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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-23159
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VARI-LITE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2239444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
201 REGAL ROW, DALLAS, TEXAS 75247
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number including area code:
(214) 630-1963
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 21, 1998, was $12,336,766. As of that date, 7,800,003 of
the shares of the registrant's Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III of this Annual Report on Form 10-K
is incorporated by reference from the registrant's definitive proxy statement
for its annual meeting of stockholders to be held on February 26, 1999.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
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PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 9
Item 3. Legal Proceedings............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........................................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 10
Item 6. Selected Financial Data....................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 21
Item 8. Financial Statements and Supplementary Data................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 21
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 22
Item 11. Executive Compensation........................................................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 22
Item 13. Certain Relationships and Related Transactions................................................ 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 23
SIGNATURES................................................................................................ 27
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is a leading international provider of proprietary automated
lighting and related services to the entertainment industry, servicing markets
such as concert touring, theatre, television, film and corporate events. The
Company is also a leader in providing complementary products and services to the
entertainment industry, including concert sound reinforcement 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 predecessor was incorporated in 1988 in the State of Texas as
a holding company to own Showco, Inc. ("Showco"), which began operations in
1970, and Vari-Lite, Inc. ("Vari-Lite"), which began operations in 1981. On
October 15, 1997, the Company was reincorporated in the State of Delaware. The
Company's principal executive offices are located at 201 Regal Row, Dallas,
Texas 75247 and its telephone number is (214) 630-1963.
PRODUCTS AND SERVICES
VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING PRODUCTS
The Company designs, manufactures and 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. 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. The Company rents rather than sells its
VARI*LITE-Registered Trademark- automated lighting systems.
SERIES 200-TM- SYSTEM. The Company's VL2C-TM- spot luminaire, VL4-TM- wash
luminaire and Artisan-Registered Trademark-Plus and
mini-Artisan-Registered Trademark-2 control consoles constitute the Company's
Series 200-TM- system. Spot luminaires create a hard-edged, crisp beam which can
be used for precisely focused illumination and visual effects, as well as for
projecting custom light images 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-TM- spot
luminaire can change light color in one-tenth of a second and can produce more
than 120 separate light colors through the use of the Company's patented color
changing system. In designing the Series 200-TM- system, the Company patented a
number of features which it believes makes the Company's light systems superior
to those of its competitors. The Company is the only industry participant which
combines patented dichroic filter color changing systems, advanced heat removal
techniques and a computer control system that utilizes distributed processing
and resident cue memory in each luminaire. By using such technology to execute a
lighting effect (or cue), an operator can transmit a single command to up to
1,000 luminaires simultaneously, each of which stores its own set of cues. As a
result, customers using the Company's systems can create lighting presentations
with greater flexibility, complexity, speed and precision than with competing
products.
The VL4-TM- wash luminaire projects a dispersed soft-edge light beam for
even illumination of objects and areas. The VL4-TM- luminaire's patented color
changing system allows the user to select 30 preset and 160 programmable colors
from thousands of available colors and to change these colors in less than
three-tenths of a second, or program the system for timed color cross-fades. In
addition, the VL4-TM- luminaire features precisely timed control of light
intensity, including the ability to instantaneously turn the light fixture on
and off. Continuous adjustment of diffusion and beam angle provides enhanced
control of the beam shape.
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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 Series 300-TM- system, including
the VL5-TM-, VL5Arc-TM- and VL5B-TM- wash luminaires, the VL6-TM-, VL6B-TM-,
VL7-TM- and VL7B-TM- spot luminaires, and the VLM-TM- automated moving mirror,
as well as the Artisan-Registered Trademark-Plus,
mini-Artisan-Registered Trademark-2 and Virtuoso-TM- control consoles, also
appeals to major concert touring clients who want to rent large systems. The
VL5-TM- luminaire is lighter than the VL4-TM- luminaire, and its cold-mirror
reflector both eliminates the need for noisy cooling fans and reduces the amount
of heat the lights emit onto the stage. Color changes for the VL5-TM- are
controlled by a system that allows color cross-fades in as little as
seven-tenths of a second and interchangeable lenses work with an internal
diffusing mechanism to provide a wide variety of beam sizes and shapes. The
VL5Arc-TM- luminaire has a brighter bulb than the VL5-TM- luminaire and a
patented fluid-filled variable lens which allows beam size control. The VL6-TM-
spot luminaire is the companion to the VL5-TM- wash luminaire, and has two
interchangeable 12-position wheels of dichroic color filters and gobos for split
second color and image changes and multi-color beams. The VL6B-TM- spot
luminaire adds a 3:1 zoom optics system and rotating gobos to the VL6-TM-. The
VL7-TM- spot luminaire has a revolutionary collection optics system that
produces a bright beam and provides an 8:1 zoom. Other features on the VL7-TM-
include full color spectrum crossfades with unparalleled precision and
repeatability via the unique CVF-TM- System, both fixed and rotating gobos,
strobe capability and image morphing. The VL7B-TM- spot luminaire adds a four
frame shuttering system to the VL7-TM- fixture. The VLM-TM- automated moving
mirror is a dual-sided highly reflective Lexan-Registered Trademark-
polycarbonate mirror panel. With its ability to both pan and tilt 360 degrees,
the VLM-TM- automated moving mirror can be used to augment the effects produced
by VARI*LITE-Registered Trademark- wash and spot luminaires, or it can be used
with conventional lights to create limited beam motion at a very low cost.
The Company's VL5-TM- wash luminaires and VL6-TM- and VL7-TM- 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.
LIGHTING CONTROL SYSTEMS. The Company's primary control console, the
Artisan-Registered Trademark-Plus, is used to operate all of the Company's
VARI*LITE-Registered Trademark- products. It provides control of up to 1,000
luminaires, dimmers and other equipment with up to 1,000 cues per channel,
allowing the operator to control each luminaire or to store and play back preset
cues. The Company also rents the smaller, less expensive
mini-Artisan-Registered Trademark-2 control console which has substantially the
same capabilities as the Artisan-Registered Trademark-Plus control console, but
requires longer programming time. Accordingly, the
mini-Artisan-Registered Trademark-2 control console is often used either where
space is limited or as a back-up system to the Artisan-Registered Trademark-Plus
control console. The Company recently introduced Virtuoso-TM-, which is the
Company's next generation control system that will ultimately replace the
Artisan-Registered Trademark- product line. The Virtuoso-TM- console offers
expanded control over VARI*LITE-Registered Trademark- luminaires, DMX automated
lights and conventional luminaires with fully integrated 3-D graphics display,
designer's remote, and 30 submasters with a variety of playback modes.
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
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and last longer than the industry-standard carpet covered wood or laminate
cases. These cases are also significantly lighter than other cases, thereby
reducing transportation costs.
The Company also sold Irideon-Registered Trademark- architectural automated
lighting systems until the sale of the product line in October 1998.
COMPLEMENTARY BUSINESSES
The Company is a leader in providing complementary products and services to
the entertainment industry, including concert sound systems, conventional
lighting equipment, custom stage construction and stage set 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. The Company's PRISM-Registered Trademark- sound system
was introduced in 1986 as the first large scale concert sound system engineered
as a totally integrated system specifically for use in concert touring. The
proprietary, scalable PRISM-Registered Trademark- system can be used in any
venue from smaller theatres to stadiums and is easier to assemble, disassemble
and transport than competitive sound systems. In November 1998, the Company
introduced PRISM-Registered Trademark-L3, which is a compact loudspeaker system
that incorporates the scalability of the PRISM-Registered Trademark- system but
is designed to address sound reinforcement needs in smaller venues. In November
1998, the Company also introduced Showconsole-TM-, a revolutionary audio control
desk that provides instant total recall of all control functions for live sound
mixing with four programmable inputs on each channel, which eliminates the need
for multiple mixing consoles for multi-artist performances, and adds other
innovative audio control features.
CONVENTIONAL LIGHTING PRODUCTS. The Company offers conventional lighting
and rigging equipment, including numerous types of luminaires and control
consoles, large search lights, automatic gel scrollers, trusses, motors, dimmers
and smoke machines.
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.
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.
MARKETING, SALES AND DISTRIBUTION
The Company markets its products and services to the entertainment industry,
including concert touring, theatre, television and film and corporate events
markets. Depending on the circumstances, the Company solicits business from
lighting and set designers and consultants, sound engineers, artist managers,
producers, production managers and production companies, promoters, corporations
and business associations. The Company believes that its customer relationships,
reputation for innovative, quality products, worldwide distribution and
excellent service are the keys to its success. No customer has accounted for
more than 10% of the Company's revenues for at least the last three fiscal
years.
In 1998, the Company began to emphasize its full-service strategy by
expanding the products and services it offers to include a more extensive
selection of conventional lighting products and related
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services. This effort is designed to accommodate the comprehensive lighting
needs of the Company's customers and, by offering "one-stop" shopping, increase
revenues from the rental of VARI*LITE-Registered Trademark- products. Most of
the Company's world-wide offices now operate under the name Vari-Lite Production
Services. The Company intends to convert its other existing offices to, and open
future offices as, Vari-Lite Production Services offices.
VARI*LITE-REGISTERED TRADEMARK- AUTOMATED LIGHTING 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, Atlanta 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, film and concert touring market, while
the Orlando, Las Vegas, Atlanta 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, Brussels, Paris,
Madrid, Stockholm, Amsterdam, Dubai and Hong Kong as well as, at October 1,
1998, independent distributors in Australia, Austria, Germany, Mexico, Korea and
Singapore and 26 independent dealers in 35 cities in the United States, Puerto
Rico, Mexico, Canada, the United Kingdom and five other countries in Europe. The
Company's Brussels, Stockholm and Paris locations were independent distributors
prior to being acquired by the Company in 1998.
The Company has two 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 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 want to purchase the Company's lighting
systems, the Company offers 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, generally for a lump sum
payment at the commencement of the term, plus a nominal renewal option exercise
price. The customer is normally responsible for maintaining the equipment under
these arrangements, but often enters into a maintenance agreement with the
Company.
CONVENTIONAL LIGHTING PRODUCTS. The Company's conventional lighting
operations, which historically operated independently were integrated into the
Vari-Lite Production Services operations in 1998 to improve the Company's
position as a full-service provider. These operations 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, price and full service capabilities.
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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
The Company's proprietary technology and development of innovative products
that meet the needs of its customers have enabled it to expand the applications
for its technology to new products and markets. From time to time, the Company
collaborates with unaffiliated entities to supplement and complement its
internal research and development activities.
As of September 30, 1998, the Company's research and development group
consisted of over 50 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, 1996, 1997 and 1998, the Company's research and development
expenditures totaled $4.4 million, $6.7 million and $6.7 million, respectively.
The Company's extensive research and development efforts have produced a
number of leading-edge technological developments in the automated lighting
industry. When appropriate, the Company seeks patent protection for its
products, particularly in its automated lighting business. As of September 30,
1998, the Company had registered and received more than 38 domestic patents and
more than 172 foreign patents in several different countries and territories. In
addition, the Company had at least 20 patent applications pending in the United
States on automated lighting technology and more than 100 patent applications
pending worldwide. The Company's patents cover the basic concepts, control
software, control hardware and features unique to each of the Company's
VARI*LITE-Registered Trademark- luminaire models. The Company believes that its
patents provide it with a substantial competitive advantage in the automated
lighting industry, and the Company's ability to compete in the future will
depend in part on maintaining its technological advantage over its competitors.
The Company has obtained trademark protection in the United States and
numerous foreign countries on various names, including, among others,
VARI*LITE-Registered Trademark-, Artisan-Registered Trademark-Plus,
Mini-Artisan-Registered Trademark-2, Virtuoso-TM-, Series 100-TM-, Series
200-TM-, VL1-TM-, VL2C-TM-, VL4-TM-, VL5-TM-, VL5Arc-TM-, VL5B-TM-, VL6-TM-,
VL6B-TM-, VL7-TM-, VL7B-TM-, Showco-TM-, PRISM-Registered Trademark-,
PRISM-Registered Trademark-L3 and Showconsole-TM-.
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
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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.
EQUIPMENT INVENTORY MANAGEMENT
The Company uses an inventory control and management system to locate its
rental equipment at all times throughout the world. Each piece of equipment is
serialized for identification purposes. Equipment utilization is centrally
monitored at the Company's headquarters to determine which products are in
highest demand in various geographic markets and whether certain equipment
should be relocated to increase utilization and revenue, whether product
shortages that require the production of additional units exist and whether
current pricing is at the appropriate level.
The maximum utilization rates of the Company equipment are affected by
production scheduling requirements of the Company's various 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.
COMPETITION
Each of the Company's businesses is highly competitive. In its automated
lighting business, the Company primarily competes with Coemar SPA, Clay Paky
SPA, High End Systems, Inc. ("High End"), Martin Gruppen A/S and Production
Resource Group, PLC. Of these competitors, only Production Resource Group, PLC
manufactures and rents equipment, while the others sell equipment to other
rental companies. The Company also competes with a number of conventional
lighting rental companies, who purchase automated lighting equipment from
others. The Company competes primarily on the basis of product capabilities,
quality and reliability, price, worldwide distribution and full service
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.
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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.
EMPLOYEES
As of September 30, 1998, the Company had 508 full-time employees. In
addition, the Company had 225 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.
ITEM 2. PROPERTIES
The Company leases all of its facilities, including five facilities
comprising approximately 164,100 square feet in Dallas, Texas under leases that
expire in April 2000, but can be extended until at least April 2001. 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 Production Services, Ltd. and Brilliant Stages are located in London,
England in two facilities. One of the facilities is approximately 14,500 square
feet and the lease expires in February 2001 and the other facility is
approximately 57,000 square feet and the associated lease expires in April 2010.
The executive offices of Vari-Lite Asia, Inc. ("Vari-Lite Asia"), as well as its
Technical Center, are located in Tokyo in two leased facilities aggregating
approximately 14,100 square feet, the terms of which expire in February 2001 and
October 2000. In addition, the Company leases sales offices in Brussels,
Amsterdam, Stockholm, Paris, Madrid, Dubai, Hong Kong, Atlanta, Chicago, Las
Vegas, Los Angeles, Nashville, New York and Orlando. The Company believes it
maintains generally adequate insurance with respect to its properties.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to time
threatened with or named as a defendant in various lawsuits, including patent
infringement claims. Additionally, the Company has filed lawsuits claiming
infringements of its patents by third parties for which the Company has been
subject to counterclaims.
In August 1995, the Company brought suit asserting a number of claims of
infringement of several of its patents by High End in the Northern District of
Texas seeking monetary damages and injunctive relief to prevent future patent
infringement (the "High End Lawsuit"). In December 1998, the court approved a
negotiated settlement between the Company and High End, the specific terms of
which are confidential, but included cash paid to the Company, a cross license
of certain patents and authorization for High End to continue to sell all of the
products that were the subject of the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "LITE." The Company consummated its initial public offering of Common
Stock on October 16, 1997. The following table sets forth, on a per share basis
for the periods indicated, the high and low sale prices for the Common Stock as
reported by the Nasdaq National Market:
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PRICE RANGE
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HIGH LOW
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Fiscal Year 1998
First Quarter............................................................................. $ 13.125 $ 11.750
Second Quarter............................................................................ $ 12.688 $ 11.375
Third Quarter............................................................................. $ 10.000 $ 5.750
Fourth Quarter............................................................................ $ 6.375 $ 2.000
Fiscal Year 1999
First Quarter (through December 21, 1998)................................................. $ 4.750 $ 2.000
</TABLE>
There were 63 stockholders of record of Common Stock on December 21, 1998.
The Company paid dividends of approximately $0.6 million, $0.6 million and
zero with respect to each of the 1996, 1997 and 1998 fiscal years. The Company
does not anticipate paying any other cash dividends 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, financial condition and such other factors the Board of
Directors deems relevant.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the Company as of and
for each of the five fiscal years in the period ended September 30, 1998 have
been derived from the audited consolidated financial statements of the Company.
This data should be read in conjunction with the information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Rental revenues.............................................. $ 47,625 $ 65,864 $ 65,741 $ 75,529 $ 74,863
Product sales and service revenues........................... 6,187 9,046 11,397 15,129 13,513
--------- --------- --------- --------- ---------
Total revenues............................................. 53,812 74,910 77,138 90,658 88,376
Rental costs................................................... 18,775 26,288 26,425 29,371 33,764
Product sales and service costs................................ 4,284 6,637 7,783 10,676 9,880
--------- --------- --------- --------- ---------
Gross profit................................................... 30,753 41,985 42,930 50,611 44,732
Selling, general and administrative expense.................... 19,181 28,163 30,077 32,983 35,077
Research and development expense............................... 3,033 3,283 4,404 6,657 6,690
Impairment of assets........................................... -- -- -- -- 3,542
Restructuring costs............................................ -- -- -- -- 1,080
--------- --------- --------- --------- ---------
Operating income (loss)........................................ 8,539 10,539 8,449 10,971 (1,657)
Interest expense (net)......................................... 1,805 2,788 3,092 3,726 2,818
--------- --------- --------- --------- ---------
Income (loss) before taxes, extraordinary loss and cumulative
effect of change in accounting principle..................... 6,734 7,751 5,357 7,245 (4,475)
Income taxes (benefit)......................................... 2,400 3,037 2,238 2,916 (1,785)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary loss and cumulative effect
of change in accounting principle............................ 4,334 4,714 3,119 4,329 (2,690)
Extraordinary loss from early extinguishment of debt........... (756) -- -- -- (737)
Cumulative effect of change in accounting principle............ -- -- -- -- (195)
--------- --------- --------- --------- ---------
Net income (loss).............................................. $ 3,578 $ 4,714 $ 3,119 $ 4,329 $ (3,622)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per basic share.............................. $ 0.63 $ 0.83 $ 0.54 $ 0.75 $ (0.47)
Net income (loss) per diluted share............................ $ 0.62 $ 0.81 $ 0.53 $ 0.74 $ (0.47)
Cash dividends per share(1).................................... $ 0.05 $ 0.10 $ 0.11 $ 0.18 $ --
Weighted average basic shares outstanding...................... 5,657 5,699 5,813 5,799 7,712
Weighted average diluted shares outstanding.................... 5,772 5,814 5,912 5,819 7,712
OTHER DATA:
EBITDA(2)...................................................... $ 14,620 $ 19,161 $ 18,517 $ 22,634 $ 11,921
Net cash provided by operations................................ 10,937 14,513 7,925 15,237 6,474
Net cash used in investing activities.......................... (18,924) (20,641) (11,826) (23,071) (27,576)
Net cash provided by financing activities...................... 9,355 7,307 2,564 8,346 23,673
Capital expenditures........................................... 13,566 20,748 11,981 23,212 25,841
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................................... $ 57,223 $ 73,465 $ 78,581 $ 96,704 $ 114,627
Total debt..................................................... 27,497 34,870 37,349 46,242 50,333
Stockholders' equity........................................... 16,631 21,329 24,538 27,541 44,704
</TABLE>
- ------------------------------
(1) The Company does not anticipate paying any cash dividends for the
foreseeable future and anticipates that future earnings will be retained to
finance future operations and expansion. See "Market for Registrant's Common
Equity and Related Stockholder Matters."
(2) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principles as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading designer and manufacturer of automated lighting
systems and products which are marketed exclusively through its domestic and
international Vari-Lite Production Services 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.
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 and
design and production management services.
Rental revenues were $65.7 million, $75.5 million and $74.9 million or
85.2%, 83.3% and 84.7% of total revenues during fiscal 1996, 1997 and 1998,
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 $4.5 million, $8.7 million and $1.2 million
during fiscal 1996, 1997 and 1998, respectively. Because most 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- architectural
automated lighting systems. The Company first introduced its
Irideon-Registered Trademark- lighting system in 1993. During fiscal 1998, the
Company made a strategic decision to dispose of its
Irideon-Registered Trademark- product line. As a result, the assets of
Irideon-Registered Trademark- were written down to their net realizable values,
resulting in a charge of $3.5 million for the impairment of these assets in
fiscal 1998. On October 30, 1998, the Company sold substantially all of the
Irideon-Registered Trademark- assets for approximately $2.0 million. During
fiscal 1996, 1997 and 1998, the Company's Irideon-Registered Trademark- product
line experienced operating losses of $1.2 million, $1.3 million and $1.7 million
(before write-down), respectively.
