PROVISIONS 6.1 AUTHORITY TO ADMINISTER. The Committee shall have responsibility for administration of the Plan. The Committee shall have full authority to determine Performance -7- Measures and awards, eligibility, and participation, interpret the Plan's provisions, set rules, and administer the Plan. The Committee may delegate administrative responsibilities as it deems appropriate. Any and all matters involving the Plan, including but not limited to disputes involving Participants and their beneficiaries, shall be referred to the Committee. The Committee shall have the exclusive discretionary authority to construe the terms of the Plan and determine eligibility for all benefits hereunder. Any such determinations or interpretations of the Plan adopted by the Committee shall be final and conclusive and shall bind all Participants. 6.2 AMENDMENT OF THE PLAN. The Plan shall continue indefinitely until terminated by the Committee. The Committee may terminate, amend, or modify the Plan prior to September 30 of any Plan Year for subsequent Plan Years, provided that no such termination, amendment, or modification of the Plan shall adversely affect the rights of any Participant to Incentive Awards earned, but unpaid, under the Plan. If federal regulations enacted during a Plan Year negate the validity of the Performance Measures established under the Plan for that Plan Year, the Plan shall be amended by the Committee to reflect such regulatory requirements. ARTICLE VII GENERAL PROVISIONS 7.1 NO RIGHT OF CONTINUED EMPLOYMENT. Nothing contained in the Plan shall give any Participant the right to be retained in the employment of the Company or any of its subsidiaries or affect the right of the Company or any subsidiary to dismiss any Participant, or shall be deemed to be a contract of employment. The receipt by a Participant of an Incentive Award for any Plan Year shall not guarantee that Participant the right to receive an Incentive Award for any subsequent Plan Year. 7.2 NO RIGHT OF ASSIGNMENT. No right or interest of any Participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy. 7.3 WITHHOLDING FOR TAXES. The Company shall have the right to deduct from all amounts paid under this Plan any taxes required by law to be withheld with respect to such payments. 7.4 GOVERNING LAW. All questions pertaining to the construction, regulation, validity, and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Texas. -8- IN WITNESS WHEREOF, the Company has caused this Plan to be executed effective as of October 1, 1997. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. Brutsche, III ----------------------------------- H.R. Brutsche, III, President -9- EX-10.33 3 EXHIBIT 10.33 [Amendment No. 9] September 30, 1997 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R 0QS Attn: A.D. Hills NBD Bank/The First National Bank of Chicago c/o First Chicago National Markets, Inc. One First National Plaza Mail Suite 0162 Chicago, IL 60670 Attn: Robert O'Connell SunTrust Bank, Atlanta 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: John A. Fields, Jr. Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David B. Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite International, Inc. ("VLH"), Vari-Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. ("NBD"), Trust Company Bank (the name of which is now SunTrust Bank, Atlanta) ("SUNTRUST") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, FNBC, SunTrust and Comerica are hereinafter individually referred to as "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by: (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among Borrowers, VLH and VLEH, as guarantors, Lenders, and Agent; (b) that certain letter agreement dated September 30, 1994 marked "[Amendment No. 2]" among Borrowers, VLH, VLEH, Ignition! Creative Group, Inc. (formerly known as Showco Creative Services, Inc.) ("ICG"), as a Guarantor, and Irideon, Inc. ("IRIDEON") as a Guarantor, Lenders, and Agent; (c) that certain letter agreement dated February 22, 1995 September 30, 1997 Page 2 marked "[Amendment No. 3]" among Borrowers, Guarantors, Concert Production Lighting, Inc., a Delaware corporation ("CPL"),as a Guarantor (VLH, VLEH, ICG, Irideon, and CPL are sometimes referred to herein collectively as "GUARANTORS"), Lenders, and Agent; (d) that certain letter agreement dated November 22, 1995 marked "[Amendment No. 4]" among Borrowers, Guarantors, Lenders, and Agent; (e) that certain letter agreement dated December 18, 1995 marked "[Amendment No. 5]" among Borrowers, Guarantors, Lenders, and Agent; (f) that certain letter agreement dated May 20, 1996 marked "[Amendment No. 6]" among Borrowers, Guarantors, Lenders, and Agent; (g) that certain letter agreement dated July 31, 1996 marked "[Amendment No. 7]" among Borrowers (including the addition thereto of Irideon Limited, a newly formed subsidiary of VLEH as a Borrower, which is hereafter included in collective references to the "BORROWERS"), Guarantors, Lenders, and Agent; and (h) that certain letter agreement dated January 16, 1997 marked "[Amendment No. 8]" among Borrowers, Guarantors, Lenders, and Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, Borrowers and Guarantors have requested amendments to the Credit Agreement in order to permit: (a) Borrowers to guaranty separate lease financing facilities by third parties to lessees of VLI; and (b) Borrower to grant liens in and to leased equipment, leases, and lease receivables to secure: (i) lease financing facilities provided by third parties to lessees of VLI; (ii) guaranty obligations referred to in (a) above; and (iii) obligations of lessees under and with respect to leases and lease receivables sold and assigned by VLI. In addition Borrowers have requested approval of the merger of CPL into VLI, with VLI begin the surviving entity. SECTION 11.5 of the Credit Agreement provides that no Borrower or Guarantor will, and no Subsidiary will be permitted to, merge or consolidate with or into, or convey, transfer, lease, or otherwise dispose of all or substantially all of its assets to, or acquire all or substantially all of the assets or capital stock of, any Person. SECTION 11.6 of the Credit Agreement provides that no Borrower or Guarantor will, or will permit any Subsidiary to, make any Investment, in excess of certain permitted amounts set forth therein. Investment is defined to include any capital contribution to any other Person and any ownership or similar investment in any other Person. Borrowers and Guarantors have requested that Agent and Lenders execute this letter agreement (hereinafter, "Amendment No. 9") in the space indicated below to evidence their agreement to the modifications and amendments contained herein, and to the merger of CPL into VLI. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Borrowers, Guarantors, Lenders, and Agent agree to the following: 1. AMENDMENTS TO DEFINITIONS. a. The definitions contained in EXHIBIT A to the Credit Agreement shall be supplemented effective the date hereof with the following definitions: September 30, 1997 Page 3 "CONTINGENT PAYMENT DEBT" is defined in SECTION 11.2(d). "LEASE" means a lease for equipment manufactured by VLI, entered into between a Lessee and VLI. "LEASE RECEIVABLES" means the right of VLI to receive rental payments under Leases. "LESSEE" means a Person: (a) that has entered into or agreed to enter into one or more Leases as a lessee; (b) the credit of which is acceptable to VLI; and (c) the indebtedness of which can be guaranteed by VLI pursuant to the terms of its articles of incorporation, bylaws, and other governing documents. b. The following definitions contained in EXHIBIT A to the Credit Agreement shall be amended in their entireties as follows: "LIABILITIES" means Debts, together with trade payables and other obligations payable less than one year from the date of the creation thereof, which would, in accordance with GAAP, be shown on a balance sheet as a liability, PROVIDED, HOWEVER, that neither the deferred revenue liability or the customer deposit liability on VLI's balance sheet resulting from the operating lease treatment of Leases under GAAP shall be considered a "LIABILITY" hereunder. c. All references to "TRUST CO." shall be deemed to be references to "SUNTRUST." 2. AMENDMENTS. a. SECTION 9.2 of the Credit Agreement shall be, and is hereby, amended to add a new SUBSECTION (h), and to re-letter the existing SUBSECTION (h) as SUBSECTION (i). The new SUBSECTION (h) shall read as follows: "(h) COPIES OF LEASE RECEIVABLE DOCUMENTS AND LEASE FINANCING GUARANTIES. Promptly upon the closing of a transaction pursuant to which VLI provides a guaranty or enters into documentation creating Contingent Payment Debt described in SECTION 11.2(d)(ii) or (iii), copies of such guaranty, Contingent Payment Debt documentation, and the related Lease Receivable sale documents or lease financing documents." b. SECTION 11.1(d) of the Credit Agreement shall be, and is hereby amended to read in full as follows: "(d) (i) Liens securing Debt described in SECTION 11.2(d)(i); (ii) Liens securing payment of Lease Receivables that have been sold and assigned by VLI or that are payable under Leases that have been sold and assigned by VLI, PROVIDED that such Liens shall only encumber the equipment that is the subject of such Leases and any rights retained by VLI in and to such Leases; (iii) Liens securing payment of lease financing facilities provided by third-party lenders to Lessees, whether or not such lease financing facilities have been guaranteed by VLI or are recourse to the credit or other Assets of VLI; and (iv) Liens securing guaranty obligations of VLI with respect to guaranties permitted by SECTION 11.2(d)(ii); PROVIDED that, September 30, 1997 Page 4 in the case of Liens described in CLAUSES (ii), (iii) and (iv) above, such Liens: shall only encumber the equipment which is the subject of the Leases to which such Lessees are parties and any rights retained by VLI in and to such Leases. All of such Liens described above shall be permitted only if: (1) the related guaranty or documents relating to the sale of the Lease or Lease Receivables require that the Assets subject to the related Lease or Leases be returned free and clear of all Liens upon the satisfaction of the obligations under such guaranty or sale documents; and (2) demand may be made under a guaranty only if the related Lease or Leases are in default. Provided that no Default or Event of Default has occurred which is continuing, upon request of VLI, each Collateral Agent shall release any and all Liens held by it in and to: (y) any equipment, Leases, or Lease Receivables to be pledged to any third-party lender pursuant to CLAUSES (ii), (iii), or (iv) of this SUBSECTION (d) at the time such Liens are granted to such third-party lender; or (z) any Leases or Lease Receivables sold by VLI at the time of such sale. If the Liens on such Assets are later released by such third-party lenders and ownership of such Assets is restored free and clear to VLI, VLI shall take all necessary actions to regrant a security interest in such Assets to Lenders." c. SECTION 11.2(d) of the Credit Agreement shall be, and is hereby amended to read in full as follows: "(d) Debt incurred: (i) upon acquisition or within 90 days thereof to finance the purchase or lease of fixed or capital assets (excluding lighting and sound equipment and other equipment which is typically leased or rented by the Vari-Lite Corporate Group to its customers) up to a maximum aggregate amount for the consolidated Vari-Lite Corporate Group at any one time outstanding of $4,000,000; provided, however, that no greater than $2,000,000 of such Debt may be incurred in any fiscal year; (ii) Debt in the form of guaranties by VLI to third-party lenders that make lease financing facilities available to Lessees; and (iii) contingent Debt arising from the right of VLI to make rental payments under Lease Receivables that have been sold and assigned by VLI or which are payable under Leases that have been sold and assigned by VLI, in order to cure defaults and prevent foreclosures of pledged equipment ("CONTINGENT PAYMENT DEBT"); in the case of Debt under CLAUSES (ii) and (iii) above, not to exceed an aggregate amount of $6,000,000 at any one time. Debt under CLAUSES (ii) and (iii) above shall be permitted so long as: (1) the guaranty documents necessary for the transactions in CLAUSE (ii) and the language in Lease Receivable or Lease sale documents creating the Contingent Payment Debt may include a provision allowing the guarantors to assume the payment obligations of a Lessee in the event of a default under the related lease financing; (2) each guaranty and the amount of any Contingent Payment Debt shall be for an amount less than or equal to eighty percent (80%) of the total original face amount of the related Lease or Leases; and (3) the financing supported by such guaranty or such Contingent Payment Debt obligation is for a term of no longer than three (3) years." 3. WAIVER. The provisions of SECTION 11.5 and SECTION 11.6, and any other provisions of the Credit Agreement or any Loan Document which could restrict the ability of the Borrowers from completing the merger of CPL into VLI, are waived to the extent and only to the extent necessary to permit such merger. September 30, 1997 Page 5 4. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 9, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of Borrowers and VLH contained in ARTICLE 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 9 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to Agent pursuant to SECTION 9.2 of the Credit Agreement. d. Each Borrower and each Guarantor executing this Amendment No. 9 is duly authorized and empowered to execute this Amendment No. 9, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 5. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor, after giving effect to the amendments set forth herein, hereby: (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable); (b) acknowledges and agrees that, to the extent the Guaranties and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Multicurrency Revolver Commitment or the VLI Term Loan, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Multicurrency Revolver Commitment and VLI Term Loan as redefined herein; and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 6. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 9 is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. From and after the date hereof, all references in the Credit Agreement to the Agreement shall be deemed to be references to the Credit Agreement after giving effect to this Amendment No. 9, and all prior Amendments. 7. