-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DGbhw/Gpy1cD5/2+Pyy1OHwW38wVRsIZ/RBbxr+gMRbauSE4yCwksO1E7x4Hj+Vy ubvRrs0/l4I7110o7yiyfw== 0000912057-97-027681.txt : 19970815 0000912057-97-027681.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027681 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19970813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARI LITE INTERNATIONAL INC CENTRAL INDEX KEY: 0001033491 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-33559 FILM NUMBER: 97659785 BUSINESS ADDRESS: STREET 1: 201 REGAL ROW CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146301963 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST , 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VARI-LITE INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 3648 75-2239444 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) H. R. BRUTSCHE III PRESIDENT AND CHIEF EXECUTIVE OFFICER 201 REGAL ROW DALLAS, TEXAS 75247 (214) 630-1963 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: ALAN J. PERKINS JEFFREY A. CHAPMAN GARDERE & WYNNE, L.L.P. VINSON & ELKINS L.L.P. 1601 ELM STREET, SUITE 3000 2001 ROSS AVENUE, SUITE 3700 DALLAS, TEXAS 75201 DALLAS, TEXAS 75201 (214) 999-3000 (214) 220-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE(1) Common Stock, $0.10 par value............................... $ 31,050,000 $ 9,410
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o). --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION DATED , 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SHARES [INSERT VARI-LITE INTERNATIONAL LOGO] COMMON STOCK ----------------- All of the shares of common stock, par value $0.10 per share (the "Common Stock"), offered hereby are being sold by Vari-Lite International, Inc. (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $ and $ per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company intends to apply for quotation of the Common Stock on the Nasdaq National Market under the symbol "LITE." ------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) ------------- ------------- ------------- Per Share..................................................... $ $ $ Total(3)...................................................... $ $ $
- ------- (1) The Company and the Selling Stockholders (as hereinafter defined) have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting estimated expenses of $600,000, which are payable by the Company. (3) Certain stockholders of the Company (the "Selling Stockholders") have granted the Underwriters a 45-day option to purchase up to additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Selling Stockholders" and "Underwriting." ------------------- The Common Stock is offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them and subject to certain conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders, in whole or in part. It is expected that delivery of the shares of Common Stock will be made on or about , 1997. [LOGO] ------------------- THE DATE OF THIS PROSPECTUS IS , 1997. [Inside Front Cover] [Insert Graphics or Pictures] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE AND TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) REFLECTS THE REINCORPORATION ("REINCORPORATION") OF THE COMPANY AS A DELAWARE CORPORATION PURSUANT TO A MERGER OF VARI-LITE INTERNATIONAL, INC., A TEXAS CORPORATION ("VARI-LITE TEXAS"), INTO THE COMPANY, WHICH WILL BE EFFECTED IMMEDIATELY PRIOR TO THE CONSUMMATION OF THE OFFERING AND IN WHICH THE SHARES OF CLASS A AND CLASS B COMMON STOCK OF VARI-LITE TEXAS WILL BE CONVERTED INTO SHARES OF THE COMPANY'S COMMON STOCK ON A -FOR- BASIS AND (B) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION UNLESS SPECIFICALLY PROVIDED OTHERWISE. ALL REFERENCES TO THE COMPANY IN THIS PROSPECTUS REFER TO VARI-LITE INTERNATIONAL, INC. AND ITS CONSOLIDATED SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE. THE COMPANY The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its longstanding collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990, and the Company won an Emmy-TM- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Barbara Streisand, Diana Ross, Whitney Houston, Sheryl Crow, Pearl Jam and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE, OLIVER, RAGTIME and SHOW BOAT. - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-TM-Awards, Grammy 3 Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Sony, Nike, IBM, Sprint, Oldsmobile and Microsoft, among others. - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark-automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaries simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include (i) maintaining its commitment to innovation, (ii) expanding its worldwide distribution capabilities and (iii) continuing to offer value-added complementary services. The Company's predecessor, Vari-Lite Texas, was incorporated in 1988 in the State of Texas as a holding company to own Showco, Inc. ("Showco"), which began operations in 1970, and Vari-Lite, Inc. ("Vari-Lite"), which began operations in 1981. Immediately prior to the consummation of the Offering, the Company was reincorporated in the State of Delaware. The Company's principal executive offices are located at 201 Regal Row, Dallas, Texas 75247 and its telephone number is (214) 630-1963. 4 THE OFFERING Common Stock offered by the Company......... shares Common Stock to be outstanding after the Offering................................... shares(1) Use of Proceeds............................. The net proceeds will be used to repay approximately $ million of indebtedness under the Company's Credit Agreement (as hereinafter defined). See "Use of Proceeds." Proposed Nasdaq National Market symbol...... "LITE"
- ------- (1) Excludes shares of Common Stock issuable upon exercise of options to be granted in connection with the Offering at an exercise price equal to the Offering price and shares of Common Stock issuable upon exercise of warrants with an exercise price of $ per share. See "Management-- Employee Benefit Plans--Omnibus Plan" and "Shares Eligible for Future Sale." 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Revenue: Rental revenues............................. $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,400 Products sales and service revenues......... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- --------- --------- Total revenues............................ 31,132 35,253 53,812 74,910 77,138 53,431 67,088 Gross profit.................................. 19,088 20,645 30,753 41,985 42,930 29,563 37,337 Selling, general and administrative expense... 13,343 13,170 19,181 28,163 30,077 22,230 25,124 Research and development expense.............. 1,948 2,347 3,033 3,283 4,404 2,947 4,684 Operating income.............................. 3,797 5,128 8,539 10,539 8,449 4,386 7,529 Interest expense.............................. 1,675 1,606 1,805 2,788 3,092 2,437 2,692 Income before extraordinary loss.............. $ 1,349 $ 2,269 $ 4,334 $ 4,714 $ 3,119 $ 1,136 $ 2,783 Net income per share(1)....................... $ $ $ $ $ $ $ Weighted average shares outstanding........... PRO FORMA DATA(2): Income before extraordinary loss.............. Net income per share.......................... Weighted average shares outstanding........... OTHER DATA: EBITDA(3)..................................... $ 8,084 $ 10,230 $ 14,874 $ 19,159 $ 18,518 $ 11,929 $ 16,169 Capital expenditures.......................... 5,503 11,050 13,566 20,748 12,587 9,125 19,880
JUNE 30, 1997 ------------------------ AS ACTUAL ADJUSTED(4) --------- ------------- BALANCE SHEET DATA: Total assets.......................................................................... $ 89,925 $ Total debt............................................................................ 45,399 Stockholders' equity.................................................................. 27,560
- ------- (1) Net income per share in fiscal 1994 includes an extraordinary loss from early extinguishment of debt of $ per share. (2) Pro forma data gives effect to the Offering and the application of the proceeds therefrom to repay the Company's outstanding borrowings under the Credit Agreement at the beginning of the periods presented, assuming the repayment of $ million of debt at a weighted average interest rate of 9.25%. See "Use of Proceeds." (3) EBITDA is calculated herein as income before income taxes plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. (4) Adjusted to reflect the sale of shares of Common Stock offered by the Company hereby at an assumed Offering price of $ per share and the anticipated application of the net proceeds therefrom. See "Use of Proceeds." 6 RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "WILL," "COULD," "MAY" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO MANAGEMENT OR THE COMPANY, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEWS OF MANAGEMENT WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THOSE DESCRIBED IN THIS PROSPECTUS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. FLUCTUATIONS IN OPERATING RESULTS AND SEASONALITY The Company has experienced and is expected to continue to experience significant fluctuations in its quarterly operating results, both between different quarters within the same fiscal year and with respect to the same quarter between different fiscal years. These fluctuations arise from several factors, including the timing and dollar value of sales-type leases with customers, the dependence of the Company on concert tours, which are unpredictable in timing and duration, the introduction of new products and general economic conditions both domestically and internationally. The Company's expenses are based, in part, on its expectations as to future revenue and, as a result, net income for a given period could be disproportionately affected by a reduction in revenue. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in the winter months. Because of the possibilities of significant fluctuations, results for any quarter may not be indicative of the results that may be achieved in a full year. While the Company expects to experience growth in revenue and profit, there can be no assurance that the Company's historical levels of revenue or profits will be sustained, particularly on a quarterly basis. Furthermore, there can be no assurance that the concert touring market on which the Company is dependent will continue to emphasize lighting as an important element of concert shows or that the Company's current or future products will continue to be used by concert touring customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Quarterly Fluctuations and Seasonality." ABILITY TO INTRODUCE NEW PRODUCTS; TECHNOLOGICAL CHANGES The Company's past success has depended, and its future growth will depend, in large part, on its ability to enhance and develop new features for its existing products, to develop new technology, to introduce new products to meet changing customer requirements and to adapt to evolving technology. There can be no assurance that the Company will successfully develop such new technology, enhancements, features or new products or that the Company's products will continue to achieve market acceptance. Any delay in or failure to complete development of such technology, enhancements, features or new products, or any failure of the Company's products to continue to achieve market acceptance, could have a material adverse effect on the Company. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies uncompetitive or obsolete. In 1996, the Company introduced its Irideon-Registered Trademark- interior lighting product line, including the AR5-TM- luminaire and the Composer-Registered Trademark- control system. In 1998, the Company anticipates introducing its high brightness, multi-feature VL7-TM- spot luminaire. There can be no assurance that these products will gain market acceptance or satisfactory revenue growth or profitability. RELIANCE ON INTELLECTUAL PROPERTY The Company generally relies on a combination of patent, trade secret, copyright and trademark laws, contracts and technical measures to establish and protect its proprietary rights in its products and technologies. However, the Company believes that such measures provide only limited protection, and there is no assurance 7 that such measures will be adequate to prevent misappropriation. As of June 30, 1997, the Company had 31 United States patents, 14 applications for United States patents pending with respect to certain elements of its hardware and software and 24 United States registered trademarks. As of June 30, 1997, the Company had over 110 foreign patents and over 100 applications for foreign patents pending. There can be no assurance that any patents will be issued from the applications pending or, if patents are issued, that the claims allowed under such patents or other patents of the Company will be sufficiently broad to deter or prohibit others from marketing similar products. Revenues generated in countries in which the Company has limited or no patent protection may be adversely affected by sales of products by competitors utilizing the Company's United States patented technology. Although the Company takes precautions to protect its trade secrets, it may be possible for unauthorized third parties to copy portions of the Company's technology or to obtain and use information that the Company regards as proprietary. Furthermore, the laws of certain countries in which the Company's products are or may be distributed do not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. In addition, there can be no assurance that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technologies. Any failure by the Company to protect its intellectual property, including any failure to prevail in the High End Lawsuit (as hereinafter defined), could have a material adverse effect on the Company. Significant and protracted litigation may be necessary to protect the Company's intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement. The Company believes that its products do not infringe any existing third-party proprietary rights; however, there can be no assurance that third-party claims alleging infringement will not be asserted against the Company in the future. If infringement is alleged, the Company could be required to discontinue the use of certain processes, to cease the manufacture, use and rental or sale of infringing products, to incur significant litigation damages, costs and expenses and to either develop non-infringing technology or obtain licenses to use the alleged infringing technology. There can be no assurance that the Company would be able to develop such alternative technologies or to obtain such licenses on terms commercially acceptable to the Company, if at all. Any infringement claims could have a material adverse effect on the Company. See "Business--Intellectual Property." CAPITALIZED LITIGATION COSTS The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit ($2.5 million as of June 30, 1997, and an estimated additional $1.6 million through consummation of the trial), a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. There can be no assurance that the Company will not be required to expense its costs relating to the High End Lawsuit. Furthermore, the defendant has asserted as a counterclaim that the Company has used the Company's patents to violate the antitrust laws. Although the Company believes such counterclaim to be without merit and intends to vigorously contest such counterclaim, if the defendant were to receive a judgment in its favor with respect to such counterclaim, the Company could be held liable for the defendant's damages which could be substantial. See "Business--Legal Proceedings." DEPENDENCE ON ENTERTAINMENT INDUSTRY Revenues from the concert touring, theatre, television and film markets accounted for 81.5%, 71.7%, 72.0%, 70.2% and 71.4%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and for the nine months ended June 30, 1996 and 1997, respectively. The amounts spent on entertainment by the general public historically have been dependent upon discretionary spending, which may be adversely affected 8 by general economic conditions. A significant reduction in the amounts spent on entertainment by the general public could have a material adverse effect on the Company. COMPETITION There is significant competition in many of the Company's markets, based primarily on product capability, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and customer service and support. In the Company's rental businesses, there are a number of competitors, particularly in the concert touring market. The Company competes in some cases with companies that are larger or have greater development, marketing and financial resources than the Company. There can be no assurance that the Company will be able to compete successfully in its markets or that the competitive pressures will not have a material adverse effect on the Company. See "Business--Competition." DEPENDENCE ON MANAGEMENT AND OTHER PERSONNEL The success of the Company's business is highly dependent upon the Company's President and Chief Executive Officer, H.R. Brutschffi III, and certain other key employees. The loss of the services of one or more of such individuals could have a material adverse effect on the Company, and there can be no assurance that the Company will be able to retain the services of its key employees. The Company believes that its future success also will depend significantly upon its ability to attract, motivate and retain additional highly skilled managerial, operational, technical, sales and marketing personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting, assimilating and retaining the personnel it requires to develop, manufacture and market its products or expand its operations. See "Business--Employees" and "Management." RISKS OF ACQUISITIONS The Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees of the acquired companies. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. The Company currently has no agreements or understandings with respect to any potential acquisitions. FOREIGN EXCHANGE RISK; INTERNATIONAL TRADE RISK International revenues accounted for 37.0%, 46.9%, 49.3%, 48.4% and 48.9%, of the Company's net revenues for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1996 and 1997, respectively. In addition, the Company purchases certain components used in its products from manufacturers located in foreign countries. As a result, the Company's operations may be adversely affected by fluctuations of the value of the U.S. dollar against foreign currencies, political instability resulting in the disruption of trade with foreign countries, the imposition of additional regulations relating to imports or duties, taxes and other charges, longer payment cycles, difficulties in receivables collection and restrictions on the transfer of funds. The Company has historically hedged its currency fluctuation risk by borrowing in local currencies under the Credit Agreement, a portion of which will be repaid with the net proceeds of the Offering. The Company is party to, and may in the future enter into additional, transactions to hedge such risks; however there can be no assurance that the Company will enter into such additional transactions or that any such transactions will effectively hedge the Company's currency risk. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 9 DEPENDENCE ON KEY SUPPLIERS The Company has chosen to develop strategic relationships with certain key suppliers and is dependent upon such suppliers for many important components used in the Company's automated lighting systems. The Company generally purchases these components pursuant to purchase orders and has no guaranteed supply arrangements with such suppliers. Some of these suppliers are critical to the Company's continued uninterrupted production because they provide custom-designed components. Major delivery delays or termination of the Company's relationship with any supplier of such components could materially adversely affect the Company. There can be no assurance that the Company's suppliers will continue to be able and willing to meet the Company's requirements for its key components. DEPENDENCE ON MANUFACTURING FACILITY The Company's principal manufacturing facility is located in Dallas, Texas. The Company is dependent on this facility and a disruption of the Company's manufacturing operations could have a material adverse effect on the Company. Such disruption could result from various factors, including human error or a natural disaster such as a tornado, fire or flood. CONTROL OF THE COMPANY BY EXISTING STOCKHOLDERS Upon consummation of the Offering, the Company's directors, officers and employees will beneficially own approximately % of the outstanding Common Stock. The holders of a majority of the outstanding Common Stock can elect all of the directors of the Company and can approve, delay or prevent certain fundamental corporate transactions, including mergers, consolidations and the sale of substantially all of the Company's assets. For so long as these stockholders own a significant percentage of the Common Stock, they will retain substantial influence over the affairs of the Company which may result in decisions that are not in the best interest of all stockholders of the Company. These factors, along with the factors described in "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws," may also have the effect of delaying or preventing a change in management or voting control of the Company. See "Principal Stockholders." LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; DETERMINATION OF OFFERING PRICE Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that after the Offering an active public market for the Common Stock will develop or be sustained or that any market that may develop for the Common Stock will be liquid. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including quarterly variations in operating results and the liquidity of the market for the Common Stock. The Offering price for the Common Stock offered hereby was determined by negotiation between the Company and the Underwriters and may not be indicative of the prices at which the Common Stock will trade after the Offering. There can be no assurance that the market price of the Common Stock after the Offering will not fall below the Offering price. See "Underwriting." EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS The Company's Certificate of Incorporation and By-Laws include provisions that may have the effect of discouraging proposals by third parties to acquire a controlling interest in the Company, which could deprive stockholders of the opportunity to consider an offer they would otherwise accept. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws." DILUTION Based on an assumed Offering price of $ per share, new investors purchasing the Common Stock offered hereby will experience immediate dilution in net tangible book value of approximately $ per 10 share. In addition, the future exercise of stock options and warrants would result in further dilution. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock. Upon completion of the Offering, the Company will have shares of Common Stock outstanding. Of these shares, the shares sold in the Offering ( shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately of such shares will have been held for more than one year as of the date of this Prospectus and may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subject to the volume, manner of sale and other limitations of Rule 144. The Company and certain stockholders who will collectively own shares of Common Stock immediately following the Offering, and the holders of warrants who will collectively have the right immediately following the Offering to purchase shares of Common Stock, have agreed not to sell or otherwise transfer any shares of Common Stock for a period of 180 days after the effective date of the Offering without the prior written consent of A.G. Edwards & Sons, Inc. Following the expiration of such 180-day lock-up agreements, approximately additional shares of Common Stock will be eligible for sale in accordance with the requirements of Rule 144. Upon completion of the Offering, the Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan (as hereinafter defined) and the ESOP (as hereinafter defined). See "Shares Eligible for Future Sale" and "Underwriting." USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company in the Offering, after deducting the estimated underwriting discounts and estimated Offering expenses to be paid by the Company, are estimated to be $ , assuming an Offering price of $ per share. See "Underwriting." The Company intends to use the net proceeds of the Offering to repay indebtedness under the Company's multicurrency credit agreement, dated March 31, 1994, as amended (the "Credit Agreement"), which will allow the Company to reborrow funds under the Credit Agreement to purchase and construct additional rental equipment, to expand its domestic and international distribution channels, to pursue potential acquisitions of complementary businesses and for other general corporate purposes. The Company currently has no agreements or understandings with respect to potential acquisitions. As of June 30, 1997, approximately $40.8 million was outstanding under the Credit Agreement (based on currency exchange rates as of such date). The Credit Agreement provides for U.S. dollar denominated revolving credit and term credit facilities in the amount of $23,000,000 and $20,500,000, respectively, British pounds sterling denominated revolving credit and term credit facilities in the amount of $5,000,000 and $6,500,000 (U.S. dollar equivalents as of June 30, 1997), respectively, and Japanese yen denominated revolving credit and term credit facilities in the amount of $6,000,000 and $1,300,000 (U.S. dollar equivalents as of June 30, 1997), respectively. The U.S. dollar denominated revolving credit facility bears interest at the prime rate of Brown Brothers Harriman & Co., agent under the Credit Agreement ("BBH"), plus 1.0% (9.50% as of June 30, 1997). The British pounds sterling denominated revolving credit facility bears interest at a rate determined by reference to the London interbank offered rate ("LIBOR") for deposits in British pounds sterling plus 2.0% (8.38% as of June 30, 1997). The Japanese yen denominated revolving credit facility bears interest at a rate determined by reference to the "Euroyen TIBOR" rate on the Bloomberg Financial Markets service at "TIBOEY" plus 3.5% (4.07% as of June 30, 1997). The U.S. dollar denominated term loan bears interest at either BBH's prime rate plus 1.0% (9.50% as of June 30, 1997) or a rate determined by reference to LIBOR for deposits in U.S. dollars plus 3.5% (9.31% as of June 30, 1997). The 11 British pounds sterling denominated term loan bears interest at a rate determined by reference to LIBOR for deposits in British pounds sterling plus 2.0% (8.44% as of June 30, 1997). The Japanese yen denominated term loan bears interest at a rate determined by reference to the Tokyo interbank offered rate for deposits in Japanese yen plus 2.5% (4.14% as of June 30, 1997). Mandatory payments of principal are due and payable quarterly on each term loan and interest are payable monthly or on the last day of any eurocurrency interest period. The entire outstanding principal balance of the term loans and the revolving credit facilities are due and payable in full on June 30, 2001. Until April 1, 1998, a prepayment penalty equal to 0.25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risk; International Trade Risk" and Note E of "Notes to Consolidated Financial Statements." DIVIDEND POLICY The Company paid dividends of approximately $0.6 million with respect to each of the 1994, 1995 and 1996 fiscal years. Through June 30, 1997, the Company has paid dividends with respect to the current fiscal year of approximately $0.2 million, and it intends to pay additional dividends of approximately $0.4 million prior to the consummation of the Offering. The Company does not anticipate paying any other cash dividends on the Common Stock in the foreseeable future and anticipates that future earnings will be retained to finance operations and expansion. The payment of cash dividends in the future will be at the discretion of the Board of Directors and will depend upon such factors as earnings levels, capital requirements, the Company's financial condition and other factors the Board of Directors deems relevant. In addition, the Credit Agreement limits the amount of dividends that may be paid by the Company in any fiscal year to 30% of net income (as defined in the Credit Agreement) for such fiscal year. DILUTION The net tangible book value attributable to the Company's Common Stock at June 30, 1997 was $ ($ per share). "Net tangible book value per share" represents the Company's total tangible assets less total liabilities divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the shares of Common Stock to be sold by the Company in the Offering (at an assumed Offering price of $ per share), and after deducting the estimated underwriting discount and expenses of the Offering to be paid by the Company, and the application of the net proceeds as set forth under "Use of Proceeds," the Company's net tangible book value as of June 30, 1997, would have been $ ($ per share), representing an immediate increase of $ in net tangible book value per share to existing stockholders and an immediate dilution of $ in net tangible book value per share to new investors purchasing shares in the Offering. The following table illustrates this dilution per share of Common Stock: Assumed Offering price per share...................................... $ Net tangible book value per share at June 30, 1997.................. $ Increase per share attributable to new investors.................... . --------- Pro forma net tangible book value per share after the Offering........ . --------- Dilution of net tangible book value per share to new investors(1)..... $ . --------- ---------
- ------- (1) Excludes shares issuable upon exercise of warrants with an exercise price of $ per share. To the extent any of these warrants are exercised, new investors would suffer further dilution. See "Shares Eligible for Future Sale." The following table sets forth, on a pro forma basis as of June 30, 1997, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the 12 Company and the total cash consideration and average price per share paid to the Company (based upon an assumed Offering price of $ per share for new investors):
TOTAL CONSIDERATION SHARES PURCHASED AVERAGE -------------------------- ------------------------ PRICE PER NUMBER(1) PERCENT AMOUNT PERCENT SHARE ------------- ----------- ----------- ----------- ----------- Existing Stockholders(2)...................................... .% $ . .% $ New Investors................................................. .% . .% --- ----- --- ----- 100.0% $ . 100.0% --- ----- --- ----- --- ----- --- -----
- ------- (1) Excludes shares issuable upon exercise of options to be granted in connection with the Offering at an exercise price equal to the Offering price and shares of Common Stock issuable upon exercise of warrants at an exercise price of $ per share. To the extent any of these options or warrants are exercised, new investors would suffer further dilution. See "Management--Employee Benefit Plans-- Omnibus Plan" and "Shares Eligible for Future Sale." (2) Approximately 91.5% of the shares of Common Stock owned by existing stockholders have been held by them since 1982. 13 CAPITALIZATION The following table sets forth the Company's capitalization at June 30, 1997 (a) on a historical basis and (b) as adjusted to give effect to the sale by the Company of shares of Common Stock offered hereby at an assumed Offering price of $ per share and the application of the net proceeds therefrom as described in "Use of Proceeds." The data set forth below should be read in conjunction with the other financial information presented elsewhere in this Prospectus.
JUNE 30, 1997 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt.............................. $ $ --------- ----------- --------- ----------- Long-term debt, net of current portion.................................................... $ $ Stockholders' equity(1): Preferred Stock, $0.10 par value; 10,000,000 shares authorized, no shares issued and outstanding; no shares issued and outstanding as adjusted............................. $ -- $ -- Common Stock, $0.10 par value; 40,000,000 shares authorized, shares issued and outstanding; shares issued and outstanding as adjusted........................... Treasury stock, at cost, shares.................................................... Additional paid-in capital.............................................................. Stockholder notes receivable............................................................ Stock purchase warrants................................................................. Cumulative foreign currency translation adjustment...................................... Retained earnings....................................................................... Total stockholders' equity............................................................ Total capitalization.................................................................. $ $ --------- ----------- --------- -----------
- ------- (1) Excludes exercise price to be paid in connection with the issuance of shares of Common Stock issuable upon exercise of options to be granted in connection with the Offering at an exercise price equal to the Offering price and shares of Common Stock issuable upon exercise of warrants with an exercise price of $ per share. 14 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected consolidated financial data for the Company as of and for each of the five fiscal years ended in the period September 30, 1996 have been derived from the consolidated financial statements of the Company. The selected consolidated financial data for the Company as of and for each of the three fiscal years ended in the period September 30, 1996 have been derived from the Company's consolidated financial statements which are included elsewhere in this Prospectus and have been audited by Deloitte & Touche, LLP, independent certified public accountants, whose audit report is included herein. Such selected consolidated financial data should be read in conjunction with such financial statements and related notes thereto. The selected consolidated financial data at June 30, 1997 and for the nine months ended June 30, 1996 and 1997 have been derived from the unaudited consolidated financial statements of the Company which, in the opinion of the Company's management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for the nine months ended June 30, 1997 are not necessarily indicative of results that may be expected for the full year. This data should be read in conjunction with the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) INCOME STATEMENT DATA: Revenue: Rental revenues................................... $ 28,539 $ 31,869 $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,400 Products sales and service revenues............... 2,593 3,384 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- --------- --------- Total revenues.................................. 31,132 35,253 53,812 74,910 77,138 53,431 67,088 Rental costs........................................ 10,395 12,320 18,775 26,288 26,425 18,267 22,342 Product sales and service costs..................... 1,649 2,288 4,284 6,637 7,783 5,601 7,409 --------- --------- --------- --------- --------- --------- --------- Gross profit........................................ 19,088 20,645 30,753 41,985 42,930 29,563 37,337 Selling, general and administrative expense......... 13,343 13,170 19,181 28,163 30,077 22,230 25,124 Research and development expense.................... 1,948 2,347 3,033 3,283 4,404 2,947 4,684 --------- --------- --------- --------- --------- --------- --------- Operating income.................................... 3,797 5,128 8,539 10,539 8,449 4,386 7,529 Interest expense.................................... 1,675 1,606 1,805 2,788 3,092 2,437 2,692 --------- --------- --------- --------- --------- --------- --------- Income before taxes and extraordinary loss.......... 2,122 3,522 6,734 7,751 5,357 1,949 4,837 Income taxes........................................ 773 1,253 2,400 3,037 2,238 813 2,054 --------- --------- --------- --------- --------- --------- --------- Income before extraordinary loss.................... 1,349 2,269 4,334 4,714 3,119 1,136 2,783 Extraordinary loss from early extinguishment of debt (net of tax of $389).............................. -- -- 756 -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income.......................................... $ 1,349 $ 2,269 $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,783 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share................................ $ $ $ $ $ $ $ Cash dividends per share(1)......................... Weighted average shares outstanding................. OTHER DATA: EBITDA(2)........................................... $ 8,084 $ 10,230 $ 14,874 $ 19,159 $ 18,518 $ 11,929 $ 16,169 Capital expenditures................................ 5,503 11,050 13,566 20,748 12,587 9,125 19,880
15
SEPTEMBER 30, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- JUNE 30, 1997 -------------------- (UNAUDITED) BALANCE SHEET DATA: Total assets........................................ $ 30,607 $ 37,626 $ 57,223 $ 73,007 $ 77,573 $ 89,925 Total debt.......................................... 13,574 16,648 27,497 34,870 37,349 45,399 Stockholders' equity................................ 11,085 13,303 16,631 21,329 24,538 27,560
- --------- (1) After the Offering, the Company does not anticipate paying any cash dividends on the Common Stock for the foreseeable future and anticipates that future earnings will be retained to finance future operations and expansion. See "Dividend Policy." (2) EBITDA is calculated herein as income before income taxes plus depreciation, amortization and net interest expense. The Company believes that EBITDA serves as an important financial analysis tool for measuring and comparing financial information such as liquidity, operating performance and leverage. EBITDA should not be considered an alternative to net income or other cash flow measures determined under generally accepted accounting principals as an indicator of the Company's performance or liquidity. EBITDA as disclosed herein may not be comparable to EBITDA as disclosed by other companies. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the fiscal years ended September 30, 1994, 1995 and 1996 and the nine-month periods ended June 30, 1996 and 1997. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. GENERAL The Company is a leading designer and manufacturer of automated lighting systems and products which are marketed exclusively through its domestic and international facilities and an independent distributor network. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems and other products and provides services to the entertainment industry, including markets such as concert touring, theatre, television and film and corporate events. In addition, the Company sells its Irideon-Registered Trademark- automated lighting systems for use in a wide variety of architectural applications. The Company's revenues are generated through the rental of lighting and sound systems and equipment, and through sales of related products and services and architectural lighting systems. Rental revenues include revenues generated from leases of VARI*LITE-Registered Trademark- automated lighting systems, concert sound systems and conventional lighting equipment. Revenues from product sales and services include custom stage construction and stage set design, design and production management services and the sale of Irideon-Registered Trademark- automated lighting systems and related products. Rental revenues were $47.6 million, $65.9 million and $65.7 million or 88.5%, 87.9% and 85.2% of total revenues during fiscal 1994, 1995 and 1996, respectively. The vast majority of the Company's rental revenues are earned from the rental of VARI*LITE-Registered Trademark- automated lighting systems, with the remainder from the rental of concert sound systems and conventional lighting equipment. The Company's rental revenues are recorded as earned over the term of each contract except for revenues from sales-type leases which are recorded and typically paid at the inception of the lease. Sales-type leases are long-term leases for the Company's VARI*LITE-Registered Trademark- automated lighting systems and are accounted for as sales for financial accounting purposes. Revenues from sales-type leases were $4.4 million, $9.9 million and $4.5 million during fiscal 1994, 1995 and 1996, respectively. Because sales-type lease revenues are recorded in their entirety at the inception of the lease, wide variations in revenues and earnings in any given quarter can occur. Rental costs consist of direct costs of maintaining, supporting and delivering the rental equipment and the depreciation costs of the capital expenditures incurred to manufacture or purchase the rental equipment. The Company depreciates rental equipment over periods of five to ten years. The direct costs associated with sales-type leases include the net book value of the equipment rented which is expensed in its entirety at the inception of the lease. The Company generates sales revenue from its custom stage construction and stage set design services, design and production management services to corporations and business associations for conventions, business meetings and special events and sales of Irideon-Registered Trademark- automated lighting systems. The Company first introduced its Irideon-Registered Trademark- lighting system in 1993 and revenues from the Irideon-Registered Trademark- product line have increased from $0.8 million in fiscal 1994 to $2.6 million in fiscal 1996, and $3.3 million for nine-month period ended June 30, 1997. During fiscal 1994, 1995 and 1996, the Company's Irideon-Registered Trademark- product line experienced operating losses of $0.1 million, $0.9 million and $1.2 million, respectively, due to start-up costs. To date, the gross margin percentage of Irideon-Registered Trademark-products has been lower than those of the Company's rental business. Although the gross margin percentage of Irideon-Registered Trademark- products is expected to improve, it is expected to remain below that of the Company's rental business. 17 The following table reflects the percentages of total revenues by market:
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Concert Touring............................................... 48.5% 38.2% 33.0% 31.0% 30.9% Theatre....................................................... 19.3 20.6 22.7 20.9 25.1 Television and Film........................................... 13.7 12.9 16.3 18.3 15.4 Corporate Events.............................................. 11.1 14.0 12.2 13.9 12.8 Other......................................................... 7.4 14.3 15.8 15.9 15.8 --------- --------- --------- --------- --------- Total Revenue................................................. 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Although the Company expects revenues earned from concert touring (primarily rental revenues) to continue to represent a significant percentage of the Company's total revenues, during the past three fiscal years, concert touring revenues have decreased as a percentage of the Company's total revenues due to an increase in rental revenues generated from the Company's other customer markets. The Company has experienced fluctuations in its concert touring revenues because of the unpredictable nature of the timing and duration of such tours and expects such fluctuations to continue in the future. The following table reflects the Company's geographic region revenues as a percentage of total revenues (see Note J of the "Notes to Consolidated Financial Statements"):
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- North America................................................. 63.0% 53.1% 50.7% 51.6% 51.1% Europe........................................................ 23.7 33.8 34.5 34.3 34.9 Asia.......................................................... 13.3 13.1 14.8 14.1 14.0 --------- --------- --------- --------- --------- Total Revenue............................................... 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The majority of the increase in European revenues in fiscal 1995 resulted from the Company's VLEH acquisition for approximately $6.0 million on March 31, 1994. These companies provided lighting services and custom stage construction and stage set design services and included the Company's London, England VARI*LITE-Registered Trademark- distributor. This acquisition was accounted for by the Company using the purchase method of accounting. In addition to London, the Company has offices in Tokyo, Hong Kong and Madrid. The Company anticipates that foreign revenues will remain a significant part of the Company's total revenues as the demand for entertainment in foreign markets continues to increase. 18 RESULTS OF OPERATIONS The following table sets forth the percentages of total revenues represented by certain income statement data and other data for the indicated periods:
YEARS ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- INCOME STATEMENT DATA: Rental revenues....................................................... 88.5% 87.9% 85.2% 84.9% 84.1% Product sales and service revenues.................................... 11.5 12.1 14.8 15.1 15.9 --------- --------- --------- --------- --------- Total revenues...................................................... 100.0 100.0 100.0 100.0 100.0 Rental costs.......................................................... 34.9 35.1 34.3 34.2 33.3 Product sales and service costs....................................... 8.0 8.9 10.1 10.5 11.0 --------- --------- --------- --------- --------- Gross margin.......................................................... 57.1 56.0 55.6 55.3 55.7 Selling, general and administrative expense........................... 35.6 37.5 39.0 41.6 37.5 Research and development expense...................................... 5.6 4.4 5.7 5.5 7.0 --------- --------- --------- --------- --------- Operating income...................................................... 15.9 14.1 10.9 8.2 11.2 Interest expense...................................................... 3.4 3.7 4.0 4.6 4.0 --------- --------- --------- --------- --------- Income before taxes and extraordinary loss............................ 12.5 10.4 6.9 3.6 7.2 Incomes taxes......................................................... 4.5 4.1 2.9 1.5 3.1 --------- --------- --------- --------- --------- Income before extraordinary loss...................................... 8.0 6.3 4.0 2.1 4.1 Extraordinary loss.................................................... 1.4 -- -- -- -- --------- --------- --------- --------- --------- Net income............................................................ 6.6% 6.3% 4.0% 2.1% 4.1% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER DATA: Rental revenues....................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Rental costs.......................................................... 39.4 39.9 40.2 40.2 39.6 --------- --------- --------- --------- --------- Rental gross margin................................................... 60.6% 60.1% 59.8% 59.8% 60.4% Product sales and service revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% Product sales and service costs....................................... 69.2 73.4 68.3 69.6 69.3 --------- --------- --------- --------- --------- Product sales and service gross margin................................ 30.8% 26.6% 31.7% 30.4% 30.7% EBITDA................................................................ 27.6% 25.6% 24.0% 22.3% 24.1%
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30, 1996 REVENUES. Total revenues increased 25.6%, or $13.7 million, to $67.1 million in the nine-month period ended June 30, 1997, compared to $53.4 million in the nine-month period ended June 30, 1996. The revenue increase was attributable primarily to the factors set forth below. Rental revenues increased 24.3%, or $11.0 million, to $56.4 million in the nine-month period ended June 30, 1997, compared to $45.4 million in the nine-month period ended June 30, 1996. This increase was primarily the result of an overall increase in concert touring revenues due to an improved concert touring market during the nine-month period ended June 30, 1997 compared to the nine-month period ended June 30, 1996. As a result, the Company experienced increased rental revenues from both automated lighting systems and sound systems, as well as from other related products and services. Rental revenues from sales-type leases accounted for approximately 33.5%, or $3.7 million, of the increase in rental revenues in the nine-month period ended June 30, 1997, compared with the nine-month period ended June 30, 1996. The increase in sales-type lease revenues was primarily due to significant leases with a new theatrical production and an amusement park. 19 Product sales and service revenues increased 32.9%, or $2.7 million, to $10.7 million in the nine-month period ended June 30, 1997, compared to $8.0 million in the nine-month period ended June 30, 1996. This increase was primarily due to sales of the Company's Irideon-Registered Trademark- automated lighting products which increased 123.2%, or $1.8 million, to $3.3 million in the nine-month period ended June 30, 1997, compared to $1.5 million in the nine-month period ended June 30, 1996. The remainder of the increase was primarily attributable to the increase in revenues from stage construction services as a result of increased concert touring activity. RENTAL COSTS. Rental costs increased 22.3%, or $4.0 million, to $22.3 million in the nine-month period ended June 30, 1997, compared to $18.3 million in the nine-month period ended June 30, 1996. Rental costs as a percentage of rental revenues decreased to 39.6% in the nine-month period ended June 30, 1997, from 40.2% in the nine-month period ended June 30, 1996. The decrease in rental costs as a percentage of total rental revenues was primarily due to higher utilization of the Company's rental equipment and other fixed charges during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. Also contributing to this decrease was a decrease in sales-type lease costs as a percentage of sales-type lease rental revenues in the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. The decrease in sales-type lease costs was due to the leasing of older equipment during the nine-month period ended June 30, 1997, compared to the nine-month period ended June 30, 1996. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 32.3%, or $1.8 million, to $7.4 million in the nine-month period ended June 30, 1997, compared to $5.6 million in the nine-month period ended June 30, 1996. Product sales and service costs as a percentage of product sales and service revenues decreased to 69.3% in the nine-month period ended June 30, 1997, from 69.6% in the nine-month period ended June 30, 1996. The decrease in product sales and service costs as a percentage of the related revenues was primarily due to the Irideon-Registered Trademark- product line, which experienced improved production efficiencies and an increase in direct sales. Partially offsetting this decrease was an increase in product sales and service costs for the Company's custom stage construction business that were subcontracted by the Company during the 1997 period, compared to the 1996 period. Product sales and service costs associated with subcontracted services are generally higher than costs associated with services provided directly by the Company. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 13.0%, or $2.9 million, to $25.1 million in the nine-month period ended June 30, 1997, compared to $22.2 million in the nine-month period ended June 30, 1996. This increase resulted primarily from payroll and related costs to support the Company's continued growth. This expense as a percentage of total revenues decreased to 37.5% in the nine-month period ended June 30, 1997, from 41.6% in the nine-month period ended June 30, 1996, due to costs incurred during fiscal year 1996, resulting from increases in personnel and improvements in information systems. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 58.9%, or $1.8 million, to $4.7 million in the nine-month period ended June 30, 1997, compared to $2.9 million in the nine-month period ended June 30, 1996. This expense as a percentage of total revenues increased to 7.0% in the nine-month period ended June 30, 1997, from 5.5% in the nine-month period ended June 30, 1996. These increases were primarily the result of an increase in the employee-related costs associated with adding research and development engineers during fiscal 1996 and the nine-month period ended June 30, 1997. INTEREST EXPENSE. Interest expense increased 10.5%, or $0.3 million, to $2.7 million in the nine-month period ended June 30, 1997, compared to $2.4 million in the nine-month period ended June 30, 1996. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures. INCOME TAXES. Effective tax rates in the nine-month periods ended June 30, 1997 and 1996 were 42.5% and 41.7%, respectively. 20 FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1995 REVENUES. Total revenues increased 3.0%, or $2.2 million, to $77.1 million in the fiscal year ended September 30, 1996, compared to $74.9 million in the fiscal year ended September 30, 1995. The revenue increase was attributable primarily to the factors set forth below. Rental revenues decreased $0.2 million to $65.7 million in fiscal 1996, compared to $65.9 million in fiscal 1995. This decrease was primarily the result of a 54.2%, or $5.4 million, decrease in rental revenues from sales-type leases, which decreased to $4.5 million in fiscal 1996, compared to $9.9 million in fiscal 1995, primarily due to one major casino installation and an increase in the cloning of several major touring theatrical productions in fiscal 1995. Additionally, the Company experienced an overall decrease in concert touring revenues in fiscal 1996 as a result of a downturn in the concert touring market compared with fiscal 1995 when the Company earned significant revenues from the Rolling Stones Voodoo Lounge tour. These decreases were offset by increased revenues earned from the Company's VARI*LITE-Registered Trademark- automated lighting systems as more of these products were available for rental as a result of fiscal 1995 capital expenditures, including an increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 26.0%, or $2.4 million, to $11.4 million in fiscal 1996, compared to $9.0 million in fiscal 1995. Product sales and service revenues increased as a percentage of total revenues to 14.8% in fiscal 1996, from 12.1% in fiscal 1995. This increase in revenue was primarily due to sales of Irideon-Registered Trademark- automated lighting products which increased 180.9%, or $1.7 million, to $2.6 million in fiscal 1996, compared to $0.9 million in fiscal 1995. RENTAL COSTS. Rental costs increased 0.5%, or $0.1 million, to $26.4 million in fiscal 1996, compared to $26.3 million in fiscal 1995. Rental costs as a percentage of rental revenues increased to 40.2% in fiscal 1996, from 39.9% in fiscal 1995. This increase was primarily the result of increased sales-type lease costs as a percentage of sales-type lease rental revenues in fiscal 1996 when compared to fiscal 1995, due to the leasing of newer equipment during fiscal 1996 when compared to fiscal 1995. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 17.3%, or $1.2 million, to $7.8 million in fiscal 1996 compared to $6.6 million in fiscal 1995. Product sales and service costs as a percentage of product sales and service revenues decreased from 73.4% in fiscal 1995 to 68.3% in fiscal 1996. The decrease in these costs as a percentage of their related revenues was primarily the result of operating improvements in the Company's custom stage construction business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased 6.8%, or $1.9 million, to $30.1 million in fiscal 1996, compared to $28.2 million in fiscal 1995. This expense as a percentage of revenues increased to 39.0% in fiscal 1996 from 37.5% in fiscal 1995. These increases primarily resulted from increased payroll and related costs and depreciation expense associated with continued growth through increases in personnel and improvements in information systems. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 34.1%, or $1.1 million, to $4.4 million in fiscal 1996, compared to $3.3 million in fiscal 1995. This expense as a percentage of revenues increased to 5.7% in fiscal 1996, from 4.4% in fiscal 1995. These increases were primarily the result of an increase in the employee-related costs associated with adding 16 research and development engineers during fiscal 1996. INTEREST EXPENSE. Interest expense increased 10.9%, or $0.3 million, to $3.1 million in fiscal 1996, compared to $2.8 million in fiscal 1995. This increase was attributable to additional long-term borrowings incurred by the Company to fund capital expenditures in fiscal 1995 and 1996. INCOME TAXES. Effective tax rates in fiscal 1996 and 1995 were 41.7% and 39.2%, respectively. 21 FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 1994 REVENUES. Total revenues increased 39.2%, or $21.1 million, to $74.9 million in fiscal 1995 compared to $53.8 million in fiscal 1994. Approximately 56.2% of the growth in total revenues, or $11.9 million, was attributable to revenues generated from Vari-Lite Europe Holdings Limited ("VLEH"), the Company's London, England based subsidiary which was formed to acquire three companies on March 31, 1994. As a result, only six months of VLEH's operations were included in fiscal 1994. Also during fiscal 1995, the Company earned $8.9 million, or approximately 11.9% of total revenues, from the rental of automated lighting and sound systems and other lighting products and services used on the Rolling Stones Voodoo Lounge tour. Rental revenues increased 38.3%, or $18.3 million, to $65.9 million in fiscal 1995, compared to $47.6 million in fiscal 1994. Approximately 48.1% of the growth in rental revenues, or $8.8 million, was attributable to an increase in revenues from the VLEH acquisition. Rental revenues from sales-type leases accounted for approximately 30.0%, or $5.5 million, of the increase in rental revenues from fiscal 1994 to fiscal 1995. The increase in sales-type lease revenues was primarily due to one major casino installation and an increase in the cloning of several major touring theatrical productions in fiscal 1995. The remainder of the increase in rental revenues was primarily due to revenues earned from the Rolling Stones Voodoo Lounge tour and an overall increase in automated lighting rental revenues in Japan. Product sales and service revenues increased 46.2%, or $2.8 million, to $9.0 million in fiscal 1995, compared to $6.2 million in fiscal 1994. Product sales and service revenues increased as a percentage of total revenues to 12.1% in fiscal 1995, from 11.5% in fiscal 1994. These increases were primarily attributable to the VLEH acquisition. RENTAL COSTS. Rental costs increased 40.0%, or $7.5 million, to $26.3 million in fiscal 1995, compared to $18.8 million in fiscal 1994. Rental costs as a percentage of rental revenues increased to 39.9% in fiscal 1995, from 39.4% in fiscal 1994. PRODUCT SALES AND SERVICE COSTS. Product sales and service costs increased 54.9%, or $2.3 million, to $6.6 million in fiscal 1995, compared to $4.3 million in fiscal 1994. Product sales and service costs as a percentage of product sales and service revenues increased to 73.4% in fiscal 1995 from to 69.2% in fiscal 1994. These increases were primarily the result of higher than anticipated costs to build custom stages and stage sets for customers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses increased 46.8%, or $9.0 million, to $28.2 million in fiscal 1995, compared to $19.2 million in fiscal 1994. This expense as a percentage of revenues increased to 37.5% in fiscal 1995 from 35.6% in fiscal 1994. These increases were partially due to the non-recurring costs associated with the VLEH acquisition in fiscal 1994 and an increase in consulting and employee benefit expenses as a result of the Company's initiatives to improve its human resource and process management. During fiscal 1995, the Company established the ESOP and Equivalence Plan (as hereinafter defined) and accrued contributions to them of an aggregate of $0.8 million. This increase was also partially due to unusually high design modification costs to improve performance of certain rental equipment and costs to make certain VARI*LITE-Registered Trademark- products compliant with international safety regulations. The remainder of the increase in selling, general and administrative expense resulted primarily from payroll and related costs to support continued growth. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased 8.2%, or $0.3 million, to $3.3 million in fiscal 1995, compared to $3.0 million in fiscal 1994. This increase in research and development expense was primarily attributable to costs incurred in connection with the development of the Company's Irideon-Registered Trademark- products. This expense as a percentage of revenues decreased to 4.4% in fiscal 1995, from 5.6% in fiscal 1994. INTEREST EXPENSE. Interest expense increased 54.5%, or $1.0 million, to $2.8 million in fiscal 1995, compared to $1.8 million in fiscal 1994. This increase was attributable to additional long-term borrowings 22 incurred by the Company to fund the VLEH acquisition in fiscal 1994 and other capital expenditures in fiscal 1994 and 1995 primarily associated with an increase in rental assets. INCOME TAXES. Effective tax rates in fiscal 1995 and 1994 were 39.2% and 35.6%, respectively. The increase in the effective tax rate in fiscal 1995 was primarily due to increased earnings from the Company's subsidiary in Japan, which are taxed at a higher rate than the Company's other earnings, and increased earnings in certain states in which the Company is subject to state income tax. EXTRAORDINARY LOSS. During fiscal 1994, the Company entered into the Credit Agreement, the proceeds of which were used to refinance outstanding indebtedness under then existing credit facilities, to fund the VLEH acquisition and to build rental equipment. The Company incurred prepayment penalties, net of taxes, of $0.8 million relating to the early extinguishment of the existing debt. See "--Liquidity and Capital Resources." QUARTERLY FLUCTUATIONS AND SEASONALITY The following table sets forth certain income statement data and EBITDA for each of the Company's last 15 quarters, which were derived from unaudited financial statements of the Company. In the opinion of the Company's management, this income statement data contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof.
QUARTERS ENDED -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ FISCAL YEAR ----------- (IN THOUSANDS) Fiscal 1994 Total Revenues.................................... $ 9,778 $ 9,591 $ 15,160 $ 19,283 $ 53,812 EBITDA............................................ 2,659 2,025 3,720 6,470 14,874 Operating income.................................. 1,321 633 2,019 4,566 8,539 Fiscal 1995 Total Revenues.................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 $ 74,910 EBITDA............................................ 6,224 4,027 4,495 4,413 19,159 Operating income.................................. 4,267 1,951 2,284 2,037 10,539 Fiscal 1996 Total Revenues.................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 $ 77,138 EBITDA............................................ 3,648 3,436 4,845 6,589 18,518 Operating income.................................. 1,186 915 2,285 4,063 8,449 Fiscal 1997 Total Revenues.................................... $ 22,326 $ 22,384 $ 22,378 EBITDA............................................ 5,215 5,083 5,871 Operating income.................................. 2,424 2,265 2,840
The Company has experienced and is expected to continue to experience fluctuations in quarterly operating results, both between different quarters within the same fiscal year and with respect to the same quarter between different fiscal years. These fluctuations arise from several factors, including the timing and dollar value of sales-type leases with customers, the dependence of the Company on concert tours, which are unpredictable in timing and duration, the introduction of new products and general economic conditions both domestically and internationally. In addition, the Company's business is subject to seasonal fluctuations with the highest percentage of its revenues being generated in the summer months and the lowest percentage being generated in winter months. Because of the possibilities of significant fluctuations, results for any quarter may not be indicative of the results that may be achieved in a full year. While the Company expects to experience growth in its revenues and profits, there can be no assurance that the Company's historical levels of revenues or profits will be sustained, particularly on a quarterly basis. See "Risk Factors--Fluctuations in Operating Results and Seasonality." 23 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has financed its operations and capital expenditures with cash flow from operations, bank borrowings and advances from distributors and customers. The Company's operating activities generated cash flow of approximately $10.9 million, $12.2 million, $7.3 million and $4.7 million during fiscal 1994, 1995 and 1996 and for the nine months ended June 30, 1997, respectively. The Company intends to use the net proceeds of the Offering to repay indebtedness under the Credit Agreement. As of June 30, 1997, approximately $40.8 million was outstanding under the Credit Agreement (based on currency exchange rates as of June 30, 1997). The Credit Agreement contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the Credit Agreement places limitations on the ability to pay stockholder distributions, make capital expenditures, incur additional indebtedness, make certain loans or investments, sell assets or reacquire Common Stock. The Company incurs a commitment fee equal to 0.5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all of the Company's assets, except those pledged to distributors, are pledged as collateral under the Credit Agreement. The Company expects to obtain a new credit facility after completion of the Offering. The Company has hedged its currency fluctuation risk by borrowing in local currencies under the Credit Agreement. The Company is a party to two interest rate swap agreements which fix the Company's effective interest costs under a portion of the Credit Agreement. See "Risk Factors--Foreign Exchange Risks; International Trade Risk," "Use of Proceeds" and Note E of "Notes to Consolidated Financial Statements." The Company has funded the costs to manufacture automated lighting equipment to be rented to certain distributors with advances made by the distributors under the terms of the Company's distributorship agreements. The distributors typically advance to the Company an amount equal to the cost to manufacture the equipment, and enter into a four-year agreement whereby the distributors have the exclusive right to sublease the lighting equipment within defined market areas. 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 from 0% to 10.25% annually. Proceeds received under these distributorship agreements were approximately $1.0 million, $2.2 million and $1.7 million for fiscal 1994, 1995 and 1996, respectively, and outstanding borrowings from distributors at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $2.1 million, $2.9 million, $2.8 million and $2.1 million, respectively. All amounts advanced by distributors are accounted for by the Company as short-term debt. See "Business--Marketing, Sales and Distribution." The Company has funded the cost to purchase computer equipment and office furniture and fixtures with advances from asset based lending institutions. Borrowings by the Company under agreements with such institutions typically amortize over three years and bear interest at various rates ranging from 8.25% to 10.40%. Proceeds received under this type of financing were approximately $0.2 million, $1.6 million, $1.8 million and $1.1 million for fiscal 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, respectively, and borrowings outstanding at September 30, 1994, 1995 and 1996 and June 30, 1997 were approximately $0.4 million, $1.7 million, $2.8 million and $3.0 million, respectively. The Company has also used customer advances or deposits on contracts to fund short-term working capital and immediate capital expenditure needs for specific contracts. As of September 30, 1994, 1995 and 1996 and June 30, 1997, the Company had outstanding payables on customer deposits on contracts of approximately $1.3 million, $1.2 million, $1.2 million and $1.8 million, respectively. Dividends paid to stockholders totaled approximately $0.6 million with respect to each of fiscal 1994, 1995 and 1996, and $0.2 million with respect to fiscal 1997 through June 30, 1997. The Company intends to pay additional dividends of approximately $0.4 million to its stockholders prior to the consummation of the Offering. The Company does not anticipate paying any additional cash dividends after the consummation of the Offering. See "Dividend Policy." The Company's business requires significant capital expenditures. Capital expenditures for the fiscal years ended September 30, 1994, 1995 and 1996 were approximately $13.6 million, $20.7 million and $12.6 million, 24 respectively, of which approximately $12.2 million, $18.0 million and $10.2 million were for rental equipment inventories. The majority of the Company's revenues are generated through the rental of automated lighting and concert sound systems and, as such, the Company must maintain a significant amount of rental equipment to meet customer demands. Total rental equipment inventories increased from approximately $49.2 million at the beginning of fiscal 1994 to $102.9 million at June 30, 1997. This increase primarily consisted of automated lighting equipment, the majority of which consisted of recently designed lighting equipment and additional equipment to resolve shortages that the Company has experienced and to replace equipment taken out of rental inventory for sales-type leases. The Company's management anticipates capital expenditures of approximately $23.0 million during fiscal 1997, primarily for expansion of rental inventories. The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to remain ahead of its competitors. In fiscal 1995 and 1996, the Company invested approximately $2.2 million constructing a wide-area network throughout the United States and implementing Oracle financial and manufacturing applications. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. The Company had a working capital deficit of approximately $2.0 million, $4.8 million and $0.6 million at September 30, 1994, 1995 and 1996, respectively, and a working capital surplus of approximately $0.5 million at June 30, 1997. The Company has historically maintained working capital deficits since the bulk of its revenue generating assets are classified as long-term assets rather than current assets. In December 1995, the Company entered into a financing transaction with an unaffiliated special purpose entity which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million and intends to build a 233,000 square foot facility. The Company is leasing this land for five years, with six five-year renewal options. The Company has the right to lease a building to be built on the land for a term that is identical to the land lease. The rental rate will be based on the total cost of the project, which is expected to be approximately $18.0 million. The Company has an option to purchase the property at any time during the term of the lease for its original cost. The Company intends to consolidate all of its Dallas, Texas based operations in this new facility when it is completed, which is expected to be in fiscal 2000. This financing arrangement will be accounted for as an operating lease for financial reporting purposes. See "Business--Properties". The Company has capitalized and expects to continue to capitalize its costs relating to the High End Lawsuit (approximately $2.5 million as of June 30, 1997, and an estimated additional $1.6 million through consummation of the trial). Unless the Company receives a judgment in this litigation that at least one of its patents has been infringed and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. See "Risk Factors--Capitalized Litigation Costs" and "Business--Litigation." Management believes that cash flow generated from operations, combined with the net proceeds from the Offering and borrowing capacity under the Credit Agreement (after giving effect to the application of the proceeds of the Offering) should be sufficient to fund its anticipated operating needs and capital expenditures for at least twelve months after the date of the Offering. However, because the Company's future operating results will depend on a number of factors, including the demand for the Company's products and services, the level of competition, the success of the Company's research and development programs, the ability to achieve competitive and technological advances and general and economic conditions and other factors beyond the Company's control, there can be no assurance that sufficient capital resources will be available to fund the expected expansion of its business beyond such period. INFLATION The Company has generally been able to offset cost increases with increases in the rental rates and sales prices charged for its products and services. Accordingly, the Company does not believe that inflation has had a material effect on its results of operations to date. However, there can be no assurance that the Company's business will not be adversely affected by inflation in the future. 25 BUSINESS GENERAL The Company is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theatre, television and film and corporate events. In 1981, the Company revolutionized the professional entertainment lighting industry by inventing the VARI*LITE-Registered Trademark- system, the first automated lighting system that allowed real-time, computerized, remote control of light beam features such as color, size, shape, position and intensity. As a result, the VARI*LITE-Registered Trademark- brand name has become recognized as the preeminent brand name for automated lighting. The Company rents its VARI*LITE-Registered Trademark- automated lighting systems exclusively through a domestic and international network of Company-owned offices and independent distributors. The Company believes that its position as an industry leader results from its broad range of innovative and technologically superior products, its longstanding collaborative relationship with participants in the entertainment industry, its worldwide distribution system and its dedication to customer service. The Company continuously addresses the technical and creative needs of its customers by designing and manufacturing products that in many instances have become the industry standard. Lighting designers using the Company's automated lighting systems have won Tony-Registered Trademark- Awards for Broadway lighting design every year since 1990, and the Company won an Emmy-TM- Award for Outstanding Achievement in Engineering for television in 1991 and 1994. For its accomplishments in the concert touring market, the Company was named by Performance Magazine as the "Lighting Company of the Year" six times since 1989 and the "Equipment Manufacturer of the Year/Lighting" ten times since 1983. The Company has capitalized on the growth of the entertainment industry and has demonstrated its ability to broaden the application of its existing technology and to develop new lighting systems and products to create and penetrate new markets. - CONCERT TOURING. The Company initially designed its systems to serve the concert touring market and remains a leader in that market. The Company's customers have included such notable performers as The Rolling Stones, Phil Collins, Genesis, Pink Floyd, Paul McCartney, David Bowie, Elton John, Tina Turner, Sting, Reba McEntire, Vince Gill, Barbara Streisand, Diana Ross, Whitney Houston, Sheryl Crow, Pearl Jam and the Indigo Girls. - THEATRE. By developing the first virtually silent automated lighting fixture, the Company secured a significant competitive advantage in the theatre market, including touring theatre shows. The Company's systems have been used in such shows as CHICAGO, MISS SAIGON, SUNSET BOULEVARD, KISS OF THE SPIDER WOMAN, THE WILL ROGERS FOLLIES, TOMMY, GREASE, HOW TO SUCCEED IN BUSINESS WITHOUT REALLY TRYING, BRING IN 'DA NOISE BRING IN 'DA FUNK, JESUS CHRIST SUPERSTAR, MARTIN GUERRE, JEKYLL & HYDE, OLIVER, RAGTIME and SHOW BOAT. - TELEVISION AND FILM. The Company successfully leveraged its versatile product line to become a leading provider of automated lighting to the television market and to increase its penetration of the film market. The Company has provided automated lighting for the Academy Awards, Emmy-TM- Awards, Grammy Awards, Country Music Awards, MTV Music Awards and other awards shows, as well as television shows such as THE TONIGHT SHOW WITH JAY LENO, THE LATE SHOW WITH DAVID LETTERMAN, WHEEL OF FORTUNE, SATURDAY NIGHT LIVE, HOME IMPROVEMENT and AMERICAN GLADIATORS, and the movies FORREST GUMP, BATMAN FOREVER, WAYNE'S WORLD and SISTER ACT, among others. VARI*LITE-Registered Trademark- automated lighting fixtures or "luminaires" are also installed in ABC's New York studios, where they are used for PRIME TIME LIVE, 20/20 and GOOD MORNING AMERICA. - CORPORATE EVENTS. The Company is continuing to expand its presence in the corporate events market by providing automated lighting systems for conventions, business meetings, new product launches and special events. The Company's systems have been used in events for Sony, Nike, IBM, Sprint, Oldsmobile and Microsoft, among others. 26 - ARCHITECTURAL. Recently, the Company has targeted the lighting needs of architectural markets such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. The Company's Irideon-Registered Trademark- automated lighting system product line, which is in the development stage, is designed specifically for such architectural lighting applications. The Company's VARI*LITE-Registered Trademark- systems incorporate advanced proprietary and patented technology in both lighting fixtures and control consoles. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaries simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The Company is also a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. INDUSTRY In the early 1980's, the concert touring market was the first to recognize that automated lighting could be used not only to augment a performance but also as an additional source of entertainment. Today, lighting and lighting design play an integral role in the entertainment industry, providing illumination of concert, theatre, television and film performers for the audience, as well as creating special effects to augment the performance. According to an industry source, the concert touring market in North America has grown at an annual rate of approximately 6% over the past nine years, as measured by major headliner arena ticket sales. The Company believes that the international concert touring market will grow at a faster rate because it is at an earlier stage in its development. The theatre market, as measured by the North American live theatre box office receipts, has grown by an annual rate of approximately 11% over the last ten years according to VARIETY. More importantly, touring shows, for which the Company's automated lighting systems are ideally suited, accounted for 60% of the total market in 1996 compared to 52% in 1986. The Company believes that the North American and international theatre markets continue to represent a significant opportunity for the Company. In recent years, lighting designers have begun to utilize entertainment lighting in new settings such as corporate meetings, restaurants, casinos, cruise ships and retail settings. The Company has broadened the application of its existing technologies to address this demand, including the development of its Irideon-Registered Trademark-product line for architectural use. The Company expects the demand for entertainment lighting in both existing and new settings to increase in the future. STRATEGY The Company's principal objectives are to maintain its worldwide leadership positions in its existing markets and to create demand for its products in new markets. The key elements of this strategy include: - MAINTAINING ITS COMMITMENT TO INNOVATION. The Company will remain committed to research and development, designing innovative technologies for use in multiple products. By continuing to develop leading edge, proprietary automated lighting products with novel and versatile features, the Company expects to maintain its leadership positions in existing markets and create demand for its products in new markets. - EXPANDING ITS WORLDWIDE DISTRIBUTION CAPABILITIES. The Company is committed to leveraging its position as an industry leader in automated lighting by expanding its domestic and international distribution channels by opening new offices, affiliating with additional independent distributors and 27 acquiring complementary businesses. The Company intends to increase its focus as a full-service provider of quality products and services by further expanding and diversifying its worldwide inventory and distribution system, improving its extensive education and training programs and continuing to emphasize customer service. The Company expects to significantly expand its recent efforts to offer a full range of lighting services and products, including conventional lighting products, in order to compete effectively for all of its customers' lighting needs. - CONTINUING TO OFFER VALUE-ADDED COMPLEMENTARY SERVICES. The Company intends to continue providing complementary sound, conventional lighting, custom stage and stage set, and design and production management products and services, thereby offering comprehensive solutions to its customers' needs and leveraging its customer relationships to maximize revenue. PRODUCTS AND SERVICES AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company designs, manufactures and markets an extensive line of integrated automated lighting systems, including light fixtures, or "luminaires," control consoles and support equipment, and provides system operators and maintenance services. To accommodate users who prefer to operate the Company's lighting systems independently, the Company also conducts extensive training programs. The Company rents rather than sells its VARI*LITE-Registered Trademark- automated lighting systems. VL1-TM- LUMINAIRE. The Company's initial product, the revolutionary VL1-TM- luminaire, was the first automated luminaire using a dichroic filter color changing system, thereby becoming the first compact, easily transportable light capable of moving and changing beam intensity, position, movement, size, shape and color. The VL1-TM- luminaire was introduced in 1981 and remained in service until 1996. SERIES 200-TM- SYSTEM. The Company's VL2C-Registered Trademark- spot luminaire, VL4-Registered Trademark- wash luminaire and Artisan-Registered Trademark- Plus and mini-Artisan-Registered Trademark- 2 control consoles constitute the Company's Series 200-TM- system. Spot luminaires create a hard- edged, crisp beam which can be used for precisely focused illumination and visual effects, as well as for projecting custom light images such as faces and designs through the use of "gobos", designs etched into a piece of glass or cut into a piece of metal through which a light beam is directed to create an image. Each VL2C-Registered Trademark- spot luminaire model can change light color in one-tenth of a second and can produce more than 120 separate light colors through the use of the Company's patented color changing system. In designing the Series 200-TM- system, the Company patented a number of features which it believes makes the Company's light systems superior to those of its competitors. The Company is the only industry participant which combines patented dichroic filter color changing systems, advanced heat removal techniques and a computer control systems that utilize distributed processing and resident cue memory in each luminaire. By using such technology to execute a lighting effect (or cue), an operator can transmit a single command to up to 1,000 luminaires simultaneously, each of which stores its own set of cues. As a result, customers using the Company's systems can create lighting presentations with greater flexibility, complexity, speed and precision than with competing products. The VL4-Registered Trademark- wash luminaire projects a dispersed soft-edge light beam for even illumination of objects and areas. The VL4-Registered Trademark- luminaire's patented color changing system allows the user to select 30 preset and 160 programmable colors from thousands of available colors and to change these colors in less than three-tenths of a second, or program the system for timed color cross-fades. In addition, the VL4-Registered Trademark-luminaire features precisely timed control of light intensity, including the ability to instantaneously turn the light fixture on and off. Continuous adjustment of diffusion and beam angle provides enhanced control of the beam shape. SERIES 300-TM- SYSTEM. The Company developed its Series 300-TM- automated lighting system principally to satisfy the demands of the theatre, television and film markets for virtually silent, light weight automated lighting products with sophisticated color changing features. The Company's Series 300-TM- system, including the VL5-Registered Trademark- wash luminaire, the VL6-Registered Trademark- spot luminaire and the VLM-TM- automated moving mirror, as well as the Artisan-Registered Trademark-Plus and mini-Artisan-Registered Trademark- 2 control consoles, also appeals to major concert touring clients who want to rent large 28 systems. The VL5-Registered Trademark- luminaire is lighter than the VL4-Registered Trademark- luminaire, and its cold-mirror reflector both eliminates the need for noisy cooling fans and reduces the amount of heat the lights emit onto the stage. Color changes for the VL5-Registered Trademark- are controlled by a system that allows color cross-fades in as little as seven-tenths of a second and interchangeable lenses work with an internal diffusing mechanism to provide a wide variety of beam sizes and shapes. The VL6-Registered Trademark- spot luminaire is the companion to the VL5-Registered Trademark- wash luminaire, and has two interchangeable 12-position wheels of dichroic color filters and gobos for split second color and image changes and multi-color beams. The VL5Arc-TM- luminaire, which won the "Product of the Year/Lighting" for 1996, awarded by Lighting Dimensions magazine, has a brighter bulb than the VL5-Registered Trademark- luminaire and an innovative fluid-filled variable lens (patent pending) which allows beam size control. The VLM-TM- automated moving mirror is a dual-sided highly reflective Lexan-Registered Trademark- polycarbonate mirror panel. With its ability to both pan and tilt 360 degrees, the VLM-TM- automated moving mirror can be used to augment the effects produced by VARI*LITE-Registered Trademark- wash and spot luminaires, or it can be used with conventional lights to create limited beam motion at a very low cost. Although the Company's VL5-Registered Trademark- wash luminaires and VL6-Registered Trademark- spot luminaires are compatible with the industry-standard DMX 512 digital protocol and, as such, can be operated by DMX 512 control consoles, the Company's other products require the more sophisticated, higher performance of the Company's proprietary control consoles which use a high speed, bi-directional communications protocol. The Company's primary control console, the Artisan-Registered Trademark- Plus, provides control of up to 1,000 luminaires, dimmers and other equipment with up to 1,000 cues per channel, allowing the operator to control each luminaire or to store and play back preset cues. The Company also rents the smaller, less expensive mini-Artisan-Registered Trademark- 2 control console which has substantially the same capabilities as the Artisan-Registered Trademark- Plus control console, but requires longer programming time. Accordingly, the mini-Artisan-Registered Trademark- 2 control console is often used either where space is limited or as a back-up system to the Artisan-Registered Trademark- Plus control console. OTHER PRODUCTS AND SERVICES. The Company provides trained personnel to operate its automated lighting systems and offers training courses, maintenance and other support services to customers. The Company considers these services to be of critical importance to its business. The Company maintains extensive, custom-designed training facilities in its Dallas, Texas and London, England offices, where it trains both its own personnel and customers who find it more efficient to have their own personnel operate and maintain the VARI*LITE-Registered Trademark- equipment. The Company also provides smaller training facilities in its New York, Los Angeles and Tokyo offices. In addition to luminaires and control consoles, the Company rents related equipment required to operate the Company's systems, such as power and control signal distribution equipment, dimmers and cables. The Company has also developed a unique stackable, plastic injection-molded storage case for transporting its equipment. The Company's cases are custom-designed to protect VARI*LITE-Registered Trademark- equipment and last longer than the industry standard carpet covered wood or laminate cases. These cases are also significantly lighter than other cases, thereby reducing transportation costs. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. In 1994, the Company began to apply its existing automated lighting technologies to create its Irideon-Registered Trademark-products for the architectural lighting industry. Through its subsidiary Irideon, Inc. ("Irideon"), the Company sells Irideon-Registered Trademark- automated lighting products, even though it continues to rent all of its non-architectural products. AR500 LUMINAIRE-TM-. The AR500-TM- weather-proof wash luminaire is the Company's first product designed specifically for exterior illumination of objects such as monuments, bridges and commercial buildings. Like the Company's other products, the AR500-TM- luminaire uses the Company's patented color changing system to produce smooth color cross-fades through virtually the entire color spectrum. Various lenses permit the light beam size to be altered and a douser provides the ability to dim beam intensity. Lighting Dimensions Magazine named the AR500-TM- luminaire the "Product of the Year/Lighting", Architectural Category in 1993. Since its introduction, the Company has sold over 1,300 AR500-TM- luminaires. 29 AR5-TM- LUMINAIRE. In 1996, the Company began selling interior architectural automated lights for use in permanent architectural installations. The AR5-TM- wash luminaire is the first product in a planned family of products for interior applications. This product uses new dichroic filter coatings, many plastic components and a newly-developed light source, which allow the Company to market less expensive products to lighting and interior designers, and does not require trained operators after the initial set-up. The AR5-TM- wash luminaire was named "Product of the Year/Lighting", Architectural Category in 1995 by Lighting Dimensions magazine and in 1996 won "Product of the Year" at Lightfair International. COMPOSER-REGISTERED TRADEMARK- CONTROL SYSTEM. The AR500-TM- and AR5-TM- luminaires both are operated with the Composer-Registered Trademark-control system. The Composer-Registered Trademark- is a Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer. After programming has been completed, the personal computer can be removed and lighting cues or sequences can be activated via an internal clock or from wall switches. The Composer-Registered Trademark- control system is DMX compatible which, among other things, allows it to operate products manufactured by others. AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS
FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION - ------------------ ------------ -------------------------------------------------------------------------------- VL1-TM- 1981 The original VARI*LITE-Registered Trademark- spot luminaire. Rendered obsolete in most markets by subsequent VARI*LITE-Registered Trademark- products. VL2C-Registered 1986 A high intensity spot luminaire using an arc light bulb. Favored by concert, Trademark- television and theatrical lighting designers due to its beam quality, motion control, bright colors and wide range of color choices. VL4-Registered 1988 A wash luminaire using an arc light bulb and featuring a high speed douser. The Trademark- brightness and precisely timed control of light intensity and beam size appeal to concert, theatre and television and film clients. VL5-Registered 1992 A lighter, less expensive version of the VL4-Registered Trademark- wash Trademark- luminaire using a tungsten light bulb. Silent operation, compactness and lighter weight appeal to theatrical, concert, television and film and corporate events users. Lower cost attracts both major concert touring clients wanting to lease larger systems and entry level concert touring clients with budgetary constraints. VL5Arc-TM- 1997 A VL5-Registered Trademark- luminaire utilizing a 600 watt arc source for very high brightness and a beam control device. Used in productions where high brightness is required. VL5B-TM- 1995 A VL5-Registered Trademark- luminaire with a color system designed for the television and theatre markets with an enhanced pastel range. VL6-Registered 1994 A compact, virtually silent spot luminaire which is the companion to the Trademark- VL5-Registered Trademark- wash luminaire. The brightness, small size and low cost of this luminaire appeal to all lighting disciplines, especially theatrical and television and film users as well as corporate events. VL7-TM- 1998 A high brightness, multi-feature spot luminaire. Expected to service all (projected) markets. VLM-TM- 1994 An automated dual-sided moving mirror able to pan and tilt 360 degrees. Appeals to both large and entry level concert touring clients.