The following table reflects the percentages of total revenues by market:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Concert Touring...................................................... 33.0% 32.1% 31.8%
Theatre.............................................................. 22.7 24.4 18.2
Television and Film.................................................. 16.3 14.7 15.5
Corporate Events..................................................... 12.2 12.4 17.8
Other................................................................ 15.8 16.4 16.7
--------- --------- ---------
Total Revenue...................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
12
<PAGE>
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. Revenues earned
from theatre decreased from fiscal 1997 to fiscal 1998 primarily as a result of
a decrease in sales-type leases to this market segment. The Company anticipates
revenues from theatre will continue to fluctuate with the development of new
theatrical productions and the cloning of productions.
The following table reflects the Company's geographic region revenues as a
percentage of total revenues (see Note M of the "Notes to Consolidated Financial
Statements"):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
North America........................................................ 50.7% 50.3% 54.3%
Europe............................................................... 34.5 36.3 34.6
Asia................................................................. 14.8 13.4 11.1
--------- --------- ---------
Total Revenue...................................................... 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The majority of European and Asian revenues are denominated in British
pounds sterling and Japanese yen, respectively. The Company has offices in
London, Tokyo, Brussels, Paris, Madrid, Stockholm, Amsterdam, Dubai and Hong
Kong. The Company anticipates that foreign revenues will remain a significant
part of the Company's total revenues as the demand for entertainment in foreign
markets increases and as a result of acquiring its Brussels, Stockholm and Paris
based distributors and the opening of offices in Amsterdam and Dubai.
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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages of total revenues (or as
percentages of a component of total revenues as shown) represented by certain
consolidated income statement data and other data for the indicated periods:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income Statement Data:
Rental revenues........................................................................ 85.2% 83.3% 84.7%
Product sales and service revenues..................................................... 14.8 16.7 15.3
--------- --------- ---------
Total revenues....................................................................... 100.0 100.0 100.0
Rental costs........................................................................... 34.3 32.4 38.2
Product sales and service costs........................................................ 10.1 11.8 11.2
--------- --------- ---------
Gross margin........................................................................... 55.6 55.8 50.6
Selling, general and administrative expense............................................ 39.0 36.4 39.7
Research and development expense....................................................... 5.7 7.3 7.6
Impairment of assets................................................................... -- -- 4.0
Restructuring costs.................................................................... -- -- 1.2
--------- --------- ---------
Operating income (loss)................................................................ 10.9 12.1 (1.9)
Interest expense....................................................................... 4.0 4.1 3.2
--------- --------- ---------
Income (loss) before income taxes, extraordinary loss and cumulative effect of change
in accounting principle.............................................................. 6.9 8.0 (5.1)
Incomes taxes (benefit)................................................................ 2.9 3.2 (2.0)
--------- --------- ---------
Income (loss) before extraordinary loss and cumulative effect of change in accounting
principle............................................................................ 4.0 4.8 (3.1)
Extraordinary loss from early extinguishment of debt................................... -- -- (0.8)
Cumulative effect of change in accounting principle.................................... -- -- (0.2)
--------- --------- ---------
Net income (loss)...................................................................... 4.0% 4.8% (4.1)%
--------- --------- ---------
--------- --------- ---------
Other Data:
Rental revenues........................................................................ 100.0% 100.0% 100.0%
Rental costs........................................................................... 40.2 38.9 45.1
--------- --------- ---------
Rental gross margin.................................................................... 59.8% 61.1% 54.9%
--------- --------- ---------
--------- --------- ---------
Product sales and service revenues..................................................... 100.0% 100.0% 100.0%
Product sales and service costs........................................................ 68.3 70.6 73.1
--------- --------- ---------
Product sales and service gross margin................................................. 31.7% 29.4% 26.9%
--------- --------- ---------
--------- --------- ---------
EBITDA(1).............................................................................. 24.0% 25.0% 13.5%
</TABLE>
- ------------------------------
(1) EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus
depreciation, amortization and net interest expense. The Company believes
that EBITDA serves as an important financial analysis tool for measuring and
comparing financial information such as liquidity, operating performance and
leverage. EBITDA should not be considered an alternative to net income or
other cash flow measures determined under generally accepted accounting
principals as an indicator of the Company's performance or liquidity. EBITDA
as disclosed herein may not be comparable to EBITDA as disclosed by other
companies.
14
<PAGE>
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1997
REVENUES. Total revenues decreased 2.5%, or $2.2 million, to $88.4 million
in fiscal 1998, compared to $90.6 million in fiscal 1997. The revenue decrease
was attributable primarily to the factors set forth below.
Rental revenues decreased 0.9%, or $0.6 million, to $74.9 million in fiscal
1998, compared to $75.5 million in fiscal 1997. This decrease was primarily due
to a lower volume of sales-type leases and a decrease in revenues in Asia due to
the economic situation in that region, partially offset by a strong performance
in North America and increased sales due to the acquisition of the Company's
Brussels-based distributor. Rental revenues from sales-type leases decreased
86.7%, or $7.5 million, to $1.2 million for fiscal 1998 compared to $8.7 million
for fiscal 1997.
Product sales and services revenues decreased 10.7%, or $1.6 million, to
$13.5 million in fiscal 1998, compared to $15.1 million in fiscal 1997. This
decrease was primarily due to lower revenues from the design and construction of
custom stages and stage sets which was partially offset by an increase in
revenues from the design and production management services.
RENTAL COSTS. Rental costs increased 15.0%, or $4.4 million, to $33.7
million in fiscal 1998, compared to $29.3 million in fiscal 1997. Rental costs
as a percentage of rental revenues increased to 45.1% in fiscal 1998, from 38.9%
in fiscal 1997. The increase in rental costs as a percentage of total rental
revenues was primarily due to the reduction in rental revenues from sales-type
leases for which the associated costs as a percentage of related revenues is
typically less than the costs as a percentage of revenue from sources other than
sales-type leases. In addition, to a lesser extent, pricing pressures from
competitors in fiscal 1998 created an environment in which increased costs
associated with renting more equipment were incurred without a corresponding
increase in revenue.
PRODUCT SALES AND SERVICES COSTS. Product sales and services costs
decreased 7.5%, or $0.8 million, to $9.9 million in fiscal 1998, compared to
$10.7 million in fiscal 1997. Product sales and services costs as a percentage
of product sales and services revenues increased to 73.1% in fiscal 1998, from
70.6% in fiscal 1997. The increase in product sales and services costs as a
percentage of the related revenues was primarily the result of higher costs
associated with the sales of the Company's Irideon-Registered Trademark-
automated lighting products due to increased warranty expense associated with a
defect in the initial delivery of a new product and higher than anticipated
costs to design and construct custom stages and stage sets for customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 6.4%, or $2.1 million, to $35.1 million in
fiscal 1998, compared to $33.0 million in fiscal 1997. This increase resulted
primarily from the addition of the Company's Brussels-based distributor, which
was acquired in March 1998, and was partially offset by lower professional
services, payroll and related costs and other discretionary expenses in the
first half of the fiscal year. This expense as a percentage of total revenues
increased to 39.7% in fiscal 1998 from 36.4% in fiscal 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were
$6.7 million in fiscal 1998 and 1997.
IMPAIRMENT OF ASSETS. During fiscal 1998, the Company made a strategic
decision to dispose of its Irideon-Registered Trademark- architectural automated
product line, and an asset sale was completed in October 1998. As a result of
this decision, the Irideon-Registered Trademark- assets were written down to
their net realizable value, resulting in a pre-tax charge of $3.5 million during
the period ended September 30, 1998.
RESTRUCTURING COSTS. In 1998, the Company recorded a one-time pretax charge
of $1.1 million for the estimated costs of restructuring the Company's
operations. The costs include the cost of employee and lease terminations. The
employee termination costs are comprised primarily of severance payments and
other employee related costs associated with terminating the employment of
approximately 75 people. The
15
<PAGE>
lease termination costs represent the cost of cancelling an operating lease as a
result of relocating the Company's manufacturing operations.
INTEREST EXPENSE. Interest expense decreased 24.4%, or $0.9 million, to
$2.8 million in fiscal 1998, compared to $3.7 million in fiscal 1997. This
decrease was attributable to the reduction in indebtedness from the use of the
proceeds from the Company's initial public offering in October 1997 to repay
$21.3 million of indebtedness and the subsequent negotiation of a new credit
facility in December 1997 with lower interest rates.
EXTRAORDINARY LOSS. A non-cash extraordinary loss of $0.7 million was
recorded in fiscal 1998, net of $0.4 million of tax benefit, relating to the
early extinguishment of debt under the Company's old credit facility.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In fiscal 1998, the
Company recorded a cumulative effect of change in accounting principle loss of
$0.2 million, net of $0.1 million of tax benefit, relating to start-up costs
that had previously been capitalized.
INCOME TAXES. Effective tax rates in fiscal 1998 and 1997 were 39.9% and
40.2%, respectively.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
REVENUES. Total revenues increased 17.5%, or $13.5 million, to $90.6
million in fiscal 1997, compared to $77.1 million in fiscal 1996. The revenue
increase was attributable primarily to the factors set forth below.
Rental revenues increased 14.9%, or $9.8 million, to $75.5 million in fiscal
1997, compared to $65.7 million in fiscal 1996. This increase was primarily the
result of an overall increase in concert touring revenues due to an improved
concert touring market during fiscal 1997 compared to fiscal 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 42.4%, or
$4.2 million, of the increase in rental revenues in fiscal 1997, compared with
fiscal 1996. The increase in sales-type lease revenues was primarily due to
significant leases with new theatrical productions and an amusement park.
Product sales and service revenues increased 32.7%, or $3.7 million, to
$15.1 million in fiscal 1997, compared to $11.4 million in fiscal 1996. This
increase was primarily due to sales of the Company's
Irideon-Registered Trademark- automated lighting products which increased 68.7%,
or $1.8 million, to $4.4 million in fiscal 1997, compared to $2.6 million in
fiscal 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 11.1%, or $2.9 million, to $29.3
million in fiscal 1997, compared to $26.4 million in fiscal 1996. Rental costs
as a percentage of rental revenues decreased to 38.9% in fiscal 1997, from 40.2%
in fiscal 1996. The decrease in rental costs as a percentage of total rental
revenues was primarily due to a decrease in sales-type lease costs as a
percentage of sales-type lease rental revenues in fiscal 1997, compared to
fiscal 1996. The decrease in sales-type lease costs was due to the leasing of
older equipment during fiscal 1997, compared to fiscal 1996.
PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased
37.2%, or $2.9 million, to $10.7 million in fiscal 1997, compared to $7.8
million in fiscal 1996. Product sales and service costs as a percentage of
product sales and service revenues increased to 70.6% in fiscal 1997, from 68.3%
in fiscal 1996. The increase in product sales and service costs as a percentage
of the related revenues was primarily due to 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 fiscal 1997, compared to fiscal
1996. Product sales and service costs associated with subcontracted services are
generally higher than costs associated with services provided directly by the
Company. Partially offsetting this increase was a decrease in product sales and
service costs as a percentage of the related revenues for the Company's
Irideon-Registered Trademark- product line, which experienced improved
production efficiencies and an increase in direct sales.
16
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased 9.7%, or $2.9 million, to $33.0 million in
fiscal 1997, compared to $30.1 million in fiscal 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 36.4% in
fiscal 1997, from 39.0% in fiscal 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 51.2%, or $2.3 million, to $6.7 million in fiscal 1997, compared to
$4.4 million in fiscal 1996. This expense as a percentage of total revenues
increased to 7.3% in fiscal 1997, from 5.7% in fiscal 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 fiscal
1997.
INTEREST EXPENSE. Interest expense increased 20.5%, or $0.6 million, to
$3.7 million in fiscal 1997, compared to $3.1 million in fiscal 1996. This
increase was attributable to additional long-term borrowings incurred by the
Company to fund capital expenditures.
INCOME TAXES. Effective tax rates in fiscal 1997 and 1996 were 40.2% and
41.7%, respectively.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The following table sets forth certain quarterly income statement data and
EBITDA for each of the Company's last three fiscal years, which were derived
from unaudited financial statements of the Company. In the opinion of the
Company's management, this income statement data contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation thereof.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 FISCAL YEAR
------------ ----------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 $ 23,763 $ 90,658
EBITDA............................................ 5,215 5,083 5,989 6,347 22,634
Operating income.................................. 2,424 2,265 2,954 3,328 10,971
FISCAL 1998
Total Revenues.................................... $ 22,519 $ 19,227 $ 22,529 $ 24,101 $ 88,376
EBITDA............................................ 6,033 3,134 4,099 (1,345) 11,921
Operating income (loss)........................... 2,808 (128) 662 (4,999) (1,657)
</TABLE>
- ------------------------------
EBITDA is calculated herein as income before income taxes, extraordinary
loss and cumulative effect of change in accounting principle plus depreciation,
amortization and net interest expense. The Company believes that EBITDA serves
as an important financial analysis tool for measuring and comparing financial
information such as liquidity, operating performance and leverage. EBITDA should
not be considered an alternative to net income or other cash flow measures
determined under generally accepted accounting principles as an indicator of the
Company's performance or liquidity. EBITDA as disclosed herein may not be
comparable to EBITDA as disclosed by other companies.
The Company early adopted SOP 98-5 and restated 1998 first quarter results
to record a pre-tax charge of $282 as a cumulative effect of change in
accounting principle.
The 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
17
<PAGE>
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. EBITDA and
operating loss for the quarter ended September 30, 1998, include charges
totaling $4.6 million for the write-down of impaired
Irideon-Registered Trademark- assets to their net realizable value and employee
termination and lease cancellation costs associated with restructuring the
Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations and capital
expenditures with cash flow from operations, bank borrowings and advances from
distributors and customers. The Company's operating activities generated cash
flow of approximately $7.9 million, $15.2 million and $6.5 million during fiscal
1996, 1997 and 1998, respectively.
During fiscal 1997, the Company borrowed under a multicurrency credit
agreement (the "Old Credit Agreement") to partially finance its operations and
capital expenditures. On October 21, 1997, the Company consummated the initial
public offering of its Common Stock and used the net proceeds thereof,
approximately $21.3 million, to repay indebtedness under the Old Credit
Agreement. In December 1997, the Company entered into a new multicurrency credit
agreement, with SunTrust Bank, Atlanta ("SunTrust"), as agent for the lenders
thereunder (the "New Credit Agreement"), which replaced the Old Credit
Agreement. The New Credit Agreement, as amended in December 1998, has a
five-year term and initially provides the Company with a $50 million revolving
credit facility, which is secured by substantially all of the assets owned by
the Company's domestic subsidiaries and the pledge of 65% of the capital stock
of the Company's foreign subsidiaries. The initial commitment decreases by $1.0
million during the third and fourth quarters of fiscal 1999 and $1.5 million per
quarter thereafter through maturity. The commitment fee on the unused portion of
the facility and the interest charged on the outstanding balance of the facility
are determined by a pricing grid based on the Company's ratio of Adjusted Funded
Debt (as defined in the New Credit Agreement) to EBITDA (as defined in the New
Credit Agreement). The commitment fee ranges from 0.2% to 0.50% and the interest
rate ranges from 1.0% to 3.5% above the London interbank offering rate ("LIBOR")
or SunTrust's base rate. The New Credit Agreement includes customary negative
covenants such as limitations on capital expenditures and restrictions on the
Company's ability to incur debt, make acquisitions or investments, sell assets
or pay dividends. Also, the New Credit Agreement includes financial covenants
regarding the Company's net worth, ratio of Adjusted Funded Debt to total
capitalization, the ratio of Adjusted Funded Debt to EBITDA and the ratio of
EBITDAR (as defined in the New Credit Agreement) to interest expense, rent
expense and capital expenditures. As of December 21, 1998, $47.2 million was
outstanding under the New Credit Agreement (based on currency exchange rates as
of that date).
The Company has hedged a portion of its currency fluctuation risk by
borrowing in British pounds sterling and Japanese yen under the both the Old
Credit Agreement and the New 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 New Credit Agreement. See Note E of "Notes to
Consolidated Financial Statements."
18
<PAGE>
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 7% annually. Proceeds received under
these distributorship agreements were approximately $1.7 million, $1.2 million
and $0.7 million for fiscal 1996, 1997 and 1998, respectively, and outstanding
borrowings from distributors at September 30, 1996, 1997 and 1998 were
approximately $2.8 million, $2.3 million and $1.2 million, respectively. All
amounts advanced by distributors are accounted for by the Company as short-term
debt. See "Business--Marketing, Sales and Distribution."
The Company has borrowed money to purchase computer equipment and office
furniture and fixtures. These loans typically amortize over three years and bear
interest at various rates ranging from 4.70% to 8.71%. Proceeds received under
this type of financing were approximately $1.8 million, $1.1 million and $2.0
million for fiscal 1996, 1997 and 1998, respectively, and borrowings outstanding
at September 30, 1996, 1997 and 1998 were approximately $2.8 million, $2.6
million and $3.2 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, 1996, 1997 and 1998, the Company had unearned revenue related to
customer advances of approximately $2.2 million, $3.0 million and $1.7 million,
respectively.
Dividends paid to stockholders totaled approximately $0.6 million with
respect to each of fiscal 1996 and 1997. The Company did not pay dividends in
fiscal 1998. The Company does not anticipate paying any additional cash
dividends for the foreseeable future. See "Market for Registrant's Common Equity
and Related Stockholder Matters."
The Company's business requires significant capital expenditures. Capital
expenditures for fiscal 1996, 1997 and 1998 were approximately $12.0 million,
$23.2 million and $25.8 million, respectively, of which approximately $10.2
million, $19.2 million and $22.2 million were for rental equipment inventories.
The majority of the Company's revenues are generated through the rental of
automated lighting and concert sound systems and, as such, the Company must
maintain a significant amount of rental equipment to meet customer demands.
Total rental equipment inventories increased from approximately $61.6 million at
the beginning of fiscal 1995 to $126.5 million at September 30, 1998. 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 $13.0 million during fiscal 1999,
primarily for expansion of rental inventories.
Inventory included in current assets consists primarily of spare parts
inventory for the Company's VARI*LITE-Registered Trademark- automated lighting
equipment and, until the sale of the Irideon-Registered Trademark- product line
in October 1998, raw materials and finished goods for
Irideon-Registered Trademark- products. Raw materials represented 83%, 86% and
87% of total inventory at September 30, 1996, 1997 and 1998, respectively.
The Company had a working capital deficit of approximately $0.6 million and
$0.8 million at September 30, 1996 and 1997, respectively. The Company had a
working capital surplus of $6.2 million at September 30, 1998. The Company has
historically maintained working capital deficits since the bulk of its revenue
generating assets are classified as long-term assets rather than current assets.
The working capital surplus in 1998 is primarily the result of terminating the
Old Credit Agreement, which included borrowings classified as current at
September 30, 1997, with proceeds from the New Credit Agreement.
19
<PAGE>
Management believes that cash flow generated from operations and borrowing
capacity under the New Credit Agreement should be sufficient to fund its
anticipated operating needs and capital expenditures for at least the next
twelve months. 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.
IMPACT OF THE YEAR 2000 ISSUE
The term "year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's". These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
In 1995 and 1996, the Company invested approximately $2.2 million
constructing a wide-area network throughout the United States and implementing
Oracle financial and manufacturing applications. The Company has conducted a
review of its computer systems to identify the systems that could be affected by
the year 2000 issue and is attempting to ensure that its information systems and
technology and computer systems are year 2000 compliant. This review is part of
the Company's overall upgrade of its systems and as a result the Company has no
separate budget for year 2000 compliance. Expenses relating to reviewing and
assessing systems are included in historical operating expenses as part of
information systems and technology and have not been separately identified. The
Company's upgrades are substantially complete and management expects upgrades to
the European based operations will be completed by mid-1999. Management believes
that with the installation of the new systems, conversion to new software and
modifications to existing software, the year 2000 issue will pose no significant
operational problems for the Company.