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 9 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Agent or Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 8. CONDITIONS PRECEDENT. Each of the modifications and amendments set forth herein is subject to the satisfaction of each of the following conditions precedent: September 30, 1997 Page 6 a. The Borrowers shall have paid to the Agent for the account of each Lender an amendment fee which shall be distributed by the Agent to the Multicurrency Revolver Lenders and to Coutts in accordance with the following table: LENDER AMENDMENT FEE BBH $4,000 FNBC $6,000 Comerica $4,000 SunTrust $4,000 Coutts $2,000 The fees described in this Section represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the Borrowers to pay such fees shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in the Agreement, and expenses described in the Agreement. All such fees shall be part of the Obligations and shall be nonrefundable. b. Borrowers and Guarantors shall have paid all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel, subject to a fee cap (exclusive of disbursements or expenses) of US$12,500 for Haynes and Boone, L.L.P.) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 9, and all other Loan Documents executed in connection herewith. Such fees and expenses shall be payable on the effective date of this Amendment No. 9. c. The Agent shall have received such other documents as it may reasonably request. 9. GOVERNING LAW. THIS AMENDMENT NO. 9 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 10. COUNTERPARTS. This Amendment No. 9 shall become effective as of the date first written above when a counterpart of this Amendment No. 9 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 11. COMPLETE AGREEMENT. THIS AMENDMENT NO. 9, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. September 30, 1997 Page 7 This Amendment No. 9 has been executed by the duly authorized officers of Borrowers and Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 9 in the space indicated below. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE(S) FOLLOW. Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H. R. Brutsche ------------------------------------ H.R. Brutsche III President SHOWCO, INC. By: /s/ Mike Herman ------------------------------------ Michael P. Herman Vice President - Finance VARI-LITE ASIA, INC. By: /s/ H. R. Brutsche ------------------------------------ H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED THEATRE PROJECTS LIGHTING SERVICES LIMITED BRILLIANT STAGES LIMITED IRIDEON LIMITED By: /s/ H. R. Brutsche ------------------------------------ H.R. Brutsche III Director Amendment No. 9 Signature Page GUARANTORS: VARI-LITE INTERNATIONAL, INC. IRIDEON, INC. CONCERT PRODUCTION LIGHTING, INC. By: /s/ H. R. Brutsche ------------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H. R. Brutsche ------------------------------------ H.R. Brutsche III Director IGNITION! CREATIVE GROUP, INC. By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President - Finance Amendment No. 9 Signature Page ACKNOWLEDGED AND AGREED: AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ Richard J. Ragoza --------------------------- Richard J. Ragoza Senior Credit Officer LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ Richard J. Ragoza --------------------------- Richard J. Ragoza Senior Credit Officer Amendment No. 9 Signature Page COUTTS & CO. By: /s/ A. D. Hills ----------------------------------- Name: MR. A.D. HILLS Title: CLIENT MANAGER Amendment No. 9 Signature Page SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ Todd C. Davis ----------------------------------- Name: TODD C. DAVIS Title: Assistant Vice President By: /s/ Steven J. Newby ----------------------------------- Name: STEVEN J. NEWBY Title: Corporate Banking Officer Amendment No. 9 Signature Page NBD BANK, N. A. By: /s/ Stephen E. McDonald ----------------------------------- Name: STEPHEN E. MCDONALD Title: 1st Vice President Amendment No. 9 Signature Page COMERICA BANK-TEXAS By: /s/ David Terry ----------------------------------- Name: DAVID TERRY Title: Vice President Amendment No. 9 Signature Page EX-10.40 4 EXHIBIT 10.40 (Multicurrency-Cross Border) ISDA-Registered Trademark- INTERNATIONAL SWAP DEALS ASSOCIATION. INC. MASTER AGREEMENT dated as of November 23, 1993 Vari-Lite Holdings, Inc. and Brown Brothers Harriman & Co. have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: 1. INTERPRETATION (a) DEFINITIONS. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) GENERAL CONDITIONS. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. 1 (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. (b) CHANGE OF ACCOUNT: Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) NETTING. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (In which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. 2 (d) DEDUCTION OR WITHHOLDING FOR TAX. (i) GROSS-UP. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will: (1) promptly notify the other party ("Y") of such requirement; (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y; (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for; (A) the failure by Y to comply with or perform any agreement contained In Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. (ii) LIABILITY. If: (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in 3 respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold, and (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (e) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement. 3. REPRESENTATIONS Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(1), at all times until the termination of this Agreement) that: (a) BASIC REPRESENTATIONS. (i) STATUS. It is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, in good standing; (ii) POWERS. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement TO deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorize such execution, delivery and performance; 4 (iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) CONSENTS. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) OBLIGATIONS BINDING. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) PAYER TAX REPRESENTATION. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) PAYEE TAX REPRESENTATIONS. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. 4. AGREEMENTS Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: 5 (a) FURNISH SPECIFIC INFORMATION. It will deliver to the other party or, in certain cases under subparagraph (iii.) below, to such government or taxing authority as the other party reasonably directs: (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation; (ii) any other documents specified in the Schedule or any Confirmation; and (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification. in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) MAINTAIN AUTHORIZATIONS. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) COMPLY WITH LAWS. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) TAX AGREEMENT. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) PAYMENT OF STAMP TAX. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by jurisdiction in which it is incorporated, organized, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is riot also a Stamp Tax Jurisdiction with respect to the other party. 6 5. EVENTS OF DEFAULT AND TERMINATION EVENTS (a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party: (i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) CREDIT SUPPORT DEFAULT. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document if such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) MISREPRESENTATION. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; 7 (v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) BANKRUPTCY. The party any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the 8 appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts; or (viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer; (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) TERMINATION EVENTS. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination event if the event is specified pursuant to (v) below: (i) ILLEGALITY. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party): (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to 9 comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) TAX EVENT. Due to (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iii) TAX EVENT UPON MERGER. The party (the "Burdened Party") on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(il) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); (iv) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X"), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (v) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such 10 event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. EARLY TERMINATION (a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT. (i) NOTICE. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) TRANSFER TO AVOID TERMINATION EVENT. If either an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such 11 other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed. (iii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)( 1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iv) RIGHT TO TERMINATE. If: (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(1)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) EFFECT OF DESIGNATION. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) CALCULATIONS. (i) STATEMENT. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in 12 reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) PAYMENT DATE. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) EVENTS OF DEFAULT. If the Early Termination Date results from an Event of Default: (1) FIRST METHOD AND MARKET QUOTATION. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-Defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-Defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) FIRST METHOD AND LOSS. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) SECOND METHOD AND MARKET QUOTATION. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated 13 Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) SECOND METHOD AND LOSS. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) TERMINATION EVENTS. If the Early Termination Date results from a Termination Event: (1) ONE AFFECTED PARTY. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) TWO AFFECTED PARTIES. If there are two Affected Parties: (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the Party with the lower Settlement Amount ("Y") and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. 14 (iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. 7. TRANSFER Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8. CONTRACTUAL CURRENCY (a) PAYMENT IN THE CONTRACTUAL CURRENCY. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received 15 exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (b) JUDGMENTS. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency. (c) SEPARATE INDEMNITIES. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) EVIDENCE OF LOSS. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 9. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) AMENDMENTS. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. 16 (d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) COUNTERPARTS AND CONFIRMATIONS. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) HEADINGS. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 10. OFFICES; MULTIBRANCH PARTIES (a) If Section 10(a) is specified in the Schedule as applying, each party that enters Into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organization of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into. (b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party. (c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation. 17 11. EXPENSES A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. NOTICES (a) EFFECTIVENESS. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) CHANGE OF ADDRESSES. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 18 13. GOVERNING LAW AND JURISDICTION (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) JURISDICTION. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably: (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying, of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) SERVICE OF PROCESS. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices n Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law. (d) WAIVER OF IMMUNITIES. Each party irrevocable waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 19 14. DEFINITIONS As used in this Agreement: "ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b). "AFFECTED PARTY" has the meaning specified in Section 5(b). "AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "AFFILIATE" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "APPLICABLE RATE" means: (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "BURDENED PARTY" has the meaning specified in Section 5(b). "CHANGE IN TAX LAW" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. "CONSENT" includes a consent, approval, action, authorization, exemption, notice, filing, registration or exchange control consent. "CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b). 20 "CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as such in this Agreement. "CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule. "DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "DEFAULTING PARTY" has the meaning specified in Section 6(a). "EARLY TERMINATION DATE" means the date determined in accordance with Section 6(a) or 6(b)(iv). "EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "ILLEGALITY" has the meaning specified in Section 5(b). "INDEMNIFIABLE TAX" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organized, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "LAW" includes any treaty, law, rule or regulation (as modified, in the case of tax matters. by the practice of any relevant governmental revenue authority) and "lawful" and "unlawful" will be construed accordingly. "LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial center, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), Ii the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. 21 "LOSS" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(l) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out- of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "MARKET QUOTATION" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, 22 it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "NON-DEFAULTING PARTY" has the meaning specified in Section 6(a). "OFFICE" means a branch or office of a party, which may be such party's head or home office. "POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "RELEVANT JURISDICTION" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organized, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made. "SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "SET-OFF" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination Date, the sum of: (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. 