30
FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION - ------------------ ------------ -------------------------------------------------------------------------------- Artisan-Registered 1986 A computerized console required to control most of the Company's luminaires. Trademark- Plus Uses a proprietary communications protocol which allows the operator more functionality, efficiency and control of lighting effects than the industry standard DMX 512 protocol. Mini-Artisan-Registered 1994 A smaller, less expensive console designed to operate the Company's luminaires. Trademark- 2 Often used as a back-up console to the Artisan-Registered Trademark- Plus console.
AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS
FISCAL YEAR PRODUCT INTRODUCED DESCRIPTION - --------------------- ------------ ----------------------------------------------------------------------------- AR500-TM- 1993 A weather-proof wash luminaire with the capability to change color and beam size or intensity. The first automated luminaire designed specifically for outdoor uses such as building exteriors and landmarks and has the "UL-Registered Trademark-" rating for "wet" location. AR5-TM- 1996 An automated wash luminaire designed for architectural applications such as restaurants, casinos, retail stores, corporate showrooms and shopping malls. Composer-Registered 1996 The control system used to operate Irideon-Registered Trademark- architectural Trademark- luminaires. A Windows-Registered Trademark- 95-based system that is programmable using a standard personal computer with playback via an internal clock or wall switches, thereby eliminating the need for trained operators after initial set-up.
COMPLEMENTARY BUSINESSES The Company is a leader in providing complementary products and services to the entertainment industry, including concert sound systems, conventional lighting equipment, custom stage construction and stage set design services, and design and production management services for conventions, business meetings and special events. CONCERT SOUND SYSTEMS. The Company's Showco subsidiary rents concert sound systems and provides related services almost exclusively to the worldwide concert touring market. Its clients have included The Rolling Stones, Janet Jackson, Eric Clapton, Paul McCartney, Genesis, Phil Collins, the Beach Boys, James Taylor, Willie Nelson, Alanis Morissette, Reba McEntire, Vince Gill, Alan Jackson, Moody Blues, Bob Seger, the Cranberries, INXS, Stone Temple Pilots and Smashing Pumpkins. The Company's PRISM-Registered Trademark- sound system was introduced in 1986 as the first large scale concert sound system engineered as a totally integrated system specifically for use in concert touring. The proprietary, scalable PRISM-Registered Trademark- system can be used in any venue from smaller theatres to stadiums and is easier to assemble, disassemble and transport than competitive sound systems. The quality of the PRISM-Registered Trademark- sound system is evidenced by the numerous awards Showco has received, including awards from Mix Magazine for "Outstanding Institutional Achievement--Sound Reinforcement Company of the Year" in 1988 and 1991 through 1993 (for which it was also nominated in 1994 through 1997) and for "Outstanding Technical Achievement--Sound Reinforcement Product of the Year" (for the PRISM-Registered Trademark-Digital Control System) in 1990, the Performance Readers Poll for "Sound Company of the Year" in 1988, 1989 and 1991 and Live Sound! "Instrumental Tin Ear Award--International Touring Company of the Year" in 1995. Since 1987, three different Showco sound engineers have won Mix Magazine's "Sound Engineer of the Year" award. 31 CONVENTIONAL LIGHTING PRODUCTS. Through its subsidiaries, Theatre Projects Lighting Services Limited ("Theatre Projects"), which was acquired in 1994, and Concert Production Lighting, Inc. ("Concert Production"), the Company offers conventional lighting equipment, including numerous types of luminaires and control consoles, large search lights, automatic gel scrollers, trusses, dimmers and smoke machines, to London's West End theatre market and the United Kingdom and European theatre touring markets, as well as to concert touring artists worldwide and to businesses for corporate events. The Company has rented equipment to such West End theatre productions as CATS, PHANTOM OF THE OPERA, SUNSET BOULEVARD and JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and to performers such as The Rolling Stones, Paul McCartney, Phil Collins, Vince Gill, Mary Chapin Carpenter and Torvill and Dean, among others. The Company is also very active in the special events market, providing services to numerous events for the British royalty. In the corporate event market, the Company has provided its conventional lighting products to numerous annual shareholder meetings (including in stadiums with up to 80,000 attendees) and new product launches. STAGE AND STAGE SETS. Through its Brilliant Stages Limited ("Brilliant Stages") subsidiary, which was acquired in 1994, the Company sells custom stage and stage set design and construction services to the international concert touring, theatre and industrial trade show and corporate events markets. The Company's welded aluminum stages are designed using CAD software and are constructed to facilitate rapid assembly, disassembly and loading in a semi-trailer for efficient transportation. The Company is noted for high-tech stages and stage sets that include distinctive hydraulic components and sophisticated electronic effects, such as the stages and stage sets designed and built for the Rolling Stones Voodoo Lounge tour in 1995 and The Rolling Stones upcoming 1997-98 tour, and has provided stages and stage sets to other concert tour customers such as Pink Floyd, Elton John, Tina Turner, U2, Metallica, Peter Gabriel and Phil Collins, and to trade shows for Whirlpool, Smirnoff, Fuji Television and Philips, among others. The Company has also provided services to such theatre productions as JOSEPH AND HIS AMAZING TECHNICOLOR DREAMCOAT and LES MISERABLES. CORPORATE MEETINGS AND SPECIAL EVENTS. The Company, through its IGNITION! Creative Group, Inc. ("Ignition") subsidiary, provides design and production management services to businesses for conventions, business meetings, new product launches and special events. The Company provides concept development, scenery, lighting, sound, special effects, scripting, media production, sound and entertainment production for such events. Clients of the Company for these services include Mary Kay Cosmetics, Inc., Kawasaki Motor Corp., U.S.A., Warner/Elektra/Atlantic Records, The Hong Kong Trade Development Council and EXCEL Communications, Inc. MARKETING, SALES AND DISTRIBUTION The Company markets its products and services to the entertainment industry, including concert touring, theatre, television and film and corporate events markets, as well as to the architectural market. Depending on the circumstances, the Company solicits business from lighting and set designers and consultants, sound engineers, artist managers, producers, production managers and production companies, promoters, architects, corporations and business associations. The Company believes that its customer relationships, reputation for innovative, quality products, worldwide distribution and excellent service are the keys to its success. The Rolling Stones represented 11.9% of the Company's revenues in fiscal 1995. No other customer has accounted for more than 10% of the Company's revenues for at least the last three fiscal years. AUTOMATED LIGHTING--VARI*LITE-REGISTERED TRADEMARK- PRODUCTS. The Company rents rather than sells its VARI*LITE-Registered Trademark-automated lighting products. In addition to providing the Company with a higher level of quality control over its rental products, which require trained operators and maintenance personnel, the Company believes renting has enabled it to better protect its intellectual property and generate a continuing revenue stream for 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 specify lighting requirements. 32 The Company markets its automated lighting systems and services in the United States through Company owned offices in Dallas, New York, Los Angeles, Nashville, Orlando, Las Vegas and Chicago and an independent distributor system. Each Company-owned office targets a specific market segment. For example, the New York office targets the theatre market, the Nashville office targets the country music, television and concert performances markets, the Los Angeles office targets the television and film market and the Orlando, Las Vegas and Chicago offices target the corporate events market. The independent distributors focus on specific geographic markets and tend to rent to all market segments. The Company's international distribution system comprises Company-owned locations in London, Tokyo, Hong Kong and Madrid, as well as, at June 30, 1997, independent distributors in Australia, Austria, Belgium, France, Germany, Korea, Singapore and Sweden and 27 independent dealers in 36 cities in the United States, Puerto Rico, Mexico, Canada, the United Kingdom and five countries in Europe. The Company has two basic types of distribution arrangements: independent distributors and independent dealers. Under the first arrangement, which typically has a term of four years, the distributor advances the Company the funds needed to build the lighting systems to be rented by that distributor. These advances are accounted for as loans and although the distributor is solely responsible for renting the Company's equipment and providing support services to the end-users, rental revenues are split on a predetermined basis between the Company and the distributor, with the distributor retaining the Company's share until the distributor's advances to the Company have been repaid. Distributors are required to undergo four weeks of intensive training in operation and maintenance of the Company's lighting systems. Under the second arrangement, independent dealers rent the less expensive Series 300-TM- systems from the Company generally for fixed lease payments over a five-year term and bear the entire risk of renting the lighting systems to end users in regional markets. In an effort to respond to requests from customers who wanted to purchase the Company's lighting systems, in 1989 the Company began entering into sales-type leases. Under the typical sales-type lease, the customer rents the Company's equipment for either a five- or a ten-year term, with unlimited one-year renewal options, for a lump sum payment at the commencement of the term, plus a nominal renewal option exercise price. The customer is normally solely responsible for maintaining the equipment under these arrangements, but often enters into a maintenance agreement with the Company. As of June 30, 1997, the Company had entered into over 50 sales-type leases with customers such as the Ringling Brothers and Barnum & Bailey Circus, the Las Vegas Hilton, Mirage and MGM Grand hotels in Las Vegas, the Lyric Opera in Chicago, The San Francisco Opera, Busch Gardens in Florida, the Mel Tillis Theater in Branson, Missouri and the Aladdin touring ice show. Recently, the Company has begun to further emphasize its full-service strategy by expanding its capability to offer conventional lighting products. This effort is designed to increase the Company's revenues from the rental of all VARI*LITE-Registered Trademark- products. AUTOMATED LIGHTING--IRIDEON-REGISTERED TRADEMARK- PRODUCTS. The Company sells its architectural lighting products primarily through a worldwide network of independent sales representatives and distributors, but also directly, to lighting designers who recommend lighting equipment for architectural applications such as restaurants, casinos, retail stores, corporate showrooms, shopping malls, building exteriors and landmarks. CONVENTIONAL LIGHTING PRODUCTS. The Company's conventional lighting operations, which have historically operated independently from the VARI*LITE-Registered Trademark- product operations, maintain internal marketing and distribution departments and rely heavily on the Company's established reputation for quality and service, which is enhanced by its high visibility projects and customers. The Company reinforces this reputation by advertising in trade and specialty magazines. Most of the Company's conventional lighting contracts are procured through a bidding process and the Company believes that competition in this industry is based on expertise, quality and price. The Company has recently begun to integrate these operations with those of its VARI*LITE-Registered Trademark- products in order to improve its position as a full-service provider. 33 CONCERT SOUND SYSTEMS. The Company markets its concert sound equipment directly to end-users worldwide. Showco has developed 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 stages and stage sets 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 or marketing executives. In-house salespeople seek requests for proposals through cold calls, sales letters and professional mailings and, to a lesser extent, through advertising in trade publications. Upon receiving an invitation to submit a proposal, the Company assembles a project team which develops concepts and designs for a multi-media presentation to the potential client. RESEARCH AND DEVELOPMENT; INTELLECTUAL PROPERTY Since 1970, the Company and its predecessors have continually developed proprietary products that serve the entertainment industry. The Company's proprietary technology and development of innovative products that meet the needs of its customers have enabled it to expand the applications for its technology to new products and markets. From time to time, the Company has forged important collaborations with unaffiliated entities to supplement and complement its internal research and development activities. As of June 30, 1997, the Company's research and development group consisted of over 70 engineers, and the Company expects to continue to expand this group. These internal capabilities enable the Company to continually improve existing products, design new products and develop new technology to meet the needs of its customers. In the fiscal years ended September 30, 1994, 1995 and 1996, the Company's research and development expenditures totaled $3.0 million, $3.3 million and $4.4 million, respectively. The Company's extensive research and development efforts have produced a number of leading-edge technological developments in the automated lighting industry. When appropriate, the Company seeks patent protection for its products, particularly in its automated lighting business. As of June 30, 1997, the Company had registered and received 31 domestic patents and over 110 foreign patents in several different countries and territories. In addition, the Company had 14 patent applications pending in the United States on automated lighting technology and over 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. None of the Company's patents expire before 2000. The Company believes that its patents provide a substantial competitive advantage over its competitors in the automated lighting industry, and the Company's ability to compete in the future will depend in part on maintaining its technological advantage over its competitors. See "Risk Factors--Reliance on Intellectual Property." The Company has obtained trademark protection in the United States and numerous foreign countries on various names, including, among others, VARI*LITE-Registered Trademark-, Artisan-Registered Trademark- Plus, Mini-Artisan-Registered Trademark- 2, Series 100-TM-, Series 200-TM-, VL1-TM-, VL2C-Registered Trademark-, VL4-Registered Trademark-, VL5-Registered Trademark-, VL5Arc-TM-, VL5B-TM-, VL6-Registered Trademark-, Dichro*Tune-TM-, Dichro*Wheel-TM-, Showco-TM-, PRISM-Registered Trademark-, Irideon-Registered Trademark-, AR500-TM-, AR5-TM- and Composer-Registered Trademark-. MANUFACTURING With the exception of the Company's stage construction business, which is based in London, England, the Company's manufacturing facilities are located in Dallas, Texas. The Company's manufacturing process principally consists of procuring, inspecting and assembling components custom-made by others to the Company's specifications. The Company generally provides its suppliers with specifications for its components and pays for all tooling used in their production. The Company emphasizes the quality and reliability of its products and, 34 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 chosen to develop strategic relationships with certain of its key suppliers to develop products specifically to meet the Company's 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 vendor). The Company attempts to maintain adequate inventories of these components and, based on its experience, does not anticipate problems obtaining sufficient supplies in the foreseeable future. The loss of any supplier that is the sole vendor of a component would delay the Company's manufacturing schedules and possibly force the Company to purchase new tooling, but the Company believes substitute suppliers can be found for all components of all of its products. See "Risk Factors--Dependence on Key Suppliers." EQUIPMENT INVENTORY MANAGEMENT The Company uses an inventory control and management system to locate its rental equipment at all times anywhere in the world. Each piece of equipment is serialized for identification purposes. Equipment utilization is centrally monitored at the Company's headquarters to determine (i) which products are in highest demand in various geographic markets and whether certain equipment should be relocated to increase utilization and revenue, (ii) whether product shortages that require the production of additional units exist and (iii) whether current pricing is at the appropriate level. The maximum utilization rates of the Company equipment are affected by production scheduling requirements of the concert touring, theatre, television and film industries and corporate events. Utilization rates are also limited by the need for maintenance, service and shipping time. The Company's inventory control system helps the Company maximize its utilization rates in light of these factors in order to satisfy customer requirements while maximizing revenue. MANAGEMENT INFORMATION SYSTEMS The Company invests heavily in management information systems, believing them to be a key factor in the Company's ability to remain ahead of its competitors. In fiscal 1995 and 1996, the Company invested approximately $2.2 million constructing a wide-area network throughout the United States and implementing Oracle financial and manufacturing applications. This computer system is expected to meet the anticipated needs of the Company for the foreseeable future. COMPETITION Each of the Company's businesses is highly competitive. In its automated lighting business, the Company primarily competes with Coemar SPA, Clay Paky SPA, High End Systems, Inc. ("High End"), Light & Sound Design, Ltd. and Martin Gruppen A/S. Of these competitors, only Light & Sound Design, Ltd. manufactures and rents equipment, while the others sell equipment to other rental companies. The Company competes with a number of conventional lighting rental companies, who also purchase automated lighting equipment from others, in the theatre, television and film, concert touring and corporate event markets. The Company competes primarily on the basis of product capabilities, quality and reliability, price, worldwide distribution capabilities, brand name recognition and reputation and customer service and support. The VARI*LITE-Registered Trademark- brand name has been recognized for years as the preeminent brand name for automated lighting. The Company has several national concert sound competitors, the most significant of which is Clair Brothers Audio. However, other companies such as Maryland Sound Industries, Inc., Audio Analysts USA, Inc., 35 dB Sound, Inc. and Southern California Sound Image, Inc. compete effectively by offering less sophisticated equipment at lower prices. The Company competes in this business principally on product capabilities, quality and reliability, price, brand name recognition, reputation and customer service. The Company's stage and stage set 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 build sophisticated and technically difficult state-of-the-art stages and stage sets. The market for design and production management services is highly competitive and fragmented, including hundreds of free lance producers and designers. Competition in this industry is based primarily on personal relationships and creativity. PROPERTIES The Company leases all of its facilities, including five facilities comprising approximately 153,000 square feet in Dallas, Texas under leases that expire in April 1999, but can be extended until at least April 2000. The Dallas facilities contain the Company's executive offices, manufacturing, warehouse, maintenance, advanced technologies and research and development facilities and training center. The executive offices, warehouse and manufacturing space of Vari-Lite Europe Limited ("Vari-Lite Europe"), Theatre Projects and Brilliant Stages are located in London, England in two facilities with approximately 71,500 square feet that are leased through January 1998 and March 2010. The executive offices of Vari-Lite Asia, Inc. ("Vari-Lite Asia"), as well as its Technical Center, are located in Tokyo in two leased facilities aggregating approximately 10,300 square feet, the terms of which expire in February 1999 and October 2000. In addition, the Company leases sales offices in Chicago, Hong Kong, Madrid, Las Vegas, Los Angeles, Nashville, New York and Orlando. In December 1995, the Company entered into a financing transaction with an unaffiliated special purpose entity which purchased a 32-acre site in the Dallas, Texas area for approximately $3.6 million, upon which the Company intends to build a 233,000 square foot facility. The Company is leasing this land for five years, with six five-year renewal options. The Company has the right to lease a building to be built on the land for a term that is identical to the land lease. The Company's rental rate will be based on the total cost of the project, which is expected to be approximately $18.0 million. The Company has an option to purchase the property at any time during the term of the lease for its original cost. The Company intends to consolidate all of its Dallas, Texas-based operations in this new facility in fiscal 2000. This financing arrangement is accounted for as an operating lease for financial reporting purposes. LEGAL PROCEEDINGS In the ordinary course of its business, the Company is from time to time threatened with or named as a defendant in various lawsuits, including patent infringement claims. Additionally, the Company has filed lawsuits claiming infringements of its patents by third parties for which the Company has been subject to counterclaims. In August 1995, the Company brought suit asserting a number of claims of infringement of several of its patents by High End in the Northern District of Texas seeking monetary damages and injunctive relief to prevent future patent infringement (the "High End Lawsuit"). The Company also sought a temporary restraining order for alleged trade secrets violations, which the court denied. High End has denied the Company's claims and has counterclaimed seeking to have certain of the Company's patents declared invalid and alleging that the Company's claims are frivolous and that the Company has violated federal antitrust laws. The Company believes High End's counterclaims are without merit. Discovery in this matter is proceeding and trial is currently scheduled for February 1998. The Company has capitalized and expects to continue to capitalize its costs relating to this lawsuit ($2.5 million as of June 30, 1997 and an estimated additional $1.6 million through consummation of the trial). Unless the Company receives a judgment in this litigation that High End has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances, that such a judgment will allow it to maintain its competitive advantage provided by the 36 infringed patents, all costs incurred by the Company relating to the High End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. EMPLOYEES As of June 30, 1997, the Company had 481 full-time employees. In addition, the Company had 167 part-time and temporary employees. None of the Company's employees is a party to any collective bargaining agreement and the Company has never experienced a work stoppage. The Company considers its relations with its employees to be good. 37 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the executive officers and directors of the Company.
NAME AGE POSITION - ---------------------------------- --- ------------------------------------------------------------------------ H. R. Brutsche III(1) 52 Chairman of the Board, President and Chief Executive Officer of the Company Michael P. Herman 54 Vice President-Finance, Chief Financial Officer and Secretary of the Company James H. Clark, Jr.(1)(2) 60 Director of the Company John D. Maxson(1) 57 Director of the Company; Chairman of the Board of Showco and Ignition J. Anthony Smith(3) 52 Director of the Company C. Vincent Prothro(2)(3)(4) 54 Director of the Company John R. Rettberg(2)(3)(4) 59 Director of the Company Keizo Akimoto 63 President and Representative Director of Vari-Lite Asia David W. Alley 52 Executive Vice President--International Operations and Director of Vari-Lite James P. Bates 50 Vice President--Information Technology and Chief Information Officer of the Company James M. Bornhorst 51 Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology and Director of Vari-Lite Richard W. Bratcher, Jr. 37 President, Chief Executive Officer and Director of Showco Brian L. Croft 58 Managing Director of VLEH Robert V. Dungan 44 Vice President, General Manager and Director of Irideon Loren J. Haas 39 Executive Vice President--North American Operations of Vari-Lite Janis C. Pestinger 45 Vice President--Administration and Assistant Secretary of the Company T. Clay Powers 38 Vice President--Product Development and Manufacturing of Vari-Lite and Director of Showco J. Scott Thompson 45 President, Chief Executive Officer and Director of Ignition
- ------- (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee (4) Member of the Omnibus Plan Committee H.R. BRUTSCHE III is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Brutsche has served as Chairman of the Board, President and Chief Executive Officer of the Company and its predecessors since 1980. Mr. Brutsche also serves as Chairman of the Board of VLEH, Vari-Lite Europe, Brilliant Stages and Theatre Projects and as President and Chief Executive Officer of Vari-Lite and Irideon. 38 MICHAEL P. HERMAN joined the Company in June 1993 as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer. In January 1997, Mr. Herman ceased acting as Treasurer of the Company. Mr. Herman also serves as Vice President--Finance, Chief Financial Officer, Secretary and Treasurer of Vari-Lite, Irideon, Showco, Concert Production and Ignition. From May 1991 to May 1993, Mr. Herman was the Vice President-- Finance and Chief Financial Officer of Barry's Cameras, Inc., a chain of retail camera and video stores. JAMES H. CLARK, JR. has been a director of the Company and its predecessors since 1978. Mr. Clark serves as Chairman of the Company's Executive Committee and Audit Committee and is a director of all of the Company's subsidiaries. Mr. Clark has been the Managing General Partner of Clark Partnership, Ltd., an investment and venture capital partnership, since 1988, and serves as Chairman of the Board of Texas Freezer Co. Mr. Clark's son is married to Mr. Prothro's daughter. JOHN D. MAXSON is one of the founders of the Company and its subsidiaries and has served as a director of the Company and its subsidiaries since their inception. Mr. Maxson has served as Chairman of the Board of Showco for approximately 25 years and as Chairman of Ignition since its inception in September 1994. J. ANTHONY SMITH has been a director of the Company and its predecessors since 1981. Mr. Smith also serves as a director of all of the Company's subsidiaries. Mr. Smith has been the Managing Director of Hit & Run Music (Publishing) Limited, an international independent music publisher, for over 20 years; the Managing Director of Hit & Run Music Limited, a professional manager of musicians, for over 20 years; and the Managing Director of Ives Street Developments Limited, a property management company, for six years. C. VINCENT PROTHRO has been a director of the Company since April 1996. Mr. Prothro has been Chairman of the Board of Dallas Semiconductor Corporation, a manufacturer of electronic chips and chip-based subsystems, since 1984 and Chief Executive Officer and President of Dallas Semiconductor Corporation since 1989. Mr. Prothro is also a general partner of Southwest Enterprise Associates, L.P., a venture capital fund. Mr. Prothro's daughter is married to Mr. Clark's son. JOHN R. RETTBERG has been a director of the Company since April 1996 and serves as Chairman of the Company's Compensation Committee and Omnibus Committee. Mr. Rettberg currently serves as a consultant to the Northrop Grumman Corporation ("Northrop Grumman"), an advanced technology company operating primarily in the fields of aircraft and military electronics design, development and manufacturing. Mr. Rettberg has served in this capacity since his retirement from Northrup Grumman on January 1, 1995. Mr. Rettberg joined Northrop Grumman in 1962 and, prior to his retirement, was Corporate Vice President and Treasurer. Mr. Rettberg is also a director of J.P. Morgan Investment Mgmt., a manager of mutual funds. KEIZO AKIMOTO has been the Representative Director (equivalent of chief executive officer) of Vari-Lite Asia since 1985 and President of Vari-Lite Asia since 1992 and has been with Vari-Lite Asia since its formation in 1984. DAVID W. ALLEY has been Executive Vice President--International Operations of Vari-Lite since 1995 and has been a director of Vari-Lite since March 1987 and of each of VLEH and Vari-Lite Asia since 1995. From 1994 to 1995, he served as Vice President-East and West Coast Operations of Vari-Lite and he served as Vice President-West Coast Operations from 1990 until 1994. Mr. Alley has held various other positions with Vari-Lite and Showco since 1981. JAMES P. BATES has been the Vice President--Information Technology and Chief Information Officer of the Company since October 1996. Prior to that time since 1989, Mr. Bates was Director of Applications Systems Implementation for DSC Communications Corp. JAMES M. BORNHORST has been the Vice President and Chief Science Officer of the Company and the Vice President--Advanced Technology of Vari-Lite since 1995 and a director of Vari-Lite since its inception. Prior to that, Mr. Bornhorst served as Vice President--Engineering of Vari-Lite since 1983 and has been employed since 1972 in various other capacities with Showco and Vari-Lite. 39 RICHARD W. BRATCHER, JR. has been the President and Chief Executive Officer and a director of Showco since July 1996. He served as Vice President and General Manager of Showco from August 1993 until July 1996 and shop manager of Showco from August 1987 until August 1993. Mr. Bratcher has also served in various other capacities with Showco since 1983. BRIAN L. CROFT has been the Managing Director of VLEH and Vari-Lite Europe since the formation of VLEH and its acquisition of Vari-Lite Europe in 1994. From 1989 until its acquisition by the Company in 1994, Mr. Croft was the General Manager and a director of Vari-Lite Europe, Ltd., which was then an independent VARI*LITE-Registered Trademark- distributor and a subsidiary of the Samuelson Group plc. ROBERT V. DUNGAN has served as Vice President and General Manager of Irideon since its inception in September 1994 and as a director of Irideon since January 1996. From January 1993 to September 1994, Mr. Dungan served as Vice President-Products Group of Vari-Lite and served as Operations Manager of Vari- Lite from 1988 until January 1993. He has also served in various other capacities with Vari-Lite since 1983. LOREN J. HAAS has been the Executive Vice President--North American Operations of Vari-Lite since 1995. From 1993 until 1995, Mr. Haas was General Manager--Dallas of Vari-Lite and was Marketing Manager of Vari-Lite from 1991 until 1993. Mr. Haas has served in various other capacities with Vari-Lite since 1987. JANIS C. PESTINGER has been Vice President--Administration and Assistant Secretary of the Company since November 1996 and May 1993, respectively. Ms. Pestinger also has served as Vice President--Administration of Vari-Lite since December 1993 and for more than three years prior to that as the Risk and Benefits Manager for Vari-Lite. Ms. Pestinger has served in various other positions with Vari-Lite and Showco since 1979. T. CLAY POWERS has been the Vice President--Product Development and Manufacturing of Vari-Lite since July 1996. Prior to that he served as the President and Chief Executive Officer of Showco since 1992. Mr. Powers also has served as a director of Showco since 1990. From 1991 to 1992, Mr. Powers served as Vice President and General Manager of Showco and from 1990 to 1991 Mr. Powers served as Vice President--Internal Operations of Showco. Mr. Powers has served in various other capacities with Showco since 1982. J. SCOTT THOMPSON has served as President and Chief Executive Officer of Ignition since October 1994 and as a director of Ignition and its predecessor since January 1992. Prior to October 1994, Mr. Thompson was a Vice President of Showco since 1987 and served in various capacities with Showco since 1978. BOARD OF DIRECTORS DIRECTOR COMPENSATION. The Board of Directors is divided into three classes, with one class of directors elected on a rotating basis at each annual meeting of stockholders for a three-year term. Each director who is not an employee of the Company or a subsidiary of the Company is paid an annual fee of $20,000, plus $1,000 for each meeting of the Board of Directors or a Committee of the Board of Directors attended. The Company also pays all transportation and lodging costs for directors to attend meetings of the Board of Directors and its Committees. Each of Messrs. Clark, Maxson and Smith also receives $10,000 annually plus $250 per meeting for serving as a director of Vari-Lite, $5,000 annually plus $62.50 per meeting for serving as a director of VLEH, $4,000 annually plus $125 per meeting for serving as a director of Showco, $4,000 annually plus $62.50 per meeting for serving as a director of each of Vari-Lite Europe and Theatre Projects, $3,000 annually plus $125 per meeting for serving as a director of each of Vari-Lite Asia, Ignition and Irideon and $3,000 annually plus $62.50 per meeting for serving as a director of Brilliant Stages. As of July 1, 1995, the Company entered into a Deferred Compensation Agreement ("Deferred Compensation Agreement") with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with each of Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. 40 Each of Messrs. Clark, Maxson and Smith (each a "Consultant") also has entered into a Consulting Agreement with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson each receive an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more life insurance policies (collectively "Policies" and individually "Policy") pursuant to split-dollar agreements (the "Split-Dollar Agreements") with the Company. The Split-Dollar Agreements each provide for sharing the costs and benefits of the Policies between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. An irrevocable trust created or an individual designated by Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, who is the owner of the Policy (the "Owner") reimburses the Company for the portion of the premium attributable to the death benefit protection of each Policy (the "P.S. 58 Cost"). The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policies that are subject to the Split-Dollar Agreements. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee and an Omnibus Committee. The Executive Committee is composed of Messrs. Clark, Maxson and Brutsche, with Mr. Clark serving as Chairman. The Executive Committee has the authority, between meetings of the Board of Directors, to take all actions with respect to the management of the Company's business that require action by the Board of Directors, except with respect to certain specified matters that by law must be approved by the entire Board. The Audit Committee is composed of Messrs. Clark, Prothro and Rettberg, with Mr. Clark serving as Chairman. The Audit Committee is responsible for (a) reviewing the scope of, and the fees for, the annual audit, (b) reviewing with the independent auditors the corporate accounting practices and policies, (c) reviewing with the independent auditors their final report, (d) reviewing with internal and independent auditors overall accounting and financial controls and (e) being available to the independent auditors during the year for consultation purposes. The Compensation Committee is composed of Messrs. Smith, Prothro and Rettberg, with Mr. Rettberg serving as Chairman. With the exception of awards under the Omnibus Plan and Annual Incentive Plan (as hereinafter defined), the Compensation Committee determines the compensation of the officers of the Company and performs other similar functions. 41 The Omnibus Committee is composed of Messrs. Prothro and Rettberg, with Mr. Rettberg serving as Chairman. The Omnibus Committee administers the Omnibus Plan and the Annual Incentive Plan, including the determination of eligibility and the granting of awards under such plans. EXECUTIVE COMPENSATION The following table summarizes the compensation paid to the Company's chief executive officer and its four other most highly compensated executive officers and a former executive officer of the Company for services rendered for the fiscal year ended September 30, 1996 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
FISCAL 1996 ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) COMPENSATION($) - ---------------------------------------------------------- --------- ----------- --------------- ---------------- H. R. Brutsche III........................................ 433,008 48,713 167,000(2) 41,454(3) Chairman of the Board, President and Chief Executive Officer of the Company Keizo Akimoto(1).......................................... 199,737 19,495 -- -- Representative Director of Vari-Lite Asia David W. Alley............................................ 154,500 11,513 -- 3,855(4) Executive Vice President--International Operations of Vari-Lite James M. Bornhorst........................................ 136,299 9,449 -- 3,756(4) Vice President and Chief Science Officer of the Company and Vice President--Advanced Technology of Vari-Lite T. Clay Powers............................................ 126,267 10,500 -- 4,231(4) Vice President--Product Development and Manufacturing of Vari-Lite James E. Kinnu(5) ........................................ 350,016 35,002 -- --
- ------- (1) Applies conversion rate of Japanese yen to U.S. dollars based on the exchange rate in effect at the end of each month during fiscal 1996. (2) This amount was paid to Mr. Brutsche pursuant to the Deferred Compensation Agreement. See "Management--Board of Directors." (3) This amount includes $3,292 and $20,725, respectively, which were paid on behalf of Mr. Brutsche for the Policies pursuant to the Split-Dollar Agreements and for a term life insurance policy maintained on the life of Mr. Brutsche; $13,817 which was paid to reimburse Mr. Brutsche for taxable income incurred with respect to the premiums paid on his behalf on the term life insurance policy; and $4,620 which were contributions made by the Company on behalf of Mr. Brutsche to the Company's 401(k) plan. See "Management--Employment Agreements." (4) These amounts were contributions made by the Company on behalf of such Named Executive Officer to the Company's 401(k) plan. (5) Prior to his departure from the Company, effective September 30, 1996, Mr. Kinnu served as the Company's Senior Executive Vice President and Chief Operating Officer. 42 EMPLOYMENT AGREEMENTS As of July 1, 1995, the Company entered into an Employment Agreement (the "Brutsche Employment Agreement") with H. R. Brutsche III, Chairman of the Board, President and Chief Executive Officer. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. The Brutsche Employment Agreement may be terminated in the event of death, upon permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If the Brutsche Employment Agreement is terminated because of permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits. If Mr. Brutsche's employment is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. In addition to those provided for under the Brutsche Employment Agreement, Mr. Brutsche is eligible to receive certain other benefits. See "Management--Board of Director--Director Compensation." The Company entered into an Employment Agreement (the "Kinnu Employment Agreement") with James E. Kinnu, the former Senior Executive Vice President and Chief Operating Officer of the Company, as of August 28, 1995. The Kinnu Employment Agreement had an initial term of three years and provided for Mr. Kinnu to receive an annual base salary of $350,000 and to participate in the Company's employee benefit plans. Pursuant to the Kinnu Employment Agreement, on September 10, 1995, Mr. Kinnu received an interest-free loan of $200,000 (the "Kinnu Loan") for a term of three years with the principal to be forgiven in equal amounts each month over the term of the Kinnu Employment Agreement, and reimbursement of relocation expenses of up to $25,000. Effective September 30, 1996, Mr. Kinnu was terminated by the Company without cause. In connection with his termination, the Company will continue to pay Mr. Kinnu as a consultant $350,000 per year until September 30, 1998, agreed to cancel and forgive the Kinnu Loan and acquired shares of Common Stock in consideration for the forgiveness and cancellation of Mr. Kinnu's $132,900 principal amount indebtedness to the Company, which accrued interest at 8% per annum, matured on August 31, 1998 and was incurred by Mr. Kinnu to acquire such shares of Common Stock. EMPLOYEE BENEFIT PLANS OMNIBUS PLAN. In August 1996, the Company adopted the Vari-Lite International, Inc. 1997 Omnibus Plan (the "Omnibus Plan") to attract and retain qualified employees and non-employee directors. An aggregate of shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications, has been authorized for issuance upon exercise of options, stock appreciation rights ("SARs"), bonus stock, phantom stock, dividend equivalents and other awards, or as restricted or performance awards under the Omnibus Plan ("Awards"). The Omnibus Committee administers the Omnibus Plan and determines to whom Awards are to be granted and the terms and conditions, including the number of shares and the period of exercisability thereof. Awards may be granted to officers, management, other key employees and to non-employee directors of the Company or any of its present or future subsidiaries as determined by the Omnibus Committee, provided that any options to be granted to non-employee directors who are members of the Omnibus Committee must be granted by the entire Board of Directors of the Company. The Omnibus Plan authorizes the grant or issuance of both nonqualified stock options and incentive stock options, with the terms of each such option set forth in separate agreements. The Omnibus Plan requires that the exercise price for each stock option must be not less than 100% of the fair market value of the Common Stock at 43 the time the option is granted. No incentive stock option, however, may be granted to a non-employee director or to an employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company unless the option price is at least 110% of the fair market value of the Common Stock at the date of grant. The fair market value of stock options that may be granted to an employee in any calendar year is not limited, but no employee may be granted incentive stock options that first become exercisable during a calendar year to purchase Common Stock with an aggregate fair market value in excess of $100,000. In addition, no grantee may be granted more than an aggregate of shares of Common Stock, subject to adjustment for stock splits, stock dividends and certain other types of reclassifications. SARs may be granted separately or in tandem with the grant of an option. Any performance awards may be denominated or payable in cash, Common Stock, other securities or other Awards and shall confer on the holder thereof the right to receive payments based upon the achievement of such performance goals and for such periods as the Omnibus Committee may establish. Restricted stock may be sold to the grantees at various prices (but not below par value) and made subject to such restrictions as may be determined by the Omnibus Committee. The Omnibus Committee may grant other Awards that provide the grantee with the right to purchase Common Stock or that are valued by reference to the fair market value of the Common Stock including, but not limited to, phantom securities or dividend equivalents. The exercise or purchase price for all options, restricted stock and other rights to acquire Common Stock, together with any applicable tax required to be withheld, may be paid in cash or, at the discretion of the Omnibus Committee, with shares of Common Stock owned by the grantee (or issuable upon exercise of the option), execution of a promissory note by the grantee or with other lawful consideration. The dates on which options or other Awards first become exercisable and on which they expire are set forth in individual stock options or other agreements setting forth the terms of the Awards. Such agreements may provide that options and other awards expire upon termination of the grantee's status as an employee or director or for any other reason and may provide that such options continue to be exercisable following the grantee's death or disability by the grantee's estate or by the person who acquired the right to exercise the option by bequest or inheritance, or by the grantee or his representative in the event of the grantee's disability, provided the option is exercised prior to the earlier of the date of its expiration or six months after the date of the grantee's death or disability. In the event of a change of control (as defined in the Omnibus Plan) of the Company, all Awards that have not expired will become fully and immediately vested and exercisable and may be exercised for the remaining term of such Awards. No Award may be assigned or transferred by the grantee, except by will or the laws of intestate succession, although shares of Common Stock issued under the Omnibus Plan may be transferred if all applicable restrictions have lapsed. Amendments of the Omnibus Plan to change the class of persons eligible to be granted awards or increase the number of shares as to which options, SARs, restricted stock and other Awards may be granted (except for adjustments resulting from stock splits and the like) require the approval of the Company's stockholders. In all other respects the Omnibus Plan can be amended, modified, suspended or terminated by the Omnibus Committee, unless such action would otherwise require stockholder approval as a matter of applicable law, regulation or rule. Amendments of the Omnibus Plan may not, without the consent of the grantee, affect such grantee's rights under an Award previously granted, unless the Award itself otherwise expressly so provides. The Omnibus Plan terminates 10 years from the date of its adoption by the Company's Board of Directors. ESOP. The Company adopted the Vari-Lite International, Inc. Employees' Stock Ownership Plan (the "ESOP"), effective as of January 1, 1995, for the benefit of its employees and the employees of its participating subsidiaries (the Company and its participating subsidiaries are referred to herein as the "Employers") who are at least 21 years of age, have completed at least one "year of service" (as defined in the ESOP) and are actively contributing to the Company's 401(k) plan. The ESOP is intended to be an eligible individual account stock bonus plan that qualifies under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and, subject to certain maximum provisions, allocates the Employers' discretionary contributions to each 44 participating employee according to the ratio of such employee's total compensation to the aggregate amount of compensation received by all participants in the ESOP. The term "compensation" includes base salary paid during a plan year and cafeteria deferrals under Section 125 of the Code, but does not include reimbursements or other expenses, allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation, welfare benefits, bonuses, overtime pay or amounts deferred under a salary deferral arrangement under Section 401(k) of the Code. The Company intends, but is not required, to make annual contributions to the ESOP in the form of nonelective contributions and qualified matching contributions (as each is defined in the ESOP) consisting of shares of Common Stock, cash or a combination thereof. The ESOP provides for full distributions of employee account balances for normal and late retirements, disability and death and distributions of vested portions of employee accounts upon a separation of service (as defined in the ESOP). Generally, a participant's benefits under the ESOP will become vested 20% per year commencing upon completion of three years of service and be fully vested upon completion of seven years of service. The assets of the ESOP are held by Overton Bank and Trust, N.A., as trustee of The Vari-Lite International, Inc. Employees' Stock Ownership Trust (the "ESOP Trust"). The ESOP Trust is intended to be exempt from taxation under Section 501(a) of the Code. Atwell & Associates acts as Plan Administrator of the ESOP. EQUIVALENCE PLAN. The Company adopted The Vari-Lite International, Inc. Employees' Stock Equivalence Plan (the "Equivalence Plan"), effective as of January 1, 1995, for the benefit of certain employees of subsidiaries of the Company domiciled outside of the United States who are at least 21 years of age and have completed at least one "year of service" (as defined in the Equivalence Plan). The Equivalence Plan is intended to be a nonqualified employee retirement plan known as a phantom stock plan under United States tax laws. Employees participating in the Equivalence Plan are eligible to receive stock equivalence units ("Units") credited to their accounts along with the contractual right to receive the cash value of such Units in the future. No shares of stock will be distributed under the Equivalence Plan. The value of each Unit is equal to the fair market value of one share of Common Stock on the date such Unit is credited to a participant's account. Upon conversion of the Units in accordance with the terms of the Equivalence Plan, participants shall be entitled to receive, for each Unit converted, an amount equal to the fair market value of one share of Common Stock on the date of conversion. A holder of Units shall not have any dividend or voting rights or any other rights as a stockholder of the Company, unless otherwise provided by the Board of Directors of the Company. The number of Units awarded under the Equivalence Plan, if any, will be determined each year by the Compensation Committee. The Company's awards of Units under the Equivalence Plan shall be made, subject to certain maximum provisions, according to the ratio of each eligible employee's total compensation to the amount of total compensation received by all participants in the Equivalence Plan. The Equivalence Plan provides for full distributions of employee account balances upon the retirement, disability or death of an employee and distributions of vested percentages of employee accounts upon termination of employment for any other reason. Generally, a participant's benefits under the Equivalence Plan will fully vest upon his or her completion of seven years of service. The Company established an irrevocable grantor trust within the meaning of the Code (commonly referred to as a rabbi trust) to provide funding for benefit payments from the Equivalence Plan. Although the employers' contributions to the rabbi trust are generally irrevocable, the assets placed in the trust must remain subject to the claims of the employers' creditors. The rabbi trust provides the participants in the Equivalence Plan with additional security that they will receive benefits in the event of a change in the management of the Company. The assets of the Equivalence Plan are held by Bank of Butterfield International (Cayman) Ltd., as trustee of The Vari-Lite International, Inc. Equivalence Plan Trust, and Atwell & Associates acts as Plan Administrator. ANNUAL INCENTIVE PLAN. On June 13, 1995, the Company adopted the Vari-Lite International, Inc. Annual Incentive Plan (the "Annual Incentive Plan"), effective October 1, 1995, to provide annual bonuses to eligible employees. Any employee who is employed by the Company or one of its subsidiaries on March 31 of a year shall 45 be considered an eligible employee for that year. Bonus amounts for a year may be granted based on predetermined targets ("formula derived awards") or in the discretion of the Omnibus Committee ("discretionary awards"), or a combination of both. The targets for each year are established by the Omnibus Committee and may be based solely on the Company's attaining its operating income goal for that year (as established by the Omnibus Committee) or may be based in part on the level of attainment by the Company of that operating income goal and in part on the level of attainment of performance measures established by the Omnibus Committee for that year based on subsidiary, department or individual performance, or a combination thereof as determined by the Omnibus Committee. The relative weight placed on each performance measure by the Omnibus Committee may vary for each eligible employee based on his position with the Company, or its subsidiaries or departments. Each year each eligible employee shall have the opportunity to earn a specified percentage of his base salary (excluding any bonus, commission or overtime) for that year as a formula derived award. The range of percentage of base salary that a participant may earn as a formula derived award is specified in the Annual Incentive Plan and is determined by each eligible employee's level of responsibility and potential impact on Company performance. No eligible employee shall be deemed to have earned a formula derived award for a year unless the Company attains the threshold level (specified in the Annual Incentive Plan) of operating income established for that year, although the Company expects to modify this restriction in the future. Discretionary awards are not limited. The Company shall make payment of all bonus amounts for a year, if any, to each eligible employee in cash no later than 90 days after the end of that year (the "Payout Date"). Unless an eligible employee's employment terminates due to death, total disability or retirement at or after age 65 during the year after he has been employed for at least six months during that year, the employee must be employed by the Company or one of its subsidiaries on the Payout Date for a year to be entitled to receive payment of his bonus, if any, for that year. If an eligible employee becomes eligible after the first day of the year or dies, retires at or after age 65 or becomes totally disabled during the year, after being employed by the Company for at least six months during that year, the bonus amount, if any, payable to him for that year shall be prorated to reflect the actual length of his service with the Company and its subsidiaries during that year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION At the beginning the fiscal year ended September 30, 1996, the Compensation Committee of the Company consisted of Messrs. Maxson, Clark and Brutsche. Mr. Brutsche is the Chairman of the Board, President and Chief Executive Officer of the Company. In May 1996, Messrs. Smith, Prothro and Rettberg replaced Messrs. Maxson, Clark and Brutsche on the Compensation Committee. As of July 1, 1995, the Company entered into the Brutsche Employment Agreement with H. R. Brutsche III, Chairman of the Board, President and Chief Executive Officer. The initial term of the Brutsche Employment Agreement is for five years, with an automatic extension of one year for each completed year of service by Mr. Brutsche thereunder. Pursuant to the Brutsche Employment Agreement, Mr. Brutsche receives an annual salary of $433,000, subject to annual review by the Compensation Committee, which may increase but not reduce his annual salary, and is eligible to receive an annual bonus, long-term incentive compensation and deferred compensation in accordance with plans established for officers and directors of the Company. Mr. Brutsche is also entitled to receive various life, medical and disability insurance benefits. The Brutsche Employment Agreement may be terminated in the event of death, upon permanent disability, for cause (as defined in the Brutsche Employment Agreement) or upon the occurrence of a change of control (as defined in the Brutsche Employment Agreement). If the Brutsche Employment Agreement is terminated because of permanent disability, Mr. Brutsche will continue to receive his base salary through the remainder of the five-year term of the Brutsche Employment Agreement, less any disability benefits. If Mr. Brutsche's employment is terminated without cause, through an action by the Company that constitutes constructive termination (as defined in the Brutsche Employment Agreement) or as the result of a change of control, the Company is obligated to continue to pay Mr. Brutsche his base salary in effect at the time of termination through the remainder of the five-year term. 46 As of July 1, 1995, the Company entered into the Deferred Compensation Agreements with each of Messrs. Brutsche, Clark, Maxson and Smith pursuant to which each of them receives $167,000 annually for six years, payable monthly. Also, as of March 31, 1994, the Company, Vari-Lite and Showco entered into Compensation Continuation Agreements with Messrs. Brutsche, Clark and Maxson pursuant to which the Company, Vari-Lite and Showco each agreed to continue paying for 60 days after the death of any such individual the cash compensation that the deceased was receiving from the companies at the time of his death. Messrs. Clark, Maxson and Smith also have entered into the Consulting Agreements with the Company, dated as of July 1, 1995, providing that the Consultant will be available to provide consulting services to the Company in consideration for the Company's payment to the Consultant of an annual consulting fee. Pursuant to their Consulting Agreements, Messrs. Clark and Maxson receives an annual consulting fee of $100,000, payable monthly, and Mr. Smith receives an annual consulting fee of $20,000, payable monthly. Each Consulting Agreement has an initial term of three years with an automatic extension of one year for each completed year of service by the Consultant thereunder and may be terminated in the event of death, upon permanent disability, for cause (as defined in the Consulting Agreement) or upon the occurrence of a change of control (as defined in the Consulting Agreement). If a Consulting Agreement is terminated without cause, because of permanent disability or through an action by the Company that constitutes constructive termination, or as a result of a change of control, the Consultant will receive the full consulting fee he would have received through the remainder of the three-year term. In addition, each of Messrs. Brutsche, Clark and Maxson is eligible to receive benefits under one or more Policies pursuant to Split-Dollar Agreements with the Company. The Split-Dollar Agreements each provide for sharing the costs and benefits of the Policies between the Company and Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be. The Company pays the entire premium on each Policy to the insurer. The Owner reimburses the Company for the P.S. 58 Cost. The Company pays the amount of the P.S. 58 Cost to Mr. Brutsche, Mr. Clark or Mr. Maxson, as the case may be, as additional compensation and such person then gifts such amount to the Owner to use to reimburse the Company. Except under certain circumstances, upon the termination of each Split-Dollar Agreement, the Company will be reimbursed for the premiums it has paid under the Policies that are subject to the Split-Dollar Agreements. All of the Split-Dollar Agreements utilize the collateral assignment method to secure the Company's right to repayment of the premiums it has paid under the Policies. Under this method, the Owner owns the Policy, and a collateral assignment (establishing the Company's right to such premium reimbursement from the cash surrender value or death benefits payable under the Policies) is filed with the insurer. The Owner has the right to designate the beneficiaries of the Policies and may borrow and make withdrawals from the cash surrender value, to the extent such cash surrender value exceeds the amount of premiums owed to the Company. The Owner may cancel or surrender the Policies at any time, subject to any applicable obligation to repay the premiums paid by the Company. CERTAIN TRANSACTIONS In fiscal years 1994, 1995 and 1996 and the nine-month period ended June 30, 1997, Philip D.C. Collins, who beneficially owns more than five percent of the Common Stock of the Company, paid the Company, $1.5 million, $0.9 million, $0 and $1.9 million, respectively, for the rental of automated lighting products and other services for use in his concert tours. Hit & Run Music Limited, a corporation owned by J. Anthony Smith ("Hit & Run"), manages Mr. Collins. The Company believes that the terms of the above transactions were at least as favorable to the Company as those which could have been obtained in an arm's length transaction with an unaffiliated third party. 47 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock, as of August 31, 1997, by (a) each person known by the Company to own beneficially more than 5% of the outstanding Common Stock, (b) each director of the Company, (c) each Named Executive Officer and (d) all executive officers and directors as a group. The Company believes that each of such stockholders has the sole voting and dispositive power over the shares held by such stockholder except as otherwise indicated. See "Risk Factors--Control of the Company by Existing Stockholders."
PERCENTAGE OF OUTSTANDING SHARES COMMON STOCK BENEFICIALLY OWNED ----------------------------- BEFORE BEFORE AFTER NAME THE OFFERING OFFERING OFFERING - -------------------------------------------------------- ------------------------ -------------- ------------- H. R. Brutsche III(1)................................... James H. Clark, Jr.(2)(3)............................... John D. Maxson(2)(4).................................... J. Anthony Smith(5)..................................... C. Vincent Prothro...................................... John R. Rettberg........................................ Anthony G. Banks(5)..................................... Philip D.C. Collins(5).................................. Michael J.C.C. Rutherford(5)............................ Alice Spradley(6)....................................... Keizo Akimoto........................................... T. Clay Powers.......................................... James M. Bornhorst...................................... David W. Alley.......................................... James E. Kinnu(7)....................................... All officer and directors as a group (18 persons).......
- ------- * less than one percent (1) Includes shares owned by Brutsche Family Trust, a trust of which BBH serves as trustee. Mr. Brutsche disclaims beneficial ownership of such shares. Mr. Brutsche's address is 201 Regal Row, Dallas, Texas 75247. (2) The address of Messrs. Clark and Maxson is 8117 Preston Road, Suite 220, Dallas, Texas 75225. (3) Includes shares owned by Clark Partnership, Ltd., a limited partnership of which Mr. Clark is the managing general partner, and shares owned by Mr. Clark's wife. Mr. Clark disclaims beneficial ownership of the shares owned by his wife. (4) Includes shares owned by Peggy Maxson 1996 Irrevocable Trust, a trust of which BBH serves as trustee. Mr. Maxson disclaims beneficial ownership of such shares. (5) Includes held by Ashtray Music Ltd., a United Kingdom limited company, the stockholders of which are Walbrook Trustees (Jersey) Ltd. re: G45, Walbrook Trustees (Jersey) Ltd. re: G47, Walbrook Trustees (Jersey) Ltd. re: G48 and Walbrook Trustees (Jersey) Ltd. (collectively, the "Walbrook Trusts"). All remaining shares are shares held of record by the Walbrook Trusts, which were settled by Messrs. Smith, Banks, Collins and Rutherford, respectively. None of the Walbrook Trusts have named beneficiaries, but the Company believes the settlors retain the power to direct the trustees of the Walbrook Trusts with respect to such shares. (6) Includes shares owned by The Walter & Alice Spradley Family Trust, shares owned by The Walter & Alice Spradley Living Trust #1, shares owned by The Walter & Alice Spradley Living Trust #2A and shares owned by The Walter & Alice Spradley Living Trust #2B. Alice Spradley is the trustee of all of such trusts. (7) Effective September 30, 1996, Mr. Kinnu was terminated as the Company's Senior Executive Vice President and Chief Operating Officer. 48 SELLING STOCKHOLDERS The Selling Stockholders listed in the following table have granted to the several Underwriters options, exercisable within 45 days from the date of this Prospectus, to purchase up to shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." The respective number of shares of Common Stock subject to such options by each Selling Stockholder is set forth opposite his name. The amount beneficially owned by the Selling Stockholders prior to the Offering are as of August 31, 1997:
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED BEFORE THE SHARES OFFERED OWNED AFTER THE OFFERING SUBJECT TO OFFERING(1) ---------------------- OVER-ALLOTMENT ---------------------- NAME OF SELLING STOCKHOLDER NUMBER PERCENTAGE OPTIONS NUMBER PERCENTAGE - --------------------------------------------------- --------- ----------- -------------- --------- -----------
- ------- * less than one percent. (1) Assumes that the over-allotment options are exercised in full. DESCRIPTION OF CAPITAL STOCK The Company has authorized capital stock consisting of 40,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. At August 31, 1997, there were shares of Common Stock outstanding, owned by holders of record, and there were no shares of Preferred Stock outstanding. A total of shares of Common Stock are reserved for future issuance under, and for issuance upon the exercise of options to be granted under the Omnibus Plan, and a total of shares of Common Stock are reserved for issuance upon the exercise of outstanding warrants. See "Management--Omnibus Plan" and "Shares Eligible for Future Sale." Upon consummation of the Offering, shares of Common Stock and no shares of Preferred Stock will be outstanding. COMMON STOCK All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby when issued and paid for will be, fully paid and nonassessable. All holders of Common Stock have full voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Votes may not be cumulated in the election of directors. Stockholders have no preemptive or subscription rights. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors from funds legally available therefor and are entitled, upon liquidation, to share ratably in all assets remaining after 49 payment of liabilities. The rights of holders of Common Stock will be subject to any preferential rights of any Preferred Stock which may be issued in the future. The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. PREFERRED STOCK The Board of Directors of the Company is authorized (without any further action by the stockholders) to issue Preferred Stock in one or more series and to fix voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences. The Board of Directors may issue Preferred Stock for such consideration and on such terms as it deems desirable. Satisfaction of any dividend preferences of outstanding Preferred Stock would reduce the amount of funds available for the payment of dividends on Common Stock. Also, holders of Preferred Stock would normally be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of Common Stock. In addition, under certain circumstances, the issuance of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of Directors of the Company, without stockholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the holders of Common Stock. The Company has no present intention to issue any shares of Preferred Stock. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS ANTI-TAKEOVER PROVISIONS. The Certificate of Incorporation and By-Laws contain certain provisions, in addition to the authorization of the Preferred Stock, that may reduce the likelihood of a change in management or voting control of the Company without the consent of the Company's Board of Directors. These provisions could have the effect of delaying, deterring or preventing tender offers or takeover attempts that some or a majority of the Company's stockholders might consider to be in the stockholders' best interest, including offers or attempts that might result in a premium over the market price for the Common Stock. The By-Laws of the Company can be amended by the stockholders of the Company only upon the affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company. Additionally, in the event of a change of control (as defined in the Omnibus Plan) of the Company, all awards under the Omnibus Plan that have not expired become fully and immediately vested and exercisable and may be exercised for the remaining terms of such awards. STAGGERED BOARD OF DIRECTORS. The Certificate of Incorporation and By-Laws divide the Board of Directors into three classes that are elected to staggered three-year terms. The Company believes that a staggered Board of Directors will help assure the continuity and stability of the Company's Board of Directors and the Company's business strategies and policies. In addition, the staggered board provisions help ensure that the Company's Board of Directors, if confronted with an unsolicited proposal from a third party that has acquired a block of the voting stock of the Company, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all stockholders. The staggered board provisions could increase the likelihood that, in the event of a takeover of the Company, incumbent directors would retain their positions. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. REMOVAL OF DIRECTORS DURING THEIR TERMS. Under the Certificate of Incorporation and By-Laws, a director may be removed during his or her term of service only "for cause" and only by the affirmative vote of not less than 80% of the outstanding voting stock of the Company. As defined, "for cause" means: (i) commission of an act of fraud or embezzlement against the Company; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Company or its stockholders; or (iv) breach of fiduciary duty owed to the Company. The By-Laws also provide that vacant directorships may be filled by the Board of Directors. 50 STOCKHOLDER ACTION. Unless limited by the Certificate of Incorporation of a corporation, the Delaware General Corporation Law permits stockholder action without a meeting, without prior notice and without a vote upon the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The Certificate of Incorporation and By-Laws prohibit stockholder action without a meeting. The affirmative vote of holders of at least 80% of the Company's outstanding voting stock is required to amend these provisions. Additionally, the By-Laws provide that meetings of the stockholders can only be called by the Chief Executive Officer, a majority of the Board of Directors or holders of not less than 50% of the outstanding voting stock of the Company. FAIR PRICE PROVISION. The Certificate of Incorporation includes a "fair price" provision that requires the affirmative vote of the holders of at least 80% of the outstanding voting stock of the Company to approve a merger with, or disposition of assets or the issuance of securities having a fair market value of $5.0 million or more to, an interested stockholder (as hereinafter defined), a liquidation proposed by an interested stockholder or the reclassification of the Company's securities or a similar transaction that increases the interested stockholder's proportionate ownership in the Company. An "interested stockholder" is anyone who owns or controls, directly, indirectly or together with others, 10% or more of the Company's voting stock. A transaction with an interested stockholder will not require stockholder approval if a majority of disinterested directors (as defined in the Certificate of Incorporation) approves the transaction or if the transaction involves the distribution to the stockholders of cash or other consideration that satisfies the "fair price" criteria set forth in the Certificate of Incorporation, which generally require that all stockholders receive equal treatment, an adequate price and adequate disclosure. The fair price provision of the Certificate of Incorporation may not be amended without the affirmative vote of at least 80% of the Company's outstanding voting stock. In addition, Section 203 of the Delaware General Corporation Law, much like the fair price provision described above, limits the ability of a corporation to enter into certain business combinations with an "interested stockholder" (generally defined as a person owning 15% or more of a corporation's outstanding voting stock) unless certain conditions are met. The Certificate of Incorporation, however, includes a provision electing not to be governed by Section 203. EVALUATION FACTORS. The Certificate of Incorporation contains a provision that allows the Board of Directors to evaluate factors other than the price offered when considering a proposed acquisition of the Company. The Certificate of Incorporation permits the Board of Directors to consider the social, legal and economic effects of the proposed acquisition upon the Company's employees, suppliers, customers and the communities in which the Company operates. The Board of Directors can also consider any other factors it deems relevant, including not only the consideration offered in the proposed transaction relative to the market price of the Common Stock but also the value of the Company in a freely negotiated transaction and in relation to the estimate by the Board of Directors of the future value of the Company as an independent entity. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. STOCKHOLDER PROPOSALS AND NOMINATIONS. The Company's By-Laws provide that notice of proposed stockholder nominations for the election of directors must be given in writing to the Secretary of the Company at the principal executive offices of the Company not less than 75 days nor more than 85 days prior to the meeting at which directors are to be elected (or if fewer than 75 days' notice or prior public disclosure of the stockholders' meeting date is given or made by the Company, not later than the 10th day following the day on which the notice was mailed or such public disclosure was made). The By-Laws also provide that at an annual stockholders' meeting, and subject to any other applicable requirements, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board of Directors or by a stockholder who has given timely prior written notice to the Secretary of the Company of such stockholder's intention to bring such business before the meeting. For such stockholder's notice to be timely, it must be delivered to or mailed and received at the principal executive offices of the Company not later than the date that corresponds to 120 days prior to the date the Company's proxy 51 statement was released to stockholders in connection with the previous year's annual meeting of stockholders. Such notice must contain certain information specified in the By-Laws. LIMITATIONS ON LIABILITY OF DIRECTORS. The Certificate of Incorporation limits the liability of directors to the extent allowed by the Delaware General Corporation Law. Specifically, directors will not be held liable to the Company or its stockholders for an act or omission in such capacity as a director, except for liability as a result of: (i) a breach of the duty of loyalty to the Company or its stockholders; (ii) actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) payment of an improper dividend or improper repurchase of the Company's stock under Section 174 of the Delaware General Corporation Law; or (iv) actions or omissions pursuant to which the director will receive an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of the Company unless the stockholder can demonstrate one of the specified bases for liability. This provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The Certificate of Incorporation does not eliminate the directors' duty of care. The inclusion of this provision in the Certificate of Incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise benefit the Company and its stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. INDEMNIFICATION. The Certificate of Incorporation and By-Laws provide that the Company is generally required to indemnify its directors and officers for all judgments, fines, settlements, legal fees and other expenses incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with the Company or another entity that the director or officer serves at the Company's request, subject to certain conditions, and to advance funds to its directors and officers to enable them to defend against such proceedings. To receive indemnification, the director or officer must have been successful in the legal proceeding or acted in good faith and in what was reasonably believed to be a lawful manner and in the Company's best interest. The affirmative vote of the holders of not less than 80% of the outstanding voting stock of the Company is required to amend this provision. 52 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the current stockholders of the Company will own approximately % of the outstanding Common Stock ( % if the Underwriters' over-allotment option is exercised in full). The Company and certain stockholders who will collectively own shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase shares of Common Stock, have agreed with A.G. Edwards & Sons, Inc. not to sell, grant any option to sell, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Underwriting." Upon completion of the Offering, the Company will have shares of Common Stock outstanding. Of these shares, the shares sold in the Offering ( shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable in the public market without restriction by persons other than affiliates of the Company. All of the remaining shares are "restricted securities" within the meaning of Rule 144 under the Securities Act. Approximately of such shares will have been held for more than one year as of the date of this Prospectus and may be sold 90 days after the Company has been subject to the reporting requirements of Section 13 of the Exchange Act, subject to the volume, manner of sale and other limitations of Rule 144. Following the expiration or release from the 180-day lock-up agreements with A.G. Edwards & Sons, Inc. approximately additional shares of Common Stock will be eligible for sale in accordance with the requirements of Rule 144. See "Underwriting." In general, under Rule 144 as currently in effect, if a period of at least one year has elapsed between the later of the date on which "restricted shares" (as that phrase is defined in Rule 144) were acquired from the Company and the date on which they were acquired from an "affiliate" of the Company (as that term is defined in Rule 144), then the holder of such restricted shares (including an affiliate) is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of (a) 1% of the then-outstanding shares of Common Stock ( shares upon completion of the Offering), and (b) the average weekly reported trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain notice and manner-of-sale requirements and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not an affiliate of the Company (in general, a person who is not a director, officer or principal stockholder of the Company) during the three months prior to resale and who has beneficially owned such shares for at least two years is entitled to sell such restricted stock under Rule 144 without regard to the requirements discussed above, other than the manner-of-sale provisions. The Company is unable to estimate the number of shares that may be sold in the future by its stockholders since this will depend on the market price for the Common Stock, the personal circumstances of the stockholders and other factors. Any sale of substantial amounts of shares in the open market may significantly reduce the market price of the Common Stock offered hereby. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 under the Securities Act may be relied upon with respect to the resale of shares of Common Stock originally purchased from the Company by its employees, directors and officers prior to the date the Company becomes subject to the reporting requirements of the Exchange Act pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. Shares of Common Stock issued in reliance on Rule 701 are "restricted shares" and, beginning 90 days after the Company becomes subject to the reporting requirements of the Exchange Act, may be sold by persons other than affiliates, subject to the provisions regarding manner-of-sale under Rule 144, and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. The Company intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of Common Stock issued or reserved for future issuance under the Omnibus Plan and the ESOP. After the effective date of such registration statements, shares purchased upon exercise of options granted pursuant to 53 the Omnibus Plan or pursuant to the ESOP will be available for resale in the public market without restriction by persons who are not affiliates of the Company, and to the extent they are held by affiliates, pursuant to Rule 144, without observance of the holding period requirements. Effective with the consummation of the Offering, options to purchase a total of shares of Common Stock will be granted, none of which will be exercisable in less than one year from the date of grant and shares will be owned by the ESOP and Equivalence Plan. See "Risk Factors--Control of the Company by Existing Stockholders," "Management-- Employee Benefit Plans--Omnibus Plan," "Management--Employee Benefits Plans--ESOP" and "Management--Employee Benefits Plans--Equivalence Plan." In connection with an amendment to the Credit Agreement on July 31, 1996, the Company issued to certain members of its bank syndicate warrants to purchase an aggregate of shares of Common Stock at an exercise price of $ per share, all of which will remain outstanding after consummation of the Offering. The outstanding warrants can be exercised at any time and the underlying shares can be sold either pursuant to demand registration rights which are exercisable on the first anniversary of the consummation of the Offering and thereafter on an annual basis through December 31, 2004, or pursuant to piggyback registration rights which are exercisable at any time. UNDERWRITING The Underwriters named below have severally agreed with the Company subject to the terms and conditions of the Underwriting Agreement, to purchase the respective numbers of shares of Common Stock set forth opposite their names below.