The Company is currently discussing with its vendors and customers the
possibility of any year 2000 interface difficulties that may affect the Company.
The ability of third parties with whom the Company transacts business to
adequately address their year 2000 issue is, however, outside of the Company's
control.
To date, the Company has not identified any information technology assets
under the control of the Company that represent a material risk of not being
year 2000 ready or for which a suitable alternative cannot be implemented. The
Company does not have a contingency plan with respect to the year 2000 issue if
the information systems and technology upgrade is not completed or is delayed
beyond the end of 1999.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" as that phrase is defined
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
20
<PAGE>
When used in this report, the words "anticipate," "believe," "estimate,"
"expect," "will," "could," "may" and similar expressions, as they relate to
management or the Company, are intended to identify forward-looking statements.
Such statements reflect the current views of management with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including without limitation the following as they relate to the Company:
fluctuations in operating results and seasonality; ability to introduce new
products; technological changes; reliance on intellectual property; dependence
on entertainment industry; competition; dependence on management; foreign
exchange risk; international trade risk; dependence on key suppliers; dependence
on manufacturing facility; and the year 2000 issue. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
which are required by this Item 8 are listed in Part IV, Item 14(a) of this
report. Such consolidated financial statements are included herein beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
21
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on the
basis that the registrant will file a definitive proxy statement pursuant to
Regulation 14A for its annual meeting of shareholders to be held on February 26,
1999 (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included therein is
incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Report of the Compensation
Committee and Omnibus Committee on Executive Compensation or the Stock
Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this item is incorporated by reference to the sections entitled
"Election of Directors" and "Management--Executive Officers" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Outstanding Capital Stock" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Transactions with Directors, Officers and Affiliates" in the
Proxy Statement.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements
The Financial Statements listed below are filed as part of this Annual
Report on Form 10-K.
(b) Financial Statement Schedule
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION PAGE
- ------------- ------------------------------------------------------------------------------------------ -----
<C> <S> <C>
II Valuation and Qualifying Accounts 28
</TABLE>
The auditors' report with respect to the above-listed financial statement
schedule appears on page F-2 of this report. All other financial statements and
schedules not listed are omitted either because they are not applicable, not
required, or the required information is included in the consolidated financial
statements.
(c) Reports on Form 8-K
None
(d) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 No.
333-33559)
3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 No. 333-33559)
4.1 Form of certificate representing shares of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 No. 333-33559)
4.2 Warrant Agreement, dated as of July 31, 1996, among the Company, Brown
Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly
known as Trust Company Bank) and Comerica Bank Texas (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-1 No. 333-33559)
10.1 Employment Agreement, dated as of July 1, 1995, between the Company and
H.R. Brutsche III (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.2 Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement,
dated as of July 1, 1995, between the Company and H.R. Brutsche III
(incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.3 Consulting Agreement, dated as of July 1, 1995, between the Company and J.
Anthony Smith (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.4 Consulting Agreement, dated as of July 1, 1995, between the Company and
John D. Maxson (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 No. 333-33559)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.5 Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement,
dated as of July 1, 1995, between the Company and John D. Maxson
(incorporated by reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-1 No. 333-33559)
10.6 Consulting Agreement, dated as of July 1, 1995, between the Company and
James H. Clark, Jr. (incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 No. 333-33559)
10.7 Deferred Compensation Agreement, dated as of July 1, 1995, between the
Company and H.R. Brutsche III (incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1 No. 333-33559)
10.8 Deferred Compensation Agreement, dated as of July 1, 1995, between the
Company and John D. Maxson (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 No. 333-33559)
10.9 Deferred Compensation Agreement, dated as of July 1, 1995, between the
Company and James H. Clark, Jr. (incorporated by reference to Exhibit
10.9 to the Company's Registration Statement on Form S-1 No. 333-33559)
10.10 Deferred Compensation Agreement, dated as of July 1, 1995, between the
Company and J. Anthony Smith (incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 No. 333-33559)
10.11 Compensation Continuation Agreement, dated as of March 31, 1994, among the
Company, Vari-Lite, Inc., Showco, Inc. and H.R. Brutsche III
(incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.12 Compensation Continuation Agreement, dated as of March 31, 1994, among the
Company, Vari-Lite, Inc., Showco, Inc. and John D. Maxson (incorporated
by reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.13 Compensation Continuation Agreement, dated as of March 31, 1994, among the
Company, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr.
(incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.14 Statement and Terms of Employment, dated as of April 1, 1994, between
Vari-Lite Europe Ltd. and Brian L. Croft (incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement on Form S-1 No.
333-33559)
10.15 Split-Dollar Agreement, dated as of October 12, 1995, among the Company,
Brown Brothers Harriman Trust Company of Texas, trustee of the H.R.
Brutsche III Insurance Trust, and H.R. Brutsche III (incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.16 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995,
among the Company, Brown Brothers Harriman Trust Company of Texas,
trustee of the H.R. Brutsche III Insurance Trust, and H.R. Brutsche III
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.17 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997,
among the Company, Brown Brothers Harriman Trust Company of Texas,
trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1 No. 333-33559)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.18 Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among
the Company, James Howard Cullum Clark and James H. Clark, Jr.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.19 Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995,
between the Company, James Howard Cullum Clark and James H. Clark, Jr.
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.20 Vari-Lite International, Inc. 1997 Omnibus Plan (including forms of
Incentive Stock Option Agreement and Nonqualified Stock Option
Agreement) (incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.21 Vari-Lite International, Inc. Employees' Stock Ownership Plan
(incorporated by reference to Exhibit 10.21 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.22 Vari-Lite International, Inc. Employees' Stock Equivalence Plan
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.23 Vari-Lite International, Inc. Annual Incentive Plan (as amended and
restated) (incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.24 Employment Agreement, dated as of August 28, 1995, by and between the
Company and James E. Kinnu (incorporated by reference to Exhibit 10.34
to the Company's Registration Statement on Form S-1 No. 333-33559)
10.25 Severance Agreement, dated as of September 30, 1996, by and between the
Company and James E. Kinnu (incorporated by reference to Exhibit 10.35
to the Company's Registration Statement on Form S-1 No. 333-33559)
10.26 Ground Lease, dated as of December 21, 1995, among Brazos Beltline
Development, Inc. and Vari-Lite, Inc., Showco, Inc., IGNITION! Creative
Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc.
(incorporated by reference to Exhibit 10.36 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.27 Guaranty, dated as of December 21, 1995, by the Company (incorporated by
reference to Exhibit 10.37 to the Company's Registration Statement on
Form S-1 No. 333-33559)
10.28 Form of Indemnification Agreement with Directors and Officers
(incorporated by reference to Exhibit 10.38 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.29 Agreement and Plan of Merger, dated as of August 27, 1997, between the
Company and Vari-Lite Texas (incorporated by reference to Exhibit 10.39
to the Company's Registration Statement on Form S-1 No. 333-33559)
10.30 International Swap Dealers Association, Inc. Master Agreement, dated as of
November 23, 1993, between the Company and Brown Brothers, Harriman &
Co. (along with confirmation of Interest Rate Swap Transaction)
(incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-1 No. 333-33559)
10.31 International Swap Dealers Association, Inc. Master Agreement, dated as of
September 13, 1996, between Vari-Lite, Inc. and SunTrust Bank, Atlanta
(along with confirmations of Interest Rate Transactions) (incorporated
by reference to Exhibit 10.41 to the Company's Registration Statement on
Form S-1 No. 333-33559)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.32 Multicurrency Credit Agreement, dated as of December 19, 1997, among the
Company and SunTrust Bank, Atlanta, as agent for the other banks
thereunder (incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended September 30, 1997)
10.33 Amendment No. 1, dated April 24, 1998 to the Multicurrency Credit
Agreement, dated as of December 19, 1997, among the Company and SunTrust
Bank, Atlanta, as agent for the other banks thereunder (incorporated by
reference to Exhibit 10.33 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998)
10.34 Amendment No. 2, dated July 31, 1998 to the Multicurrency Credit
Agreement, dated as of December 19, 1997, among the Company and SunTrust
Bank, Atlanta, as agent for the other banks thereunder (incorporated by
reference to Exhibit 10.34 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998)
*10.35 Amendment No. 3, dated December 15, 1998 to the Multicurrency Credit
Agreement, dated as of December 19, 1997, among the Company and SunTrust
Bank, Atlanta, as agent for the other banks thereunder
*11.1 Statements re computation of per share earnings
*21.1 List of Company's Subsidiaries
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas
and State of Texas on the 29th day of December, 1998.
<TABLE>
<S> <C> <C>
VARI-LITE INTERNATIONAL, INC.
By: /s/ H.R. BRUTSCHE, III
-----------------------------------------
H.R. Brutsche, III
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the 29th day of December, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board,
/s/ H.R. BRUTSCHE, III President and Chief
- ------------------------------ Executive Officer
H.R. Brutsche, III (Principal Executive
Officer)
Vice President--Finance,
/s/ MICHAEL P. HERMAN Chief Financial Officer
- ------------------------------ and Secretary (Principal
Michael P. Herman Financial and Accounting
Officer)
/s/ JAMES H. CLARK, JR.
- ------------------------------ Director
James H. Clark, Jr.
/s/ JOHN D. MAXSON
- ------------------------------ Director
John D. Maxson
/s/ C. VINCENT PROTHRO
- ------------------------------ Director
C. Vincent Prothro
/s/ JOHN R. RETTBERG
- ------------------------------ Director
John R. Rettberg
/s/ J. ANTHONY SMITH
- ------------------------------ Director
J. Anthony Smith
</TABLE>
27
<PAGE>
Schedule II
VARI-LITE INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(in thousands of dollars)
<TABLE>
<CAPTION>
CHARGED TO WRITE-OFFS
BEGINNING COSTS AND AND DISCOUNTS ENDING
DESCRIPTION BALANCE EXPENSES ALLOWED BALANCE
- ----------------------------------------------------------------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
September 30, 1996
Allowances deducted from assets to which they apply
Allowance for doubtful accounts.............................. $ 495 $ 408 $ (555) $ 348
Allowance for excess and obsolete inventory.................. 363 23 -- 386
September 30, 1997
Allowances deducted from assets to which they apply
Allowance for doubtful accounts.............................. 348 134 (32) 450
Allowance for excess and obsolete inventory.................. 386 23 -- 409
September 30, 1998
Allowances deducted from assets to which they apply
Allowance for doubtful accounts.............................. 450 741 (291) 900
Allowance for excess and obsolete inventory.................. 409 15 -- 424
</TABLE>
28
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of September 30, 1997 and 1998.............................................. F-3
Consolidated Statements of Income for the Years Ended September 30, 1996, 1997, and 1998................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1996, 1997 and 1998...... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
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, 1997 and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 30,
1997 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 20, 1998 (December 21, 1998, as to
Note P)
F-2
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................................................... $ 1,862 $ 3,838
Receivables, less allowance for doubtful accounts of $450 and $900...................... 14,445 13,471
Inventory............................................................................... 4,050 6,075
Prepaid expense and other current assets................................................ 2,536 1,749
---------- ----------
TOTAL CURRENT ASSETS.................................................................. 22,893 25,133
EQUIPMENT AND OTHER PROPERTY:
Lighting and sound equipment............................................................ 102,487 127,763
Machinery and tools..................................................................... 2,929 5,097
Furniture and fixtures.................................................................. 3,945 4,439
Office and computer equipment........................................................... 9,189 10,399
Work in progress and raw materials inventory............................................ 5,343 5,320
---------- ----------
123,893 153,018
Less accumulated depreciation and amortization........................................ 55,248 71,745
---------- ----------
68,645 81,273
OTHER ASSETS.............................................................................. 5,166 8,221
---------- ----------
TOTAL ASSETS.......................................................................... $ 96,704 $ 114,627
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses................................................... $ 12,086 $ 13,189
Unearned revenue........................................................................ 2,992 1,694
Income taxes payable.................................................................... 820 999
Current portion of long-term obligations................................................ 7,824 3,049
---------- ----------
TOTAL CURRENT LIABILITIES............................................................. 23,722 18,931
LONG-TERM OBLIGATIONS..................................................................... 38,418 47,284
DEFERRED INCOME TAXES..................................................................... 7,023 3,708
---------- ----------
TOTAL LIABILITIES..................................................................... 69,163 69,923
COMMITMENTS AND CONTINGENCIES (Note F) -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.10 par value (10,000,000 shares authorized; no shares
outstanding).......................................................................... -- --
Common Stock, $0.10 par value (40,000,000 shares authorized; 5,800,003 and 7,800,003
shares outstanding)................................................................... 585 785
Treasury Stock.......................................................................... (186) (186)
Additional paid-in capital.............................................................. 3,344 24,426
Stockholder notes receivable............................................................ (176) (82)
Stock purchase warrants................................................................. 600 600
Accumulated other comprehensive income (loss)--foreign currency translation
adjustment............................................................................ 361 (230)
Retained earnings....................................................................... 23,013 19,391
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................................................ 27,541 44,704
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 96,704 $ 114,627
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Rental revenues............................................................... $ 65,741 $ 75,529 $ 74,863
Product sales and services revenues........................................... 11,397 15,129 13,513
--------- --------- ---------
TOTAL REVENUES.............................................................. 77,138 90,658 88,376
Rental cost................................................................... 26,425 29,371 33,764
Product sales and services cost............................................... 7,783 10,676 9,880
--------- --------- ---------
TOTAL COST OF SALES......................................................... 34,208 40,047 43,644
--------- --------- ---------
GROSS PROFIT.................................................................. 42,930 50,611 44,732
Selling, general and administrative expense................................... 30,077 32,983 35,077
Research and development expense.............................................. 4,404 6,657 6,690
Impairment of assets.......................................................... -- -- 3,542
Restructuring costs........................................................... -- -- 1,080
--------- --------- ---------
TOTAL OPERATING EXPENSES.................................................... 34,481 39,640 46,389
--------- --------- ---------
OPERATING INCOME (LOSS)....................................................... 8,449 10,971 (1,657)
Interest expense (net)........................................................ 3,092 3,726 2,818
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............................................. 5,357 7,245 (4,475)
Income taxes (benefit)........................................................ 2,238 2,916 (1,785)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................................ 3,119 4,329 (2,690)
Extraordinary loss............................................................ -- -- (737)
Cumulative effect of change in accounting principle........................... -- -- (195)
--------- --------- ---------
NET INCOME (LOSS)............................................................. 3,119 4,329 (3,622)
Other comprehensive income (loss)--foreign currency translation adjustment.... 125 (544) (591)
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS)................................................... $ 3,244 $ 3,785 $ (4,213)
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING........................................... 5,813,256 5,799,328 7,712,332
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING................................... 5,911,986 5,818,801 7,712,332
--------- --------- ---------
--------- --------- ---------
PER SHARE INFORMATION
BASIC:
Income (loss) before extraordinary loss and cumulative effect of change in
accounting principle...................................................... $ 0.54 $ 0.75 $ (0.35)
Extraordinary loss.......................................................... $ -- $ -- $ (0.10)
Cumulative effect of change in accounting principle......................... $ -- $ -- $ (0.02)
Net income (loss)........................................................... $ 0.54 $ 0.75 $ (0.47)
DILUTED:
Income (loss) before extraordinary loss and cumulative effect of change in
accounting principle...................................................... $ 0.53 $ 0.74 $ (0.35)
Extraordinary loss.......................................................... $ -- $ -- $ (0.10)
Cumulative effect of change in accounting principle......................... $ -- $ -- $ (0.02)
Net income (loss)........................................................... $ 0.53 $ 0.74 $ (0.47)
Dividends declared............................................................ $ 0.11 $ 0.18 $ 0.00
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------ ---------------------- ---------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 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
Other comprehensive income--
foreign currency 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 2 248
Other comprehensive income--
foreign currency translation
adjustment......................
Net income........................
----- ----------- --------- ----- --------- ----- -----------
BALANCE, SEPTEMBER 30, 1997....... -- -- 5,845,167 585 (45,164) (186) 3,344
Initial public offering........... 2,000,000 200 21,082
Payments on stockholder notes
receivable......................
Other comprehensive income--
foreign currency translation
adjustment......................
Net loss..........................
----- ----------- --------- ----- --------- ----- -----------
BALANCE, SEPTEMBER 30, 1998....... -- $ -- 7,845,167 $ 785 (45,164) $ (186) $ 24,426
----- ----------- --------- ----- --------- ----- -----------
----- ----------- --------- ----- --------- ----- -----------
<CAPTION>
STOCKHOLDER STOCK ACCUMULATED OTHER
NOTES PURCHASE COMPREHENSIVE RETAINED
RECEIVABLES WARRANTS INCOME EARNINGS TOTAL
------------- ------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 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
Other comprehensive income--
foreign currency translation
adjustment...................... 125 125
Net income........................ 3,119 3,119
----- ----- ----- ----------- ---------
BALANCE, SEPTEMBER 30, 1996....... (353) 600 905 19,735 24,538
Dividends declared................ (1,051) (1,051)
Purchase of treasury stock........ (158)
Payments on stockholder notes
receivable...................... 177 177
Issuance of stock to the ESOP and
ESEP............................ 250
Other comprehensive income--
foreign currency translation
adjustment...................... (544) (544)
Net income........................ 4,329 4,329
----- ----- ----- ----------- ---------
BALANCE, SEPTEMBER 30, 1997....... (176) 600 361 23,013 27,541
Initial public offering........... 21,282
Payments on stockholder notes
receivable...................... 94 94
Other comprehensive income--
foreign currency translation
adjustment...................... (591) (591)
Net loss.......................... (3,622) (3,622)
----- ----- ----- ----------- ---------
BALANCE, SEPTEMBER 30, 1998....... $ (82) $ 600 $ (230) $ 19,391 $ 44,704
----- ----- ----- ----------- ---------
----- ----- ----- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ 3,119 $ 4,329 $ (3,622)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 9,869 11,459 13,515
Amortization of note discount and deferred loan fees............................ 199 346 83
Provision for doubtful accounts................................................. 348 134 641
Extraordinary loss from early extinguishment of debt............................ -- -- 737
Cumulative effect of change in accounting principle............................. -- -- 195
Impairment of assets............................................................ -- -- 3,542
Deferred income taxes........................................................... 1,127 1,470 (2,735)
Loss (gain) on sale of equipment and other property............................. 42 (171) (18)
Provisions for ESOP and ESEP contributions...................................... 250 250 250
Net change in assets and liabilities:.........................................