23 "SPECIFIED ENTITY" has the meaning specified in the Schedule. "SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "STAMP TAX" means any stamp, registration, documentation or similar tax. "TAX" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "TAX EVENT" has the meaning specified in Section 5(b). "TAX EVENT UPON MERGER" has the meaning specified in Section 5(b). "TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "TERMINATION CURRENCY" has the meaning specified in the Schedule. "TERMINATION CURRENCY EQUIVALENT" means, In respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign 24 exchange agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "TERMINATION EVENT" means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate, Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed, The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. VARI-LITE HOLDINGS, INC. BROWN BROTHERS HARRIMAN & CO. - --------------------------------- --------------------------------- (Name of Party) (Name of Party) By: /s/ Mike Herman By: /s/ Anil Agarwal ----------------------------- ----------------------------- Name: Mike Herman Name: Anil Agarwal Title: Vice President-Finance Title: Manager Date: December 7, 1993 Date: November 23, 1992 25 (MULTICURRENCY-CROSS BORDER) ISDA-R- INTERNATIONAL SWAP DEALERS ASSOCIATION, INC. SCHEDULE TO THE MASTER AGREEMENT dated as of ________________________ between ________________________________ and _________________________________ ("Party A") ("Party B") PART 1. TERMINATION PROVISIONS. (a) "SPECIFIED ENTITY" means in relation to Party A for the purpose of: Section 5(a)(v), _______________________________________________________ Section S(a)(vi), ______________________________________________________ Section 5(a)(vii), _____________________________________________________ Section 5)(iv), ________________________________________________________ and In relation to Party B for the purpose of: Section 5(a)(v), _______________________________________________________ Section 5(a)(vi), ______________________________________________________ Section 5(a)(vii), _____________________________________________________ Section 5)(iv), ________________________________________________________ 26 (b) "SPECIFIED TRANSACTION" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here ________________ ________________________________________________________________________ ________________________________________________________________________ (c) The "CROSS DEFAULT" provisions of Section 5(a)(vi) will/will not* apply to Party A will/will not* apply to Party B If such provisions apply: "SPECIFIED INDEBTEDNESS" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here ________________ ________________________________________________________________________ "THRESHOLD AMOUNT" means _______________________________________________ ________________________________________________________________________ (d) The "CREDIT EVENT UPON MERGER" provisions of Section 5(b)(iv) will/will not* apply to Party A will/will not* apply to Party B (e) The "AUTOMATIC EARLY TERMLNATION" provision of Section 6(a) will/will not* apply to Party A will/will not* apply to Party B (f) PAYMENTS ON EARLY TERMINATION. For the purpose of Section 6(e) of this Agreement: (i) Market Quotation/Loss* will apply. (ii) The First Method/The Second Method* will apply. (g) "TERMINATION CURRENCY" means ____________________________ if such currency is specified and freely available, and otherwise United States Dollars. (h) ADDITIONAL TERMINATION EVENT will/will not* apply. The following shall constitute an Additional Termination Event: ____________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ *Delete as applicable. 27 For the purpose of the foregoing Termination Event, the Affected Party or Affected Parties shall be: ________________________________________________________________________ PART 2. TAX REPRESENTATIONS. (a) PAYER REPRESENTATIONS. For the purpose of Section 3(e) of this Agreement, Party A will/will not* make the following representation and Party B will/will not* make the following representation: It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, it may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of this Agreement, (ii) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a) (iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a) (iii) of this Agreement and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement, provided that it shall not be a breach of this representation where reliance is placed on clause (ii) and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (b) PAYEE REPRESENTATIONS. For the purpose of Section 3(f) of this Agreement, Party A and Party B make the representations specified below, if any: (i) The following representation will/will not* apply to Party A and will/will not* apply to Party B: It is fully eligible for the benefits of the "Business Profits" or "Industrial and Commercial Profits" provision, as the case may be, the "Interest" provision or the "Other Income" provision (if any) of the Specified Treaty with respect to any payment described in such provisions and received or to be received by it in connection with this Agreement and no such payment is attributable to a trade or business carried on by it through a permanent establishment in the Specified Jurisdiction. If such representation applies, then: "SPECIFIED TREATY" means with respect to Party A ____________________________ "SPECIFIED JURISDICTION" means with respect to Party A ______________________ *Delete as applicable. 28 "SPECIFIED TREATY" means with respect to Party B ____________________________ "SPECIFIED JURISDICTION" means with respect to Party B ______________________ (ii) The following representation will/will not apply to Party A and will/will not apply to Party B: Each payment received or to be received by it in connection with this Agreement will be effectively connected with its conduct of a trade or business in the Specified Jurisdiction. If such representation applies, then: "SPECIFIED JURISDICTION" means with respect to Party A ______________________ "SPECIFIED JURISDICTION" means with respect to Party B ______________________ (iii) The following representation will/will not apply to Party A and will/will not apply to Party B: -- (A) It is entering into each Transaction in the ordinary course of its trade as, and is, either (1) a recognized U.K. bank or (2) a recognized U.K. swaps dealer (in either case (1) or (2), for purposes of the United Kingdom Inland Revenue extra statutory concession C17 on interest and currency swaps dated March 14, 1989), and (B) it will bring into account payments made and received in respect of each Transaction in computing its income for United Kingdom tax purposes. (iv) Other Payee Representations: ______________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ N.B. The above representations may need modification if either party is a Multibranch Party. PART 3. AGREEMENT TO DELIVER DOCUMENTS. For the purpose of Sections 4(a)(i) and (ii) of this Agreement, each party agrees to deliver the following documents, as applicable: (a) Tax forms, documents or certificates to be delivered are: 29 PARTY REQUIRED TO FORM/DOCUMENT DATE BY WHICH DELIVER DOCUMENT CERTIFICATE TO BE DELIVERED - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- (b) Other documents to be delivered are: COVERED BY PARTY REQUIRED TO FORM/DOCUMENT DATE BY WHICH SECTION 3(d) DELIVER DOCUMENT CERTIFICATE TO BE DELIVERED REPRESENTATION Yes/No* - ------------------- ------------------- ------------------- Yes/No* - ------------------- ------------------- ------------------- Yes/No* - ------------------- ------------------- ------------------- Yes/No* - ------------------- ------------------- ------------------- Yes/No* - ------------------- ------------------- ------------------- Yes/No* - ------------------- ------------------- ------------------- PART 4. MISCELLANEOUS (a) ADDRESSES FOR NOTICES. For the purpose of section 12(a) of this Agreement: Address for notices or communications to Party A: Address: _______________________________________________________________ Attention: _____________________________________________________________ Telex No.: ____________________________ Answerback: ____________________ Facsimile No.: ________________________ Telephone No.: _________________ Delete as applicable. 30 Electronic Messaging System Details: ___________________________________ Address for notices or communications to Party B: Address: _______________________________________________________________ Attention: _____________________________________________________________ Telex No.: ____________________________ Answerback: ____________________ Facsimile No.: ________________________ Telephone No.: _________________ Electronic Messaging System Details: ___________________________________ (b) PROCESS AGENT. For the purpose of section 13(c) of this Agreement: Party A appoints as its Process Agent __________________________________ Party B appoints as its Process Agent __________________________________ (c) OFFICES. The provisions of Section 10(a) will/will not* apply to this Agreement. (d) MULTIBRANCH PARTY. For the purpose of Section 10(c) of the Agreement: Party A is/is not* a Multibranch Party and, if so, may act through the following Offices: - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- Party B is/is not* a Multibranch Party and, if so, may act through the following Offices: - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- - --------------------- --------------------- --------------------- *Delete as applicable. 31 (e) CALCULATION AGENT. The Calculation Agent is _____________________ , unless otherwise specified in a Confirmation in relation to the relevant Transaction. (f) CREDIT SUPPORT DOCUMENT. Details of any Credit Support Document: ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (g) CREDIT SUPPORT PROVIDER. Credit Support Provider means in relation to Party A, ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Credit Support Provider means in relation to Party B, __________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (h) GOVERNING LAW. This Agreement will be governed by and construed in accordance with English law/the laws of the State of New York (without reference to choice of law doctrine)*. (i) NETTING OF PAYMENTS. Subparagraph (ii) of Section 2(c) of this Agreement will not apply to the following transactions or groups of Transactions (in each case starting from the date of this Agreement/in each case starting from ___________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ (j) "AFFILIATE" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here _______________________________ ________________________________________________________________________ PART 5. OTHER PROVISIONS. 32 TRADE CONFIRMATION To: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Attn: Mr. Michael Herman Chief Financial Officer This confirmation sets forth the terms and conditions of the Swap Transaction ("Swap") entered into between Vari-Lite Holdings, Inc. and Brown Brothers Harriman & Co. on the Trade Date specified below. This constitutes a "Confirmation" as referred to in the Interest Rate & Currency Exchange Agreement specified below. This Confirmation replaces our previous Confirmation dated November 23, 1993 (copy attached) which shall be of no further force and effect. The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swap Dealers Association, Inc.) are incorporated into this Confirmation. In the event of any inconsistency between those definitions and provisions and this Confirmation, this Confirmation will govern. This Confirmation supplements, forms part of, and is subject to the 1992 Multicurrency-Cross Border ISDA Master Agreement (the Agreement) between us (attached). All provisions contained in the Agreement govern this confirmation except as expressly modified below. The terms of the particular Swap executed are as follows: A) _____________________________________________________________________________ Initial Notional Amount: USD 10,000,000 (Amortizing by $200,000 on September 30, 1996 and by $700,000 every quarter, commencing on December 31, 1996 up to December 31, 1998 -see Attachment A) _____________________________________________________________________________ Trade Date: February 28, 1994 _____________________________________________________________________________ Effective Date: March 31, 1994 _____________________________________________________________________________ Termination Date: March 31, 1999, subject to adjustment in accordance with the Modified Following Business Day Convention. _____________________________________________________________________________ B) Fixed Rate Payer: Vari-Lite Holdings, Inc. Fixed Rate: 10.08 percent per annum. Payment Dates: The last day of March, June, September, and December of each year, commencing on June 30, 1994 up to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Fixed Rate Day Count Fraction: Actual/360 C) Floating Rate Payer: Brown Brothers Harriman & Co. Floating Rate: Three month USD-LIBOR-BBA plus 4.50 percent. Floating Rate for Initial Calculation Period: To be determined on March 29, 1994. Payment Dates: The last day of March, June, September, and December of each year, commencing on June 30, 1994 up to and including the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Reset Dates: Each Floating Rate Payment Date except the Termination Date. Fixed Rate Day Count Fraction: Actual/360 D) Business Days: New York and London. E) Governing Law: Laws of New York. /s/ Anil Agarwal ------------------------------------ per pro Brown Brothers Harriman & Co. Accepted and Agreed to: By: Vari-Lite Holdings, Inc. ------------------------------------------------------ Name: /s/ Mike Herman ---------------------------------------------------- Title: Vice President Finance, Chief Financial Officer --------------------------------------------------- Brown Brothers Harriman & Co. Attachment A Date Principal Amount Outstanding - ---- ---------------------------- 1. March 31, 1994 $10,000,000 2. June 30, 1994 $10,000,000 3. September 30, 1994 $10,000,000 4. December 31, 1994 $10,000,000 5. March 31, 1995 $10,000,000 6. June 30, 1995 $10,000,000 7. September 30, 1995 $10,000,000 8. December 31, 1995 $10,000,000 9. March 31, 1996 $10,000,000 10. June 30, 1996 $10,000,000 11. September 30, 1996 $ 9,800,000 12. December 31, 1996 $ 9,100,000 13. March 31, 1997 $ 8,400,000 14. June 30, 1997 $ 7,700,000 15. September 30, 1997 $ 7,000,000 16. December 31, 1997 $ 6,300,000 17. March 31, 1998 $ 5,600,000 18. June 30, 1998 $ 4,900,000 19. September 30, 1998 $ 4,200,000 20. December 31, 1998 $ 3,500,000 21. March 31, 1999 $ 0 EX-10.41 5 EXHIBIT 10.41 (Multicurrency-Cross Border) ISDA-Registered Trademark- INTERNATIONAL SWAP DEALS ASSOCIATION, INC. MASTER AGREEMENT dated as of September 13, 1996 Sun Trust Bank, Atlanta and Vari-Lite, Inc. have entered and/or anticipate entering into one or more transactions (each a "Transaction") that are or will be governed by this Master Agreement, which includes the schedule (the "Schedule"), and the documents and other confirming evidence (each a "Confirmation") exchanged between the parties confirming those Transactions. Accordingly, the parties agree as follows: 1. INTERPRETATION (a) DEFINITIONS. The terms defined in Section 14 and in the Schedule will have the meanings therein specified for the purpose of this Master Agreement. (b) INCONSISTENCY. In the event of any inconsistency between the provisions of the Schedule and the other provisions of this Master Agreement, the Schedule will prevail. In the event of any inconsistency between the provisions of any Confirmation and this Master Agreement (including the Schedule), such Confirmation will prevail for the purpose of the relevant Transaction. (c) SINGLE AGREEMENT. All Transactions are entered into in reliance on the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this "Agreement"), and the parties would not otherwise enter into any Transactions. 