NUMBER OF UNDERWRITERS SHARES - -------------------------------------------------------------------------------- ------------ A.G. Edwards & Sons, Inc........................................................ Total......................................................................... ------------ ------------
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock, if any are purchased. The Company has been advised by A.G. Edwards & Sons, Inc., the Representative of the several Underwriters (the "Representative"), that the Underwriters propose to offer the Common Stock to the public at the Offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $. per share and that the Underwriters and such dealers may reallow a discount of not in excess of $. per share to other dealers. The Offering price and the concession and discount to dealers may be changed by the Underwriters after the Offering. 54 In the Underwriting Agreement, the Selling Stockholders have granted the Underwriters options, expiring at the close of business on the 45th day subsequent to the date of this Prospectus, to purchase up to an aggregate of additional shares of Common Stock at the Offering price, less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such options solely to cover over-allotments, if any, in the sale of the shares. To the extent the Underwriters exercise such options, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the option shares as the number of shares to be purchased by it shown in the table above bears to , and the Selling Stockholders will be obligated, pursuant to the options, to sell such shares to the Underwriters. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The liability of each Selling Stockholder under this indemnity is limited to the amount of his proceeds. The Company and certain stockholders who collectively will own shares of Common Stock immediately following the Offering, and holders of warrants who will collectively have the right immediately following the Offering to purchase shares of Common Stock, have agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock, other than the shares offered pursuant to this Prospectus, for a period of 180 days from the date of this Prospectus without the prior written consent of A.G. Edwards & Sons, Inc. See "Shares Eligible for Future Sale." In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company and the Selling Stockholders, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, A.G. Edwards & Sons, Inc., on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if it is undertaken, it may be discontinued at any time. The Representative has informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Prior to the Offering, there has been no public market for the Common Stock. The Offering price for the Common Stock was determined by negotiation between the Company and the Representative. Among the factors considered in determining the Offering price was the history of and the prospects for the Company and the industry in which it operates, the past and present operating results of the Company and the trends of such results, the future prospects of the Company, an assessment of the Company's management, the general condition for the securities markets at the time of the Offering and the prices for similar securities of comparable companies. At the request of the Company, up to shares of Common Stock in the Offering have been reserved for sale to certain officers, directors and employees, business affiliates and related persons of the Company who have expressed an interest in purchasing shares of Common Stock at the Price to Public set forth on the cover page of this Prospectus. The number of shares of Common Stock available for sale in the Offering will be reduced to the extent such persons purchase such shares. Purchases will be prohibited to the extent that they are 55 requested in lots of less than 100 shares. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as the other shares available through the Offering. LEGAL MATTERS The validity of the issuance of the shares of Common Stock covered by this Prospectus will be passed upon for the Company by Gardere & Wynne, L.L.P., Dallas, Texas. Certain legal matters pertaining to the Common Stock will be passed upon for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas. EXPERTS The consolidated financial statements and related schedules of the Company as of September 30, 1995 and 1996 and for each of the three years in the period ended September 30, 1996, included in this Prospectus and the Registration Statement have been audited by Deloitte & Touche LLP, independent certified public accountants, as stated in their reports thereon appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon the reports of such firm given upon the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information concerning the Company and the Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith, copies of which may be inspected at the Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, or copies of which may be obtained from the Commission at such office upon payment of the fees prescribed by the Commission or on the Internet at HTTP://WWW.SEC.GOV. The summaries in this Prospectus of additional information included in the Registration Statement or any exhibit thereto are qualified in their entirety by reference to such information or exhibit filed with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 56 INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of September 30, 1995 and 1996, and June 30, 1997 (unaudited)......................................................................... F-3 Consolidated Statements of Income for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 and 1997 (unaudited).............. F-4 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1997 (unaudited)........ F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 1994, 1995 and 1996, and for the Nine Months Ended June 30, 1996 and 1997 (unaudited).............. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT To the Stockholders of Vari-Lite International, Inc. Dallas, Texas We have audited the accompanying consolidated balance sheets of Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") as of September 30, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. Dallas, Texas November 22, 1996 (October , 1997, as to the first paragraph of Note F) The accompanying consolidated financial statements are presented to give effect to the Company's reincorporation in Delaware and the Company's recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. The above opinion is in the form which will be signed by Deloitte & Touche LLP upon effectiveness of the above events, assuming that from November 22, 1996 to the effective date of such events, no other material events have occurred which would affect the accompanying consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas August 13, 1997 F-2 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) ASSETS
SEPTEMBER 30, -------------------- JUNE 30, 1995 1996 1997 --------- --------- ----------- (UNAUDITED) CURRENT ASSETS: Cash........................................................................... $ 3,973 $ 2,633 $ -- Receivables, less allowance for doubtful accounts of $495, $348 and $448....... 8,158 11,070 13,178 Inventory...................................................................... 2,013 2,395 2,996 Prepaid expense and other current assets....................................... 1,876 816 2,627 --------- --------- ----------- TOTAL CURRENT ASSETS......................................................... 16,020 16,914 18,801 EQUIPMENT AND OTHER PROPERTY: Lighting and sound equipment................................................... 79,486 87,932 101,713 Machinery and tools............................................................ 1,591 2,179 2,149 Furniture and fixtures......................................................... 3,563 3,728 3,791 Office and computer equipment.................................................. 5,244 7,593 8,043 Work in progress and raw materials inventory................................... 3,759 3,259 6,805 --------- --------- ----------- 93,643 104,691 122,501 Less accumulated depreciation and amortization............................... 38,620 47,982 55,947 --------- --------- ----------- 55,023 56,709 66,554 OTHER ASSETS..................................................................... 1,964 3,950 4,570 --------- --------- ----------- TOTAL ASSETS................................................................. $ 73,007 $ 77,573 $ 89,925 --------- --------- ----------- --------- --------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses.......................................... $ 10,361 $ 8,596 $ 8,508 Deposits on contracts.......................................................... 1,164 1,187 1,854 Income taxes payable........................................................... 857 350 155 Current portion of long-term obligations....................................... 8,477 7,427 7,806 --------- --------- ----------- TOTAL CURRENT LIABILITIES.................................................... 20,859 17,560 18,323 LONG-TERM OBLIGATIONS............................................................ 26,393 29,922 37,593 DEFERRED INCOME TAXES............................................................ 4,426 5,553 6,449 --------- --------- ----------- TOTAL LIABILITIES............................................................ 51,678 53,035 62,365 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $0.10 par value (10,000,000 shares authorized), none issued or outstanding.................................................................. Common Stock, $0.10 par value (40,000,000 shares authorized)................... Treasury Stock, at cost, shares at September 30, 1996, and shares at June 30, 1997................................................................ Additional paid-in capital..................................................... Stockholder notes receivable................................................... (398) (352) (186) Stock purchase warrants........................................................ 663 600 600 Cumulative foreign currency translation adjustment............................. 780 905 1,451 Retained earnings.............................................................. 16,861 19,735 21,953 --------- --------- ----------- TOTAL STOCKHOLDERS' EQUITY................................................... 21,329 24,538 27,560 --------- --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 73,007 $ 77,573 $ 89,925 --------- --------- ----------- --------- --------- -----------
See notes to consolidated financial statements. F-3 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER FOR THE NINE MONTHS 30, ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) Rental revenues............................................ $ 47,625 $ 65,864 $ 65,741 $ 45,389 $ 56,400 Product sales and services revenues........................ 6,187 9,046 11,397 8,042 10,688 --------- --------- --------- --------- --------- TOTAL REVENUES........................................... 53,812 74,910 77,138 53,431 67,088 Rental cost of sales....................................... 18,775 26,288 26,425 18,267 22,342 Product sales and services cost of sales................... 4,284 6,637 7,783 5,601 7,409 --------- --------- --------- --------- --------- TOTAL COST OF SALES...................................... 23,059 32,925 34,208 23,868 29,751 --------- --------- --------- --------- --------- GROSS PROFIT............................................. 30,753 41,985 42,930 29,563 37,337 Selling, general and administrative expense................ 19,181 28,163 30,077 22,230 25,124 Research and development expense........................... 3,033 3,283 4,404 2,947 4,684 --------- --------- --------- --------- --------- TOTAL OPERATING EXPENSES................................. 22,214 31,446 34,481 25,177 29,808 --------- --------- --------- --------- --------- OPERATING INCOME........................................... 8,539 10,539 8,449 4,386 7,529 Interest expense........................................... 1,805 2,788 3,092 2,437 2,692 --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS.......... 6,734 7,751 5,357 1,949 4,837 Income taxes............................................... 2,400 3,037 2,238 813 2,054 --------- --------- --------- --------- --------- INCOME BEFORE EXTRAORDINARY LOSS........................... 4,334 4,714 3,119 1,136 2,783 Extraordinary loss from early extinguishment of debt (net of tax of $389).......................................... 756 --------- --------- --------- --------- --------- NET INCOME................................................. $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,783 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- WEIGHTED AVERAGE SHARES OUTSTANDING........................ --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- EARNINGS PER SHARE......................................... $ $ $ $ $ --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See notes to consolidated financial statements. F-4 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------------- --------------------- TREASURY PAID-IN SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL ---------- --------- ---------- --------- ----------- ----------- BALANCE, OCTOBER 1, 1993......................... -- $ -- $ $ -- $ Dividends declared............................... Shares purchased and retired..................... Shares issued.................................... Net effect of translation adjustment............. Adjust warrant valuation allowance............... Net income....................................... ---------- --------- ---------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1994...................... -- -- -- Dividends declared............................... Shares issued.................................... Payments on stockholder notes receivable......... Net effect of translation adjustment............. Issuance of stock to the ESOP and ESEP Plans..... Adjust warrant valuation allowance............... Net income....................................... ---------- --------- ---------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1995...................... Dividends declared............................... Purchase of treasury stock....................... (28) Purchases of stock warrants...................... Issuance of stock warrants....................... Payments on stockholder notes receivable......... Issuance of stock to the ESOP and ESEP Plans..... Net effect of translation adjustment............. Net income....................................... ---------- --------- ---------- --------- ----- ----------- BALANCE, SEPTEMBER 30, 1996 UNAUDITED:..................................... (28) Dividends declared............................... Purchase of treasury stock....................... (158) Payments on stockholder notes receivable......... Issuance of stock to the ESOP and ESEP Plans..... Net effect of translation adjustment............. Net income....................................... ---------- --------- ---------- --------- ----- ----------- BALANCE, JUNE 30, 1997 (UNAUDITED)............... -- $ -- $ $ (186) $ ---------- --------- ---------- --------- ----- ----------- ---------- --------- ---------- --------- ----- ----------- CUMULATIVE FOREIGN STOCKHOLDER STOCK CURRENCY NOTES PURCHASE TRANSLATION RETAINED RECEIVABLE WARRANTS ADJUSTMENT EARNINGS TOTAL ------------- ----------- ----------- ----------- --------- BALANCE, OCTOBER 1, 1993......................... $ -- $ 480 $ 651 $ 9,671 $ Dividends declared............................... (315) Shares purchased and retired..................... Shares issued.................................... (98) Net effect of translation adjustment............. 67 Adjust warrant valuation allowance............... 67 (67) Net income....................................... 3,578 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1994...................... (98) 547 718 12,867 Dividends declared............................... (604) Shares issued.................................... (323) Payments on stockholder notes receivable......... 23 Net effect of translation adjustment............. 62 Issuance of stock to the ESOP and ESEP Plans..... Adjust warrant valuation allowance............... 116 (116) Net income....................................... 4,714 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1995...................... (398) 663 780 16,861 Dividends declared............................... (648) Purchase of treasury stock....................... Purchases of stock warrants...................... (663) 403 Issuance of stock warrants....................... 600 Payments on stockholder notes receivable......... 46 Issuance of stock to the ESOP and ESEP Plans..... Net effect of translation adjustment............. 125 Net income....................................... 3,119 ----- ----- ----------- ----------- --------- BALANCE, SEPTEMBER 30, 1996 UNAUDITED:..................................... (352) 600 905 19,735 Dividends declared............................... (565) Purchase of treasury stock....................... Payments on stockholder notes receivable......... 166 Issuance of stock to the ESOP and ESEP Plans..... Net effect of translation adjustment............. 546 Net income....................................... 2,783 ----- ----- ----------- ----------- --------- BALANCE, JUNE 30, 1997 (UNAUDITED)............... $ (186) $ 600 $ 1,451 $ 21,953 $ ----- ----- ----------- ----------- --------- ----- ----- ----------- ----------- ---------
See notes to consolidated financial statements. F-5 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE NINE MONTHS FOR THE YEARS ENDED SEPTEMBER 30, ENDED JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income........................................................... $ 3,578 $ 4,714 $ 3,119 $ 1,136 $ 2,783 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................................... 5,876 8,436 9,869 7,393 8,489 Amortization of note discount and deferred loan fees............... 205 186 199 149 265 Extraordinary loss from the early extinguishment of debt........... 756 -- -- -- -- Provision for doubtful accounts.................................... 67 334 348 103 94 Deferred income taxes.............................................. 958 702 1,127 (51) 896 Gain on sale of equipment and other property....................... (53) (1,967) (574) -- (2,991) Provisions for ESOP and ESEP contributions......................... -- 750 250 -- 250 Net change in assets and liabilities: Decrease (increase) in accounts receivable....................... (2,823) (2,436) (2,846) (1,989) (2,202) Decrease (increase) in prepaid expenses.......................... (959) (15) 1,060 (4,716) (1,811) Decrease (increase) in inventory................................. -- (1,031) (382) 2,412 (601) Decrease (increase) in other assets.............................. (1,130) (370) (2,616) (232) (824) Increase (decrease) in accounts payable, accrued liabilities and income taxes payable........................................... 3,543 3,077 (2,268) (1,180) (284) Increase (decrease) in deposits on contracts..................... 919 (172) 23 474 667 --------- --------- --------- --------- --------- Net cash provided by operating activities........................ 10,937 12,208 7,309 3,499 4,731 Cash flows from investing activities: Capital expenditures................................................. (13,566) (20,748) (12,587) (9,125) (19,880) VLEH Acquisition..................................................... (5,940) -- -- -- -- Proceeds from sale of equipment...................................... 582 2,412 1,377 -- 5,030 --------- --------- --------- --------- --------- Net cash used in investing activities............................ (18,924) (18,336) (11,210) (9,125) (14,850) Cash flows from financing activities: Proceeds from issuance of debt....................................... 25,800 10,998 28,204 12,476 16,967 Principal payments on debt........................................... (12,525) (3,926) (24,601) (8,869) (8,127) Proceeds from issuance of distributor advances....................... 997 2,168 1,745 1,306 604 Principal payments on distributor advances........................... (4,200) (1,362) (1,894) (1,322) (1,216) Proceeds from payments on stockholder notes receivable............... -- 33 46 38 166 Proceeds from issuance of common stock............................... 102 -- -- -- -- Prepayment penalty from early extinguishment of debt................. (500) -- -- -- -- Purchase of common stock............................................. (4) -- -- -- -- Purchase of treasury stock........................................... -- -- (28) -- (158) Purchase of stock warrant............................................ -- -- (260) -- -- Dividends paid....................................................... (315) (604) (648) (568) (565) --------- --------- --------- --------- --------- Net cash provided by financing activities........................ 9,355 7,307 2,564 3,061 7,671 Effect on cash from foreign currency translation adjustment............ 99 (624) (3) (166) (185) --------- --------- --------- --------- --------- Net increase (decrease) during the period.............................. 1,467 555 (1,340) (2,731) (2,633) Cash, beginning of period.............................................. 1,951 3,418 3,973 3,973 2,633 --------- --------- --------- --------- --------- Cash, end of period.................................................... $ 3,418 $ 3,973 $ 2,633 $ 1,242 $ -- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental Cash Flow Information - ----------------------------------------------------------------------- Cash paid for interest expense....................................... $ 1,812 $ 2,905 $ 3,234 $ 2,564 $ 2,956 Cash paid for income taxes........................................... $ 1,111 $ 1,752 $ 1,528 $ 1,470 $ 1,765 Acquisition of property under capital leases......................... $ 302 $ -- $ -- $ -- $ -- Warrants issued...................................................... $ -- $ -- $ 600 $ -- $ --
See notes to consolidated financial statements. F-6 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE A--ORGANIZATION: Vari-Lite International, Inc. and subsidiaries (herein referred to as "the Company") is a leading international provider of proprietary automated lighting systems and related services to the entertainment industry, servicing markets such as concert touring, theater, television and film and corporate events. On March 31, 1994, the Company formed Vari-Lite Europe Holdings Limited ("VLEH") to acquire the net assets, consisting primarily of equipment and property, and the operations of three London-based companies, which are in the business of providing lighting services and stage and stage set construction. The total purchase price, including related acquisition and financing costs was approximately $6,000, which was funded with a portion of the proceeds from the Company's Credit Facility (see Note E). The acquisition was accounted for using the purchase method of accounting, and accordingly, the purchase price was allocated to the tangible assets acquired, and liabilities assumed based upon a determination of their fair values at the acquisition date. The results of operations of VLEH have been included in the consolidated financial statements since its acquisition. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES The consolidated financial statements of Vari-Lite International, Inc. includes the accounts of its wholly-owned subsidiaries Vari-Lite, Inc., Showco, Inc., Irideon, Inc., IGNITION! Creative Group, Inc., Concert Production Lighting, Inc., Vari-Lite Asia, Inc. (a Japanese corporation), Vari-Lite Hong Kong Limited and VLEH and its subsidiaries. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Certain estimates are used in determining the valuation of assets and liabilities. Actual results could differ from these estimates. INTERIM FINANCIAL STATEMENTS The balance sheet as of June 30, 1997, and the statements of income, stockholders' equity and cash flows for the nine months ended June 30, 1996 and 1997, have been prepared by the Company without audit. In the opinion of management, all adjustments (which included only normal, recurring adjustments) necessary to present fairly the financial position, at June 30, 1997 and the results of operations and cash flows for the nine months ended June 30, 1996 and 1997, have been made. The results of operations for the nine months ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has certain financial instruments consisting primarily of cash, accounts and lease receivables, debt and long-term obligations and interest rate swap agreements. The carrying values of substantially all of the financial instruments approximate their respective fair values. F-7 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. Market for raw materials is based on replacement costs and for other inventory classifications, on net realizable value. Appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. EQUIPMENT AND OTHER PROPERTY Equipment and other property are stated at cost or, in the case of capitalized leases, at the lower of the present value of future lease payments or the fair value of the equipment. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the various classes of equipment and other property. In 1996, management reevaluated the estimated useful lives of the Company's lighting equipment and accordingly lengthened the lives of certain lighting equipment to correspond with the anticipated revenue of the equipment. 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 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. Such costs are capitalized when the Company is successful or management believes it will be successful. These costs are amortized over the lives of the applicable patents, copyrights and trademarks. REVENUE RECOGNITION Revenues related to equipment rental and services are recognized as earned over the terms of the contracts. Revenues from long-term leases classified as sales-type leases are recognized upon delivery and installation of the equipment. Revenues related to the sale of architectural products are recognized upon shipment of the equipment. In 1995, one customer accounted for 11.9% of the Company's revenues. No other customer accounted for more than 10% of the Company's revenues during any of the three years in the period ended September 30, 1996 or the nine months ended June 30, 1997. RESEARCH AND DEVELOPMENT Costs incurred in connection with the development of new products are considered research and development costs and are charged to operations as incurred. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes," and files a consolidated federal income tax return. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting F-8 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) purposes, referred to as temporary differences. Provision is made for deferred taxes relating to temporary differences in the recognition of income and expense for financial reporting and for income tax purposes. FOREIGN CURRENCY TRANSLATION In accordance with SFAS No. 52, "Foreign Currency Translation," the asset and liability accounts of the Company's non-U.S. subsidiaries are translated into U.S. dollars using rates of exchange in effect at the balance sheet date. Revenues and expenses are translated at exchange rates which approximate the average rates prevailing during the year. The cumulative translation gains and losses are included in stockholders' equity. EARNINGS PER SHARE Earnings per share is calculated by dividing net income by the weighted average shares outstanding for the applicable period. Common stock equivalents, including warrants and options, are included, to the extent considered dilutive, using the treasury stock method and are assumed to be outstanding for the full period in the period of issuance. NEW ACCOUNTING PRONOUNCEMENTS In October 1996, the Financial Accounting Standards Board ("the FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which is effective for periods ending after December 15, 1995. Management intends to implement only the disclosure requirements of such statement for employee stock-based compensation. However, the accounting provisions of this statement will be required to be implemented upon the future issuance of non-employee stock-based compensation. The Company does not believe that there will be a material impact to the historically reported amount of earnings per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is effective for periods ending after December 15, 1997. Implementation of SFAS No. 128 will have no effect on the Company's results of operations, financial position or cash flows but will require a change in the calculation of earnings per share. The Company does not believe that there will be a material impact to the reported amount of earnings per share upon the implementation of this statement. In February 1997, the FASB issued SFAS No. 129, "Capital Structure," which is effective for periods ending after December 15, 1997. Implementation of SFAS No. 129 will have no effect on the Company's results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events from nonowner sources. SFAS No. 130 will require that changes in the balances of items that are reported directly in a separate component of stockholders' equity (such as unrealized gains and losses and minimum pension liability adjustments) be added to net income to arrive at comprehensive income. Implementation of SFAS No. 130 will have no effect on the Company's results of operations, financial position or cash flows, but will require additional footnote disclosures presenting the Company's comprehensive income. F-9 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. Accordingly, the Company plans to adopt SFAS No. 131 for its fiscal year beginning October 1, 1998. Implementation of SFAS No. 131 will have no effect on the Company's results of operations, financial position or cash flows, but may require a change in the disclosures regarding the Company's operating segments. OTHER Certain reclassifications have been made to the September 30, 1994 and 1995, consolidated financial statements to conform to the presentation in the September 30, 1996, consolidated financial statements. NOTE C--INVENTORY: Inventory consists of the following:
SEPTEMBER 30, -------------------- 1995 1996 --------- --------- JUNE 30, ----------- 1997 ----------- (UNAUDITED) Raw materials................................................ $ 766 $ 1,998 $ 2,654 Work in progress............................................. 216 294 197 Finished goods............................................... 1,031 103 145 --------- --------- ----------- $ 2,013 $ 2,395 $ 2,996 --------- --------- ----------- --------- --------- -----------
NOTE D--OTHER ASSETS: Other assets consist of the following:
SEPTEMBER 30, -------------------- 1995 1996 --------- --------- JUNE 30, ----------- 1997 ----------- (UNAUDITED) Patents and trademarks....................................... $ 263 $ 2,355 $ 2,809 Deferred financing costs..................................... 947 1,432 1,436 Other, including sales-type lease receivables 1,239 865 1,230 --------- --------- ----------- 2,449 4,652 5,475 Less accumulated amortization................................ (485) (702) (905) --------- --------- ----------- $ 1,964 $ 3,950 $ 4,570 --------- --------- ----------- --------- --------- -----------
Included in the amount of patents and trademarks are amounts capitalized by the Company relating to the High End Lawsuit, a patent infringement suit in which the Company is the plaintiff. Unless the Company receives a judgment in this litigation that the defendant has infringed at least one of its patents and the Company concludes, based on all of the facts and circumstances that such a judgment will allow it to maintain its competitive advantage provided by the infringed patents, all costs incurred by the Company related to the High F-10 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE D--OTHER ASSETS: (CONTINUED) End Lawsuit (including those previously capitalized) will be required to be recorded as an expense in the period that the judgment is rendered. NOTE E--LONG-TERM OBLIGATIONS: Long-term obligations consist of the following:
SEPTEMBER 30, -------------------- 1995 1996 --------- --------- JUNE 30, ----------- 1997 ----------- (UNAUDITED) Credit Facility: Term loans at current exchange rates (net of value assigned to warrants of $600 at September 30, 1996, and $488 at June 30, 1997)................................. $ 21,813 $ 26,514 $ 24,402 Revolving lines of credit................................ 8,346 5,236 15,938 Advances from distributors................................. 2,943 2,810 2,101 Obligations under capital leases with interest at 8.6% to 10.4%, maturities through 1999........................... 530 348 201 Other...................................................... 1,238 2,441 2,757 --------- --------- ----------- 34,870 37,349 45,399 Less current portion....................................... (8,477) (7,427) (7,806) --------- --------- ----------- $ 26,393 $ 29,922 $ 37,593 --------- --------- ----------- --------- --------- -----------
The Company's Credit Facility allows borrowings up to $28,000 under a revolving line of credit. The Company incurred prepayment penalties in 1994 of $756 (net of tax benefit of $389) relating to the early extinguishment of its prior debt facility, which was expensed in the consolidated statement of income as an extraordinary loss. Loans under the revolver may be drawn in U.S. dollars, U.K. pounds sterling or Japanese yen, subject to their availability under the Credit Facility. Interest on the term loans and the revolvers is calculated as follows:
LOAN DENOMINATION INTEREST RATE - -------------------------------------------- -------------------------------------------- U.S. dollar term Prime rate plus 1% or LIBOR plus 3.5% Multicurrency revolver Prime rate plus 1% for U.S. dollar borrowings and Euroyen TIBOR plus 3.5% for Japanese yen borrowings U.K. pound sterling term LIBOR rate plus 2% U.K. pound sterling revolver LIBOR rate plus 2% Japanese yen term TIBOR rate plus 2.5%
Based on the outstanding amounts under the Credit Facility as of September 30, 1995 and 1996 and June 30, 1997, the weighted average interest rates were 10.35%, 8.69% and 8.83%, respectively. F-11 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE E--LONG-TERM OBLIGATIONS: (CONTINUED) At September 30, 1996 and June 30, 1997, the Company had interest rate swap agreements with two of its primary lenders relating to a notional principal amount of $19,800, and $17,700, respectively, which effectively changes the Company's variable interest rate exposure on such borrowing to a fixed weighted average interest rate of 9.60%. The interest rate swap agreements mature on or before the maturity date of the related notes as follows:
SEPTEMBER 30,1996 ------------ JUNE 30, 1997 ----------- (UNAUDITED) Year one.......................................................... $ 3,050 $ 3,800 Year two.......................................................... 3,800 5,900 Year three........................................................ 5,450 1,000 Year four......................................................... 1,000 7,000 Year five......................................................... 6,500 -- ------------ ----------- $ 19,800 $ 17,700 ------------ ----------- ------------ -----------
The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the other parties. Principal payments of approximately $826 under the multicurrency term loan are due quarterly and increase to $1,076 per quarter on September 30, 1997 through the remaining term of the loan. A lump sum payment of approximately $8,471 is due June 30, 2001. Interest on outstanding term loans is due quarterly. Principal amounts outstanding under the revolving line of credit are due June 30, 2001 and interest on outstanding amounts is due monthly. Until April 1, 1998, a prepayment penalty equal to .25% of the amount prepaid is due and payable in connection with voluntary prepayments of the term loans. The Credit Facility contains compliance covenants, including requirements that the Company achieve certain financial ratios. In addition, the Credit Facility places limitations on the ability to pay stockholder distributions, make capital expenditures, incur additional indebtedness, make certain loans or investments, sell assets or reacquire the Company's stock. The Company incurs a commitment fee equal to .5% per annum on the average daily unused portion of the revolver which is payable quarterly. Substantially all Company assets, except those pledged to distributors (described below), are pledged as collateral under the Credit Facility. In connection with certain distributor agreements, the Company has received advances for a five-year period to provide the necessary funds for construction of the leased lighting systems (see Note G). The remaining balances outstanding under such borrowings at September 30, 1995 and 1996, and June 30, 1997, were $2,943, $2,810 and $2,101, respectively. Equipment with a net book value of approximately $8,700 at June 30, 1997 ($7,500 at September 30, 1996) has been pledged to the distributors as collateral for such loans. The interest rate on substantially all the notes is variable and ranged from 3% to 7% for the years ended September 30, 1995 and 1996 and the unaudited nine months ended June 30, 1997. Substantially all the advances are nonrecourse and are repaid from the Company's portion of the rental revenue earned on the associated leases. F-12 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) Maturities of long-term obligations including capital lease obligations are approximately as follows:
SEPTEMBER 30, 1996 ------------ JUNE 30, 1997 ----------- (UNAUDITED) Year one.......................................................... $ 7,427 $ 7,806 Year two.......................................................... 5,204 5,353 Year three........................................................ 4,872 4,762 Year four......................................................... 4,225 27,478 Year five......................................................... 15,621 -- ------------ ----------- $ 37,349 $ 45,399 ------------ ----------- ------------ -----------
NOTE F--STOCKHOLDERS' EQUITY: On October , 1997, in conjunction with the Company's reincorporation in Delaware, the Board of Directors of the Company created a new class of common stock and authorized 40,000,000 shares. As a result of the reincorporation, stockholders will receive shares of common stock for each share of the Company's Class A common stock and Class B common stock held by the stockholders. Share amounts and the weighted average shares outstanding for all periods presented give retroactive effect to the recapitalization of the common stock. In addition, the Company authorized 10,000,000 shares of preferred stock which the Company's Board of Directors may issue for such consideration and on such terms as it deems desirable, including with voting and conversion rights that could adversely affect the holders of common stock. In connection with prior debt agreements, 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 of these loan agreements to the warrant and in subsequent years increased such warrant value to an amount equal to the warrant valuation as defined in the agreement. 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 shares of Common Stock at a price based on the Company's earnings as defined in the warrant agreement. After December 31, 2001, and through the warrant expiration date of December 31, 2004, the warrant holders may put the warrant shares back to the Company at the price specified in the warrant agreement. This put right will terminate upon the occurrence of certain events, including an initial public offering. The terms of the warrants also provide for registration rights and adjustments to the price and number of shares in certain circumstances. As of September 30, 1996 and June 30, 1997, no warrants had been exercised. F-13 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: Company has agreements with various distributors whereby it has leased certain lighting equipment to the distributors for a five-year period. These agreements are accounted for as operating leases. Under the terms of these agreements, these distributors have the exclusive right to market the lighting equipment by subrental within defined market areas or customers. The distributors' lease payments to the Company are calculated at 50% of the gross rental revenue received by the distributors from their subrental of the lighting equipment and amounted to approximately $2,864, $3,797, $4,893, $3,778 and $3,576 for the years ended September 30, 1994, 1995 and 1996, and for the unaudited nine months ended June 30, 1996 and 1997, respectively. The lighting equipment under these leasing arrangements had a net book value of approximately $7,552, $7,473 and $8,736 at September 30, 1995 and 1996, and June 30, 1997, respectively. The Company is also the lessor under sales-type leases. Leases classified as sales-type leases generally stipulate that all lease payments be made within 30 days of the start of the lease term; however, the Company has also entered into certain sales-type leases that allow for periodic payment throughout the term of the lease. The Company recorded revenues of $4,427, $9,914, $4,544, $2,318 and $6,009 and cost of products and services of $1,465, $3,422, $2,223, $1,023 and $2,054 in the years ended September 30, 1994 1995 and 1996, and in the unaudited nine months ended June 30, 1996 and 1997, respectively, related to sales-type leases. Equipment under leases which do not qualify as sales-type leases are accounted for as operating leases. Leases of this type include distributor leases, as detailed above, and dealer leases. Under dealer leases, dealers receive exclusive rights to subrent the Company's lighting equipment in a certain geographic area. The Company provides the lighting equipment to the dealers, who pay a monthly rental fee to the Company. Future minimum lease payments receivable, including those which relate to sales-type leases and are included in other assets, are as follows:
SALES-TYPE OPERATING ------------------------------ -------------------------- SEPTEMBER 30, SEPTEMBER 30, 1996 1996 --------------- JUNE 30, 1997 ------------- JUNE 30, ------------- 1997 (UNAUDITED) ----------- (UNAUDITED) Year one............................. $ 344 $ 181 $ 929 $ 1,798 Year two............................. 303 102 920 1,830 Year three........................... 151 -- 785 1,577 Year four............................ -- -- 519 1,329 Year five............................ -- -- 209 1,089 Thereafter........................... -- -- 20 19 ----- ----- ------ ----------- Total minimum lease payments......... 798 283 $ 3,382 $ 7,642 ------ ----------- ------ ----------- Less amount representing interest.... (105) (28) ----- ----- Present value of net minimum lease payments........................... 693 255 Less current portion................. (279) (177) ----- ----- Long-term lease receivables.......... $ 414 $ 78 ----- ----- ----- -----
F-14 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) AS LESSEE The Company leases certain computers and equipment. The following is a summary of assets held under capital leases:
SEPTEMBER 30, -------------------- 1995 1996 --------- --------- JUNE 30, 1997 ----------- (UNAUDITED) Computers and equipment under capital leases............ $ 2,563 $ 2,563 $ 2,563 Less accumulated depreciation........................... (2,014) (2,144) (2,241) --------- --------- ----------- Property under capital leases, net...................... $ 549 $ 419 $ 322 --------- --------- ----------- --------- --------- -----------
The Company also leases manufacturing facilities and office space. The future minimum lease payments, including those which relate to capital leases and are included in long-term obligations, are as follows:
CAPITAL OPERATING ------------------------------ -------------------------- SEPTEMBER 30, SEPTEMBER 30, 1996 1996 --------------- JUNE 30, 1997 ------------- JUNE 30, ------------- 1997 (UNAUDITED) ----------- (UNAUDITED) 1997................................. $ 223 $ 136 $ 1,109 $ 1,132 1998................................. 99 63 897 802 1999................................. 44 -- 527 454 2000................................. -- -- 400 243 2001................................. -- -- -- -- ----- ----- ------ ----------- Total minimum lease payments......... 366 199 $ 2,933 $ 2,631 ------ ----------- ------ ----------- Less amount representing interest.... (18) (14) ----- ----- Present value of net minimum lease payments........................... 348 185 Less current portion................. (200) (134) ----- ----- Long-term lease obligations.......... $ 148 $ 51 ----- ----- ----- -----
Rental expense for the years ended September 30, 1994, 1995 and 1996, and the unaudited nine months ended June 30, 1996 and 1997 was approximately $1,347, $1,957, $2,397, $1,760 and $1,956, respectively. In December 1995, the Company entered into a lease agreement with an unaffiliated entity ("Lessor") for land to be used as the site for a new corporate facility. After the initial non-cancelable lease term, ending in December 2000, the lease may be renewed for up to six additional five-year terms by agreement of the parties. If the lease is not renewed or is otherwise terminated, the Company may be required to make a residual termination payment equal to 85% of the $3,600 paid by the lessor to acquire the land. In addition, the Company has an option to purchase the land during the term of the lease for a price equal to the Lessor's cost. Rent payable under the lease is based upon the $3,600 spent by the Lessor to acquire the land and the Lessor's cost of funds from time to time. At September 30, 1996 and June 30, 1997, the Company had a swap agreement with one F-15 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE G--LEASES: (CONTINUED) of its primary lenders relating to a notional amount of $3,600, which effectively changes the Company's variable rent exposure on this lease to a fixed annual amount of $388. This swap agreement matures in October 2000. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the other party. Future minimum rental commitments and rent expense for the year ended September 30, 1996, and the unaudited nine months ended June 30, 1996 and 1997, have been included in the amounts above. NOTE H--INCOME TAXES: The provision for income taxes consists of the following:
SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) Current: U.S. Federal..................................................... $ 1,273 $ 1,289 $ 100 $ 87 $ 104 State............................................................ -- 217 54 46 56 International.................................................... 169 829 957 731 998 Deferred: U.S. Federal..................................................... 860 906 992 (50) 787 State............................................................ 20 217 135 (1) 109 International.................................................... 78 (421) -- -- -- --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 2,054 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
A reconciliation of income taxes computed at the U.S. Federal statutory tax rate to the provision for income tax is as follows:
SEPTEMBER 30, JUNE 30, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) Income tax expense at U.S. statutory rate.......................... $ 2,289 $ 2,635 $ 1,821 $ 663 $ 1,644 Cumulative effect of change in accounting principle................ 90 -- -- -- -- International taxes................................................ 119 153 255 93 230 State taxes........................................................ -- 434 189 69 170 Foreign and general business tax credits........................... (128) (300) (100) -- -- Other--primarily permanent differences............................. 30 115 73 (12) 10 --------- --------- --------- --- --------- $ 2,400 $ 3,037 $ 2,238 $ 813 $ 2,054 --------- --------- --------- --- --------- --------- --------- --------- --- ---------
Deferred income taxes have been provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. Deferred income taxes resulted principally from the use of accelerated depreciation for tax purposes and straight-line depreciation for financial reporting purposes. F-16 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE H--INCOME TAXES: (CONTINUED) In 1995 and 1996 and for the unaudited nine months ended June 30, 1996 and 1997, there was no valuation allowance at the beginning or end of the respective fiscal period. For tax purposes, the Company has approximately $1,500 of foreign tax credits that expire in 1997 through 2001. In addition, approximately $542 of alternative minimum tax credits (which do not expire) and approximately $165 of tax benefits related to net operating loss carryforwards (which expire in 2011) are available to offset future regular tax liability. The benefit of these tax credit carryforwards has been recognized for financial statement purposes as part of deferred taxes. International income taxes relate to the results of operations of the wholly-owned subsidiaries, Vari-Lite Asia, Inc., Vari-Lite Hong Kong Limited and VLEH, as well as to withholding taxes on revenue generated by the Company's foreign distributors. NOTE I--EMPLOYEE BENEFIT PLANS: The Company has a defined contribution 401(k) plan in which substantially all its U.S. employees can elect to be participants. Under the terms of the 401(k) plan, employees can defer up to 20% of their earnings up to the permitted maximum as defined by IRS regulations. The Company matches 50% of the employee's contribution up to 5% of the employee's earnings during the plan year. During the years ended September 30, 1994, 1995 and 1996, and for the unaudited nine months ended June 30, 1996 and 1997, the Company's cost to match employee contributions was approximately $150, $300, $242, $195 and $193, respectively. Substantially all employees of VLEH may elect to be participants in the Vari-Lite Europe Pension Plan. The plan is a defined contribution plan under which employees may contribute up to 3% of their base salaries. The Company makes contributions at a rate of 200% of the employee contributions, with additional contributions made for certain key employees. The Company incurred costs of $46, $140, $156, $114 and $150, representing matching contributions for the years ended September 30, 1994, 1995 and 1996, and for the unaudited nine months ended June 30, 1996 and 1997, respectively. The Company adopted an employee stock ownership plan ("ESOP"), effective January 1, 1995, in which its U.S. employees are eligible to participate after completing one year of service, attaining age twenty-one and being a participant making elective deferrals in the Company's 401(k) Plan. Each year the Company may make discretionary contributions of stock to the ESOP as determined by the Board of Directors. Participant's 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. 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. F-17 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE I--EMPLOYEE BENEFIT PLANS: (CONTINUED) For the years ended September 30, 1995 and 1996 and the unaudited nine months ended June 30, 1996 and 1997, the Company recorded contributions of $750, $250, $186 and $189 for contributions to the ESOP and ESEP, representing approximately , , and shares of common stock, respectively. F-18 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE J--OPERATIONS BY GEOGRAPHIC AREA: The income statement and balance sheet information by geographic area is summarized in the following table:
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ----------------------------------------------------- Net Revenues......................................... $ 37,903 $ 7,141 $ 12,744 $ (3,976) $ 53,812 Net Income........................................... 3,280 51 247 -- 3,578 September 30, 1995 - ----------------------------------------------------- Net Revenues......................................... $ 43,443 $ 9,779 $ 25,337 $ (3,649) $ 74,910 Net Income........................................... 3,381 773 560 -- 4,714 September 30, 1996 - ----------------------------------------------------- Net Revenues......................................... $ 45,253 $ 11,401 $ 26,584 $ (6,100) $ 77,138 Net Income........................................... 1,590 1,153 376 -- 3,119 June 30, 1996 (unaudited) - ----------------------------------------------------- Net Revenues......................................... $ 31,824 $ 7,524 $ 18,313 $ (4,230) $ 53,431 Net Income........................................... 584 560 (8) -- 1,136 June 30, 1997 (unaudited) - ----------------------------------------------------- Net Revenues......................................... $ 40,307 $ 9,410 $ 23,408 $ (6,037) $ 67,088 Net Income........................................... 1,626 768 389 -- 2,783
UNITED STATES ASIA EUROPE INTERCOMPANY TOTAL ------------ --------- --------- ------------- --------- September 30, 1994 - ----------------------------------------------------- Assets............................................... $ 53,317 $ 5,349 $ 13,068 $ (14,511) $ 57,223 Liabilities.......................................... 33,589 2,545 11,691 (7,233) 40,592 September 30, 1995 - ----------------------------------------------------- Assets............................................... $ 68,722 $ 5,698 $ 15,591 ($ 17,004) $ 73,007 Liabilities.......................................... 46,004 3,191 13,522 (11,039) 51,678 September 30, 1996 - ----------------------------------------------------- Assets............................................... $ 69,052 $ 4,760 $ 13,529 ($ 9,768) $ 77,573 Liabilities.......................................... 44,615 2,486 10,838 (4,904) 53,035 June 30, 1996 (unaudited) - ----------------------------------------------------- Assets............................................... $ 67,283 $ 6,205 $ 15,440 $ (12,639) $ 76,289 Liabilities.......................................... 44,619 3,330 12,947 (6,673) 54,223 June 30, 1997 (unaudited) - ----------------------------------------------------- Assets............................................... $ 78,738 $ 5,519 16,760 $ (11,092) $ 89,925 Liabilities.......................................... 53,275 2,143 13,175 (6,228) 62,365
F-19 VARI-LITE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, (UNAUDITED) AS TO THE NINE MONTHS ENDED JUNE 30, 1996 AND 1997 (IN THOUSANDS EXCEPT SHARE DATA) NOTE K--RELATED PARTY TRANSACTIONS: Certain directors provided consulting services to the Company and received fees totaling approximately $526, $424, $512, $374 and $467 for the years ended September 30, 1994 and 1995 and 1996 and for the unaudited nine months ended June 30, 1996 and 1997, respectively. At September 30, 1996 and June 30, 1997, the Company had notes receivable from stockholders totaling $353 and $186, respectively, related to common stock purchases. The notes bear interest at various rates, mature at various times, and are collateralized by and shares of common stock at September 30, 1996 and June 30, 1997, respectively. The Company received from a stockholder of the Company $1,500, $900, $0 and $1,942 in the years ended September 30, 1994, 1995 and 1996 and the nine months ended June 30, 1997, respectively, for the rental of automated lighting products and other services. NOTE L--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the years ended September 30, 1995 and 1996, and the nine months ended June 30, 1997:
YEAR ENDED SEPTEMBER 30, 1995 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 18,648 $ 17,234 $ 19,314 $ 19,714 Income before income taxes.................................... 3,670 1,277 1,533 1,271 Net income.................................................... 2,232 777 932 773 Net income per share.......................................... YEAR ENDED SEPTEMBER 30, 1996 -------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ------------ ----------- --------- ------------ Revenues...................................................... $ 16,791 $ 16,995 $ 19,645 $ 23,707 Income before income taxes.................................... 359 113 1,476 3,409 Net income.................................................... 209 66 861 1,983 Net income per share.......................................... YEAR ENDED SEPTEMBER 30, 1997 ------------------------------------ DECEMBER 31 MARCH 31 JUNE 30 ------------ ----------- --------- Revenues...................................................... $ 22,326 $ 22,384 $ 22,378 Income before income taxes.................................... 1,551 1,372 1,914 Net income.................................................... 892 789 1,102 Net income per share..........................................
F-20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ Risk Factors.............................................................. Use of Proceeds........................................................... Dividend Policy........................................................... Dilution.................................................................. Capitalization............................................................ Selected Consolidated Financial Data...................................... Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. Business.................................................................. Management................................................................ Principal Stockholders.................................................... Selling Stockholders...................................................... Description of Capital Stock Shares Eligible for Future Sale.............. Underwriting.............................................................. Legal Matters............................................................. Experts................................................................... Additional Information.................................................... Index to Consolidated Financial Statements................................
------------------- UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES [VARI-LITE LOGO] COMMON STOCK ----------------- PROSPECTUS ----------------- [LOGO] , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The Registrant estimates that expenses to be paid by the Company in connection with the offering described in this Registration Statement will be as follows. All of the amounts except the SEC registration fee, the NASD fee and the Nasdaq National Market listing fee are estimates.
ITEM AMOUNT - ---------------------------------------------------------------------------------- ---------- SEC registration fee.............................................................. $ 9,410 NASD fee.......................................................................... 3,605 Nasdaq National Market listing fee................................................ Legal fees and expenses........................................................... 200,000 Accounting fees and expenses...................................................... 200,000 Printing expenses................................................................. 100,000 Fees and expenses for qualification under state securities laws (including legal fees)........................................................................... 5,000 Transfer agent's and registrar's fees and expenses................................ 20,000 Miscellaneous..................................................................... ---------- Total........................................................................... $ 600,000* ---------- ----------
- ------- * None of this amount is to be borne by the Selling Stockholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant is incorporated under the laws of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any person against expenses, fines and settlements actually and reasonably incurred by any such person in connection with a threatened, pending or completed action, suit or proceeding in which he is involved by reason of the fact that he is or was a director, officer, employee or agent of such corporation, provided that (i) he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. If the action or suit is by or in the name of the corporation, the corporation may indemnify any such person against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the Delaware Court of Chancery or the court in which the action or suit is brought determines upon application that, despite the adjudication of liability but in light of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. As permitted by the Delaware General Corporation Law, the Certificate of Incorporation provides that the directors and officers of the Registrant shall be indemnified by the Registrant against certain liabilities that those persons may incur in their capacities as directors or officers. The Certificate of Incorporation eliminates the liability of directors of the Registrant, under certain circumstances, to the maximum extent permitted by the Delaware General Corporation Law. See "Description of Capital Stock--Special Provisions of the Certificate of Incorporation and By-Laws" included in the Prospectus. II-1 The Company has entered into Indemnification Agreements with the directors and officers of the Company and certain of its subsidiaries pursuant to which the Company has agreed to indemnify such individuals to the fullest extent authorized by the Delaware General Corporation Law. The Underwriting Agreement filed as Exhibit 1.1 hereto contains reciprocal agreements of indemnity between the Registrant and the Underwriters as to certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), and in certain circumstances provides for indemnification of the Registrant's directors and officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since June 30, 1994 the Registrant has issued and sold the following securities (all such amounts having been adjusted to reflect the reincorporation of the Registrant as a Delaware corporation pursuant to a merger with Vari-Lite International, Inc., a Texas corporation ("Vari-Lite Texas"), which will be effected immediately prior to the consummation of the Offering and pursuant to which the two classes of Common Stock of Vari-Lite Texas will be converted into the Registrant's Common Stock on a -for- basis) without registration under the Securities Act (none of which sales were underwritten): On September 28, 1994, the Registrant issued shares of Common Stock at a purchase price of $ per share to Michael P. Herman, an officer and employee of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On March 31, 1995, the Registrant issued shares of Common Stock at a purchase price of $ per share to Brian L. Croft, an officer and employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 15, 1995, the Registrant issued , , , , , and shares of Common Stock at a purchase price of $ per share to Richard W. Bratcher, Jr., Howard Page, T. Clay Powers, Loren J. Haas, Janis C. Pestinger, J. Scott Thompson and James E. Kinnu, respectively. Mr. Kinnu was an officer and employee of the Registrant. Messrs. Powers, Thompson, Bratcher and Haas and Ms. Pestinger are officers and employees of subsidiaries of the Registrant and Mr. Page is an employee of a subsidiary of the Registrant. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On September 29, 1995, the Registrant issued shares to Overton Bank and Trust, N.A., as trustee of the Vari-Lite International, Inc. Employees' Stock Ownership Plan ("ESOP"), as the Registrant's discretionary contribution in the amount of $494,995.26 or $ per share to the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On July 31, 1996, the Registrant issued warrants to purchase shares of Common Stock at an exercise price of $ per share to certain members of the Company's bank syndicate. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On February 6, 1997, the Registrant issued shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the Vari-Lite International, Inc. Employees' Stock Equivalence Plan ("ESEP"), as the Registrant's discretionary contribution in the amount of $248,340.35, the ESEP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On February 6, 1997, the Registrant issued shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's additional discretionary contribution in the amount of $6,683.63 or $ per share to II-2 the ESOP for the 1995 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued shares to Overton Bank and Trust, N.A., as trustee of the ESOP, as the Registrant's discretionary contribution in the amount of $174,652.86 or $ per share to the ESOP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. On June 30, 1997, the Registrant issued shares to Bank of Butterfield International (Cayman) Ltd., as trustee of the ESEP, as the Registrant's discretionary contribution in the amount of $75,318.26 or $ per share to the ESEP for the 1996 calendar plan year. Exemption from registration was claimed under Section 4(2) of the Securities Act regarding transactions by an issuer not involving any public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ *1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant *3.2 -- By-Laws of the Registrant *4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas *5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III *10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson *10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith
II-3 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft *10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson *10.18 -- Amended and Restated Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan *10.21 -- First Amendment to Vari-Lite International, Inc. 1997 Omnibus Plan 10.22 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan *10.23 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.24 -- Vari-Lite International, Inc. Annual Incentive Plan *10.25 -- First Amendment to Vari-Lite International, Inc. Annual Incentive Plan 10.26 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.30 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.31 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas
II-4 10.32 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.33 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Company and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.35 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.36 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.37 -- Ground Lease, dated as of December 21, 1995, among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., Ignition! Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc. 10.38 -- Guaranty, dated as of December 21, 1995, by the Registrant *10.39 -- Form of Indemnification Agreement with Directors and Officers 21.1 -- List of Registrant's Subsidiaries 23.1 -- Consent of Deloitte & Touche LLP *23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney (set forth on page II - ) 27.1 -- Financial Data Schedule
- ------- * To be filed by amendment (b) Financial Statement Schedules Not applicable ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes to provide to the representatives of the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the representatives of the underwriters to permit prompt delivery to each purchaser. (c) The undersigned Registrant hereby undertakes that: II-5 (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas and State of Texas on the 13th day of August, 1997. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. BRUTCHE, III ----------------------------------------- H.R. Brutche, III CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each of the undersigned hereby appoints H. R. Brutsche III and Michael P. Herman and each of them (with full power to act alone) as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act of 1933 any and all amendments and exhibits to this Registration Statement and any and all applications, instruments and other documents to be filed with the Securities and Exchange Commission pertaining to the registration of the securities covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite or desirable. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on the 13th day of August, 1997. NAME TITLE - ------------------------------ ----------------------------------------------- /s/ H.R. BRUTCHE, III Chairman of the Board, President and Chief - ------------------------------ Executive Officer (Principal Executive H.R. Brutche, III Officer) /s/ MICHAEL P. HERMAN Vice President--Finance, Chief Financial - ------------------------------ Officer and Secretary (Principal Financial Michael P. Herman 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 II-7 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------------------ *1.1 -- Form of Underwriting Agreement 3.1 -- Certificate of Incorporation of the Registrant *3.2 -- By-Laws of the Registrant *4.1 -- Form of certificate representing shares of the Registrant's Common Stock 4.2 -- Warrant Agreement, dated as of July 31, 1996, among the Registrant, Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank--Texas *5.1 -- Legal Opinion of Gardere & Wynne, L.L.P. regarding legality of securities being registered 10.1 -- Employment Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III *10.2 -- Amendment No. 1, dated as of August 11, 1997, to the Employment Agreement, dated as of July 1, 1995, between the Registrant and H.R. Brutsche III 10.3 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.4 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson *10.5 -- Amendment No. 1, dated as of August 11, 1997, to the Consulting Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.6 -- Consulting Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.7 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and H. R. Brutsche III 10.8 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and John D. Maxson 10.9 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and James H. Clark, Jr. 10.10 -- Deferred Compensation Agreement, dated as of July 1, 1995, between the Registrant and J. Anthony Smith 10.11 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and H. R. Brutsche III 10.12 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and John D. Maxson 10.13 -- Compensation Continuation Agreement, dated as of March 31, 1994, among the Registrant, Vari-Lite, Inc., Showco, Inc. and James H. Clark, Jr. 10.14 -- Statement and Terms of Employment, dated as of April 1, 1994, between Vari-Lite Europe Ltd. and Brian L. Croft *10.15 -- Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III *10.16 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the H.R. Brutsche III Insurance Trust, and H. R. Brutsche III
*10.17 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1997, among the Registrant, Brown Brothers Harriman Trust Company of Texas, trustee of the John D. Maxson 1995 Irrevocable Trust, and John D. Maxson *10.18 -- Amended and Restated Split-Dollar Life Insurance Agreement, dated as of October 12, 1995, among the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.19 -- Amended and Restated Split-Dollar Agreement, dated as of October 12, 1995, between the Registrant, James Howard Cullum Clark and James H. Clark, Jr. *10.20 -- Vari-Lite International, Inc. 1997 Omnibus Plan *10.21 -- First Amendment to Vari-Lite International, Inc. 1997 Omnibus Plan 10.22 -- Vari-Lite International, Inc. Employees' Stock Ownership Plan *10.23 -- Vari-Lite International, Inc. Employees' Stock Equivalence Plan *10.24 -- Vari-Lite International, Inc. Annual Incentive Plan *10.25 -- First Amendment to Vari-Lite International, Inc. Annual Incentive Plan 10.26 -- Credit Agreement, dated as of March 31, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.27 -- Amendment No. 1 to Credit Agreement, dated as of July 1, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.28 -- Amendment No. 2 to Credit Agreement, dated as of September 30, 1994, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.29 -- Amendment No. 3 to Credit Agreement, dated as of February 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.30 -- Amendment No. 4 to Credit Agreement, dated as of November 22, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, N.A., Trust Company Bank and Comerica Bank--Texas 10.31 -- Amendment No. 5 to Credit Agreement, dated as of December 18, 1995, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.32 -- Amendment No. 6 to Credit Agreement, dated as of May 20, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.33 -- Amendment No. 7 to Credit Agreement, dated as of July 31, 1996, among the Registrant and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.34 -- Amendment No. 8 to Credit Agreement, dated as of January 16, 1997, among the Company and all of its subsidiaries and Brown Brothers Harriman & Co., Coutts & Co., NBD Bank, SunTrust Bank, Atlanta and Comerica Bank--Texas 10.35 -- Employment Agreement, dated as of August 28, 1995, by and between the Registrant and James E. Kinnu 10.36 -- Severance Agreement, dated as of September 30, 1996, by and between the Registrant and James E. Kinnu 10.37 -- Ground Lease, dated as of December 21, 1995, among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., Ignition! Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc. 10.38 -- Guaranty, dated as of December 21, 1995, by the Registrant
*10.39 -- Form of Indemnification Agreement with Directors and Officers 21.1 -- List of Registrant's Subsidiaries 23.1 -- Consent of Deloitte & Touche LLP *23.2 -- Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1) 24.1 -- Power of attorney (set forth on page II - ) 27.1 -- Financial Data Schedule
- ------- * To be filed by amendment EX-3.1 2 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF VARI-LITE INTERNATIONAL, INC. FIRST. The name of the corporation is Vari-Lite International, Inc. (the "Corporation"). SECOND. The Corporation's registered office in the State of Delaware is 1209 Orange Street, Corporation Trust Center, in the City of Wilmington, County of New Castle. The name and address of its registered agent is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. Section 1. CAPITALIZATION. The Corporation is authorized to issue fifty million (50,000,000) shares of capital stock. Forty million (40,000,000) of the authorized shares shall be common stock, $0.10 par value each ("Common Stock"), and ten million (10,000,000) of the authorized shares shall be preferred stock, $0.10 par value each ("Preferred Stock"). Each holder of shares of capital stock of the Corporation shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock of the Corporation held by the stockholder, unless otherwise specifically provided pursuant to this Certificate of Incorporation. Section 2. PREFERRED STOCK. A. The Preferred Stock may, from time to time, be divided into and issued in one or more series with each series to be so designated as to distinguish the shares thereof from the shares of all other series and classes. The shares of each series may have such powers, designations, preferences, relative rights, qualifications, limitations or restrictions as are stated herein and in one or more resolutions providing for the issue of such series adopted by the Board of Directors as provided below. B. To the extent that this Certificate of Incorporation does not fix and determine the variations in the relative rights and preferences of the Preferred Stock, both in relation to the Common Stock and as between series of Preferred Stock, the Board of Directors of the Corporation is expressly vested with the authority to divide the Preferred Stock into one or more series and, within the limitations set forth in this Certificate of Incorporation, to fix and determine the relative rights and preferences of the shares of any series so established, and, with respect to each such series, to fix by one or more resolutions providing for the issue of such series, the following: (i) The maximum number of shares to constitute such series and the distinctive designation thereof; (ii) The annual dividend rate, if any, on the shares of such series and the date or dates from which dividends shall commence to accrue or accumulate as herein provided, and whether dividends shall be cumulative; (iii) The price at and the terms and conditions on which the shares of such series may be redeemed, including, without limitation, the time during which shares of the series may be redeemed, the premium, if any, over and above the par value thereof and any accumulated dividends thereon that the holders of shares of such series shall be entitled to receive upon the redemption thereof, which premium may -1- vary at different dates and may also be different with respect to shares redeemed through the operation of any retirement or sinking fund; (iv) The liquidation preference, if any, over and above the par value thereof, and any accumulated dividends thereon, that the holders of shares of such series shall be entitled to receive upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (v) Whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes, and the terms and provisions relative to the operations of such retirement or sinking fund; (vi) The terms and conditions, if any, on which the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of capital stock of the Corporation or any series of any other class or classes, or of any other series of the same class, including the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, provided that shares of such series may not be convertible into shares of a series or class that has prior or superior rights and preferences as to dividends or distribution of assets of the Corporation upon voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (vii) The voting rights, if any, on the shares of such series; and (viii) Any or all other preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as shall not be inconsistent with the law or with this Article Fourth. C. All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon, if any, shall be cumulative; and all series shall rank equally and be identical in all respects, except as provided in Paragraph A of this Section 2 and except as permitted by the foregoing provisions of Paragraph B. D. Except to the extent restricted or otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, no dividends (other than dividends payable in Common Stock) on any class or classes of capital stock of the Corporation ranking, with respect to dividends, junior to the Preferred Stock, or any series thereof, shall be declared, paid or set apart for payment, until and unless the holders of shares of Preferred Stock of each senior series shall have been paid, or there shall have been set apart for payment, cash dividends, when and as declared by the Board of Directors out of funds of the Corporation legally available therefor, at the annual rate, and no more, fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series. E. To the extent provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, upon the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of any class or classes of capital stock of the Corporation ranking junior, as to liquidation rights, to the Preferred Stock, or any series thereof, the holders of the shares of the Preferred Stock shall be entitled to receive payment at the rate fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of the respective series. Unless otherwise provided in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock, for the purposes of this Paragraph E and Paragraph B(iv) of this Section 2, neither the consolidation nor merger of the Corporation with one or more other corporations shall be deemed to be a liquidation, dissolution or winding up. -2- F. The Corporation, at the option of the Board of Directors, may redeem, unless otherwise provided in the resolution establishing a series of Preferred Stock, at such time as is fixed (and if not so fixed, at any time) in the resolution or resolutions adopted by the Board of Directors providing for the issue of a series, the whole or, from time to time, any part of the Preferred Stock of any series then outstanding, at the par value thereof, plus in every case an amount equal to all accumulated dividends, if any (whether or not earned or declared), with respect to each share so redeemed and, in addition thereto, the amount of the premium, if any, payable upon such redemption fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series. The Board of Directors shall have full power and authority, subject to the limitations and provisions contained herein and in the Delaware General Corporation Law, to prescribe the terms and conditions upon which the Preferred Stock shall be redeemed from time to time. G. Shares of Preferred Stock that have been redeemed, purchased or otherwise acquired by the Corporation or that, if convertible or exchangeable, have been converted into or exchanged for shares of capital stock of any other class or classes or any series of any other class or classes or of any other series of the same class, shall be cancelled and such shares may not under any circumstances thereafter be reissued as Preferred Stock, and the Corporation shall from time to time cause all such acquired shares of Preferred Stock to be cancelled in the manner provided by law. H. Nothing herein contained shall limit any legal right of the Corporation to purchase any shares of the Preferred Stock. Section 3. COMMON STOCK. A. Shares of Common Stock may be issued by the Corporation from time to time for such consideration as may lawfully be fixed by the Board of Directors. B. Subject to the prior rights and preferences of the Preferred Stock set forth in this Article Fourth, or in any resolution or resolutions providing for the issuance of a series of Preferred Stock, and to the extent permitted by the laws of the State of Delaware, the holders of Common Stock shall be entitled to receive such cash dividends as may be declared and made payable by the Board of Directors. -3- C. After payment shall have been made in full to the holders of any series of Preferred Stock having preferred liquidation rights, upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the remaining assets and funds of the Corporation shall be distributed among the holders of the Common Stock according to their respective shares. FIFTH. The name and mailing address of the incorporator is: Carter Meyer Gardere & Wynne, L.L.P. Suite 3000 1601 Elm Street Dallas, Texas 75201 SIXTH. Section 1. NUMBER, ELECTION AND TERMS OF DIRECTORS; BOARD ACTION. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors. The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors. The directors shall be divided, with respect to the time for which they severally hold office, into three classes, Class I, Class II and Class III, as nearly equal in number as reasonably possible, with the initial term of office of Class I directors to expire at the 1998 annual meeting of stockholders, the initial term of office of Class II directors to expire at the 1999 annual meeting of stockholders and the initial term of office of Class III directors to expire at the 2000 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. The number of directors until changed in the manner provided in the By-Laws shall be six. The name and mailing addresses of the persons who are to serve as directors until their respective successors are elected and qualified, and the class into which each is initially placed, are as follows: Name Address ---- ------- CLASS I John D. Maxson 8117 Preston Road, LB 27 Dallas, Texas 75225 C. Vincent Prothro 4401 Beltwood Parkway South Dallas, Texas 75244 CLASS II James H. Clark, Jr. 8117 Preston Road, Suite 220 Dallas, Texas 75225 John R. Rettberg 1770 W. Balboa Blvd. #2B Newport Beach, California 92663 CLASS III H.R. Brutsche III 201 Regal Row Dallas, Texas 75247 J. Anthony Smith 30 Ives Street London, England SW3 Section 2. STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES AND INTRODUCTION OF BUSINESS. Advance notice of stockholder nominations for the election of directors and of business to be brought by -4- stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-Laws of the Corporation. Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Subject to applicable law and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires or until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the entire Board of Directors shall shorten the term of any incumbent director. Section 4. REMOVAL. Any director, or the entire Board of Directors, may be removed from office at any time, but only "for cause" and only by the affirmative vote of the holders of not less than 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (referred to in this Certificate of Incorporation as the "Voting Stock"), voting together as a single class. "For cause" means: (i) commission of an act of fraud or embezzlement against the Corporation; (ii) conviction of a felony or a crime involving moral turpitude; (iii) gross negligence or willful misconduct in performing the director's duties to the Corporation or its stockholders; or (iv) breach of fiduciary duty owed to the Corporation. Section 5. STOCKHOLDERS' MEETINGS. Meetings of stockholders of the Corporation may be called only by the Chief Executive Officer, the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or by the holders of not less than 50% of the outstanding shares of Voting Stock. Section 6. STOCKHOLDER ACTIONS. All actions of the stockholders of the Corporation must be taken at an annual or special meeting of stockholders and may not be taken by a consent or consents in writing. SEVENTH. Cumulative voting for the election of directors shall not be permitted. EIGHTH. No stockholder shall by reason of his holding shares of any class have a preemptive or preferential right to purchase or subscribe to any shares of any class of stock of the Corporation, or any notes, debentures, bonds, warrants, rights, options or other securities of the Corporation, now or hereafter to be authorized, other than such rights, if any, as the Board of Directors, in its discretion, may fix. NINTH. The Board of Directors of the Corporation shall have the power to make, alter or repeal the By-Laws of the Corporation, subject to such restrictions upon the exercise of such powers as may be imposed by the stockholders in any by-laws adopted by them from time to time. -5- TENTH. It shall be a proper corporate purpose, reasonably calculated to benefit stockholders, for the Board of Directors to base the response of the Corporation to any "Acquisition Proposal" on the evaluation by the Board of Directors of what response is in the best interests of the Corporation, and for the Board of Directors, in evaluating what response is in the best interests of the Corporation, to consider: (i) the best interests of the stockholders and, for this purpose, the Board of Directors shall consider, among other factors, not only the consideration being offered in the Acquisition Proposal, in relation to the market price, but also in relation to the value of the Corporation in a freely negotiated transaction and in relation to the estimate by the Board of Directors of the future value of the Corporation as an independent entity; and (ii) such other factors as the Board of Directors determines to be relevant, including, among other factors, the social, legal and economic effects upon the Corporation's employees, suppliers, customers and business and the communities in which the Corporation operates. For purposes of this Article Tenth, "Acquisition Proposal" means any proposal of any person or entity (a) for a tender offer or exchange offer for any equity security of the Corporation, (b) to merge or consolidate the Corporation with another corporation, or (c) to purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation. ELEVENTH. The Corporation hereby elects not to be governed by Section 203 of the Delaware General Corporation Law, or any successor provision, and to substitute therefor Article Twelfth of this Certificate of Incorporation. TWELFTH. Section 1. APPROVAL OF CERTAIN BUSINESS COMBINATIONS. A Business Combination (as hereinafter defined) shall require (i) only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of Paragraph A or Paragraph B of this Section 1 are met or (ii) in addition to any affirmative vote required by law or this Certificate of Incorporation, the affirmative vote of the holders of not less than 80% of the outstanding shares of the Voting Stock, voting together as a single class (it being understood that for the purposes of this Article Twelfth, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article Fourth of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. A. APPROVAL BY DISINTERESTED DIRECTORS. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). B. PRICE AND PROCEDURE REQUIREMENTS. All of the following conditions shall have been met: (i) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of Common Stock in such Business Combination shall be at least equal to the higher of the following: (a) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder (as hereinafter defined) for any shares of Common Stock or the common stock of any Predecessor Corporation (as hereinafter defined) acquired by it (1) within the three-year period immediately prior to the first public announcement of the terms of the proposed Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; or (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such later date is referred to in this Article Twelfth as the "Determination Date"), whichever is higher. (ii) The aggregate amount of the cash and Fair Market Value as of the date of the -6- consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph B(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest price per share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock or a substantially identical class of stock of any Predecessor Corporation acquired by it (1) within the three-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (iii) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock or stock of a Predecessor Corporation. If the Interested Stockholder has paid for shares of any class of Voting Stock or stock of a Predecessor Corporation with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock or stock of a Predecessor Corporation previously acquired by it. The price determined in accordance with Paragraphs B(i) and B(ii) of this Section 1 shall be subject to appropriate adjustment in the event of any special dividend or other disposition of material assets other than in the ordinary course of business, stock dividend, stock split, combination of shares or similar event. Whether specific consideration satisfies this Paragraph B(iii) shall be determined by vote of a majority of the Disinterested Directors. (iv) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or upon liquidation; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (c) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction that results in such Interested Stockholder's becoming an Interested Stockholder. (v) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guaranties, pledges or other financial assistance or any tax credits or other tax advantages provided to or by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be -7- mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Section 2. CERTAIN DEFINITIONS. For purposes of this Article Twelfth: A. "Business Combination" shall mean any transaction that is referred to in any one or more of the following clauses (i) through (v): (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder or (b) any other corporation (whether or not itself an Interested Stockholder) that is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $5 million or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5 million or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Equity Security (as hereinafter defined) of the Corporation or any Subsidiary that is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. B. "Person" shall mean any individual, firm, corporation or other entity. C. "Interested Stockholder" shall mean any Person (other than the Corporation or any Subsidiary or employee benefit plan of the Corporation or any Subsidiary) that: (i) is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding Voting Stock; or (ii) at any time within the three-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock or of capital stock of any Predecessor Corporation that were at any time within the three-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. -8- D. A person shall be a "beneficial owner" of any stock that: (i) such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns directly or indirectly; or (ii) such Person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) is beneficially owned, directly or indirectly, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of such stock. E. For the purpose of determining whether a Person is an Interested Stockholder pursuant to Paragraph C of this Section 2, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of Paragraph D of this Section 2 but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. F. "Affiliate" and "Associate" shall have the meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. G. "Subsidiary" means any corporation of which a majority of any class of Equity Security is owned, directly or indirectly, by the Corporation, provided, however, that for purposes of the definition of Interested Stockholder set forth in Paragraph C of this Section 2, the term "Subsidiary" shall mean only a corporation of which a majority of each class of Equity Security is owned, directly or indirectly, by the Corporation. H. "Disinterested Director" means any member of the Board of Directors who is not an Affiliate of the Interested Stockholder and was a member of the Board of Directors immediately before the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. I. "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of stock (a) on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or (b) if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on The Nasdaq Stock Market, Inc. National Market or any system then in use, or (c) if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; or (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. J. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs B(i) and B(ii) of Section 1 of this Article Twelfth shall include the shares of Common Stock and the shares of any other class of outstanding Voting Stock retained by the holders of such shares. K. "Equity Security" shall have the meaning ascribed to such term in Section 3(a)(11) of the Securities Exchange Act of 1934, as amended. -9- L. A "Predecessor Corporation" includes any corporation of which the Corporation was at one time a wholly-owned subsidiary, or of which the Corporation would be deemed to be a legal successor in interest (by contract or by merger or other operation of law). Section 3. POWERS OF THE BOARD OF DIRECTORS. A majority of the Disinterested Directors shall have the power and duty to determine for the purposes of this Article Twelfth, on the basis of information known to them after reasonable inquiry, (i) whether a Person is an Interested Stockholder, (ii) the number of shares of Voting Stock beneficially owned by any Person, (iii) whether a Person is an Affiliate or Associate of another, (iv) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $5 million or more. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article Twelfth. Section 4. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED STOCKHOLDERS. Nothing contained in this Article Twelfth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. THIRTEENTH. No contract or other transaction between the Corporation and any other corporation, firm or individual shall be affected or invalidated by the fact that any one or more of the directors or officers of the Corporation is interested in or is a director or officer of such other corporation, or a member of such firm, and any director or officer, individually or jointly, may be a party to or may be interested in any contract or transaction with the Corporation, or in which the Corporation is interested, and no contract, act or transaction of the Corporation with any person or persons, firms or corporations, shall be affected or invalidated by the fact that any director or officer of the Corporation is a party to or interested in such contract, act or transaction, or in any way connected with such person or persons, firms or corporations, and each and every person who may become a director or officer of the Corporation is hereby relieved from any liability that might otherwise exist solely from contracting with the Corporation for the benefit of himself or any firm or corporation in which he may be in any way interested. FOURTEENTH. To the fullest extent permitted by Delaware statutory or decisional law, as the same exists or may hereafter be amended or interpreted, including but not limited to, Section 102(b)(7) of the Delaware General Corporation Law or any successor provision, a director of the Corporation shall not be liable to the Corporation or its stockholders for any act or omission in such director's capacity as a director. Any amendment or repeal of this Article Fourteenth, or adoption of any other provision of this Certificate of Incorporation inconsistent with this Article Fourteenth, by the stockholders of the Corporation shall be prospective only and shall not adversely affect any limitation on the liability to the Corporation or its stockholders of a director of the Corporation existing at the time of such repeal, amendment or adoption of an inconsistent provision. FIFTEENTH. Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (all of such persons being hereafter referred to in this Article as a "Corporate Functionary"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or -10- conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by law, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Corporate Functionary against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under Sections 1 or 2 of this Article Fifteenth (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Corporate Functionary is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 or 2 of this Article Fifteenth. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iii) by the stockholders. Section 4. RIGHT TO INDEMNIFICATION. Notwithstanding the other provisions of this Article Fifteenth, to the extent that a Corporate Functionary has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 or 2 of this Article Fifteenth (including the dismissal of a proceeding without prejudice or the settlement of a proceeding without admission of liability), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 5. PREPAID EXPENSES. Expenses incurred by a Corporate Functionary in defending a civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of the Corporate Functionary to repay such amount if it shall ultimately be determined he is not entitled to be indemnified by the Corporation as authorized in this Article Fifteenth. Section 6. RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Any indemnification of a Corporate Functionary under Sections 1, 2 and 4, or any advance of expenses under Section 5, of this Article Fifteenth shall be made promptly upon, and in any event within 60 days after, the written request of the Corporate Functionary, unless with respect to applications under Sections 1, 2, 4 or 5 of this Article Fifteenth, a determination is reasonably and promptly made in accordance with Section 3 of this Article Fifteenth that such Corporate Functionary acted in a manner set forth in such Sections as to justify the Corporation in not indemnifying or making an advance of expenses to the Corporate Functionary. The right to indemnification or advance of expenses granted by this Article Fifteenth shall be enforceable by the Corporate Functionary in the Court of Chancery or court of competent jurisdiction if his claim for indemnification or advancement of expenses is denied, in whole or in part, or if no disposition of such claim is made within 60 days. The expenses of the Corporate Functionary incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. -11- Section 7. OTHER RIGHTS AND REMEDIES. The indemnification and advancement of expenses provided by or granted pursuant to this Article Fifteenth shall not be deemed exclusive of any other rights to which any person seeking indemnification and/or advancement of expenses may be entitled under any other provision of this Certificate of Incorporation, or any agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Corporate Functionary and shall inure to the benefit of the heirs, executors and administrators of such a person. Any repeal or modification of this Certificate of Incorporation or relevant provisions of the General Corporation Law of Delaware and other applicable law, if any, shall not affect any then existing rights of a Corporate Functionary to indemnification or advancement of expenses. Section 8. INSURANCE. Upon resolution passed by the Board of Directors, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Fifteenth or the General Corporation Law of Delaware. Section 9. MERGERS. For purposes of this Article Fifteenth, references to "the Corporation" shall include, in addition to the resulting or surviving corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article Fifteenth with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 10. SAVINGS PROVISION. If this Article Fifteenth or any portion hereof shall be invalidated on any ground by a court of competent jurisdiction, the Corporation shall nevertheless indemnify each Corporate Functionary as to expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, including a grand jury proceeding or action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article Fifteenth that shall not have been invalidated. SIXTEENTH. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws), the affirmative vote of the holders of not less than 80% of the outstanding shares of the Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, Articles Sixth, Tenth, Eleventh, Twelve, Fourteenth, Fifteenth or this Article Sixteenth of this Certificate of Incorporation. Except as provided in this Article Sixteenth, this Certificate of Incorporation may be amended in the manner provided by the General Corporation Law of the State of Delaware. The By-Laws of the Corporation may be altered, amended or repealed, or new By-Laws adopted, only at any regular or special meeting of the Board of Directors or upon the affirmative vote of the holders of not less than 80% of the outstanding shares entitled to vote at any regular or special meeting of stockholders, and only if such proposed alteration, amendment, repeal or adoption be contained in the notice of such regular or special meeting. The undersigned, being the incorporator named above, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and accordingly has -12- hereunto set his hand this 8th day of August, 1997. /s/ Carter Meyer ------------------------------------- Carter Meyer -13- EX-4.2 3 EXHIBIT 4.2 WARRANT AGREEMENT WARRANT AGREEMENT (this "Agreement") is made and entered into as of July 31, 1996, by and between (i) Vari-Lite International, Inc., a corporation incorporated under the laws of the State of Texas (together with its successors, the "Company") and (ii) Brown Brothers Harriman & Co., NBD Bank, SunTrust Bank, Atlanta (formerly known as Trust Company Bank) and Comerica Bank - Texas (each an "Initial Holder" and collectively, the "Initial Holders"). WHEREAS, the Company (and each of its subsidiaries) and the Initial Holders are parties to that certain Credit Agreement, dated as of March 31, 1994 (as the same has been or shall be modified, amended and supplemented and in effect from time to time, the "Credit Agreement"), providing for the making of certain loans to the Company as contemplated therein; WHEREAS, pursuant to the Credit Agreement, Brown Brothers Harriman & Co. ("BBH") is acting as administrative agent for the various lenders named therein; WHEREAS, in order to induce the Initial Holders to amend the Credit Agreement, pursuant to Amendment No. 7 thereto, the Company has agreed to issue the Warrants (as hereinafter defined) to the Initial Holders as contemplated herein; WHEREAS, the Company has authorized the issuance of the Warrants which are exercisable, pursuant to the terms and conditions thereof, for Class A Common Stock or Class B Common Stock of the Company; and WHEREAS, the Initial Holders now desire to subscribe for, and the Company now desires to issue to the Initial Holders, upon the terms and conditions set forth herein, the Warrants substantially in the form of Exhibit A hereto (the "Warrant"); NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Section 1. DEFINITIONS. 1.01 DEFINITIONS. Terms defined in either the Warrant or the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. The following additional terms, as used herein, shall have the following respective meanings: "Acceptance Notice" shall have the meaning provided in Section 6.02 hereof. "Affiliate" shall mean, with respect to any Person, any other Person that directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with its correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of power to direct or cause the direction of the management and policies of such Person (whether through the ownership of securities or partnership or other ownership interests, contract or otherwise), PROVIDED that, in any event, any Person which owns, directly or indirectly, more than 10% of the securities having ordinary voting power for the election of directors or other governing body of a corporation or more than 10% of the partnership or other ownership interests of any Person (other than as a limited partner of such other Person) shall be deemed to control such corporation or other Person. Notwithstanding the foregoing, neither the Initial Holders nor any of their respective Affiliates shall be deemed to be an Affiliate of the Company. As used herein, an "Affiliate" shall include (a) a Person's spouse and/or lineal descendants, (b) a Person's estate, executor, guardian or conservator, (c) a trust for the benefit of such Person or his spouse and/or lineal descendants and (d) the partners of a Person that is a partnership or the spouse and/or lineal descendants of such partner or a trust for the benefit of such partner or his spouse and/or lineal descendants. "Agreement" shall have the meaning provided in the recitals hereof. "Appraised Value" shall have the meaning provided in Section 6.02 hereof. "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which commercial banks are required by law or authorized to close in New York City. "Change of Control" shall mean, with respect to the Company, such time as (i) a Person or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than a Person or group composed solely of the current holders of capital stock of the Company, becomes the beneficial owner of a majority of the voting capital stock of the Company; or (ii) (A) the Company consolidates with or merges into any other Person or conveys, transfers or leases all or substantially all of the business of the Company to any Person, or (B) any Person merges into the Company, in either event pursuant to a transaction in which any voting shares of the Company outstanding immediately prior to the effectiveness thereof are altered, reclassified or changed into or exchanged for cash, securities or other property; PROVIDED, HOWEVER, that any merger, consolidation, conveyance, transfer or lease pursuant to which the holders of a majority of the Company's shares of voting capital stock immediately prior to such event shall continue to hold a majority of the voting capital stock of the resulting entity following such event shall not constitute a "Change of Control." "Class A Common Stock" shall mean the Class A common stock of the Company, $0.10 par value. "Class B Common Stock" shall mean the Class B non-voting common stock of the Company, $0.10 par value. "Common Stock" shall mean and include collectively the Company's authorized Class A Common Stock and the Company's authorized Class B Common Stock, as constituted on the date hereof. "Company" shall have the meaning provided in the recitals hereof. "Confidential Information" shall have the meaning provided in Section 4.07 hereof. 2 "Credit Agreement" shall have the meaning provided in the recitals hereof. "Demand Notice" shall have the meaning provided in Section 5.01 hereof. "Demand Registration" shall have the meaning provided in Section 5.01 hereof. "Demand Registration Statement" shall have the meaning provided in Section 5.01 hereof. "Disagreement Notice" shall have the meaning provided in Section 2.03 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any successor rule or regulation. "Final Put Notice" shall have the meaning provided in Section 2.03 hereof. "First Demand Date" shall have the meaning provided in Section 5.01 hereof. "GAAP" shall mean generally accepted accounting principles, as in effect from time to time in the United States. "Holder" initially shall mean any Initial Holder and each other holder of any Warrant or Warrant Share that is a direct or indirect transferee of an Initial Holder or any other Holder unless, with respect to any such Warrant Share, such Warrant Share is acquired in a public distribution pursuant to a registration statement under the Securities Act or pursuant to a transaction exempt from registration under the Securities Act if securities sold in such transaction may be resold without subsequent registration under the Securities Act. "Holder Expenses" shall have the meaning provided in Section 5 hereof. "Indebtedness" shall mean any obligation of the Company for borrowed money (and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money) which would, in accordance with GAAP, be shown on a balance sheet as a liability. "Initial Holders" shall have the meaning provided in the recitals hereof. "Initial Public Offering" shall mean the initial sale, in an underwritten public offering registered under the Securities Act, of shares of the Company's Common Stock having an aggregate offering price of at least $10 million. "Inspectors" shall have the meaning provided in Section 5.03 hereof. "Offered Warrants or Warrant Shares" shall have the meaning provided in Section 6.02 hereof. "Person" shall mean an individual, a corporation, a limited liability company, a company, a voluntary association, a general partnership, a limited partnership, a trust, an unincorporated organization or a government or any agency, instrumentality or political subdivision thereof. 3 "Permitted Transferee" shall have the meaning provided in Section 6.02 hereof. "Piggy-Back Registration" shall have the meaning provided in Section 5.02 hereof. "Put Exercise Date" shall have the meaning provided in Section 2.02 hereof. "Put Exercise Notice" shall have the meaning provided in Section 2.03 hereof. "Put Note" shall mean a promissory note, in form and substance reasonably satisfactory to the Holder, which note shall (i) bear interest at a rate equal to the lesser of (x) the sum of (A) the Base Rate of BBH plus (B) one percent (1%), or (y) the Highest Lawful Rate, and (ii) be payable in either (a) four (4) equal quarterly installments of principal, plus accrued and unpaid interest thereon, through the date of payment in full, if such note is unsecured, or (b) in eight (8) equal quarterly installments of principal, plus accrued and unpaid interest thereon, through the date of payment in full, if, and only if, such note is secured, on a PARI PASSU basis, by all of the collateral then securing the primary credit facility (the "Primary Credit Facility") of the Company, or its operating subsidiaries, as the case may be, and the Holders shall have entered into an intercreditor agreement, reasonably satisfactory in form and substance to the Required Holders, with the lenders under the Primary Credit Facility addressing matters affecting the collateral and the enforcement of remedial rights thereupon, such payments commencing on the date which is the last business day of the first full calendar quarter subsequent to the Put Exercise Date. If the Primary Credit Facility is unsecured or if the Holders are unable to enter into an intercreditor agreement with the lenders under the Primary Credit Facility, then the Put Note shall be payable as provided in clause (ii)(a) above. "Put Option" shall have the meaning provided in Section 2.02 hereof. "Put Sales Price" shall have the meaning provided in Section 2.02 hereof. "Qualified Public Offering" shall mean the earliest to occur of (i) the closing of an Initial Public Offering, PROVIDED that all Holders who have requested to sell Registrable Securities in connection with such Initial Public Offering shall have actually been able to sell such Registrable Securities therein, without being subject to any cutbacks or other limitations upon such sales, (ii) the First Demand Date, assuming that none of the Holders elects to exercise its Demand Registration rights under Section 5.01 on such date, and (iii) the effectiveness of the first Demand Registration, assuming that at least one of the Holders elects to exercise its Demand Registration rights under Section 5.01 on the First Demand Date. "Records" shall have the meaning provided in Section 5.03 hereof. "Registrable Securities" shall mean any Warrant Shares until (i) one or more registration statements covering any such Warrant Shares has become effective under the Securities Act and all such Warrant Shares have been disposed of pursuant to such effective registration statement, (ii) such Warrant Shares are sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met or under which such Warrant Shares may be sold pursuant to Rule 144(k), (iii) the Company has delivered a new certificate or other evidence of ownership for such Warrant Shares not bearing any legend relating to restrictions on transfer and such Warrant Shares may be resold without subsequent registration under the Securities Act or (iv) such Warrant Shares are no longer outstanding. 4 "Registration Expenses" shall have the meaning provided in Section 5 hereof. "Requested Securities" shall have the meaning provided in Section 5.01 hereof. "Required Holders" shall mean the holders of more than sixty percent (60%) of all Warrant Shares then outstanding (assuming the full exercise of all Warrants). "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor rule or regulation. "Selling Holder" shall have the meaning provided in Section 6.02 hereof. "Shelf Registration" shall mean (i) an effective registration statement filed on any appropriate form under Rule 415 promulgated under the Securities Act or (ii) an amendment or supplement thereto. "Subsequent Demand Date" shall have the meaning provided in Section 5.01 hereof. "Transfer" means any sale, transfer, encumbrance, gift, donation, assignment, pledge, hypothecation or other disposition of any Warrants or Warrant Shares or any interest therein, whether voluntary or involuntary, and whether during a Holder's lifetime or upon or after his death, including, but not limited to, any Transfer by operation of law, by court order, by judicial process, or by foreclosure, levy, or attachment. Notwithstanding the foregoing, neither (i) a sale, transfer, encumbrance, gift, donation, assignment, pledge, hypothecation or other disposition of any Warrants or Warrant Shares or any interest therein by a Holder (A) to an Affiliate of such Holder, (B) to another Holder, (C) to an Affiliate of another Holder, or (D) to the Company pursuant to the Put Option, (ii) the exercise of the Warrant by a Holder pursuant to the terms of the Warrant and this Agreement, nor (iii) the sale, transfer or disposition of any Warrant Shares by a Holder pursuant to an effective registration statement under the Securities Act, shall constitute a "Transfer" for purposes hereof. "Transfer Notice" shall have the meaning provided in Section 6.02 hereof. "Trigger Date" shall mean with respect to each Holder the earlier to occur of (i) the date on which the Holder elects to exercise its Warrants or the Put Option, and (ii) the date on which the Company shall have consummated a Qualified Public Offering. "Warrant" shall mean a Warrant substantially in the form of Exhibit A hereto, and any Warrant or Warrants issued upon Transfer thereof or in substitution therefor. "Warrant Share" shall mean any share of Class A Common Stock or Class B Common Stock issued or issuable upon exercise of any Warrant pursuant to the terms hereof. For purposes of this Agreement, a Warrant Share shall be "outstanding" from and after the date hereof until the redemption or cancellation of such Warrant Share (or, if the related Warrant has not been exercised, the expiration, repurchase or cancellation of such Warrant) by the Company. 1.02 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall 5 be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all financial statements and certificates and reports as to financial matters required to be delivered hereunder shall be prepared, in accordance with GAAP. Section 2. TERMS AND CONDITIONS OF ISSUANCE OF WARRANTS; PUT OPTION. 2.01 ISSUANCE OF THE WARRANTS. In consideration of the premises set forth herein and in the Credit Agreement and other good and valuable consideration, the Company hereby issues to each Initial Holder Warrants to purchase the number of shares of Warrant Shares set forth opposite such Initial Holder's name on Schedule A hereto, subject to the terms and conditions set forth herein and in the form of Warrant attached hereto as Exhibit A; PROVIDED, HOWEVER, that (i) if the Trigger Date with respect to a Holder occurs on or after September 1, 1998, and on or before August 31, 1999, the number of Warrant Shares underlying such Holder's Warrants shall be adjusted upward as set forth on Schedule A; and (ii) if the Trigger Date with respect to a Holder occurs on or after September 1, 1999, the number of Warrant Shares underlying such Holder's Warrants shall be further adjusted as set forth on Schedule A; and PROVIDED, FURTHER, that the Warrants shall automatically be convertible to Warrants to purchase Class A Common Stock in lieu of Class B Common Stock, on a share-to-share basis, at the option of the Holder, upon the occurrence of (x) an Initial Public Offering (but only if shares of Class A Common Stock are being registered in such Initial Public Offering), or (y) a Change of Control, except that upon a Change of Control, only a portion of the Warrants shall be convertible to Warrants to purchase Class A Common Stock (with the remainder of the Warrants continuing to be Warrants to purchase Class B Common Stock) which portion shall be determined as follows: (i) following the Change of Control, the number of Warrant Shares underlying such Holder's Warrants shall be divided by the total number of shares of Common Stock then outstanding, such resulting amount being hereinafter referred to as the "Percentage Ownership"; and (ii) a portion of the Warrants held by such Holder shall be converted into Warrants to purchase Class A Common Stock in an amount sufficient to cause the number of such Holder's Warrant Shares representing Class A Common Stock to equal (x) the total number of shares of Class A Common Stock then outstanding, MULTIPLIED BY (y) the Percentage Ownership. Notwithstanding the foregoing, the number of Warrant Shares contemplated by this Section 2.01 and Schedule A attached hereto shall be subject to further adjustment in accordance with the anti-dilution provisions contained in the Warrant. 2.02 PUT OPTION. The Company hereby grants to each Holder a put option (the "Put Option") entitling the Holder, at its election, to sell to the Company and to require the Company to purchase on the terms and conditions and in the manner stated herein and to the extent permitted by applicable law, all (and not less than all) of the Warrant Shares underlying such Holder's Warrant, and, upon the exercise of the Put Option by the Holder, the Company agrees to purchase the Warrant Shares that such Holder desires to sell, all on the terms and subject to the conditions and in the manner set forth herein. The Put Option shall be exercisable at any time after December 31, 2001, prior to the expiration, redemption or cancellation of the Warrants upon receipt by the Company of written notice from the Holder stating its intent to exercise the Put Option (the "Put Exercise Date"). The purchase price payable by the Company to a Holder upon exercise of the Put Option (the "Put Sales Price") shall be equal to the product of (i) 5.5 times the Company's earnings before interest, taxes, depreciation and amortization for the trailing twelve-month period ending on the calendar month end immediately prior to the Put Exercise Date 6 (as determined in accordance with GAAP, subject to normal recurring year-end adjustments with respect to the then current fiscal year), MINUS (x) all Indebtedness of the Company outstanding as of the end of the month immediately preceding the Put Exercise Date, and PLUS (y) all cash and cash equivalents held by the Company as of the end of the month immediately preceding the Put Exercise Date, each as reflected in the Company's books and records, MULTIPLIED BY (ii) a fraction, the numerator of which shall equal the number of Warrant Shares subject to such Put Option, and the denominator of which shall equal the total number of shares of Common Stock outstanding on the Put Exercise Date, determined on a fully diluted basis. Notwithstanding the foregoing, the Put Option granted by this Section 2.02 shall terminate and be of no further force and effect upon the earlier to occur of (A) the consummation of a Qualified Public Offering, and (B) December 31, 2004. 2.03 EXERCISE OF PUT OPTION. As set forth in Section 4.03 hereof, the Company shall provide monthly financial information to each Holder which shall include, commencing on January 1, 2002, a calculation of the Put Sales Price. In the event that a Holder elects to exercise the Put Option, the Holder shall send a written notice (a "Put Exercise Notice") to the Company informing the Company that the Holder exercises the Put Option, which notice shall include (i) the number of Warrant Shares to which the exercise relates, and (ii) a statement of whether the Holder agrees with the Put Sales Price calculated by the Company. If the Holder agrees with the Company's calculation of the Put Sales Price, then the Company shall promptly pay the Put Sales Price to the Holder in exchange for the Warrants, duly endorsed for transfer, by delivery of a duly executed Put Note. If the Holder disagrees with the Company's calculation of the Put Sales Price, then the Holder shall furnish a revised calculation of the Put Sales Price determined by the Holder (a "Disagreement Notice"). If the Company agrees with the revised calculation of the Put Sales Price submitted by the Holder, then the Company shall promptly pay the Put Sales Price to the Holder in exchange for the Warrants, duly endorsed for transfer, by delivery of a duly executed Put Note. If the Company disagrees with the revised Put Sales Price set forth in the Disagreement Notice, it may request that the Company's independent public auditors review such calculation and promptly provide to the Company and the Holders an agreed upon procedures letter as to the calculation of the Put Sales Price under the terms of this Agreement, indicating any comparisons of information to the books and records of the Company and any mathematical calculations made and including the auditors' determination of whether the Put Sales Price computed by the Holders or the Company is correct. If the auditors disagree with the Holder's calculation of the Put Sales Price, then the Holder shall have the option to (i) withdraw its exercise of the Put Option, or (ii) exercise the Put Option at the Put Sales Price proposed by the Company, and shall deliver written notice (a "Final Put Notice") to the Company of such determination within ten (10) days following the delivery of the auditor's letter to the Holder. In such event, if the Holder elects to exercise the Put Option at the Put Sales Price proposed by the Company, the Company shall promptly pay such Put Sales Price to the Holder in exchange for the Warrants, duly endorsed for transfer, by delivery of a duly executed Put Note following its receipt of such Final Put Notice. If the auditors agree with the Holder's calculation of such amount, then the Company shall promptly pay such Put Sales Price to the Holder in exchange for the Warrants, duly endorsed for transfer, by delivery of a duly executed Put Note. If a Holder at any time withdraws its exercise of its Put Option pursuant to this Section 2.03, such Holder shall be entitled to exercise its Put Option at a later date subject to the provisions of this Section 2. Nothing contained herein shall obligate the Holder to exercise the Put Option, it being intended that the Holder shall have the sole discretion in determining whether the Put Option shall be exercised. The Company shall at all times permit the cashless exercise of a Warrant by a Holder that has delivered a Put Exercise Notice to the Company with respect to its underlying Warrant Shares, with it being 7 understood that in such event, the Company shall only be obligated to pay to such Holder the amount by which the Put Sales Price exceeds the aggregate Exercise Price for such Warrant Shares. Section 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Holder as follows: 3.01 AUTHORIZATION. The Company has all necessary power and authority to execute, deliver and perform its obligations under this Agreement and the Warrants and to issue and deliver the Warrants and Warrant Shares. The execution, delivery and performance by the Company of this Agreement and the Warrants have been duly authorized by all necessary corporate action. Each of this Agreement and the Warrants has been duly executed and delivered by the Company and, assuming that this Agreement is the legal, valid and binding obligation of each of the Holders, constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject, as to enforceability, to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws relating to creditors' rights generally and to general equitable principles. 3.02 VALID ISSUANCES. The Warrants, when issued and delivered pursuant hereto, and the Warrant Shares when issued and delivered pursuant to the Warrants, will be validly issued, fully paid and non-assessable, with no liability on the part of the Holders, and are not subject to any preemptive rights, rights of first refusal or rights of first offer. Except for the registration rights as set forth in this Agreement, the Company is not under any obligation to cause the registration of any of its presently outstanding securities or any of its securities which hereafter may be issued. 3.03 NO BREACH. Assuming the accuracy of the representations and warranties of the Holders, and the compliance with the covenants of the Holders, each as set forth in Section 6.01 hereof, neither the execution and delivery of this Agreement or the Warrants, nor the consummation of the transactions herein or therein contemplated, including the issuance and delivery of the Warrants and, upon the exercise of the Warrants, the Warrant Shares, nor compliance by the Company with the terms and provisions hereof or thereof, will conflict with or result in a breach of, or require any consent under, the Articles of Incorporation or Bylaws of the Company, or any applicable law or regulation, or any order, writ, injunction or decree of any court or governmental authority or agency, or any agreement or instrument to which the Company is a party or by which it is bound or to which any of its properties or assets is subject, or constitute a default under any such agreement or instrument or result in the creation or imposition of any lien upon any of the revenues or assets of the Company pursuant to the terms of any such agreement or instrument. 3.04 APPROVALS. No authorizations, approvals or consents of, and no filings or registrations with, any governmental or regulatory authority or agency, which have not already been made or obtained, are necessary for the execution, delivery or performance by the Company of this Agreement or the Warrants and the consummation of the transactions contemplated herein and therein or the validity or enforceability hereof or thereof. 3.05 CAPITALIZATION. The authorized capital stock of the Company on the date hereof consists of (i) 2,000,000 shares of Class A Common Stock of which 200,000 shares are issued and outstanding and no shares are held in the treasury of the Company, and (ii) 8,000,000 shares of Class B Common Stock par value, of which 1,344,681 shares are issued and outstanding and no shares are held in the 8 treasury. There are no other outstanding shares of capital stock of the Company and no outstanding options or warrants to acquire any shares of capital stock of the Company exist. 3.06 OFFER OF WARRANTS. Neither the Company nor any Person acting on its behalf has directly or indirectly offered the Warrants or any part thereof or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than a Holder. Neither the Company nor any Person acting on its behalf has taken or will take any action which would subject the issuance and sale of the Warrants to the provisions of Section 5 of the Securities Act, or to the provisions of any state securities law requiring registration of securities, notification of the issuance or sale thereof or confirmation of the availability of any exemption from such registration except pursuant to this Agreement. Section 4. COVENANTS. 4.01 MAINTENANCE OF EXISTENCE; CONDUCT OF BUSINESS. The Company will preserve and maintain its corporate existence and all of its rights, privileges and franchises necessary in the ordinary course of its business. 4.02 INSPECTION. The Company covenants and agrees that it will permit each Holder and its representatives to inspect the properties of the Company, to examine and make extracts and copies from the books and records of the Company during normal business hours and to discuss with management the business and affairs of the Company; PROVIDED, HOWEVER, that the Company shall not be required to permit such inspection more than once per calendar quarter. 4.03 INFORMATION. The Company covenants and agrees that prior to a Qualified Public Offering it will deliver to each Holder (i) as soon as such information becomes available to the Company, monthly financial statements of the Company prepared in accordance with GAAP (subject to normal recurring year- end adjustments with respect to the then current fiscal year), including, without limitation, a calculation of the Put Sales Price (commencing on January 1, 2002) and the Exercise Price (as defined in the Warrant), and (ii) such other financial statements and other information regarding the Company or any of its subsidiaries that the Company is obligated to prepare and deliver to, or does in fact prepare and deliver to, any shareholder of the Company, in each case at the same time such financial statements and other information are delivered to any such shareholder, PROVIDED, HOWEVER, that following an Initial Public Offering and prior to a Qualified Public Offering, the Company shall only be obligated to provide the foregoing information to a Holder to the extent that (x) such information is requested by such Holder, and (y) such requesting Holder executes an agreement, in form and substance reasonably satisfactory to the Company and to such Holder, not to engage in trading of the Common Stock until 48 hours after the date of the Company's next public disclosure of financial information. The Company hereby acknowledges and agrees that, subject to the provisions of Section 4.07 below, each Holder may share with any of its Affiliates any information related to the Company and any of its subsidiaries (including, without limitation, any nonpublic customer information regarding the creditworthiness of the Company and its subsidiaries). 4.04 TRANSACTIONS WITH AFFILIATES. The Company will not, directly or indirectly, enter into any transaction with or for the benefit of any Affiliate; PROVIDED that this Section 4.04 shall not prohibit (i) any such transaction entered into on an arm's length basis containing terms which are no less favorable to the Company than those terms that would be obtained in a similar transaction with a Person which is 9 not an Affiliate, and (ii) any such transaction between the Company and any subsidiary or Affiliate thereof or any stockholder which is permitted pursuant to, and conducted in accordance with, the terms and provisions of the Credit Agreement. 4.05 COMPLIANCE WITH SECURITIES LAWS. At all times after the Warrants and Warrant Shares are issued, the Company covenants that it will file all reports required to be filed by it under the Securities Act and the Exchange Act. 4.06 FUTURE ISSUANCES. The Company covenants and agrees prior to a Qualified Public Offering to provide written notice to each of the Holders of the issuance by the Company following the date hereof of any securities convertible into or exchangeable for, or options or other rights to acquire from the Company or any other agreements by the Company following the date hereof to issue, directly or indirectly, any shares of capital stock of the Company; PROVIDED, HOWEVER, that the Company shall only be required to provide notice to a Holder of issuances of securities to its employees pursuant to its employee benefit plans upon the request of such Holder. During any fiscal year of the Company, the Company shall not issue any of its securities, or options or rights to purchase any of its securities, to (i) employees of the Company or any of its subsidiaries pursuant to employee benefit plans or (ii) employee benefit plans in an aggregate amount (assuming the immediate exercise of any such options or rights) exceeding 15% of the Company's outstanding securities on a fully diluted basis as of the date of each such issuance. 4.07 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Each of the Holders agrees and acknowledges that the information to be furnished by the Company to the Holders pursuant to Sections 4.02 and 4.03 hereof is of a confidential nature (the "Confidential Information"). No Holder shall sell, transfer, publish, disclose, display or otherwise make available the Confidential Information to any third party who is not an Affiliate of such Holder (and such Holder shall ensure that such Affiliate complies with this Section 4.07), except (i) as otherwise permitted by the Company or by this Agreement, (ii) to a Permitted Transferee, or (iii) as may be required by applicable law, in which case the Holder from whom disclosure is sought shall promptly notify the Company. To the extent that the Company objects to disclosure of such Confidential Information, the Holder from which disclosure is sought shall (i) use reasonable and lawful efforts to resist making any disclosure of such Confidential Information, (ii) use reasonable and lawful efforts to limit the amount of such Confidential Information to be disclosed, and (iii) use all reasonable efforts to obtain a protective order or other appropriate relief to minimize the further dissemination of any Confidential Information to be disclosed. Each Holder shall inform all Affiliates, employees and agents of such Holder receiving such Confidential Information that the Confidential Information is subject to this non-disclosure obligation. 4.08 DURATION. Except as otherwise provided herein, the covenants contained in this Agreement, including this Section 4, shall remain in full force and effect until and shall terminate upon the earlier of (i) December 31, 2004, and (ii) such time as the Warrants or Warrant Shares are no longer Registrable Securities. Section 5. REGISTRATION RIGHTS. 5.01 DEMAND REGISTRATION RIGHTS. 10 (a) ANNUAL DEMAND REGISTRATIONS. On the first anniversary of an Initial Public Offering (the "First Demand Date") and thereafter once per calendar year on the earlier to occur of (i) the date of filing by the Company of its Annual Report of Form 10-K (or such successor form as may then be in effect) (a "Form 10-K"), and (ii) that date which is five (5) Business Days after the deadline for the filing by the Company of its Form 10-K (the "Subsequent Demand Date"), until December 31, 2004 (with it being understood that the Subsequent Demand Date with respect to the Form 10-K due on or about December 31, 2004, shall be no later than five (5) Business Days after December 31, 2004), any Holder may request in writing that the Company file a registration statement under the Securities Act registering all (and not less than all) of the Registrable Securities held by such Holder (a "Demand Registration"), which request shall include a statement that such Holder has a good faith intention to sell its Registrable Securities. Each Holder shall have fifteen (15) Business Days following the First Demand Date and any Subsequent Demand Date to provide such written request of a Demand Registration to the Company. Within 10 Business Days of receipt of such request the Company shall serve written notice (the "Demand Notice") of such registration request to all Holders, and the Company shall include in such registration all Registrable Securities of such Holders with respect to which the Company has received written requests for inclusion therein (the "Requested Securities") within 10 Business Days after receipt by the Holders of the Demand Notice, which request shall include a statement that such Holder has a good faith intention to sell its Registrable Securities. The Company shall use its best efforts to cause to be filed and declared effective as soon as practicable a registration statement (a "Demand Registration Statement") providing for the sale of all such Requested Securities. Such Demand Registration Statement shall provide for the continuous offer and sale of the Requested Securities pursuant to a Shelf Registration; PROVIDED, HOWEVER, that the Company shall only be required to keep the Demand Registration Statement effective for a period of six (6) months. Notwithstanding the foregoing, no Holder shall be required to sell its Requested Securities pursuant to such Demand Registration Statement. Such Demand Registration Statement shall also permit persons and entities purchasing securities thereunder to resell such securities thereunder if registration is necessary for such resales. The Company shall give written notice to each Holder of its filing of a Form 10-K within five (5) Business Days following the filing thereof. (b) UNDERWRITER. If the Holders of a majority of the Requested Securities desire, in their sole discretion, to sell the Requested Securities in an underwritten offering, the Company shall have the right to select one or more nationally recognized investment banking firms to manage the offering, which underwriter(s) shall be reasonably acceptable to the Holders of a majority of the Requested Securities. (c) RIGHT OF COMPANY OR OTHER PERSON TO PIGGY-BACK ON DEMAND REGISTRATIONS. Neither the Company nor any Person owning any of its securities (other than the Holders) shall have the right to include any of the Company's securities in a registration statement initiated as a Demand Registration under this Section 5.01 unless in the case of an underwritten offering, (i) in the opinion of the managing underwriter or underwriters of such offering, the inclusion of such additional securities would not adversely affect the sale of the Requested Securities thereunder, and (ii) the Holders of a majority of the Requested Securities agree to such inclusion (which agreement shall not be unreasonably withheld or delayed). The Company covenants that it shall not grant any registration rights to any Person which rights would conflict with or be inconsistent with the provisions of this Section 5.01(c) or which would otherwise materially adversely affect the rights of any Holder under this Agreement, and in the event of such a conflict or inconsistency, the terms of this Section 5.01(c) shall prevail. (d) REDUCTION OF OFFERING. Notwithstanding anything to the contrary contained herein, if the managing underwriter or underwriters of an underwritten offering described in this Section 5.01 delivers 11 a written opinion to the Holders that the size of the offering that the Holders, the Company or any other Person intends to make or the kind or combination of securities that the Holders, the Company and any other Persons intend to include in such offering are such that the success of the offering would be materially and adversely affected by inclusion of all securities requested to be included therein, then the amount of any securities proposed to be offered by the Company and any other Person (other than the Holders) shall be reduced or excluded from the offering first on a pro rata basis among the Company and all holders of similar "piggy-back" or "demand" registration rights (other than the Holders) to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters and then the amount of any securities proposed to be included by the Holders shall be reduced or excluded on a pro rata basis among the Holders to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. (e) RIGHT TO DEFER DEMAND REGISTRATION. Notwithstanding the foregoing, the Company shall have the right to defer for a period of not more than 120 days the filing of a Demand Registration Statement otherwise required by this Section 5.01 if (i) the Company has effected any other registration statement within thirty (30) days of the First Demand Date or any Subsequent Demand Date, as the case may be, (ii) the Company has advised the Holders that it intends in good faith to effect a registration statement under which the Holders shall be entitled to register all of their Registrable Securities under Section 5.02 during the 120-day period following the First Demand Date or Subsequent Demand Date, as the case may be, or (iii) the Company has advised the Holders that it is contemplating engaging in an undisclosed transaction, including without limitation an acquisition, disposition, merger, consolidation or tender offer, that would be material to the Company during the 120-day period following the First Demand Date or any Subsequent Demand Date, as the case may be, and that filing such Demand Registration Statement would require the Company to disclose material non-public information, the disclosure of which would have a material adverse effect upon the Company. In the case of clause (iii) above, the filing of a Demand Registration Statement (or any amendment or supplement thereto) cannot be deferred, and the Holders' rights to make sales pursuant to an effective Demand Registration Statement cannot be suspended, once such material nonpublic information (A) is disclosed or becomes available to the public, (B) ceases to be material, (C) ceases to exist, (D) ceases to have a material adverse effect on the Company if disclosed, or (E) in any event, for more than 120 days after the date of the Company's determination referenced in the preceding sentence. The delay right contemplated by this Section 5.01(e) may be exercised by the Company no more frequently than once during any calendar year. 5.02 PIGGY-BACK REGISTRATION. (a) GENERAL. (i) In connection with the Initial Public Offering, and (ii) if, at any time or from time to time while any Registrable Securities are outstanding, the Company proposes to register any of its securities (whether for its own or others' account) under the Securities Act (other than pursuant to Section 5.01 or by a registration statement on Form S-8 or other form that does not include substantially the same information as would be required in a form for the general registration of securities or that would not be available for registration of Registrable Securities), the Company shall, as expeditiously as possible, give written notice to the Holders of the Company's intention to effect such registration. If, within 20 days after receipt of such notice, any Holder submits a written request to the Company specifying the Registrable Securities such Holder proposes to sell or otherwise dispose of (a "Piggy-Back Registration"), the Company shall include the number of shares of Registrable Securities specified in such Holder's request in such registration statement and the Company shall use its best efforts to keep each such 12 registration statement in effect and to maintain compliance with each Federal and state law and regulation for the period necessary for such Holder to effect the proposed sale or other disposition, but in no event longer than 180 days. Any Holder participating in an underwritten offering pursuant to this Section 5.02 shall, if required by the managing underwriter or underwriters of such offering, enter into an underwriting agreement in a form customary for underwritten offerings of the same general type as such offering. (b) REDUCTION OF OFFERING. Notwithstanding anything to the contrary contained herein, if the managing underwriter or underwriters of an offering described in this Section 5.02 delivers a written opinion to the Company that the size of the offering that the Holders, the Company or any other Person intends to make or the kind or combination of securities that the Holders, the Company and any other Persons intend to include in such offering are such that the success of the offering would be materially and adversely affected by inclusion of all securities requested to be included therein, then the amount of any securities proposed to be offered by the Holders and any other Person (other than the Holders) shall be reduced or excluded from the offering first on a pro rata basis among the Holders and all holders of similar "piggy-back" registration rights to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters and then the amount of any securities proposed to be included by the Company shall be reduced or excluded to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters. (c) DELAYED OR DISCONTINUED PIGGY-BACK REGISTRATION. If at any time after giving notice of the filing of a registration statement that results in the Holders having the right to register Registrable Shares under this Section 5.02, and prior to the effective date of such registration statement, the Company shall determine not to register or to delay the registration of the securities that are the subject of such registration statement, the Company may give written notice of such determination to each Holder who has exercised its rights under this Section 5.02 and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration, and (ii) in the case of a determination to delay such registration, shall be permitted to delay registering any Registrable Securities for the same period of time as the delay in registering the other securities that are the subject of such registration statement. 5.03 REGISTRATION PROCEDURES. Whenever any Holder or Holders request that any Registrable Securities be registered pursuant to this Section 5, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) The Company will as expeditiously as possible prepare and file with the Securities and Exchange Commission a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and will use its best efforts to cause such filed registration statement to become and remain effective for a period of not less than 180 days or until all of such Registrable Securities have been disposed of (if earlier); PROVIDED that, if the Holders specify that such registration shall be a Shelf Registration, the Company shall use its best efforts to effect such Shelf Registration. (b) The Company will, if requested, prior to filing a registration statement or prospectus or any amendment or supplement thereto, furnish to the Holders requesting registration of Registrable 13 Securities and each underwriter, if any, of the Registrable Securities covered by such registration statement copies of such registration statement as proposed to be filed, and thereafter furnish to the Holders requesting registration of Registrable Securities and each underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as the Holders requesting registration of Registrable Securities or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holders. (c) After the filing of the registration statement, the Company will promptly notify the Holders of any stop order issued or, to its knowledge, threatened by the Securities and Exchange Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered. (d) The Company will use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Holders requesting registration of Registrable Securities reasonably (in light of such Holders' intended plan of distribution) request and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Holders to consummate the disposition of the Registrable Securities owned by the Holders; PROVIDED that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 5.03(d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (e) The Company will immediately notify the Holders, at any time when a prospectus relating to any registration to be made pursuant to this Section 5 is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and promptly make available to the Holders any such supplement or amendment. (f) The Company will enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities. (g) The Company will make reasonably available for inspection by the Holders requesting registration of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other professional retained by such Holders or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration 14 statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction. Each Holder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its Affiliates unless and until such is made generally available to the public. (h) The Company will furnish to the Holders requesting registration of Registrable Securities and to each underwriter, if any, a signed counterpart, addressed to such Holders or underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as such Holders or the managing underwriter therefor reasonably requests. (i) The Company will otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission. (j) The Company will (at its own expense) use its best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed. The Company may require the Holders requesting registration of Registrable Securities to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration. The Holders agree that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5.03(e) hereof, the Holders will forthwith discontinue disposition of any Registrable Securities registered pursuant to this Section 5 pursuant to the registration statement covering such Registrable Securities until the Holders' receipt of the copies of the supplemented or amended prospectus contemplated by Section 5.03(e) hereof, and, if so directed by the Company, the Holders will deliver to the Company all copies, other than permanent file copies then in such Holders' possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 5.03(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 5.03(e) hereof to the date when the Company shall make available to the Holder a prospectus supplemented or amended to conform with the requirements of Section 5.03(e) hereof. (k) Upon the transfer of Shares by a Holder in connection with a registration hereunder, the Company shall furnish unlegended certificates representing ownership of the Registrable Securities in such denominations as shall be requested by the Holders or the underwriters. 5.04 REGISTRATION EXPENSES. In connection with any registration statement required to be filed hereunder, the Company shall pay the following registration expenses (the "Registration Expenses"): (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities) , (iii) printing expenses, (iv) internal expenses (including, without limitation, all 15 salaries and expenses of its officers and employees performing legal or accounting duties), (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters), and (vii) the fees and expenses of any special experts retained by the Company in connection with such registration. Except as set forth above, the Company shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities, or any out-of-pocket expenses of Holders selling Registrable Securities under this Section 5 (or the agents who manage its account) (collectively, the "Holder Expenses"). 5.05 INDEMNIFICATION AND CONTRIBUTION. (a) In connection with each registration statement relating to the disposition of Registrable Securities, the Company shall indemnify and hold harmless each of the Holders, each underwriter of Registrable Securities, each partner, officer or director of each of the Holders or any such underwriter and each Person, if any, who controls (within the meaning of either the Securities Act or the Exchange Act) any of the Holders or any such underwriter against all losses, claims, damages or liabilities, joint or several, to which any of the Holders, such underwriter or any such Person may be subject arising out of or based upon (A) any untrue statement or alleged untrue statement of a material fact contained in such registration statement or the prospectus included therein (or any supplement or amendment thereto) or a preliminary prospectus or (B) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company shall reimburse each of the Holders and each of such other Persons for any reasonable legal or other expenses incurred in connection with the investigation or defense thereof (any such reimbursement to be made as such expenses are incurred); PROVIDED, HOWEVER, that the Company shall not be liable in any such instance to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission or alleged untrue statement or omission made in any such registration statement, preliminary prospectus or prospectus (or amendment or supplement) in reliance upon and in conformity with information relating to any Person referred to above who would be indemnified by the Company pursuant to this Section 5.05(a) furnished in writing to the Company by such Person expressly for use therein; and PROVIDED, FURTHER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission of a material fact made in a preliminary prospectus if, at or prior to the written confirmation of the sale of any Warrant Shares, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to the person asserting any such loss, claim, damage or liability if the alleged untrue statement or alleged omission of a material fact contained in such preliminary prospectus was corrected by the Company in the prospectus (or the prospectus as amended or supplemented) and such corrected prospectus (or the prospectus as amended or supplemented) was delivered by the Company to the Holders. (b) In connection with each registration statement relating to the disposition of Registrable Securities, each Holder shall severally indemnify the Company, each director or officer of the Company and any Person who controls the Company (within the meaning of either the Securities Act or the Exchange Act) to the same extent as the indemnity from the Company provided in Section 5.05(a) hereof, but only with respect to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any such registration statement, preliminary prospectus or prospectus (or amendment or supplement). The maximum liability of any Holder under this Section 5.05(b) shall be 16 limited to the aggregate amount of all sales proceeds actually received by such Holder upon the sale of such Holder's Registrable Securities in connection with such registration. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to subsections (a) or (b) of this Section 5.05, such Person (the "indemnified party") shall promptly notify the Person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party, and shall assume the payment of all fees and disbursements related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (x) the indemnifying party and indemnified party shall have mutually agreed to the retention of such counsel or (y) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) at any time for all such indemnified parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the indemnified parties, such firm shall be designated in writing by the indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such proceeding. (d) If the indemnification provided for in this Section 5.05 is unavailable to the indemnified parties in respect of any losses, claims, damages or liabilities referred to herein, then each such indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities as between the Company on the one hand and the respective Holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and such Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the respective Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 5.05(d) were determined by PRO RATA allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such 17 indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.05(d), no Holder shall be required to contribute any amount in excess of the amount of all sales proceeds actually received by such Holder upon the sale of such Holder's Registrable Securities in connection with such registration. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 5.06 HOLDBACK AGREEMENT. The Company agrees (i) not to effect any public sale or distribution of any Registrable Securities or any securities similar to the Registrable Securities, or any securities convertible into or exchangeable or exercisable for Registrable Securities or any securities similar to the Registrable Securities, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement filed pursuant to Section 5.01 or 5.02 of this Agreement (except as part of such registration statement where the Holders consent); and (ii) that any agreement entered into after the date of the agreement pursuant to which the Company issues or agrees to issue any privately placed securities shall contain a provision under which holders of such securities agree not to effect any public sale or distribution of any such securities during the periods described in (i) above, in each case including a sale pursuant to Rule 144 under the Securities Act (except as part of any such registration, if permitted); PROVIDED, HOWEVER, that the provisions of this paragraph shall not prevent the (x) conversion or exchange of any securities pursuant to their terms into or for other securities or (y) the issuance of securities pursuant to the Company's employee benefit plans. 5.07 SPECIFIC ENFORCEMENT. The Company and each of the Holders acknowledge that remedies at law for the enforcement of this Section 5 may be inadequate and intend that this Section 5 shall be specifically enforceable in accordance with Section 7.04 hereof. 5.08 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to Section 5 may be assigned in connection with any transfer or assignment by a Holder of Registrable Securities provided that (i) such transfer may otherwise be effected in accordance with applicable securities laws, and (ii) such transfer is effected in compliance with the restrictions on transfer contained in this Agreement and in any other agreement between the Company and such Holder. No transfer or assignment will divest a Holder or any subsequent owner of such rights and powers unless all Registrable Securities are transferred or assigned. This Section 5.08 is not intended to modify or waive any restrictions on transfer of the Registrable Securities that may exist under any other agreement between the Company and any of its Holders. 5.09 LIMITATIONS ON REGISTRATION RIGHTS OF OTHERS. The Company covenants and agrees that, from and after the date hereof, the Company will not, without the prior written consent of the Holders, enter into any agreement with any Holder or prospective Holder of any of the securities of the Company to include such securities in any registration filed under Section 5.01 or 5.02 hereof, unless the rights granted under the terms of such agreement are expressly subject and subordinated to the rights of registration granted to the Holders pursuant to Section 5 hereof. 5.10 PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may participate in any underwritten registration hereunder unless such Holder (i) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Company and the Holders, and (ii) agrees to complete and execute all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents as may be reasonably required under the terms of such 18 underwriting arrangements and these registration rights and to provide such other information as may be reasonably requested by the Company in connection with such registration. Section 6. COMPLIANCE WITH THE SECURITIES LAWS. 6.01 REPRESENTATIONS AND WARRANTIES. Each Holder by its acceptance of the Warrants represents and warrants as follows: (a) Such Holder is acquiring the Warrants and the related Warrant Shares for its own account for investment purposes only and not as nominee or agent for any other Person and not for offer or sale in any manner that would be in violation of the securities laws of the United States of America or any state thereof, without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of said Warrants or Warrant Shares under a registration under the Securities Act or any applicable state securities laws or under an exemption from such registration available under such Act or any applicable state securities laws. (b) Such Holder is an "accredited" investor within the meaning of Regulation D promulgated under the Securities Act. 6.02 RESTRICTIONS ON TRANSFER. (a) GENERAL. A Holder shall not make or suffer any Transfer of all or any part of its Warrants or Warrant Shares except in accordance with the terms of this Agreement, and any purported Transfer not made in compliance with this Agreement shall be void and of no force and effect. (b) NO TRANSFERS TO COMPETITORS. Under no circumstances shall a Holder be permitted to Transfer its Warrants or Warrant Shares to any Person whose products or activities compete with the products or activities of the Company, anywhere within the United States or the world where the Company actually conducts such business activities. (c) OPTION. Each time a Holder proposes to make or suffer any Transfer of all or any portion of its Warrants or Warrant Shares pursuant to a bona fide third party offer or pursuant to the Holder's death, incapacity, spouse's death (if applicable) or divorce (if applicable), such Holder, or in the event of his death or incapacity, any other appropriate person or entity (the "Selling Holder"), shall so inform the Company by notice in writing (the "Transfer Notice") stating the number or amount of Warrants or Warrant Shares that are the subject of such proposed Transfer (the "Offered Warrants or Warrant Shares"), the name and address of the proposed transferee, and the other terms and conditions of such proposed Transfer, including any consideration proposed to be received for the Offered Warrants or Warrant Shares (and, if the proposed Transfer is to be wholly or partly for consideration other than cash or indebtedness of any person, the Transfer Notice shall state the amount of the cash consideration, if any, and shall describe all non-monetary consideration). By giving the Transfer Notice, the Selling Holder shall be deemed to have granted to the Company an option to purchase all (but not less than all) of the Offered Warrants or Warrant Shares (i) if such Transfer is pursuant to the death of the Holder, the divorce of the Holder, or the death of the Holder's spouse, at a price equal to the Appraised Value (defined below) of the Offered Warrants or Warrant Shares, or (ii) if clause (i) is not applicable, at the same consideration and on the same terms as are set forth in the Transfer Notice (except that any portion of the consideration 19 set forth in the Transfer Notice which is not cash or indebtedness of the transferee shall be payable in cash at the Appraised Value (as hereinafter defined) thereof. (d) INTENTION TO EXERCISE BY COMPANY. Within 20 days after its receipt of any Transfer Notice or the final determination of Appraised Value of the Offered Warrants or Warrant Shares or non-monetary consideration referenced in a Transfer Notice, whichever is later, the Company, acting through its Board of Directors, shall determine, and shall notify (the "Acceptance Notice") the Selling Holder as to whether the Company desires to purchase the Offered Warrants or Warrant Shares and, if applicable, the Appraised Value of the Offered Warrants or Warrant Shares or non-monetary consideration. (e) REQUIREMENT TO PURCHASE ALL OFFERED WARRANTS OR WARRANT SHARES. Notwithstanding any other provision of this Agreement, in no event shall any Selling Holder be required to sell any of the Offered Warrants or Warrant Shares to the Company unless, within the period provided, the Selling Holder has been notified that all the Offered Warrants or Warrant Shares will be purchased by the Company. If the Company elects not to purchase all the Offered Warrants or Warrant Shares as described above, then the Company shall not have any right or obligation to purchase any of the Offered Warrants or Warrant Shares. (f) CLOSING. The Closing (herein so called) of the purchase and sale of Offered Warrants or Warrant Shares that are being purchased and sold under this Section 6.02 shall take place on the 90th day following the date of delivery of the Acceptance Notice (or if such date is a Saturday, Sunday, or legal holiday in the state where the Company's principal office is located, the first day thereafter that is not a Saturday, Sunday, or legal holiday) at the place designated in such Acceptance Notice; PROVIDED, HOWEVER, that if a Holder whose Warrants or Warrant Shares are being sold is deceased or mentally incompetent, the Closing shall be delayed as long as is necessary to allow the legal representative, executor, or administrator of any person whose Warrants or Warrant Shares are to be sold to qualify properly as such in order that such legal representative, executor, or administrator shall have all necessary authority to convey such Warrants or Warrant Shares. At the Closing, the parties shall take all action necessary to convey such Warrants or Warrant Shares to be transferred in accordance with this Agreement, free of all liens and encumbrances. (g) FAILURE TO EXERCISE. If the Company does not elect to purchase all of the Offered Warrants or Warrant Shares within the period provided, then all of such Offered Warrants or Warrant Shares may be disposed of by the Selling Holder to the prospective transferee named in the Transfer Notice, for the price and on the terms and conditions set forth in the Transfer Notice or upon any other terms more favorable to the Selling Holder, at any time within 90 days after the expiration of the period provided for in the notice of the Company to be delivered pursuant to Section 6.02(d) herein. Any Warrants or Warrant Shares not so disposed of within such 90-day period shall remain subject to all of the provisions of this Agreement. (h) WAIVER. The rights of first refusal of the Company granted under this Section 6.02 may be waived by the Board of Directors of the Company in respect of any particular Transfer. Any such waiver, if given, shall bind the Company as to the Transfer in question, but shall not affect its rights in respect of any subsequent Transfer. The Company shall give notice of such waiver to all Holders within five days after giving such waiver. 20 (i) APPRAISED VALUE. For purposes of this Section 6.02, "Appraised Value" shall mean, as to any Offered Warrants or Warrant Shares or non-monetary consideration, the fair market value of such Offered Warrants or Warrant Shares or non-monetary consideration at the date of the Transfer Notice, as determined by an independent appraiser selected by the Board of Directors of the Company; PROVIDED, HOWEVER, if the Selling Holder shall object to such determination within 10 days after being notified thereof by the Company, such Selling Holder shall within such 10-day period select an independent appraiser to determine the fair market value of such Offered Warrants or Warrant Shares or non-monetary consideration on behalf of the Selling Holder. In the event that the independent appraisers selected by the Company and the Selling Holder cannot agree on the fair market value of such Offered Warrants or Warrant Shares or non-monetary consideration, then the two independent appraisers shall mutually select a third independent appraiser to determine the fair market value of such Offered Warrants or Warrant Shares and non-monetary consideration, and the value selected by such independent appraiser shall be binding upon all of the parties hereto. Each such independent appraiser may use any customary method of determining fair market value. The cost of the independent appraiser selected by the Company shall be paid by the Company, the cost of the independent appraiser, if any, selected by the Selling Holder shall be paid by the Selling Holder, and the cost of the independent appraiser selected by the two independent appraisers appointed by each of the Company and the Selling Holder shall be paid one-half by the Company and one-half by the Selling Holder. (j) TERMINATION OF RESTRICTIONS. Notwithstanding the foregoing, the restrictions upon Transfer set forth in this Section 6.02 shall cease and be of no further force and effect upon the consummation of an Initial Public Offering. (k) NO PARTIAL TRANSFERS. Notwithstanding the foregoing, to the extent enforceable and unless waived by the Company, no Holder shall be permitted to Transfer less than all of its Warrants or Warrant Shares, except upon an Change of Control, as contemplated by that certain Shareholders Agreement of even date herewith among the Company, the Holders and certain shareholders of the Company named therein. (l) PERMITTED TRANSFEREES BOUND BY AGREEMENT. Upon the Transfer by a Holder of its Warrants or Warrant Shares in compliance with the provisions of this Section 6.02, the Selling Holder shall obtain a written agreement from the third party transferee (the "Permitted Transferee"), in form and substance reasonably satisfactory to the Company, stating that the Permitted Transferee agrees to hold such Warrant or Warrant Shares subject to the terms and conditions set forth in the Warrant and this Agreement. 6.03 LEGEND. Each Warrant or certificate or instrument (if any) representing the Warrant Shares issued upon exercise of the Warrants (and each Warrant or certificate or instrument (if any) representing the Warrant Shares issued to transferees of such Warrant or certificate or instrument (if any)), unless at such time as the same is no longer required under the applicable requirements of the Securities Act, or any applicable state securities laws, shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, PLEDGED OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID 21 ACT OR LAWS. SUCH SECURITIES ARE ALSO SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER, AS SET FORTH IN THAT CERTAIN WARRANT AGREEMENT DATED JULY 31, 1996." Section 7. MISCELLANEOUS. 7.01 EXPENSES. The parties hereby agree and acknowledge that pursuant to the terms of the Credit Agreement, the Company has agreed to pay certain expenses arising in connection with the issuance of the Warrants as contemplated hereby. Additionally, the Company agrees to pay any and all stamp, transfer and other similar taxes payable or determined to be payable in connection with the execution and delivery of this Agreement, the Warrants or the issuance or transfer of the Warrants. 7.02 NOTICES. All notices and other communications provided for herein (including, without limitation, any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, telecopy, cable or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company given in accordance with this Section 7.02. All such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 7.03 EXCLUSION. This Agreement and the Warrants shall be binding upon, and inure solely to the benefit of, the Company and the Holders, and no other Person shall acquire or have any right under or by virtue of this Agreement or the Warrants (other than any such Person to whom such Holders have transferred an interest in the Warrants pursuant to the terms thereof and hereof). 7.04 SPECIFIC PERFORMANCE. The Company acknowledges and agrees that in the event of any breach of this Agreement or the Warrants by the Company, the Holders would be irreparably harmed and could not be made whole by monetary damages. The Company accordingly agrees (i) to waive the defense in any action for specific performance that a remedy at law would be adequate, and (ii) that the Holders, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to compel specific performance of this Agreement or the Warrants in any action instituted in the United States District Court for the Southern District of New York, or, in the event such Court would not have jurisdiction for such action, in any court of the United States or any state thereof having subject matter jurisdiction for such action. 7.05 HOLDER NOT A SHAREHOLDER. Prior to the exercise of any of its Warrants, no Holder shall, except as specifically provided herein, be entitled to any of the rights of, or be deemed to be, a shareholder in the Company. 7.06 NO WAIVERS. No failure or delay by any party in exercising any rights, power or privilege hereunder or under the Warrants shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided herein shall be cumulative and not exclusive of any rights or remedies provided by law. 22 7.07 AMENDMENTS AND WAIVERS. (a) Any provision of this Agreement or the Warrants may be amended or waived if, but only if, such amendment or waiver is in writing and signed by the Company and the Required Holders; provided, however, that no amendment or waiver which adversely affects any one Holder (the "Affected Holder") VIS-A-VIS the other Holders shall be effective without the approval in writing of a majority of the Affected Holders. (b) Any such amendment, modification or waiver effected pursuant to this Section 7.07 shall be binding upon the Holders of all Warrants and Warrant Shares and upon the Company. In the event of any such amendment, modification or waiver, the Company shall give prompt written notice thereof to all Holders and, if appropriate, notation thereof shall be made on all Warrants thereafter surrendered for registration of transfer or exchange. 7.08 GOVERNING LAW. This Agreement and the Warrants shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof. 7.09 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. * * * * * 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President Address for Notices: 201 Regal Row Dallas, Texas 75247 Telephone No.: (214) 819-3144 Telecopier No.: (214) 819-3247 Attention: H.R. Brutsche III PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan III ------------------------------------ W. Carter Sullivan III Senior Manager Address for Notices: 59 Wall Street New York, New York 10005 Telephone No.: (212) 493-7899 Telecopier No.: (212) 493-7903 Attention: W. Carter Sullivan III NBD BANK By: /s/ Thomas A. Levasseur ------------------------------------ Name: Thomas A. Levasseur ------------------------------ Title: Vice President ----------------------------- Address for Notices: 611 Woodward Avenue Detroit, Michigan 48226 Telephone No.: (313) 225-2557 Telecopier No.: (313) 225-2649 Attention: Thomas A. Levasseur Warrant Agreement Signature Page SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ Jennifer L. McClure ------------------------------------ Name: Jennifer L. McClure ------------------------------ Title: Assistant Vice President ----------------------------- By: /s/ John A. Fields ------------------------------------ Name: John A. Fields ------------------------------ Title: Vice President ----------------------------- Address for Notices: 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Telephone No.: (404) 588-7412 Telecopier No.: (404) 827-6270 Attention: Jennifer L. McClure COMERICA BANK - TEXAS By: /s/ David Terry ------------------------------------ Name: David Terry ------------------------------ Title: Corporate Banking Officer ----------------------------- Address for Notices: 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Telephone No.: (214) 841-4419 Telecopier No.: (214) 263-9837 Attention: David B. Terry Warrant Agreement Signature Page SCHEDULE A SHARES OF CLASS B COMMON STOCK UNDERLYING WARRANTS Shares of Class B Common Stock Underlying Warrants ----------------------------------------- Trigger Date Occurs: ----------------------- 9/1/98 to On or after Initial Holder Initially 8/31/99 9/1/99 - -------------- --------- ------- ------ Brown Brothers Harriman & Co. 14,301 16,173 18,065 NBD Bank 21,458 24,267 27,105 SunTrust Bank, Atlanta 14,301 16,173 18,065 Comerica Bank - Texas 14,301 16,173 18,065 Warrant Agreement Signature Page EX-10.1 4 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and H. R. Brutsche III (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and its subsidiaries are engaged in the business of manufacturing and leasing automated lighting and sound reinforcement equipment; and WHEREAS, the Executive is experienced and knowledgeable in the Company's business and currently serves as the Company's President and Chief Executive Officer; and WHEREAS, the Company is interested in continuing to employ the Executive and the Executive is interested in continuing to work for the Company; and WHEREAS, the Executive and the Company desire to enter into a written agreement governing the terms and conditions of the Executive's employment, including, without limitation, the compensation paid to the Executive, the duration of the Executive's employment and the protection of the Company's confidential information, business, accounts, patronage and goodwill; and WHEREAS, this Agreement will supersede and replace all prior employment agreements between the Company and the Executive; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and conditions herein contained, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive on the terms and conditions set forth below. The Executive hereby accepts such employment and agrees that he will at all times act and discharge his duties and utilize his skills in the best interests of the Company. 