Accounts receivable......................................................... (3,396) (2,500) 1,758
Prepaid expenses............................................................ 1,060 (1,720) 746
Inventory................................................................... (382) (1,655) (3,561)
Other assets................................................................ (2,616) (1,462) (3,085)
Accounts payable, accrued liabilities and income taxes payable.............. (2,726) 3,960 (568)
Unearned revenue............................................................ 1,031 797 (1,404)
--------- --------- ---------
Net cash provided by operating activities................................... 7,925 15,237 6,474
Cash flows from investing activities:
Capital expenditures, including rental equipment.................................. (11,981) (23,212) (25,841)
Acquisition of European companies, net of cash acquired........................... -- -- (1,833)
Proceeds from sale of equipment................................................... 155 141 98
--------- --------- ---------
Net cash used in investing activities....................................... (11,826) (23,071) (27,576)
Cash flows from financing activities:
Proceeds from issuance of debt.................................................. 28,204 21,997 79,760
Principal payments on debt...................................................... (24,601) (12,189) (76,418)
Proceeds from issuance of distributor advances.................................. 1,745 1,237 690
Principal payments on distributor advances...................................... (1,894) (1,667) (1,735)
Proceeds from payments on stockholder notes receivable.......................... 46 177 94
Proceeds from public offering of common stock................................... -- -- 21,282
Purchase of treasury stock...................................................... (28) (158) --
Purchase of stock warrant....................................................... (260) -- --
Dividends paid.............................................................. (648) (1,051) --
--------- --------- ---------
Net cash provided by financing activities........................................... 2,564 8,346 23,673
Effect from foreign currency translation adjustment................................. (3) (1,283) (595)
--------- --------- ---------
Net increase (decrease) during the year............................................. (1,340) (771) 1,976
Cash, beginning of year............................................................. 3,973 2,633 1,862
--------- --------- ---------
Cash, end of year................................................................... $ 2,633 $ 1,862 $ 3,838
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense.................................................. $ 3,234 $ 4,102 $ 2,732
Cash paid for income taxes...................................................... $ 1,528 $ 1,787 $ 1,313
Non-cash transactions:
Warrants issued............................................................... $ 600 $ -- $ --
Warrants retired.............................................................. $ (403) $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE A--ORGANIZATION:
Vari-Lite International, Inc. (together with its 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.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES
The consolidated financial statements of Vari-Lite International, Inc.
include the accounts of its wholly-owned subsidiaries which consist of operating
and holding companies. The operating companies consist of Vari-Lite, Inc.,
Showco, Inc., I.R. Sub, Inc. (formerly Irideon, Inc.), IGNITION! Creative Group,
Inc., Brilliant Stages, Ltd., Vari-Lite Asia, Inc., Vari-Lite Production
Services Hong Kong Limited, Vari-Lite Production Services, Ltd., Vari-Lite
Production Services, S.A., Vari-Lite Production Services, NV, Vari-Lite
Production Services Europe, NV, Vari-Lite Production Services, AB, Vari-Lite
Production Services, SAS and Vari-Lite Production Services-Dubai, Inc. The
wholly-owned holding companies are comprised of Vari-Lite Europe Holdings, Ltd.
and Vari-Lite Europe International, BV. During 1998, the Company acquired two of
its distributors for a total purchase price of approximately $3,160, which
created approximately $1,000 of goodwill. In October 1998, the Company acquired
the VARI*LITE-Registered Trademark- distribution rights and related assets of
its French distributor for approximately $1,200, virtually all of which will be
recorded as goodwill. All material intercompany transactions and balances have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual results could differ from these estimates.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement cost and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.
EQUIPMENT AND OTHER PROPERTY
Equipment and other property are stated at cost or, in the case of
capitalized leases, at the lower of the present value of future lease payments
or the fair value of the equipment. Depreciation and amortization are provided
on the straight-line method over the estimated useful lives ranging from three
to ten years of the various classes of equipment and other property.
LONG-LIVED ASSETS
As required by Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed
Of", the Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have
F-7
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
made recovery of the assets' carrying value unlikely. An impairment loss would
be recognized when the sum of the expected future net cash flows is less than
the carrying amount of the asset.
OTHER ASSETS
The Company capitalizes and includes in other assets deferred financing
costs and the costs of acquiring patents and trademarks on its products.
Deferred financing costs are amortized over the term of the related debt.
Amortization on patents and trademarks is computed on the straight-line basis
over the lives of the patents or trademarks or the period of expected benefit.
In addition, the Company capitalizes legal costs associated with the pursuit of
third parties for infringement of certain of the Company's patents, copyrights
and trademarks when the Company is successful, or management believes it will be
successful, and that these costs will be recovered pursuant to SFAS No. 121.
These costs are amortized over the lives of the applicable patents, copyrights
and trademarks.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
identifiable tangible and intangible net assets of businesses acquired. Goodwill
is amortized on a straight-line basis over periods not exceeding 25 years. The
recoverability of carrying values of intangible assets is evaluated on a
recurring basis. The primary indicators are current and forecasted profitability
of the related acquired business.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," the asset
and liability accounts of the Company's non-U.S. subsidiaries are translated
into U.S. dollars using rates of exchange in effect at the balance sheet date.
Revenues and expenses are translated at exchange rates which approximate the
average rates prevailing during the year. The cumulative translation gains and
losses are a component of comprehensive income and included in stockholders'
equity.
REVENUE RECOGNITION
Revenues related to equipment rental and services are recognized as earned
over the terms of the contracts. Revenues from long-term leases classified as
sales-type leases are recognized upon delivery and installation of the
equipment. Revenues related to the sale of products are recognized upon shipment
of the equipment.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In assessing the fair value of financial instruments at September 30, 1997
and 1998, the Company has used available market information and other valuation
methodologies. Some judgement is necessarily required in interpreting market
data to develop the estimates of fair value, and, accordingly, the estimates are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange.
F-8
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The carrying amounts of cash, receivables, payables and long term
obligations approximated fair value as of September 30, 1997 and 1998.
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 settlement. The fair value of the
interest rate swaps, which are carried at zero value, at September 30, 1997 and
1998 were liabilities to the Company of approximately $100 and $940,
respectively.
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.
NET INCOME PER SHARE
Net income per share is calculated by dividing net income by the weighted
average shares outstanding for the applicable period. Potential common shares,
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.
ACCOUNTING STANDARDS CHANGES
In 1998, the Company adopted the disclosure only provisions of SFAS No. 123
"Accounting for Stock-based Compensation". The Company also adopted SFAS No.
128, "Earning per Share", which specifies the computation, presentation and
disclosure requirements for earnings per share. All per share amounts have been
computed using SFAS 128. Changes from previously reported amounts are not
material. Options to purchase 556,000 shares of Common Stock at prices ranging
from $7.875 to $13.20 were outstanding during 1998 but were not included in the
computation of diluted EPS because the exercise prices of the options were
greater than the average market price of the common shares. All of the options
were still outstanding at the end of fiscal 1998. In addition, the Company early
adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and displaying comprehensive income and its components.
Also in 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities", which requires that such costs be expensed as incurred. The
Company's practice has been to record the costs of bringing significant new
operations into operation as deferred charges and to amortize them over periods
of not more than five years. The Company early adopted the SOP effective October
1, 1997, and restated 1998 first quarter results to record a pre-tax charge of
$282 ($195 after taxes, or $0.02 per basic and diluted share) as a cumulative
effect of this accounting change.
F-9
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", will be effective in 1999 and requires the disclosure of certain
information about the Company's operating segments on a basis consistent with
the way the Company is organized and operated. This standard expands or modifies
disclosures and, accordingly, will have no effect on the Company's consolidated
financial position, results of operations or cash flows.
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. This standard, which establishes new accounting and
reporting standards for derivative financial instruments, must be adopted no
later than 2000. The Company is currently analyzing the effect of this standard
and does not expect it to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In 1998, AcSec issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This statement, which becomes
effective in 1999, requires that certain costs of developing or obtaining
software for internal use be capitalized. The Company presently capitalizes most
of the required costs, and consequently does not expect the statement to have
any material effect on the Company's consolidated financial position, results of
operations or cash flows.
OTHER
Certain reclassifications have been made to the September 30, 1996 and 1997
consolidated financial statements to conform to the presentation in the
September 30, 1998 consolidated financial statements.
NOTE C--INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Raw materials.............................................................. $ 3,483 $ 5,283
Work in progress........................................................... 350 616
Finished goods............................................................. 217 176
--------- ---------
$ 4,050 $ 6,075
--------- ---------
--------- ---------
</TABLE>
NOTE D--OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Patents and trademarks..................................................... $ 3,524 $ 5,686
Goodwill................................................................... 250 1,299
Deferred financing costs................................................... 1,469 426
Other, including sales-type lease receivables.............................. 871 1,144
--------- ---------
6,114 8,555
Less accumulated amortization.............................................. (948) (334)
--------- ---------
$ 5,166 $ 8,221
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE D--OTHER ASSETS: (CONTINUED)
Included in the amount of patents and trademarks are the amounts capitalized
by the Company relating to a patent infringement suit in which the Company was
the plaintiff. (See Note P).
NOTE E--LONG-TERM OBLIGATIONS:
Long-term obligations expressed in U.S. dollars consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Credit Facility:
Term loans:
U.S. dollars........................................................ $ 17,750 $ --
British pounds sterling............................................. 4,896 --
Japanese yen........................................................ 956 --
Discount............................................................ (458) --
--------- ---------
Net term loans.................................................... 23,144 --
Revolving lines of credit:
U.S. dollars........................................................ 12,500 34,000
British pounds sterling............................................. 3,966 8,500
Japanese yen........................................................ 1,809 981
French franc........................................................ -- 1,340
--------- ---------
Total revolving lines of credit................................... 18,275 44,821
Advances from distributors.............................................. 2,264 1,228
Obligations under capital leases with interest at 4.7% to 8.5%,
maturities through 2002............................................... 140 1,171
Other................................................................... 2,419 3,113
--------- ---------
46,242 50,333
Less current portion.................................................... (7,824) (3,049)
--------- ---------
$ 38,418 $ 47,284
--------- ---------
--------- ---------
</TABLE>
Based on the outstanding amounts under the Credit Facility as of September
30, 1997 and 1998, the weighted average interest rates were 8.88% and 7.80%,
respectively.
At September 30, 1997 and 1998, the Company had interest rate swap
agreements with two of its primary lenders relating to a notional principal
amount of $16,750 and $24,200, respectively, which effectively changes the
Company's variable LIBOR interest rate exposure on a substantial portion of its
F-11
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED)
U.S. dollar borrowings to a fixed weighted average interest rate of 7.79%. The
interest rate swap agreements mature as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Year one................................................................ $ 3,800 $ 4,200
Year two................................................................ 5,450 --
Year three.............................................................. 1,000 --
Year four............................................................... 6,500 --
Year five............................................................... -- 20,000
--------- ---------
$ 16,750 $ 24,200
--------- ---------
--------- ---------
</TABLE>
The Company is exposed to credit loss in the event of nonperformance by its
lenders who are the counter-parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the lenders who are
AAA rated financial institutions.
On December 19, 1997, the Company entered into a five-year $50,000
multicurrency revolving credit facility (the "New Credit Facility") and canceled
its existing Credit Facility. The initial $50,000 commitment on the New Credit
Facility, as amended in December 1998, (see Note P) decreases by $1,000 during
the third and fourth quarters of fiscal 1999 and $1,500 per quarter thereafter
through maturity. Borrowings under the New Credit Facility bear interest at the
lenders base rate or LIBOR plus a rate margin ranging from 1.00% to 3.50% based
upon the Company's ratio of Adjusted Funded Debt to EBITDA (as defined in the
credit agreement) and are secured by substantially all of the assets owned by
the Company's domestic subsidiaries and a pledge of 65% of the capital stock of
the Company's foreign subsidiaries. A commitment fee is charged on the average
daily unused portion of the New Credit Facility at a rate ranging from 0.20% to
0.50% per annum based upon the ratio of Adjusted Funded Debt to EBITDA. The New
Credit Facility contains compliance covenants, including requirements that the
Company achieve certain financial ratios. In addition, the New Credit Facility
places limitations on annual capital expenditures, on the ability to incur
additional indebtedness, make certain loans or investments, sell assets, pay
dividends or reacquire the Company's stock.
In connection with certain distributor agreements, the Company has received
advances to provide the necessary funds for construction of the leased lighting
systems (see Note H). The remaining balances outstanding under such borrowings
at September 30, 1997 and 1998, were $2,264 and $1,228, respectively. Equipment
with a net book value of approximately $6,600 at September 30, 1998 ($8,200 at
September 30, 1997) 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, 1997 and 1998. Substantially all
the advances are nonrecourse and are repaid from the Company's portion of the
rental revenue earned on the associated leases.
F-12
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED)
Maturities of long-term obligations, including capital lease obligations,
are approximately as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Year one................................................................ $ 7,824 $ 3,049
Year two................................................................ 5,224 4,488
Year three.............................................................. 4,506 6,610
Year four............................................................... 28,688 6,186
Year five............................................................... -- 30,000
--------- ---------
$ 46,242 $ 50,333
--------- ---------
--------- ---------
</TABLE>
NOTE F--COMMITMENTS AND CONTINGENCIES:
In the ordinary course of its business, the Company is from time to time
threatened with or named as a defendant in various lawsuits, including patent
infringement claims. Additionally, the Company has filed lawsuits claiming
infringements of its patents by third parties for which the Company has been
subject to counterclaims. Management does not believe that these lawsuits will
have a significant impact on the Company's financial position or results of
operations. (See Note P).
NOTE G--STOCKHOLDERS' EQUITY:
On October 15, 1997, in conjunction with the Company's reincorporation in
Delaware and an initial public offering, the Board of Directors of the Company
created a new class of common stock and authorized 40,000,000 shares. As a
result of the reincorporation, stockholders received 3.76368 shares of common
stock for each share of the Company's Class A common stock and Class B common
stock held by the stockholders. Share amounts and the weighted average shares
outstanding for all periods presented give effect to the recapitalization of the
common stock. In addition, the Company authorized 10,000,000 shares of preferred
stock which the Company's Board of Directors may issue for such consideration
and on such terms as it deems desirable, including voting and conversion rights
that could adversely affect the holders of common stock.
The Company filed a Registration Statement (Commission file no. 333-33559)
for the public offering of 2,000,000 shares of common stock with the Securities
and Exchange Commission, which became effective October 16, 1997. The managing
underwriters were A.G. Edwards & Sons, Inc. and EVEREN Securities, Inc. The
shares were sold for $12.00 per share for an aggregate amount of $24,000. All of
the shares sold were offered by the Company.
F-13
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
Expenses incurred for the Company's account in connection with the issuance
and distribution of the common stock registered were as follows:
<TABLE>
<S> <C>
Underwriting discounts and commissions.............................. $ 1,680
Other Expenses...................................................... 1,038(1)
---------
Total............................................................... $ 2,718
---------
---------
</TABLE>
- ------------------------
(1) There were no direct or indirect payments to directors, officers or persons
owning ten percent or more of the Company's securities, or their associates
or affiliates. However, out-of-pocket expenses (i.e., attorneys,
accountants, travel, lodging and meals) incurred directly in connection with
the offering were reimbursed and are included in other expenses.
The net offering proceeds to the Company were $21,282, all of which was used
to repay indebtedness under the Company's Credit Facility.
The Company adopted a fixed option plan during fiscal 1998 which reserves
shares of common stock for issuance to executives, key employees and directors.
No compensation cost has been recognized for the stock options. Had compensation
cost for the Company's stock options been determined based on the fair value at
the grant date for awards in 1998 consistent with the provisions in SFAS No.
123, the Company's net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Net income (loss)................................................................... $ (3,911)
Basic net income (loss) per share................................................... $ (.51)
Diluted net income (loss) per share................................................. $ (.51)
</TABLE>
The weighted-average per share value of the options granted during 1998 is
estimated at $4.44 on the date of grant. No options were granted prior to 1998.
The fair values were determined using a Black-Scholes option pricing model with
the following assumptions:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Dividend yield........................................................................ 0
Volatility............................................................................ 30%
Risk-free interest rate............................................................... 6%
Expected life......................................................................... 5 yrs.
</TABLE>
Under the plan, the total number of stock options that may be granted is
800,000. The price of the options granted pursuant to the plan will be no less
than the fair market value of the common stock on the
F-14
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE G--STOCKHOLDERS' EQUITY: (CONTINUED)
date of grant. The options vest over a two-month to five-year period and expire
ten years from the date of grant.
<TABLE>
<CAPTION>
1998
------------------------
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
(000) PRICE
----------- -----------
<S> <C> <C>
Outstanding--Beginning of year........................................... -- $ --
Granted.................................................................. 576 12.00
Exercised................................................................ -- --
Forfeited................................................................ (20) 12.00
Canceled or expired...................................................... -- --
--- -----------
Outstanding--End of year................................................. 556(a) 12.00
---
---
Exercisable--End of year................................................. 8(a) 13.20
---
---
</TABLE>
- ------------------------
(a) At September 30, 1998, exercise prices, number of options outstanding and
remaining contractual life are shown in the following table:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE REMAINING AVERAGE
NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICE RANGE (000) PRICE LIFE (YEARS) (000) PRICE
- ------------------------------------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$7.875-$11.875............................. 18 $ 9.21 9.4 -- $ --
$12.00-$13.20.............................. 538 12.09 9.0 8 13.20
</TABLE>
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). The terms of the warrants also provide for
registration rights and adjustments to the price and number of shares in certain
circumstances. The warrants expire on December 31, 2004. As of September 30,
1998, no warrants had been exercised.
NOTE H--LEASES:
AS LESSOR
As lessor, the Company has agreements whereby it has leased certain lighting
equipment to various distributors. These agreements are accounted for as
operating leases. Under the terms of these agreements, these distributors have
the exclusive right for a specified time period to market the lighting
F-15
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE H--LEASES: (CONTINUED)
equipment by subrental within defined territories. The distributors' lease
payments to the Company are based on a pre-determined percentage of the gross
rental revenue received by the distributors from their subrental of the lighting
equipment and amounted to approximately $4,893, $4,197 and $2,693 for the years
ended September 30, 1996, 1997, and 1998, respectively. The lighting equipment
under these leasing arrangements had a net book value of approximately $7,473,
$8,231 and $6,594 at September 30, 1996, 1997 and 1998, 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 $4,544,
$8,699 and $1,154 and cost of products and services of $2,223, $1,955 and $369
for the years ended September 30, 1996, 1997 and 1998, respectively, related to
sales-type leases.
Equipment under leases which do not qualify as sales-type leases, including
distributor leases and dealer leases, are accounted for as operating leases.
Under dealer leases, dealers receive exclusive rights to subrent the Company's
lighting equipment in certain geographic areas. The Company provides the
lighting equipment to the dealers, who pay a monthly rental fee to the Company.
Future minimum lease payments receivable, including those which relate to
sales-type leases and are included in other assets at September 30, 1998, are as
follows:
<TABLE>
<CAPTION>
SALE-TYPE OPERATING
----------- -----------
<S> <C> <C>
Year one............................................................... $ 60 $ 2,529
Year two............................................................... -- 2,186
Year three............................................................. -- 1,868
Year four.............................................................. -- 1,600
Year five.............................................................. -- 1,424
----- -----------
Total minimum lease payments........................................... 60 $ 9,607
-----------
-----------
Less amount representing interest...................................... (1)
-----
Present value of net minimum lease payments............................ 59
Less current portion................................................... (59)
-----
Long-term lease receivables............................................ $ --
-----
-----
</TABLE>
AS LESSEE
The Company leases certain computers and equipment. The following is a
summary of assets held under capital leases:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Computers and equipment under capital leases............................. $ 2,563 $ 4,455
Less accumulated depreciation............................................ (2,274) (3,090)
--------- ---------
Property under capital leases, net....................................... $ 289 $ 1,365
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE H--LEASES: (CONTINUED)
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 at September 30, 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
Year one................................................................. $ 488 $ 709
Year two................................................................. 386 291
Year three............................................................... 195 123
Year four................................................................ 186 84
Year five................................................................ -- 44
Thereafter............................................................... -- 17
--------- -----------
Total minimum lease payments............................................. 1,255 $ 1,268
-----------
-----------
Less amount representing interest........................................ (84)
---------
Present value of net minimum lease payments.............................. 1,171
Less current portion..................................................... (440)
---------
Long-term lease obligations.............................................. $ 731
---------
---------
</TABLE>
Rental expense for the years ended September 30, 1996, 1997 and 1998 was
$2,397, $2,616 and $2,809, respectively.
In December 1995, the Company entered into a lease with an unaffiliated
developer ("Lessor") for land. Rent expense under this lease was $319, $388 and
$388 for the years ended September 30, 1996, 1997 and 1998. In December 1998,
(See Note P) the lease was canceled as a result of the sale of the land by the
Lessor, resulting in a gain to the Company of approximately $500 to be recorded
in fiscal 1999. Future minimum rental commitments for this lease have not been
included in the amounts above as a result of the subsequent cancellation of the
lease.
NOTE I--IMPAIRMENT OF ASSETS:
During 1998, the Company made a strategic decision to dispose of it's
Irideon-Registered Trademark- architectural automated lighting product line. As
a result of this decision, the Irideon-Registered Trademark- assets were written
down to their net realizable value in accordance with SFAS No. 121. This
resulted in a pre-tax charge of $3,542 (or $2,179 after taxes, $0.28 per basic
and diluted share).