2. OBLIGATIONS (a) GENERAL CONDITIONS. (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. 1 (ii) Payments under this Agreement will be made on the due date for value on that date in the place of the account specified in the relevant Confirmation or otherwise pursuant to this Agreement, in freely transferable funds and in the manner customary for payments in the required currency. Where settlement is by delivery (that is, other than by payment), such delivery will be made for receipt on the due date in the manner customary for the relevant obligation unless otherwise specified in the relevant Confirmation or elsewhere in this Agreement. (iii) Each obligation of each party under Section 2(a)(i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated and (3) each other applicable condition precedent specified in this Agreement. (b) CHANGE OF ACCOUNT: Either party may change its account for receiving a payment or delivery by giving notice to the other party at least five Local Business Days prior to the scheduled date for the payment or delivery to which such change applies unless such other party gives timely notice of a reasonable objection to such change. (c) NETTING. If on any date amounts would otherwise be payable: (i) in the same currency; and (ii) in respect of the same Transaction, by each party to the other, then, on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The parties may elect in respect of two or more Transactions that a net amount will be determined in respect of all amounts payable on the same date in the same currency in respect of such Transactions, regardless of whether such amounts are payable in respect of the same Transaction. The election may be made in the Schedule or a Confirmation by specifying that subparagraph (ii) above will not apply to the Transactions identified as being subject to the election, together with the starting date (In which case subparagraph (ii) above will not, or will cease to, apply to such Transactions from such date). This election may be made separately for different groups of Transactions and will apply separately to each pairing of Offices through which the parties make and receive payments or deliveries. 2 (d) DEDUCTION OR WITHHOLDING FOR TAX. (i) GROSS-UP. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a party is so required to deduct or withhold, then that party ("X") will: (1) promptly notify the other party ("Y") of such requirement; (2) pay to the relevant authorities the full amount required to be deducted or withheld (including the full amount required to be deducted or withheld from any additional amount paid by X to Y under this Section 2(d)) promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against Y; (3) promptly forward to Y an official receipt (or a certified copy), or other documentation reasonably acceptable to Y, evidencing such payment to such authorities; and (4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for; (A) the failure by Y to comply with or perform any agreement contained In Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. (ii) LIABILITY. If: (1) X is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, to make any deduction or withholding in 3 respect of which X would not be required to pay an additional amount to Y under Section 2(d)(i)(4); (2) X does not so deduct or withhold. and (3) a liability resulting from such Tax is assessed directly against X, then, except to the extent Y has satisfied or then satisfies the liability resulting from such Tax, Y will promptly pay to X the amount of such liability (including any related liability for interest, but including any related liability for penalties only if Y has failed to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)). (e) DEFAULT INTEREST; OTHER AMOUNTS. Prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party that defaults in the performance of any payment obligation will, to the extent permitted by law and subject to Section 6(c), be required to pay interest (before as well as after judgment) on the overdue amount to the other party on demand in the same currency as such overdue amount, for the period from (and including) the original due date for payment to (but excluding) the date of actual payment, at the Default Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. If, prior to the occurrence or effective designation of an Early Termination Date in respect of the relevant Transaction, a party defaults in the performance of any obligation required to be settled by delivery, it will compensate the other party on demand if and to the extent provided for in the relevant Confirmation or elsewhere in this Agreement 3. REPRESENTATIONS Each party represents to the other party (which representations will be deemed to be repeated by each party on each date on which a Transaction is entered into and, in the case of the representations in Section 3(1), at all times until the termination of this Agreement) that: (a) BASIC REPRESENTATIONS. (i) STATUS. It is duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, in good standing; (ii) POWERS. It has the power to execute this Agreement and any other documentation relating to this Agreement to which it is a party, to deliver this Agreement and any other documentation relating to this Agreement that it is required by this Agreement TO deliver and to perform its obligations under this Agreement and any obligations it has under any Credit Support Document to which it is a party and has taken all necessary action to authorize such execution, delivery and performance; 4 (iii) NO VIOLATION OR CONFLICT. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets; (iv) CONSENTS. All governmental and other consents that are required to have been obtained by it with respect to this Agreement or any Credit Support Document to which it is a party have been obtained and are in full force and effect and all conditions of any such consents have been complied with; and (v) OBLIGATIONS BINDING. Its obligations under this Agreement and any Credit Support Document to which it is a party constitute its legal, valid and binding obligations. enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)). (b) ABSENCE OF CERTAIN EVENTS. No Event of Default or Potential Event of Default or, to its knowledge, Termination Event with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any Credit Support Document to which it is a party. (c) ABSENCE OF LITIGATION. There is not pending or, to its knowledge, threatened against it or any of its Affiliates any action, suit or proceeding at law or in equity or before any court, tribunal, governmental body, agency or official or any arbitrator that is likely to affect the legality, validity or enforceability against it of this Agreement or any Credit Support Document to which it is a party or its ability to perform its obligations under this Agreement or such Credit Support Document. (d) ACCURACY OF SPECIFIED INFORMATION. All applicable information that is furnished in writing by or on behalf of it to the other party and is identified for the purpose of this Section 3(d) in the Schedule is, as of the date of the information, true, accurate and complete in every material respect. (e) PAYER TAX REPRESENTATION. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(e) is accurate and true. (f) PAYEE TAX REPRESENTATIONS. Each representation specified in the Schedule as being made by it for the purpose of this Section 3(f) is accurate and true. 4. AGREEMENTS Each party agrees with the other that, so long as either party has or may have any obligation under this Agreement or under any Credit Support Document to which it is a party: 5 (a) FURNISH SPECIFIC INFORMATION. It will deliver to the other party or, in certain cases under subparagraph (iii.) below, to such government or taxing authority as the other party reasonably directs: (i) any forms, documents or certificates relating to taxation specified in the Schedule or any Confirmation; (ii) any other documents specified in the Schedule or any Confirmation; and (iii) upon reasonable demand by such other party, any form or document that may be required or reasonably requested in writing in order to allow such other party or its Credit Support Provider to make a payment under this Agreement or any applicable Credit Support Document without any deduction or withholding for or on account of any Tax or with such deduction or withholding at a reduced rate (so long as the completion, execution or submission of such form or document would not materially prejudice the legal or commercial position of the party in receipt of such demand), with any such form or document to be accurate and completed in a manner reasonably satisfactory to such other party and to be executed and to be delivered with any reasonably required certification. in each case by the date specified in the Schedule or such Confirmation or, if none is specified, as soon as reasonably practicable. (b) MAINTAIN AUTHORIZATIONS. It will use all reasonable efforts to maintain in full force and effect all consents of any governmental or other authority that are required to be obtained by it with respect to this Agreement or any Credit Support Document to which it is a party and will use all reasonable efforts to obtain any that may become necessary in the future. (c) COMPLY WITH LAWS. It will comply in all material respects with all applicable laws and orders to which it may be subject if failure so to comply would materially impair its ability to perform its obligations under this Agreement or any Credit Support Document to which it is a party. (d) TAX AGREEMENT. It will give notice of any failure of a representation made by it under Section 3(f) to be accurate and true promptly upon learning of such failure. (e) PAYMENT OF STAMP TAX. Subject to Section 11, it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by jurisdiction in which it is incorporated, organized, managed and controlled, or considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located ("Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is riot also a Stamp Tax Jurisdiction with respect to the other party. 6 5. EVENTS OF DEFAULT AND TERMINATION EVENTS (a) EVENTS OF DEFAULT. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an "Event of Default") with respect to such party: (i) FAILURE TO PAY OR DELIVER. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; (ii) BREACH OF AGREEMENT. Failure by the party to comply with or perform any agreement or obligation (other than an obligation to make any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice of a Termination Event or any agreement or obligation under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or performed by the party in accordance with this Agreement if such failure is not remedied on or before the thirtieth day after notice of such failure is given to the party; (iii) CREDIT SUPPORT DEFAULT. (1) Failure by the party or any Credit Support Provider of such party to comply with or perform any agreement or obligation to be complied with or performed by it in accordance with any Credit Support Document f such failure is continuing after any applicable grace period has elapsed; (2) the expiration or termination of such Credit Support Document or the failing or ceasing of such Credit Support Document to be in full force and effect for the purpose of this Agreement (in either case other than in accordance with its terms) prior to the satisfaction of all obligations of such party under each Transaction to which such Credit Support Document relates without the written consent of the other party; or (3) the party or such Credit Support Provider disaffirms, disclaims, repudiates or rejects, in whole or in part, or challenges the validity of, such Credit Support Document; (iv) MISREPRESENTATION. A representation (other than a representation under Section 3(e) or (f)) made or repeated or deemed to have been made or repeated by the party or any Credit Support Provider of such party in this Agreement or any Credit Support Document proves to have been incorrect or misleading in any material respect when made or repeated or deemed to have been made or repeated; 7 (v) DEFAULT UNDER SPECIFIED TRANSACTION. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party (1) defaults under a Specified Transaction and, after giving effect to any applicable notice requirement or grace period, there occurs a liquidation of, an acceleration of obligations under, or an early termination of, that Specified Transaction, (2) defaults, after giving effect to any applicable notice requirement or grace period, in making any payment or delivery due on the last payment, delivery or exchange date of, or any payment on early termination of, a Specified Transaction (or such default continues for at least three Local Business Days if there is no applicable notice requirement or grace period) or (3) disaffirms, disclaims, repudiates or rejects, in whole or in part, a Specified Transaction (or such action is taken by any person or entity appointed or empowered to operate it or act on its behalf); (vi) CROSS DEFAULT. If "Cross Default" is specified in the Schedule as applying to the party, the occurrence or existence of (1) a default, event of default or other similar condition or event (however described) in respect of such party, any Credit Support Provider of such party or any applicable Specified Entity of such party under one or more agreements or instruments relating to Specified Indebtedness of any of them (individually or collectively) in an aggregate amount of not less than the applicable Threshold Amount (as specified in the Schedule) which has resulted in such Specified Indebtedness becoming, or becoming capable at such time of being declared, due and payable under such agreements or instruments, before it would otherwise have been due and payable or (2) a default by such party, such Credit Support Provider or such Specified Entity (individually or collectively) in making one or more payments on the due date thereof in an aggregate amount of not less than the applicable Threshold Amount under such agreements or instruments (after giving effect to any applicable notice requirement or grace period); (vii) BANKRUPTCY. The party any Credit Support Provider of such party or any applicable Specified Entity of such party: (1) is dissolved (other than pursuant to a consolidation, amalgamation or merger); (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the 8 appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive); or (9) takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in. any of the foregoing acts; or (viii) MERGER WITHOUT ASSUMPTION. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer; (1) the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or (2) the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement. (b) TERMINATION EVENTS. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any event specified below constitutes an Illegality if the event is specified in (i) below, a Tax Event if the event is specified in (ii) below or a Tax Event Upon Merger if the event is specified in (iii) below, and, if specified to be applicable, a Credit Event Upon Merger if the event is specified pursuant to (iv) below or an Additional Termination event if the event is specified pursuant to (v) below: (i) ILLEGALITY. Due to the adoption of, or any change in, any applicable law after the date on which a Transaction is entered into, or due to the promulgation of, or any change in, the interpretation by any court, tribunal or regulatory authority with competent jurisdiction of any applicable law after such date, it becomes unlawful (other than as a result of a breach by the party of Section 4(b)) for such party (which will be the Affected Party): (1) to perform any absolute or contingent obligation to make a payment or delivery or to receive a payment or delivery in respect of such Transaction or to 9 comply with any other material provision of this Agreement relating to such Transaction; or (2) to perform, or for any Credit Support Provider of such party to perform, any contingent or other obligation which the party (or such Credit Support Provider) has under any Credit Support Document relating to such Transaction; (ii) TAX EVENT. Due to (x) any action taken by a taxing authority, or brought in a court of competent jurisdiction, on or after the date on which a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (y) a Change in Tax Law, the party (which will be the Affected Party) will, or there is a substantial likelihood that it will, on the next succeeding Scheduled Payment Date (1) be required to pay to the other party an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a payment from which an amount is required to be deducted or withheld for or on account of a Tax (except in respect of interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect of such Tax under Section 2(d)(i)(4) (other than by reason of Section 2(d)(i)(4)(A) or (B)); (iii) TAX EVENT UPON MERGER. The party (the Burdened Party") on the next succeeding Scheduled Payment Date will either (1) be required to pay an additional amount in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(il) or 6(e)) or (2) receive a payment from which an amount has been deducted or withheld for or on account of any Indemnifiable Tax in respect of which the other party is not required to pay an additional amount (other than by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a party consolidating or amalgamating with, or merging with or into, or transferring all or substantially all its assets to, another entity (which will be the Affected Party) where such action does not constitute an event described in Section 5(a)(viii); (iv) CREDIT EVENT UPON MERGER. If "Credit Event Upon Merger" is specified in the Schedule as applying to the party, such party ("X'), any Credit Support Provider of X or any applicable Specified Entity of X consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and such action does not constitute an event described in Section 5(a)(viii) but the creditworthiness of the resulting, surviving or transferee entity is materially weaker than that of X, such Credit Support Provider or such Specified Entity, as the case may be, immediately prior to such action (and, in such event, X or its successor or transferee, as appropriate, will be the Affected Party); or (v) ADDITIONAL TERMINATION EVENT. If any "Additional Termination Event" is specified in the Schedule or any Confirmation as applying, the occurrence of such event (and, in such 10 event, the Affected Party or Affected Parties shall be as specified for such Additional Termination Event in the Schedule or such Confirmation). (c) EVENT OF DEFAULT AND ILLEGALITY. If an event or circumstance which would otherwise constitute or give rise to an Event of Default also constitutes an Illegality, it will be treated as an Illegality and will not constitute an Event of Default. 6. EARLY TERMINATION (a) RIGHT TO TERMINATE FOLLOWING EVENT OF DEFAULT. If at any time an Event of Default with respect to a party (the "Defaulting Party") has occurred and is then continuing, the other party (the "Non-defaulting Party") may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, "Automatic Early Termination" is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (b) RIGHT TO TERMINATE FOLLOWING TERMINATION EVENT. (i) NOTICE. If a Termination Event occurs, an Affected Party will, promptly upon becoming aware of it, notify the other party, specifying the nature of that Termination Event and each Affected Transaction and will also give such other information about that Termination Event as the other party may reasonably require. (ii) TRANSFER TO AVOID TERMINATION EVENT. If either an Illegality under Section 5(b)(i)(l) or a Tax Event occurs and there is only one Affected Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the Affected Party, the Affected Party will, as a condition to its right to designate an Early Termination Date under Section 6(b)(iv), use all reasonable efforts (which will not require such party to incur a loss, excluding immaterial, incidental expenses) to transfer within 20 days after it gives notice under Section 6(b)(i) all its rights and obligations under this Agreement in respect of the Affected Transactions to another of its Offices or Affiliates so that such Termination Event ceases to exist. If the Affected Party is not able to make such a transfer it will give notice to the other party to that effect within such 20 day period, whereupon the other party may effect such a transfer within 30 days after the notice is given under Section 6(b)(i). Any such transfer by a party under this Section 6(b)(ii) will be subject to and conditional upon the prior written consent of the other party, which consent will not be withheld if such 11 other party's policies in effect at such time would permit it to enter into transactions with the transferee on the terms proposed. (iii) TWO AFFECTED PARTIES. If an Illegality under Section 5(b)(i)(1) or a Tax Event occurs and there are two Affected Parties, each party will use all reasonable efforts to reach agreement within 30 days after notice thereof is given under Section 6(b)(i) on action to avoid that Termination Event. (iv) RIGHT TO TERMINATE. If: (1) a transfer under Section 6(b)(ii) or an agreement under Section 6(1)(iii), as the case may be, has not been effected with respect to all Affected Transactions within 30 days after an Affected Party gives notice under Section 6(b)(i); or (2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger or an Additional Termination Event occurs, or a Tax Event Upon Merger occurs and the Burdened Party is not the Affected Party, either party in the case of an Illegality, the Burdened Party in the case of a Tax Event Upon Merger, any Affected Party in the case of a Tax Event or an Additional Termination Event if there is more than one Affected Party, or the party which is not the Affected Party in the case of a Credit Event Upon Merger or an Additional Termination Event if there is only one Affected Party may, by not more than 20 days notice to the other party and provided that the relevant Termination Event is then continuing, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all Affected Transactions. (c) EFFECT OF DESIGNATION. (i) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. (ii) Upon the occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) CALCULATIONS. (i) STATEMENT. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in 12 reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the records of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) PAYMENT DATE. An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default) and on the day which is two Local Business Days after the day on which notice of the amount payable is effective (in the case of an Early Termination Date which is designated as a result of a Termination Event). Such amount will be paid together with (to the extent permitted under applicable law) interest thereon (before as well as after judgment) in the Termination Currency, from (and including) the relevant Early Termination Date to (but excluding) the date such amount is paid, at the Applicable Rate. Such interest will be calculated on the basis of daily compounding and the actual number of days elapsed. (e) PAYMENTS ON EARLY TERMINATION. If an Early Termination Date occurs, the following provisions shall apply based on the parties' election in the Schedule of a payment measure, either "Market Quotation" or "Loss", and a payment method, either the "First Method" or the "Second Method". If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that "Market Quotation" or the "Second Method", as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (i) EVENTS OF DEFAULT. If the Early Termination Date results from an Event of Default: (1) FIRST METHOD AND MARKET QUOTATION. If the First Method and Market Quotation apply, the Defaulting Party will pay to the Non-defaulting Party the excess, if a positive number, of (A) the sum of the Settlement Amount (determined by the Non-Defaulting Party) in respect of the Terminated Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-Defaulting Party over (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. (2) FIRST METHOD AND LOSS. If the First Method and Loss apply, the Defaulting Party will pay to the Non-defaulting Party, if a positive number, the Non-defaulting Party's Loss in respect of this Agreement. (3) SECOND METHOD AND MARKET QUOTATION. If the Second Method and Market Quotation apply, an amount will be payable equal to (A) the sum of the Settlement Amount (determined by the Non-defaulting Party) in respect of the Terminated 13 Transactions and the Termination Currency Equivalent of the Unpaid Amounts owing to the Non-defaulting Party less (B) the Termination Currency Equivalent of the Unpaid Amounts owing to the Defaulting Party. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (4) SECOND METHOD AND LOSS. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. (ii) TERMINATION EVENTS. If the Early Termination Date results from a Termination Event: (1) ONE AFFECTED PARTY. If there is one Affected Party, the amount payable will be determined in accordance with Section 6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except that, in either case, references to the Defaulting Party and to the Non-defaulting Party will be deemed to be references to the Affected Party and the party which is not the Affected Party, respectively, and, if Loss applies and fewer than all the Transactions are being terminated, Loss shall be calculated in respect of all Terminated Transactions. (2) TWO AFFECTED PARTIES. If there are two Affected Parties: (A) if Market Quotation applies, each party will determine a Settlement Amount in respect of the Terminated Transactions, and an amount will be payable equal to (I) the sum of (a) one-half of the difference between the Settlement Amount of the party with the higher Settlement Amount ("X") and the Settlement Amount of the Party with the lower Settlement Amount ("Y") and (b) the Termination Currency Equivalent of the Unpaid Amounts owing to X less (II) the Termination Currency Equivalent of the Unpaid Amounts owing to Y; and (B) if Loss applies, each party will determine its Loss in respect of this Agreement (or, if fewer than all the Transactions are being terminated, in respect of all Terminated Transactions) and an amount will be payable equal to one-half of the difference between the Loss of the party with the higher Loss ("X") and the Loss of the party with the lower Loss ("Y"). If the amount payable is a positive number, Y will pay it to X; if it is a negative number, X will pay the absolute value of that amount to Y. 14 (iii) ADJUSTMENT FOR BANKRUPTCY. In circumstances where an Early Termination Date occurs because "Automatic Early Termination" applies in respect of a party, the amount determined under this Section 6(e) will be subject to such adjustments as are appropriate and permitted by law to reflect any payments or deliveries made by one party to the other under this Agreement (and retained by such other party) during the period from the relevant Early Termination Date to the date for payment determined under Section 6(d)(ii). (iv) PRE-ESTIMATE. The parties agree that if Market Quotation applies an amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss and not a penalty. Such amount is payable for the loss of bargain and the loss of protection against future risks and except as otherwise provided in this Agreement neither party will be entitled to recover any additional damages as a consequence of such losses. TRANSFER Subject to Section 6(b)(ii), neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that: (a) a party may make such a transfer of this Agreement pursuant to a consolidation or amalgamation with, or merger with or into, or transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and (b) a party may make such a transfer of all or any part of its interest in any amount payable to it from a Defaulting Party under Section 6(e). Any purported transfer that is not in compliance with this Section will be void. 8. CONTRACTUAL CURRENCY (a) PAYMENT IN THE CONTRACTUAL CURRENCY. Each payment under this Agreement will be made in the relevant currency specified in this Agreement for that payment (the "Contractual Currency"). To the extent permitted by applicable law, any obligation to make payments under this Agreement in the Contractual Currency will not be discharged or satisfied by any tender in any currency other than the Contractual Currency, except to the extent such tender results in the actual receipt by the party to which payment is owed, acting in a reasonable manner and in good faith in converting the currency so tendered into the Contractual Currency, of the full amount in the Contractual Currency of all amounts payable in respect of this Agreement. If for any reason the amount in the Contractual Currency so received falls short of the amount in the Contractual Currency payable in respect of this Agreement, the party required to make the payment will, to the extent permitted by applicable law, immediately pay such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall. If for any reason the amount in the Contractual Currency so received 15 exceeds the amount in the Contractual Currency payable in respect of this Agreement, the party receiving the payment will refund promptly the amount of such excess. (b) JUDGMENTS. To the extent permitted by applicable law, if any judgment or order expressed in a currency other than the Contractual Currency is rendered (i) for the payment of any amount owing in respect of this Agreement, (ii) for the payment of any amount relating to any early termination in respect of this Agreement or (iii) in respect of a judgment or order of another court for the payment of any amount described in (i) or (ii) above, the party seeking recovery, after recovery in full of the aggregate amount to which such party is entitled pursuant to the judgment or order, will be entitled to receive immediately from the other party the amount of any shortfall of the Contractual Currency received by such party as a consequence of sums paid in such other currency and will refund promptly to the other party any excess of the Contractual Currency received by such party as a consequence of sums paid in such other currency if such shortfall or such excess arises or results from any variation between the rate of exchange at which the Contractual Currency is converted into the currency of the judgment or order for the purposes of such judgment or order and the rate of exchange at which such party is able, acting in a reasonable manner and in good faith in converting the currency received into the Contractual Currency, to purchase the Contractual Currency with the amount of the currency of the judgment or order actually received by such party. The term "rate of exchange" includes, without limitation, any premiums and costs of exchange payable in connection with the purchase of or conversion into the Contractual Currency. (c) SEPARATE INDEMNITIES. To the extent permitted by applicable law, these indemnities constitute separate and independent obligations from the other obligations in this Agreement, will be enforceable as separate and independent causes of action, will apply notwithstanding any indulgence granted by the party to which any payment is owed and will not be affected by judgment being obtained or claim or proof being made for any other sums payable in respect of this Agreement. (d) EVIDENCE OF LOSS. For the purpose of this Section 8, it will be sufficient for a party to demonstrate that it would have suffered a loss had an actual exchange or purchase been made. 9. MISCELLANEOUS (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. (b) AMENDMENTS. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (c) SURVIVAL OF OBLIGATIONS. Without prejudice to Sections 2(a)(iii) and 6(c)(ii), the obligations of the parties under this Agreement will survive the termination of any Transaction. 16 (d) REMEDIES CUMULATIVE. Except as provided in this Agreement, the rights, powers, remedies and privileges provided in this Agreement are cumulative and not exclusive of any rights, powers, remedies and privileges provided by law. (e) COUNTERPARTS AND CONFIRMATIONS. (i) This Agreement (and each amendment, modification and waiver in respect of it) may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. (ii) The parties intend that they are legally bound by the terms of each Transaction from the moment they agree to those terms (whether orally or otherwise). A Confirmation shall be entered into as soon as practicable and may be executed and delivered in counterparts (including by facsimile transmission) or be created by an exchange of telexes or by an exchange of electronic messages on an electronic messaging system, which in each case will be sufficient for all purposes to evidence a binding supplement to this Agreement. The parties will specify therein or through another effective means that any such counterpart, telex or electronic message constitutes a Confirmation. (f) NO WAIVER OF RIGHTS. A failure or delay in exercising any right, power or privilege in respect of this Agreement will not be presumed to operate as a waiver, and a single or partial exercise of any right, power or privilege will not be presumed to preclude any subsequent or further exercise, of that right, power or privilege or the exercise of any other right, power or privilege. (g) HEADINGS. The headings used in this Agreement are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Agreement. 10. OFFICES; MULTIBRANCH PARTIES (a) If Section 10(a) is specified in the Schedule as applying, each party that enters Into a Transaction through an Office other than its head or home office represents to the other party that, notwithstanding the place of booking office or jurisdiction of incorporation or organization of such party, the obligations of such party are the same as if it had entered into the Transaction through its head or home office. This representation will be deemed to be repeated by such party on each date on which a Transaction is entered into. (b) Neither party may change the Office through which it makes and receives payments or deliveries for the purpose of a Transaction without the prior written consent of the other party. (c) If a party is specified as a Multibranch Party in the Schedule, such Multibranch Party may make and receive payments or deliveries under any Transaction through any Office listed in the Schedule, and the Office through which it makes and receives payments or deliveries with respect to a Transaction will be specified in the relevant Confirmation. 17 11. EXPENSES A Defaulting Party will, on demand, indemnify and hold harmless the other party for and against all reasonable out-of-pocket expenses, including legal fees and Stamp Tax, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement or any Credit Support Document to which the Defaulting Party is a party or by reason of the early termination of any Transaction, including, but not limited to, costs of collection. 12. NOTICES (a) EFFECTIVENESS. Any notice or other communication in respect of this Agreement may be given in any manner set forth below (except that a notice or other communication under Section 5 or 6 may not be given by facsimile transmission or electronic messaging system) to the address or number or in accordance with the electronic messaging system details provided (see the Schedule) and will be deemed effective as indicated: (i) if in writing and delivered in person or by courier, on the date it is delivered; (ii) if sent by telex, on the date the recipient's answerback is received; (iii) if sent by facsimile transmission, on the date that transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine); (iv) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or (v) if sent by electronic messaging system, on the date that electronic message is received, unless the date of that delivery (or attempted delivery) or that receipt, as applicable, is not a Local Business Day or that communication is delivered (or attempted) or received, as applicable, after the close of business on a Local Business Day, in which case that communication shall be deemed given and effective on the first following day that is a Local Business Day. (b) CHANGE OF ADDRESSES. Either party may by notice to the other change the address, telex or facsimile number or electronic messaging system details at which notices or other communications are to be given to it. 18 13. GOVERNING LAW AND JURISDICTION (a) GOVERNING LAW. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. (b) JURISDICTION. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably: (i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law, or to the non-exclusive jurisdiction of the courts of the State of New York and the United States District Court located in the Borough of Manhattan in New York City, if this Agreement is expressed to be governed by the laws of the State of New York; and (ii) waives any objection which it may have at any time to the laying, of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction. (c) SERVICE OF PROCESS. Each party irrevocably appoints the Process Agent (if any) specified opposite its name in the Schedule to receive, for it and on its behalf, service of process in any Proceedings. If for any reason any party's Process Agent is unable to act as such, such party will promptly notify the other party and within 30 days appoint a substitute process agent acceptable to the other party. The parties irrevocably consent to service of process given in the manner provided for notices in Section 12. Nothing in this Agreement will affect the right of either party to serve process in any other manner permitted by law. (d) WAIVER OF IMMUNITIES. Each party irrevocable waives, to the fullest extent permitted by applicable law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the grounds of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any court, (iii) relief by way of injunction, order for specific performance or for recovery of property, (iv) attachment of its assets (whether before or after judgment) and (v) execution or enforcement of any judgment to which it or its revenues or assets might otherwise be entitled in any Proceedings in the courts of any jurisdiction and irrevocably agrees, to the extent permitted by applicable law, that it will not claim any such immunity in any Proceedings. 19 14. DEFINITIONS As used in this Agreement: "ADDITIONAL TERMINATION EVENT" has the meaning specified in Section 5(b). "AFFECTED PARTY" has the meaning specified in Section 5(b). "AFFECTED TRANSACTIONS" means (a) with respect to any Termination Event consisting of an Illegality, Tax Event or Tax Event Upon Merger, all Transactions affected by the occurrence of such Termination Event and (b) with respect to any other Termination Event, all Transactions. "AFFILIATE" means, subject to the Schedule, in relation to any person, any entity controlled, directly or indirectly, by the person, any entity that controls, directly or indirectly, the person or any entity directly or indirectly under common control with the person. For this purpose, "control" of any entity or person means ownership of a majority of the voting power of the entity or person. "APPLICABLE RATE" means: (a) in respect of obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate; (b) in respect of an obligation to pay an amount under Section 6(e) of either party from and after the date (determined in accordance with Section 6(d)(ii)) on which that amount is payable, the Default Rate; (c) in respect of all other obligations payable or deliverable (or which would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default Rate; and (d) in all other cases, the Termination Rate. "BURDENED PARTY" has the meaning specified in Section 5(b). "CHANGE IN TAX LAW" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. "CONSENT" includes a consent, approval, action, authorization, exemption, notice, filing, registration or exchange control consent. "CREDIT EVENT UPON MERGER" has the meaning specified in Section 5(b). 20 "CREDIT SUPPORT DOCUMENT" means any agreement or instrument that is specified as such in this Agreement. "CREDIT SUPPORT PROVIDER" has the meaning specified in the Schedule. "DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the relevant payee (as certified by it) if it were to fund or of funding the relevant amount plus 1% per annum. "DEFAULTING PARTY" has the meaning specified in Section 6(a). "EARLY TERMINATION DATE" means the date determined in accordance with Section 6(a) or 6(b)(iv). "EVENT OF DEFAULT" has the meaning specified in Section 5(a) and, if applicable, in the Schedule. "ILLEGALITY" has the meaning specified in Section 5(b). "INDEMNIFIABLE TAX" means any Tax other than a Tax that would not be imposed in respect of a payment under this Agreement but for a present or former connection between the jurisdiction of the government or taxation authority imposing such Tax and the recipient of such payment or a person related to such recipient (including, without limitation, a connection arising from such recipient or related person being or having been a citizen or resident of such jurisdiction, or being or having been organized, present or engaged in a trade or business in such jurisdiction, or having or having had a permanent establishment or fixed place of business in such jurisdiction, but excluding a connection arising solely from such recipient or related person having executed, delivered, performed its obligations or received a payment under, or enforced, this Agreement or a Credit Support Document). "LAW" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority) and "lawful" and "unlawful" will be construed accordingly. "LOCAL BUSINESS DAY" means, subject to the Schedule, a day on which commercial banks are open for business (including dealings in foreign exchange and foreign currency deposits) (a) in relation to any obligation under Section 2(a)(i), in the place(s) specified in the relevant Confirmation or, if not so specified, as otherwise agreed by the parties in writing or determined pursuant to provisions contained, or incorporated by reference, in this Agreement, (b) in relation to any other payment, in the place where the relevant account is located and, if different, in the principal financial center, if any, of the currency of such payment, (c) in relation to any notice or other communication, including notice contemplated under Section 5(a)(i), in the city specified in the address for notice provided by the recipient and, in the case of a notice contemplated by Section 2(b), in the place where the relevant new account is to be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations for performance with respect to such Specified Transaction. 