2. POSITION AND DUTIES. The Executive shall serve as President and Chief Executive Officer of the Company. The Executive shall also serve as the Chairman of the Board of Directors of the Company and shall serve on the Executive Committee and other committees of the Board of Directors as shall be determined by the Board of Directors. The Executive shall discharge the duties of his office or offices as described in the Company's Bylaws and as otherwise determined from time to time by the Board of Directors; provided, however, that such duties shall be reasonably commensurate with the duties of a president or chief executive officer of a corporation. The Executive shall devote his full working time, best efforts and undivided attention to the Company's business and affairs. The Executive may, however, devote reasonable periods of time to engage in charitable and community activities and manage his personal investments, to the extent that such activities are not inconsistent with and do not detract from the performance of his duties and responsibilities hereunder. 3. LOCATION OF EMPLOYMENT. The Executive's office and principal place of business in carrying out his duties hereunder shall be at the Company's corporate headquarters in Dallas, Texas and the Executive's location of employment shall not be changed without the Executive's written consent. The Executive will give reasonable consideration to any proposed change in the location of his employment if such change would serve the best interests of the Company. 1 4. TERM. The Executive's employment under this Agreement shall be for a term of five years commencing as of the date first above written (the "Commencement Date"), provided that such term shall automatically be extended by one year for each complete year served by the Executive. The term as originally set forth or as automatically extended is referred to hereinafter as the "Employment Term." 5. COMPENSATION. In consideration of the services to be performed by the Executive hereunder, the Company shall pay the Executive as follows: (a) BASE SALARY. The Company shall pay the Executive an annual salary of $433,000 (the "Base Salary"). The Base Salary shall be payable bi-monthly on the 15th and the last day of each month in equal installments. The Compensation Committee of the Board of Directors shall conduct an annual review of the Base Salary; the first review shall be conducted not later than November 1, 1996, and the subsequent reviews shall be conducted not later than November 1 of the following years during the Employment Term. The Executive shall be entitled to such increases in the Base Salary, if any, that may be determined by the Board of Directors in its sole discretion pursuant to such annual reviews. In no event shall the Base Salary, as it may be increased from time to time in accordance with this Section 5, be reduced. (b) ANNUAL INCENTIVE COMPENSATION. The Executive shall be eligible to receive annual incentive compensation (the "Annual Incentive Compensation") in accordance with the plans established or to be established for officers or directors of the Company. (c) LONG-TERM INCENTIVE COMPENSATION. The Executive shall be eligible to receive long-term incentive compensation (the "Long-Term Incentive Compensation") in accordance with the plans established or to be established for officers or directors of the Company. (d) DEFERRED COMPENSATION. The Executive shall be entitled to receive deferred compensation (the "Deferred Compensation") in accordance with the plans established or to be established for officers or directors of the Company. (e) ANNUAL BONUS FOR TERM LIFE INSURANCE. The Executive shall be entitled to receive an annual bonus in an amount equal to the sum of (i) the annual premiums payable under Term Life Insurance Policy No. 4114972 from Transamerica Occidental Life Insurance Company and owned by the H.R. Brutsche III Insurance Trust, or any substitute life insurance policy owned by the Executive or a designated owner in replacement thereof and approved by the Company, and (ii) an additional amount such that the net amount of such bonus retained by the Executive or for his benefit, after deduction of any federal, state or local income tax payable by the Executive thereon, shall be equal the amount in clause (i) above. Such bonus shall be paid to the Executive as and when such premiums are due. (f) LIFE INSURANCE. The Executive shall be entitled to receive life insurance benefits (including the right to designate one or more beneficiaries) under the Company's Group Life Insurance Policy, Policy No. 100-0399-046, from Phoenix Home Life or any additional or substitute life insurance policy, plan or program hereafter obtained or established for, or made available to, officers or directors of the Company (collectively 2 referred to in this Agreement, as they may be changed or revised consistent with this Agreement, as the "Life Insurance Plan"). (g) DISABILITY INSURANCE. The Executive shall be entitled to receive disability insurance benefits under (i) the Company's Group Disability Insurance Policy, Policy No. 100-0399-013, from Phoenix Home Life, (ii) Disability Insurance Policy, Policy No. G556342, from Guardian Life Insurance Company, (iii) Disability Income Policy, Policy No. 9412790, from Massachusetts Mutual Life Insurance Company, (iv) Income Replacement Policy, Policy No. 003002955, from United Life and Accident Insurance Company and (v) any additional or substitute disability insurance policy, plan or program hereafter obtained or established for, or made available to, officers or directors of the Company (collectively referred to in this Agreement, as they may be changed or revised consistent with this Agreement, as the "Disability Insurance Plan"); provided, however, that at any time during the Employment Term the terms of any such disability insurance policies, plans or programs shall be equivalent to or exceed the terms, taken as a whole, of the policies described in clauses (i), (ii), (iii) and (iv) above, as currently in effect or, if obtained after the Commencement Date, in effect as of the date obtained, and the aggregate benefits payable under any such policies, plans or programs shall be in an amount equal to or exceeding 59% of the Executive's Base Salary at the rate then in effect. (h) SPLIT-DOLLAR INSURANCE. The Executive shall be eligible, directly or indirectly through a designated owner, to receive benefits (including the right to designate one or more beneficiaries) under (i) Life Insurance Policy No. 8592771 from Massachusetts Mutual Life Insurance Company and any agreement or instrument between the Company and the designated owner of such policy with respect to such policy, (ii) Life Insurance Policy No. 67127331 from John Hancock Mutual Life Insurance Company and any Split-Dollar Life Insurance Agreement and Assignment of Life Insurance Policy as Collateral between the Company and the designated owner of such policy with respect to such policy and (iii) any additional or substitute split-dollar insurance policy, plan or program hereafter obtained or established for, or made available to, officers or directors of the Company; provided, however, that at any time during the Employment Term the terms of any such split-dollar insurance policies, plans or programs shall be equivalent to or exceed the terms, taken as a whole, of the policies described in clauses (i) and (ii) above, as currently in effect. 6. EMPLOYEE BENEFITS. (a) BENEFIT PLANS OR OTHER ARRANGEMENTS. In addition to the benefits required by Section 5 of this Agreement, subject to meeting eligibility provisions, the Executive shall be entitled to participate in all employee benefit plans of the Company, and to receive such other employee benefits as are available to the Company's officers generally, as such benefits may exist from time to time, including, for example and without limitation, group health, disability and life insurance benefits and participation in the Company's profit sharing, stock purchase and stock option plans. (b) VACATION AND SICK LEAVE. The Executive shall be entitled to receive the number of days of vacation and sick leave determined pursuant to vacation and sick leave plans established from time to time by the Company. 3 (c) FRINGE BENEFITS. The Company shall provide the Executive with an automobile allowance of $1,000 per month and such other fringe benefits as are or may be generally provided to officers or directors of the Company and such other benefits as the Board of Directors may, from time to time, in its sole discretion, determine. 7. BUSINESS EXPENSES. (a) OUT-OF-POCKET EXPENSES. The Company shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by the Executive in the conduct of the Company's business, provided that the Executive submits expense accounts accompanied by receipts and vouchers within 12 months following the expenditures. (b) FIRST CLASS AIR TRAVEL. The Company shall provide the Executive with domestic first class air travel via upgrade coupons and business class for overseas travel in connection with the performance of his duties hereunder. 8. TAXES. All compensation to the Executive hereunder shall be subject to applicable employment and withholding taxes. The Executive shall be responsible for any taxes resulting from a determination that any portion of any benefits supplied to the Executive hereunder may be reimbursing personal as well as business expenses. 9. TERMINATION. The Executive's employment may be terminated by either party at any time in accordance with the following provisions. In the event of such termination, the Executive's rights and entitlements shall be determined in accordance with the following provisions. (a) DEATH. Notwithstanding any other provision to the contrary, if the Executive dies, the Executive's employment hereunder shall terminate as of the date of death. Upon termination due to the Executive's death, the Executive's estate shall receive the Base Salary at the rate in effect at the time of the Executive's death through the end of the month in which the death occurs. The Executive's estate shall also be entitled to receive a pro rata portion of the Annual Incentive Compensation, if any, the Executive would have received for the fiscal year in which he died. All other benefits, if any, due the Executive following the Executive's termination of employment on account of death shall be determined in accordance with Sections 5, 6, and 7 and with the plans, policies and practices of the Company, as such may be amended or supplemented by the terms of this Agreement. For purposes of determining a pro rata portion of the Annual Incentive Compensation under this Section 9, the amount shall be calculated in accordance with the provisions of each applicable Annual Incentive Compensation plan, but shall be based on the actual results of the Company from the beginning of the fiscal year through the date of death plus the projected results of the Company for the remainder of the fiscal year as of the date of death. (b) DISABILITY. If the Executive suffers a Permanent Disability (as defined below), the Company may terminate his employment by written notice effective as of the Date of Disability (as defined below). If the Executive's employment is terminated by reason of a Permanent Disability, from the Date of Disability until the end of the Employment Term, the Company shall pay to the Executive his Base Salary at the rate then in effect, less any disability benefits which the Executive receives pursuant to any disability insurance policy, plan or program purchased or maintained by the Company. 4 For the purpose of this Agreement, "Permanent Disability" shall mean the inability to perform the services required hereunder due to mental or physical disability which prevents the Executive from substantially performing his duties hereunder and continues for either (i) a total of 180 working days during any 12-month period or (ii) 150 consecutive working days. "Date of Disability" shall mean the date following the last of such days to so occur. If either party disputes, after notice from the other, that the Executive is disabled, such dispute shall be submitted to a physician mutually satisfactory to the Executive and the Company. If the parties are unable to agree on a mutually satisfactory physician, each shall select a reputable physician, who shall select a third physician whose determination of the Executive's ability to perform shall be conclusive and binding on the parties. Evidence of such disability, as so certified, shall be conclusive notwithstanding that a disability policy, or clause in an insurance policy, covering the Executive shall contain a different definition of "permanent disability." The Company shall pay the fees and expenses of each physician so appointed. If the Company's group health insurance plan is fully insured as of the Date of Disability and thereafter, the Company shall allow the Executive to continue participation in the Company's group health insurance plan at the Company's expense through the end of the Employment Term. If the Company's group health insurance plan is self-insured as of the Date of Disability, or becomes self-insured after the Date of Disability, then (x) until the expiration of continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (the "COBRA Continuation Coverage") (currently 18 months or 29 months depending on the nature of the Permanent Disability), the Company shall allow the Executive to continue participation in the Company's group health insurance plan at the Company's expense and (y) after the expiration of COBRA Continuation Coverage until the end of the Employment Term, the Company shall (A) pay the cost of an individual health insurance policy for the Executive with the same or better coverage as provided under the Company's group health insurance plan as of the date of termination, or (B) if an individual policy cannot be obtained, provide comparable coverage in another manner reasonably acceptable to the Executive. (c) FOR CAUSE. The Company may terminate the Executive's employment for Cause (as defined below) at any time, without any additional notice. The Company shall inform the Executive as to the grounds for such termination. If the Executive's termination is for Cause, the Executive shall not be entitled to damages for such termination and shall have no claim for such damages, and shall be entitled after such termination to receive the Base Salary only for services rendered through the date of termination. The Executive shall also be entitled to (i) a pro rata portion of the Annual Incentive Compensation, if any, he would have received for the year in which he was terminated (computed as provided in Subsection (b) above) and (ii) a payment for unused vacation time in the year in which he was terminated as determined pursuant to the Company's vacation and sick leave plans in effect at the time of termination. For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by the Executive to follow the reasonable and lawful directions of the Board of Directors in connection with the Executive's duties hereunder or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board of Directors ("Executive Committee") (or, if the Executive is the Chairman, 5 another member of the Executive Committee elected by the member or members thereof other than the Executive), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding the Executive if he is a member of the Executive Committee), delivers a written demand to the Executive for substantial performance specifically setting forth the manner in which the Executive Committee believes the Executive has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) the Executive's gross negligence or intentional misconduct in the performance of his duties hereunder; (iii) the Executive's conviction of a felony; (iv) the commission by the Executive of any act involving embezzlement or fraud; or (v) the Executive's habitual absenteeism not related to disability or illness, but only after written notice from the Executive Committee on two occasions, as determined by the Executive Committee in good faith, of such habitual absenteeism and the occurrence of such habitual absenteeism for a third time during any consecutive 12-month period. (d) WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION. The Company may terminate the Executive's employment for other than death, disability, Cause or Change of Control (as defined below) upon 30 days prior written notice. If at any time during the Employment Term, an event of Constructive Termination (as defined below) occurs, then the Executive shall have the right, upon 30 days prior written notice to the Company, to terminate his employment hereunder. Such termination shall be deemed a "Constructive Termination" of the Executive by the Company. In addition to any other rights of the Executive, if termination is (i) by the Company for other than death, disability, Cause or Change of Control, or (ii) on the basis of a Constructive Termination, from the date of termination until the end of the Employment Term, the Company shall pay to the Executive his Base Salary at the rate then in effect. In the event of such termination, the Executive shall not be required to mitigate damages by seeking other employment or otherwise; however, the amount paid by the Company shall be reduced by any compensation earned by the Executive from another employer. For purposes of this Agreement, "Constructive Termination" means the following: (i) the continued and material failure of the Company to comply with its covenants and obligations under this Agreement, but only after (A) the Executive delivers written demand to the Company for substantial performance specifically setting forth the manner in which he believes the Company has so failed to comply with its covenants and obligations and (B) such material failure continues for a period of ten days; (ii) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, titles and reporting requirements), duties or responsibilities as contemplated in Section 2 of this Agreement, which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; 6 (iii) a change by the Company in the Executive's location of employment as contemplated by Section 3 of this Agreement without the consent of the Executive; (iv) any purported termination by the Company of the Executive's employment other than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 13(c)(iii) of this Agreement, provided that the successor referred to therein has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 13(c)(iii). (e) CHANGE OF CONTROL. Upon 30 days prior written notice to the other party stating the grounds for such termination, either the Company or the Executive may terminate the Executive's employment as the result of a Change of Control. A "Change of Control" shall be deemed to have occurred if (i) the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation are owned in the aggregate by the former shareholders of the Company; (ii) the Company sells all or substantially all of its assets to another corporation, which is not a wholly-owned subsidiary of the Company; (iii) any person or group within the meaning of the Securities Exchange Act of 1934, as amended, acquires (together with voting securities of the Company held by such person or group) 30% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record) pursuant to any transaction or combination of transactions; (iv) there is a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirements; or (v) the individuals who, at the beginning of any period of twelve consecutive months, constituted the Board of Directors cease, for any reason, to constitute at least a majority thereof, unless the nomination for election or election by the Company's shareholders of each new director of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an initial public offering of the Company's capital stock or the issuance of capital stock by the Company approved by a vote of at least two-thirds of the directors then in office. If the Executive's employment is terminated as a result of a Change of Control or if the Executive elects to terminate his employment as the result of a Change of Control at any time within two years after the Change of Control, the Executive shall be entitled to the compensation and benefits provided below: (i) From the date of termination until the end of the Employment Term, the Company shall pay to the Executive his Base Salary at the rate then in effect. 7 (ii) In lieu of shares of capital stock of the Company issuable upon the exercise of exercisable or unexercisable stock based incentives (which stock based incentives shall be cancelled upon the making of the payment referred to below), the Company shall pay the Executive in cash, not later than the tenth day following the date of termination, an aggregate amount equal to the product of (A) the difference (to the extent that such difference is a positive number) obtained by subtracting the per share exercise price of each stock based incentive held by the Executive, whether or not then fully exercisable, from the higher of (x) the market price per share or (y) the highest price per share actually paid in connection with any Change of Control, and (B) the number of shares covered by each such stock based incentive. (iii) If the Company's group health insurance plan is fully insured as of the date of termination and thereafter, the Company shall allow the Executive to continue participation in the Company's group health insurance plan at the Company's expense until he has obtained other employment, but in any event not longer than the end of the Employment Term. If the Company's group health insurance plan is self-insured as of the date of termination, or becomes self-insured after the date of termination, (x) then until the first to occur of the expiration of COBRA Continuation Coverage (currently 18 months) or the Executive obtaining other employment, the Company shall allow the Executive to continue participation in the Company's group health insurance plan at the Company's expense and (y) if the Executive has not obtained other employment after the expiration of 18 months from the date of termination, then until the first to occur of the Executive obtaining other employment or the end of the Employment Term, the Company shall pay the cost of an individual health insurance policy for the Executive with the same or better coverage as provided under the Company's group health insurance plan as of the date of termination. (iv) The Executive shall be entitled to continue to participate under the Disability Insurance Plan and the Life Insurance Plan until he has obtained other employment, but in any event not longer than the end of the Employment Term. The amounts to be paid to the Executive pursuant to clauses (i) and (ii) above shall be referred to herein as the "Severance Payments." (f) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Severance Payments pursuant to Section 9(e) of this Agreement become subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 9(f)), shall be equal to the Severance Payments. (i) For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by the Executive in connection with a Change of Control and the subsequent termination of the Executive's employment (whether such termination is pursuant to the terms of this Agreement 8 or any other plan, arrangement or agreement with the Company, with any other person whose actions resulted in the Change of Control or with any person affiliated with the Company or such other person) shall be treated as a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive such other payments or benefits (in whole or in part) do not constitute parachute payments (including by reason of Section 280G(b)(4)(A) of the Code) or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" (as determined according to Section 280G(b)(3) of the Code, any final or temporary regulations promulgated under Section 280G of the Code and any interpretations thereof by the Internal Revenue Service) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. (ii) For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date of termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of the Executive's termination of employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the 9 existence or amount of liability for Excise Tax with respect to the Severance Payments. (g) TIME FOR PAYMENT. Except as otherwise provided in this Section 9, the Company shall pay (a) any Base Salary due to the Executive or his heirs or legal representatives under this Section 9 on the Company's regularly scheduled paydays and (b) any Annual Incentive Compensation payments due to the Executive or his heirs or legal representatives under this Section 9 within 30 days from the date of termination. 10. ADDITIONAL OBLIGATIONS OF THE EXECUTIVE DURING AND AFTER EMPLOYMENT. (a) CONFIDENTIAL INFORMATION; RECORDS. The Executive recognizes that the Executive's retention by the Company is one of the highest trust and confidence by reason of the Executive's access to and contact with certain trade secrets, confidential business practices and proprietary information of the Company (collectively, "Trade Secrets"). The Executive shall use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets. Except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, the Executive shall not, either during the term of his employment or thereafter, directly or indirectly, use for the Executive's own benefit or for the benefit of another, or disclose, disseminate or distribute to another, any of the Trade Secrets (whether or not acquired, learned, obtained or developed by the Executive alone or in conjunction with another) of the Company or of any other person with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents or other writings whatsoever made, compiled, acquired or received by the Executive during the term of his employment arising out of, in connection with or related to any activity or business of the Company (other than records and personal notes received or prepared by Executive in his capacity as a director of the Company) are and shall continue to be the sole and exclusive property of the Company, and shall, together with all copies thereof, be delivered to the Company by the Executive immediately when the Executive ceases to be employed by the Company, or at any other time upon the Company's demand. (b) NONCOMPETITION AGREEMENT. The Executive acknowledges and agrees that as a result of his employment with the Company, including, without limitation, the experience he has gained and will gain therefrom and the information he has acquired and will acquire regarding the Trade Secrets, he will be able to injure the Company if he should engage in a business that is competitive with the business conducted or to be conducted by the Company. For these reasons, the Executive hereby agrees as follows: (i) Without the prior written consent of the Company, the Executive shall not, during his period of employment with the Company, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (A) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) or engage in any business that is competitive with that of the Company or its affiliates, (B) accept employment with or render services to a competitor of the Company or any of its affiliates as a director, officer, agent, employee or consultant, (C) contact, solicit, or attempt to solicit or accept business from any (1) customers of the Company or its affiliates or (2) person or entity whose business the Company or its affiliates is 10 soliciting, (D) contact, solicit or attempt to solicit or accept or direct business that is competitive with such business being conducted by the Company or any of its affiliates during the Executive's employment under this Agreement from any of the customers of the Company or any of its affiliates or (E) take any action inconsistent with the fiduciary relationship of an employee to his employer. For purposes of this Section 10, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations or other entities that market products and/or perform services in direct or indirect competition with the products marketed and/or services performed by the Company or its affiliates anywhere in the world. Without limiting the generality of the foregoing, the Company's products and services include, but are not limited to, professional and architectural lighting, sound reinforcement, stages and stage sets, design and production management and other similar products and services for concert touring, theatre, television and film, corporate events and conventions, commercial buildings and similar markets. As used in this Section 10, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company. (ii) Upon termination of the Executive's employment with the Company for any reason, and for a period of two years thereafter, the Executive shall not, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, in any geographic market in which the Company or any of its affiliates is doing business on the date of termination (A) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) or engage in any business that is competitive with that of the Company or its affiliates, (B) accept employment with or render services to a competitor of the Company or its affiliates as a director, officer, agent, employee or consultant, (C) contact, solicit or attempt to solicit or accept business from any party (1) who, on the date of termination of the Executive's employment or within one year prior thereto, was a customer of the Company or its affiliates, or (2) to whom the Company or any of its affiliates has made, or from whom the Company or any of its affiliates has received, a written sales proposal within six months prior to such date of termination or (D) hire or solicit or in any manner attempt to influence or induce any employee of the Company or its affiliates to leave the employment of the Company or its affiliates, or use or disclose to any person, partnership, association, corporation or other entity any information obtained while an employee of the Company concerning the names and addresses of employees of the Company or its affiliates. Notwithstanding the foregoing, if the Executive's employment terminates for any reason and the Company fails to perform timely its obligations under Section 9 of this Agreement, the Executive's obligations under this Section 10(b) shall permanently terminate; provided, however, that the Company shall not thereby be released of its obligations under this Agreement, including, without limitation, its payment obligations under Section 9. (c) ACKNOWLEDGEMENTS. The Executive acknowledges and recognizes that the enforcement of any of the nondisclosure and noncompetition provisions in Section 10 of this Agreement by the Company will not interfere with the Executive's ability to pursue a proper livelihood. The Executive further represents that he is capable of pursuing a career 11 in other industries to earn a proper livelihood. The Executive recognizes and agrees that the enforcement of this Agreement is necessary to ensure the preservation and continuity of the business and goodwill of the Company. The Executive agrees that due to the nature of the Company's business, the noncompetition restrictions set forth in this Agreement are reasonable as to time and geographic area. At any time during the Executive's employment with the Company and for a period of two years thereafter, the Company may request the Executive to supply such information as the Company deems necessary to ascertain whether or not the Executive has complied with, or has violated, the restrictive covenants of Section 10 of this Agreement. The Executive shall furnish the requested information to the Company within ten days following the receipt of such request. (d) REMEDIES. The Executive recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of this Section 10 would be difficult, and the Executive agrees that the Company, in addition to all other remedies it may have, shall have the right to specific performance or injunctive relief to enforce its terms if there is such a breach, without any requirement to post bond or other security. (e) Notwithstanding anything to the contrary in this Agreement, the provisions of this Section 10 shall survive any termination of the Executive's employment under this Agreement. 11. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to Executive: H. R. Brutsche III 5146 Kelsey Dallas, Texas 75229 Facsimile: (214) 363-4113 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. 12. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement (including, without limitation, whether termination has been for "Cause" pursuant to Section 9(c)) shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (a) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two 12 arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas, where the arbitration shall take place shall select the third arbitrator. (b) The arbitration shall follow the Employment Arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (c) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (d) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and the Executive shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (e) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (f) The Company and the Executive hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 13. MISCELLANEOUS PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement replaces and supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof and constitutes the entire understanding of the parties. (b) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which he or it may be entitled. (c) SUCCESSORS AND ASSIGNS. (i) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Executive and the Executives legal representatives. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. 13 (ii) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (iii) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. (d) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (e) AMENDMENT. This Agreement may be amended, or a new agreement substituted, at any time and from time to time only by a written instrument duly authorized and executed by the Company and the Executive. (f) WAIVER. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof. (g) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid, or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid, or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid, and enforceable. In addition, however, the Executive agrees that the provisions of Section 10 of this Agreement each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of the Executive contained in Section 10. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE] 14 IN WITNESS WHEREOF the parties have executed this Agreement as of the date first above written. COMPANY: Vari-Lite Holdings, Inc. By:/s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President-Finance EXECUTIVE: /s/ H. R. Brutsche III --------------------------------------- H. R. Brutsche III 15 EX-10.3 5 EXHIBIT 10.3 CONSULTING AGREEMENT This Consulting Agreement ("Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and J. Anthony Smith ("Consultant"). W I T N E S S E T H: WHEREAS, the Company wishes to enter into a consulting relationship with Consultant; and WHEREAS, Consultant desires to enter into a consulting relationship with the Company upon the terms and conditions hereinafter contained; NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Company and Consultant agree as follows: 1. CONSULTING RELATIONSHIP. The Company hereby retains Consultant, and Consultant hereby agrees to be retained by the Company, as an independent consultant, and not as an employee. 2. CONSULTING SERVICES. Consultant agrees that during the term of this Agreement: (a) POSITION AND DUTIES. Consultant will devote his best efforts to this position as an independent consultant and will perform such duties and execute the policies of the Company as determined by the Board of Directors or President of the Company, or their designee. Consultant shall exercise a reasonable degree of skill and care in performing such duties. (b) QUALIFICATIONS. Consultant's qualifications for providing consulting services include: (i) Operating at highest levels of live performance concert and artist industry; (ii) Extensive knowledge of concert touring and entertainment industry; (iii) Excellent expert knowledge of market for sound and lighting systems; (iv) Extensive worldwide social and business contacts; and (v) Extensive knowledge of international financial matters. (c) AVAILABILITY. Consultant shall be available to render services to the Company under this Agreement upon receipt of five days' written notice from the Company and for a minimum of 60 days during any 12-month period commencing on the date of this Agreement or any anniversary thereof. Consultant shall not be obligated to render in excess of 90 days of service during any such 12-month 1 period. Consultant shall not be obligated to render any services under this Agreement during any such period when he is unable to do so due to illness, disability or injury. (d) AUTHORITY. Consultant shall have no authority over any employee or officer of the Company, except as may be necessary in routine performance of his duties hereunder, nor shall the Company be required in any manner to implement any plans or suggestions Consultant may provide. 3. COMPENSATION. (a) CONSULTING FEE. The Company agrees to pay Consultant for his services performed under this Agreement at the rate of $1,667 per month or $20,000 per year ("Consulting Fee"), whether or not services are actually rendered hereunder. (b) OTHER EMPLOYEE BENEFITS. Except as expressly provided in this Agreement, Consultant shall not be entitled, based on his status as a consultant, to participate in or receive benefits under any programs maintained by the Company for its employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. 4. BUSINESS EXPENSES. (a) OUT-OF-POCKET EXPENSES. The Company shall reimburse Consultant for all reasonable out-of-pocket expenses incurred by Consultant in the conduct of the Company's business, provided that Consultant submits expense accounts accompanied by receipts and vouchers within 12 months following the expenditures. (b) OFFICE SPACE EXPENSES. The Company shall pay Consultant and/or Consultant's designees an aggregate of $1,000 per month to reimburse Consultant for expenses incurred in connection with the maintenance of offsite office space provided by Consultant for the benefit of the Company, including, but not limited, to the hiring of support staff. 5. TERM. This Agreement shall continue for a term of three years commencing as of the date first above written, provided that such term shall automatically be extended for one year for each complete year Consultant provides services hereunder. The term as originally set forth or as automatically extended is referred to hereinafter as the "Consulting Term." 6. TERMINATION. This Agreement may be terminated by either party at any time in accordance with the following provisions. In the event of such termination, Consultant's rights and entitlements shall be determined in accordance with the following provisions. (a) DEATH. If Consultant dies, this Agreement shall terminate as of the date of death. Upon termination due to Consultant's death, Consultant's estate shall receive the Consulting Fee through the end of the month in which the death occurs. 2 (b) DISABILITY. If Consultant suffers a Permanent Disability (as defined below), the Company may terminate this Agreement by written notice effective as of the Date of Disability (as defined below). If this Agreement is terminated by reason of a Permanent Disability, from the Date of Disability until the end of the Consulting Term in effect immediately prior to the termination, the Company shall pay to Consultant his Consulting Fee. For the purpose of this Agreement, "Permanent Disability" shall mean the inability to perform the services required hereunder due to mental or physical disability which prevents Consultant from substantially performing his duties hereunder and continues for either (i) a total of 180 working days during any 12-month period or (ii) 150 consecutive working days. "Date of Disability" shall mean the date following the last of such days to so occur. If either party disputes, after notice from the other, that Consultant is disabled, such dispute shall be submitted to a physician mutually satisfactory to Consultant and the Company. If the parties are unable to agree on a mutually satisfactory physician, each shall select a reputable physician, who shall select a third physician whose determination of Consultant's ability to perform shall be conclusive and binding on the parties. Evidence of such disability, as so certified, shall be conclusive notwithstanding that a disability policy, or clause in an insurance policy, covering Consultant shall contain a different definition of "permanent disability." The Company shall pay the fees and expenses of each physician so appointed. (c) FOR CAUSE. The Company may terminate this Agreement for Cause (as defined below) at any time, without any additional notice. The Company shall inform Consultant as to the grounds for such termination. Consultant shall not be entitled to damages for such termination and shall have no claim for such damages, and shall be entitled after such termination to receive the Consulting Fee only through the date of termination. For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by Consultant to follow the reasonable and lawful directions of the Board of Directors in connection with Consultant's duties hereunder or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board of Directors ("Executive Committee") (or, if Consultant is the Chairman, another member of the Executive Committee elected by the member or members thereof other than Consultant), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding Consultant if he is a member of the Executive Committee), delivers a written demand to Consultant for substantial performance specifically setting forth the manner in which the Executive Committee believes Consultant has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) Consultant's gross negligence or intentional misconduct in the performance of his duties hereunder; (iii) Consultant's conviction of a felony; or (iv) the commission by Consultant of any act involving embezzlement or fraud. 3 (d) WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION. The Company may terminate this Agreement for other than death, disability, breach or injurious conduct or Change of Control (as defined below) upon 30 days prior written notice. If at any time during the Consulting Term, an event of Constructive Termination (as defined below) occurs, then Consultant shall have the right upon 30 days prior written notice to the Company to terminate his services hereunder. Such termination shall be deemed a "Constructive Termination" of this Agreement by the Company. In addition to any other rights of Consultant, if termination is (i) by the Company for other than death, disability, breach or injurious conduct or Change of Control, or (ii) on the basis of a Constructive Termination, from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee. For purposes of this Agreement, "Constructive Termination" means the following: (i) the continued and material failure of the Company to comply with its covenants and obligations under this Agreement, but only after (A) Consultant delivers written demand to the Company for substantial performance specifically setting forth the manner in which he believes the Company has so failed to comply with its covenants and obligations and (B) such material failure continues for a period of ten days; (ii) the assignment to Consultant of any duties inconsistent in any respect with Consultant's position, duties or responsibilities as contemplated in Section 2 of this Agreement, which results in a diminution in such position, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Consultant; (iv) any purported termination by the Company of this Agreement other than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c)(iii) of this Agreement, provided that the successor referred to therein has received at least ten days prior written notice from the Company or Consultant of the requirements of Section 10(c)(iii). (e) CHANGE OF CONTROL. Upon 30 days prior written notice to the other party stating the grounds for such termination, either the Company or Consultant may terminate this Agreement as the result of a Change of Control. A "Change of Control" shall be deemed to have occurred if (i) the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation are owned in the aggregate by the former shareholders of 4 the Company; (ii) the Company sells all or substantially all of its assets to another corporation, which is not a wholly-owned subsidiary of the Company; (iii) any person or group within the meaning of the Securities Exchange Act of 1934, as amended, acquires (together with voting securities of the Company held by such person or group) 30% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record) pursuant to any transaction or combination of transactions; (iv) there is a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirements; or (v) the individuals who, at the beginning of any period of twelve consecutive months, constituted the Board of Directors cease, for any reason, to constitute at least a majority thereof, unless the nomination for election or election by the Company's shareholders of each new director of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an initial public offering of the Company's capital stock or the issuance of capital stock by the Company approved by a vote of at least two-thirds of the directors then in office. If this Agreement is terminated as a result of a Change of Control or if Consultant elects to terminate this Agreement as the result of a Change of Control at any time within two years after the Change of Control, then from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee (the "Severance Payments"). (f) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Severance Payments pursuant to Section 6(e) of this Agreement become subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), the Company shall pay to Consultant an additional amount (the "Gross-Up Payment") such that the net amount retained by Consultant, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6(f)), shall be equal to the Severance Payments. (i) For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Consultant in connection with a Change of Control and the subsequent termination of this Agreement (whether such termination is pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, with any other person whose actions resulted in the Change of Control or with any person affiliated with the Company or such other person) shall be treated as a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as 5 subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Consultant such other payments or benefits (in whole or in part) do not constitute parachute payments (including by reason of Section 280G(b)(4)(A) of the Code) or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" (as determined according to Section 280G(b)(3) of the Code, any final or temporary regulations promulgated under Section 280G of the Code and any interpretations thereof by the Internal Revenue Service) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. (ii) For purposes of determining the amount of the Gross-Up Payment, Consultant shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Consultant's residence on the date of termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Consultant's termination of employment, Consultant shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Consultant to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Consultant's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Consultant with respect to such excess) at the time that the amount of such excess is finally determined. Consultant and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. 6 (g) TIME FOR PAYMENT. Except as otherwise provided in this Section 6, the Company shall pay any Consulting Fee, or portion thereof, due to Consultant or his heirs or legal representatives under this Section 6 on the Company's regularly scheduled paydays. 7. ADDITIONAL OBLIGATIONS OF CONSULTANT. (a) TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether original or duplicates) including, but not limited to, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training materials, client record cards, client files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, specifications, models, computer programs and records of any kind in the possession or control of Consultant which in any way relate or pertain to the Company's business, including the business of subsidiaries or other affiliates of the Company, whether furnished to Consultant by the Company or prepared, compiled or acquired by Consultant during his consulting relationship with Company, shall be the sole property of the Company. At any time upon request of the Company, and in any event promptly upon termination of this Agreement, Consultant shall deliver all such materials to the Company. The Company shall be under no obligation to pay to Consultant any sums of money then due Consultant or becoming due thereafter until Consultant has complied with the provisions of this Section 7(a). (b) TITLE TO CERTAIN INTANGIBLE PROPERTY. Consultant shall immediately disclose and assign to the Company all his right, title and interest in any inventions, models, processes, patents, copyrights and improvements thereon relating to services or processes or products of the Company or its affiliates that he conceives or acquires during any consulting relationship with the Company or that he may conceive or acquire during a period of one year after termination of this Agreement. (c) CONFIDENTIAL INFORMATION; RECORDS. Consultant recognizes that Consultant's retention by the Company is one of the highest trust and confidence by reason of Consultant's access to and contact with certain trade secrets, confidential business practices and proprietary information of the Company (collectively, "Trade Secrets"). Consultant shall use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets. Except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, Consultant shall not, either during the Consulting Term or thereafter, directly or indirectly, use for Consultant's own benefit or for the benefit of another, or disclose, disseminate or distribute to another, any of the Trade Secrets (whether or not acquired, learned, obtained or developed by Consultant alone or in conjunction with another) of the Company or of any other person with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents or other writings whatsoever made, compiled, acquired or received by Consultant during the Consulting Term arising out of, in connection with or related to any activity or business of the Company (other than records and personal notes received or prepared by Consultant in his capacity as a director of 7 the Company) are and shall continue to be the sole and exclusive property of the Company, and shall, together with all copies thereof, be delivered to the Company by Consultant immediately when Consultant ceases to be retained by the Company, or at any other time upon the Company's demand. (d) NONCOMPETITION AGREEMENT. Consultant acknowledges and agrees that as a result of his consulting relationship with the Company, including, without limitation, the experience he will gain therefrom and the information he will acquire regarding the Trade Secrets, he will be able to injure the Company if he should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company. For these reasons, Consultant hereby agrees as follows: (i) Without the prior written consent of the Company, Consultant shall not, during the term of this Agreement, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (A) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) or engage in any business that is competitive with that of the Company or its affiliates, (B) accept employment with or render services to a competitor of the Company or any of its affiliates as a director, officer, agent, employee or consultant, (C) contact, solicit or attempt to solicit or accept business from any (1) customers of the Company or its affiliates or (2) person or entity whose business the Company or its affiliates is soliciting or (D) contact, solicit or attempt to solicit or accept or direct business that is competitive with such business being conducted by the Company or any of its affiliates during the term of this Agreement from any of the customers of the Company or any of its affiliates. For purposes of this Section 7, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations or other entities that market products and/or perform services in direct or indirect competition with the products marketed and/or services performed by the Company or its affiliates anywhere in the world. Without limiting the generality of the foregoing, the Company's products and services include, but are not limited to, professional and architectural lighting, sound reinforcement, stages and stage sets, design and production management and other similar products and services for concert touring, theater, television and film, corporate events and conventions, commercial buildings and similar markets. As used in this Section 7, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company. (ii) Upon termination of this Agreement for any reason, and for a period of two years thereafter, Consultant shall not, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, in any geographic market in which the Company or any of its affiliates is doing business on the date of termination, (A) contact, solicit or attempt to solicit or accept business from any party (1) who, on the date of termination of 8 this Agreement or within one year prior thereto, was a customer of the Company or its affiliates, or (2) whom Consultant solicited, contacted or otherwise dealt with on behalf of the Company or any of its affiliates within one year prior to such date of termination or (B) hire or solicit or in any manner attempt to influence or induce any employee of the Company or its affiliates to leave the employment of the Company or its affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained during the term of this Agreement concerning the names and addresses of employees of the Company or its affiliates. Notwithstanding the foregoing, if this Agreement terminates for any reason and the Company fails to perform timely its obligations under Section 6 of this Agreement, Consultant's obligations under this Section 7(d) shall permanently terminate; provided, however, that the Company shall not thereby be released of its obligations under this Agreement, including, without limitation, its payment obligations under Section 6. (e) ACKNOWLEDGEMENTS. Consultant acknowledges and recognizes that the enforcement of any of the nondisclosure and noncompetition provisions in Section 7 of this Agreement by the Company will not interfere with Consultant's ability to pursue a proper livelihood. Consultant further represents that he is capable of pursuing a career in other industries other than the Company's to earn a proper livelihood. Consultant recognizes and agrees that the enforcement of this Agreement is necessary to ensure the preservation and continuity of the business and goodwill of the Company. Consultant agrees that due to the nature of the Company's business, the noncompetition restrictions set forth in this Agreement are reasonable as to time and geographic area. At any time during the Consulting Term and for a period of two years thereafter, the Company may request Consultant to supply such information as the Company deems necessary to ascertain whether or not Consultant has complied with, or has violated, the restrictive covenants of Section 7 of this Agreement. Consultant shall furnish the requested information to the Company within 10 days following the receipt of such request. (f) REMEDIES. Consultant recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of Section 7 of this Agreement would be difficult, and Consultant agrees that the Company, in addition to all other remedies it may have, shall have the right to specific performance or injunctive relief to enforce its terms if there is such a breach, without any requirement to post bond or other security. (g) SURVIVAL. Notwithstanding anything to the contrary in this Agreement, the provisions of Section 7 of this Agreement shall survive any termination of this Agreement. 8. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same- 9 day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to Consultant: J. Anthony Smith Hit & Run Music, Ltd. 25 Ives Street London SW3 2ND England Facsimile: 011-44-171-5845774 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement (including, without limitation, whether termination has been for "conduct injurious to the Company" pursuant to Section 6(c)) shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (a) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas, where the arbitration shall take place shall select the third arbitrator. (b) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (c) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (d) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators 10 shall be final and binding upon the parties, and accordingly the Company and Consultant shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (e) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (f) The Company and consultant hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 10. MISCELLANEOUS PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement represents the entire agreement between the Company and Consultant concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Consultant and the Company. (b) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (c) SUCCESSORS AND ASSIGNS. (i) This Agreement shall be binding upon, inure to the benefit of and be enforceable by Consultant and Consultant's legal representatives. This Agreement is personal to Consultant and without the prior written consent of the Company shall not be assignable by Consultant otherwise than by will or the laws of descent and distribution. (ii) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (iii) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its 11 business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (e) AMENDMENT. This Agreement may be amended, or a new agreement substituted, at any time and from time to time only by a written instrument duly authorized and executed by the Company and Consultant. (f) WAIVER. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof. (g) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In addition, however, Consultant agrees that the provisions of Sections 9 and 10 of this Agreement each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Consultant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of Consultant contained in Section 7. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CONSULTANT: /s/ J. Anthony Smith ----------------------------------------- J. Anthony Smith COMPANY: Vari-Lite Holdings, Inc. By: /s/ H. R. Brutsche III ------------------------------------ H. R. Brutsche III Chairman of the Board and President 13 EX-10.4 6 EXHIBIT 10.4 CONSULTING AGREEMENT This Consulting Agreement ("Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and John D. Maxson ("Consultant"). W I T N E S S E T H: WHEREAS, the Company wishes to enter into a consulting relationship with Consultant; and WHEREAS, Consultant desires to enter into a consulting relationship with the Company upon the terms and conditions hereinafter contained; NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Company and Consultant agree as follows: 1. CONSULTING RELATIONSHIP. The Company hereby retains Consultant, and Consultant hereby agrees to be retained by the Company, as an independent consultant, and not as an employee. 2. CONSULTING SERVICES. Consultant agrees that during the term of this Agreement: (a) POSITION AND DUTIES. Consultant will devote his best efforts to this position as an independent consultant and will perform such duties and execute the policies of the Company as determined by the Board of Directors or President of the Company, or their designee. Consultant shall exercise a reasonable degree of skill and care in performing such duties. (b) QUALIFICATIONS. Consultant's qualifications for providing consulting services include: (i) Extensive knowledge of entertainment production support industry; (ii) Expert in audio and sound systems, electrical distribution systems and entertainment lighting systems; (iii) Expert in sound mixing; (iv) Extensive knowledge of sound and lighting technology; (v) Expert in the structure and operations of the Company; and (vi) Extensive business and social relationships in the Dallas, Texas, business community. (c) AVAILABILITY. Consultant shall be available to render services to the Company under this Agreement upon receipt of five days' written notice from the Company and for a minimum of 60 days during any 12-month period commencing on the date of this Agreement or any anniversary thereof. Consultant shall not be obligated to render in excess of 90 days of service during any such 12-month period. Consultant shall not be obligated to render any services under this Agreement during any such period when he is unable to do so due to illness, disability or injury. 1 (d) AUTHORITY. Consultant shall have no authority over any employee or officer of the Company, except as may be necessary in routine performance of his duties hereunder, nor shall the Company be required in any manner to implement any plans or suggestions Consultant may provide. 3. COMPENSATION. (a) CONSULTING FEE. The Company agrees to pay Consultant for his services performed under this Agreement at the rate of $8,333 per month or $100,000 per year ("Consulting Fee"), whether or not services are actually rendered hereunder. (b) SPLIT-DOLLAR INSURANCE. Consultant shall be eligible, directly or indirectly through a designated owner, to receive benefits (including the right to designate one or more beneficiaries) under (i) Life Insurance Policy No. A1013721L, from American General Life Insurance Company and any Split-Dollar Life Insurance Agreement and Assignment of Life Insurance Policy as Collateral between the Company and the designated owner of such policy with respect to such policy and (ii) any additional or substitute split-dollar insurance policy, plan or program hereafter obtained or established for, or made available to, officers or directors of the Company; provided, however, that at any time during the Consulting Term the terms of any such split-dollar insurance policies, plans or programs shall be equivalent to or exceed the terms, taken as a whole, of the policies described in clause (i) above, as currently in effect. (c) OTHER EMPLOYEE BENEFITS. Except as expressly provided in this Agreement, Consultant shall not be entitled, based on his status as a consultant, to participate in or receive benefits under any programs maintained by the Company for its employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. 4. BUSINESS EXPENSES. (a) OUT-OF-POCKET EXPENSES. The Company shall reimburse Consultant for all reasonable out-of-pocket expenses incurred by Consultant in the conduct of the Company's business, provided that Consultant submits expense accounts accompanied by receipts and vouchers within 12 months following the expenditures. (b) OFFICE SPACE EXPENSES. The Company shall pay Consultant and/or Consultant's designees an aggregate of $1,000 per month to reimburse Consultant for expenses incurred in connection with the maintenance of offsite office space provided by Consultant for the benefit of the Company, including, but not limited, to the hiring of support staff. 5. TERM. This Agreement shall continue for a term of three years commencing as of the date first above written, provided that such term shall automatically be extended for one year for each complete year Consultant provides services hereunder. The term as originally set forth or as automatically extended is referred to hereinafter as the "Consulting Term." 6. TERMINATION. This Agreement may be terminated by either party at any time in accordance with the following provisions. In the event of such termination, Consultant's rights and entitlements shall be determined in accordance with the following provisions. 2 (a) DEATH. If Consultant dies, this Agreement shall terminate as of the date of death. Upon termination due to Consultant's death, Consultant's estate shall receive the Consulting Fee through the end of the month in which the death occurs. (b) DISABILITY. If Consultant suffers a Permanent Disability (as defined below), the Company may terminate this Agreement by written notice effective as of the Date of Disability (as defined below). If this Agreement is terminated by reason of a Permanent Disability, from the Date of Disability until the end of the Consulting Term in effect immediately prior to the termination, the Company shall pay to Consultant his Consulting Fee. For the purpose of this Agreement, "Permanent Disability" shall mean the inability to perform the services required hereunder due to mental or physical disability which prevents Consultant from substantially performing his duties hereunder and continues for either (i) a total of 180 working days during any 12-month period or (ii) 150 consecutive working days. "Date of Disability" shall mean the date following the last of such days to so occur. If either party disputes, after notice from the other, that Consultant is disabled, such dispute shall be submitted to a physician mutually satisfactory to Consultant and the Company. If the parties are unable to agree on a mutually satisfactory physician, each shall select a reputable physician, who shall select a third physician whose determination of Consultant's ability to perform shall be conclusive and binding on the parties. Evidence of such disability, as so certified, shall be conclusive notwithstanding that a disability policy, or clause in an insurance policy, covering Consultant shall contain a different definition of "permanent disability." The Company shall pay the fees and expenses of each physician so appointed. (c) FOR CAUSE. The Company may terminate this Agreement for Cause (as defined below) at any time, without any additional notice. The Company shall inform Consultant as to the grounds for such termination. Consultant shall not be entitled to damages for such termination and shall have no claim for such damages, and shall be entitled after such termination to receive the Consulting Fee only through the date of termination. For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by Consultant to follow the reasonable and lawful directions of the Board of Directors in connection with Consultant's duties hereunder or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board of Directors ("Executive Committee") (or, if Consultant is the Chairman, another member of the Executive Committee elected by the member or members thereof other than Consultant), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding Consultant if he is a member of the Executive Committee), delivers a written demand to Consultant for substantial performance specifically setting forth the manner in which the Executive Committee believes Consultant has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) Consultant's gross negligence or intentional misconduct in the performance of his duties hereunder; (iii) Consultant's conviction of a felony; or (iv) the commission by Consultant of any act involving embezzlement or fraud. (d) WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION. The Company may terminate this Agreement for other than death, disability, breach or injurious conduct or Change of Control (as defined below) upon 30 days prior written notice. 3 If at any time during the Consulting Term, an event of Constructive Termination (as defined below) occurs, then Consultant shall have the right upon 30 days prior written notice to the Company to terminate his services hereunder. Such termination shall be deemed a "Constructive Termination" of this Agreement by the Company. In addition to any other rights of Consultant, if termination is (i) by the Company for other than death, disability, breach or injurious conduct or Change of Control, or (ii) on the basis of a Constructive Termination, from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee. For purposes of this Agreement, "Constructive Termination" means the following: (i) the continued and material failure of the Company to comply with its covenants and obligations under this Agreement, but only after (A) Consultant delivers written demand to the Company for substantial performance specifically setting forth the manner in which he believes the Company has so failed to comply with its covenants and obligations and (B) such material failure continues for a period of ten days; (ii) the assignment to Consultant of any duties inconsistent in any respect with Consultant's position, duties or responsibilities as contemplated in Section 2 of this Agreement, which results in a diminution in such position, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Consultant; (iv) any purported termination by the Company of this Agreement other than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c)(iii) of this Agreement, provided that the successor referred to therein has received at least ten days prior written notice from the Company or Consultant of the requirements of Section 10(c)(iii). (e) CHANGE OF CONTROL. Upon 30 days prior written notice to the other party stating the grounds for such termination, either the Company or Consultant may terminate this Agreement as the result of a Change of Control. A "Change of Control" shall be deemed to have occurred if (i) the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation are owned in the aggregate by the former shareholders of the Company; (ii) the Company sells all or substantially all of its assets to another corporation, which is not a wholly-owned subsidiary of the Company; (iii) any person or group within the meaning of the Securities Exchange Act of 1934, as amended, acquires (together with voting securities of the Company held by such person or group) 30% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record) pursuant to any transaction or combination of transactions; (iv) there is a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, 4 as amended, whether or not the Company is then subject to such reporting requirements; or (v) the individuals who, at the beginning of any period of twelve consecutive months, constituted the Board of Directors cease, for any reason, to constitute at least a majority thereof, unless the nomination for election or election by the Company's shareholders of each new director of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an initial public offering of the Company's capital stock or the issuance of capital stock by the Company approved by a vote of at least two-thirds of the directors then in office. If this Agreement is terminated as a result of a Change of Control or if Consultant elects to terminate this Agreement as the result of a Change of Control at any time within two years after the Change of Control, then from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee (the "Severance Payments"). (f) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Severance Payments pursuant to Section 6(e) of this Agreement become subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), the Company shall pay to Consultant an additional amount (the "Gross-Up Payment") such that the net amount retained by Consultant, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6(f)), shall be equal to the Severance Payments. (i) For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Consultant in connection with a Change of Control and the subsequent termination of this Agreement (whether such termination is pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, with any other person whose actions resulted in the Change of Control or with any person affiliated with the Company or such other person) shall be treated as a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Consultant such other payments or benefits (in whole or in part) do not constitute parachute payments (including by reason of Section 280G(b)(4)(A) of the Code) or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" (as determined according to Section 280G(b)(3) of the Code, any final or temporary regulations promulgated under Section 280G of the Code and any interpretations thereof by the Internal Revenue Service) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code 5 (after applying clause (A) above), and (C) the value of any non- cash benefit, deferred payment or other benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. (ii) For purposes of determining the amount of the Gross-Up Payment, Consultant shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Consultant's residence on the date of termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Consultant's termination of employment, Consultant shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Consultant to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Consultant's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Consultant with respect to such excess) at the time that the amount of such excess is finally determined. Consultant and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (g) TIME FOR PAYMENT. Except as otherwise provided in this Section 6, the Company shall pay any Consulting Fee, or portion thereof, due to Consultant or his heirs or legal representatives under this Section 6 on the Company's regularly scheduled paydays. 7. ADDITIONAL OBLIGATIONS OF CONSULTANT. (a) TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether original or duplicates) including, but not limited to, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training materials, client record cards, client files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, specifications, models, computer programs and records of any kind in the possession or control of Consultant which in any way relate or pertain to the Company's business, including the business of subsidiaries or other affiliates of the Company, whether furnished to Consultant by the Company or prepared, compiled or acquired by Consultant during his consulting relationship with Company, shall be the sole property of the Company. At any time upon request of the Company, and in any event promptly upon termination of this Agreement, Consultant shall deliver all such materials to the Company. 6 The Company shall be under no obligation to pay to Consultant any sums of money then due Consultant or becoming due thereafter until Consultant has complied with the provisions of this Section 7(a). (b) TITLE TO CERTAIN INTANGIBLE PROPERTY. Consultant shall immediately disclose and assign to the Company all his right, title and interest in any inventions, models, processes, patents, copyrights and improvements thereon relating to services or processes or products of the Company or its affiliates that he conceives or acquires during any consulting relationship with the Company or that he may conceive or acquire during a period of one year after termination of this Agreement. (c) CONFIDENTIAL INFORMATION; RECORDS. Consultant recognizes that Consultant's retention by the Company is one of the highest trust and confidence by reason of Consultant's access to and contact with certain trade secrets, confidential business practices and proprietary information of the Company (collectively, "Trade Secrets"). Consultant shall use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets. Except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, Consultant shall not, either during the Consulting Term or thereafter, directly or indirectly, use for Consultant's own benefit or for the benefit of another, or disclose, disseminate or distribute to another, any of the Trade Secrets (whether or not acquired, learned, obtained or developed by Consultant alone or in conjunction with another) of the Company or of any other person with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents or other writings whatsoever made, compiled, acquired or received by Consultant during the Consulting Term arising out of, in connection with or related to any activity or business of the Company (other than records and personal notes received or prepared by Consultant in his capacity as a director of the Company) are and shall continue to be the sole and exclusive property of the Company, and shall, together with all copies thereof, be delivered to the Company by Consultant immediately when Consultant ceases to be retained by the Company, or at any other time upon the Company's demand. (d) NONCOMPETITION AGREEMENT. Consultant acknowledges and agrees that as a result of his consulting relationship with the Company, including, without limitation, the experience he will gain therefrom and the information he will acquire regarding the Trade Secrets, he will be able to injure the Company if he should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company. For these reasons, Consultant hereby agrees as follows: (i) Without the prior written consent of the Company, Consultant shall not, during the term of this Agreement, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (A) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) or engage in any business that is competitive with that of the Company or its affiliates, (B) accept employment with or render services to a competitor of the Company or any of its affiliates as a director, officer, agent, employee or consultant, (C) contact, solicit or attempt to solicit or accept business from any (1) customers of the Company or its affiliates or (2) person or entity whose business the Company or its affiliates is soliciting or (D) contact, solicit or attempt to solicit or accept or direct business 7 that is competitive with such business being conducted by the Company or any of its affiliates during the term of this Agreement from any of the customers of the Company or any of its affiliates. For purposes of this Section 7, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations or other entities that market products and/or perform services in direct or indirect competition with the products marketed and/or services performed by the Company or its affiliates anywhere in the world. Without limiting the generality of the foregoing, the Company's products and services include, but are not limited to, professional and architectural lighting, sound reinforcement, stages and stage sets, design and production management and other similar products and services for concert touring, theatre, television and film, corporate events and conventions, commercial buildings and similar markets. As used in this Section 7, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company. (ii) Upon termination of this Agreement for any reason, and for a period of two years thereafter, Consultant shall not, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, in any geographic market in which the Company or any of its affiliates is doing business on the date of termination, (A) contact, solicit or attempt to solicit or accept business from any party (1) who, on the date of termination of this Agreement or within one year prior thereto, was a customer of the Company or its affiliates, or (2) whom Consultant solicited, contacted or otherwise dealt with on behalf of the Company or any of its affiliates within one year prior to such date of termination or (B) hire or solicit or in any manner attempt to influence or induce any employee of the Company or its affiliates to leave the employment of the Company or its affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained during the term of this Agreement concerning the names and addresses of employees of the Company or its affiliates. Notwithstanding the foregoing, if this Agreement terminates for any reason and the Company fails to perform timely its obligations under Section 6 of this Agreement, Consultant's obligations under this Section 7(d) shall permanently terminate; provided, however, that the Company shall not thereby be released of its obligations under this Agreement, including, without limitation, its payment obligations under Section 6. (e) ACKNOWLEDGEMENTS. Consultant acknowledges and recognizes that the enforcement of any of the nondisclosure and noncompetition provisions in Section 7 of this Agreement by the Company will not interfere with Consultant's ability to pursue a proper livelihood. Consultant further represents that he is capable of pursuing a career in other industries other than the Company's to earn a proper livelihood. Consultant recognizes and agrees that the enforcement of this Agreement is necessary to ensure the preservation and continuity of the business and goodwill of the Company. Consultant agrees that due to the nature of the Company's business, the noncompetition restrictions set forth in this Agreement are reasonable as to time and geographic area. At any time during the Consulting Term and for a period of two years thereafter, the Company may request Consultant to supply such information as the Company deems necessary to ascertain whether or not Consultant has complied with, or has violated, the restrictive covenants of 8 Section 7 of this Agreement. Consultant shall furnish the requested information to the Company within 10 days following the receipt of such request. (f) REMEDIES. Consultant recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of Section 7 of this Agreement would be difficult, and Consultant agrees that the Company, in addition to all other remedies it may have, shall have the right to specific performance or injunctive relief to enforce its terms if there is such a breach, without any requirement to post bond or other security. (g) SURVIVAL. Notwithstanding anything to the contrary in this Agreement, the provisions of Section 7 of this Agreement shall survive any termination of this Agreement. 8. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to Consultant: John D. Maxson Preston Commons West, Suite 220 8117 Preston Road Dallas, Texas 75225 Facsimile: (214) 696-2228 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement (including, without limitation, whether termination has been for "conduct injurious to the Company" pursuant to Section 6(c)) shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (a) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas, where the arbitration shall take place shall select the third arbitrator. (b) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. 9 (c) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (d) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and Consultant shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (e) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (f) The Company and Consultant hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 10. MISCELLANEOUS PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement represents the entire agreement between the Company and Consultant concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Consultant and the Company. (b) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (c) SUCCESSORS AND ASSIGNS. (i) This Agreement shall be binding upon, inure to the benefit of and be enforceable by Consultant and Consultant's legal representatives. This Agreement is personal to Consultant and without the prior written consent of the Company shall not be assignable by Consultant otherwise than by will or the laws of descent and distribution. (ii) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (iii) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business 10 and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (e) AMENDMENT. This Agreement may be amended, or a new agreement substituted, at any time and from time to time only by a written instrument duly authorized and executed by the Company and Consultant. (f) WAIVER. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof. (g) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In addition, however, Consultant agrees that the provisions of Sections 9 and 10 of this Agreement each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Consultant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of Consultant contained in Section 7. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CONSULTANT: /s/ John D. Maxson --------------------------------------- John D. Maxson COMPANY: Vari-Lite Holdings, Inc. By:/s/ H.R. Brutsche III --------------------------------------- H. R. Brutsche III Chairman of the Board and President 12 EX-10.6 7 EXHIBIT 10.6 CONSULTING AGREEMENT This Consulting Agreement ("Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and James H. Clark, Jr. ("Consultant"). W I T N E S S E T H: WHEREAS, the Company wishes to enter into a consulting relationship with Consultant; and WHEREAS, Consultant desires to enter into a consulting relationship with the Company upon the terms and conditions hereinafter contained; NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to Consultant from the consulting relationship to be established between the parties by the terms of this Agreement, the Company and Consultant agree as follows: 1. CONSULTING RELATIONSHIP. The Company hereby retains Consultant, and Consultant hereby agrees to be retained by the Company, as an independent consultant, and not as an employee. 2. CONSULTING SERVICES. Consultant agrees that during the term of this Agreement: (a) POSITION AND DUTIES. Consultant will devote his best efforts to this position as an independent consultant and will perform such duties and execute the policies of the Company as determined by the Board of Directors or President of the Company, or their designee. Consultant shall exercise a reasonable degree of skill and care in performing such duties. (b) QUALIFICATIONS. Consultant's qualifications for providing consulting services include: (i) Knowledge and expertise in business and finance (Undergraduate degree from Yale and MBA from Stanford); (ii) Extensive business and social relationships throughout the U.S. and particularly in Dallas, Texas; (iii) Sophisticated investor and businessman; (iv) Extensive knowledge of the structure and operations of the Company; and (v) Knowledge of various segments of business such as finance, real estate, accounting and legal. (c) AVAILABILITY. Consultant shall be available to render services to the Company under this Agreement upon receipt of five days' written notice from the Company and for a minimum of 60 days during any 12-month period commencing on the date of this Agreement or any anniversary thereof. Consultant shall not be obligated to render in excess of 90 days of service during any such 12-month period. Consultant shall not be obligated to render any services under this Agreement during any such period when he is unable to do so due to illness, disability or injury. 1 (d) AUTHORITY. Consultant shall have no authority over any employee or officer of the Company, except as may be necessary in routine performance of his duties hereunder, nor shall the Company be required in any manner to implement any plans or suggestions Consultant may provide. 3. COMPENSATION. (a) CONSULTING FEE. The Company agrees to pay Consultant for his services performed under this Agreement at the rate of $8,333 per month or $100,000 per year ("Consulting Fee"), whether or not services are actually rendered hereunder. (b) SPLIT-DOLLAR INSURANCE. Consultant shall be eligible, directly or indirectly through a designated owner, to receive benefits (including the right to designate one or more beneficiaries) under (i) Life Insurance Policy No. 8592938, from Massachusetts Mutual Life Insurance Company and any agreement or instrument between the Company and the designated owner of such policy with respect to such policy, (ii) Life Insurance Policy No. 67127330, from John Hancock Mutual Life Insurance Company and any Split-Dollar Life Insurance Agreement and Assignment of Life Insurance Policy as Collateral between the Company and the designated owner of such policy with respect to such policy and (iii) any additional or substitute split-dollar insurance policy, plan or program hereafter obtained or established for, or made available to, officers or directors of the Company; provided, however, that at any time during the Consulting Term the terms of any such split-dollar insurance policies, plans or programs shall be equivalent to or exceed the terms, taken as a whole, of the policies described in clauses (i) and (ii) above, as currently in effect. (c) OTHER EMPLOYEE BENEFITS. Except as expressly provided in this Agreement, Consultant shall not be entitled, based on his status as a consultant, to participate in or receive benefits under any programs maintained by the Company for its employees, including, without limitation, life, medical and disability benefits, pension, profit sharing or other retirement plans or other fringe benefits. 4. BUSINESS EXPENSES. (a) OUT-OF-POCKET EXPENSES. The Company shall reimburse Consultant for all reasonable out-of-pocket expenses incurred by Consultant in the conduct of the Company's business, provided that Consultant submits expense accounts accompanied by receipts and vouchers within 12 months following the expenditures. (b) OFFICE SPACE EXPENSES. The Company shall pay Consultant and/or Consultant's designees an aggregate of $1,000 per month to reimburse Consultant for expenses incurred in connection with the maintenance of offsite office space provided by Consultant for the benefit of the Company, including, but not limited, to the hiring of support staff. 