NOTE J--RESTRUCTURING COSTS:
In the fourth quarter of 1998, the Company recorded a one-time pre-tax
charge of $1,080 (or $664 after taxes, $0.09 per basic and diluted share) for
the estimated costs of restructuring the Company's operations. The costs include
the cost of employee and lease terminations. The costs of the workforce
reduction are comprised primarily of severance payments and other employee
related costs for approximately 75 people. Communication of these planned
workforce reductions took place on or before September 30, 1998 and severance
payments are expected to be substantially complete by the end of 1999. The lease
termination costs represent the cost of terminating an operating lease as a
result of relocating the Company's manufacturing operations.
F-17
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE K--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal.................................................. $ 100 $ -- $ --
State......................................................... 54 38 33
International................................................. 957 1,408 917
Deferred:
U.S. Federal.................................................. 992 927 (2,244)
State......................................................... 135 367 (264)
International................................................. -- 176 (807)
--------- --------- ---------
Total provision (benefit) for income taxes...................... 2,238 2,916 (2,365)
Less: Deferred income taxes related to extraordinary
losses.................................................... -- -- 452
Deferred income taxes related to cumulative effect
of change in accounting method........................... -- -- 128
--------- --------- ---------
Total provision (benefit) excluding income taxes related to
extraordinary losses and cumulative effect of change in
accounting method............................................. $ 2,238 $ 2,916 $ (1,785)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of income taxes computed at the U.S. Federal statutory tax
rate to the provision for income tax is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense at U.S. Federal statutory rate............... $ 1,821 $ 2,463 $ (2,036)
International taxes............................................. 255 287 (167)
State taxes..................................................... 189 267 (240)
Foreign and general business tax credits........................ (100) -- --
Other--primarily permanent differences.......................... 73 (101) 78
--------- --------- ---------
$ 2,238 $ 2,916 $ (2,365)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of deductible temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income
F-18
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE K--INCOME TAXES: (CONTINUED)
tax purposes. The tax effects of significant items comprising the Company's net
deferred income taxes, consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Deferred tax asset
Foreign tax credit carryover.......................................... $ 2,678 $ 2,615
Net operating loss carryover.......................................... 440 2,406
Alternative minimum tax credit carryover.............................. 507 507
Reserve for loss on sale of Irideon................................... -- 1,345
Restructuring reserve................................................. -- 352
Other tax asset items................................................. 537 1,861
Deferred tax liability
Depreciation.......................................................... (8,940) (10,549)
Other tax liability items............................................. (1,701) (1,701)
--------- ----------
Total................................................................... (6,479) (3,164)
Less: Valuation allowance............................................... (544) (544)
--------- ----------
Net deferred income taxes............................................... $ (7,023) $ (3,708)
--------- ----------
--------- ----------
</TABLE>
For tax purposes, the Company has approximately $2,615 of foreign tax
credits that expire in 2000 through 2002. In addition, approximately $507 of
alternative minimum tax credits (which do not expire) are available to offset
future regular tax liability. The benefit of this tax credit carryforward has
been recognized for financial statement purposes as part of deferred taxes. In
1997 and 1998, there was a valuation allowance of $544 related to foreign tax
credits.
International income taxes relate to the Company's operations in England,
Japan, Belgium, Sweden and Hong Kong, as well as to withholding taxes on revenue
generated by the Company's foreign distributors.
NOTE L--EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution 401(k) plan in which substantially
all its U.S. employees can elect to be participants. Under the terms of the
401(k) plan, employees can defer up to 20% of their earnings up to the permitted
maximum as defined by IRS regulations. The Company matches 50% of the employee's
contribution up to 5% of the employee's earnings during the plan year. During
the years ended September 30, 1996, 1997 and 1998, the Company's cost to match
employee contributions was approximately $242, $257 and $274, respectively.
Substantially all employees of the Company's London-based operations may
elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a
defined contribution plan under which employees may contribute up to 3% of their
base salaries. The Company makes contributions at a rate of 200% of the employee
contributions, with additional contributions made for certain key employees. The
Company incurred costs of $156, $203 and $231, representing matching
contributions for the years ended September 30, 1996, 1997 and 1998,
respectively.
F-19
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE L--EMPLOYEE BENEFIT PLANS: (CONTINUED)
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.
In 1996, the Company contributed to the ESOP and ESEP an aggregate of 14,965
shares of Common Stock valued at $250. These shares were considered as
outstanding for the purpose of calculating net income per share. The dividends
on these shares have been recorded as a reduction of retained earnings. In 1997,
the Company accrued $250 and subsequently in fiscal 1998 made a cash
contribution to the Trustee who in turn purchased 68,000 shares of Common Stock
on the open market. In 1998, the Company has accrued $250 for contribution to
the ESOP and ESEP.
F-20
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE M--OPERATIONS BY GEOGRAPHIC AREA:
The income statement and balance sheet information by geographic area is
summarized in the following table:
<TABLE>
<CAPTION>
NORTH AMERICA ASIA EUROPE INTERCOMPANY TOTAL
-------------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
September 30, 1996
Net Revenues................ $ 45,253 $ 11,401 $ 26,584 $ (6,100) $ 77,138
Net Income.................. 1,590 1,153 376 -- 3,119
September 30, 1997
Net Revenues................ $ 54,179 $ 12,124 $ 32,948 $ (8,593) $ 90,658
Net Income.................. 2,097 1,242 990 -- 4,329
September 30, 1998
Net Revenues................ $ 53,992 $ 9,858 $ 30,565 $ (6,039) $ 88,376
Net Income (Loss)........... (2,916) 625 (1,331) -- (3,622)
</TABLE>
<TABLE>
<CAPTION>
NORTH AMERICA ASIA EUROPE INTERCOMPANY TOTAL
-------------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
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
September 30, 1997
Assets..................... $ 84,882 $ 5,716 $ 18,406 $ (12,300) $ 96,704
Liabilities................ 59,350 2,102 15,147 (7,436) 69,163
September 30, 1998
Assets..................... $ 99,197 $ 5,599 $ 17,477 $ (7,646) $ 114,627
Liabilities................ 55,380 1,756 14,996 (2,209) 69,923
</TABLE>
NOTE N--RELATED PARTY TRANSACTIONS:
Certain directors provided consulting services to the Company and received
fees totaling approximately $220, $234 and $241 for the years ended September
30, 1996, 1997 and 1998, respectively.
At September 30, 1997 and 1998, the Company had notes receivable from
stockholders totaling $176 and $82, respectively, related to common stock
purchases. The notes bear interest at various rates, mature at various times and
are collateralized by 43,282 shares of Common Stock.
The Company received from certain stockholders of the Company $0, $2,623 and
$2,303 in the years ended September 30, 1996, 1997 and 1998, respectively, for
the rental of automated lighting products and other services.
F-21
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE O--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for
the years ended September 30, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996
--------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707
Operating income........................... 1,186 915 2,285 4,063
Net income................................. 209 66 861 1,983
Net income per diluted share............... 0.03 0.01 0.15 0.34
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
--------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 22,326 $ 22,384 $ 22,185 $ 23,763
Operating income........................... 2,424 2,265 2,954 3,328
Net income................................. 926 820 1,210 1,373
Net income per diluted share............... 0.16 0.14 0.21 0.23
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
--------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
Revenues................................... $ 22,519 $ 19,227 $ 22,529 $ 24,101
Operating income (loss).................... 2,808 (128) 662 (4,999)
Net income (loss).......................... 326 (421) 0 (3,527)
Net income (loss) per diluted share........ 0.04 (0.05) 0.00 (0.46)
</TABLE>
During the fourth quarter of 1997, the Company recorded a reduction of cost
of sales of $675 related to a change in estimates related to cost of equipment
sold under a sales-type lease contract executed in the third quarter. The
Company early adopted SOP 98-5 and restated 1998 first quarter results to record
a pre-tax charge of $282 as a cumulative effect of change in accounting
principle.
NOTE P--SUBSEQUENT EVENTS
In December 1998, the Company amended the New Credit Facility. The amendment
granted a security interest in substantially all of the Company's domestic
assets and revised the interest rate, commitment fees and compliance covenants
and placed limitations on annual capital expenditures, the Company's ability to
incur additional indebtedness and grant liens and included other restrictions.
In December 1995, the Company entered into a lease with an unaffiliated land
developer ("Lessor"). In December 1998, the lease was canceled as a result of
the sale of the land by the Lessor, resulting in a gain to the Company of
approximately $500 to be recorded in fiscal 1999.
In August 1995, the Company brought suit asserting a number of claims of
infringement of several of its patents by High End in the United States District
Court for the Northern District of Texas seeking monetary damages and injunctive
relief to prevent future patent infringement. In December 1998, the court
approved a negotiated settlement between the Company and High End, the specific
terms of which
F-22
<PAGE>
VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE P--SUBSEQUENT EVENTS (CONTINUED)
are confidential but included cash paid to the Company, a cross license of
certain patents and authorization for High End to continue to sell all of the
products that were the subject of the suit. The settlement, which will be
recorded in fiscal 1999, does not affect the sale or use of any of the Company's
or High End's products or services that existed at the time of settlement.
F-23
<PAGE>
AMENDMENT NO. 3 TO
CREDIT AGREEMENT
THIS AMENDMENT NO. 3 TO CREDIT AGREEMENT (this "AMENDMENT")
effective as of September 30, 1998, by and among VARI-LITE INTERNATIONAL,
INC., a Delaware corporation (the "BORROWER"), SUNTRUST BANK, ATLANTA, BROWN
BROTHERS HARRIMAN & CO., CHASE BANK OF TEXAS, N.A. (FORMERLY KNOWN AS TEXAS
COMMERCE BANK NATIONAL ASSOCIATION), COMERICA BANK-TEXAS and THE FIRST
NATIONAL BANK OF CHICAGO (collectively, the "LENDERS"), SUNTRUST BANK,
ATLANTA, as agent and collateral agent for the Lenders (in such capacities,
the "AGENT" and "COLLATERAL AGENT", respectively), and BROWN BROTHERS
HARRIMAN & CO, as co-agent for the Lenders (in such capacity, the "CO-AGENT").
W I T N E S S E T H:
WHEREAS, BORROWER, THE LENDERS, THE AGENT, THE COLLATERAL AGENT,
AND THE CO-AGENT ARE PARTIES TO A CERTAIN MULTICURRENCY CREDIT AGREEMENT
DATED AS OF DECEMBER 19, 1997, AS AMENDED BY A CERTAIN AMENDMENT NO. 1 TO
CREDIT AGREEMENT DATED AS OF APRIL 21, 1998, AND AS AMENDED BY A CERTAIN
AMENDMENT NO. 2 TO CREDIT AGREEMENT DATED AS OF JULY 31, 1998 (AS SO AMENDED,
THE "CREDIT AGREEMENT"; defined terms used herein without definition shall
have the meanings ascribed to such terms in the Credit Agreement);
WHEREAS, Borrower has requested, and the Lenders have agreed, that
the Credit Agreement be amended to make certain modifications therein, all as
more specifically set forth below;
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein and other valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending
to be legally bound, agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the
satisfaction of the conditions precedent set forth in Section 2 hereof, and
effective as of the Effective Date (as hereinafter defined), the Credit
Agreement is hereby amended as follows:
1.1 SECTION 1.01 of the Credit Agreement is hereby amended by
deleting in their entirety the defined terms "ADJUSTED LIBO RATE", "ADJUSTED
SPECIAL LIBO RATE", "APPLICABLE COMMITMENT FEE RATE", "APPLICABLE MARGIN",
"BUSINESS DAY", "COMMITMENT", "CONSOLIDATED EBIT", "CONSOLIDATED RENTAL
EXPENSE", "CURRENCY", "FIXED CHARGE COVERAGE RATIO", "MASTER SYNDICATED LOAN
COMMITMENT", "MULTICURRENCY
<PAGE>
SYNDICATED LOAN SUBCOMMITMENT", "PLEDGE AGREEMENTS", "PLEDGED STOCK",
"SECURITY DOCUMENTS", "SWING LINE ADVANCE", "SWING LINE BORROWING NOTICE",
"SWING LINE COMMITMENT", "SWING LINE LENDER", "SWING LINE LOANS", and "SWING
LINE NOTE" and their accompanying definitions, and substituting in lieu
thereof the following defined terms and accompanying definitions:
"ADJUSTED LIBO RATE" shall mean, with respect to each Interest Period
for a Euro Advance, the sum of (i) the rate obtained by dividing (a) LIBOR
for such Interest Period by (b) a percentage equal to 1 MINUS the then
stated maximum rate (stated as a decimal) of all reserves requirements
(including, without limitation, any marginal, emergency, supplemental,
special or other reserves) applicable to any member bank of the Federal
Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D (or against any successor category of liabilities as defined
in Regulation D), PLUS (ii) a percentage sufficient to compensate the
Lenders for the cost of complying with any reserves, liquidity and/or
special deposit requirements directly or indirectly affecting the
maintenance or funding of such Advance imposed by the Bank of England or
any other central bank or governmental or quasi-governmental authority of
any jurisdiction that is an issuer of a Currency or the Council of the
European Union.
"ADJUSTED SPECIAL LIBO RATE" shall mean, with respect to a Euro
Advance, the sum of (i) the rate obtained by dividing (a) Special LIBOR as
in effect from time to time by (b) a percentage equal to 1 MINUS the then
stated maximum rate (stated as a decimal) of all reserves requirements
(including, without limitation, any marginal, emergency, supplemental,
special or other reserves) applicable to any member bank of the Federal
Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D (or against any successor category of liabilities as defined
in Regulation D), PLUS (ii) a percentage sufficient to compensate the
Lenders for the cost of complying with any reserves, liquidity and/or
special deposit requirements directly or indirectly affecting the
maintenance or funding of such Advance imposed by the Bank of England or
any other central bank or governmental or quasi-governmental authority of
any jurisdiction that is an issuer of a Currency or the Council of the
European Union.
"APPLICABLE COMMITMENT FEE RATE" shall mean (x) through September 30,
1998, the rate determined pursuant to the definition of "Applicable
Commitment Fee Rate" as defined in the Agreement immediately prior to the
effectiveness of Amendment No. 3, and (y) on and after October 1, 1998, the
rate for any date to be used to calculate commitment fees payable by
Borrower pursuant to Section 3.05, expressed as a percentage and determined
from the chart set forth below based on Borrower's Adjusted Fund
Debt/EBITDA Ratio calculated as the relevant determination date:
<PAGE>
<TABLE>
<CAPTION>
ADJUSTED FUNDED APPLICABLE COMMITMENT
DEBT/EBITDA RATIO FEE RATE
----------------------------------------------------
<S> <C>
Greater than or equal to
2.50:1.00 0.500%
Less than 2.50:1.00, but
greater than or equal to
2.00:1.00 0.375%
Less than 2.00:1.00, but
greater than or equal to
1.00:1.00 0.250%
Less than 1.00:1.00 0.200%
</TABLE>
The Adjusted Funded Debt/EBITDA Ratio and the resulting Applicable
Commitment Fee Rate shall be determined quarterly, based upon the financial
statements delivered to the Lenders pursuant to Section 6.07(a) or Section
6.07(b) hereof, as the case may be, in accordance with Section 6.08(b),
with such Applicable Commitment Fee Rate to be effective with respect to
calculations based upon the financial statements delivered pursuant to
Section 6.07 as of the 1st day of the 2nd fiscal quarter immediately
following the fiscal quarter for which such financial statements are
delivered (for example, the Applicable Commitment Fee Rate effective as of
the 1st day of the 3rd fiscal quarter shall be calculated based on the
financial statements delivered for the 1st fiscal quarter of Borrower).
Notwithstanding the foregoing, at any time during which Borrower has failed
to deliver the financial statements and certificates when required by
Section 6.07(a), (b), and (c), as applicable (and the cure period set forth
in Section 8.02 hereof shall have expired), the Applicable Commitment Fee
Rate shall be 0.500%.
"APPLICABLE MARGIN" shall mean (x) with respect to all outstanding
Euro Advances through September 30, 1998, the percentage determined
pursuant to the definition of "Applicable Margin" as defined in the
Agreement immediately prior to the effectiveness of Amendment No. 3, and
(y) on and after October 1, 1998, with respect to all outstanding Euro
Advances for any day, the applicable percentage determined from the chart
set forth below based on Borrower's Adjusted Funded Debt/EBITDA Ratio
calculated as of the relevant determination date:
<TABLE>
<CAPTION>
ADJUSTED FUNDED APPLICABLE
DEBT/EBITDA RATIO MARGIN
---------------------------------------------
<S> <C>
Greater than or equal to
<PAGE>
3.00:1.00 3.50%
Less than 3.00:1.00, but
greater than or equal to
2.50:1.00 3.00%
Less than 2.50:1.00, but
greater than or equal to
2.00:1.00 2.50%
Less than 2.00:1.00, but
greater than or equal to
1.50:1.00 2.00%
Less than 1.50:1.00, but
greater than or equal to
1.00:1.00 1.50%
Less than 1.00:1.00 1.00%
</TABLE>
The Adjusted Funded Debt/EBITDA Ratio and the resulting Applicable Margin
shall be determined quarterly, based upon the financial statements
delivered to the Lenders pursuant to Section 6.07(a) or Section 6.07(b)
hereof, as the case may be, in accordance with Section 6.08(b), with such
Applicable Margin to be effective with respect to calculations based upon
the financial statements delivered pursuant to Section 6.07 as of the first
day of the second fiscal quarter immediately following the fiscal quarter
for which such financial statements are delivered (for example, the
Applicable Margin effective with respect to all outstanding Euro Advances
as of the first day of the third fiscal quarter shall be calculated based
upon the financial statements delivered for the first fiscal quarter of
Borrower). Notwithstanding the foregoing, at any time during which
Borrower has failed to deliver the financial statements and certificates
when required by Section 6.07(a), (b), and (c), as applicable (and the cure
period set forth in Section 8.02 hereof shall have expired), the Applicable
Margin with respect to the Euro Advances then outstanding shall be 3.50%.
"BUSINESS DAY" shall mean (i) with respect to any borrowing, payment
or rate selection of Euro Advances, a day (other than a Saturday or Sunday)
on which banks generally are open in Atlanta, Georgia, Dallas, Texas, and
New York, New York for the conduct of substantially all of their commercial
lending activities and on which dealings in Dollars and each of the
Currencies are carried on in the London interbank market (and, if the
Advances which are the subject of such borrowing, payment or rate selection
are denominated in the EURO, a day upon which such clearing system as is
determined by the Agent to be suitable for clearing or settlement of the
EURO is open for business), and (ii) for all other
<PAGE>
purposes, a day (other than a Saturday or Sunday) on which banks generally
are open in Atlanta, Georgia, Dallas, Texas, and New York, New York for
the conduct of substantially all of their commercial lending activities.
"COMMITMENT" shall mean (i) for any Lender at any time, any of its
Master Syndicated Loan Commitment or Multicurrency Syndicated Loan
Subcommitment, and (ii) for any Swing Line Lender at any time, its Swing
Line Commitment, in each case as the context may require.
"CONSOLIDATED EBIT" shall mean, for any fiscal period of Borrower, an
amount equal to the sum for such fiscal period of (i) Consolidated Net
Income (Loss), PLUS (ii) to the extent subtracted in determining such
Consolidated Net Income (Loss), (x) provisions for taxes based on income,
and (y) Consolidated Interest Expense for such period, and MINUS (iii) any
items of gain (or PLUS any items of loss) not realized in the ordinary
course of business that were included (or any items of loss that had been
excluded) in determining such Consolidated Net Income (Loss), including
without limitation, one-time gains or losses associated with the sale of
any Subsidiary of Borrower and one-time gains or losses recognized in
connection with the settlement of any pending litigation; PROVIDED,
HOWEVER, that in connection with the sale of Irideon, Inc. the amount of
loss that may be used to increase Consolidated EBIT pursuant to the
foregoing clause (iii) shall not exceed $4,000,000 in the aggregate. For
purposes of calculating Consolidated EBIT, to the extent that the net
income (loss) of any Person acquired or consolidated with a Consolidated
Company is included in the calculation of Consolidated Net Income (Loss),
corresponding additions and deductions of the types described in clauses
(ii) and (iii) of the preceding sentence shall be made pursuant to this
definition for such Person in accordance with GAAP.