21 "LOSS" means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or reestablishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(l) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. "MARKET QUOTATION" means, with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market-makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early termination Date, have been required after that date. For this purpose, Unpaid Amounts in respect of the Terminated Transaction or group of Terminated Transactions are to be excluded but, without limitation, any payment or delivery that would, but for the relevant Early Termination Date, have been required (assuming satisfaction of each applicable condition precedent) after that Early Termination Date is to be included. The Replacement transaction would be subject to such documentation as such party and the Reference Market-maker may, in good faith, agree. The party making the determination (or its agent) will request each Reference Market-maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is so obliged, after consultation with the other. If more than three quotations are provided, the Market Quotation will be the arithmetic mean of the quotations, without regard to the quotations having the highest and lowest values. If exactly three such quotations are provided, the Market Quotation will be the quotation remaining after disregarding the highest and lowest quotations. For this purpose, if more than one quotation has the same highest value or lowest value, then one of such quotations shall be disregarded. If fewer than three quotations are provided, 22 it will be deemed that the Market Quotation in respect of such Terminated Transaction or group of Terminated Transactions cannot be determined. "NON-DEFAULT RATE" means a rate per annum equal to the cost (without proof or evidence of any actual cost) to the Non-defaulting Party (as certified by it) if it were to fund the relevant amount. "NON-DEFAULTING PARTY" has the meaning specified in Section 6(a). "OFFICE" means a branch or office of a party, which may be such party's head or home office. "POTENTIAL EVENT OF DEFAULT" means any event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. "REFERENCE MARKET-MAKERS" means four leading dealers in the relevant market selected by the party determining a Market Quotation in good faith (a) from among dealers of the highest credit standing which satisfy all the criteria that such party applies generally at the time in deciding whether to offer or to make an extension of credit and (b) to the extent practicable, from among such dealers having an office in the same city. "RELEVANT JURISDICTION" means, with respect to a party, the jurisdictions (a) in which the party is incorporated, organized, managed and controlled or considered to have its seat, (b) where an Office through which the party is acting for purposes of this Agreement is located, (c) in which the party executes this Agreement and (d) in relation to any payment, from or through which such payment is made. "SCHEDULED PAYMENT DATE" means a date on which a payment or delivery is to be made under Section 2(a)(i) with respect to a Transaction. "SET-OFF" means set-off, offset, combination of accounts, right of retention or withholding or similar right or requirement to which the payer of an amount under Section 6 is entitled or subject (whether arising under this Agreement, another contract, applicable law or otherwise) that is exercised by, or imposed on, such payer. "SETTLEMENT AMOUNT" means, with respect to a party and any Early Termination Date, the sum of: (a) the Termination Currency Equivalent of the Market Quotations (whether positive or negative) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation is determined; and (b) such party's Loss (whether positive or negative and without reference to any Unpaid Amounts) for each Terminated Transaction or group of Terminated Transactions for which a Market Quotation cannot be determined or would not (in the reasonable belief of the party making the determination) produce a commercially reasonable result. 23 "SPECIFIED ENTITY" has the meaning specified in the Schedule. "SPECIFIED INDEBTEDNESS" means, subject to the Schedule, any obligation (whether present or future, contingent or otherwise, as principal or surety or otherwise) in respect of borrowed money. "SPECIFIED TRANSACTION" means, subject to the Schedule, (a) any transaction (including an agreement with respect thereto) now existing or hereafter entered into between one party to this Agreement (or any Credit Support Provider of such party or any applicable Specified Entity of such party) and the other party to this Agreement (or any Credit Support Provider of such other party or any applicable Specified Entity of such other party) which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), (b) any combination of these transactions and (c) any other transaction identified as a Specified Transaction in this Agreement or the relevant confirmation. "STAMP TAX" means any stamp, registration, documentation or similar tax. "TAX" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature (including interest, penalties and additions thereto) that is imposed by any government or other taxing authority in respect of any payment under this Agreement other than a stamp, registration, documentation or similar tax. "TAX EVENT" has the meaning specified in Section 5(b). "TAX EVENT UPON MERGER" has the meaning specified in Section 5(b). "TERMINATED TRANSACTIONS" means with respect to any Early Termination Date (a) if resulting from a Termination Event, all Affected Transactions and (b) if resulting from an Event of Default, all Transactions (in either case) in effect immediately before the effectiveness of the notice designating that Early Termination Date (or, if "Automatic Early Termination" applies, immediately before that Early Termination Date). "TERMINATION CURRENCY" has the meaning specified in the Schedule. "TERMINATION CURRENCY EQUIVALENT" means, In respect of any amount denominated in the Termination Currency, such Termination Currency amount and, in respect of any amount denominated in a currency other than the Termination Currency (the "Other Currency"), the amount in the Termination Currency determined by the party making the relevant determination as being required to purchase such amount of such Other Currency as at the relevant Early Termination Date, or, if the relevant Market Quotation or Loss (as the case may be), is determined as of a later date, that later date, with the Termination Currency at the rate equal to the spot exchange rate of the foreign exchange 24 agent (selected as provided below) for the purchase of such Other Currency with the Termination Currency at or about 11:00 a.m. (in the city in which such foreign exchange agent is located) on such date as would be customary for the determination of such a rate for the purchase of such Other Currency for value on the relevant Early Termination Date or that later date. The foreign exchange agent will, if only one party is obliged to make a determination under Section 6(e), be selected in good faith by that party and otherwise will be agreed by the parties. "TERMINATION EVENT" means an Illegality, a Tax Event or a Tax Event Upon Merger or, if specified to be applicable, a Credit Event Upon Merger or an Additional Termination Event. "TERMINATION RATE" means a rate per annum equal to the arithmetic mean of the cost (without proof or evidence of any actual cost) to each party (as certified by such party) if it were to fund or of funding such amounts. "UNPAID AMOUNTS" owing to any party means, with respect to an Early Termination Date, the aggregate of (a) in respect of all Terminated Transactions, the amounts that became payable (or that would have become payable but for Section 2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early Termination Date and which remain unpaid as at such Early Termination Date and (b) in respect of each Terminated Transaction, for each obligation under Section 2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be settled by delivery to such party on or prior to such Early Termination Date and which has not been so settled as at such Early Termination Date, an amount equal to the fair market value of that which was (or would have been) required to be delivered as of the originally scheduled date for delivery, in each case together with (to the extent permitted under applicable law) interest, in the currency of such amounts, from (and including) the date such amounts or obligations were or would have been required to have been paid or performed to (but excluding) such Early Termination Date, at the Applicable Rate, Such amounts of interest will be calculated on the basis of daily compounding and the actual number of days elapsed, The fair market value of any obligation referred to in clause (b) above shall be reasonably determined by the party obliged to make the determination under Section 6(e) or, if each party is so obliged, it shall be the average of the Termination Currency Equivalents of the fair market values reasonably determined by both parties. IN WITNESS WHEREOF the parties have executed this document on the respective dates specified below with effect from the date specified on the first page of this document. 25 SUN TRUST BANK, ATLANTA VARI-LITE, INC. - -------------------------------- -------------------------------------- (Name of Party) (Name of Party) By: /s/ W. P. Dechert By: /s/ Mike Herman ----------------------------- ----------------------------------- Name: W. P. Dechert Name: Mike Herman Title: Senior Vice President Title: Vice President, Finance Chief Financial Officer Date: Date: October 7, 1996 By: /s/ Grace Vanderwall ----------------------------- Name: Grace Vanderwall Title: Assistant Vice President Date: (MULTICURRENCY-CROSS BORDER) 26 ISDA-R- INTERNATIONAL SWAP DEALERS ASSOCIATION, INC. SCHEDULE TO THE MASTER AGREEMENT dated as of ________________________ between ________________________________ and _________________________________ ("Party A") ("Party B") PART 1. TERMINATION PROVISIONS. (a) "SPECIFIED ENTITY" means in relation to Party A for the purpose of: Section 5(a)(v), _________________________________________________________ Section 5(a)(vi), ________________________________________________________ Section 5(a)(vii), _______________________________________________________ Section 5(iv), ___________________________________________________________ and In relation to Party B for the purpose of: Section 5(a)(v), _________________________________________________________ Section 5(a)(vi), ________________________________________________________ Section 5(a)(vii), _______________________________________________________ Section 5(iv), ___________________________________________________________ (b) "SPECIFIED TRANSACTION" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here __________________ __________________________________________________________________________ 27 __________________________________________________________________________ (c) The "CROSS DEFAULT" provisions of Section 5(a)(vi) will/will not* apply to Party A will/will not* apply to Party B If such provisions apply: "SPECIFIED INDEBTEDNESS" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here __________________ __________________________________________________________________________ "THRESHOLD AMOUNT" means _________________________________________________ __________________________________________________________________________ (d) The "CREDIT EVENT UPON MERGER" provisions of Section 5(b)(iv) will/will not* apply to Party A will/will not* apply to Party B (e) The "AUTOMATIC EARLY TERMINATION" provision of Section 6(a) will/will not* apply to Party A will/will not* apply to Party B (f) PAYMENTS ON EARLY TERMINATION. For the purpose of Section 6(e) of this Agreement: (i) Market Quotation/Loss * will apply. (ii) The First Method/The Second Method * will apply. (g) "TERMINATION CURRENCY" means ____________________________ if such currency is specified and freely available, and otherwise United States Dollars. (h) ADDITIONAL TERMINATION EVENT will/will not* apply. The following shall constitute an Additional Termination Event: ______________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ *Delete as applicable. For the purpose of the foregoing Termination Event, the Affected Party or Affected Parties shall be: __________________________________________________________________________ PART 2. TAX REPRESENTATIONS. (a) PAYER REPRESENTATIONS. For the purpose of Section 3(e) of this Agreement, Party A will/will not* make the following representation and Party B will/will not* make the following representation: It is not required by any applicable law, as modified by the practice of any relevant governmental revenue authority, of any Relevant Jurisdiction to make any deduction or withholding for or on account of any Tax from any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party under this Agreement. In making this representation, it may rely on (i) the accuracy of any representations made by the other party pursuant to Section 3(f) of this Agreement, (ii) the satisfaction of the agreement contained in Section 4(a)(i) or 4(a)(iii) of this Agreement and the accuracy and effectiveness of any document provided by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement and (iii) the satisfaction of the agreement of the other party contained in Section 4(d) of this Agreement, provided that it shall not be a breach of this representation where reliance is placed on clause (ii) and the other party does not deliver a form or document under Section 4(a)(iii) by reason of material prejudice to its legal or commercial position. (b) PAYEE REPRESENTATIONS. For the purpose of Section 3(f) of this Agreement, Party A and Party B make the representations specified below, if any: (i) The following representation will/will not * apply to Party A and will/will not *apply to Party B: It is fully eligible for the benefits of the "Business Profits" or "Industrial and Commercial Profits" provision, as the case may be, the "Interest" provision or the "Other Income" provision (if any) of the Specified Treaty with respect to any payment described in such provisions and received or to be received by it in connection with this Agreement and no such payment is attributable to a trade or business carried on by it through a permanent establishment in the Specified Jurisdiction. If such representation applies, then: "SPECIFIED TREATY" means with respect to Party A ______________________________ "SPECIFIED JURISDICTION" means with respect to Party A ________________________ *Delete as applicable. "SPECIFIED TREATY" means with respect to Party B ______________________________ "SPECIFIED JURISDICTION" means with respect to Party B ________________________ (ii) The following representation will/will not apply to Party A and will/will not apply to Party B: Each payment received or to be received by it in connection with this Agreement will be effectively connected with its conduct of a trade or business in the Specified Jurisdiction. If such representation applies, then: "SPECIFIED JURISDICTION" means with respect to Party A ________________________ "SPECIFIED JURISDICTION" means with respect to Party B ________________________ (iii) The following representation will/will not apply to Party A and will/will not apply to Party B: -- (A) It is entering into each Transaction in the ordinary course of its trade as, and is, either (1) a recognized U.K. bank or (2) a recognized U.K. swaps dealer (in either case (1) or (2), for purposes of the United Kingdom Inland Revenue extra statutory concession C17 on interest and currency swaps dated March 14, 1989), and (B) it will bring into account payments made and received in respect of each Transaction in computing its income for United Kingdom tax purposes. (iv) Other Payee Representations: ________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ N.B. The above representations may need modification if either party is a Multibranch Party. PART 3. AGREEMENT TO DELIVER DOCUMENTS. For the purpose of Sections 4(a)(i) and (ii) of this Agreement, each party agrees to deliver the following documents, as applicable: (a) Tax forms, documents or certificates to be delivered are: PARTY REQUIRED TO FORM/DOCUMENT DATE BY WHICH DELIVER DOCUMENT CERTIFICATE TO BE DELIVERED - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- (b) Other documents to be delivered are: PARTY REQUIRED TO FORM/DOCUMENT DATE BY WHICH COVERED BY DELIVER DOCUMENT CERTIFICATE TO BE DELIVERED SECTION 3(d) REPRESENTATION --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- --------------------- Yes/No* --------------------- --------------------- --------------------- Yes/No* --------------------- --------------------- --------------------- Yes/No* --------------------- --------------------- --------------------- Yes/No* --------------------- --------------------- --------------------- Yes/No* --------------------- --------------------- --------------------- Yes/No*