5. TERM. This Agreement shall continue for a term of three years commencing as of the date first above written, provided that such term shall automatically be extended for one year for each complete year Consultant provides services hereunder. The term as originally set forth or as automatically extended is referred to hereinafter as the "Consulting Term." 2 6. TERMINATION. This Agreement may be terminated by either party at any time in accordance with the following provisions. In the event of such termination, Consultant's rights and entitlements shall be determined in accordance with the following provisions. (a) DEATH. If Consultant dies, this Agreement shall terminate as of the date of death. Upon termination due to Consultant's death, Consultant's estate shall receive the Consulting Fee through the end of the month in which the death occurs. (b) DISABILITY. If Consultant suffers a Permanent Disability (as defined below), the Company may terminate this Agreement by written notice effective as of the Date of Disability (as defined below). If this Agreement is terminated by reason of a Permanent Disability, from the Date of Disability until the end of the Consulting Term in effect immediately prior to the termination, the Company shall pay to Consultant his Consulting Fee. For the purpose of this Agreement, "Permanent Disability" shall mean the inability to perform the services required hereunder due to mental or physical disability which prevents Consultant from substantially performing his duties hereunder and continues for either (i) a total of 180 working days during any 12-month period or (ii) 150 consecutive working days. "Date of Disability" shall mean the date following the last of such days to so occur. If either party disputes, after notice from the other, that Consultant is disabled, such dispute shall be submitted to a physician mutually satisfactory to Consultant and the Company. If the parties are unable to agree on a mutually satisfactory physician, each shall select a reputable physician, who shall select a third physician whose determination of Consultant's ability to perform shall be conclusive and binding on the parties. Evidence of such disability, as so certified, shall be conclusive notwithstanding that a disability policy, or clause in an insurance policy, covering Consultant shall contain a different definition of "permanent disability." The Company shall pay the fees and expenses of each physician so appointed. (c) FOR CAUSE. The Company may terminate this Agreement for Cause (as defined below) at any time, without any additional notice. The Company shall inform Consultant as to the grounds for such termination. Consultant shall not be entitled to damages for such termination and shall have no claim for such damages, and shall be entitled after such termination to receive the Consulting Fee only through the date of termination. For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by Consultant to follow the reasonable and lawful directions of the Board of Directors in connection with Consultant's duties hereunder or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board of Directors ("Executive Committee") (or, if Consultant is the Chairman, another member of the Executive Committee elected by the member or members thereof other than Consultant), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding Consultant if he is a member of the Executive Committee), delivers a written demand to Consultant for substantial performance specifically setting forth the manner in which the Executive Committee believes Consultant has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) Consultant's gross negligence or intentional misconduct in the performance of his duties hereunder; (iii) Consultant's conviction of a felony; or (iv) the commission by Consultant of any act involving embezzlement or fraud. 3 (d) WITHOUT CAUSE OR CONSTRUCTIVE TERMINATION. The Company may terminate this Agreement for other than death, disability, breach or injurious conduct or Change of Control (as defined below) upon 30 days prior written notice. If at any time during the Consulting Term, an event of Constructive Termination (as defined below) occurs, then Consultant shall have the right upon 30 days prior written notice to the Company to terminate his services hereunder. Such termination shall be deemed a "Constructive Termination" of this Agreement by the Company. In addition to any other rights of Consultant, if termination is (i) by the Company for other than death, disability, breach or injurious conduct or Change of Control, or (ii) on the basis of a Constructive Termination, from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee. For purposes of this Agreement, "Constructive Termination" means the following: (i) the continued and material failure of the Company to comply with its covenants and obligations under this Agreement, but only after (A) Consultant delivers written demand to the Company for substantial performance specifically setting forth the manner in which he believes the Company has so failed to comply with its covenants and obligations and (B) such material failure continues for a period of ten days; (ii) the assignment to Consultant of any duties inconsistent in any respect with Consultant's position, duties or responsibilities as contemplated in Section 2 of this Agreement, which results in a diminution in such position, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Consultant; (iv) any purported termination by the Company of this Agreement other than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 10(c)(iii) of this Agreement, provided that the successor referred to therein has received at least ten days prior written notice from the Company or Consultant of the requirements of Section 10(c)(iii). (e) CHANGE OF CONTROL. Upon 30 days prior written notice to the other party stating the grounds for such termination, either the Company or Consultant may terminate this Agreement as the result of a Change of Control. A "Change of Control" shall be deemed to have occurred if (i) the Company is merged or consolidated with another corporation and as a result of such merger or consolidation less than 50% of the outstanding voting securities of the surviving or resulting corporation are owned in the aggregate by the former shareholders of the Company; (ii) the Company sells all or substantially all of its assets to another corporation, which is not a wholly-owned subsidiary of the Company; (iii) any person or group within the meaning of the Securities Exchange Act of 1934, as amended, acquires (together with voting securities of the Company held by such person or group) 30% or more of the outstanding voting 4 securities of the Company (whether directly, indirectly, beneficially or of record) pursuant to any transaction or combination of transactions; (iv) there is a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirements; or (v) the individuals who, at the beginning of any period of twelve consecutive months, constituted the Board of Directors cease, for any reason, to constitute at least a majority thereof, unless the nomination for election or election by the Company's shareholders of each new director of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an initial public offering of the Company's capital stock or the issuance of capital stock by the Company approved by a vote of at least two-thirds of the directors then in office. If this Agreement is terminated as a result of a Change of Control or if Consultant elects to terminate this Agreement as the result of a Change of Control at any time within two years after the Change of Control, then from the date of termination until the end of the Consulting Term, the Company shall pay to Consultant his Consulting Fee (the "Severance Payments"). (f) CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Severance Payments pursuant to Section 6(e) of this Agreement become subject to the excise tax (the "Excise Tax") imposed under Section 4999 of the Internal Revenue Code of 1986, as amended ("Code"), the Company shall pay to Consultant an additional amount (the "Gross-Up Payment") such that the net amount retained by Consultant, after deduction of any Excise Tax on the Severance Payments (and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 6(f)), shall be equal to the Severance Payments. (i) For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payment or benefit received or to be received by Consultant in connection with a Change of Control and the subsequent termination of this Agreement (whether such termination is pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, with any other person whose actions resulted in the Change of Control or with any person affiliated with the Company or such other person) shall be treated as a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to Consultant such other payments or benefits (in whole or in part) do not constitute parachute payments (including by reason of Section 280G(b)(4)(A) of the Code) or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the "base amount" (as determined according to Section 280G(b)(3) of the Code, any final or temporary regulations promulgated under Section 280G of the Code and any interpretations thereof by the Internal Revenue Service) allocable to such reasonable compensation, or are 5 otherwise not subject to the Excise Tax, (B) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Severance Payments and (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (A) above), and (C) the value of any non-cash benefit, deferred payment or other benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. (ii) For purposes of determining the amount of the Gross-Up Payment, Consultant shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Consultant's residence on the date of termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of Consultant's termination of employment, Consultant shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by Consultant to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Consultant's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by Consultant with respect to such excess) at the time that the amount of such excess is finally determined. Consultant and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. (g) TIME FOR PAYMENT. Except as otherwise provided in this Section 6, the Company shall pay any Consulting Fee, or portion thereof, due to Consultant or his heirs or legal representatives under this Section 6 on the Company's regularly scheduled paydays. 7. ADDITIONAL OBLIGATIONS OF CONSULTANT. (a) TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether original or duplicates) including, but not limited to, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training materials, client record cards, client files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, specifications, models, computer programs and records of any kind in the possession or control of Consultant which in any way relate or pertain to the Company's business, including the business of subsidiaries or other affiliates of the Company, whether 6 furnished to Consultant by the Company or prepared, compiled or acquired by Consultant during his consulting relationship with Company, shall be the sole property of the Company. At any time upon request of the Company, and in any event promptly upon termination of this Agreement, Consultant shall deliver all such materials to the Company. The Company shall be under no obligation to pay to Consultant any sums of money then due Consultant or becoming due thereafter until Consultant has complied with the provisions of this Section 7(a). (b) TITLE TO CERTAIN INTANGIBLE PROPERTY. Consultant shall immediately disclose and assign to the Company all his right, title and interest in any inventions, models, processes, patents, copyrights and improvements thereon relating to services or processes or products of the Company or its affiliates that he conceives or acquires during any consulting relationship with the Company or that he may conceive or acquire during a period of one year after termination of this Agreement. (c) CONFIDENTIAL INFORMATION; RECORDS. Consultant recognizes that Consultant's retention by the Company is one of the highest trust and confidence by reason of Consultant's access to and contact with certain trade secrets, confidential business practices and proprietary information of the Company (collectively, "Trade Secrets"). Consultant shall use his best efforts and exercise utmost diligence to protect and safeguard the Trade Secrets. Except as may be required by the Company in connection with this Agreement, or with the prior written consent of the Company, Consultant shall not, either during the Consulting Term or thereafter, directly or indirectly, use for Consultant's own benefit or for the benefit of another, or disclose, disseminate or distribute to another, any of the Trade Secrets (whether or not acquired, learned, obtained or developed by Consultant alone or in conjunction with another) of the Company or of any other person with whom the Company has a business relationship. All memoranda, notes, records, drawings, documents or other writings whatsoever made, compiled, acquired or received by Consultant during the Consulting Term arising out of, in connection with or related to any activity or business of the Company (other than records and personal notes received or prepared by Consultant in his capacity as a director of the Company) are and shall continue to be the sole and exclusive property of the Company, and shall, together with all copies thereof, be delivered to the Company by Consultant immediately when Consultant ceases to be retained by the Company, or at any other time upon the Company's demand. (d) NONCOMPETITION AGREEMENT. Consultant acknowledges and agrees that as a result of his consulting relationship with the Company, including, without limitation, the experience he will gain therefrom and the information he will acquire regarding the Trade Secrets, he will be able to injure the Company if he should compete with the Company in a business that is competitive with the business conducted or to be conducted by the Company. For these reasons, Consultant hereby agrees as follows: (i) Without the prior written consent of the Company, Consultant shall not, during the term of this Agreement, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, (A) invest (other than investments in publicly-owned companies which constitute not more than 1% of the voting securities of any such company) or engage in any business that is competitive with that of the Company or its affiliates, (B) accept employment with or render services to a competitor of the Company or any of its affiliates as 7 a director, officer, agent, employee or consultant, (C) contact, solicit or attempt to solicit or accept business from any (1) customers of the Company or its affiliates or (2) person or entity whose business the Company or its affiliates is soliciting or (D) contact, solicit or attempt to solicit or accept or direct business that is competitive with such business being conducted by the Company or any of its affiliates during the term of this Agreement from any of the customers of the Company or any of its affiliates. For purposes of this Section 7, a "competitor" specifically includes persons, firms, sole proprietorships, partnerships, companies, corporations or other entities that market products and/or perform services in direct or indirect competition with the products marketed and/or services performed by the Company or its affiliates anywhere in the world. Without limiting the generality of the foregoing, the Company's products and services include, but are not limited to, professional and architectural lighting, sound reinforcement, stages and stage sets, design and production management and other similar products and services for concert touring, theatre, television and film, corporate events and conventions, commercial buildings and similar markets. As used in this Section 7, "affiliates" shall mean persons or entities that directly, or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Company. (ii) Upon termination of this Agreement for any reason, and for a period of two years thereafter, Consultant shall not, directly or indirectly, either as an individual, a partner or a joint venturer, or in any other capacity, in any geographic market in which the Company or any of its affiliates is doing business on the date of termination, (A) contact, solicit or attempt to solicit or accept business from any party (1) who, on the date of termination of this Agreement or within one year prior thereto, was a customer of the Company or its affiliates, or (2) whom Consultant solicited, contacted or otherwise dealt with on behalf of the Company or any of its affiliates within one year prior to such date of termination or (B) hire or solicit or in any manner attempt to influence or induce any employee of the Company or its affiliates to leave the employment of the Company or its affiliates, nor shall he use or disclose to any person, partnership, association, corporation or other entity any information obtained during the term of this Agreement concerning the names and addresses of employees of the Company or its affiliates. Notwithstanding the foregoing, if this Agreement terminates for any reason and the Company fails to perform timely its obligations under Section 6 of this Agreement, Consultant's obligations under this Section 7(d) shall permanently terminate; provided, however, that the Company shall not thereby be released of its obligations under this Agreement, including, without limitation, its payment obligations under Section 6. (e) ACKNOWLEDGEMENTS. Consultant acknowledges and recognizes that the enforcement of any of the nondisclosure and noncompetition provisions in Section 7 of this Agreement by the Company will not interfere with Consultant's ability to pursue a proper livelihood. Consultant further represents that he is capable of pursuing a career in other industries other than the Company's to earn a proper livelihood. Consultant recognizes and agrees that the enforcement of this Agreement is necessary to ensure the preservation and continuity of the business and goodwill of the Company. Consultant agrees that due to the nature of the Company's business, the noncompetition restrictions set forth in this Agreement are reasonable as to time and geographic area. At any time during the 8 Consulting Term and for a period of two years thereafter, the Company may request Consultant to supply such information as the Company deems necessary to ascertain whether or not Consultant has complied with, or has violated, the restrictive covenants of Section 7 of this Agreement. Consultant shall furnish the requested information to the Company within 10 days following the receipt of such request. (f) REMEDIES. Consultant recognizes and acknowledges that the ascertainment of damages in the event of his breach of any provision of Section 7 of this Agreement would be difficult, and Consultant agrees that the Company, in addition to all other remedies it may have, shall have the right to specific performance or injunctive relief to enforce its terms if there is such a breach, without any requirement to post bond or other security. (g) SURVIVAL. Notwithstanding anything to the contrary in this Agreement, the provisions of Section 7 of this Agreement shall survive any termination of this Agreement. 8. NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to Consultant: James H. Clark, Jr. Preston Commons West, Suite 220 8117 Preston Road Dallas, Texas 75225 Facsimile: (214) 696-2228 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. 9. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement (including, without limitation, whether termination has been for "conduct injurious to the Company" pursuant to Section 6(c)) shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (a) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas, where the arbitration shall take place shall select the third arbitrator. (b) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall 9 provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (c) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (d) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and Consultant shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (e) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (f) The Company and Consultant hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 10. MISCELLANEOUS PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement represents the entire agreement between the Company and Consultant concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Consultant and the Company. (b) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (c) SUCCESSORS AND ASSIGNS. (i) This Agreement shall be binding upon, inure to the benefit of and be enforceable by Consultant and Consultant's legal representatives. This Agreement is personal to Consultant and without the prior written consent of the Company shall not be assignable by Consultant otherwise than by will or the laws of descent and distribution. (ii) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or 10 to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (iii) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. (d) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (e) AMENDMENT. This Agreement may be amended, or a new agreement substituted, at any time and from time to time only by a written instrument duly authorized and executed by the Company and Consultant. (f) WAIVER. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof. (g) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In addition, however, Consultant agrees that the provisions of Sections 9 and 10 of this Agreement each constitute separate agreements independently supported by good and adequate consideration and shall be severable from the other provisions of, and shall survive, this Agreement. The existence of any claim or cause of action of Consultant against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants and agreements of Consultant contained in Section 7. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. CONSULTANT: /s/ James H. Clark, Jr. --------------------------------------- James H. Clark, Jr. COMPANY: Vari-Lite Holdings, Inc. By: /s/ H. R. Brutsche III ------------------------------------ H. R. Brutsche III Chairman of the Board and President 12 EX-10.7 8 EXHIBIT 10.7 DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE HOLDINGS, INC. AND H. R. BRUTSCHE III This Deferred Compensation Agreement ("Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and H. R. Brutsche III (the "Director"). W I T N E S S E T H: WHEREAS, the Director is a member of the Board of Directors of the Company ("Board"); and WHEREAS, the Company recognizes the valuable services heretofore performed for it by the Director and wishes to encourage his continued relationship with the Company and valuable services; and WHEREAS, the Director and the Company wish to provide the terms and conditions upon which the Company will pay deferred compensation to the Director (or his beneficiary after his death) on account of the valuable services heretofore performed for the Company by the Director; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to the Director because of the key business relationship which has existed between them, the Company and the Director agree as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount of $167,000, payable in equal monthly installments on the first day of each month (the "Deferred Compensation Payments") to the Director (or, if the Director dies, to his beneficiary as provided in Section 4(a) of this Agreement) during the Term (as hereinafter defined). 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments for the period commencing on July 1, 1995, and ending June 30, 2001 (the "Term") , unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. 3. TERMINATION OF DEFERRED COMPENSATION PAYMENTS AND FORFEITURE OF RIGHTS. The Deferred Compensation Payments will cease immediately upon the occurrence of any of the events listed below in this Section 3 and all of the Director's rights and entitlements under this Agreement will be forfeited. (a) VOLUNTARY TERMINATION. Except as provided in Section 4 of this Agreement, the Deferred Compensation Payments shall terminate on the date that is the later of the date of the Director's voluntarily termination of employment with the Company, the date of his -1- voluntary termination of any consulting relationship with the Company and the date of his resignation as a director of the Company. (b) FOR CAUSE. The Company may terminate the Deferred Compensation Payments at any time, without any additional notice, for Cause (as hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by the Director to follow the reasonable and lawful directions of the Board in connection with the Director's duties or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board ("Executive Committee") (or, if the Director is the Chairman, another member of the Executive Committee elected by the member or members thereof other than the Director), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding the Director if he is a member of the Executive Committee), delivers a written demand to the Director for substantial performance specifically setting forth the manner in which the Executive Committee believes the Director has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) the Director's gross negligence or intentional misconduct in the performance of his duties; (iii) the Director's conviction of a felony; (iv) the commission by the Director of any act involving embezzlement or fraud; or (v) the Director's habitual absenteeism not related to disability or illness, but only after written notice from the Executive Committee and the continuation or repetition of such habitual absenteeism during a period of 30 days following such notice. (c) CONFIDENTIAL INFORMATION; RECORDS. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any covenant, agreement or other obligation with the Company with respect to nondisclosure of confidential information or records of the Company, whether or not such covenant or agreement is in an employment, consulting or other agreement with the Company, and including, but not limited to, Section 10(a) of that certain Employment Agreement dated as of July 1, 1995, by and between the Company and the Director (the "Employment Agreement"). (d) NONCOMPETITION AGREEMENT. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any noncompetition covenant or agreement with the Company, whether such covenant or agreement is in an employment, consulting or other agreement with the Company, and including, but not limited to, Section 10(b) of the Employment Agreement. 4. CONTINUATION OF DEFERRED COMPENSATION PAYMENTS. The Deferred Compensation Payments shall continue after the termination of the Director as an employee and director of, and consultant to, the Company under the following circumstances: (a) DEATH. If the Director dies, the Company shall pay the Deferred Compensation Payments to the beneficiary designated by the Director. The Director shall designate a beneficiary to receive the Deferred Compensation Payments in the event of his death, which designation, including any initial designation set forth in this Agreement, may only be changed by written notice from the Director to the Company. If the Director has not -2- designated a beneficiary to receive the Deferred Compensation Payments who is surviving on the date of his death, the Deferred Compensation Payments shall be payable to the surviving spouse, if any, of the Director and, if none, to the estate of the Director or as otherwise directed by the duly appointed personal representative of the estate of the Director. The Director hereby designates Deborah F. Brutsche as his beneficiary. (b) DISABILITY. If the Director suffers a Permanent Disability (as hereinafter defined) and all of his services for the Company are terminated by reason thereof, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Permanent Disability" shall have the meaning given to it in Section 9(b) of the Employment Agreement or any successor employment agreement or consulting agreement between the Company and the Director. (c) TERMINATION WITHOUT CAUSE. If the Director's employment or consulting relationship with the Company is terminated by the Company without Cause, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. (d) CONSTRUCTIVE TERMINATION. If the Director's employment or consulting relationship with the Company is terminated by the Director because an event of Constructive Termination (as hereinafter defined) occurs, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Constructive Termination" shall have the meaning given to it in Section 9(d) of the Employment Agreement or any successor employment agreement or consulting agreement between the Company and the Director. (e) CHANGE OF CONTROL. If the Director's employment or consulting relationship with the Company is terminated, whether by the Company or the Director, as a result of a Change of Control (as hereinafter defined), and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Change of Control" shall have the meaning given to it in Section 9(e) of the Employment Agreement or any successor employment agreement or consulting agreement between the Company and the Director. 5. DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. Subject to the terms and provisions of this Agreement, the Executive Committee (excluding the Director if he is a member of the Executive Committee) shall have the discretion to make all benefit entitlement determinations under this Agreement. All of the following references to the Director in this Section 5 shall be deemed to include the Director or his duly authorized representative. (a) CLAIMS. Any claim for the benefits under this Agreement shall be made in writing to the Company, Attention: Executive Committee. If the Claim is accepted, the Executive Committee shall provide written notice to the Director. (b) NOTICE OF DENIAL OF CLAIM. When a claim for benefits under this Agreement is denied, the Executive Committee shall provide notice to the Director in writing of the denial -3- within 90 days after the submission of the claim. The notice shall be written in a manner calculated to be understood by the Director and shall include: (i) the specific reason or reasons for the denial; (ii) specific references to the pertinent provisions of this Agreement on which the denial is based; (iii) a description of any additional material or information necessary for the Director to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedures under this Agreement as may be adopted by the Board or the Executive Committee. If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the Director before the end of the initial 90-day period, provided that in no event shall this extension exceed 90 days. (c) APPEAL OF DENIAL CLAIM. If a claim for benefits is denied or if the Director has received no response to such claim within 90 days of its submission (in which case the claim for benefits shall be deemed to have been denied), the Director, at the Director's sole expense, may appeal the denial to the Board within 60 days of the receipt of written notice of the denial or the date such claim is deemed to be denied. In pursuing such appeal the Director (i) may request in writing that the Board review the denial, (ii) may review pertinent documents and (iii) may submit issues and comments in writing. The decision on review shall be made within 60 days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the Director before the end of the original 60-day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the Director and shall include specific references to the provisions of this Agreement on which the denial is based. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review. (d) ARBITRATION. If the Director still believes that his claim has been wrongfully denied or if there is any other controversy or claim arising out of or relating to this Agreement, it shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (i) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas where the arbitration shall take place shall select the third arbitrator. -4- (ii) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (iii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (iv) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and the Director shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (v) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (vi) The Company and the Director hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 6. GENERAL PROVISIONS. (a) STATUS OF AGREEMENT. For the purposes of ERISA, this Agreement is an unfunded arrangement, sponsored by the Company and maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company. Nothing in this Agreement should be construed to mean that this Agreement is a funded deferred compensation plan, fund, program or agreement. Furthermore, nothing in this Agreement and no action taken by the Company according to this Agreement should be construed to create a trust of any kind or a fiduciary relationship between the Company and the Director, his designated beneficiary or any other person. (b) ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire agreement between the Company and the Director concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both the parties. -5- (c) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, or any arbitration proceeding is necessary pursuant to Section 5(d) of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (d) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to the Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to the Director: H. R. Brutsche III 5146 Kelsey Dallas, Texas 75229 Facsimile: (214) 363-4113 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. (e) SUCCESSORS AND ASSIGNS. (1) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Director and the Director's legal representatives. This Agreement is personal to the Director and without the prior written consent of the Company shall not be assignable by the Director otherwise than by will or the laws of descent and distribution. (2) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (3) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. -6- (f) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (g) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas to the extent not preempted by ERISA. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DIRECTOR: /s/ H.R. Brutsche III --------------------------------------- H. R. Brutsche III COMPANY: Vari-Lite Holdings, Inc. By:/s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President-Finance -8- EX-10.8 9 EXHIBIT 10.8 DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE HOLDINGS, INC. AND JOHN D. MAXSON This Deferred Compensation Agreement (the "Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and John D. Maxson (the "Director"). W I T N E S S E T H: WHEREAS, the Director is a member of the Board of Directors of the Company ("Board"); and WHEREAS, the Company recognizes the valuable services heretofore performed for it by the Director and wishes to encourage his continued relationship with the Company and valuable services; and WHEREAS, the Director and the Company wish to provide the terms and conditions upon which the Company will pay deferred compensation to the Director (or his beneficiary after his death) on account of the valuable services heretofore performed for the Company by the Director; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to the Director because of the key business relationship which has existed between them, the Company and the Director agree as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount of $167,000, payable in equal monthly installments on the first day of each month (the "Deferred Compensation Payments") to the Director (or, if the Director dies, to his beneficiary as provided in Section 4(a) of this Agreement) during the Term (as hereinafter defined). 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments for the period commencing on July 1, 1995, and ending June 30, 2001 (the "Term") , unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. 3. TERMINATION OF DEFERRED COMPENSATION PAYMENTS AND FORFEITURE OF RIGHTS. The Deferred Compensation Payments will cease immediately upon the occurrence of any of the events listed below in this Section 3 and all of the Director's rights and entitlements under this Agreement will be forfeited. (a) VOLUNTARY TERMINATION. Except as provided in Section 4 of this Agreement, the Deferred Compensation Payments shall terminate on the date that is the later of the date of the Director's voluntarily termination of his consulting relationship with the Company and the date of his resignation as a director of the Company. -1- (b) FOR CAUSE. The Company may terminate the Deferred Compensation Payments at any time, without any additional notice, for Cause (as hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by the Director to follow the reasonable and lawful directions of the Board in connection with the Director's duties or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board ("Executive Committee") (or, if the Director is the Chairman, another member of the Executive Committee elected by the member or members thereof other than the Director), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding the Director if he is a member of the Executive Committee), delivers a written demand to the Director for substantial performance specifically setting forth the manner in which the Executive Committee believes the Director has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) the Director's gross negligence or intentional misconduct in the performance of his duties; (iii) the Director's conviction of a felony; or (iv) the commission by the Director of any act involving embezzlement or fraud. (c) CONFIDENTIAL INFORMATION; RECORDS. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any covenant, agreement or other obligation with the Company with respect to nondisclosure of confidential information or records of the Company, whether or not such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(c) of that certain Consulting Agreement dated as of July 1, 1995, by and between the Company and the Director (the "Consulting Agreement"). (d) NONCOMPETITION AGREEMENT. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any noncompetition covenant or agreement with the Company, whether such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(d) of the Consulting Agreement. 4. CONTINUATION OF DEFERRED COMPENSATION PAYMENTS. The Deferred Compensation Payments shall continue after the termination of the Director as a director of, and consultant to, and the Company under the following circumstances: (a) DEATH. If the Director dies, the Company shall pay the Deferred Compensation Payments to the beneficiary designated by the Director. The Director shall designate a beneficiary to receive the Deferred Compensation Payments in the event of his death, which designation, including any initial designation set forth in this Agreement, may only be changed by written notice from the Director to the Company. If the Director has not designated a beneficiary to receive the Deferred Compensation Payments who is surviving on the date of his death, the Deferred Compensation Payments shall be payable to the surviving spouse, if any, of the Director and, if none, to the estate of the Director or as otherwise directed by the duly appointed personal representative of the estate of the Director. The Director hereby designates Sally Stocker Maxson as his beneficiary. -2- (b) DISABILITY. If the Director suffers a Permanent Disability (as hereinafter defined) and all of his services for the Company are terminated by reason thereof, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Permanent Disability" shall have the meaning given to it in Section 6(b) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (c) TERMINATION WITHOUT CAUSE. If the Director's consulting relationship with the Company is terminated by the Company without Cause, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. (d) CONSTRUCTIVE TERMINATION. If the Director's consulting relationship with the Company is terminated by the Director because an event of Constructive Termination (as hereinafter defined) occurs, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Constructive Termination" shall have the meaning given to it in Section 6(d) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (e) CHANGE OF CONTROL. If the Director's consulting relationship with the Company is terminated, whether by the Company or the Director, as a result of a Change of Control (as hereinafter defined), and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Change of Control" shall have the meaning given to it in Section 6(e) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. 5. DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. Subject to the terms and provisions of this Agreement, the Executive Committee (excluding the Director if he is a member of the Executive Committee) shall have the discretion to make all benefit entitlement determinations under this Agreement. All of the following references to the Director in this Section 5 shall be deemed to include the Director or his duly authorized representative. (a) CLAIMS. Any claim for the benefits under this Agreement shall be made in writing to the Company, Attention: Executive Committee. If the Claim is accepted, the Executive Committee shall provide written notice to the Director. (b) NOTICE OF DENIAL OF CLAIM. When a claim for benefits under this Agreement is denied, the Executive Committee shall provide notice to the Director in writing of the denial within 90 days after the submission of the claim. The notice shall be written in a manner calculated to be understood by the Director and shall include: (i) the specific reason or reasons for the denial; (ii) specific references to the pertinent provisions of this Agreement on which the denial is based; -3- (iii) a description of any additional material or information necessary for the Director to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedures under this Agreement as may be adopted by the Board or the Executive Committee. If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the Director before the end of the initial 90-day period, provided that in no event shall this extension exceed 90 days. (c) APPEAL OF DENIAL CLAIM. If a claim for benefits is denied or if the Director has received no response to such claim within 90 days of its submission (in which case the claim for benefits shall be deemed to have been denied), the Director, at the Director's sole expense, may appeal the denial to the Board within 60 days of the receipt of written notice of the denial or the date such claim is deemed to be denied. In pursuing such appeal the Director (i) may request in writing that the Board review the denial, (ii) may review pertinent documents and (iii) may submit issues and comments in writing. The decision on review shall be made within 60 days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the Director before the end of the original 60-day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the Director and shall include specific references to the provisions of this Agreement on which the denial is based. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review. (d) ARBITRATION. If the Director still believes that his claim has been wrongfully denied or if there is any other controversy or claim arising out of or relating to this Agreement, it shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (i) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas where the arbitration shall take place shall select the third arbitrator. (ii) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. -4- (iii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (iv) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and the Director shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (v) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (vi) The Company and the Director hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 6. GENERAL PROVISIONS. (a) STATUS OF AGREEMENT. For the purposes of ERISA, this Agreement is an unfunded arrangement, sponsored by the Company and maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company. Nothing in this Agreement should be construed to mean that this Agreement is a funded deferred compensation plan, fund, program or agreement. Furthermore, nothing in this Agreement and no action taken by the Company according to this Agreement should be construed to create a trust of any kind or a fiduciary relationship between the Company and the Director, his designated beneficiary or any other person. (b) ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire agreement between the Company and the Director concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both the parties. (c) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, or any arbitration proceeding is necessary pursuant to Section 5(d) of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (d) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt -5- requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to the Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to the Director: John D. Maxson Preston Commons West, Suite 220 8117 Preston Road Dallas, Texas 75225 Facsimile: (214) 696-2228 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. (e) SUCCESSORS AND ASSIGNS. (1) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Director and the Director's legal representatives. This Agreement is personal to the Director and without the prior written consent of the Company shall not be assignable by the Director otherwise than by will or the laws of descent and distribution. (2) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (3) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. (f) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added -6- automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (g) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas to the extent not preempted by ERISA. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DIRECTOR: /s/ John D. Maxson --------------------------------------- John D. Maxson COMPANY: Vari-Lite Holdings, Inc. By:/s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President-Finance -8- EX-10.9 10 EXHIBIT 10.9 DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE HOLDINGS, INC. AND JAMES H. CLARK, JR. This Deferred Compensation Agreement (the "Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and James H. Clark, Jr. (the "Director"). W I T N E S S E T H: WHEREAS, the Director is a member of the Board of Directors of the Company ("Board"); and WHEREAS, the Company recognizes the valuable services heretofore performed for it by the Director and wishes to encourage his continued relationship with the Company and valuable services; and WHEREAS, the Director and the Company wish to provide the terms and conditions upon which the Company will pay deferred compensation to the Director (or his beneficiary after his death) on account of the valuable services heretofore performed for the Company by the Director; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to the Director because of the key business relationship which has existed between them, the Company and the Director agree as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount of $167,000, payable in equal monthly installments on the first day of each month (the "Deferred Compensation Payments") to the Director (or, if the Director dies, to his beneficiary as provided in Section 4(a) of this Agreement) during the Term (as hereinafter defined). 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments for the period commencing on July 1, 1995, and ending June 30, 2001 (the "Term"), unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. 3. TERMINATION OF DEFERRED COMPENSATION PAYMENTS AND FORFEITURE OF RIGHTS. The Deferred Compensation Payments will cease immediately upon the occurrence of any of the events listed below in this Section 3 and all of the Director's rights and entitlements under this Agreement will be forfeited. (a) VOLUNTARY TERMINATION. Except as provided in Section 4 of this Agreement, the Deferred Compensation Payments shall terminate on the date that is the later of the date of the Director's voluntarily termination of his consulting relationship with the Company and the date of his resignation as a director of the Company. -1- (b) FOR CAUSE. The Company may terminate the Deferred Compensation Payments at any time, without any additional notice, for Cause (as hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by the Director to follow the reasonable and lawful directions of the Board in connection with the Director's duties or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board ("Executive Committee") (or, if the Director is the Chairman, another member of the Executive Committee elected by the member or members thereof other than the Director), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding the Director if he is a member of the Executive Committee), delivers a written demand to the Director for substantial performance specifically setting forth the manner in which the Executive Committee believes the Director has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) the Director's gross negligence or intentional misconduct in the performance of his duties; (iii) the Director's conviction of a felony; or (iv) the commission by the Director of any act involving embezzlement or fraud. (c) CONFIDENTIAL INFORMATION; RECORDS. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any covenant, agreement or other obligation with the Company with respect to nondisclosure of confidential information or records of the Company, whether or not such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(c) of that certain Consulting Agreement dated as of July 1, 1995, by and between the Company and the Director (the "Consulting Agreement"). (d) NONCOMPETITION AGREEMENT. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any noncompetition covenant or agreement with the Company, whether such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(d) of the Consulting Agreement. 4. CONTINUATION OF DEFERRED COMPENSATION PAYMENTS. The Deferred Compensation Payments shall continue after the termination of the Director as a director of, and consultant to, and the Company under the following circumstances: (a) DEATH. If the Director dies, the Company shall pay the Deferred Compensation Payments to the beneficiary designated by the Director. The Director shall designate a beneficiary to receive the Deferred Compensation Payments in the event of his death, which designation, including any initial designation set forth in this Agreement, may only be changed by written notice from the Director to the Company. If the Director has not designated a beneficiary to receive the Deferred Compensation Payments who is surviving on the date of his death, the Deferred Compensation Payments shall be payable to the surviving spouse, if any, of the Director and, if none, to the estate of the Director or as otherwise directed by the duly appointed personal representative of the estate of the Director. The Director hereby designates Carolyn Levy Clark as his beneficiary. -2- (b) DISABILITY. If the Director suffers a Permanent Disability (as hereinafter defined) and all of his services for the Company are terminated by reason thereof, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Permanent Disability" shall have the meaning given to it in Section 6(b) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (c) TERMINATION WITHOUT CAUSE. If the Director's consulting relationship with the Company is terminated by the Company without Cause, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. (d) CONSTRUCTIVE TERMINATION. If the Director's consulting relationship with the Company is terminated by the Director because an event of Constructive Termination (as hereinafter defined) occurs, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Constructive Termination" shall have the meaning given to it in Section 6(d) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (e) CHANGE OF CONTROL. If the Director's consulting relationship with the Company is terminated, whether by the Company or the Director, as a result of a Change of Control (as hereinafter defined), and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Change of Control" shall have the meaning given to it in Section 6(e) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. 5. DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. Subject to the terms and provisions of this Agreement, the Executive Committee (excluding the Director if he is a member of the Executive Committee) shall have the discretion to make all benefit entitlement determinations under this Agreement. All of the following references to the Director in this Section 5 shall be deemed to include the Director or his duly authorized representative. (a) CLAIMS. Any claim for the benefits under this Agreement shall be made in writing to the Company, Attention: Executive Committee. If the Claim is accepted, the Executive Committee shall provide written notice to the Director. (b) NOTICE OF DENIAL OF CLAIM. When a claim for benefits under this Agreement is denied, the Executive Committee shall provide notice to the Director in writing of the denial within 90 days after the submission of the claim. The notice shall be written in a manner calculated to be understood by the Director and shall include: (i) the specific reason or reasons for the denial; (ii) specific references to the pertinent provisions of this Agreement on which the denial is based; -3- (iii) a description of any additional material or information necessary for the Director to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedures under this Agreement as may be adopted by the Board or the Executive Committee. If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the Director before the end of the initial 90-day period, provided that in no event shall this extension exceed 90 days. (c) APPEAL OF DENIAL CLAIM. If a claim for benefits is denied or if the Director has received no response to such claim within 90 days of its submission (in which case the claim for benefits shall be deemed to have been denied), the Director, at the Director's sole expense, may appeal the denial to the Board within 60 days of the receipt of written notice of the denial or the date such claim is deemed to be denied. In pursuing such appeal the Director (i) may request in writing that the Board review the denial, (ii) may review pertinent documents and (iii) may submit issues and comments in writing. The decision on review shall be made within 60 days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the Director before the end of the original 60-day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the Director and shall include specific references to the provisions of this Agreement on which the denial is based. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review. (d) ARBITRATION. If the Director still believes that his claim has been wrongfully denied or if there is any other controversy or claim arising out of or relating to this Agreement, it shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (i) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas where the arbitration shall take place shall select the third arbitrator. (ii) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. -4- (iii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (iv) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and the Director shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (v) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (vi) The Company and the Director hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 6. GENERAL PROVISIONS. (a) STATUS OF AGREEMENT. For the purposes of ERISA, this Agreement is an unfunded arrangement, sponsored by the Company and maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company. Nothing in this Agreement should be construed to mean that this Agreement is a funded deferred compensation plan, fund, program or agreement. Furthermore, nothing in this Agreement and no action taken by the Company according to this Agreement should be construed to create a trust of any kind or a fiduciary relationship between the Company and the Director, his designated beneficiary or any other person. (b) ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire agreement between the Company and the Director concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both the parties. (c) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, or any arbitration proceeding is necessary pursuant to Section 5(d) of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (d) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt -5- requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to the Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to the Director: James H. Clark, Jr. Preston Commons West, Suite 220 8117 Preston Road Dallas, Texas 75225 Facsimile: (214) 696-2228 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. (e) SUCCESSORS AND ASSIGNS. (1) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Director and the Director's legal representatives. This Agreement is personal to the Director and without the prior written consent of the Company shall not be assignable by the Director otherwise than by will or the laws of descent and distribution. (2) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (3) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. (f) PARTIAL INVALIDITY AND SEVERABILITY. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added -6- automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (g) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas to the extent not preempted by ERISA. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DIRECTOR: /s/ James H. Clark, Jr. ------------------------------------ James H. Clark, Jr. COMPANY: Vari-Lite Holdings, Inc. By: /s/ Michael P. Herman --------------------------------- Michael P. Herman Vice President-Finance -8- EX-10.11 11 EXHIBIT 10.11 COMPENSATION CONTINUATION AGREEMENT This Compensation Continuation Agreement, dated as of March 31, 1994, is by and among Vari-Lite Holdings, Inc., a Texas corporation ("VLH"), Vari-Lite, Inc., a Delaware corporation ("VLI"), Showco, Inc., a Delaware corporation ("Showco"), and H.R. Brutsche III ("Brutsche"). W I T N E S S E T H: WHEREAS, VLH, Clark Partnership, Ltd., Brutsche, John D. Maxson ("Maxson") and James H. Clark, Jr. ("Clark"), and the spouses of Brutsche, Maxson and Clark, have entered into that certain Voting Trust and Shareholders' Agreement (the "Voting Trust") of even date herewith to provide for continuity in the life, management and progress of VLH by restricting the transfer of shares of Class A Common Stock, $0.10 par value ("Class A Shares"), and establishing a voting trust with respect to the Class A Shares; and WHEREAS, pursuant to Section 7.3 of the Voting Trust VLH agreed to adopt, and to use its best efforts to cause those subsidiaries that now, or in the future may, pay any cash compensation, including, but not limited to salary, bonus and consulting fees, to Brutsche, Maxson and/or Clark to each adopt, a compensation continuation agreement; and WHEREAS, the parties hereto desire to enter into this Agreement to provide for the continuation of compensation payments to the estate of Brutsche upon his death as herein provided; NOW, THEREFORE, in consideration of the mutual promises, conditions and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. COMPENSATION CONTINUATION. Each of VLH, VLI and/or Showco, as the case may be, shall, for a period of 60 days after the date of the death of Brutsche, continue to pay to Brutsche's estate cash compensation (including without limitation salary, bonus and consulting fees) in a monthly amount equal to one-twelfth of all cash compensation (including without limitation salary, bonus and consulting fees) paid or payable to Brutsche on an annualized basis immediately preceding his death. Notwithstanding the foregoing, if the proceeds from any life insurance policy purchased by VLH, VLI and/or Showco, as the case may be, for the benefit of Brutsche and in effect upon the date of his death have not been paid within 60 days after the date of his death, VLH, VLI and/or Showco, as the case may be, shall continue to make such compensation payments as herein provided until the date such life insurance proceeds are paid in full (provided that in no event shall such payments continue for more than one year after the date of his death). Any payments required under this Agreement shall be made in accordance with the general payroll practices of VLH, VLI and/or Showco, as the case may be, in effect at the time such payment is made, but in no event less frequently than monthly. 2. MISCELLANEOUS. (a) AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. (b) BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable by any party hereto, without the express prior written consent of the other parties hereto; provided, however, that nothing contained herein shall be deemed to impair the right of any party hereto to consummate any merger or other corporate reorganization transaction provided that the resulting, surviving or acquiring entity assumes the obligations of said party hereunder by a written instrument reasonably satisfactory to the other parties hereto or by operation of law. (c) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties and any of them relating to such subject matter. (d) GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas, without regard to the principles of conflicts of laws thereof. (e) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. (f) SEVERABILITY. If any provision of this Agreement should be held illegal, invalid or unenforceable, such provision shall be fully severable herefrom, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were never a part hereof; the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom; and in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision, as may be possible and be legal, valid and enforceable. (g) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Vari-Lite Holdings, Inc., By: /s/ Michael P. Herman ------------------------------------------- Michael P. Herman, Vice President - Finance Vari-Lite, Inc., By: /s/ Michael P. Herman ------------------------------------------- Michael P. Herman, Vice President - Finance Showco, Inc., By: /s/ Michael P. Herman ------------------------------------------- Michael P. Herman, Vice President - Finance /s/ H.R. Brutsche III ----------------------------------------------- H.R. Brutsche III 3 EX-10.12 12 EXHIBIT 10.12 COMPENSATION CONTINUATION AGREEMENT This Compensation Continuation Agreement, dated as of March 31, 1994, is by and among Vari-Lite Holdings, Inc., a Texas corporation ("VLH"), Vari-Lite, Inc., a Delaware corporation ("VLI"), Showco, Inc., a Delaware corporation ("Showco"), and John D. Maxson ("Maxson"). W I T N E S S E T H: WHEREAS, VLH, Clark Partnership, Ltd., H.R. Brutsche III ("Brutsche"), Maxson and James H. Clark, Jr. ("Clark"), and the spouses of Brutsche, Maxson and Clark, have entered into that certain Voting Trust and Shareholders' Agreement (the "Voting Trust") of even date herewith to provide for continuity in the life, management and progress of VLH by restricting the transfer of shares of Class A Common Stock, $0.10 par value ("Class A Shares"), and establishing a voting trust with respect to the Class A Shares; and WHEREAS, pursuant to Section 7.3 of the Voting Trust VLH agreed to adopt, and to use its best efforts to cause those subsidiaries that now, or in the future may, pay any cash compensation, including, but not limited to salary, bonus and consulting fees, to Brutsche, Maxson and/or Clark to each adopt, a compensation continuation agreement; and WHEREAS, the parties hereto desire to enter into this Agreement to provide for the continuation of compensation payments to the estate of Maxson upon his death as herein provided; NOW, THEREFORE, in consideration of the mutual promises, conditions and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. COMPENSATION CONTINUATION. Each of VLH, VLI and/or Showco, as the case may be, shall, for a period of 60 days after the date of the death of Maxson, continue to pay to Maxson's estate cash compensation (including without limitation salary, bonus and consulting fees) in a monthly amount equal to one-twelfth of all cash compensation (including without limitation salary, bonus and consulting fees) paid or payable to Maxson on an annualized basis immediately preceding his death. Notwithstanding the foregoing, if the proceeds from any life insurance policy purchased by VLH, VLI and/or Showco, as the case may be, for the benefit of Maxson and in effect upon the date of his death have not been paid within 60 days after the date of his death, VLH, VLI and/or Showco, as the case may be, shall continue to make such compensation payments as herein provided until the date such life insurance proceeds are paid in full (provided that in no event shall such payments continue for more than one year after the date of his death). Any payments required under this Agreement shall be made in accordance with the general payroll practices of VLH, VLI and/or Showco, as the case may be, in effect at the time such payment is made, but in no event less frequently than monthly. 2. MISCELLANEOUS. (a) AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. (b) BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable by any party hereto, without the express prior written consent of the other parties hereto; provided, however, that nothing contained herein shall be deemed to impair the right of any party hereto to consummate any merger or other corporate reorganization transaction provided that the resulting, surviving or acquiring entity assumes the obligations of said party hereunder by a written instrument reasonably satisfactory to the other parties hereto or by operation of law. (c) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties and any of them relating to such subject matter. (d) GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas, without regard to the principles of conflicts of laws thereof. (e) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. (f) SEVERABILITY. If any provision of this Agreement should be held illegal, invalid or unenforceable, such provision shall be fully severable herefrom, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were never a part hereof; the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom; and in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision, as may be possible and be legal, valid and enforceable. (g) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Vari-Lite Holdings, Inc., By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman, Vice President - Finance Vari-Lite, Inc., By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman, Vice President - Finance Showco, Inc., By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman, Vice President - Finance /s/ John D. Maxson ----------------------------------- John D. Maxson 3 EX-10.13 13 EXHIBIT 10.13 COMPENSATION CONTINUATION AGREEMENT This Compensation Continuation Agreement, dated as of March 31, 1994, is by and among Vari-Lite Holdings, Inc., a Texas corporation ("VLH"), Vari-Lite, Inc., a Delaware corporation ("VLI"), Showco, Inc., a Delaware corporation ("Showco"), and James H. Clark, Jr. ("Clark"). W I T N E S S E T H: WHEREAS, VLH, Clark Partnership, Ltd., H.R. Brutsche III ("Brutsche"), John D. Maxson ("Maxson") and Clark, and the spouses of Brutsche, Maxson and Clark, have entered into that certain Voting Trust and Shareholders' Agreement (the "Voting Trust") of even date herewith to provide for continuity in the life, management and progress of VLH by restricting the transfer of shares of Class A Common Stock, $0.10 par value ("Class A Shares"), and establishing a voting trust with respect to the Class A Shares; and WHEREAS, pursuant to Section 7.3 of the Voting Trust VLH agreed to adopt, and to use its best efforts to cause those subsidiaries that now, or in the future may, pay any cash compensation, including, but not limited to salary, bonus and consulting fees, to Brutsch , Maxson and/or Clark to each adopt, a compensation continuation agreement; and WHEREAS, the parties hereto desire to enter into this Agreement to provide for the continuation of compensation payments to the estate of Clark upon his death as herein provided; NOW, THEREFORE, in consideration of the mutual promises, conditions and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. COMPENSATION CONTINUATION. Each of VLH, VLI and/or Showco, as the case may be, shall, for a period of 60 days after the date of the death of Clark, continue to pay to Clark's estate cash compensation (including without limitation salary, bonus and consulting fees) in a monthly amount equal to one-twelfth of all cash compensation (including without limitation salary, bonus and consulting fees) paid or payable to Clark on an annualized basis immediately preceding his death. Notwithstanding the foregoing, if the proceeds from any life insurance policy purchased by VLH, VLI and/or Showco, as the case may be, for the benefit of Clark and in effect upon the date of his death have not been paid within 60 days after the date of his death, VLH, VLI and/or Showco, as the case may be, shall continue to make such compensation payments as herein provided until the date such life insurance proceeds are paid in full (provided that in no event shall such payments continue for more than one year after the date of his death). Any payments required under this Agreement shall be made in accordance with the general payroll practices of VLH, VLI and/or Showco, as the case may be, in effect at the time such payment is made, but in no event less frequently than monthly. 2. MISCELLANEOUS. (a) AMENDMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all parties hereto. (b) BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assignable by any party hereto, without the express prior written consent of the other parties hereto; provided, however, that nothing contained herein shall be deemed to impair the right of any party hereto to consummate any merger or other corporate reorganization transaction provided that the resulting, surviving or acquiring entity assumes the obligations of said party hereunder by a written instrument reasonably satisfactory to the other parties hereto or by operation of law. (c) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties and any of them relating to such subject matter. (d) GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas, without regard to the principles of conflicts of laws thereof. (e) HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. (f) SEVERABILITY. If any provision of this Agreement should be held illegal, invalid or unenforceable, such provision shall be fully severable herefrom, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were never a part hereof; the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom; and in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision, as may be possible and be legal, valid and enforceable. (g) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE] 2 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Vari-Lite Holdings, Inc., By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman, Vice President - Finance Vari-Lite, Inc., By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman, Vice President - Finance Showco, Inc., By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman, Vice President - Finance /s/ James H. Clark, Jr. --------------------------------------- James H. Clark, Jr. 3 EX-10.14 14 EXHIBIT 10.14 STATEMENT OF TERMS OF EMPLOYMENT 1. NAME OF EMPLOYER: VARI-LITE EUROPE LTD. ("Employer") 2. NAME OF EMPLOYEE: BRIAN LESLIE CROFT ("Employee") This is a written statement of the Terms of Employment given under Section 1 of the Employment Protection (Consolidation) Act 1978. 3. PLACE OF WORK: 3.1 Your place of work is 20/22 Fairway Drive, Greenford. 4. DATE OF COMMENCEMENT OF EMPLOYMENT: 4.1. The Employee's employment under this Agreement starts on 1ST APRIL 1994 and his period of continuous employment with the Employer and any previous employer started on 1ST MAY 1973. 5. JOB TITLE: 5.1. MANAGING DIRECTOR 6. NORMAL HOURS OF WORK: The normal weekly hours of work are 40 hours. You will be expected to work such hours as may be required in excess of the normal hours to carry out your duties and responsibilities to the satisfaction of the Company. No payment will be made for such additional hours. 7. REMUNERATION: 7.1. The Employee's yearly pay at the date of this statement is 58,000.00 and any changes will be notified in writing. The Employee will be paid on the 28th day of each month. The Employer has the right to pay all salaries and wages by direct transfer to the Employee's Bank or Building Society Account, particulars of which must be supplied to the Employer on request. 7.2. If the Employee is for any reason indebted to the Employer for any amount, the Employer shall be entitled to make a deduction in or towards the discharge of that liability from the Employee's remuneration or any other money payable from the Employer to the Employee. 7.3. The Employee's salary will be reviewed annually. 8. PENSIONS: 8.1. The Employer operates a pension scheme. If the Employee is eligible for membership, the Employee may become and remain a member of it on the signing of this Agreement. The Employee may also join at a later date at the discretion of the Trustees. 8.2. Neither the existence of this, nor any other scheme, nor the provisions contained in it form part of any contract between the Employer and any of its employees. Any benefits arising under or in respect of the pension scheme will be payable by or under the authority of its trustees or provider and are not guaranteed or warranted by the Employer. 9. ABSENCES AND ILLNESS: 9.1. The Employer has the right to suspend any employee from work on medical grounds if to continue work would involve a risk to health or safety or an infringement of any law or code of practice relating to health and safety. 9.2. The Employee must notify the Employer on the first day of each absence from work and give the reason for, and expected duration of, the Employee's absence and also: i) complete and sign a self certification of absence document as soon as is practicable and in any event not later than the Employee's return to work; ii) send to the Employer a Certificate of Disability by a registered medical practitioner at the end of seven days from the start of the Employee's absence and a further Certificate in each week of absence; and iii) (where the absence is for some reason other than illness or injury) supply such evidence about the absence and its cause as the Employer from time to time reasonably requires. 9.4. The days which are qualifying days for the purpose of Section 154 of the Social Security Contributions and Benefits Act 1992 are Monday to Friday of every week. 9.5. After the Employee's probation period, normal basic pay (less the amount of any statutory sick pay and any other sickness or invalidity benefits to which the Employee is entitled, whether or not claimed and paid) will be paid to the Employee in accordance with the following table: Length of Service Period of Sick Pay - ----------------- ------------------ Full Pay Half Pay -------- -------- 0 to 6 months 1 week 1 week 6 to 12 months 2 weeks 2 weeks 12 to 24 months 4 weeks 4 weeks 24 to 36 months 6 weeks 6 weeks The Employee shall be paid 1 week at full pay and 1 week at half pay for each full year employment over 3 years subject to a maximum of 26 weeks. The Employer may at its discretion extend the period of paid sick leave in any individual case if -2- there are special reasons to do so. 9.6. The Employer reserves the right to terminate the Employee's employment without further notice at any time after the entitlement to sick pay has ceased (or earlier if necessary for the conduct of its business) but except in special circumstances will not do so without consultation with the Employee and the Employee's medical advisers. 9.7. The Employer shall not terminate the Employee's employment whilst he is in receipt of income payable under a policy effected under Clause 14 if it is a term of the policy or the pension scheme that the Employee remains an Employee of the Employer but the Employer shall not be bound to pay or provide any remuneration of benefits except those paid or provided through any insurance effected under Clause 14 and the Employee shall not have any normal hours of work. 10. HOLIDAYS: 10.1. The holiday year is from 1st April to 31st March. In a full holiday year you will be entitled to 25 days paid annual holiday, this will accrue at the rate of 2.1 days holiday entitlement per complete calendar month of service. 10.2. The Employee is entitled to take the following paid Public Holidays - New Years Day, Good Friday, Easter Monday, May Day, Spring Bank Holiday, Late Summer Holiday, Christmas Day, Boxing Day and any further Public Holidays granted thereafter. 10.3. In order that Senior Management cover is maintained the Employee should notify the Administration Manager of Vari-Lite Europe Holdings Ltd responsible for the Company as early as possible of your intended holiday arrangements. 10.4. If the Employee's pay is calculated on a monthly or annual basis and is paid monthly, the Employee shall be paid his or her usual remuneration on the usual dates of payment during each period in which any paid holiday is taken. 10.5. Holiday time cannot be carried forward from one holiday year to another and no payment shall be made to the Employee at the end of any holiday year if the Employee's holiday entitlement for that year has not been taken. 10.6. If and when the Employee's employment is terminated and a number of days of annual holiday which the Employee has taken in the relevant year differs from the entitlement, then a payment with the number of days difference will be either paid to the Employee or refunded to the Employer depending on whether the amount actually taken is less or greater than the entitlement. The amount paid will be the number of days difference multiplied by the daily equivalent of the Employee's annual basis salary, on the basis of 260 days per year. 10.7. The Employee will not be entitled to a payment under Clause 12 if the Employer is entitled to and does terminate the Employee's employment summarily or if the Employee refuses to take any holiday entitlement during the Employee's notice period. 10.8. If in addition to the Employee's holiday entitlement the Employee requires additional holiday leave for compassionate or other good reasons, the Employee should apply to the Employer who -3- may at its discretion authorize additional leave, which in exceptional circumstances may be paid. 11. NOTICE OF TERMINATION: 11.1. After the probationary period the Employee's employment may be ended by prior notice for the following periods: By the Employee: 12 months minimum period of notice. By the Employer: 12 months period of notice. 11.2. The Employee's normal retirement age is 65 years (unless varied by prior consultation) and accordingly the Employee's employment (unless terminated) will end automatically on the last day of the month in which the Employee attains that age. 11.3. The Employee's employment shall not continue at any time after it has been terminated by the Employer notwithstanding that the termination is without prior notice or by shorter notice than provided for in this Agreement. 11.4. No employment with a previous employer counts as part of a continuous period of the Employee's employment with the Employer unless it is shown in 4.1. 12. LIFE ASSURANCE: The Employee's life will be assured at 4 times the Employee's pensionable salary with effect from the date the Employee joins the Employer. Should the Employee die whilst in the Employer's service, a sum equivalent to the above can be paid to the persons stated on a Nomination Form signed by the Employee. However, the application of any due sums is at the complete discretion of the Trustees. 13. PRIVATE MEDICAL INSURANCE: The Employer will pay the annual subscription to BUPA or some other private medical insurance company for the Employee, the Employee's spouse and any unmarried children of the Employee who are under the age of 18 years. 14. Permanent Health Insurance: The Employer shall effect and maintain in respect of the Employee a policy in accordance with the Employer's practice from time to time in force for the provision of an income equal to not less than 2/3 of the salary payable under Clause 7 and pension contributions payable from the date on which sick pay under Clause 9 ceases to be payable of a pre tax amount if the Employee becomes incapacitated for a period extending beyond that date. 15. MOTOR CAR: 15.1. The Employer shall provide a motor car, approved by the Employer, and to the maximum rental value as specified in the Employer's Policy No. 001 - Company Cars. This motor car will be replaced after a 3/4 year contract hire period. The Employer shall pay or reimburse to the -4- Employee all expenses in connection with taxing, insurance, maintenance and running of the car including the cost of petrol or diesel oil and shall permit the Employee to use the car for private use. 15.2. While the Employee has the use of the car provided by the Employer, the Employee shall: i) take good care of the motor vehicle whilst it is in the Employee's custody and ensure so far as the Employee is able to do so that it is kept in good and undamaged condition, fair wear and tear only excepted; ii) observe all the provisions of any insurance policy from time to time relating to the motor car; iii) arrange at the Employee's own expense any additional insurance required because of the Employee's individual circumstances; iv) not take the motor car out of the U.K. without the Employer's written consent; v) return the motor car to the Employer on demand during any period in which the Employee is absent from work for any reason except agreed holidays; vi) at the termination of the Employee's agreement and on the Employee's disqualification from driving to return to the Employer the motor car and its keys and any documents relating to it. 15.3. The Employee shall whenever requested permit the Employer to examine the Employee's driving license. 16. DISCIPLINARY RULES: TERMINATION FOR BREACH. 1. The Employer may terminate this Agreement immediately and without liability for compensation for damages if the Employee commits any serious or persistent breach of its provisions or is guilty of any grave misconduct or willful neglect in the discharge of his duties under this Agreement. 2. The Employer shall have the right (in addition to any other rights which it has at law) to terminate this Agreement immediately and without liability for compensation or damages on the happening of any of the following events if: (i) The Employee is guilty of an act which brings the Employer into disrepute or which in the Employer's reasonable opinion is prejudicial to its interests. (ii) The Employee becomes bankrupt, has a Receiving Order made against him, makes an arrangement with his creditors generally or takes or suffers any similar action as a result of a debt. (iii) The Employee is convicted of any criminal offense other than an offense which in the reasonable opinion of the Employer does not affect his relation to the Employer under the Agreement. (iv) The Employee becomes prohibited in law from holding the office of Director. -5- 3. GRIEVANCES: If the Employee has any grievance relating to his employment he should raise it orally or in writing with the Employer's Board of Directors to whom he is responsible who at their discretion after consultation with the Employee may take such steps as they think fit with a view to settling the grievance. The Employee must answer (in writing if so requested) all questions put to him on the matter by any member of the Board before its decision is reached. The decision of the Board on the matter should be final. 17. HEALTH SCREENING: It is a condition of employment that you will undergo a medical examination at the Company's expense and at the Company's request, if the Company considers your health is affecting your job performance. 18. Confidential Information: 18.1. "Confidential Information" means all confidential information relating to the organization, finances, processes, specifications, methods, designs, formulae, technology and business activities of and concerning the Employer and its customers and suppliers. 18.2. Except as authorized or required by the Employee's duties, the Employee shall keep secret and shall not use or disclose and should use their best endeavors to prevent the use or disclosure by or to any person of any of the confidential information which come to the Employee's knowledge during their Employment. 18.3. The restriction in 18.2 should apply during and after the termination of the Employee's employment without any time limit and shall cease to apply to information or knowledge which the Employees establishes has, in its entirety, become public knowledge otherwise than through any unauthorized disclosure or other breach on the Employee's part of that restriction. 18.4. All records in any medium (whether written, computer readable or otherwise) including accounts, documents, drawings and private notes about the Employer and all copies and extracts of them made or acquired by the Employee in the course of the Employee's employment shall be: i) The property of the Employer. ii) Used for the purposes of the Employer only. iii) Returned to the Employer at any time on demand. iv) Returned to the Employer without demand on the termination of the Employee's employment. 18.5. Any discovery or invention or secret process or improvement in procedure made or discovered by the Employee, whilst in the service of the Employer, in connection with or in any way affecting or relating to the business of the Employer or of any of its affiliated Companies or capable of being used or adapted for use therein or in connection therewith, shall forthwith be disclosed to the Employer and shall belong to and be the absolute property of the Employer and -6- or such of its affiliated Companies as the Company may nominate for the purpose. 19. COMPETITION: References to the Employers, customers, clients, agents, suppliers, advisers, employers and directors means those at the date of termination and during the two years immediately before it. 19.1. The Employee shall not for the period of twelve months after termination of his employment solicit or transact business in competition with the Employer from or with any of the Employer's customers, clients, agents, suppliers or advisers. 19.2. The Employee shall not for the period of twelve months after termination of his employment encourage or assist any of the Employers other Employees or Directors to leave its service or to do anything which, if done by the Employee, would be a breach of this agreement. 19.3. The Employee shall not at any time after the termination of his employment under this agreement represent himself as being interested or employed or in any way connected with the Employer or its business. 19.5. Each of the restrictions in this clause are separate restrictions for the separate benefit of the Employer and each associated company and shall be severable one from the other. 19.6. The restrictions in this clause shall apply and remain in force notwithstanding that the Employee establishes that his employment was terminated unfairly or on the grounds of redundancy (both within the meaning of the 1978 Act) or as a result of a breach by the Employer of the terms of this agreement. 20. PROCEDURE DOCUMENTS AND POLICY: Copies of the Employer's disciplinary rules, grievance procedure and health and safety policy are kept in the Personnel Department and all employees upon request shall be given a copy of them or an opportunity to read them. /s/ Barbara Joynson June 21, 1995 - ----------------------------- --------------- Administration Manager Date Vari-Lite Europe Ltd. /s/ Brian Croft June 21, 1995 - ----------------------------- --------------- Employee Date -7- EX-10.21 15 EXHIBIT 10.21 - ----------------------------------------------------------------- VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN - ----------------------------------------------------------------- TABLE OF CONTENTS Table of Contents. . . . . . . . . . . . . . . . . . . . . . . .i Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii Alphabetical Listing of Definitions. . . . . . . . . . . . . .vii Employee Stock Ownership Plan. . . . . . . . . . . . . . . . . .1 ARTICLE I: DEFINITIONS. . . . . . . . . . . . . . . . . . . . .2 ARTICLE II: EMPLOYEE PARTICIPANTS . . . . . . . . . . . . . . 19 ARTICLE III: EMPLOYER CONTRIBUTIONS AND PARTICIPANT FORFEITURES . . . . . . . . . . . . . . . . . . 22 ARTICLE IV: PARTICIPANT CONTRIBUTIONS . . . . . . . . . . . . 38 ARTICLE V: TERMINATION OF SERVICE - PARTICIPANT VESTING . . . 40 ARTICLE VI: TIME AND METHOD OF PAYMENT OF BENEFITS. . . . . . 46 ARTICLE VII: EMPLOYER ADMINISTRATIVE PROVISIONS . . . . . . . 