"CONSOLIDATED RENTAL EXPENSE" shall mean, as at any date of
determination, total rental expense of the Consolidated Companies
determined on a consolidated basis in accordance with GAAP, but excluding
(i) Synthetic Lease Obligations, and (ii) rental expense for equipment not
being leased together with, and included in the same rental or lease
agreement as, any related real property.
"CURRENCY" shall mean, with respect to the Multicurrency Syndicated
Loan Subcommitments, each of the following currencies, so long as such
currencies remain Eligible Currencies: British pounds sterling, Belgian
francs, German marks, Japanese yen, French francs, and from and after
becoming generally available in the international currency and exchange
markets, the EURO, as selected by Borrower. For purposes of this
definition, each of the specific currencies referred to in the immediately
preceding sentence shall mean and be deemed to refer to the lawful currency
of the jurisdiction referred to in connection with such currency, E.G.,
"Japanese yen" means the lawful currency of Japan.
<PAGE>
"FIXED CHARGE COVERAGE RATIO" shall mean the ratio of (i) Consolidated
EBITDAR to (ii) the sum of (x) Consolidated Interest Expense, (y)
Consolidated Rental Expense, and (z) Capital Expenditures of the
Consolidated Companies, in each case as determined on the last day of each
fiscal quarter of Borrower on a consolidated basis for the quarter then
ending and three immediately preceding fiscal quarters.
"MASTER SYNDICATED LOAN COMMITMENT" shall mean, at any time for each
Lender, the amount of such commitment as in effect at such time as set
forth under such Lender's name on SCHEDULE 2.01 (PART I) attached to
Amendment No. 3, as the same may be increased or decreased from time to
time as a result of any reduction thereof pursuant to Section 2.05, any
amendment thereof pursuant to Section 10.02, or any assignment thereof
pursuant to Section 10.06.
"MULTICURRENCY SYNDICATED LOAN SUBCOMMITMENT" shall mean, at any time
for each Lender, the amount of such commitment as in effect at such time as
set forth under such Lender's name on SCHEDULE 2.01 (PART II) attached to
Amendment No. 3, as the same may be increased or decreased from time to
time as a result of any reduction thereof pursuant to Section 2.05, any
amendment thereof pursuant to Section 10.02, or any assignment thereof
pursuant to Section 10.06.
"PLEDGE AGREEMENTS" shall mean, collectively, (i) that certain Pledge
and Security Agreement dated as of September 30, 1998, from Borrower in
favor of the Collateral Agent for the ratable benefit of the Lenders in
respect of shares of Vari-Lite Asia, Inc., (ii) that certain Deed of Pledge
dated as of 30 September 1998 from Borrower in favor of the Collateral
Agent for the ratable benefit of the Lenders in respect of shares of
Vari-Lite Europe Holdings Limited, (iii) the Domestic Pledge Agreement,
and (iv) each other pledge agreement, security agreement deed of charge,
and similar instrument from Borrower or any of its Subsidiaries in favor
of the Collateral Agent for the ratable benefit of the Lenders delivered
pursuant to the requirements of Section 6.10 hereof, in each case as the
same may be amended, restated and supplemented from time to time.
"PLEDGED STOCK" shall mean, collectively, (i) not less than 65% of all
issued and outstanding capital stock, together with not less than 65% of
all warrants, stock options, and other purchase and conversion rights in
respect of such capital stock, of Vari-Lite Asia, Inc. and Vari-Lite Europe
Holdings Limited, (ii) 100% of all issued and outstanding capital stock or
other equity or ownership interests, together with not less than 100% of
all warrants, options, and other purchase and conversion rights in respect
of such capital stock or other equity or ownership interests, of each
Domestic Subsidiary of Borrower whose capital stock or other equity or
ownership interests are subject to a Pledge Agreement, and (iii) not less
than 65% of all issued and outstanding capital stock or other equity or
ownership interests, together with not less than 65% of all warrants,
options, and other purchase and conversion rights in respect of such
capital stock or other
<PAGE>
equity or ownership interest, of each Foreign Subsidiary whose capital
stock or other equity or ownership interests are subject to a Pledge
Agreement.
"SECURITY DOCUMENTS" shall mean, collectively, the Guaranty Agreement,
the Pledge Agreements, the Borrower Security Agreement, the Subsidiary
Security Agreement, and each other guaranty agreement, mortgage, deed of
trust, security agreement, pledge agreement, and other security or
collateral document guaranteeing or securing the Obligations, as the same
may be amended, restated, and supplemented from time to time.
"SWING LINE ADVANCE" shall mean a Borrowing pursuant to Section 2.03
consisting of a Swing Line Loan (which may be made either as a Base Rate
Advance or as a Transaction Rate Advance) made to Borrower on the same date
and interest rate basis by the same Swing Line Lender and, if made as a
Fixed Rate Advance, for the same Interest Period.
"SWING LINE BORROWING NOTICE" shall mean the notice given by Borrower
to a Swing Line Lender (with a copy to the Agent) requesting a Swing Line
Advance as provided in Section 2.03(c).
"SWING LINE COMMITMENT" shall mean the commitment of each Swing Line
Lender to make Swing Line Loans in an aggregate principal amount at any
time outstanding not to exceed the amount set forth under such Swing Line
Lender's name on SCHEDULE 2.01 (PART III) attached to Amendment No. 3.
"SWING LINE LENDER" shall mean (i) SunTrust Bank, Atlanta, (ii) Chase
Bank of Texas, N.A., and (iii) each other Lender extending to Borrower a
Swing Line Commitment hereunder, or all of such Lenders, as the context may
require.
"SWING LINE LOANS" shall mean, collectively, the loans made to
Borrower pursuant to Section 2.03.
"SWING LINE NOTE" shall mean the promissory notes evidencing the Swing
Line Loans made by each Swing Line Lender, substantially in the form of
EXHIBIT N attached to Amendment No. 3 and duly completed in accordance with
the terms hereof.
1.2 SECTION 1.01 of the Credit Agreement is hereby amended by
adding the following defined terms and accompanying definitions in proper
alphabetical order:
"AMENDMENT NO. 3" shall mean that certain Amendment No. 3 to Credit
Agreement effective as of September 30, 1998, by and among Borrower, the
Agent and Collateral Agent, the Co-Agent, and the Lenders, as the same may
be amended, restated and supplemented from time to time.
<PAGE>
"BORROWER SECURITY AGREEMENT" shall mean that certain Borrower
Security Agreement dated as of November __, 1998, executed by Borrower and
granting to the Collateral Agent for the ratable benefit of the Lenders, in
the form of EXHIBIT L attached to Amendment No. 3, first priority Liens on
the personal property of Borrower as described therein, as the same may be
amended, restated and supplemented from time to time.
"BRAZOS LEASE" shall mean the Ground Lease Agreement dated as of
December 21, 1995, among Brazos Beltline Development, Inc., Vari-Lite,
Inc., Showco, Inc., Showco Creative Services, Inc., Concert Production
Lighting, Inc., and Trideon, Inc., as the same may have been or hereafter
be amended, restated and supplemented from time to time.
"CAPITAL EXPENDITURES" shall mean, for any period and without
duplication, the sum of all amounts that would, in conformity with GAAP, be
included as (i) additions to property, plant and equipment (including
renewals, improvements and replacements thereof) and (ii) other capital
expenditures on a consolidated statement of cash flows for the Consolidated
Companies for such period.
"CONSOLIDATED EBITDAR" shall mean, for any fiscal period of Borrower,
an amount equal to Consolidated EBITDA PLUS, to the extent subtracted in
determining Consolidated Net Income (Loss) in relation thereto,
Consolidated Rental Expense of the Consolidated Companies, as determined
for such period on a consolidated basis in accordance with GAAP.
"CONTRIBUTION AGREEMENT SUPPLEMENT" shall mean each Supplement to the
Contribution Agreement substantially in the form of ANNEX I attached
thereto executed by a Domestic Subsidiary of Borrower pursuant to the
requirements of Section 6.10.
"DOMESTIC PLEDGE AGREEMENT" shall mean the Domestic Pledge and
Security Agreement dated as of November __, 1998 executed by Borrower and,
if applicable, certain Subsidiaries of Borrower, granting to the Collateral
Agent for the ratable benefit of the Lenders, in the form of EXHIBIT K
attached to Amendment No. 3, first priority Liens on 100% of all issued and
outstanding common stock or other equity or ownership interests, together
with 100% of all warrants, stock options, and other purchase and conversion
rights with respect to such capital stock or other equity or ownership
interests, of each Domestic Subsidiary owned directly by Borrower or such
Subsidiaries, as the case may be.
"DOMESTIC PLEDGE AGREEMENT SUPPLEMENT" shall mean each Supplement to
the Domestic Pledge Agreement substantially in the form of ANNEX II or
ANNEX III attached thereto, executed by Borrower and, if applicable,
certain Subsidiaries of Borrower, in favor of the Collateral Agent for the
ratable benefit of the Lenders pursuant to the requirements of Section
6.10.
<PAGE>
"DOMESTIC SHELL SUBSIDIARY" shall mean any Domestic Subsidiary of
Borrower that has no assets (other than legally required minimum paid-in
capital) or operations.
"DOMESTIC SUBSIDIARY" shall mean each Subsidiary of Borrower that is
not a Foreign Subsidiary.
"ELIGIBLE CURRENCY" shall mean any currency other than Dollars (i)
that is readily available, (ii) that is freely traded, (iii) in which
deposits are customarily offered to banks in the London interbank market,
(iv) that is convertible into Dollars in the international interbank market
and (v) as to which a Dollar Equivalent may be readily calculated. If,
with respect to any such currency, (x) currency control or other exchange
regulations are imposed in the country in which such currency is issued
with the result that different types of such currency are introduced, (y)
such currency is, in the determination of the Agent, no longer readily
available or freely traded, or (z) in the determination of the Agent, a
Dollar Equivalent of such currency is not readily calculable, the Agent
shall promptly notify the Lenders and Borrower, and such currency shall no
longer be a Currency as provided herein until such time as all of the
Lenders agree to reinstate such currency as a Currency hereunder.
"EURO" shall mean the euro referred to in Council Regulations (EC) No.
1103/97 dated June 17, 1997 passed by the Council of the European Union,
or, if different, the then lawful currency of the member states of the
European Union that participate in the third stage of Economic and Monetary
Union.
"EURO IMPLEMENTATION DATE" shall mean the first date (currently
expected to be January 1, 1999) on which the EURO becomes the currency of
some or all of the member states of the European Union.
"EXCLUDED PROPERTY" shall mean any of the following property now owned
or hereafter acquired by Borrower or any Domestic Subsidiary of Borrower:
(a) any property subject to a Permitted Lien of the type described in
clauses (a), (b), (h), (i), (j), (l) or (m) of Section 7.02 to the extent
that the terms of any instrument or agreement evidencing such Lien or the
Indebtedness secured thereby prohibit Liens on such property in favor of
the Collateral Agent securing the Obligations, such instruments and
agreements as in effect on November __, 1998 being more particularly
described on SCHEDULE 1.01-EP attached to Amendment No. 3, (b) the capital
stock of any Domestic Shell Subsidiary, and (c) any contract rights or
other general intangibles to the extent that the instruments or agreements
evidencing such contract rights or other general intangibles prohibit Liens
on such contract rights or other general intangibles in favor of the
Collateral Agent securing the Obligations, such instruments and agreements
evidencing material contract rights or other general intangibles as in
effect on November __, 1998 being more particularly described on SCHEDULE
1.01-EP attached to Amendment
<PAGE>
No. 3, PROVIDED THAT all accounts arising from such contract rights or
other general intangibles shall not constitute "Excluded Property" for
purposes of this Agreement or the other Credit Documents.
"GUARANTY AGREEMENT SUPPLEMENT" shall mean each Supplement to the
Guaranty Agreement substantially in the form ANNEX I attached thereto,
executed by a Domestic Subsidiary of Borrower in favor of the Lenders, the
Agent and the Collateral Agent pursuant to the requirements of Section
6.10.
"SUBSIDIARY SECURITY AGREEMENT" shall mean that certain Subsidiary
Security Agreement in the form of EXHIBIT M attached to Amendment No. 3,
dated as of November __, 1998, executed by the Domestic Subsidiaries of
Borrower and granting to the Collateral Agent for the ratable benefit of
the Lenders first priority Liens on the personal property of such Domestic
Subsidiaries as described therein, as the same may be amended, restated and
supplemented from time to time.
"SUBSIDIARY SECURITY AGREEMENT SUPPLEMENT" shall mean each Supplement
to the Subsidiary Security Agreement substantially in the form of ANNEX I
attached thereto, executed by a Domestic Subsidiary of Borrower in favor of
the Collateral Agent pursuant to the requirements of Section 6.10.
"YEAR 2000 ISSUES" shall mean the actual and anticipated costs,
claims, losses, liabilities, delays, and other consequences associated with
the inability of certain computer applications to handle effectively data
that includes dates on and after January 1, 2000, as such inability in
respect of Borrower and its Subsidiaries and in respect of their respective
customers, suppliers and vendors affects the business, operations,
liabilities, prospects, and financial condition of Borrower and its
Subsidiaries.
1.3 SECTION 2.01 of the Credit Agreement is hereby amended by
deleting the first six words of clause (b) thereof and substituting in lieu
thereof the words "the Swing Line Lenders hereby establish. . . ."
1.4 SECTION 2.03 of the Credit Agreement is hereby amended by
deleting said Section 2.03 in its entirety and substituting in lieu thereof the
following SECTION 2.03:
SECTION 2.03. SWING LINE LOANS.
(a) Subject to and upon the terms and conditions herein set forth
(including the limitation set forth in Section 2.01), each Swing Line
Lender agrees to make to Borrower, from time to time prior to the
Revolver/Multicurrency Maturity Date, Swing Line Loans in an aggregate
principal amount outstanding at any time not to exceed its Swing Line
Commitment then in effect; PROVIDED,
<PAGE>
HOWEVER, that the aggregate principal amount of all Swing Line Loans
outstanding to all Swing Line Lenders shall at no time exceed $5,000,000.
Borrower shall be entitled to repay and reborrow Swing Line Loans in
accordance with the provisions, and subject to the limitations, set forth
herein (including the limitation set forth in Section 2.01).
(b) Each Swing Line Loan shall, at the option of Borrower, be made
as a Base Rate Advance or Transaction Rate Advance. The aggregate
principal amount of each Swing Line Borrowing shall be not less than
$100,000 or a greater integral multiple of $1,000. At no time shall the
number of Swing Line Borrowings outstanding under this Section 2.03 to any
Swing Line Lender exceed three; PROVIDED THAT, for purposes of determining
the number of Swing Line Borrowings outstanding, all Swing Line Borrowings
consisting of Base Rate Advances shall be considered as one Swing Line
Borrowing.
(c) Whenever Borrower desires to make a Swing Line Borrowing, it
shall give the Swing Line Lender from which the Swing Line Borrowing is
being requested (with a copy to the Agent) prior written notice (or
telephonic notice promptly confirmed in writing) of such Swing Line
Borrowing (each a "Swing Line Borrowing Notice") prior to 10:00 a.m. (local
time for the Swing Line Lender) on the date of such Swing Line Borrowing.
Each Swing Line Borrowing Notice shall specify the aggregate principal
amount of the Swing Line Borrowing, the date of such Swing Line Borrowing
(which shall be a Business Day), whether a Transaction Rate Quote is being
requested and, if so, the Interest Period to be applicable thereto. If
Borrower requests a Transaction Rate Quote as aforesaid, then prior to
12:00 noon (local time for the Swing Line Lender) on such date, the Swing
Line Lender receiving such Swing Line Borrowing Notice shall furnish
Borrower (with a copy to the Agent) with a quotation of the interest rate
being offered with respect to such Swing Line Borrowing (whether expressed
as a fixed rate of interest in effect for the Interest Period applicable
thereto or as a floating rate of interest based on a specified interest
rate index and applicable margin for the Interest Period to be applicable
thereto; in either case, a "Transaction Rate Quote") by telephone (promptly
confirmed in writing) or by facsimile transmission. Borrower shall
immediately inform such Swing Line Lender (with a copy to the Agent) of its
decision as to whether to accept the Transaction Rate Quote and to confirm
the Swing Line Borrowing (which may be done by telephone, promptly
confirmed in writing, and which decision shall be irrevocable). If
Borrower has so informed such Swing Line Lender and confirmed the terms of
the Swing Line Borrowing, then no later than 2:00 p.m. (local time for the
Swing Line Lender) on such date, such Swing Line Lender shall make the
principal amount of the Swing Line Loan available to the Agent in
immediately available funds at the Pyment Office of the Agent, and the
Agent will make available to Borrower such amount by crediting such amount
to Borrower's demand deposit account maintained with the Agent. In the
event that such Swing Line Lender does not make such amount available to
the Agent at the time
<PAGE>
prescribed above, but such amount is received later that day, such amount
may be credited to Borrower in the manner described in the preceding
sentence on the next Business Day (with interest on such amount to begin
accruing hereunder on such next Business Day).
(d) Borrower's obligations to pay the principal of, and interest
on, the Swing Line Loans shall be evidenced by the records of the Agent and
each Swing Line Lender and by the Swing Line Note payable to each Swing
Line Lender (or the assignor of such Swing Line Lender) completed in
conformity with this Agreement.
(e) The outstanding principal amount under each Swing Line Loan
shall be due and payable in full (i) on the expiration of the Interest
Period applicable to such Swing Line Loan if outstanding as a Transaction
Rate Advance, and (ii) on the Revolver/Multicurrency Maturity Date.
(f) At any time on the request of any Swing Line Lender, each
Lender other than such Swing Line Lender shall purchase a participating
interest in all outstanding Swing Line Loans of such Swing Line Lender in
an amount equal to its Pro Rata Share of such Swing Line Loans, and such
Swing Line Lender shall furnish each Lender with a certificate evidencing
such participating interest. Such purchase shall be made on the third
Business Day after such request is made; PROVIDED, HOWEVER, that unless an
Event of Default has occurred and is continuing on the date such request is
made, the purchase of a participating interest in any Swing Line Loan
outstanding as a Transaction Rate Advance shall not be required to be made
until the expiration of the current Interest Period in effect for such
Swing Line Loan. On the date of such required purchase, each Lender will
immediately transfer to such Swing Line Lender, in immediately available
funds, the amount of its participation. Whenever, at any time after such
Swing Line Lender has received from any such Lender the funds for its
participating interest in a Swing Line Loan, the Agent or such Swing Line
Lender receives any payment on account thereof, the Agent or such Swing
Line Lender will distribute to such Lender its participating interest in
such amount (appropriately adjusted, in the case of interest payments, to
reflect the period of time during which such Lender's participating
interest was outstanding and funded); PROVIDED, HOWEVER, that if such
payment received by the Agent or such Swing Line Lender is required to be
returned, such Lender will return to the Agent or such Swing Line Lender
any portion thereof previously distributed by the Agent or such Swing Line
Lender to it. Each Lender's obligation to purchase such participating
interests shall be absolute and unconditional and shall not be affected by
any circumstance, including without limitation (i) any setoff,
counterclaim, recoupment, defense or other right that such Lender or any
other Person may have against the Lender requesting such purchase or any
other Person for any reason whatsoever, (ii) the occurrence or continuation
of a Default or an Event of Default or the termination of any of the
Commitments, (iii) any adverse change in the condition (financial or
otherwise) of Borrower, any of its Consolidated Subsidiaries, or any other
Person,
<PAGE>
(iv) any breach of this Agreement by Borrower or any other Lender, or
(v) any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing; PROVIDED, HOWEVER, that no such obligation
shall exist (A) to the extent that the aggregate Swing Line Loans were
advanced in excess of the Swing Line Commitment then in effect, or
(B) with respect to any Swing Line Loan where the Swing Line Lender
actually advanced to Borrower net proceeds from the Swing Line Loan (and
therefore was not refunding a previous Swing Line Loan) at a time when (x)
the Swing Line Lender had actual knowledge that an Event of Default had
occurred and then existed, and (y) the Required Lenders had not agreed to
waive such Event of Default for purposes of funding such Swing Line Loan.