PART 4. MISCELLANEOUS (a) ADDRESSES FOR NOTICES. For the purpose of section 12(a) of this Agreement: Address for notices or communications to Party A: Address: _________________________________________________________________ Attention: _______________________________________________________________ Telex No.: _________________________ Answerback: _________________________ Facsimile No.: _____________________ Telephone No.: ______________________ Delete as applicable. Electronic Messaging System Details: _____________________________________ Address for notices or communications to Party B: Address: _________________________________________________________________ Attention: _______________________________________________________________ Telex No.: _________________________ Answerback: _________________________ Facsimile No.: _____________________ Telephone No.: ______________________ Electronic Messaging System Details: _____________________________________ (b) PROCESS AGENT. For the purpose of section 13(c) of this Agreement: Party A appoints as its Process Agent ____________________________________ Party B appoints as its Process Agent ____________________________________ (c) OFFICES. The provisions of Section 10(a) will/will not* apply to this Agreement. (d) MULTIBRANCH PARTY. For the purpose of Section 10(c) of the Agreement: Party A is/is not* a Multibranch Party and, if so, may act through the following Offices: - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- Party B is/is not* a Multibranch Party and, if so, may act through the following Offices: - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- - ------------------------- ------------------------- ------------------------- *Delete as applicable. (e) CALCULATION AGENT. The Calculation Agent is ___________________________, unless otherwise specified in a Confirmation in relation to the relevant Transaction. (f) CREDIT SUPPORT DOCUMENT. Details of any Credit Support Document: ________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ (g) CREDIT SUPPORT PROVIDER. Credit Support Provider means in relation to Party A, _________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ Credit Support Provider means in relation to Party B, ____________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ (h) GOVERNING LAW. This Agreement will be governed by and construed in accordance with English law/the laws of the State of New York (without reference to choice of law doctrine)*. (i) NETTING OF PAYMENTS. Subparagraph (ii) of Section 2(c) of this Agreement will not apply to the following transactions or groups of Transactions (in each case starting from the date of this Agreement/in each case starting from _____________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ (j) "AFFILIATE" will have the meaning specified in Section 14 of this Agreement unless another meaning is specified here _________________________________ __________________________________________________________________________ PART 5. OTHER PROVISIONS. September 16, 1997 CONFIRMATION OF INTEREST RATE SWAP TRANSACTION Mr. Mike Herman, CFO Vari-Lite, Inc. 201 Regal Row Dallas, TX 75247 Ph#: 214/819-3200 Fax#: 214/819-3247 Dear Mr. Herman: The purpose of this letter agreement is to set forth the terms and conditions of the Rate Swap Transaction entered into between you and SunTrust Bank, Atlanta on the Trade Date specified below (the "Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement to be entered into by the parties hereto. The definitions and provisions contained in the 1991 ISDA Definitions (the "Definitions") published by the International Swap Dealers Association, Inc. ("ISDA") are incorporated by reference to this Confirmation. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. 1. This Confirmation supplements, forms a part of, and is subject to the ISDA Master Agreement (a "Swap Agreement"), as amended and supplemented from time to time, between you and SunTrust Bank, Atlanta. All provisions contained or incorporated by reference in the Swap Agreement shall govern this Confirmation except as expressly modified below. Prior to the execution and delivery of such Swap Agreement, this Confirmation alone shall constitute a complete and binding agreement with respect to the Transaction. Each party is hereby advised, and each such party acknowledges, that the other party has engaged in (or refrained from engaging in) substantial financial transactions and has taken other material actions in reliance upon the parties' entry in the Transaction to which this Confirmation relates on the terms and conditions set forth below. This Confirmation will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and wholly performed within the State of Georgia. Page 2 The terms of the particular Transaction to which this Confirmation relates are as follows: Type of Transaction: Rate Swap Notional Amount: US$ 10,000,000.00 amortizing $250,000 on the 30th of each March, June, September, and December beginning September 30, 1997, with adjustment in accordance with the Modified Following Business Day Convention. Trade Date: September 13, 1996 Effective Date September 17, 1996 Termination Date June 29, 2001, with adjustment in accordance with the Modified Following Business Day Convention. FIXED AMOUNTS: Fixed Rate Payer: Vari-Lite, Inc. Fixed Rate Payer Payment Dates: The 30th day of each March, June, September and December, beginning September 30th, 1996 and terminating on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Fixed Rate: 6.60% per annum Fixed Rate Day Count Fraction: Actual/360 FLOATING AMOUNTS: Floating Rate Payer: SunTrust Bank, Atlanta Floating Rate Payer Payment Dates: The 30th day of each March, June, September and December, beginning September 30th, 1996 and terminating on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate for Initial Calculation Period: 5.4375% per annum Designated Maturity for All Subsequent Three month Calculation Periods: Page 3 Floating Rate Option: USD-LIBOR-BBA Spread: 0.00% per annum Floating Rate Day Count Fraction: Actual/360 Reset Dates: The Effective Date and each Floating Rate Payer Payment Date except the Termination Date. Calculation Agent: SunTrust Bank, Atlanta Business Days: New York 3. Other Provisions: a) Vari-Lite, Inc. agrees to provide a certificate of signing authority and incumbency with respect to the individual executing this Confirmation as well as a Corporate Resolution authorizing Vari-Lite, Inc. to enter into this Transaction. This provision will constitute an additional Agreement for the purpose of Section 3 of the Interest Rate Swap Agreement. 4. Account Details: Payment to Fixed Rate Payer: [PLEASE ADVISE] Account No.: Depository: Address: Favor of: Payments to Floating Rate Payer: SunTrust Bank, Atlanta ABA# 061000104 Bond Wire Clearing, Center 095 Attn: Financial Risk Management, Operations Offices: (a) The Office of Fixed Rate Payer for the Transaction is its Dallas office; and (b) The Office of Floating Rate Payer for the Transaction is its Atlanta office. Please confirm that the foregoing correctly sets forth the terms of our agreement by signing this copy of this Confirmation and faxing it back to us at the following fax number: 404/658-4835, Attn: Andrean Stone. An original execution copy will be forwarded to you upon us receiving your faxed copy. Page 4 By signing below, you also acknowledge and agree that we have explained to you the risks involved in this Transaction, which risks include but are not limited to the following: - - Market Risk: the risk that the Transaction may increase or decrease in value with a change in, among other things, interest rates or the yield curve; and - - Liquidity Risk: the risk that the Transaction cannot be closed out or disposed of quickly at or near its value. You further acknowledge and agree that you understand these risks and the Transaction as a whole, that you are capable of managing the risks associated with this Transaction, that the risks involved in this Transaction are consistent with your financial goals, policies and procedures, and risk tolerance, and that you have determined that this Transaction is appropriate for you. Very truly yours, SunTrust Bank, Atlanta By: /s/ W. P. Dechert ------------------------------------- Name: W. P. Dechert Title: Senior Vice President By: /s/ Grace Vanderwall ------------------------------------- Name: Grace Vanderwall Title: Assistant Vice President Accepted and Confirmed as of the Date First Written: Vari-Lite, Inc. By: /s/ Mike Herman -------------------------------- Name: Mike Herman Title Senior Vice President, Chief Financial Officer September 16, 1997 CONFIRMATION OF INTEREST RATE SWAP TRANSACTION Mr. Mike Herman, CFO Vari-Lite, Inc. 201 Regal Row Dallas, TX 75247 Ph#: 214/819-3200 Fax#: 214/819-3247 Dear Mr. Herman: The purpose of this letter agreement is to set forth the terms and conditions of the Rate Swap Transaction entered into between you and SunTrust Bank, Atlanta on the Trade Date specified below (the "Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement to be entered into by the parties hereto. The definitions and provisions contained in the 1991 ISDA Definitions (the "Definitions") published by the International Swap Dealers Association, Inc. ("ISDA") are incorporated by reference to this Confirmation. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. 1. This Confirmation supplements, forms a part of, and is subject to the ISDA Master Agreement (a "Swap Agreement"), as amended and supplemented from time to time, between you and SunTrust Bank, Atlanta. All provisions contained or incorporated by reference in the Swap Agreement shall govern this Confirmation except as expressly modified below. Prior to the execution and delivery of such Swap Agreement, this Confirmation alone shall constitute a complete and binding agreement with respect to the Transaction. Each party is hereby advised, and each such party acknowledges, that the other party has engaged in (or refrained from engaging in) substantial financial transactions and has taken other material actions in reliance upon the parties' entry in the Transaction to which this Confirmation relates on the terms and conditions set forth below. This Confirmation will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and wholly performed within the State of Georgia. Page 2 2. The terms of the particular Transaction to which this Confirmation relates are as follows: Type of Transaction: Rate Swap Notional Amount: US$ 3,600,000.00 Trade Date: September 13, 1996 Effective Date September 17, 1996 Termination Date October 1, 2000, with adjustment in accordance with the Modified Following Business Day Convention FIXED AMOUNTS: Fixed Rate Payer: Vari-Lite, Inc. Fixed Rate Payer Payment Dates: The 1st day of each month, beginning October 1, 1996 and terminating on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention Fixed Rate: 6.53% per annum Fixed Rate Day Count Fraction: Actual/360 FLOATING AMOUNTS: Floating Rate Payer: SunTrust Bank, Atlanta Floating Rate Payer Payment Dates: The 1st day of each month, beginning October 1, 1996 and terminating on the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention Floating Rate for initial 5.4375% per annum Calculation Period: Designated Maturity for all subsequent Calculation Periods: One month Floating Rate Option: USD-LIBOR-BBA Spread: 0.00% per annum Floating Rate Day Count Fraction: Actual/360 Page 3 Reset Dates: The Effective Date and each Floating Rate Payer Payment Date except the Termination Date Calculation Agent: SunTrust Bank, Atlanta Business Days: New York 3. Other Provisions a) Vari-Lite, Inc. agrees to provide a certificate of signing authority and incumbency with respect to the individuals executing this Confirmation as well as a Corporate Resolution authorizing Vari-Lite, Inc. to enter into this Transaction. This provision will constitute an additional Agreement for the purpose of Section 3 of the Interest Rate Swap Agreement. 4. Account Details Payment to Fixed Rate Payer: [PLEASE ADVISE] Acct No.: Depository: Address: Favor of: Payments to Floating Rate Payer: SunTrust Bank, Atlanta ABA# 061000104 Bond Wire Clearing, Center 095 Attn: Financial Risk Management, Operations 5. Offices (a) The Office of Fixed Rate Payer for the Transaction is its Dallas office; and (b) The Office of Floating Rate Payer for the Transaction is its Atlanta office. Please confirm that the foregoing correctly sets forth the terms of our agreement by signing this copy of this Confirmation and faxing it back to us at the following fax number: 404/658-4835, Attn: Andrean Stone. An original execution copy will be forwarded to you upon us receiving your faxed copy. By signing below, you also acknowledge and agree that we have explained to you the risks involved in this Transaction, which risks include but are not limited to the following: Page 4 - - Market Risk: the risk that the Transaction may increase or decrease in value with a change in, among other things, interest rates or the yield curve; and - - Liquidity Risk: the risk that the Transaction cannot be closed out or disposed of quickly at or near its value. You further acknowledge and agree that you understand these risks and the Transaction as a whole, that you are capable of managing the risks associated with this Transaction, that the risks involved in this Transactionare consistent with your financial goals, policies and procedures, and risk tolerance, and that you have determined that this Transaction is appropriate for you. Very truly yours, SunTrust Bank, Atlanta By: /s/ W. P. Dechert ---------------------------------- Name: W. P. Dechhert Title: Senior Vice President By: /s/ Grace Vanderwall ---------------------------------- Name: Grace Vanderwall Title: Assistant Vice President Accepted and Confirmed as of the Date First Written: Vari-Lite, Inc. By: /s/ Mike Herman ----------------------------- Name: Mike Herman Title Vice President-Finance, Chief Financial Officer EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Vari-Lite International, Inc. and Subsidiaries on Form S-1 of our report dated August 27, 1997 (October , 1997, as to the first paragraph of Note F) on the consolidated financial statements, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our firm under the heading "Experts" in such Prospectus, which is part of this Registration Statement. Dallas, Texas October , 1997 ------------------- The consolidated financial statements of Vari-Lite International, Inc. and Subsidiaries appearing in the above Prospectus are presented to give effect to the Company's reincorporation in Delaware and related recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. On the effective date of the Registration Statement, the above consent is in the form that we will sign upon the effectiveness of such events assuming that, from August 27, 1997 to the effective date of such events, no other material events have occurred which would affect the consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas October 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----