1.5 SECTION 2.04(b) of the Credit Agreement is hereby amended by
adding the following sentence as the penultimate sentence of said SECTION
2.04(b):
The aggregate principal amount of each Borrowing of
Multicurrency Syndicated Loans made in the EURO shall be in
the minimum amounts and multiples determined by the Agent
and communicated to Borrower in writing based on the
approximate Dollar Equivalent of EUROS for a minimum amount
of $500,000 and a multiple of $250,000.
1.6 SECTION 2.06 of the Credit Agreement is hereby amended by
deleting subsection (a) thereof in its entirety and substituting in lieu thereof
the following subsection (a):
(a) Subject to Section 2.06(b) below in the case of
currency fluctuations, if the aggregate outstanding principal amounts
of the Loans exceed at any time the amount of the Master Syndicated
Loan Commitments, or if the aggregate outstanding principal amount of
the Multicurrency Syndicated Loans exceed at any time the amount of
the Multicurrency Syndicated Loan Subcommitments, in either case as
reduced in accordance with SCHEDULE 2.01 or pursuant to Section 2.05
or 10.02 or otherwise, Borrower shall immediately repay the Loans
and/or the Multicurrency Syndicated Loans, as the case may be, by an
amount equal to such excess, together with all accrued but unpaid
interest on such excess amount(s).
1.7 SECTION 3.05(a) of the Credit Agreement is hereby amended by
deleting clause (ii) of the second sentence of SECTION 3.05(a) and
substituting in lieu thereof the following clause (ii):
(ii) the aggregate principal amount of the Swing Line Loans from
time to time outstanding from any Swing Line Lender shall constitute a
usage of the Master Syndicated Loan Commitment only with respect to such
Swing Line
<PAGE>
Lender unless and until a participation is purchased in such Swing Line
Loans by the other Lenders.
1.8 SECTION 3.06 of the Credit Agreement is hereby amended by
deleting the first sentence of subsection (a) thereof in its entirety and
substituting the following sentence as the new first sentence of subsection
(a) of said SECTION 3.06:
Borrower may, at its option, prepay Borrowings consisting of Base Rate
Advances and Transaction Rate Advances (to the extent not outstanding
as Fixed Rate Advances) at any time in whole, or from time to time in
part, in amounts aggregating $250,000 (or, in the case of Swing Line
Borrowings, $100,000) or any greater integral multiple of $1,000, by
paying the principal amount to be prepaid together with interest
accrued and unpaid thereon to the date of prepayment.
1.9 SECTION 3.09 of the Credit Agreement is hereby amended by
deleting SECTION 3.09 in its entirety and substituting in lieu thereof the
following SECTION 3.09:
SECTION 3.09. ILLEGALITY, CURRENCY CONTROL AND EXCHANGE REGULATIONS,
MARKET DISRUPTION, ETC.
(a) In the event that any Lender shall have determined
(which determination shall be made in good faith and, absent manifest
error, shall be final, conclusive and binding on all parties) at any
time (i) that the making or continuance of any Euro Advance has become
unlawful by compliance by such Lender in good faith with any
applicable law, governmental rule, regulation, guideline or order
(whether or not having the force of law and whether or not failure to
comply therewith would be unlawful), (ii) that there have been imposed
any currency control or exchange regulations that prohibit Borrower
from making payment to the Agent for the account of the Lenders in
any particular Currency or which results in any particular Currency
ceasing to exist or otherwise qualify as an "Eligible Currency"
hereunder, or (iii) that any change occurs in the national or
international financial, political or economic conditions that would
make it unlawful, impossible, or impracticable for any Lender to make
or have outstanding Loans denominated in any particular Currency to
Borrower as contemplated by this Agreement, then, in any such event,
the Lender shall give prompt written notice (by telephone confirmed in
writing) to Borrower and to the Agent of such determination and a
summary of the basis for such determination (which notice the Agent
shall promptly transmit to the other Lenders).
(b) Upon the giving of the notice to Borrower referred to
in subsection (a) above, Borrower's right to request and such Lender's
<PAGE>
obligation to fund its portion of Euro Advances, as the case may be
(limited in the case of clauses (ii) and (iii) of subsection (a) above
to the affected Currency or Currencies) shall be immediately
suspended, whereupon any request for a Euro Advance shall, as to such
Lender only, (A) if such Loan is not a Multicurrency Syndicated Loan,
be deemed to have been a request for a Base Rate Advance, and (B) if
such Loan is a Multicurrency Syndicated Loan, be deemed to have been
withdrawn unless and until such Lender shall advise the Agent that the
circumstances giving rise to such suspension no longer exists. In
addition, such Lender may require that all outstanding Eurodollar
Loans or Multicurrency Syndicated Loans (in the affected Currency or
Currencies) as the case may be, made by it be (A) if such Loan is not
a Multicurrency Syndicated Loan, converted to a Base Rate Advance, and
(B) if such Loan is a Multicurrency Syndicated Loan, repaid (in the
affected Currency or Currencies or, if specified by such Lender, in an
amount equal to the Dollar Equivalent (as of the date of repayment) of
such Multicurrency Syndicated Loan), in which case all such
Multicurrency Syndicated Loans (in the affected Currency or
Currencies) shall be required to be repaid in full by Borrower as of
the effective date of the notice as provided in subsection (c) below;
PROVIDED that if more than one Lender is affected at any time, then
all affected Lenders must be treated the same pursuant to this SECTION
3.09(b).
(c) For purposes of this SECTION 3.09, a notice to Borrower
by any Lender shall be effective as to each such Loan on the last day
of the Interest Period currently applicable thereto except where it
would be contrary to any currency control or exchange regulations or
otherwise unlawful for such Loan to remain outstanding, in which case
such notice shall be effective on the date of receipt by Borrower.
1.10 ARTICLE III of the Credit Agreement is hereby amended by
adding a new SECTION 3.20 as follows:
SECTION 3.20. EUROPEAN ECONOMIC AND MONETARY UNION.
(a) If any Multicurrency Syndicated Advance made (or to be
made) on or after the EURO Implementation Date would, but for the
provisions of this Section 3.20, be capable of being made in either
the EURO or in another Currency, such Multicurrency Syndicated Advance
shall be made in the EURO.
(b) With effect on and from the EURO Implementation Date:
(i) Without prejudice to any method of conversion or
rounding prescribed by any legislative measures of the
Council of the European Union, each reference in this
Agreement to a
<PAGE>
fixed amount or amounts in another Currency of a
member state of the European Union that is
participating in the Economic and Monetary Union to
be paid to or by the Agent shall, notwithstanding any
other provision of this Agreement, be replaced by a
reference to such comparable and convenient fixed
amount or amounts in the EURO as the Agent may from
time to time specify; and
(ii) The Agent may notify the other parties to this
Agreement of any modifications to this Agreement which
the Agent (acting reasonably and after consultation
with the other parties to this Agreement) determines to
be necessary as a result of the commencement of the
third stage of European Economic and Monetary Union and
the occurrence of the EURO Implementation Date. So far
as possible, such modifications shall be such as to put
the parties in the same position as if the EURO
Implementation Date had not occurred. However, if and
to the extent that the Agent determines that it is not
possible to put the parties in such position, the Agent
may give priority to putting the Agent and the Lenders
into such position. Notwithstanding any other
provision of this Agreement, any modifications of which
the Agent so notifies the other parties shall take
effect in accordance with the terms of such
notification; PROVIDED, HOWEVER, that if such
modifications shall materially increase the liability
and obligations, or materially diminish the rights, of
the Consolidated Companies under this Agreement and the
other Credit Documents, Borrower may terminate in its
entirety the Multicurrency Syndicated Loan
Subcommitments of the Lenders (without any
corresponding termination or reduction of the Master
Syndicated Loan Commitments of the Lenders) and
simultaneously repay all outstanding Multicurrency
Syndicated Loans, together with all interest accrued
and unpaid thereon and all compensation payments that
may be due pursuant to Section 3.12 in respect of such
payments.
1.11 ARTICLE V of the Credit Agreement is hereby amended by adding
an additional SECTION 5.24 thereto as follows:
SECTION 5.24. YEAR 2000 ISSUES. Borrower and the other Consolidated
Companies have made a full and complete assessment of the Year 2000 Issues
and have a realistic and achievable program for remediating the Year 2000
Issues
<PAGE>
on a timely basis. Based on such assessment and program, Borrower does
not reasonably anticipate that Year 2000 Issues will have a Materially
Adverse Effect.
1.12 SECTION 6.07 of the Credit Agreement is hereby amended by
deleting clause (ii) of subsection (c) thereof in its entirety and substituting
in lieu thereof the following clause (ii):
(ii) demonstrating in reasonable detail compliance as at the end of
such fiscal year or such fiscal quarter with Sections 6.08 and 6.12
and with Sections 7.01 through 7.05;
SECTION 6.07 of the Credit Agreement is hereby further amended by (i) deleting
the word "and" at the end of subsection (s) thereof, (ii) re-lettering existing
subsection (t) thereof as subsection (v), and (iii) adding new subsections (t)
and (u) as follows:
(t) (i) Simultaneously with the delivery of each set of annual
and semi-annual financial statements referred to in Sections 6.07(a) and
(b), a statement of a member of Senior Management of Borrower to the effect
that nothing has come to Borrower's attention to cause it to believe that
the hardware and software systems of Borrower and the other Consolidated
Companies will not be Year 2000 compliant on a timely basis in accordance
with the Year 2000 plan previously disclosed in writing to the Lenders,
(ii) within five (5) Business Days after Borrower becomes aware of any
deviations from the Year 2000 plan previously disclosed in writing to the
Lenders that would cause compliance with such plan to be delayed or not
achieved in any material respect, a statement of a member of Senior
Management of Borrower setting forth the details thereof and the action
that Borrower is taking or proposes to take with respect thereto, and (iii)
promptly upon the receipt thereof, a copy of any third party assessments of
Borrower's Year 2000 plan, together with any recommendations made by such
third party with respect to Year 2000 compliance;
(u) MONTHLY FINANCIAL STATEMENTS AND REPORTS. As soon as
available and in any event within 45 days after the end of each calendar
month of each fiscal year of Borrower (but excluding, in the case of the
financial statements described in clause (i) below, the final calendar
month of each fiscal year), (i) consolidated statements of income,
shareholders' equity, and cash flows (including itemization of capital
expenditures) for such month, presented on a consolidated basis, all in
reasonable detail and certified by the chief financial officer or principal
accounting officer of Borrower that such financial statements fairly
present in all material respects the results of operations and cash flows
for such monthly period (subject to normal year-end audit adjustments), and
(ii) utilization reports for automated luminaires, by location, in such
detail as the Agent may reasonably request; and
<PAGE>
1.13 SECTION 6.08 of the Credit Agreement is hereby amended by
deleting said Section 6.08 in its entirety and substituting in lieu thereof the
following Section 6.08:
(a) LEVERAGE RATIO. Maintain as of the last day of each fiscal
quarter of Borrower, a maximum Leverage Ratio of no greater than the
amounts specified below for the period(s) indicated:
<TABLE>
<CAPTION>
END OF FISCAL QUARTER MAXIMUM LEVERAGE RATIO
-------------------------------------------------------------------------
<S> <C>
4th fiscal quarter of 1998
fiscal year through 2nd
fiscal quarter of 1999
fiscal year 57%
3rd fiscal quarter of 1999
fiscal year 56%
4th fiscal quarter of 1999
fiscal year and 1st fiscal
quarter of 2000 fiscal year 55%
All other fiscal quarters 50%
</TABLE>
(b) ADJUSTED FUNDED DEBT/EBITDA. Maintain as of the last day of
each fiscal quarter of Borrower, a maximum Adjusted Funded Debt/EBITDA
Ratio of no greater than the amounts specified below for the period(s)
indicated:
<TABLE>
MAXIMUM ADJUSTED FUNDED
END OF FISCAL QUARTERS DEBT/EBITDA RATIO
---------------------------------------------------------------------------
<S> <C>
4th fiscal quarter of
1998 fiscal year and
1st fiscal quarter of
1999 fiscal year 3.70:1.00
2nd fiscal quarter of
1999 fiscal year 3.30:1.00
3rd fiscal quarter of
1999 fiscal year 2.95:1.00
4th fiscal quarter of 1999 fiscal
<PAGE>
year and all fiscal quarters thereafter 2.50:1.00
</TABLE>
(c) FIXED CHARGE COVERAGE. Maintain as of the last day of
each fiscal quarter of Borrower a minimum Fixed Charge Coverage Ratio of no
less than the amounts specified below for the period(s) indicated:
<TABLE>
<CAPTION>
MINIMUM FIXED CHARGE
END OF FISCAL QUARTERS COVERAGE RATIO
---------------------------------------------------------------------
<S> <C>
4th fiscal quarter of
1998 fiscal year and 1st
fiscal quarter of 1999 fiscal year 0.54:1.00
2nd fiscal quarter of
1999 fiscal year 0.66:1.00
3rd fiscal quarter of
1999 fiscal year 0.92:1.00
4th fiscal quarter of
1999 fiscal year 1.12:1.00
1st fiscal quarter of
2000 fiscal year and thereafter 1.20:1.00
</TABLE>
(d) CONSOLIDATED NET WORTH. Maintain as of the last day of each
fiscal quarter of Borrower, a Consolidated Net Worth equal to or greater
than the Minimum Compliance Level. The "Minimum Compliance Level" shall,
as of any date of determination, equal to the sum of (1) $42,000,000, PLUS
(2) an additional amount calculated as of the last day of each fiscal year
of Borrower, commencing with the fiscal year ending September 30, 1998,
equal to 50% of the Consolidated Net Income for such fiscal year of
Borrower then ending, PLUS (3) without duplication of any amount reflected
in the preceding clause (2), the amount of any gain recognized by Borrower
in the settlement of pending litigation that is included in the calculation
of Consolidated Net Worth, and PLUS (4) the net proceeds of any equity
offering consummated by any Consolidated Company since the last date of the
determination of Minimum Compliance Level; PROVIDED, HOWEVER, in the event
that the Consolidated Companies suffer a net loss for any fiscal year,
Consolidated Net Income shall be deemed to be $0, and further provided that
amounts calculated pursuant to clauses (2), (3) and (4) above shall be
permanent increases in the Minimum Compliance Level so that in no event
shall the Minimum Compliance Level at any date of determination be less
than the amount required at any preceding date of determination.
<PAGE>
(e) FOURTH FISCAL QUARTER CALCULATIONS. SCHEDULE 6.08-B attached
to Amendment No. 3 sets forth the calculation of the estimated financial
covenant amounts, ratios, and percentages required by subsections (a)
through (d) of this Section 6.08 calculated, using preliminary financial
results and information as of the end of the 4th fiscal quarter of
Borrower's 1998 fiscal year; PROVIDED, HOWEVER, that because Borrower has
not prepared final financial statements for the fourth fiscal quarter of
Borrower's 1998 fiscal year, such calculations represent estimates only
based on Borrower's preliminary financial statements prepared from
financial information currently available to Borrower, and no
representations or warranties are made as to the accuracy of the
calculations set forth in SCHEDULE 6.08-B.
1.14 SECTION 6.10 is hereby amended by deleting subsections (a)
and (b) of said Section 6.10 in their entirety and substituting in lieu
thereof new subsections (a) and (b) as follows:
(a) [INTENTIONALLY OMITTED]
(b) Promptly after (i) the formation or acquisition of any
Subsidiary of Borrower not listed on SCHEDULE 5.01, (ii) the domestication
of any Foreign Subsidiary of Borrower, or (iii) the occurrence of any other
event creating a new Subsidiary of Borrower, Borrower shall execute and
deliver, and cause to be executed and delivered, the following documents,
in each case in form and substance satisfactory to the Agent:
(x) With respect to each Domestic Subsidiary (other than a
Domestic Shell Subsidiary) so formed, acquired, domesticated
or otherwise created, the following documents: (1) a Guaranty
Agreement Supplement from such Domestic Subsidiary, (2) a
Domestic Pledge Agreement Supplement executed by the owner(s)
of the capital stock or other equity or ownership interests in
such Domestic Subsidiary, together with appropriate stock
powers and endorsements, (3) a Subsidiary Security Agreement
Supplement executed by such Domestic Subsidiary, together with
appropriate Uniform Commercial Code financing statements and
other filings necessary or appropriate to perfect the security
interests in the collateral therein described, (4) a
Contribution Agreement Supplement executed by such Domestic
Subsidiary, and (5) related documents of the type described in
Section 4.01(d), (e), (f), (g), (h), and (k); and
(y) With respect to each Foreign Subsidiary so formed, acquired,
or otherwise created, the following documents: (1) a Pledge
Agreement with respect to not less than sixty-five percent
(65%) of the capital stock or other equity or ownership
interests of such Foreign Subsidiary (as specified in the
immediately following
<PAGE>
sentence) if such Foreign Subsidiary is directly owned by
Borrower or a Subsidiary that is not, and is not directly or
indirectly controlled by, a Foreign Subsidiary, together with
such certificates or other instruments as may evidence the
Pledged Stock subject thereto, with appropriate stock powers
and endorsements, and (2) such opinions, officer's certificates
and other evidence as to the enforceability and priority of
the Liens granted thereby as may be requested by the Agent;
PROVIDED, HOWEVER, that Borrower shall not be required at such
time to execute and deliver, or cause to be executed and
delivered, a Pledge Agreement with respect to any capital stock
of a Foreign Subsidiary that may be included as one of the
Non-Material Foreign Subsidiaries without causing the portion
of the Consolidated EBITDA or Consolidated Tangible Assets
contributed or possessed by such Non-Material Foreign
Subsidiaries in the aggregate (on a pro forma basis) to exceed
the specified percentage of Consolidated EBITDA or
Consolidated Tangible Assets set forth in the definition of
the term "Non-Material Foreign Subsidiaries." In complying
with the requirements set forth in the immediately preceding
sentence, (i) Borrower shall pledge capital stock or other
equity or ownership interests of that Foreign Subsidiary or
those Foreign Subsidiaries that have contributed or possessed,
or would have contributed or possessed (on a pro forma basis),
the greatest portion of such Consolidated EBITDA or
Consolidated Tangible Assets for the most recently ended
fiscal quarter of Borrower, and (ii) all other Foreign
Subsidiaries whose capital stock shall not have been pledged
pursuant to this Section 6.10 shall in the aggregate qualify
(on a pro forma basis) as Non-Material Foreign Subsidiaries as
defined herein.
1.15 ARTICLE VI of the Credit Agreement is hereby amended
by adding new Sections 6.11, 6.12 and 6.13 thereto as follows:
SECTION 6.11. YEAR 2000 COMPLIANCE. Take, and cause its
Subsidiaries to take, all actions reasonably necessary to implement the
Year 2000 plan previously disclosed to the Lenders and otherwise to assure
that the Year 2000 Issues will not have a Materially Adverse Effect. Upon
request by any Lender or the Agent, Borrower will provide the Lenders a
written updated description of its Year 2000 compliance program. Borrower
will promptly advise the Lenders and the Agent of any reasonably
anticipated Materially Adverse Effect as a result of any Year 2000 Issues.
SECTION 6.12. COLLATERAL REQUIREMENT FOR EQUIPMENT AND OTHER
PROPERTY. Grant and convey, and cause its Domestic Subsidiaries to grant
and convey, to Collateral Agent for the ratable benefit of the Lenders and
Agent, a
<PAGE>
first-priority perfected Lien on those assets of Borrower and its Domestic
Subsidiaries that constitute lighting and sound equipment, machinery and
tools, furniture and fixtures, office and computer equipment, work in
progress and raw materials inventory, and any other fixed assets
classified on Borrower's consolidated financial statements as "equipment
and other property", such that at all times all such assets of Borrower and
its Domestic Subsidiaries that are subject to such Lien shall not be less
than seventy-five percent (75%) of all the assets of the Consolidated
Companies of the same types, in each case determined by the book value of
such assets, net of depreciation, in accordance with GAAP. Borrower shall
execute and deliver, and cause its Domestic Subsidiaries to execute and
deliver, such documents as Collateral Agent may reasonably require in order
to evidence such Liens, together with appropriate collateral filings,
recordings and registrations, and reports, certificates and opinions
evidencing and confirming the perfection and priority of such Liens.
SECTION 6.13. MOVEMENT OF LUMINAIRES. If any automated
luminaires that are located outside the United States of America and owned
by Borrower or any of its Subsidiaries receive no utilization for a period
in excess of 90 days, Borrower or its Subsidiaries will promptly cause such
automated luminaires to be taken (i) to another location where such
automated luminaires are under contract for sale or lease, or (ii) to a
storage location in the United States of America in a jurisdiction where
such automated luminaires are subject to a Lien in favor of the Collateral
Agent for the benefit of the Lenders duly perfected by the filing of all
necessary Uniform Commercial Code financing statements in such
jurisdiction; PROVIDED, HOWEVER, that the foregoing requirement shall not
apply to automated luminaires in the possession and control of (x) dealers
and distributors that are not Affiliates of Borrower or its Subsidiaries,
or (y) the Dubai division of Vari-Lite, Inc. so long as the aggregate value
(expressed in Dollars) of all such automated luminaires at the Dubai
division at any time does not exceed $3,750,000.
1.16 SECTION 7.03 of the Credit Agreement is hereby amended by
deleting subsection (c) of said Section 7.03 in its entirety and substituting in
lieu thereof a new subsection (c) as follows:
(c) Acquisitions (i) which have been approved in advance by a
majority of the board of directors of the seller, (ii) where the
information required to be delivered to the Lenders pursuant to Section
6.07(h) has been provided and the Required Lenders have approved the
Acquisition, and (iii) which are in compliance with the terms of Section
7.07, where the total consideration to be paid by the Consolidated
Companies does not exceed (1) with respect to any Acquisition or related
series of Acquisitions, 40% of the Consolidated Net Worth of Borrower, as
calculated as of the last day of the most recently ended fiscal quarter of
Borrower, and (2) with respect to all Acquisitions made during such fiscal
quarter and the most recent three fiscal quarters of Borrower, an amount
<PAGE>
equal to the Consolidated EBITDA for the most recently ended four fiscal
quarters of Borrower;
1.17 ARTICLE VII of the Credit Agreement is hereby amended by
adding new Sections 7.13, 7.14 and 7.15 at the end of said Article VII, as
follows:
SECTION 7.13. CAPITAL EXPENDITURES. Incur or otherwise permit to be
made Capital Expenditures for the periods specified below in an aggregate
amount in excess of the amount specified for such period:
<TABLE>
<CAPTION>
FISCAL QUARTER(S) MAXIMUM AMOUNT
--------------------------------------------------------------
<S> <C>
1st fiscal quarter of 1999
fiscal year $ 4,500,000
1st and 2nd fiscal quarters of 1999
fiscal year (cumulative total) $ 7,500,000
1st, 2nd and 3rd fiscal quarters of 1999
fiscal year (cumulative total) $10,500,000
1999 fiscal year
(cumulative total) $13,000,000
</TABLE>
SECTION 7.14. BANK ACCOUNTS AND CASH.
(a) Maintain any deposit or other bank accounts with any banks or
other depositary institutions other than the Lenders and Affiliates of the
Lenders, except that Borrower and its Subsidiaries may maintain accounts
with such other banks or other depositary institutions where the aggregate
amount maintained in all such accounts does not exceed $2,000,000 (or the
Dollar Equivalent thereof) at any time.
(b) Maintain cash or cash equivalents in Foreign Subsidiaries in
an aggregate amount in excess of $5,000,000 (or the Dollar Equivalent
thereof) at any time.
SECTION 7.15. OPERATING LEASES. Enter in or maintain in
effect as lessee thereunder operating leases in respect of equipment and
other personal property having aggregate payments thereunder in excess of
$1,000,000 in any fiscal year of Borrower.
1.18 ARTICLE VIII of the Credit Agreement is hereby amended by
adding a new Section 8.15 thereto immediately following Section 8.14, as
follows:
<PAGE>
SECTION 8.15. BRAZOS LEASE. Any "Event of Default" shall
occur or exist under the terms of the Brazos Lease, or any "Default" shall
occur or exist under the terms of the "Guaranty" (as defined in the Brazos
Lease) given by Borrower in respect of the Brazos Lease;
1.19 SECTION 10.02 of the Credit Agreement is hereby amended by
deleting clause (vi) in its entirety and substituting in lieu thereof the
following clause (vi):
(vi) Agree to release any Guarantor from its obligations
under any Guaranty Agreement or release any collateral from the Lien
of the Security Documents (PROVIDED, HOWEVER, that (1) no agreement to
any such release shall be required from any Lenders in connection with
(x) any Asset Sale expressly permitted by Section 7.03(b) or any
Sales/Leases effected in the ordinary course of business consistent
with prior practices, or (y) any grant by Borrower or any other
Consolidated Company of any Lien on any of the collateral described in
the Security Documents where such Lien is of the type described in
clauses (b), (h), (i), (l) or (m) of Section 7.02 where, as a result
of the grant of such Lien, such collateral then constitutes Excluded
Property hereunder, and (2) at the request and sole expense of
Borrower, so long as there exists no Default of Event of Default
hereunder, the Collateral Agent will deliver such documents reasonably
requested by Borrower to evidence such release), or
1.20 SECTION 10.05 of the Credit Agreement is hereby amended by
deleting said Section 10.05 in its entirety and substituting in lieu thereof
the following Section 10.05:
SECTION 10.5. RIGHT OF SETOFF. In addition to and not in
limitation of all rights of offset that any Lender or other holder of
a Note may have under applicable law, each Lender or other holder of a
Note shall, during the continuance of any Event of Default and whether
or not such Lender or such holder has made any demand or any Credit
Party's obligations are matured, have the right to appropriate and
apply to the payment of any Credit Party's obligations hereunder and
the other Credit Documents, all deposits of any Credit Party (general
or special, time or demand, provisional or final) then or thereafter
held by and other indebtedness or property then or thereafter owing by
such Lender or other holder, or by any Affiliate of such Lender or
holder, to any Credit Party, whether or not related to this Agreement
or any transaction hereunder.
1.21 The Credit Agreement is hereby amended by adding SCHEDULE
1.01-EP, SCHEDULE 2.01 and SCHEDULE 6.08-B thereto in the forms attached to
this Amendment.
<PAGE>
SECTION 2. CONDITIONS OF EFFECTIVENESS. This Amendment shall
become effective as of the date first above written (the "EFFECTIVE DATE") on
the first day when the following conditions have been satisfied:
(a) This Amendment shall have been executed and delivered by
Borrower, the Lenders, the Agent and the Co-Agent;
(b) The Swing Line Notes shall have been executed by Borrower and
delivered to the Collateral Agent;
(c) The Borrower Security Agreement and Subsidiary Security
Agreement, together with accompanying agreements and UCC-1 financing
statements, shall have been executed by Borrower and the Domestic
Subsidiaries of Borrower, as the case may be, and delivered to the
Collateral Agent;
(d) The Domestic Pledge Agreement, together with all original
stock certificates referenced therein and appropriately completed stock
powers executed in blank, shall have been executed by Borrower and any
Domestic Subsidiaries of Borrower that are parties thereto, as the case may
be, and delivered to the Collateral Agent;
(e) The Agent shall have received certificates of the Secretary or
Assistant Secretary of Borrower and each Domestic Subsidiary attaching and
certifying copies of the resolutions of their respective boards of
directors authorizing the execution, delivery and performance of this
Amendment and all Credit Documents to be executed and delivered by Borrower
and its Domestic Subsidiaries pursuant to the terms of this Amendment;
(f) The Agent shall have received examination reports from the
Uniform Commercial Code, judgment, and tax lien records of the
jurisdictions of the principal places of business and chief executive
offices of Borrower and its Domestic Subsidiaries and those jurisdictions
where any tangible personal property of Borrower and its Domestic
Subsidiaries are located, reflecting no Liens other than those expressly
permitted by the Credit Agreement;
(g) The Agent shall have received copies of all documents and
instruments, including all consents, authorizations and filings, required
or advisable under any applicable law or by any material contractual
obligation of Borrower or any of its Subsidiaries, in connection with the
execution, delivery, performance, validity and enforceability of this
Amendment and the Credit Documents being executed and delivered hereunder,
and such consents, authorizations, filings and orders shall be in full
force and effect;
(h) The Agent shall have received a certificate of Borrower and
each Domestic Subsidiary, as the case may be, dated as of the date hereof,
signed by
<PAGE>
the Secretary or an Assistant Secretary of Borrower or such Subsidiary,
as the case may be, certifying (i) as to the names, true signatures and
incumbency of the officer or officers of Borrower or such Subsidiary
authorized to execute and deliver this Amendment and each other Credit
Document being executed and delivered pursuant to the requirements of
this Amendment, and (ii) that Borrower's or such Subsidiary's articles
or certificate of incorporation and by-laws attached to such certificate
have not been amended or modified and are in full force and effect as of
the date hereof;
(i) The Agent shall have received the favorable opinion of Vinson
& Elkins L.L.P., counsel to Borrower and its Domestic Subsidiaries
addressed to the Agent and Collateral Agent, the Co-Agent, and the Lenders,
covering such matters relating to Borrower and the Domestic Subsidiaries
and the transactions contemplated by this Amendment and the Credit
Documents being delivered pursuant to this Amendment, as the Lenders may
reasonably request;
(j) Borrower shall have paid to the Agent, for the benefit of each
Lender, a total amendment fee equal to $75,000, payable to each Lender in
the amount of $15,000;
(k) The Agent shall have received stock certificate(s)
representing the Pledged Stock with respect to Vari-Lite Asia, Inc.; and
(l) The Agent shall have received payment in full from Borrower
for all outstanding costs and expenses required to be paid or reimbursed by
Borrower under the Credit Agreement, including without limitation, all
professional fees and expenses of counsel for the Agent and Collateral
Agent.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower,
without limiting the representations and warranties provided in the Credit
Agreement, represents and warrants to the Lenders and the Agents as follows:
3.1 The execution, delivery and performance by Borrower of this
Amendment, and by Borrower and the Domestic Subsidiaries of the Credit
Documents being delivered pursuant to this Amendment, are within Borrower's
and such Subsidiaries' corporate powers, have been duly authorized by all
necessary corporate action (including any necessary shareholder action) and
do not and will not (a) violate any provision of any law, rule or regulation,
any judgment, order or ruling of any court or governmental agency, the
articles or certificate of incorporation or by-laws of Borrower or any such
Subsidiary or any indenture, agreement or other instrument to which Borrower
or any such Subsidiary is a party or by which Borrower or any such Subsidiary
or any of its properties is bound or (b) be in conflict with, result in a
breach of, or constitute with notice or lapse of time or both a default under
any such indenture, agreement or other instrument.
<PAGE>
3.2 This Amendment and the Credit Documents being delivered
pursuant to this Amendment constitute the legal, valid and binding
obligations of Borrower and its Domestic Subsidiaries, enforceable against
Borrower and its Domestic Subsidiaries in accordance with their terms.
3.3 After giving effect to this Amendment, no Default or Event
of Default has occurred and is continuing as of the Effective Date.
SECTION 4. SURVIVAL. Each of the foregoing representations and
warranties and each of the representations and warranties made in the Credit
Agreement (other than those made only as of a specified date) shall be made
at and as of the Effective Date. Each of the foregoing representations and
warranties shall constitute a representation and warranty of Borrower under
the Credit Agreement, and it shall be an Event of Default if any such
representation and warranty shall prove to have been incorrect or false in
any material respect at the time when made. Each of the representations and
warranties made under the Credit Agreement (including those made herein)
shall survive and not be waived by the execution and delivery of this
Amendment or any investigation by the Lenders or the Agent or the Collateral
Agent.
SECTION 5. NO WAIVER, ETC. Borrower hereby agrees that nothing
herein shall constitute a waiver by the Lenders of any Default or Event of
Default, whether known or unknown, which may exist under the Credit
Agreement, other than any Default or Event of Default that ceases to exist as
a result of the amendments made by the express provisions of this Amendment.
Borrower hereby further agrees that no action, inaction or agreement by the
Lenders, including without limitation, any indulgence, waiver, consent or
agreement altering the provisions of the Credit Agreement which may have
occurred with respect to the non-payment of any obligation during the terms
of the Credit Agreement or any portion thereof, or any other matter relating
to the Credit Agreement, shall require or imply any future indulgence,
waiver, or agreement by the Lenders. In addition, Borrower acknowledges and
agrees that it has no defenses, counterclaims, offsets or objections in its
favor against any Lender with regard to any of the obligations due under the
terms of the Credit Agreement or otherwise as of the date of this Amendment.
SECTION 6. AFFIRMATION OF COVENANTS. Borrower hereby affirms
and restates as of the date hereof all covenants set forth in the Credit
Agreement, as amended hereby, and such covenants are incorporated by
reference herein as if set forth herein directly.
SECTION 7. RATIFICATION OF CREDIT AGREEMENT. Except as
expressly amended herein, all terms, covenants and conditions of the Credit
Agreement and the other Loan Documents shall remain in full force and effect,
and the parties hereto do expressly ratify and confirm the Credit Agreement
as amended herein. All future references to the Credit Agreement shall be
deemed to refer to the Credit Agreement as amended hereby.
<PAGE>
SECTION 8. BINDING NATURE. This Amendment shall be binding
upon and inure to the benefit of the parties hereto, their respective heirs,
successors, successors-in-titles, and assigns.
SECTION 9. COSTS, EXPENSES AND TAXES. Borrower agrees to pay
on demand all reasonable costs and expenses of the Agent and the Collateral
Agent in connection with the preparation, execution and delivery of this
Amendment and the other instruments and documents to be delivered hereunder,
including, without limitation, the reasonable fees and out-of-pocket expenses
of counsel for the Agent and the Collateral Agent with respect thereto and
with respect to advising the Agent and the Collateral Agent as to its rights
and responsibilities hereunder and thereunder. In addition, Borrower shall
pay any and all stamp and other taxes payable or determined to be payable in
connection with the execution and delivery of this Amendment and the other
instruments and documents to be delivered hereunder, and agrees to save the
Agent, the Collateral Agent, the Co-Agent and each Lender harmless from and
against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes.
SECTION 10. GOVERNING LAW. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of Georgia.
SECTION 11. ENTIRE UNDERSTANDING. This Amendment sets forth the
entire understanding of the parties with respect to the matters set forth
herein, and shall supersede any prior negotiations or agreements, whether
written or oral, with respect thereto.
SECTION 12. COUNTERPARTS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts and may be delivered by telecopier. Each counterpart so
executed and delivered shall be deemed an original and all of which taken
together shall constitute but one and the same instrument.
[Signatures Set Forth on Next Page]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
through their authorized officers as of the date first above written.
VARI-LITE INTERNATIONAL, INC.
By:
Name:
Title:
SUNTRUST BANK, ATLANTA,
INDIVIDUALLY AND AS AGENT AND COLLATERAL
AGENT
By:
Name:
Title:
By:
Name:
Title:
BROWN BROTHERS HARRIMAN & CO.,
INDIVIDUALLY AND AS CO-AGENT
By:
Name:
Title:
CHASE BANK OF TEXAS, N.A.
(FORMERLY TEXAS COMMERCE BANK NATIONAL
ASSOCIATION)
By:
Name:
Title:
<PAGE>
COMERICA BANK-TEXAS
By:
Name:
Title:
THE FIRST NATIONAL BANK OF CHICAGO
By:
Name:
Title:
<PAGE>
EXHIBIT 11.1
VARI-LITE INTERNATIONAL, INC.
COMPUTATION OF INCOME PER COMMON SHARE
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Income (loss) before extraordinary loss and cumulative effect of accounting change...... $ 4,329 $ (2,690)
Net income (loss)....................................................................... $ 4,329 $ (3,622)
Weighted average shares outstanding..................................................... 5,799,328 7,712,332
Dilutive effect of stock warrants after application of treasury stock method............ 19,473 --
Shares used in calculating diluted income per share..................................... 5,818,801 7,712,332
Basic income (loss) per share before extraordinary loss and cumulative effect of change
in accounting principle............................................................... $ 0.75 $ (0.35)
Diluted income (loss) per share before extraordinary loss and cumulative effect of
change in accounting principle........................................................ $ 0.74 $ (0.35)
Basic net income (loss) per share....................................................... $ 0.75 $ (0.47)
Diluted net income (loss) per share..................................................... $ 0.74 $ (0.47)
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF VARI-LITE INTERNATIONAL, INC.
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION OWNER
- ---- ----------------------------- -----
<S> <C> <C>
Vari-Lite, Inc. Delaware Vari-Lite International, Inc.
Concert Production Lighting, Inc. Delaware Vari-Lite International, Inc.
Showco, Inc. Delaware Vari-Lite International, Inc.
IGNITION! Creative Group, Inc. Delaware Vari-Lite International, Inc.
Vari-Lite Europe Holdings, Ltd. United Kingdom Vari-Lite International, Inc.
Vari-Lite Production Services, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd.
Theatre Projects Lighting
Services, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd.
Brilliant Stages, Ltd. United Kingdom Vari-Lite Europe Holdings, Ltd.
Vari-Lite Europe International, BV The Netherlands Vari-Lite International, Inc.
Vari-Lite Production Services, S.A. Spain Vari-Lite International Europe, BV
Vari-Lite Production Services, AB Sweden Vari-Lite International Europe, BV
Vari-Lite Production Services, SAS France Vari-Lite International Europe, BV
Vari-Lite Production Services
Europe, NV Belgium Vari-Lite International Europe, BV
Vari-Lite Production Services, NV Belgium Vari-Lite Production Services Europe, NV
Vari-Lite Asia, Inc. Japan Vari-Lite International, Inc.
Vari-Lite Production Services
Hong Kong Limited Hong Kong Vari-Lite International, Inc.
Vari-Lite Hong Kong, Ltd. Hong Kong Vari-Lite International, Inc.
Vari-Lite Production Services -
Dubai, Inc. Delaware Vari-Lite International, Inc.
I.R. Sub, Inc. Delaware Vari-Lite International, Inc.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENTS OF INCOME FOR THE TWELVE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND
1998 OF VARI-LITE INTERNATIONAL, INC. AS SET FORTH IN THIS FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-START> OCT-01-1996 OCT-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 1,862 3,838
<SECURITIES> 0 0
<RECEIVABLES> 14,895 14,371
<ALLOWANCES> (450) (900)
<INVENTORY> 4,050 6,075
<CURRENT-ASSETS> 22,893 25,133
<PP&E> 123,893 153,018
<DEPRECIATION> (55,248) (71,745)
<TOTAL-ASSETS> 96,704 114,627
<CURRENT-LIABILITIES> 23,722 18,931
<BONDS> 38,418 47,284
0 0
0 0
<COMMON> 585 785
<OTHER-SE> 26,956 43,919
<TOTAL-LIABILITY-AND-EQUITY> 96,704 114,627
<SALES> 15,129 13,513
<TOTAL-REVENUES> 90,658 88,376
<CGS> 10,676 9,880
<TOTAL-COSTS> 40,047 43,644
<OTHER-EXPENSES> 39,640 46,389
<LOSS-PROVISION> 134 641
<INTEREST-EXPENSE> 3,726 2,818
<INCOME-PRETAX> 7,245 (4,475)
<INCOME-TAX> 2,916 (1,785)
<INCOME-CONTINUING> 4,329 (2,690)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (737)
<CHANGES> 0 (195)
<NET-INCOME> 4,329 (3,622)
<EPS-PRIMARY> 0.75 (0.47)
<EPS-DILUTED> 0.74 (0.47)
</TABLE>