57 ARTICLE VIII: PARTICIPANT ADMINISTRATIVE PROVISIONS . . . . . 59 ARTICLE IX: ESOP COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS . . . . . . . . . . . . . 64 ARTICLE X: REPURCHASE OF EMPLOYER SECURITIES. . . . . . . . . 69 ARTICLE XI: PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY. . . . . . . . . . . . . . . . . . . . . 73 ARTICLE XII: MISCELLANEOUS. . . . . . . . . . . . . . . . . . 76 ARTICLE XIII: EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION . . . 81 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE i INDEX ARTICLE I: DEFINITIONS Sec. 1.01. Plan . . . . . . . . . . . . . . . . . . . .2 Sec. 1.02. Employer . . . . . . . . . . . . . . . . . .2 Sec. 1.03. Trustee. . . . . . . . . . . . . . . . . . .2 Sec. 1.04. Plan Administrator . . . . . . . . . . . . .2 Sec. 1.05. ESOP Committee . . . . . . . . . . . . . . .2 Sec. 1.06. Employee . . . . . . . . . . . . . . . . . .2 Sec. 1.07. Highly Compensated Employee. . . . . . . . .2 Sec. 1.08. Participant. . . . . . . . . . . . . . . . .4 Sec. 1.09. Beneficiary. . . . . . . . . . . . . . . . .4 Sec. 1.10. Compensation . . . . . . . . . . . . . . . .4 Sec. 1.11. Account. . . . . . . . . . . . . . . . . . .6 Sec. 1.12. Accrued Benefit. . . . . . . . . . . . . . .6 Sec. 1.13. Nonforfeitable . . . . . . . . . . . . . . .6 Sec. 1.14. Plan Year. . . . . . . . . . . . . . . . . .6 Sec. 1.15. Effective Date . . . . . . . . . . . . . . .6 Sec. 1.16. Plan Entry Date. . . . . . . . . . . . . . .6 Sec. 1.17. Accounting Date. . . . . . . . . . . . . . .6 Sec. 1.18. Trust. . . . . . . . . . . . . . . . . . . .6 Sec. 1.19. Trust Fund . . . . . . . . . . . . . . . . .6 Sec. 1.20. Nontransferable Annuity. . . . . . . . . . .6 Sec. 1.21. ERISA. . . . . . . . . . . . . . . . . . . .7 Sec. 1.22. Code . . . . . . . . . . . . . . . . . . . .7 Sec. 1.23. Service. . . . . . . . . . . . . . . . . . .7 Sec. 1.24. Hour of Service. . . . . . . . . . . . . . .7 Sec. 1.25. Disability . . . . . . . . . . . . . . . . .8 Sec. 1.26. Service for Predecessor Employer . . . . . .8 Sec. 1.27. Related Employers. . . . . . . . . . . . . .9 Sec. 1.28. Leased Employees . . . . . . . . . . . . . .9 Sec. 1.29. Determination of Top Heavy Status. . . . . .9 Sec. 1.30. Disqualified Person. . . . . . . . . . . . 12 Sec. 1.31. Employer Securities. . . . . . . . . . . . 14 Sec. 1.32. Separation from Service. . . . . . . . . . 14 Sec. 1.33. Alternate Payee. . . . . . . . . . . . . . 14 Sec. 1.34. Board of Directors . . . . . . . . . . . . 14 Sec. 1.35. Income of the Trust Fund . . . . . . . . . 14 Sec. 1.36. Participant Employer Securities Account. . 14 Sec. 1.37. Rollover Account . . . . . . . . . . . . . 14 Sec. 1.38. Severance Date . . . . . . . . . . . . . . 14 Sec. 1.39. Valuation Date . . . . . . . . . . . . . . 14 Sec. 1.40. Qualified Participant. . . . . . . . . . . 14 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE ii Sec. 1.41. Qualified Election Period. . . . . . . . . 15 Sec. 1.42. Retirement . . . . . . . . . . . . . . . . 15 Sec. 1.43. Participation of Other Employers . . . . . 15 Sec. 1.44. Ineligible Employee. . . . . . . . . . . . 15 Sec. 1.45. Late Retirement Date . . . . . . . . . . . 15 Sec. 1.46. Company. . . . . . . . . . . . . . . . . . 15 Sec. 1.47. Eligible Rollover Distribution . . . . . . 16 Sec. 1.48. Eligible Retirement Plan . . . . . . . . . 16 Sec. 1.49. Distributee. . . . . . . . . . . . . . . . 16 Sec. 1.50. Direct Rollover. . . . . . . . . . . . . . 16 Sec. 1.51. Eligible Employee. . . . . . . . . . . . . 16 Sec. 1.52. Forfeiture . . . . . . . . . . . . . . . . 16 Sec. 1.53. Vested . . . . . . . . . . . . . . . . . . 16 Sec. 1.54. Aggregate Account. . . . . . . . . . . . . 16 Sec. 1.55. Fiduciary. . . . . . . . . . . . . . . . . 17 Sec. 1.56. Former Participant . . . . . . . . . . . . 17 Sec. 1.57. Investment Manager . . . . . . . . . . . . 17 Sec. 1.58. Participant's Account. . . . . . . . . . . 17 Sec. 1.59. Retired Participant. . . . . . . . . . . . 17 Sec. 1.60. Retirement Date. . . . . . . . . . . . . . 17 Sec. 1.61. Terminated Participant . . . . . . . . . . 17 Sec. 1.62. Net Profits. . . . . . . . . . . . . . . . 17 Sec. 1.63. Self-Employed Individual . . . . . . . . . 17 Sec. 1.64. Normal Retirement. . . . . . . . . . . . . 18 Sec. 1.65. Annuity Starting Date. . . . . . . . . . . 18 Sec. 1.66. Inactive Participant . . . . . . . . . . . 18 Sec. 1.67. Elective Contributions . . . . . . . . . . 18 Sec. 1.68. ACP. . . . . . . . . . . . . . . . . . . . 18 ARTICLE II: EMPLOYEE PARTICIPANTS Sec. 2.01. Participation. . . . . . . . . . . . . . . 19 Sec. 2.02. Year of Service - Participation. . . . . . 19 Sec. 2.03. Break in Service - Participation . . . . . 19 Sec. 2.04. Participation upon Re-Employment . . . . . 19 Sec. 2.05. Ineligibility to Become a Participant. . . 19 Sec. 2.06. Continuance as a Participant . . . . . . . 20 Sec. 2.07. Employment by Employer; Service with Newly Acquired Entities; Records of Employer. . 20 Sec. 2.08. Election Not to Participate. . . . . . . . 21 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE iii ARTICLE III: EMPLOYER CONTRIBUTIONS AND PARTICIPANT FORFEITURES Sec. 3.01. Amount . . . . . . . . . . . . . . . . . . 22 Sec. 3.02. Determination of Contribution. . . . . . . 22 Sec. 3.03. Time of Payment of Contribution. . . . . . 22 Sec. 3.04. Allocations. . . . . . . . . . . . . . . . 23 Sec. 3.05. Forfeitures. . . . . . . . . . . . . . . . 25 Sec. 3.06. Accrual of Benefit . . . . . . . . . . . . 26 Sec. 3.07. Limitations on Allocations to Participants' Accounts. . . . . . . . . . . . . . . . . 27 Sec. 3.08. Definitions - Article III. . . . . . . . . 29 Sec. 3.09. Nondiscrimination Rules for Employer Matching Contributions and Employee Contributions . . . . . . . . . . . . . . 32 Sec. 3.10. Definitions. . . . . . . . . . . . . . . . 35 ARTICLE IV: PARTICIPANT CONTRIBUTIONS Sec. 4.01. Participant Voluntary Contributions. . . . 38 Sec. 4.02. Participant Voluntary Contributions - Special Discrimination Test . . . . . . . 38 Sec. 4.03. Participant Rollover Contributions . . . . 38 ARTICLE V: TERMINATION OF SERVICE - PARTICIPANT VESTING Sec. 5.01. Normal Retirement Age. . . . . . . . . . . 40 Sec. 5.02. Participant Disability or Death. . . . . . 40 Sec. 5.03. Vesting Schedule . . . . . . . . . . . . . 40 Sec. 5.04. Cash-out Distributions to Partially-Vested Participants and Restoration of Forfeited Accrued Benefit . . . . . . . . . . . . . 41 Sec. 5.05. Segregated Account for Repaid Amount . . . 43 Sec. 5.06. Year of Service - Vesting. . . . . . . . . 43 Sec. 5.07. Break in Service - Vesting . . . . . . . . 43 Sec. 5.08. Included Years of Service - Vesting. . . . 44 Sec. 5.09. Forfeiture Occurs. . . . . . . . . . . . . 44 ARTICLE VI: TIME AND METHOD OF PAYMENT OF BENEFITS Sec. 6.01. Time of Payment of Accrued Benefit . . . . 46 Sec. 6.02. Method of Payment of Accrued Benefit . . . 48 Sec. 6.03. Benefit Payment Elections. . . . . . . . . 51 Sec. 6.04. Annuity Distributions to Participants and Surviving Spouses. . . . . . . . . . . . 53 Sec. 6.05. Default on a Loan. . . . . . . . . . . . . 53 Sec. 6.06. Distributions under Domestic Relations Orders. . . . . . . . . . . . . . . . . . 53 Sec. 6.07. Late Retirement. . . . . . . . . . . . . . 54 Sec. 6.08. Limitations on Benefits. . . . . . . . . . 54 Sec. 6.09. Thirty (30) Day Period . . . . . . . . . . 55 Sec. 6.10. Special Distribution and Payment Requirements. . . . . . . . . . . . . . . 55 ARTICLE VII: EMPLOYER ADMINISTRATIVE PROVISIONS Sec. 7.01. Information to ESOP Committee. . . . . . . 57 Sec. 7.02. No Liability . . . . . . . . . . . . . . . 57 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE iv Sec. 7.03. Indemnity of Certain Fiduciaries . . . . . 57 Sec. 7.04. Amendment to Vesting Schedule. . . . . . . 57 ARTICLE VIII: PARTICIPANT ADMINISTRATIVE PROVISIONS Sec. 8.01. Beneficiary Designation. . . . . . . . . . 59 Sec. 8.02. No Beneficiary Designation . . . . . . . . 59 Sec. 8.03. Personal Data to Committee . . . . . . . . 60 Sec. 8.04. Address for Notification . . . . . . . . . 60 Sec. 8.05. Assignment or Alienation . . . . . . . . . 61 Sec. 8.06. Notice of Change in Terms. . . . . . . . . 61 Sec. 8.07. Litigation Against the Trust . . . . . . . 61 Sec. 8.08. Information Available. . . . . . . . . . . 61 Sec. 8.09. Appeal Procedure for Denial of Benefits. . 61 Sec. 8.10. Voting of Employer Securities. . . . . . . 62 ARTICLE IX: ESOP COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS Sec. 9.01. Members' Compensation, Expenses. . . . . . 64 Sec. 9.02. Term . . . . . . . . . . . . . . . . . . . 64 Sec. 9.03. Powers . . . . . . . . . . . . . . . . . . 64 Sec. 9.04. General. . . . . . . . . . . . . . . . . . 64 Sec. 9.05. Funding Policy . . . . . . . . . . . . . . 65 Sec. 9.06. Manner of Action . . . . . . . . . . . . . 66 Sec. 9.07. Authorized Representative. . . . . . . . . 66 Sec. 9.08. Interested Member. . . . . . . . . . . . . 66 Sec. 9.09. Individual Accounts. . . . . . . . . . . . 66 Sec. 9.10. Value of Participant's Accrued Benefit . . 67 Sec. 9.11. Allocations to Participants' Accounts. . . 67 Sec. 9.12. Individual Statement . . . . . . . . . . . 67 Sec. 9.13. Account Charged. . . . . . . . . . . . . . 67 Sec. 9.14. Unclaimed Account Procedure. . . . . . . . 67 ARTICLE X: REPURCHASE OF EMPLOYER SECURITIES Sec. 10.01. Put Option . . . . . . . . . . . . . . . . 69 Sec. 10.02. Restriction on Employer Securities . . . . 69 Sec. 10.03. Lifetime Transfer and Right of First Refusal . . . . . . . . . . . . . . . . . 70 Sec. 10.04. Payment of Purchase Price. . . . . . . . . 70 Sec. 10.05. Notice . . . . . . . . . . . . . . . . . . 71 Sec. 10.06. Terms and Definitions. . . . . . . . . . . 71 Sec. 10.07. Certain Rights with Respect to Employer Securities. . . . . . . . . . . . . . . . 72 Sec. 10.08. Trustee's Put Option . . . . . . . . . . . 72 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE v ARTICLE XI: PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY Sec. 11.01. Insurance Benefit. . . . . . . . . . . . . 73 Sec. 11.02. Limitation on Life Insurance Protection. . 73 Sec. 11.03. Definitions. . . . . . . . . . . . . . . . 74 Sec. 11.04. Dividend Plan. . . . . . . . . . . . . . . 75 Sec. 11.05. Insurance Company Not a Party to Agreement . . . . . . . . . . . . . . . . 75 Sec. 11.06. Insurance Company Not Responsible for Trustee's Actions . . . . . . . . . . . . 75 Sec. 11.07. Insurance Company Reliance on Trustee's Signature . . . . . . . . . . . . . . . . 75 Sec. 11.08. Acquittance. . . . . . . . . . . . . . . . 75 Sec. 11.09. Duties of Insurance Company. . . . . . . . 75 ARTICLE XII: MISCELLANEOUS Sec. 12.01. Evidence . . . . . . . . . . . . . . . . . 76 Sec. 12.02. No Responsibility for Employer Action. . . 76 Sec. 12.03. Fiduciaries Not Insurers . . . . . . . . . 76 Sec. 12.04. Waiver of Notice . . . . . . . . . . . . . 76 Sec. 12.05. Successors . . . . . . . . . . . . . . . . 76 Sec. 12.06. Word Usage . . . . . . . . . . . . . . . . 76 Sec. 12.07. State Law. . . . . . . . . . . . . . . . . 77 Sec. 12.08. Employment Not Guaranteed. . . . . . . . . 77 Sec. 12.09. Severability . . . . . . . . . . . . . . . 77 Sec. 12.10. Contrary Provisions. . . . . . . . . . . . 77 Sec. 12.11. Notice to Employees. . . . . . . . . . . . 77 Sec. 12.12. Agreement of Participants. . . . . . . . . 77 Sec. 12.13. Action by Employers. . . . . . . . . . . . 77 Sec. 12.14. Adoption of the Plan by a Controlled Group Member. . . . . . . . . . . . . . . . . . 77 Sec. 12.15. Disassociation of Any Employer from Plan . 78 Sec. 12.16. Audit. . . . . . . . . . . . . . . . . . . 78 Sec. 12.17. Bonding. . . . . . . . . . . . . . . . . . 79 Sec. 12.18. Named Fiduciary. . . . . . . . . . . . . . 79 Sec. 12.19. Securities and Exchange Commission Approval. . . . . . . . . . . . . . . . . 80 ARTICLE XIII: EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION Sec. 13.01. Exclusive Benefit. . . . . . . . . . . . . 81 Sec. 13.02. Amendment by Company . . . . . . . . . . . 81 Sec. 13.03. Discontinuance . . . . . . . . . . . . . . 82 Sec. 13.04. Full Vesting on Termination. . . . . . . . 82 Sec. 13.05. Merger and Direct Transfer . . . . . . . . 82 Sec. 13.06. Complete Termination . . . . . . . . . . . 83 Sec. 13.07. Partial Termination. . . . . . . . . . . . 84 Sec. 13.08. Valuation of Trust . . . . . . . . . . . . 84 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE vi ALPHABETICAL LISTING OF DEFINITIONS Definition Sec.# - ---------- ----- Account 1.11 Accounting Date 1.17 Accrued Benefit 1.12 ACP 1.68 Aggregate Account 1.54 Alternate Payee 1.33 Annuity Starting Date 1.65 Beneficiary 1.09 Board of Directors 1.34 Code 1.22 Company 1.46 Compensation 1.10 Determination of Top Heavy Status 1.29 Direct Rollover 1.50 Disability 1.25 Disqualified Person 1.30 Distributee 1.49 Effective Date 1.15 Elective Contributions 1.67 Eligible Employee 1.51 Eligible Retirement Plan 1.48 Eligible Rollover Distribution 1.47 Employee 1.06 Employer 1.02 Employer Securities 1.31 Employment Commencement Date 2.02 ERISA 1.21 ESOP Committee 1.05 Fiduciary 1.55 Forfeiture 1.52 Former Participant 1.56 Highly Compensated Employee 1.07 Hour of Service 1.24 Inactive Participant 1.66 Income of the Trust Fund 1.35 Ineligible Employee 1.44 Investment Manager 1.57 Late Retirement Date 1.45 Leased Employees 1.28 Named Fiduciaries 12.18 Net Profits 1.62 Nonforfeitable 1.13 Nontransferable Annuity 1.20 Normal Retirement 1.64 Normal Retirement Age 5.01 Participant 1.08 Participant's Account 1.58 Participant Employer Securities Account 1.36 Participation of Other Employers 1.43 Plan 1.01 Plan Administrator 1.04 Plan Entry Date 1.16 Plan Year 1.14 Qualified Election Period 1.41 Qualified Participant 1.40 Related Employers 1.27 Retired Participant 1.59 Retirement 1.42 Retirement Date 1.60 Rollover Account 1.37 Self-Employed Individual 1.63 Separation From Service 1.32 Service 1.23 Service for Predecessor Employer 1.26 Severance Date 1.38 Terminated Participant 1.61 Trust 1.18 Trust Fund 1.19 Trustee 1.03 Valuation Date 1.39 Vested 1.53 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE vii VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN VARI-LITE HOLDINGS, INC., a corporation organized under the laws of the state of Texas pursuant to articles of incorporation filed with the Secretary of State of the state of Texas, hereby establishes the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN to be effective on the Effective Date and hereafter shall be known as the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN for the benefit of certain of its employees and their beneficiaries. It is intended that the Plan be an eligible individual account stock bonus plan that qualifies under Section 401(a) of the Code. It is also intended that the Trust which implements and forms a part of the Plan be exempt from tax under Section 501(a) of the Code. The Plan shall be interpreted, wherever possible, to comply with the terms of the Code, ERISA and all formal regulations and rulings. All contributions made under the Plan will be held, managed, and controlled by the Trustee. The terms of the Trust are set forth in a trust agreement known as the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP TRUST. PURPOSES: The purposes of this Plan are to reward Eligible Employees of the Employer for their loyal and faithful service and to provide Employees with an opportunity to share in the ownership of VARI-LITE HOLDINGS, INC. The benefits provided by this Plan will be in addition to the benefits Employees are entitled to receive under any other announced programs of the Employer. This Plan is established and shall be maintained for the exclusive benefit of Eligible Employees of the Employer and their Beneficiaries. No part of the Trust Fund can ever revert to any Employer or be used for or diverted for purposes other than the exclusive benefit of Employees of the Employer and their Beneficiaries, except as provided herein. This Plan shall be interpreted in a manner consistent with this intent and the intent of the Company that the Plan established hereunder shall satisfy the provisions of ERISA and those of the Code relating to stock bonus plans. WITNESSETH: WHEREAS, VARI-LITE HOLDINGS, INC., establishes the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN, effective January 1, 1995, for the administration and distribution of contributions made by the Employer for the purpose of providing retirement benefits for Eligible Employees and their Beneficiaries; WHEREAS, VARI-LITE HOLDINGS, INC. establishes this Plan for the administration and distribution of contributions made by the Employer for the purpose of providing retirement benefits for Eligible Employees. The provisions of this Plan apply solely to an Employee whose employment with the Employer terminates on or after the Effective Date of the Plan. If an VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 1 Employee's employment with the Employer terminates prior to the Effective Date, that Employee is not entitled to benefits under the Plan. NOW, THEREFORE, the Company establishes the following terms and conditions: ARTICLE I DEFINITIONS Sec. 1.01. PLAN. "Plan" means the retirement plan established by the Company in the form of this Agreement, designated as the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN. The Company has designated this Plan to be an eligible individual account stock bonus plan. Sec. 1.02. EMPLOYER. "Employer" means VARI-LITE HOLDINGS, INC., a Texas corporation, and any corporation, association, partnership, subsidiary, or other entity or person adopting this Plan pursuant to Section 1.43 hereof. Sec. 1.03. TRUSTEE. "Trustee" means the trustee or trustees acting at the time in question under a trust agreement, and its or his or her or their successor(s) as such. Sec. 1.04. PLAN ADMINISTRATOR. "Plan Administrator" is the Company unless the Company designates another person to hold the position of Plan Administrator. In addition to its other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA. Sec. 1.05. ESOP COMMITTEE. "ESOP Committee" means the Employees' Stock Ownership Plan Committee, which members are appointed by the Company, as from time to time constituted. Sec. 1.06. EMPLOYEE. "Employee" means any employee of the Employer. Sec. 1.07. HIGHLY COMPENSATED EMPLOYEE. "Highly Compensated Employee" means an Employee who, during the Plan Year or during the preceding twelve (12) month period: (a) is a more than five percent (5%) owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); (b) has Compensation in excess of Seventy-Five Thousand Dollars ($75,000) (as adjusted by the Commissioner of the Internal Revenue Service for the relevant year); (c) has Compensation in excess of Fifty Thousand Dollars ($50,000) (as adjusted by the Commissioner of the Internal Revenue Service for the relevant VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 2 year) and is part of the top-paid twenty percent (20%) group of employees (based on Compensation for the relevant year); or (d) has Compensation in excess of fifty percent (50%) of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer. If the Employee satisfies the definition in clause (b), (c) or (d) of this Section 1.07 in the Plan Year but does not satisfy clause (b), (c) or (d) of this Section 1.07 during the preceding twelve (12) month period, or if elected by the Company, the calendar year ending with or within the applicable determination year (or, in the case of a determination year that is shorter than twelve (12) months, the calendar year ending with or within the twelve (12) month period ending with the end of the applicable determination year), or if elected by the Company, the twelve (12) month period immediately preceding the calendar year, and does not satisfy clause (a) of this Section 1.07 in either period, the Employee is a Highly Compensated Employee only if he is one (1) of the one hundred (100) most highly compensated Employees for the Plan Year. The number of officers taken into account under clause (d) of this Section 1.07 will not exceed the greater of three (3) or ten percent (10%) of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than fifty (50) officers. If no Employee satisfies the Compensation requirement in clause (d) of this Section 1.07 for the relevant year, the ESOP Committee will treat the highest paid officer as satisfying clause (d) of this Section 1.07 for that year. For purposes of this Section 1.07, "Compensation" means the general definition of "Compensation" as defined in Section 1.10(A) hereof, increased for "Elective Contributions" (as defined in Section 1.67 hereof). The ESOP Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid twenty percent (20%) group, the top one hundred (100) paid Employees, the number of officers includible in clause (d) of this Section 1.07 and the relevant Compensation, consistent with Code Section 414(q) and Treasury regulations issued under that Code Section. The Company may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. A calendar year election must apply to all plans and arrangements of the Company. For purposes of applying any nondiscrimination test required under the Plan or under the Code, in a manner consistent with applicable Treasury regulations, the ESOP Committee will treat a Highly Compensated Employee and all family members (a spouse, a lineal ascendant or descendant, or a spouse of a lineal ascendant or descendant) as a single Highly Compensated Employee, but only if the Highly Compensated Employee is a more than five percent (5%) owner or is one of the ten (10) Highly Compensated Employees with the greatest Compensation for the Plan Year. This aggregation rule applies to a family member even if that family member is a Highly Compensated Employee without family aggregation. The term "Highly Compensated Employee" also includes any former Employee who Separated from Service (or has a deemed Separation from Service, as determined under Treasury VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 3 regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or any Plan Year ending on or after his fifty-fifth (55th) birthday. If the former Employee's Separation from Service occurred prior to January 1, 1987, he is a Highly Compensated Employee only if he satisfied clause (a) of this Section 1.07 or received Compensation in excess of Fifty Thousand Dollars ($50,000) during either of the following: (1) the year of his Separation from Service (or the prior year); or (2) any year ending after his fifty-fourth (54th) birthday. Sec. 1.08. PARTICIPANT. "Participant" is an Eligible Employee who becomes a Participant in accordance with the provisions of Section 2.01 hereof. Sec. 1.09. BENEFICIARY. "Beneficiary" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until his benefits have been fully distributed to him. A Beneficiary's right to (and the Plan Administrator's or the ESOP Committee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan. Sec. 1.10. COMPENSATION. Any references in this Plan to Compensation is a reference to the definition in this Section 1.10, unless the Plan reference specifies a modification to this definition. The ESOP Committee will take into account only Compensation actually paid for the relevant period. (A) GENERAL DEFINITION OF COMPENSATION. "Compensation" means the Participant's base salary for professional service (whether or not paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan but only to the extent includible in the gross income of the Participant, and Code Section 125 employee salary reductions for the Participant. This definition of Compensation does not include: (1) Employer contributions to a plan of deferred compensation to the extent the contributions are not included in the gross income of the Employee for the taxable year in which contributed, on behalf of an Employee to a Simplified Employee Pension Plan to the extent such contributions are excludable from the Employee's gross income, and any distributions from a plan of deferred compensation, regardless of whether such amounts are includible in the gross income of the Employee when distributed. (2) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture. (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a stock option described in Part II, Subchapter D, Chapter 1 of the Code. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 4 (4) Amounts paid as bonuses and overtime pay to the Employee. (5) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are excludable from the gross income of the Employee). (B) Definition of Compensation for Allocation Purposes. To determine a Participant's contribution allocation under Section 3.04(A) hereof, Compensation means the general definition of Compensation described in Section 1.10(A) hereof, but excludes (1) reimbursements or other expense allowances, (2) P.S. 58 costs (as defined in the Code and Treasury regulations and rulings thereunder), (3) fringe benefits (cash and non-cash), (4) moving expenses, and (5) deferred compensation and welfare benefits. Compensation, however, includes Elective Contributions (as defined in Section 1.67 hereof). (C) LIMITATIONS ON COMPENSATION. (1) COMPENSATION DOLLAR LIMITATION. The ESOP Committee must take into account only the first One Hundred Fifty Thousand Dollars ($150,000) (or such other amount as the Commissioner of Internal Revenue Service may prescribe, which may be higher or lower) of any Participant's Compensation. (2) APPLICATION OF COMPENSATION LIMITATION TO CERTAIN FAMILY MEMBERS. The One Hundred Fifty Thousand Dollars ($150,000) Compensation limitation applies to the combined Compensation of the Employee and of any family member aggregated with the Employee under Section 1.07 hereof who is either (i) the Employee's spouse; or (ii) the Employee's lineal descendant under the age of nineteen (19). If, for a Plan Year, the combined Compensation of the Employee and such family members who are Participants entitled to an allocation for that Plan Year exceeds the One Hundred Fifty Thousand Dollars ($150,000) (or as adjusted) limitation, "Compensation" for each such Participant, for purposes of the contribution and allocation provisions of Article III hereof, means his Adjusted Compensation. "Adjusted Compensation" is the amount which bears the same ratio to the One Hundred Fifty Thousand Dollars ($150,000) (or as adjusted) limitation as the affected Participant's Compensation (without regard to the One Hundred Fifty Thousand Dollars ($150,000), as adjusted, Compensation limitation) bears to the combined Compensation of all the affected Participants in the family unit. If the Plan uses permitted disparity, the ESOP Committee must determine the integration level of each affected family member Participant prior to the proration of the One Hundred Fifty Thousand Dollar ($150,000), as adjusted, Compensation Limitation, but the combined integration level of the affected Participants may not exceed One Hundred Fifty Thousand Dollars ($150,000) (or the adjusted limitation). The combined excess compensation of the affected Participants in the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 5 family unit may not exceed One Hundred Fifty Thousand Dollars ($150,000) (or the adjusted limitation) minus the affected Participant's combined integration level (as determined under the preceding sentence). If the combined excess compensation exceeds this limitation, the ESOP Committee will prorate the excess Compensation Limitation among the affected Participants in the family unit in proportion to each such individual's Adjusted Compensation minus his integration level. Sec. 1.11. ACCOUNT. "Account" means the separate account(s) which the Trustee or the ESOP Committee establishes and maintains for a Participant under the Plan. Sec. 1.12. ACCRUED BENEFIT. "Accrued Benefit" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions, if any. Sec. 1.13. NONFORFEITABLE. "Nonforfeitable" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit. Sec. 1.14. PLAN YEAR. "Plan Year" means the tax year of the Plan, a twelve (12) consecutive month period beginning on January 1 of each year and ending on the following December 31. Sec. 1.15. EFFECTIVE DATE. "Effective Date" of the Plan is January 1, 1995. Sec. 1.16. PLAN ENTRY DATE. "Plan Entry Date" means the Effective Date and every January 1, April 1, July 1, and October 1 after the Effective Date. Sec. 1.17. ACCOUNTING DATE. "Accounting Date" is the last day of the Plan Year. Unless otherwise specified in the Plan, all Plan allocations for a particular Plan Year will be made as of the Accounting Date of that Plan Year. Sec. 1.18. TRUST. "Trust" means the separate Trust which implements and forms a part of the Plan. Sec. 1.19. TRUST FUND. "Trust Fund" means all property of every kind held or acquired by the Trustee under the Plan. Trust Fund is also referred to as "Trust assets." Sec. 1.20. NONTRANSFERABLE ANNUITY. "Nontransferable Annuity" or "Nontransferable Annuity Contract" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Plan distributes an annuity contract, the contract must be a Nontransferable Annuity. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 6 Sec. 1.21. ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute thereto and the final and temporary regulations promulgated, and the applicable rulings issued thereunder. References herein to Sections of ERISA shall include any successor provisions thereto. Sec. 1.22. CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute thereto. References herein to Sections of the Code shall include any successor provisions thereto. Sec. 1.23. SERVICE. "Service" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. Sec. 1.24. HOUR OF SERVICE. "Hour of Service" means: (a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The ESOP Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, regardless of when paid; (b) Each Hour of Service for back pay, regardless of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The ESOP Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and (c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee or for which the Employee is entitled to payment (regardless of whether the employment relationship is terminated) for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including Disability), layoff, jury duty or military duty. The ESOP Committee will credit no more than five hundred and one (501) Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The ESOP Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Regulations Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c). The ESOP Committee will not credit an Hour of Service under more than one of the above paragraphs. A computation period for purposes of this Section 1.24 is the Plan Year, Year VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 7 of Service period, Break in Service period or other period, as determined under the Plan provision for which the ESOP Committee is measuring an Employee's Hours of Service. The ESOP Committee will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. (A) METHOD OF CREDITING HOURS OF SERVICE. The Employer will credit every Employee with Hours of Service on the basis of the "actual" method. For purposes of the Plan, "actual" method means the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer. (B) MATERNITY OR PATERNITY LEAVE. Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the ESOP Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The ESOP Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The ESOP Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the ESOP Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of eight (8) hours per day during the absence period. The ESOP Committee will credit only the number (not exceeding five hundred and one (501)) of Hours of Service necessary to prevent an Employee's Break in Service. The ESOP Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the ESOP Committee credits these Hours of Service to the immediately following computation period. Sec. 1.25. DISABILITY. "Disability" means total and permanent disability, the physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder which renders the Participant incapable of engaging in his or her usual and customary occupation. The total and permanent disability of a Participant shall be determined by a physician, selected by the Participant, in accordance with uniform medical principles consistently applied, upon the basis of such evidence as the physician deems necessary and desirable. The Plan considers a Participant disabled on the date the ESOP Committee determines the Participant satisfies the definition of Disability. Notwithstanding any provision herein, the ESOP Committee may require a Participant to submit to another physical examination performed by a physician selected by the ESOP Committee in order to confirm Disability. The ESOP Committee will apply the provisions of this Section 1.25 in a nondiscriminatory, consistent and uniform manner. Sec. 1.26. SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as Service with the Employer. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 8 Sec. 1.27. RELATED EMPLOYERS. "Related Employers" means a controlled group of corporations (as defined in Code Section 414(b)), trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)) or an affiliated service group (as defined in Code Section 414(m) or in Code Section 414(o)). "Related Employer" means one of the Related Employers. If the Employer is a Related Employer, the term "Employer" includes the Related Employers for purposes of crediting Hours of Service, determining Years of Service and Breaks in Service under Articles II and V hereof, applying the Participation Test and the Coverage Test under the suspension of accrual requirements of Section 3.06(E) hereof, applying the limitations on allocations in Part 2 of Article III hereof, applying the top heavy rules and the minimum allocation requirements of Article III hereof, the definitions of Employee, Highly Compensated Employee, Compensation and Leased Employee, and for any other purpose required by the applicable Code section or by a Plan provision. Only an Employer described in Section 1.02 hereof may contribute to the Plan and only an Employee employed by an Employer described in Section 1.02 hereof is eligible to participate in this Plan. Sec. 1.28. LEASED EMPLOYEES. The Plan treats a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code Section 144(a)(3)) on a substantially full time basis for at least one (1) year and who performs services historically performed by employees in the Employer's business field. If a Leased Employee is treated as an Employee by reason of this Section 1.28, "Compensation" includes Compensation from the leasing organization which is attributable to services performed for the Employer. The Plan does not treat a Leased Employee as an Employee if the leasing organization covers the employee in a safe harbor plan and, prior to application of this safe harbor plan exception, twenty percent (20%) or less of the Employer's Employees (other than Highly Compensated Employees) are Leased Employees. A safe harbor plan is a money purchase pension plan providing immediate participation, full and immediate vesting, and a non-integrated contribution formula equal to at least ten percent (10%) of the employee's compensation without regard to employment by the leasing organization on a specified date. The safe harbor plan must determine the ten percent (10%) contribution on the basis of compensation as defined in Code Section 415(c)(3) plus Elective Contributions (as defined in Section 1.67 hereof). The ESOP Committee must apply this Section 1.28 in a manner consistent with Code Sections 414(n) and 414(o) and the regulations issued under those Code Sections. The ESOP Committee will reduce a Leased Employee's allocation of Employer contributions under this Plan by the Leased Employee's allocation under the leasing organization's plan, but only to the extent that allocation is attributable to the Leased Employee's service provided to the Employer. Sec. 1.29. DETERMINATION OF TOP HEAVY STATUS. If this Plan is the only qualified plan maintained by the Employer, the Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date (as hereafter defined) exceeds sixty percent (60%). The "top VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 9 heavy ratio" is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees (as hereafter defined) as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The ESOP Committee must include in the top heavy ratio, as part of the present value of Accrued Benefits, any contribution not made as of the Determination Date but includible under Code Section 416 and the applicable Treasury regulations, and distributions made within the Determination Period (as hereafter defined). The ESOP Committee must calculate the top heavy ratio by disregarding the Accrued Benefit (and distributions, if any, of the Accrued Benefit) of any Non-Key Employee (as hereafter defined) who was formerly a Key Employee, and by disregarding the Accrued Benefit (including distributions, if any, of the Accrued Benefit) of an individual who has not received credit for at least one (1) Hour of Service with the Employer during the Determination Period. The ESOP Committee must calculate the top heavy ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Code Section 416 and the Treasury regulations thereunder. If the Employer maintains other qualified plans (including a 401(k) arrangement or simplified employee pension plan), or maintained another such plan which now is terminated, this Plan is top heavy only if it is part of the Required Aggregation Group (as hereafter defined), and the top heavy ratio for the Required Aggregation Group and for the Permissive Aggregation Group (as hereafter defined), if any, each exceeds sixty percent (60%). The Trustee or ESOP Committee will calculate the top heavy ratio in the same manner as required by the first paragraph of this Section 1.29, taking into account all plans that are aggregated. To the extent distributions to a Participant are taken into account, distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date must be included. The present value of Accrued Benefits under defined benefit plans or simplified employee pension plans included within the group will be calculated in accordance with the terms of those plans, Code Section 416 and the Treasury regulations under that Code Section. If a Participant in a defined benefit plan is a Non-Key Employee, his Accrued Benefit will be determined under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code Section 411(b)(1)(C). To calculate the present value of benefits from a defined benefit plan, the actuarial assumptions (interest and mortality only) prescribed by the defined benefit plan(s) will be used to value benefits for top heavy purposes. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Accrued Benefits in the aggregated plan must be valued as of the most recent valuation date falling within the twelve-month period ending on the Determination Date, except as Code Section 416 and applicable Treasury regulations require for the first and second plan year of a defined benefit plan. The top heavy ratio with reference to the Determination Dates that fall within the same calendar year will be calculated. DEFINITIONS. For purposes of applying the provisions of this Section 1.29: (a) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for any VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 10 Plan Year in the Determination Period: (i) has Compensation in excess of fifty percent (50%) of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code Section 415(c)(1)(A) (relating to defined contribution plans) and is one of the Employees owning the ten (10) largest interests in the Employer; (iii) is a more than five percent (5%) owner of the Employer; or (iv) is a more than one percent (1%) owner of the Employer and has Compensation of more than One Hundred Fifty Thousand Dollars ($150,000). The constructive ownership rules of Code Section 318 (or the principles of that Section, in the case of an unincorporated Employer,) will apply to determine ownership in the Employer. The number of officers taken into account under clause (i) will not exceed the greater of three (3) or ten percent (10%) of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than fifty (50) officers. The ESOP Committee will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the Treasury regulations under that Code Section. (b) "Non-Key Employee" is an employee who does not meet the definition of Key Employee. (c) "Compensation" means the general definition of Compensation as determined under Section 1.10(A) hereof, increased for Elective Contributions (as defined in Section 1.67 hereof). (d) "Required Aggregation Group" means: (1) each qualified plan of the Employer in which at least one Key Employee participates at any time during the Determination Period; and (2) any other qualified plan of the Employer which enables a plan described in clause (1) to meet the requirements of Code Section 401(a)(4) or of Code Section 410. (e) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the requirements of Code Sections 401(a)(4) and 410. The ESOP Committee will determine the Permissive Aggregation Group. (f) "Employer" means the Employer that adopts this Plan and any Related Employers described in Section 1.27 hereof. (g) "Determination Date" for any Plan Year is the Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the Accounting Date of that Plan Year. (h) The "Determination Period" is the five (5) year period ending on the Determination Date. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 11 (i) "Super Top Heavy Plan" means that, as of the Determination Date, (i) the present value of Accrued Benefits of Key Employees, and (ii) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the present value of Accrued Benefits and the Aggregate Accounts of all Participants under this Plan and all plans of an Aggregation Group. Sec. 1.30. DISQUALIFIED PERSON. "Disqualified Person" means a person who is: (a) a fiduciary (as hereinafter defined); (b) a person providing services to the Plan; (c) an Employer any of whose Employees are covered by the Plan; (d) an employee organization any of whose members are covered by the Plan; (e) an owner, direct or indirect, of fifty percent (50%) or more of: (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation; (ii) the capital interest or the profits interest of a partnership, or (iii) the beneficial interest of a trust or unincorporated enterprise, which is an Employer or an employee organization described in subparagraph (c) or (d) above; (f) a member of the family (as hereafter defined) of any individual described in subparagraph (a), (b), (c), or (e) above; (g) a corporation, partnership, or trust or estate of which (or in which) fifty percent (50%) or more of: (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of such corporation; (ii) the capital interest or profits interest of such partnership; or VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 12 (iii) the beneficial interest of such trust or estate is owned, directly or indirectly, or held by persons described in subparagraph (a), (b), (c), (d) or (e) above; (h) an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a ten percent (10%) or more shareholder, or a highly compensated employee (earning ten percent (10%) or more of the yearly wages of an Employer) of a person described in subparagraph (c), (d), (e) or (g) above; or (i) a ten percent (10%) or more (in capital or profits) partner or joint venturer of a person described in subparagraph (c), (d), (e) or (g) above. The Secretary of the Treasury, after consultation and coordination with the Secretary of Labor or his delegate, may by regulation prescribe a percentage lower than fifty percent (50%) for subparagraphs (e) and (g) above and lower than ten percent (10%) for subparagraphs (h) and (i) above. For purposes of this Section 1.30, the term "fiduciary" means any person who: (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets; (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan, or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan. The term "fiduciary" includes any person designated under Section 405(c)(1)(B) of ERISA. For purposes of subparagraphs (e)(i) and (g)(i) above, there shall be taken into account indirect stockholdings which would be taken into account under Section 267(c)(4) of the Code, except that, for purposes of this paragraph, Section 267(c)(4) of the Code shall be treated as providing that the members of the family of an individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. For purposes of subparagraphs (e)(ii) and (iii), (g)(ii) and (iii), and (i) above, the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in Section 267(c) of the Code (other than paragraph (3) thereof), except that Section 267(c)(4) of the Code shall be treated as providing that the members VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 13 of the family of an individual shall include his spouse, ancestor, lineal descendant, and any spouse of a lineal descendant. Sec. 1.31. EMPLOYER SECURITIES. "Employer Securities" means nonvoting common stock issued by the Company, or by a corporation which is a member of the same controlled group of the Company. Sec. 1.32. SEPARATION FROM SERVICE. "Separation from Service," "Separates from Service," or "Separated from Service" means the Employee no longer has an employment relationship with the Employer maintaining this Plan. Severance Date is defined in Section 1.38. Sec. 1.33. ALTERNATE PAYEE. "Alternate Payee" means a spouse, former spouse, child, or other dependent of a Participant to whom benefits are payable under the Plan pursuant to the terms of a qualified domestic relations order. Sec. 1.34. BOARD OF DIRECTORS. "Board of Directors" or "Board" means the Board of Directors of the Company, as from time to time constituted. Sec. 1.35. INCOME OF THE TRUST FUND. "Income of the Trust Fund" means the net gain or loss of the General Investments Accounts of the Trust Fund, as reflected by interest payments, dividends, realized and unrealized gains and losses on securities, other than Employer Securities, and on other investment transactions, and reduced by expenses paid from the Trust Fund. The expenses of the Trust Fund do not include interest paid on any installment contracts for the purchase of Employer Securities by the Trust or on any loan of the Trust incurred to purchase Employer Securities. Sec. 1.36. PARTICIPANT EMPLOYER SECURITIES ACCOUNT. "Participant Employer Securities Account" means the account of a Participant which is credited with shares and fractional shares of Employer Securities contributed to the Plan or shares otherwise allocable to the Participant's participation in the Plan. Participant Employer Securities Account is also referred to as "Employer Securities Account." Sec. 1.37. ROLLOVER ACCOUNT. "Rollover Account" has the meaning given in Section 4.03 hereof. Sec. 1.38. SEVERANCE DATE. "Severance Date" means termination of a Participant's Service prior to Normal Retirement Age (as defined in Section 5.01 hereof) for reasons other than Retirement, Disability or death. Sec. 1.39. VALUATION DATE. "Valuation Date" means each date on which the Trust Fund is valued under Section 9.11 hereof. Sec. 1.40. QUALIFIED PARTICIPANT. "Qualified Participant" means a Participant who has attained age fifty-five (55) and who, commencing on the Effective Date, has completed at least ten (10) years of participation in the Plan. A "year of participation" means a Plan Year VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 14 commencing on the Effective Date in which the Participant was eligible for an allocation of Employer contributions, regardless of whether the Employer actually contributed to the Plan for that Plan Year. Sec. 1.41. QUALIFIED ELECTION PERIOD. "Qualified Election Period" means the six (6) Plan Years beginning with the Plan Year in which the Participant first becomes a Qualified Participant. Sec. 1.42. RETIREMENT. "Retirement" means a Participant's Separation from Service with an Employer at or after attaining Normal Retirement Age. Sec. 1.43. PARTICIPATION OF OTHER EMPLOYERS. Subject to Section 12.14 hereof, any other corporation or organization which is a member of a group of corporations described in Code Section 409(l) that includes the Company may adopt this Plan, effective as of the date indicated in its instrument of adoption, if (i) its application is made in writing to the Board and ESOP Committee; (ii) such application is accepted in writing by the Board and ESOP Committee; and (iii) such approved Employer executes an instrument in writing duly authorized by it adopting this Plan and delivers a copy thereof to the ESOP Committee. Throughout this instrument, a distinction is purposely drawn between rights and obligations of the Company and rights and obligations of an Employer. The rights and obligations specified as belonging to the Company shall belong only to it, including but not limited to, appointment of the ESOP Committee and amendment of the Plan. An Employer's instrument of adoption may provide for the following: (i) making of an initial contribution to the Plan, (ii) making such other changes with respect to the Plan as are approved by the ESOP Committee, and (iii) the designation of the name of the Plan with respect to its Employees. Each Employer shall have the obligation, as hereinafter provided and as may be provided in its instrument of adoption, to make contributions for its own Participants, and no Employer shall have the obligation to make contributions for the Participants of any other Employer unless determined by the ESOP Committee. Any failure by an Employer to fulfill its own obligations under this Plan shall, except as provided in the next preceding sentence, have no effect upon any other Employer. An Employer may withdraw from this Plan without affecting any other Employer. If an Employer withdraws or its participation is terminated by the Board, such Employer may, in its sole discretion, adopt for its Employees alone and independent of this Plan its own plan which shall be considered a continuation of this Plan with respect to itself and its Participants. Sec. 1.44. INELIGIBLE EMPLOYEE. "Ineligible Employee" means an Employee who ceases to be an Eligible Employee, but remains in the Service of the Employer or a Related Employer. Sec. 1.45. LATE RETIREMENT DATE. "Late Retirement Date" means the date of termination of an Employee's Service with the Employer for any reason other than death where the termination occurs subsequent to the Employee's Normal Retirement Date. Sec. 1.46. COMPANY. "Company" means VARI-LITE HOLDINGS, INC. or its successor. The tax identification number of the Company is as follows: 75-2239444. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 15 Sec. 1.47. ELIGIBLE ROLLOVER DISTRIBUTION. An "Eligible Rollover Distribution" is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include the following: (1) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of ten (10) years or more; (2) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities). Sec. 1.48. ELIGIBLE RETIREMENT PLAN. An "Eligible Retirement Plan" is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. In the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. Sec. 1.49. DISTRIBUTEE. "Distributee" includes an employee, former employee, or beneficiary of either an employee or former employee. The employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the Alternate Payee under a qualified domestic relations order (as defined in Section 414(p) of the Code) are Distributees with regard to the interest of the spouse or former spouse. Sec. 1.50. DIRECT ROLLOVER. A "Direct Rollover" is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. Sec. 1.51. ELIGIBLE EMPLOYEE. Each Employee becomes an "Eligible Employee," and thereby eligible to participate in the Plan, immediately following the later of the date on which he completes one (1) Year of Service and has attained age twenty-one (21). For purposes of an Employee's eligibility, the Plan takes into account all of his Years of Service (as defined in Section 2.02 hereof) with the Employer. Sec. 1.52. FORFEITURE. "Forfeiture" refers to the amount of a Participant's Accrued Benefit which is not Vested. Sec. 1.53. VESTED. "Vested" refers to the portion of a Participant's Accrued Benefit which is Nonforfeitable. Sec. 1.54. AGGREGATE ACCOUNT. "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 16 Sec. 1.55. FIDUCIARY. "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control and management of the Plan or exercises any authority or control and management or disposition of Plan assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee and the Plan Administrator. Sec. 1.56. FORMER PARTICIPANT. "Former Participant" means a person who has been a Participant but has ceased to be a Participant for any reason. Sec. 1.57. INVESTMENT MANAGER. "Investment Manager" means any person, firm, or corporation who is a registered investment advisor under the Investment Advisors Act of 1940, a bank or an insurance company, and who has the power to manage, acquire, or dispose of Plan assets, and who acknowledges in writing his fiduciary responsibility to the Plan. Sec. 1.58. PARTICIPANT'S ACCOUNT. "Participant's Account" means the accounts established and maintained for each Participant with respect to his total interest in the Plan. Sec. 1.59. RETIRED PARTICIPANT. "Retired Participant" means a person who has been a Participant, but has become entitled to retirement benefits under the Plan. Sec. 1.60. RETIREMENT DATE. "Retirement Date" means the date as of which a Participant retires for reasons other than Disability or death, whether such retirement occurs on a Participant's Retirement or Late Retirement Date. Sec. 1.61. TERMINATED PARTICIPANT. "Terminated Participant" means a person who has been a Participant but whose employment has been terminated other than by death, Disability, or Retirement. Sec. 1.62. NET PROFITS. "Net Profits" mean, with respect to any fiscal year, the Employer's net income or profit for such fiscal year determined upon the basis of the Employer's books of account in accordance with generally accepted accounting principles without any reduction for tax based upon income, or for contributions made by the Employer to the Plan. Sec. 1.63. SELF-EMPLOYED INDIVIDUAL. "Self-Employed Individual" means, with respect to any taxable year, an individual who has earned income (as defined in Code Section 401(c)(2)), in such taxable year. To the extent provided in Treasury regulations prescribed by the Secretary, for any taxable year, such term also includes: (a) an individual who would be a self-employed individual within the meaning of the preceding sentence, but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 17 (b) an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year. Sec. 1.64. NORMAL RETIREMENT. "Normal Retirement" means Separation from Service on or after reaching Normal Retirement Age. Sec. 1.65. ANNUITY STARTING DATE. "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity. In the case of a benefit not payable in the form of an annuity, "Annuity Starting Date" means the first day on which all events have occurred which entitle the Participant to the benefit. Sec. 1.66. INACTIVE PARTICIPANT. An "Inactive Participant" is a Participant who is no longer an Employee. Sec. 1.67. ELECTIVE CONTRIBUTIONS. "Elective Contributions" are amounts excludable from the Employee's gross income under Code Sections 125, 402(a)(8), 401(h) or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a Simplified Employee Pension, a Cafeteria Plan, or tax-sheltered annuity. Sec. 1.68. ACP. "ACP" means the actual contribution percentage for a group of Eligible Employees (as defined in Section 13.10 hereof) for a Plan Year. The actual contribution percentage for a group of Eligible Employees for a Plan is the average of the actual contribution ratios of the Eligible Employees in the group for that Plan Year. An Eligible Employee's actual contribution ratio is the sum of the Eligible Employee's contribution and matching contributions allocated to the Eligible Employee's account for the Plan Year, and the qualified nonelective and elective contributions treated as matching contributions for the Plan Year, divided by the Eligible Employee's Compensation for the Plan Year. END OF ARTICLE I VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 18 ARTICLE II EMPLOYEE PARTICIPANTS Sec. 2.01. PARTICIPATION. Each Eligible Employee becomes a Participant in the Plan on the Plan Entry Date (if employed on such date) immediately following the date on which he became an Eligible Employee. Sec. 2.02. YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Section 2.01 hereof, the Plan takes into account all of his Years of Service with the Employer. "Year of Service" means an eligibility computation period during which the Employee completes not less than one thousand (1,000) Hours of Service. The initial eligibility computation period is the first twelve (12) consecutive month period measured from the Employment Commencement Date. The Plan measures the subsequent periods by reference to the Plan Year, beginning with the Plan Year which includes the first anniversary of the Employee's Employment Commencement Date. "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for the Employer. For purposes of this Section 2.02, "Employer" means the Employer as defined in Section 1.02 hereof and any corporation, association, partnership or other entity acquired by the Employer as defined in Section 1.02 hereof. Sec. 2.03. BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the Plan, the Plan does not apply any Break in Service rule. Sec. 2.04. PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment terminates shall re-enter the Plan as a Participant on the date of his re-employment. An Employee who satisfies the Plan's eligibility conditions but who terminates employment with the Employer prior to becoming a Participant will become a Participant on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his reemployment. Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with the provisions of Section 2.01 hereof. Sec. 2.05. INELIGIBILITY TO BECOME A PARTICIPANT. Notwithstanding the provisions of Section 2.01 above, any Eligible Employee shall not be eligible and shall not become a Participant, and any Employee who is a Participant shall cease to be eligible to be a Participant, if: (a) Such Employee is or becomes a member of a collective bargaining unit if retirement benefits covering such unit were the subject of good faith bargaining and coverage under this Plan was not agreed to under such bargaining; (b) Such Employee is employed by a Related Employer that is not an adopting Employer or is excluded from participation by the terms of the Employer's adoption agreement; VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 19 (c) Such individual is not on the payroll of an Employer; (d) Such individual is considered a "Leased Employee" under Section 1.28 hereof; (e) Such Employee is a non-resident alien who receives no earned income from an Employer that constitutes income from sources within the United States; or (f) The date the Employee elects not to participate in the Plan, pursuant to Section 2.08 hereof. Sec. 2.06. CONTINUANCE AS A PARTICIPANT. Notwithstanding any other provision herein, a Participant shall continue as a Participant until whichever of the following dates first occurs: (a) The date of such Participant's death; (b) The date the Participant ceases to be an Employee; (c) The date the Participant becomes ineligible to participate in the Plan, pursuant to Section 2.05 hereof; or (d) The date the Participant elects not to participate in the Plan, pursuant to Section 2.08 hereof. After an individual ceases to be a Participant, his Account shall continue to be held and invested pursuant to the terms of the Plan, and shall share in the earnings or losses of the Plan pending distribution pursuant to Article VI hereof. However, he shall be ineligible to share in Employer contributions and Participant Forfeitures, except as otherwise provided in Sections 3.06(B) and 3.06(C) hereof. Sec. 2.07. EMPLOYMENT BY EMPLOYER; SERVICE WITH NEWLY ACQUIRED ENTITIES; RECORDS OF EMPLOYER. Notwithstanding any other provision herein, this provision applies, as follows: (a) In the event the Employer has or shall acquire the control of any organization by the purchase of assets or stock, merger, amalgamation, consolidation or any other similar event, the Board of Directors may direct to what extent, if any, employment by such organization shall be deemed to be employment by the Employer, and, in connection therewith, may specify a special Plan Entry Date. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 20 (b) The personnel records of the Employer or any Related Employer shall be conclusive evidence for the purpose of determining the period of employment of any and all Employees. Sec. 2.08. ELECTION NOT TO PARTICIPATE. An Eligible Employee, or any present Participant, may elect not to participate in the Plan or enter into an agreement with the Company not to participate in the Plan. For an election to be effective for a particular Plan Year, the Employee or Participant must either (1) file the election in writing with the ESOP Committee not later than thirty (30) days prior to the Accounting Date of that Plan Year unless accepted by the ESOP Committee at a different time or (2) enter into an agreement with the Company which provides that the Employee or Participant shall not participate in the Plan (collectively referred to herein as "election"). The Employer will not make a contribution under the Plan for the Employee or for the Participant for the Plan Year for which the election or agreement is effective, nor for any succeeding Plan Year. The Employee or Participant may re-elect to participate in the Plan unless the election or agreement provides otherwise. After an Employee's or Participant's election not to participate has been effective for at least two (2) Plan Years, unless the agreement between the Employee and Company provides otherwise, the Employee or Participant may re-elect to participate in the Plan for any Plan Year and subsequent Plan Years. If the Employee or Participant is permitted to enter or re-enter the Plan, he may re-elect to participate in the Plan by filing his election in writing with the ESOP Committee not later than thirty (30) days prior to the Accounting Date of the Plan Year for which his election is to be effective. An Employee or Participant who re-elects to participate may not again elect not to participate in the Plan. If an Employee is a Self-Employed Individual, the Employee's election must be effective no later than the date the Employee first would become a Participant in the Plan and the election is irrevocable (except as permitted by Treasury regulations without creating a Code Section 401(k) arrangement with respect to that Self-Employed Individual). The ESOP Committee must furnish an Employee or a Participant any form required for purposes of an election under this Section 2.08. An election timely filed is effective for the entire Plan Year. A Participant who elects not to participate in the Plan may not receive a distribution of his Accrued Benefit attributable thereto except as provided under Article VI hereof. For each Plan Year for which a Participant's election not to participate is effective, his Account(s), if any, continues to share in allocations under Article IX hereof. The Employee or the Participant receives vesting credit under Article V hereof for each included Year of Service during the period the election not to participate is effective. END OF ARTICLE II VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 21 ARTICLE III EMPLOYER CONTRIBUTIONS AND PARTICIPANT FORFEITURES Part 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS: SECTIONS 3.01 THROUGH 3.06 Sec. 3.01. AMOUNT. For each Plan Year, the Employer will contribute to the Trust as follows: (A) NONELECTIVE CONTRIBUTIONS. A discretionary amount the Employer may from time to time deem advisable. Participants who do not satisfy the requirements under Section 3.06 hereof shall not share in the Employer discretionary contribution. (B) QUALIFIED MATCHING CONTRIBUTIONS. The amount the Employer, in its sole discretion, designates as qualified matching contributions. The Employer may contribute to this Plan regardless of whether it has Net Profits. However, the Employer may not make a contribution for any Plan Year to the extent the contribution would exceed the Participants' Maximum Permissible Amounts pursuant to Part 2 of this Article III. The Employer contributes to this Plan on the condition its contribution is not due to a mistake of fact and the Internal Revenue Service will not disallow the deduction for its contribution. The amount of the Employer's contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404 shall be returned to the Employer. No portion of the Employer's contribution under the provisions of this paragraph shall be returned if made longer than one (1) year after the Employer made the contribution by mistake of fact. If the Internal Revenue Service disallows part or all of the contribution as a deduction and it has been longer than one (1) year after the Employer made the contribution, a portion of the Employer's contribution which represents the amount disallowed will be returned. The Employer may make its contribution in cash or in Employer Securities as the Employer from time to time may determine provided the contribution in Employer Securities is not a prohibited transaction under the Code or ERISA. The Employer may make its contribution of Employer Securities at fair market value determined at the time of contribution. Sec. 3.02. DETERMINATION OF CONTRIBUTION. The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan. Sec. 3.03. TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution for each Plan Year in one or more installments without interest. The Employer must VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 22 make its contribution to the Plan within the time prescribed by the Code or applicable Treasury regulations to be deductible on its Federal corporate income tax return. Sec. 3.04. ALLOCATIONS. (A) METHOD OF ALLOCATION. To make allocations under the Plan, the ESOP Committee must, at least, establish a Qualified Matching Contributions Account and a Participant Employer Securities Account for each Participant. (1) DISCRETIONARY NONELECTIVE CONTRIBUTIONS. Subject to any restoration allocation required under Section 5.04, the ESOP Committee will allocate and credit each annual Employer nonelective contributions (and Participant Forfeitures, if any) to the Participant Employer Securities Account of each Participant who satisfies the conditions of Section 3.06 in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. (2) QUALIFIED MATCHING CONTRIBUTIONS. If the Employer, at the time of contribution, designates a contribution to be a qualified matching contribution for the Plan Year, the ESOP Committee will allocate that qualified matching contribution to the Qualified Matching Contributions Account of each Participant eligible for an allocation of qualified matching contributions. The ESOP Committee will make the allocation to each eligible Participant's Qualified Matching Contributions Account in the same ratio that the Participant's Compensation for the Plan Year bears to the total Compensation of all eligible Participants for the Plan Year. For purposes of allocating the qualified matching contributions, the term "eligible Participant" means any Nonhighly compensated Participant. (3) ALLOCATION PROCEDURES. Accounts shall be adjusted in accordance with the following: (i) INCOME AND APPRECIATION IN VALUE OF QUALIFIED MATCHING CONTRIBUTIONS ACCOUNTS AND ROLLOVER ACCOUNTS. The income of Participant's Qualified Matching Contributions Accounts and Rollover Accounts (including the appreciation or depreciation in value of the assets in such Accounts) shall be allocated to such Accounts in proportion to the balances in such Accounts as of the next preceding Valuation Date, but after first reducing each such Account balance by any distributions or charges from such Account since the next preceding Valuation Date. Such amounts shall be allocated among the Participant's Qualified Matching Contributions Accounts and Rollover Accounts in such uniform and reasonable manner as the ESOP Committee may prescribe. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 23 (ii) INCOME AND APPRECIATION IN VALUE OF EMPLOYER SECURITIES ACCOUNTS. The income (except stock in kind) dividends with respect to Employer Securities (except the unrealized appreciation or depreciation in value of Employer Securities) held in Participant Employer Securities Accounts shall be allocated to the appropriate Participant Employer Securities Account, in proportion to the balances, as of the last Valuation Date, in the respective Participant Employer Securities Accounts to which the income is attributable but after first reducing each such Account balance by any distributions or charges from such Accounts since the last Valuation Date. Stock (in kind) dividends with respect to Employer Securities shall be allocated to the Account which held the Employer Securities that generated the stock (in kind) dividend. (B) TOP HEAVY MINIMUM ALLOCATION. (1) MINIMUM ALLOCATION. If the Employer satisfies the top heavy minimum benefit requirements in another qualified retirement plan it maintains, this Plan does not guarantee a top heavy minimum allocation. If another qualified retirement plan maintained by the Employer does not satisfy the top heavy minimum benefit requirements and the Plan is top heavy in any Plan Year, the following provisions apply: (a) Each Non-Key Employee who is a Participant and is employed by the Employer on the last day of the Plan Year will receive a top heavy minimum allocation for that Plan Year, irrespective of whether he satisfies the Hours of Service condition under Section 3.06 hereof; and (b) The top heavy minimum allocation is the lesser of three percent (3%) of the Non-Key Employee's Compensation for the Plan Year or the highest contribution rate for the Plan Year made on behalf of any Key Employee. However, if a defined benefit plan maintained by the Employer which benefits a Key Employee depends on this Plan to satisfy the anti-discrimination rules of Code Section 401(a)(4) or the coverage rules of Code Section 410 (or another plan benefiting the Key Employee so depends on such defined benefit plan), the top heavy minimum allocation is three percent (3%) of the Non-Key Employee's Compensation regardless of the contribution rate for the Key Employees. (2) SPECIAL DEFINITIONS. For purposes of this Section 3.04(B), the term "Participant" includes any Employee otherwise eligible to participate in the Plan but who is not a Participant because of his failure to make elective deferrals under a Code Section 401(k) arrangement or because of his failure to make mandatory employee contributions. For purposes of Section 3.04(B)(1)(b), "Compensation" means Compensation as defined in Section 1.10 hereof, except: (i) Compensation does not include Elective Contributions (as defined in Section 1.67 hereof); (ii) VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 24 any exclusions from Compensation (other than the exclusion of Elective Contributions and the exclusions described in paragraphs (1), (2), (3), and (4) of Section 1.10 (A) hereof) do not apply; and (iii) any modification to the definition of Compensation in Section 3.06 hereof does not apply. (3) DETERMINING CONTRIBUTION RATES. For purposes of this Section 3.04(B), a Participant's contribution rate is the sum of Employer contributions (not including Employer contributions to Social Security) and Forfeitures allocated to the Participant's Account for the Plan Year divided by his or her Compensation for the entire Plan Year. However, for purposes of satisfying a Participant's top heavy minimum in Plan Years beginning after December 31, 1988, a non-key employee Participant's contribution rate does not include any Elective Contributions under a Code Section 401(k) arrangement nor any Employer matching contributions necessary to satisfy the nondiscrimination requirements of Code Section 401(k) or Code Section 401(m). To determine a Participant's contribution rate, the ESOP Committee must treat all qualified top heavy defined contribution plans maintained by the Employer or by any Related Employers (described in Section 1.27 of the Plan) as a single plan. (4) NO ALLOCATIONS. If, for a Plan Year, there are no allocations of Employer contributions or Forfeitures for any Key Employee, the Plan does not require any top heavy minimum allocation for the Plan Year, unless a top heavy minimum allocation applies because of the maintenance by the Employer of more than one plan. (5) METHOD OF COMPLIANCE. The Plan will satisfy the top heavy minimum allocation in accordance with this Section 3.04(B)(5). The ESOP Committee first will allocate the Employer contributions (and Participant Forfeitures, if any) for the Plan Year in accordance with the allocation formula under Section 3.04(A) hereof. The Employer then will contribute an additional amount for such account of any Participant entitled under this Section 3.04(B) to a top heavy minimum allocation and whose contribution rate for the Plan Year, under this Plan, is less than the top heavy minimum allocation. The additional amount is the amount necessary to increase the Participant's contribution rate to the top heavy minimum allocation. The ESOP Committee will allocate the additional contribution to the Account of the Participant on whose behalf the Employer makes the contribution. Sec. 3.05. FORFEITURES. Forfeitures occurring during a Plan Year (net of any amount of Forfeitures allocated to the restoration of prior Forfeitures) shall be allocated to the Account of each Participant. Forfeitures shall be allocated according to the ratio that the Compensation for the Plan Year of each Participant bears to the total Compensation of all such Participants for the Plan Year. If the Participant has an interest in more than one (1) class of Employer Securities which have been allocated to the Participant Employer Securities Account (and any other Account holding Employer Securities), the ESOP Committee, to the extent VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 25 possible, must forfeit the same proportion of each class of stock held in the Participant Employer Securities Account (and any other Account holding Employer Securities). In making a Forfeiture allocation under this provision, the ESOP Committee will base Forfeitures of Employer Securities upon fair market value of the Employer Securities as of the Accounting Date of the Forfeitures. Sec. 3.06. ACCRUAL OF BENEFIT. The ESOP Committee will determine the accrual of benefit (Employer contributions and Participant Forfeitures) on the basis of the Plan Year. (A) COMPENSATION TAKEN INTO ACCOUNT. In allocating an Employer contribution to a Participant's Account, the ESOP Committee, except for purposes of determining the top heavy minimum contribution under Section 3.04(B) hereof, will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant. (B) HOURS OF SERVICE REQUIREMENT. Subject to the top heavy minimum allocation requirement of Section 3.04(B) hereof, the ESOP Committee will not allocate any portion of an Employer contribution and Participant Forfeitures, if any, for a Plan Year to any Participant's Account if the Participant does not complete a minimum of one thousand (1,000) Hours of Service during the Plan Year, unless the Participant terminates employment during the Plan Year because of death or Disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. (C) EMPLOYMENT REQUIREMENT. If the conditions of Section 3.06(B) hereof are satisfied and the Participant Separates from Service during a Plan Year, such Participant will not share in the allocation of Employer contributions and Participant Forfeitures, if any, for that Plan Year unless the Participant Separates from Service because of death or Disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year. (D) PARTICIPATION IN 401(K) PLAN REQUIREMENT. If the conditions of Sections 3.06(B) and (C) are satisfied, the ESOP Committee will not allocate any portion of an Employer contribution and Participant Forfeitures, if any, for a Plan Year to a Participant's Account unless he is a participant in the SHOWCO/VARI-LITE 401(k) SAVINGS PLAN and making Elective Deferrals therein, or the Employer contribution is a Qualified Matching Contribution. (E) SUSPENSION OF ACCRUAL REQUIREMENTS. The Plan suspends the accrual requirements under Sections 3.06(B) and (C) hereof if the Plan fails to satisfy the Participation Test or the Coverage Test. A Plan satisfies the Participation Test if for the Plan Year, the number of Employees who benefit under the Plan is at least equal to the lesser of fifty (50) or forty percent (40%) of the total number of Includible Employees (as hereafter defined) for the Plan Year. A Plan satisfies the Coverage Test if, for the Plan Year, the number of Non-highly Compensated Employees (as hereafter defined) who benefit under the Plan is at least equal to seventy percent (70%) of the total number of Includible Non-highly Compensated Employees for the Plan Year. "Includible Employees" are all Employees other than the following: (1) those Employees excluded from participating in the Plan for the entire Plan Year by reason of the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 26 collective bargaining unit exclusion or the nonresident alien exclusion described under the Code or by reason of eligibility requirements of Section 1.51 hereof; and (2) any Employee who incurs a Separation from Service during the Plan Year and fails to complete at least five hundred and one (501) Hours of Service for the Plan Year. A "Non-highly Compensated Employee" is an Employee who is not a Highly Compensated Employee and who is not a family member aggregated with a Highly Compensated Employee pursuant to Section 1.07 hereof. For purposes of the Participation Test and the Coverage Test, an Employee is benefiting under the Plan for a Plan Year if, under Section 3.04 hereof, he is entitled to an allocation for the Plan Year. If this Section 3.06(E) applies for a Plan Year, the ESOP Committee will suspend the accrual requirements for the Includible Employees who are Participants, beginning first with the Includible Employee(s) employed with the Employer on the last day of the Plan Year, then the Includible Employee(s) who have the latest Separation from Service during the Plan Year, and continuing to suspend the accrual requirements for each Includible Employee who incurred an earlier Separation from Service, from the latest to the earliest Separation from Service date, until the Plan satisfies both the Participation Test and the Coverage Test for the Plan Year. If two or more Includible Employees have a Separation from Service on the same day, the ESOP Committee will suspend the accrual requirements for all such Includible Employees, notwithstanding whether the Plan can satisfy the Participation Test and the Coverage Test by accruing benefits for fewer than all such Includible Employees. If the Plan suspends the accrual requirements for an Includible Employee, that Employee will share in the allocation of Employer contributions and Participant Forfeitures, if any, without regard to the number of Hours of Service he has earned for the Plan Year and without regard to whether he is employed by the Employer on the last day of the Plan Year. PART 2. LIMITATIONS ON ALLOCATIONS: SECTIONS 3.07 AND 3.08 Sec. 3.07. LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount of Annual Additions (as defined in Section 3.08 hereof) which the ESOP Committee may allocate under this Plan on a Participant's behalf for a Limitation Year (as defined in Section 3.08 hereof) may not exceed the Maximum Permissible Amount (as defined in Section 3.08 hereof). If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.04 hereof, would result in an Excess Amount (as defined in Section 3.08 hereof) (other than an Excess Amount resulting from the circumstances described in Section 3.07(B) hereof) to the Participant's Account, the ESOP Committee will reallocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The ESOP Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions. If the amount the Employer otherwise would contribute to the Participant's Account will still cause the Annual Additionals for the Limitation Year to exceed VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 27 the Maximum Permissible Amount, the ESOP Committee would dispose of such excess amount in accordance with Section 3.07(B) hereof. (A) ESTIMATION OF COMPENSATION. Prior to the determination of the Participant's actual Compensation for a Limitation Year, the ESOP Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The ESOP Committee must make this determination on a reasonable and uniform basis for all Participants similarly situated. The ESOP Committee must reduce any Employer contributions (including any allocation of Participant Forfeitures) based on estimated annual Compensation by any Excess Amounts carried over from prior years. As soon as is administratively feasible after the end of the Limitation Year, the ESOP Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for such Limitation Year. (B) DISPOSITION OF EXCESS AMOUNT. If, pursuant to Sections 3.07 and 3.07(A) hereof, or because of the allocation of Participant Forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, the ESOP Committee will dispose of such Excess Amount as follows: (1) The ESOP Committee will return any nondeductible voluntary Employee contributions, if any, to the Participant to the extent that the return would reduce the Excess Amount. (2) If, after the application of paragraph (1), an Excess Amount still exists, and the Plan covers the Participant at the end of the Limitation Year, then the ESOP Committee will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of Participant Forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant. The Participant may elect to limit his Compensation for allocation purposes to the extent necessary to reduce his allocation for the Limitation Year to the Maximum Permissible Amount and eliminate the Excess Amount. (3) If, after the application of paragraph (1), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the ESOP Committee will hold the Excess Amount unallocated in a suspense account. The ESOP Committee will apply the suspense account to reduce Employer contributions (including allocation of Participant Forfeitures) for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary. (4) The ESOP Committee will not distribute any Excess Amount(s) to Participants or to Former Participants. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 28 (C) MORE THAN ONE PLAN. The Employer may contribute under another defined contribution plan in addition to its contributions under this Plan. If the ESOP Committee allocated an Excess Amount to a Participant's Account on an allocation date of this Plan which coincides with an allocation of the other defined contribution plan, the ESOP Committee will attribute the total Excess Amount allocated as of such date to any other qualified plan maintained by the Employer unless the ESOP Committee determines otherwise or applicable law prohibits such allocation to the other qualified plan maintained by the Employer. Sec. 3.08. DEFINITIONS - ARTICLE III. For purposes of Section 3.07 hereof, the following terms mean: (a) "Annual Addition" - The sum of the following amounts allocated on behalf of a Participant for a Limitation Year: (i) all Employer contributions; (ii) all Participant Forfeitures; and (iii) all Employee contributions. Except to the extent provided in Treasury regulations, Annual Additions include excess contributions described in Code Section 401(k), excess aggregate contributions described in Code Section 401(m) regardless of whether the Plan distributes or forfeits such excess amounts. Excess deferrals under Code Section 402(g) are not Annual Additions unless distributed after the correction period described in Code Section 402(g). Annual Additions also include Excess Amounts reapplied to reduce Employer contributions under Section 3.07 hereof. Amounts allocated after March 31, 1984, to an individual medical account (as defined in Code Section 415(l)(2)) included as part of a defined benefit plan maintained by the Employer are Annual Additions. Furthermore, Annual Additions include contributions paid or accrued after December 31, 1985, for taxable years ending after December 31, 1985, attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, but only for purposes of the dollar limitation applicable to the Maximum Permissible Amount. (b) "Compensation" means for purposes of applying the limitations of Part 2 of this Article III, "Compensation" as determined under the general definition of Compensation in Section 1.10(A) hereof that includes Elective Contributions (as defined in Section 1.67 hereof) and excludes (1) reimbursements or other expense allowances, (2) P.S. 58 costs, (3) fringe benefits (cash or non-cash), (4) moving expenses, and (5) deferred compensation and welfare benefits. (c) "Maximum Permissible Amount" means the lesser of (i) Thirty Thousand Dollars ($30,000) or (ii) twenty- five percent (25%) of the Participant's Compensation for the Limitation Year. If there is a short Limitation Year because of a change in Limitation Year, the ESOP Committee will multiply the Thirty Thousand Dollars ($30,000) (or adjusted limitation) by the following fraction: VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 29 Number of months in the short Limitation Year --------------------------------------------- 12 (d) "Employer" means the Employer that adopts this Plan and any Related Employers described in Section 1.27 hereof. Solely for purposes of applying the limitations of Part 2 of this Article III, the ESOP Committee will determine Related Employers described in Section 1.27 hereof by modifying Code Sections 414(b) and (c) in accordance with Code Section 415(h). (e) "Excess Amount" means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (f) "Limitation Year" means the Plan Year. If the Employer amends the Limitation Year to a different twelve (12) consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year. (g) "Defined contribution plan" means a retirement plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which the plan may allocate to such participant's account. The ESOP Committee must treat all defined contribution plans (whether or not terminated) maintained by the Employer as a single plan. Solely for purposes of the limitations of Part 2 of this Article III, the ESOP Committee will treat employee contributions made to a defined benefit plan maintained by the Employer as a separate defined contribution plan. The ESOP Committee also will treat as a defined contribution plan an individual medical account (as defined in Code Section 415(l)(2)) included as part of a defined benefit plan maintained by the Employer and a welfare benefit fund under Code Section 419(e) maintained by the Employer to the extent there are post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)). (h) "Defined benefit plan" means a retirement plan which does not provide for individual accounts for Employer contributions. The ESOP Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 30 (i) "Defined benefit plan fraction" - Projected annual benefit of the Participant under the defined benefit plan(s) -------------------------------------------- The lesser of (i) 125% (subject to the "100% limitation" in paragraph (k)) of the dollar limitation in effect under Code Section 415(b)(1)(A) for the Limitation Year, or (ii) 140% of the Participant's average Compensation for his high 3 consecutive Years of Service To determine the denominator of this fraction, the ESOP Committee will make any adjustment required under Code Section 415(b) and will determine a Year of Service as a Plan Year in which the Employee completed at least one thousand (1,000) Hours of Service. The "projected annual benefit" is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if the plan expresses such benefit in a form other than a straight life annuity or qualified joint and survivor annuity) of the Participant under the terms of the defined benefit plan on the assumptions he continues employment until his normal retirement age (or current age, if later) as stated in the defined benefit plan, his compensation continues at the same rate as in effect in the Limitation Year under consideration until the date of his normal retirement age and all other relevant factors used to determine benefits under the defined benefit plan remain constant as of the current Limitation Year for all future Limitation Years. CURRENT ACCRUED BENEFIT. If the Participant accrued benefits in one or more defined benefit plans maintained by the Employer which were in existence on May 5, 1986, the dollar limitation used in the denominator of this fraction will not be less than the Participant's Current Accrued Benefit. A Participant's "Current Accrued Benefit" is the sum of the annual benefits under such defined benefit plans which the Participant had accrued as of the end of the 1986 Limitation Year (the last Limitation Year beginning before January 1, 1987), determined without regard to any change in the terms or conditions of the Plan made after May 5, 1986, and without regard to any cost of living adjustment occurring after May 5, 1986. This Current Accrued Benefit rule applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 as in effect at the end of the 1986 Limitation Year. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 31 (j) "Defined contribution plan fraction" - The sum, as of the close of the Limitation Year, of the Annual Additions to the Participant's Account under the defined contribution plan(s) ---------------------------------------------- The sum of the lesser of the following amounts determined for the Limitation Year and for each prior Year of Service with the Employer: (i) 125% (subject to the "100% limitation" in paragraph (k)) of the dollar limitation in effect under Code Section 415(c)(1)(A) for the Limitation Year (determined without regard to the special dollar limitations for employee stock ownership plans), or (ii) 35% of the Participant's Compensation for the Limitation Year For purposes of determining the defined contribution plan fraction, the ESOP Committee will not recompute Annual Additions in Limitation Years beginning prior to January 1, 1987, to treat all Employee contributions as Annual Additions. If the Plan satisfied Code Section 415 for Limitation Years beginning prior to January 1, 1987, the ESOP Committee will redetermine the defined contribution plan fraction and the defined benefit plan fraction as of the end of the 1986 Limitation Year, in accordance with this Section 3.08. If the sum of the redetermined fractions exceeds 1.0, the ESOP Committee will subtract permanently from the numerator of the defined contribution plan fraction an amount equal to the product of (1) the excess of the sum of the fractions over 1.0, times (2) the denominator of the defined contribution plan fraction. In making the adjustment, the ESOP Committee must disregard any accrued benefit under the defined benefit plan which is in excess of the Current Accrued Benefit. This Plan continues any transitional rules applicable to the determination of the defined contribution plan fraction under the Employer's Plan as of the end of the 1986 Limitation Year. (k) "100% limitation" - If the 100% limitation applies, the ESOP Committee must determine the denominator of the defined benefit plan fraction and the denominator of the defined contribution plan fraction by substituting 100% for 125%. The 100% limitation applies only if: (i) the Plan's top heavy ratio exceeds 90%; or (ii) the Plan's top heavy ratio is greater than 60%, and the Employer does not provide extra minimum benefits which satisfy Code Section 416(h)(2). Sec. 3.09. NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS AND EMPLOYEE CONTRIBUTIONS. The ESOP Committee must determine whether the annual Employer matching contributions, if any, and the Employee contributions, if any, satisfy one of the following average contribution percentage ("ACP") tests: VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 32 (i) The ACP for the Highly Compensated Group does not exceed 1.25 times the ACP of the Nonhighly Compensated Group; or (ii) The ACP for the Highly Compensated Group does not exceed the ACP for the Nonhighly Compensated Group by more than two percentage points and the ACP for the Highly Compensated Group is not more than twice the ACP for the Nonhighly Compensated Group. (A) CALCULATION OF ACP. The average contribution percentage for a group is the average of the separate contribution percentages calculated for each Eligible Employee who is a member of that group. An Eligible Employee's contribution percentage for a Plan Year is the ratio of the Eligible Employee's aggregate contributions for the Plan Year to the Employee's Compensation for the Plan Year. "Aggregate contributions" are matching contributions and employee contributions. For aggregated family members treated as a single Highly Compensated Employee, the contribution percentage of the family unit is the contribution percentage determined by combining the aggregate contributions and Compensation of all aggregated family members. The ESOP Committee, in a manner consistent with Treasury regulations, may determine the contribution percentages of the Eligible Employees by taking into account qualified nonelective contributions made to this Plan or to any other qualified Plan maintained by the Employer. The ESOP Committee may not include qualified nonelective contributions in the ACP test unless the allocation of nonelective contributions is nondiscriminatory when the ESOP Committee takes into account all nonelective contributions (including the qualified nonelective contributions) and also when the ESOP Committee takes into account only the nonelective contributions not used in the ACP test described in this Section 13.09 of the Plan. The ESOP Committee may not include in the ACP test any qualified nonelective contributions or elective deferrals under another qualified plan unless that plan has the same plan year as this Plan. The ESOP Committee must maintain records to demonstrate compliance with the ACP test, including the extent to which the Plan used qualified nonelective contributions or elective deferrals to satisfy the test. (B) SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the contribution percentage of any Highly Compensated Employee, the aggregate contributions taken into account must include any matching contributions and any employee contributions made on his behalf to any other plan maintained by the Employer, unless the other plan is an ESOP described in Code Section 4975(e)(7) or Section 409. If the plans have different plan years, the ESOP Committee will determine the combined aggregate contributions on the basis of the plan years ending in the same calendar year as if a single plan. (C) AGGREGATION OF CERTAIN PLANS. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the plans to determine whether either plan satisfies the ACP test. This aggregation rule applies to the contribution percentage determination for all Eligible Employees, regardless of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. The ESOP VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 33 Committee also may elect to aggregate plans which the Employer does not treat as a unit for coverage or nondiscrimination purposes. For Plan Years beginning after December 31, 1989, an aggregation of plans under this paragraph does not apply to plans which have different plan years and, for Plan Years beginning after December 31, 1988, the ESOP Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). (D) DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. The ESOP Committee will determine excess aggregate contributions under the Plan. If the ESOP Committee determines the Plan fails to satisfy the ACP test for a Plan Year, it must distribute the excess aggregate contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to ten percent (10%) of the amount of excess aggregate contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess aggregate contributions are the amount of the aggregate contributions allocated on behalf of the Highly Compensated Employees which causes the Plan to fail to satisfy the ACP test. The ESOP Committee will distribute to each Highly Compensated Employee his respective share of the excess aggregate contributions. The ESOP Committee will determine the respective shares of excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the greatest contribution percentage, reducing his contribution percentage to the next highest contribution percentage then, if necessary, reducing the contribution percentage of the Highly Compensated Employee(s) at the next highest contribution percentage (including the contribution percentage of the Highly Compensated Employee(s) whose contribution percentage the ESOP Committee already has reduced), and continuing in this manner until the ACP for the Highly Compensated Group satisfies the ACP test. If the Highly Compensated Employee is part of an aggregated family group, the ESOP Committee, in accordance with the applicable Treasury regulations, will determine each aggregated family member's allocable share of the excess aggregate contributions assigned to the family unit. A distribution of excess aggregate contributions (and income) may be made under this Subsection "(D)" without regard to any notice or consent otherwise required under Code Sections 411(a)(11) and 417. (E) ALLOCABLE INCOME. To determine the amount of the corrective distribution required under this Section 13.09 of the Plan, the ESOP Committee must calculate the allocable income for the Plan Year in which the excess aggregate contributions arose and for the "gap period" measured from the beginning of the next Plan Year to the date of the distribution. "Allocable income" means net income or net loss. The Committee will determine allocable income in the same manner for excess contributions, except the numerator of the allocation fraction will be the Highly Compensated Employee's excess aggregate contributions for the Plan Year and the denominator of the allocation fraction will be the sum of: (a) the total account balance of the Employee attributable to the Employee and Matching Contributions, and amounts treated as matching contributions as of the beginning of the Plan Year; and (b) the Employee and matching contributions, and amounts treated as matching contributions for the Plan Year. (F) CHARACTERIZATION OF EXCESS AGGREGATE CONTRIBUTIONS. The ESOP Committee will treat a Highly Compensated Employee's allocable share of excess aggregate contributions VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 34 in the following priority: (1) on a pro rata basis to matching contributions which the ESOP Committee has included in the ACP test; and (2) then to qualified nonelective contributions used in the ACP test. To the extent the Highly Compensated Employee's excess aggregate contributions are attributable to matching contributions, and he is not one hundred percent (100%) vested in his Accrued Benefit attributable to matching contributions, the ESOP Committee will distribute only the vested portion and forfeit the nonvested portion. The vested portion of the Highly Compensated Employee's excess aggregate contributions attributable to Employer matching contributions is the total amount of such excess aggregate contributions (as adjusted for allocable income) multiplied by his vested percentage (determined as of the last day of the Plan Year for which the Employer made the matching contribution). The Plan will allocate forfeited excess aggregate contributions as Employer discretionary matching contributions for the Plan Year in which the forfeiture occurs, except the ESOP Committee will not allocate these forfeitures to the Highly Compensated Employees who incurred the forfeitures. Sec. 3.10. DEFINITIONS. For purposes of Section 3.09, the following definitions shall apply: (a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.07 hereof. Family members aggregated as a single Employee under Section 1.07 hereof constitute a single Highly Compensated Employee, whether a particular family member is a Highly Compensated Employee or a Nonhighly Compensated Employee without the application of family aggregation. (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a Highly Compensated Employee and who is not a family member treated as a Highly Compensated Employee. (c) For purposes of the ACP test described in Section 13.09 hereof, an "Eligible Employee" means a Participant who is eligible to receive an allocation of Employer matching contributions (or would be eligible if he made the type of contributions necessary to receive an allocation of matching contributions) and a Participant who is eligible to make Employee contributions, regardless of whether he actually makes Employee contributions. An Employee continues to be an Eligible Employee during a period the Plan suspends the Employee's right to make elective deferrals or nondeductible contributions following a hardship distribution. (d) "Highly Compensated Group" means the group of Eligible Employees who are Highly Compensated Employees for the Plan Year. (e) "Non-highly Compensated Group" means the group of Eligible Employees who are Non-highly Compensated Employees for the Plan Year. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 35 (f) "Compensation" means, except as specifically provided under this Article III, Compensation as defined for nondiscrimination purposes in Section 1.10(B) hereof. Compensation includes Compensation received only for the portion of the Plan Year in which the Employee was an Eligible Employee and only for the portion of the Plan Year in which the Plan or the Code Section 401(k) arrangement was in effect. (g) "Deferral contributions" means the sum of the deferral contributions the Employer contributes on behalf of an Eligible Employee. (h) "Elective deferrals" are the deferral contributions the Employer contributes at the election of an Eligible Employee. If the Code Section 401(k) arrangement includes a cash or deferred feature, any portion of a cash or deferred contribution contributed because of the Employee's failure to make a cash election is an elective deferral, but any portion of a cash or deferred contribution over which the Employee does not have a cash election is not an elective deferral. Elective deferrals do not include amounts which have become currently available to the Employee prior to the election nor amounts designated as nondeductible employee contributions at the time of deferral or contribution. (i) "Matching contributions" or "Regular Matching contributions" are contributions made by the Employer on account of elective deferrals under a Code Section 401(k) arrangement or on account of employee contributions. Matching contributions also include Participant forfeitures allocated on account of such elective deferrals or employee contributions. (j) "Nonelective contributions" are contributions made by the Employer which are not subject to a deferral election by an Employee and which are not matching contributions. (k) "Qualified matching contributions" are matching contributions which are one hundred percent (100%) Nonforfeitable at all times and which are subject to the distribution restrictions described in Paragraph "(m)" of Section 13.10 hereof. Matching contributions are not one hundred percent (100%) Nonforfeitable at all times if the Employee does not have a one hundred percent (100%) Nonforfeitable interest because of his Years of Service taken into account under the vesting schedule of the Plan. (l) "Qualified nonelective contributions" are nonelective contributions which are one hundred percent (100%) Nonforfeitable at all times and which are subject to the distribution restrictions described in Paragraph "(m)" of Section 13.10 hereof. Nonelective contributions are not one hundred percent (100%) Nonforfeitable at all times if the Employee does not have a one hundred percent (100%) Nonforfeitable interest because of his Years of Service taken into account under the vesting schedule of the Plan. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 36 (m) "Distribution restrictions" means the Employee may not receive a distribution of the specified contributions (nor earnings on those contributions) except in the event of (1) the Participant's death, disability, termination of employment, attainment of age 59 1/2, (2) financial hardship satisfying the requirements of Code Section 401(k) and the applicable Treasury regulations, (3) plan termination, without establishment of a successor defined contribution plan (other than an employee stock ownership plan ("ESOP") or a simplified employee pension), (4) a sale of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business, but only to an employee who continues employment with the corporation acquiring those assets, or (5) a sale by a corporation of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)), but only to an employee who continues employment with the subsidiary. A distribution on account of financial hardship, as described in clause (2), may not include earnings on elective deferrals credited as of a date later than December 31, 1988, and may not include any earnings on qualified matching contributions and qualified nonelective contributions, regardless of when credited. A distribution described in clauses (3), (4) or (5), must be a lump sum distribution, as required under Code Section 401(k)(10). (n) "Employee contributions" are contributions made by a Participant on an after-tax basis, whether voluntary or mandatory, and designated, at the time of contribution, as an employee (or nondeductible) contribution. Elective deferrals and deferral contributions are not employee contributions. END OF ARTICLE III VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 37 ARTICLE IV PARTICIPANT CONTRIBUTIONS Sec. 4.01. PARTICIPANT VOLUNTARY CONTRIBUTIONS. The Plan does not permit (or require) Participant voluntary contributions. Sec. 4.02. PARTICIPANT VOLUNTARY CONTRIBUTIONS - SPECIAL DISCRIMINATION TEST. The ESOP Committee, in accordance with Section 4.01 above, is not required to satisfy a special discrimination test under Code Section 401(m). Sec. 4.03. PARTICIPANT ROLLOVER CONTRIBUTIONS. If the SHOWCO/VARI-LITE 401(k) SAVINGS PLAN (or a successor plan) permits Participant rollover contributions, this Section 4.03 does not apply. If the SHOWCO/VARI-LITE 401(k) SAVINGS PLAN (or a successor plan) does not exist or does not permit Participant rollover contributions, this Plan will permit Participant rollover contributions provided the following provisions are satisfied: (A) ROLLOVER CONTRIBUTIONS. Any Participant, with the Company's and the ESOP Committee's written consent and after filing with the ESOP Committee the form prescribed by the ESOP Committee, may contribute cash or other property to the Trust other than as a voluntary contribution, if the contribution is a "Rollover Contribution" which the Code permits an employee to transfer either directly or indirectly from one qualified plan to another qualified plan. A Rollover Contribution is not an Annual Addition under Part 2 of Article III hereof. (B) ROLLOVER ACCOUNT. A "Rollover Contribution" accepted by the ESOP Committee shall be credited to a separate Rollover Account, and (i) shall be held pursuant to the provisions of this Plan; (ii) shall be fully vested at all times and not be subject to forfeiture for any reason; and (iii) may not be withdrawn by the Employee, in whole or in part, for any reason, except as provided in Section 6.02 hereof. (C) DEFINITIONS. For purposes of this Section 4.03, the term "Rollover Contribution" shall include: (1) amounts transferred to this Plan directly from another qualified corporate plan which does not provide a life annuity form of payment, provided that the trust from which such funds are transferred permits the transfer to be made; (2) amounts which are properly characterized as an Eligible Rollover Distribution (including a lump sum distribution), received by a person who is not an Employee, from another qualified corporate plan with respect to such person's service for such corporate employer, which amounts are eligible for tax free rollover treatment and which are transferred by the Employee to the Trustee of this Plan within sixty (60) days following receipt thereof; VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 38 (3) amounts transferred to this Plan from an individual retirement account, provided that the individual retirement account contains no assets: (A) other than assets which were previously distributed to a person who is now an Employee by another qualified corporate plan as an Eligible Rollover Distribution (including a lump sum distribution) with respect to such person's service for such corporate employer, which amounts were eligible for tax-free rollover treatment, and which amounts were deposited in such individual retirement account within sixty (60) days of receipt thereof; and (B) other than earnings on said assets; and (4) amounts distributed to a person who is now an Employee from an individual retirement account meeting the requirements of paragraph (3) above, and transferred by the Employee to this Plan within sixty (60) days of receipt thereof from such individual retirement account. (D) TRANSFERS. Prior to accepting the transfers to which this Section 4.03 applies, the Company and ESOP Committee may require the following: (1) the Employee to furnish satisfactory evidence that the proposed transfer is in fact a "Rollover Contribution" which the Code permits an Employee to make to a qualified plan; (2) the Employee to establish that the amounts to be transferred to this Plan meet the requirements of this Section 4.03; (3) the Employee to furnish an opinion of counsel or other documentation satisfactory that the amounts to be transferred meet the requirements of this Section 4.03 and will not jeopardize the tax exempt status of this Plan for any reason (including, but not limited to, the failure of the amount to be excluded from the definition of Annual Addition in Section 415(c)(2) of the Code, and thereby causing the Annual Addition to the account to exceed the permissible limits of Section 415 of the Code, or create adverse tax consequences to the Employer); and (4) the Employee to furnish to the ESOP Committee and Company a written opinion from legal counsel (legal counsel must be approved by the ESOP Committee) which provides that such Rollover Contribution does not violate any provisions under the Federal and State Securities laws and that the Company is not required to register any Employer Securities held by the Plan under the Federal and State Securities laws as a result of such Rollover Contribution. (E) INVESTMENT. A Rollover Account shall be invested in a diversified manner in accordance with the provisions of this Plan and in investments other than Employer Securities. (F) WRITTEN CONSENT OF ESOP COMMITTEE AND COMPANY. Notwithstanding any provision to the contrary herein, the Plan shall not accept any Participant Rollover Contributions unless the ESOP Committee and Company consent to such Rollover Contribution in writing. END OF ARTICLE IV VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 39 ARTICLE V TERMINATION OF SERVICE - PARTICIPANT VESTING Sec. 5.01. NORMAL RETIREMENT AGE. A Participant's Normal Retirement Age is sixty-five (65) years of age. Under Section 6.07 hereof, a Participant who remains in the employ of the Employer after attaining Normal Retirement Age shall continue to participate in the Plan until his Late Retirement Date. A Participant's Accrued Benefit derived from Employer contributions is one hundred percent (100%) Nonforfeitable upon and after his attaining Normal Retirement Age (if employed by the Employer on or after that date). Sec. 5.02. PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with the Employer terminates as a result of death or Disability, the Participant's Accrued Benefit derived from Employer contributions and Participant Forfeitures will be one hundred percent (100%) Nonforfeitable. Sec. 5.03. VESTING SCHEDULE. (A) QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT AND ROLLOVER ACCOUNT. A Participant has a one hundred percent (100%) nonforfeitable interest at all times in his Qualified Matching Contributions Account and Rollover Account. (B) VESTING SCHEDULE. Except as provided in Sections 5.01, 5.02, 5.03(A), and 9.14 hereof, for each Year of Service a Participant's Nonforfeitable Percentage of his Accrued Benefit derived from Employer Nonelective Contributions equals the percentage in the following vesting schedule: Percent of Years of Service Nonforfeitable With the Employer Accrued Benefit ----------------- --------------- Less than 3 years . . . . . . . . . . . . . None 3 years, but less than 4 . . . . . . . . . . 30% 4 years, but less than 5 . . . . . . . . . . 40% 5 years, but less than 6 . . . . . . . . . . 60% 6 years, but less than 7 . . . . . . . . . . 80% 7 years or more . . . . . . . . . . . . . . 100% Effective the first Plan Year for which the Plan is a top heavy Plan (as defined in Section 1.29 hereof), the Employer will calculate a Participant's Nonforfeitable Percentage of his Accrued Benefit under the following vesting schedule: VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 40 Percent of Years of Service Nonforfeitable With the Employer Accrued Benefit ----------------- --------------- Less than 2 years . . . . . . . . . . . . . None 2 years, but less than 3 . . . . . . . . . . 30% 3 years, but less than 4 . . . . . . . . . . 40% 4 years, but less than 5 . . . . . . . . . . 60% 5 years, but less than 6 . . . . . . . . . . 80% 6 years or more . . . . . . . . . . . . . . 100% The Employer will apply the top heavy vesting schedule to Participants who earn at least one (1) Hour of Service after the top heavy vesting schedule becomes effective. A shift between vesting schedules under this Section 5.03 is an amendment to the vesting schedule and the ESOP Committee must apply the rules of Section 7.05 hereof accordingly. A shift to a new vesting schedule under this Section 5.03 is effective on the first day of the Plan Year for which the top heavy status of the Plan changes. (C) SPECIAL VESTING FORMULA. If a distribution (other than a cash-out distribution described in Section 5.04 hereof) is made to a partially-vested Participant, and the Participant has not incurred a Forfeiture Break in Service (as defined in Section 5.08(B) hereof) at the relevant time, the ESOP Committee will establish a separate Account for the Participant's Accrued Benefit. At any relevant time following the distribution, the ESOP Committee will determine the Participant's Nonforfeitable Accrued Benefit derived from Employer contributions in accordance with the following formula: P(AB + (R x D)) - (R x D). To apply this formula, "P" is the Participant's current vesting percentage at the relevant time, "AB" is the Participant's Employer-derived Accrued Benefit at the relevant time, "R" is the ratio of "AB" to the Participant's Employer-derived Accrued Benefit immediately following the earlier distribution and "D" is the amount of the earlier distribution. If, under a restated Plan, the Plan has made distribution to a partially-vested Participant prior to its restated Effective Date and is unable to apply the cash-out provisions of Section 5.04 hereof to that prior distribution, this special vesting formula also applies to that Participant's remaining Account. Sec. 5.04. CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS AND RESTORATION OF FORFEITED ACCRUED BENEFIT. If, pursuant to Article VI hereof, a partially-vested Participant receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in Section 5.08(B) hereof), the cash-out distribution will result in an immediate Forfeiture of the non-vested portion of the Participant's Accrued Benefit derived from Employer contributions. A partially-vested Participant is a Participant whose Nonforfeitable percentage determined under Section 5.03 hereof is less than one hundred percent (100%). A cash-out distribution is a distribution of the entire present value of the Participant's Nonforfeitable Accrued Benefit. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 41 (A) RESTORATION AND CONDITIONS UPON RESTORATION. A partially-vested Participant who is re-employed by the Employer after receiving a cash-out distribution of the Nonforfeitable percentage of his Accrued Benefit may repay the amount of the cash-out distribution attributable to Employer contributions, unless the Participant no longer has a right to restoration by reason of the conditions of this Section 5.04(A). If a partially-vested Participant makes the cash-out distribution repayment, the ESOP Committee, subject to the conditions of this Section 5.04(A), must restore his Accrued Benefit attributable to Employer contributions to the same dollar amount as the dollar amount of his Accrued Benefit on the Accounting Date, or other Valuation Date, immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other Valuation Date. Restoration of the Participant's Accrued Benefit includes restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Accrued Benefit, in accordance with applicable Treasury regulations. The ESOP Committee will not restore a re-employed Participant's Accrued Benefit under this paragraph if: (1) Five (5) years have elapsed since the Participant's first re-employment date with the Employer following the cash-out distribution; or (2) The Participant incurred a Forfeiture Break in Service (as defined in Section 5.08(B) hereof). This condition also applies if the Participant makes repayment within the Plan Year in which he incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the ESOP Committee otherwise would restore. (B) TIME AND METHOD OF RESTORATION. If neither of the two conditions preventing restoration of the Participant's Accrued Benefit applies, the ESOP Committee will restore the Participant's Accrued Benefit as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the ESOP Committee, to the extent necessary, will allocate to the Participant's Account: (1) First, the amount, if any, of Participant Forfeitures the ESOP Committee would otherwise allocate under Section 3.04 hereof; (2) Second, the amount, if any, of the Trust Fund net income or gain for the Plan Year; and (3) Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula. To the extent the amounts described in clauses (1), (2) and (3) above are insufficient to enable the ESOP Committee to make the required restoration, the Employer must contribute, without regard to any requirement or condition of Section 3.01 hereof, the additional amount necessary to enable the ESOP Committee to make the required restoration. If, for a particular Plan Year, the ESOP Committee must restore the Accrued Benefit of more than one re-employed Participant, then the ESOP Committee will make the restoration allocation(s) to each such VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 42 Participant's Account in the same proportion that a Participant's restored amount for the Plan Year bears to the restored amount for the Plan Year of all re-employed Participants. The ESOP Committee will not take into account the allocation under this Section 5.04 in applying the limitation on allocations under Part 2 of Article III hereof. (C) ZERO PERCENT VESTED PARTICIPANT. The deemed cash-out rule applies to a zero percent (0%) vested Participant. A zero percent (0%) vested Participant is a Participant whose Accrued Benefit derived from Employer contributions is entirely forfeitable at the time of his Separation from Service. If the Participant's Account is not entitled to an allocation for the Plan Year in which he has a Separation from Service, the ESOP Committee will apply the deemed cash-out rule as if the zero percent vested Participant received a cash-out distribution on the date of the Participant's Separation from Service. If the Participant's Account is entitled to an allocation for the Plan Year in which he has a Separation from Service, the ESOP Committee will apply the deemed cash-out rule as if the zero percent (0%) vested Participant received a cash-out distribution on the first day of the first Plan Year beginning after his Separation from Service. For purposes of applying the restoration provisions of this Section 5.04, the ESOP Committee will treat the zero percent (0%) vested Participant as repaying his cash-out "distribution" on the first date of his re-employment with the Employer. Sec. 5.05. SEGREGATED ACCOUNT FOR REPAID AMOUNT. Until the ESOP Committee restores the Participant's Accrued Benefit, as described in Section 5.04, the cash-out amount the Participant has repaid will be retained in a Segregated Account maintained solely for that Participant. The amount in the Participant's Segregated Account will be reinvested in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. Until the ESOP Committee restores the Participant's Accrued Benefit, the Participant's Segregated Account alone shares in any income it earns and it alone bears any expense or loss it incurs. Unless the repayment qualifies as a Rollover Contribution, the Participant will be repaid as soon as is administratively practicable the full amount of the Participant's Segregated Account if the ESOP Committee determines either of the conditions of Section 5.04(A) prevents restoration as of the applicable Accounting Date, notwithstanding the Participant's repayment. The Participant's Segregated Account will be commingled with the balance of the Trust Fund as of the second Accounting Date immediately following the date of the Participant's repayment. Sec. 5.06. YEAR OF SERVICE - VESTING. For purposes of vesting under Section 5.03 hereof, Year of Service means any Plan Year during which an Employee completes not less than one thousand (1,000) Hours of Service with the Employer. Sec. 5.07. BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant incurs a "Break in Service" if during any Plan Year he does not complete more than five hundred (500) Hours of Service with the Employer, unless he does not complete more than five hundred (500) Hours of Service because: (a) he is transferred; (b) he is on an approved leave of absence which does not exceed eighteen (18) months and he returns to employment with the Employer immediately following the leave of absence; (c) he is temporarily laid off, and he returns to employment with the Employer immediately following the temporary layoff; or (d) he VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 43 is in the service in the armed forces of the United States, and he returns to employment with the Employer within ninety (90) days after termination of military service without being employed somewhere else. Solely for the purpose of determining whether an Employee has incurred a Break in Service, if the Employee is absent from Service because of her pregnancy, the birth of her child, his or her receipt of a child through adoption, or his or her caring for the child immediately after birth or adoption, he or she shall be entitled to the Hours of Service that he or she would have received but for that absence for one (1) year after the absence began. Eight (8) Hours of Service shall be credited for each day of such absence. However, no more than a total of five hundred and one (501) hours can be credited. The five hundred and one (501) hours shall be credited to the Plan Year in which the absence first begins if such hours prevent a Break in Service in that period; otherwise, the five hundred and one (501) hours shall be credited to the next Plan Year. Sec. 5.08. INCLUDED YEARS OF SERVICE - VESTING. (A) INCLUDED YEARS OF SERVICE. For purposes of determining "Years of Service" under Section 5.06 hereof, the Plan takes into account all Years of Service an Employee completes with the Employer, except: (1) Any Year of Service before a Break in Service if the number of consecutive Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of the Years of Service prior to the Break. This exception applies only if the Participant is not vested in his Accrued Benefit derived from Employer contributions at the time he has a Break in Service. The aggregate number of Years of Service before a Break in Service does not include any Years of Service not required to be taken into account under this exception by reason of any prior Break in Service. (2) Any Year of Service earned prior to the effective date of ERISA, if the Plan would have disregarded that Year of Service on account of an Employee's Separation from Service under a Plan provision adopted and in effect before January 1, 1974. (3) Any Year of Service before January 1, 1971, unless the Employee has had three (3) Years of Service after December 31, 1970. (B) FORFEITURE BREAK IN SERVICE. For the sole purpose of determining a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs five (5) consecutive Breaks in Service. Sec. 5.09. FORFEITURE OCCURS. A Participant's Forfeiture, if any, of his Accrued Benefit derived from Employer contributions and Forfeitures of other Participants occurs under the Plan as of the last day of the Plan Year in which the Participant first incurs a Forfeiture VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 44 Break in Service; or the date the Participant receives a cash-out distribution. The ESOP Committee determines the percentage of a Participant's Accrued Benefit Forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule of Section 5.03 hereof. A Participant will not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.14 hereof. End of Article V VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 45 ARTICLE VI TIME AND METHOD OF PAYMENT OF BENEFITS Sec. 6.01. TIME OF PAYMENT OF ACCRUED BENEFIT. Unless, pursuant to Sections 6.03 hereof, the Participant or the Beneficiary elects in writing to a different time or method of payment, the ESOP Committee will direct the Trustee to commence distribution of a Participant's Nonforfeitable Accrued Benefit in accordance with this Section 6.01. A Participant must consent, in writing, to any distribution required under this Section 6.01 if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds or at the time of any prior distribution exceeded Three Thousand Five Hundred Dollars ($3,500) and the Participant has not attained the later of Normal Retirement Age or age sixty-two (62). The Participant's spouse also must consent, in writing, to any distribution. A distribution date under this Article VI, unless otherwise specified within the Plan, is March 1 of each Plan Year or as soon as administratively practicable following a distribution date. For purposes of the consent requirements under this Article VI, if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds or at the time of any prior distribution exceeded Three Thousand Five Hundred Dollars ($3,500), the ESOP Committee must treat that present value as exceeding Three Thousand Five Hundred Dollars ($3,500) for purposes of all subsequent Plan distributions to the Participant. (A) SEPARATION FROM SERVICE FOR A REASON OTHER THAN DEATH. (1) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $3,500. If the Participant's Separation from Service is for any reason other than death or Disability, the ESOP Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum as soon as administratively practicable following the close of the Plan Year in which the Participant's Separation from Service occurs, but in no event later than the sixtieth (60th) day following the close of the Plan Year in which the Participant attains Normal Retirement Age. If the Participant has attained Normal Retirement Age when he Separates from Service, the distribution under this paragraph will occur no later than the 60th day following the close of the Plan Year in which the Participant's Separation from Service occurs. Notwithstanding anything to the contrary in this Paragraph, the Participant may elect to have his Nonforfeitable Accrued Benefit distributed, in whole or in part, directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover and at the time and in the manner prescribed by the Plan Administrator; provided, however, the Direct Rollover portion of the distribution qualifies as an Eligible Rollover Distribution. (2) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. If the Participant's Separation from Service is for any reason other than death or Disability, the ESOP Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a form and at the time elected by the Participant, pursuant to Section 6.03 hereof. In the absence of an election by VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 46 the Participant, the ESOP Committee will direct the Trustee to commence distribution of the Participant's Nonforfeitable Accrued Benefit in a lump sum on the sixtieth (60) day following the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Age; (b) the Participant attains age sixty-two (62); or (c) the Participant's Separation from Service. (3) DISABILITY. If the Participant's Separation from Service is because of Disability, the ESOP Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a form and at the time elected by the Participant, pursuant to Section 6.03 hereof. In the absence of an election by the Participant, the ESOP Committee will direct the Trustee to commence distribution of the Participant's Nonforfeitable Accrued Benefit in a lump sum on the sixtieth (60) day following the close of the Plan Year in which the Participant's Separation from Service occurs, subject to the notice and consent requirements of this Article VI and to the applicable mandatory commencement dates described in Paragraph (1) or in Paragraph (2) of this Section 6.01(A). (B) REQUIRED BEGINNING DATE. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or nonelection), is later than the Participant's Required Beginning Date, the ESOP Committee instead must direct the Trustee to make distribution on the Participant's Required Beginning Date. A Participant's Required Beginning Date is April 1 following the close of the calendar year in which the Participant attains age seventy and one-half (70 1/2). However, if the Participant, prior to incurring a Separation from Service, attained age seventy and one-half (70 1/2) by January 1, 1988, and, for the five (5) Plan Year period ending in the calendar year in which he attained age seventy and one-half (70 1/2) and for all subsequent years, the Participant was not a more than five percent (5%) owner, the Required Beginning Date is the April 1 following the close of the calendar year in which the Participant Separates from Service or, if earlier, the April 1 following the close of the calendar year in which the Participant becomes a more than five percent (5%) owner. Furthermore, if a Participant who was not a more than five percent (5%) owner attained age seventy and one-half (70 1/2) during 1988 and did not incur a Separation from Service prior to January 1, 1989, his Required Beginning Date is April 1, 1990. A mandatory distribution at the Participant's Required Beginning Date will be in lump sum unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment. (C) DEATH OF THE PARTICIPANT. The ESOP Committee will direct the Trustee, in accordance with this Section 6.01(C), to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death. The ESOP Committee will determine the death benefit by reducing the Participant's Nonforfeitable Accrued Benefit by any security interest the Plan has against that Nonforfeitable Accrued Benefit by reason of an outstanding Participant loan. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 47 (1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES NOT EXCEED $3,500. The ESOP Committee must direct the Trustee to distribute the deceased Participant's Nonforfeitable Accrued Benefit in a lump sum as soon as administratively practicable following the Participant's death or, if later, the date on which the ESOP Committee receives notification of or otherwise confirms the Participant's death. Notwithstanding anything to the contrary in this Paragraph, the Participant's Beneficiary may elect to have his Nonforfeitable Accrued Benefit distributed, in whole or in part, directly to an Eligible Retirement Plan specified by the Participant's Beneficiary in a Direct Rollover and at the time and in the manner prescribed by the Plan Administrator; provided, however, the Direct Rollover portion of the distribution qualifies as an Eligible Rollover Distribution. (2) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. The ESOP Committee will direct the Trustee to distribute the deceased Participant's Nonforfeitable Accrued Benefit at the time and in the form elected by the Participant or, if applicable by the Beneficiary, as permitted under this Article VI. In the absence of an election, the ESOP Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum on the sixtieth (60) day following the close of the Plan Year in which the Participant's death occurs or, if later, the first distribution date (as defined in Section 6.01 hereof) following the date the ESOP Committee receives notification of or otherwise confirms the Participant's death. If the death benefit is payable in full to the Participant's surviving spouse, the surviving spouse, in addition to the distribution options provided in this Section 6.01(C), may elect distribution at any time or in any form (other than the joint and survivor annuity) this Article VI would permit for a Participant. Sec. 6.02. METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to any restrictions prescribed by Section 6.03 hereof and subject to Section 6.05 hereof, a Participant or Beneficiary may elect distribution under one, or any combination, of the following methods: (a) METHOD 1 - LUMP SUM. The Participant's Account shall be distributed in a single lump sum payment no later than the end of the Plan Year following the Plan Year in which occurs the Participant's death, Retirement, Disability, or Separates from Service. (b) METHOD 2 - INSTALLMENT OPTION. The Participant's Account shall be distributed in installments over a period of time not to exceed the life expectancy of the Participant or joint and last survivor expectancy of the Participant and designated Beneficiary, as selected by the Participant. If a Participant elects installment payments in accordance with this Section 6.02(b), payment shall be made in monthly, quarterly, or other regular installments over a fixed period of time, not exceeding in the case of benefits payable upon VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 48 Retirement or Disability, the longer of the life expectancy of the Participant or the joint life expectancy of the Participant and his designated Beneficiary. Initial payments under any installment schedule shall be set in such amounts as would complete the payment of total benefit in substantially equal payments over the period of time fixed for such payments; but the amounts of each installment may be adjusted by the Trustee following each valuation of the Trust Fund to reflect the effect of net earnings, gains, or losses credited to the Participant's Account in accordance with this Plan. Payments under any installment method shall not be subject to any mortality risk or determination, but shall be continued in all events to the Participant, his Spouse, or his designated Beneficiaries or, if none, as provided in Section 8.02 hereof until the full amount of his Account shall have been distributed; however, this sentence does not constitute any guaranty by the Plan of the sufficiency of the Account to meet all payments initially scheduled or any guaranty against the diminution in value of assets retained in the Account to meet installment obligations, whether such diminution shall occur by losses in market values, operating expenses of the Plan, or any other charges properly made to such Account while any part of its assets are retained in the Trust Fund. For purposes of determining the value of a Participant's Account under this Section 6.02(b), a Participant's Account balance is determined as of the end of the Plan Year in which occurs the Participant's death, Retirement, or Disability or Separation from Service and without regard to the value of the Participant's Rollover Account. During the period such installment payments are being made from the funds in the Participant's Account, the Participant's Account shall continue to participate in the annual adjustments for "net increase" or "net decrease" of the Trust. (c) METHOD 3 - DIRECT ROLLOVER. At the time the Participant is entitled to receive a distribution under Subsection (a) or (b) of Section 6.02 hereof, the Participant's Account, in whole or in part, shall be distributed directly to an Eligible Retirement Plan specified by the Participant in a Direct Rollover and at the time and in the manner prescribed by the Plan Administrator; provided, however, the Direct Rollover portion of the distribution qualifies as an Eligible Rollover Distribution. Distribution options (a) or (b) permitted under this Section 6.02 are available only if the present value of the Participant's Nonforfeitable Accrued Benefit at the time of the distributions to the Participant exceeds or at the time of any prior distribution exceeded three thousand five hundred dollars ($3,500.00). If a Participant elects distribution option (c), the Participant's Account, in whole or in part, shall be distributed directly to the Eligible Retirement Plan specified by the Participant in a Direct Rollover and at the time and in the manner prescribed by the Plan Administrator; provided, however, the Direct Rollover portion of the distribution qualifies as an Eligible Rollover Distribution. To facilitate installment payments under this Article VI, the ESOP Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a Separate Account. The Trustee will invest the Participant's Segregated Account in Federally insured VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 49 interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A Segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. Notwithstanding any other provision herein, the Participant may elect to commence distribution on any later distribution date as provided under Treasury regulation Section 1.411(d)-4. (A) MINIMUM DISTRIBUTION REQUIREMENTS FOR PARTICIPANTS. The ESOP Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations. The minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest Valuation Date preceding the beginning of the calendar year divided by the Participant's life expectancy (as determined under Article VIII hereof, subject to the requirements of the Code Section 401(a)(9) regulations). The ESOP Committee will increase the Participant's Nonforfeitable Accrued Benefit, as determined on the relevant Valuation Date, for contributions or Forfeitures allocated after the Valuation Date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the Valuation Date and by December 31 of the valuation calendar year. For purposes of this valuation, the ESOP Committee will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In computing a minimum distribution, the ESOP Committee must use the unisex life expectancy multiples under Treasury Regulation Section 1.72-9. The ESOP Committee, only upon the Participant's written request, will compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. The ESOP Committee may not redetermine the joint life and last survivor expectancy of the Participant and a nonspouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy. If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant (whether by Participant election or by ESOP Committee direction) may not provide more than incidental benefits to the Beneficiary. The Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the ESOP Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant's death, the ESOP Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan satisfies the incidental benefit requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than fifty percent (50%) of the present value of the total benefits payable to the Participant and his Beneficiary. The ESOP Committee must determine whether benefits VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 50 to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the Trustee redetermines the payment period to the Participant. The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required Beginning Date falls, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations. (B) MINIMUM DISTRIBUTION REQUIREMENTS FOR BENEFICIARIES. The method of distribution to the Participant's Beneficiary must satisfy Code Section 401(a)(9) and the applicable Treasury regulations. If the Participant's death occurs after his Required Beginning Date, the method of payment to the Beneficiary must provide for completion of payment over a period which does not exceed the payment period which had commenced for the Participant. If the Participant's death occurs prior to his Required Beginning Date, the method of payment to the Beneficiary must provide for completion of payment to the Beneficiary over a period not exceeding: (i) five (5) years after the date of the Participant's death; or (ii) if the Beneficiary is a designated Beneficiary, the designated Beneficiary's life expectancy. The ESOP Committee may not direct payment of the Participant's Nonforfeitable Accrued Benefit over a period described in clause (ii) unless the Trustee will commence payment to the designated Beneficiary no later than the December 31 following the close of the calendar year in which the Participant's death occurred or, if later, and the designated Beneficiary is the Participant's surviving spouse, December 31 of the calendar year in which the Participant would have attained age seventy and one-half (70 1/2). If the Trustee will make distribution in accordance with clause (ii), the minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest Valuation Date preceding the beginning of the calendar year divided by the designated Beneficiary's life expectancy. The ESOP Committee must use the unisex life expectancy multiples under Treasury Regulation Section 1.72-9 for purposes of applying this paragraph. The ESOP Committee, only upon the written request of the Participant or of the Participant's surviving spouse, will recalculate the life expectancy of the Participant's surviving spouse not more frequently than annually, but may not recalculate the life expectancy of a nonspouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The ESOP Committee will apply this paragraph by treating any amount paid to the Participant's child, which becomes payable to the Participant's surviving spouse upon the child's attaining the age of majority, as paid to the Participant's surviving spouse. Upon the Beneficiary's written request, the ESOP Committee must direct the Trustee to accelerate payment of all, or any portion, of the Participant's unpaid Accrued Benefit, as soon as administratively practicable following the effective date of that request. Sec. 6.03. BENEFIT PAYMENT ELECTIONS. Not earlier than ninety (90) days, but not later than thirty (30) days, before the Participant's Annuity Starting Date (as defined in Section 1.65 hereof), the ESOP Committee must provide a benefit notice to a Participant who VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 51 is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant's right to defer distribution until he attains the later of Normal Retirement Age or age sixty-two (62). If a Participant or Beneficiary makes an election prescribed by this Section 6.03, the ESOP Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that election. Any election under this Section 6.03 is subject to the requirements of Section 6.02 hereof. The Participant or Beneficiary must make an election under this Section 6.03 by filing his election form with the ESOP Committee at any time before the Trustee otherwise would commence to pay a Participant's Accrued Benefit in accordance with the requirements of Article VI hereof. (A) PARTICIPANT ELECTIONS AFTER SEPARATION FROM SERVICE. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds three thousand five hundred dollars ($3,500), he may elect to have the Trustee commence distribution as of any distribution date, but not earlier than March 1 following the close of Plan Year in which the Participant's Separation from Service occurs. The Participant may reconsider an election at any time prior to the Annuity Starting Date and elect to commence distribution as of any other distribution date, but not earlier than the date described in the first sentence of this Paragraph (A). Following his attainment of Normal Retirement Age, a Participant who has Separated from Service may elect distribution as of any distribution date, regardless of the restrictions otherwise applicable under this Section 6.03(A). If the Participant is partially-vested in his Accrued Benefit, an election under this Paragraph (A) to distribute prior to the Participant's incurring a Forfeiture Break in Service (as defined in Section 5.08 hereof), must be in the form of a cash-out distribution (as defined in Article V hereof). A Participant may not receive a cash-out distribution if, prior to the time the Trustee actually makes the cash-out distribution, the Participant returns to employment with the Employer. (B) PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE. After a Participant attains Normal Retirement Age, the Participant, until he retires, has a continuing election to receive all or any portion of his Accrued Benefit. A Participant must make an election under this Section 6.03(B) on a form prescribed by the ESOP Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan Year greater than the dollar amount or percentage specified in his election form terminates on the Accounting Date. A distribution must be made to a Participant in accordance with his election under this Section 6.03(B) within the ninety (90) day period (or as soon as administratively practicable) after the Participant files his written election. The balance of the Participant's Accrued Benefit not distributed pursuant to his election(s) will be distributed in accordance with the other distribution provisions of this Plan. (C) DEATH BENEFIT ELECTIONS. If the present value of the deceased Participant's Nonforfeitable Accrued Benefit exceeds Three Thousand Five Hundred Dollars ($3,500), the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 52 Participant's Beneficiary may elect to have the Trustee distribute the Participant's Nonforfeitable Accrued Benefit in a form and within a period permitted under Section 6.02 hereof. The Beneficiary's election is subject to any restrictions designated in writing by the Participant and not revoked as of his date of death. (D) ELECTION TO POSTPONE DISTRIBUTION OF BENEFITS. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds Three Thousand Five Hundred Dollars ($3,500.00), he may elect to postpone the distribution of the Nonforfeitable Accrued Benefit under the Plan as provided in Sections 6.02 and 6.03(A) hereof. Upon request, the ESOP Committee will direct the Trustee to provide the Participant electing to postpone his distribution of his Nonforfeitable Accrued Benefit with the necessary election forms. (E) DIRECT ROLLOVER ELECTION. Notwithstanding anything to the contrary herein, at the time the Participant is entitled to receive a distribution, any Participant who is considered a "Distributee" and who receives an Eligible Rollover Distribution may elect to have all or any portion of the distribution transferred directly to an Eligible Retirement Plan. Upon request, the ESOP Committee will direct the Trustee to provide the Distributee with the necessary forms. Sec. 6.04. ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The joint and survivor annuity requirements of the Code do not apply to this Plan. This Plan does not provide any annuity distributions to Participants. A transfer agreement described in Section 13.05 hereof may not permit a plan which is subject to the provisions of Code Section 417 to transfer assets to this Plan. Sec. 6.05. DEFAULT ON A LOAN. If a Participant or Beneficiary defaults on a loan made pursuant to a loan policy adopted by the ESOP Committee, the Plan treats the default as a distributable event only if the Participant has incurred a Separation from Service or has attained Normal Retirement Age. If either condition applies, then, at the time of the default, or, if later, at the time either condition first occurs, the Participant's Nonforfeitable Accrued Benefit will be reduced by the lesser of the amount in default (plus accrued interest) or the Plan's security interest in that Nonforfeitable Accrued Benefit. Sec. 6.06. DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this Plan prevents the ESOP Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an Alternate Payee under a qualified domestic relations order at any time regardless of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an Alternate Payee prior to the time the Participant reaches his earliest retirement age is available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the Alternate Payee to authorize an earlier distribution; and (2) the order requires the Alternate Payee's consent to such distribution prior to the Participant's attainment of his earliest retirement age if the present value of the Alternate Payee's benefits under the Plan exceeds Three Thousand Five Hundred Dollars ($3,500). Nothing in this Section 6.06 gives a Participant a right to receive distribution at a time VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 53 otherwise not permitted under the Plan nor does it permit the Alternate Payee to receive a form of payment not otherwise permitted under the Plan. The ESOP Committee must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the ESOP Committee promptly will notify the Participant and any Alternate Payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the ESOP Committee must determine the qualified status of the order and must notify the Participant and each Alternate Payee, in writing, of its determination. The ESOP Committee must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the ESOP Committee is making its determination of the qualified status of the domestic relations order, the ESOP Committee must make a separate accounting of the amounts payable. If the ESOP Committee determines the order is a qualified domestic relations order within eighteen (18) months of the date amounts first are payable following receipt of the order, the ESOP Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the ESOP Committee determines that the order is not a qualified domestic relations order or does not make its determination of the qualified status of the order within the eighteen (18) month determination period, the ESOP Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the ESOP Committee later determines the order is a qualified domestic relations order. To the extent it is not inconsistent with the provisions of the qualified domestic relations order, the ESOP Committee may direct the Trustee to invest any partitioned amount in a segregated subaccount or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount alone shares in any income it earns, and it alone bears any expense or loss it incurs. Any payments or distributions required under this Section 6.06 will be made by separate benefit checks or other separate distribution to the Alternate Payee(s). Sec. 6.07. LATE RETIREMENT. A Participant may remain in the service of the Employer after his Normal Retirement Date. In such case, he shall remain a Participant until his Late Retirement Date. At such time, his interest in his Account shall be distributed to him in accordance with this Article VI. Such Participant is subject to the minimum distribution requirement of Section 401(a)(9) of the Code. Sec. 6.08. LIMITATIONS ON BENEFITS. All of the provisions of this Article VI are subject to withholding for payment of taxes, and are subject to the rights of any Alternate Payee. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 54 Sec. 6.09. THIRTY (30) DAY PERIOD. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than thirty (30) days after the notice required under Section 1.411(a)-11(c) of the Treasury regulations is given that: (1) The ESOP Committee clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option); and (2) The Participant, after receiving the notice, affirmatively elects in writing a distribution. Sec. 6.10. SPECIAL DISTRIBUTION AND PAYMENT REQUIREMENTS. (A) Unless the Participant and, if applicable, pursuant to Sections 401(a)(11) and 417 of the Code, with the consent of a Participant's spouse, elects to have other distribution provisions of the Plan apply, or unless other distribution provisions of the Plan require earlier distribution of the Participant's Account, the portion of the Participant's Account attributable to Employer Securities (the "Eligible Portion") must be distributed no later than the time prescribed by this Section 6.10(A), regardless of any other provision of the Plan. The distribution provisions of this Section 6.10(A) are subject to the consent and form of distribution requirements of the Plan. (1) If the Participant Separates from Service by reason of the attainment of Normal Retirement Age, death or Disability, the ESOP Committee will direct the Trustee to commence distribution of the Eligible Portion not later than one (1) year after the close of the Plan Year in which that event occurs. (2) If the Participant separates from Service for any reason other than by reason of the attainment of Normal Retirement Age, death or Disability, the ESOP Committee will direct the Trustee to commence distribution of the Eligible Portion not later than one (1) year after the close of the fifth (5th) Plan Year following the Plan Year in which the Participant Separated from Service. If the Participant resumes employment with the Employer on or before the last day of the fifth (5th) Plan Year following the Plan Year of his or her Separation from Service, the distribution provisions of this Paragraph (2) do not apply. (B) If Sections 401(a)(11) and 417 of the Code do not apply to a distribution, such distribution may commence less than thirty (30) days after the notice required under Treasury Regulation Section 1.411(a)-11(c) is given, provided that: (1) The ESOP Committee clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after receiving the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 55 notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. END OF ARTICLE VI VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 56 ARTICLE VII EMPLOYER ADMINISTRATIVE PROVISIONS Sec. 7.01. INFORMATION TO ESOP COMMITTEE. The Employer must supply current information to the ESOP Committee as to the name, date of birth, date of employment, annual compensation, leaves of absence, Years of Service and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the ESOP Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the ESOP Committee are conclusive as to all persons. Sec. 7.02. NO LIABILITY. The Employer assumes no obligation or responsibility to any of its Employees, Former Participants, Participants or Beneficiaries for any act of, or failure to act, on the part of its ESOP Committee (unless the Employer is the ESOP Committee), or the Plan Administrator (unless the Employer is the Plan Administrator). Sec. 7.03. INDEMNITY OF CERTAIN FIDUCIARIES. The Employer indemnifies and saves harmless the Plan Administrator, ESOP Committee, and the members of the ESOP Committee, and each of them, from and against any and all loss resulting from liability to which the Plan Administrator, the ESOP Committee, or the members of the ESOP Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Plan, including all court costs and other expenses reasonably incurred in their defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve the Plan Administrator or any ESOP Committee member from any liability he may have under ERISA for breach of a fiduciary duty. In the case of any ESOP Committee member, the indemnification provisions of this Section 7.03 do not relieve it from any liability, to the extent that a court of competent jurisdiction from which no appeal can be taken, enters a final judgment that the ESOP Committee member's actions or omissions were the result of gross negligence or willful misconduct. The Plan Administrator, the ESOP Committee members, and the Company may execute a letter agreement further delineating the indemnification agreement of this Section 7.03, provided the letter agreement is consistent with and does not violate ERISA, the Code, and Texas law. The indemnification provisions of this Section 7.03 extend to any other fiduciary solely to the extent provided by a letter agreement executed by such person and the Company. Sec. 7.04. AMENDMENT TO VESTING SCHEDULE. Though the Company reserves the right to amend the vesting schedule at any time, the ESOP Committee will not apply the amended vesting schedule to reduce the Nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the Employer adopts the amendment, or the date the amendment becomes effective) to a percentage less than the Nonforfeitable percentage computed under the Plan without regard to the amendment. An amended vesting schedule will apply to a Participant only if the Participant receives credit for at least one (1) Hour of Service after the new schedule becomes effective. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 57 If the Company makes a permissible amendment to the vesting schedule, each Participant having at least three (3) Years of Service with the Employer may elect to have the percentage of his Nonforfeitable Accrued Benefit computed under the Plan without regard to the amendment. The Participant must file his election with the ESOP Committee within sixty (60) days of the latest of (a) the Company's adoption of the amendment; (b) the effective date of the amendment; or (c) his receipt of a copy of the amendment. The ESOP Committee as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. The election described in this Section 7.04 does not apply to a Participant if the amended vesting schedule provides for vesting at least as rapid at all times as the vesting schedule in effect prior to the amendment. For purposes of this Section 7.04, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Nonforfeitable percentage of an Employee's rights to his Employer derived Accrued Benefit. END OF ARTICLE VII VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 58 ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS Sec. 8.01. BENEFICIARY DESIGNATION. Any Participant from time to time may designate, in writing, any person or persons contingently or successively to whom the Trustee will pay his Nonforfeitable Accrued Benefit (including any life insurance proceeds payable to the Participant's Account) in the event of his or her death, and the Participant may designate the form and method. The ESOP Committee will prescribe the form for the written designation of Beneficiary and upon the Participant's filing the form with the ESOP Committee, the form effectively revokes all designations filed prior to that date by the same Participant. The Beneficiary designation of a married Participant is not valid unless the Participant's spouse consents to the Beneficiary designation. The Participant's spouse shall automatically be the named Beneficiary and shall be paid the Participant's death benefit unless (1) the Participant's spouse affirmatively consents to the Beneficiary designation according to Code Section 417; or (2) the following sentence applies. The spousal consent requirements in this paragraph do not apply if the Participant and his spouse are not married throughout the one year ending on the date of Participant's death or if the Participant's spouse is the Participant's sole primary Beneficiary. If the joint and survivor requirements of Article VI hereof apply to the Participant, this Section 8.01 does not impose any special spousal consent requirements on the Participant's Beneficiary designation. In the absence of spousal consent (as required by Article VI hereof) to the Participant's Beneficiary designation: (1) any waiver of the joint and survivor annuity or of the pre-retirement survivor annuity is not valid; and (2) if the Participant dies prior to his Annuity Starting Date, the Participant's Beneficiary designation will apply only to the portion of the death benefit which is not payable as a pre-retirement survivor annuity. Regarding clause (2), if the Participant's surviving spouse is a primary Beneficiary under the Participant's Beneficiary designation, the spouse's interest in the Participant's death benefit will be satisfied first from the portion which is payable as a pre-retirement survivor annuity. Sec. 8.02. NO BENEFICIARY DESIGNATION. If a Participant fails to name a Beneficiary in accordance with Section 8.01 hereof, or if the Beneficiary named by a Participant predeceases him, or if the Beneficiary designation is invalid or void, the Participant's Nonforfeitable Accrued Benefit will be paid in accordance with Section 6.02 hereof in the following order of priority to: (a) The Participant's surviving spouse; (b) The Participant's surviving children, including adopted children, in equal shares; (c) The Participant's surviving parents, in equal shares; or (d) The Participant's estate. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 59 If the Beneficiary does not predecease the Participant, but dies prior to distribution of the Participant's entire Nonforfeitable Accrued Benefit, the remaining Nonforfeitable Accrued Benefit will be paid to the Beneficiary's estate unless the Participant's Beneficiary designation provides otherwise. Sec. 8.03. PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a deceased Participant must furnish to the ESOP Committee such evidence, data or information as the ESOP Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the ESOP Committee, provided the ESOP Committee advises each Participant of the effect of his failure to comply with its request. Any adjustment required by reason of lack of proof or the misstatement of the age of persons entitled to benefits hereunder, by the Participant or otherwise, shall be in such manner as the ESOP Committee deems equitable. Any notice or information which according to the terms of the Plan or the rules of the ESOP Committee must be filed with the ESOP Committee, shall be deemed so filed if addressed and either delivered in person or mailed, postage fully prepaid, to the ESOP Committee. If mailed, any such notice or information shall be addressed to the ESOP Committee Chairman c/o VARI-LITE HOLDINGS, INC. and mailed to its corporate headquarters address. Whenever a provision herein requires that a Participant (or the Participant's Beneficiary) give notice to the ESOP Committee within a specified number of days or by a certain date, and the last day of such period, or such date falls on a Saturday, Sunday, or Company holiday, the Participant (or the Participant's Beneficiary) will be deemed in compliance with such provision if notice is delivered in person to the ESOP Committee or is mailed, properly addressed, postage prepaid, and postmarked on or before the business day next following such Saturday, Sunday or Company holiday. The ESOP Committee may, in its sole discretion, modify or waive any specified requirement notice; provided, however, that such modification or waiver must be administratively feasible, must be in the best interest of the Participant, and must be made on the basis of rules of the ESOP Committee which are applied uniformly to all Participants. Sec. 8.04. ADDRESS FOR NOTIFICATION. Each Participant, each Beneficiary of a deceased Participant, and other person entitled to benefits hereunder must file with the ESOP Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, Inactive Participant, Former Participant, or Beneficiary, at his last post office address filed with the ESOP Committee, or as shown on the records of the Employer, binds the Participant, Inactive Participant, Former Participant, or Beneficiary, for all purposes of this Plan. Any check representing payment hereunder and any communication addressed to a Participant, Inactive Participant, Former Participant, an Employee, a former Employee, or Beneficiary, at such person's last address filed with the ESOP Committee, or if no such address has been filed, then at such person's last address as indicated on the records of the Employer, shall be deemed to have been delivered to such VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 60 person on the date on which such check or communication is deposited, postage prepaid, in the United States mail. If the ESOP Committee, for any reason, is in doubt as to whether payments are being received by the person entitled thereto, it shall, by registered mail addressed to the person concerned, at his address last known to the ESOP Committee, notify such person that all unmailed and future payments shall be henceforth withheld until he provides the ESOP Committee with evidence of his existence and his proper mailing address. Sec. 8.05. ASSIGNMENT OR ALIENATION. Unless Section 6.07 hereof applies, which relates to qualified domestic relations orders, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan. A benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process. Sec. 8.06. NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries a summary description of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by ERISA to be furnished without charge. Sec. 8.07. LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan. Sec. 8.08. INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan, contract or any other instrument under which the Plan was established or is operated. The Plan Administrator will maintain all of the items listed in this Section 8.08 in his office, or in such other place or places as he may designate from time to time in order to comply with the regulations issued under ERISA, for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary, the Plan Administrator will furnish him with a copy of any item listed in this Section 8.08. The Plan Administrator may make a reasonable charge to the requesting person for the copy so furnished. Sec. 8.09. APPEAL PROCEDURE FOR DENIAL OF BENEFITS. A Participant, Former Participant, or a Beneficiary ("Claimant") may file with the ESOP Committee a written claim for benefits, if the Participant, Former Participant, or Beneficiary determines the distribution procedures of the Plan have not provided him his proper Nonforfeitable Accrued Benefit. The ESOP Committee must render a decision on the claim within sixty (60) days of the Claimant's written claim for benefits. The Plan Administrator must provide adequate notice in writing to the Claimant whose claim for benefits under the Plan the ESOP Committee has denied. The Plan Administrator's notice to the Claimant must set forth: VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 61 (a) The specific reason for the denial; (b) Specific references to pertinent Plan provisions on which the ESOP Committee based its denial; (c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and (d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the ESOP Committee within seventy-five (75) days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the ESOP Committee in writing within the seventy-five (75) day period will render the ESOP Committee's determination final, binding and conclusive. If the Claimant should appeal to the ESOP Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. At the hearing (or prior thereto upon five (5) business days written notice to the ESOP Committee), the Claimant, or his duly authorized representative, may review Plan documents in the possession of the Plan Administrator which are pertinent to the claim. Either the Claimant, ESOP Committee, Trustee, or Plan Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceeding shall be furnished to all parties by the court reporter. The full expense of any court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. The ESOP Committee will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The ESOP Committee must advise the Claimant of its decision within sixty (60) days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day limit unfeasible, but in no event may the ESOP Committee render a decision respecting a denial for a claim for benefits later than one hundred-twenty (120) days after its receipt of a request for review. The Plan Administrator's notice of denial of benefits must identify the name of each member of the ESOP Committee and the name and address of the ESOP Committee member to whom the Claimant may forward his appeal. Sec. 8.10. VOTING OF EMPLOYER SECURITIES. In the event the Plan holds Employer Securities which are voting common stock of the Company, the following provisions shall apply: (A) With respect to Employer Securities held in the Employer Securities Accounts, a Participant has the right to direct the Trustee regarding the voting of such Employer Securities allocated to his Employer Securities Account with respect to any corporate matter which involves VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 62 the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transaction as the Department of Treasury may prescribe in regulations. On other corporate matters requiring a vote of the shareholders, the ESOP Committee shall direct the Trustee to properly vote such Employer Securities which are held in the Employer Securities Accounts of the Participants (or Beneficiaries). The ESOP Committee shall direct the Trustee to vote Employer Securities for which it has not received direction, or for which it has not received a valid direction, from a Participant (or Beneficiary) as part of the Plan Assets. Each Participant (or Beneficiary) who timely provides instructions to the Trustee shall be entitled to direct the Trustee how to vote Employer Securities allocated to such Participant's (or Beneficiary's) Account in accordance with this Section. In order to implement these voting directions, each Participant (or Beneficiary) shall be provided with proxy solicitation materials or other notices or information statements which are distributed to Company shareholders, together with a form requesting confidential instructions as to the manner in which Employer Securities allocated to the Participants (or Beneficiaries) Employer Securities Accounts are to be voted. Each Participant (or Beneficiary) shall, as a named fiduciary described in Section 403(a)(1) of ERISA, direct the Trustee with respect to the vote of such Employer Securities which are allocated to the Employer Securities Account of the Participant (or Beneficiary). Reasonable means shall be employed to provide confidentiality with respect to the voting by such Participant (or Beneficiary). Such directions shall be held in confidence and such directions shall not be divulged or released to any person, including the Company or any director, officer, employee or agent of the Company, it being the intent of this provision of this Section to ensure that the Company (and its directors, officers, employees and agents) cannot determine the direction given by any Participant (or Beneficiary). Such instructions shall be in such form and shall be filed in such manner and at such time as the ESOP Committee may prescribe. (B) Notwithstanding any provision contained in this Section, Participant (or Beneficiary) directions shall not be voted in a manner which are or would result in a violation of ERISA or would not be in the best interest of the Participant (or Beneficiary). In the event of the items set forth in the preceding sentence, the ESOP Committee, in its discretion, shall properly vote the Employer Securities as part of the Plan Assets in a manner which is in the best interest of the Participants (or Beneficiaries). (C) If any provision contained in or action required by this Section violates any provision under ERISA, the ESOP Committee shall comply with the provisions under ERISA. END OF ARTICLE VIII VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 63 ARTICLE IX ESOP COMMITTEE DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS Sec. 9.01. MEMBERS' COMPENSATION, EXPENSES. The Company may appoint an ESOP Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. In the absence of an ESOP Committee appointment, the Plan Administrator assumes the powers, duties and responsibilities of the ESOP Committee. The members of the ESOP Committee will serve without compensation for services as such, but the Employer will pay all expenses of the ESOP Committee, except to the extent the Trust properly pays for such expenses, pursuant to Article X hereof. Sec. 9.02. TERM. Each member of the ESOP Committee serves until the appointment of his successor. Sec. 9.03. POWERS. The ESOP Committee is empowered to assist the Trustee to satisfy and operate the Plan in accordance with the terms of the Plan, the Code, and ERISA. In case of a vacancy in the membership of the ESOP Committee, the remaining members of the ESOP Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the ESOP Committee pending the filling of the vacancy. Sec. 9.04. GENERAL. The ESOP Committee has the following powers and duties: (a) To select a Secretary, who need not be a member of the ESOP Committee; (b) To determine the rights of eligibility of an Employee to participate in the Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable percentage of each Participant's Accrued Benefit; (c) To adopt rules of procedure and regulations and guidelines necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Agreement; (d) To construe and enforce the terms of the Plan and the rules and regulations it adopts, including interpretation of the Plan documents and documents related to the Plan's operation; (e) To credit and distribute the Trust assets; (f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan; VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 64 (g) To furnish the Employer with information which the Employer may require for tax or other purposes; (h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; (i) To engage the services of an Investment Manager or Managers (as defined in ERISA Section 3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition or disposition) of any Plan asset under its control; (j) To establish a nondiscriminatory policy with regard to making loans, if any, to Participants and Beneficiaries; (k) To construe and interpret the Plan and the rules and regulations adopted and to answer all questions arising in the administration, interpretation and application of the Plan document and documents related to the Plan's operation; and (l) To establish and maintain a funding standard account and to make credits and charges to the account to the extent required by and in accordance with the provisions of the Code. Notwithstanding any other provision herein to the contrary, the ESOP Committee shall not interfere or cause the Trustee to violate the terms of the Plan, the Code, and ERISA. The ESOP Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner. All decisions, determinations, directions, interpretations, and applications of the Plan by the ESOP Committee shall be final and binding upon all persons, including (but not limited to) the Company, Employer, Trustee, and all Participants, Inactive Participants, Former Participants, and Beneficiaries unless in violation of the Plan, ERISA, the Code, or any Federal or State laws. If the ESOP Committee adopts a loan policy, pursuant to paragraph (j) of this Section 9.04, the loan policy must be a written document and must include: (1) the identity of the person or persons authorized to administer the participant loan program; (2) a procedure for applying for the loan; (3) the criteria for approving or denying a loan; (4) the limitations, if any, on the types and amounts of loans available; (5) the procedure for determining a reasonable rate of interest; (6) the types of collateral which may secure the loan; and (7) the events constituting default and the steps the Plan will take to preserve Plan assets in the event of default. This Section 9.04 specifically incorporates a written loan policy as part of the Employer's Plan. Sec. 9.05. FUNDING POLICY. This Plan is designed to invest primarily in Employer Securities. The ESOP Committee, however, may invest in assets other than Employer Securities to provide for expenses and distributions and to the extent as the ESOP Committee deems appropriate. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 65 Sec. 9.06. MANNER OF ACTION. The decision of a majority of the members of the ESOP Committee appointed and qualified controls. Sec. 9.07. AUTHORIZED REPRESENTATIVE. The ESOP Committee may authorize any one of its members, or its Secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The ESOP Committee must evidence this authority by an instrument signed by all members. Sec. 9.08. INTERESTED MEMBER. No member of the ESOP Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the ESOP Committee. Sec. 9.09. INDIVIDUAL ACCOUNTS. The ESOP Committee will maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan set forth below. The ESOP Committee must maintain one Account for the Employer Securities held by the Plan and another Account for the Employer's qualified matching contributions. If a Participant re-enters the Plan subsequent to his having a Forfeiture Break in Service (as defined in Section 5.08 hereof), a separate Account for the Participant's pre-Forfeiture Break in Service Accrued Benefit and a separate Account for his post-Forfeiture Break in Service Accrued Benefit must be maintained unless the Participant's entire Accrued Benefit under the Plan is one hundred percent (100%) Nonforfeitable. The ESOP Committee will make its allocations, or request the Trustee to make its allocations, to the Accounts of the Participants in accordance with the provisions of Section 9.11 hereof. The ESOP Committee may direct the Trustee to maintain a temporary Segregated Investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 9.11 hereof. The ESOP Committee shall create and maintain adequate records to reflect all transactions of the Plan and to disclose the interest of each Participant, Former Participant, Beneficiary, or Alternate Payee who has an undistributed interest in the Trust Fund, as follows: (a) Individual Accounts. The ESOP Committee may establish and maintain for each such individual a Participant Employer Securities Account and a Participant Qualified Matching Contributions Account which Accounts are collectively referred to herein as an Account. (b) Accounts for Transferred Participants. In the event a Participant transferred from one (1) Employer to another Employer during a Plan Year, the ESOP Committee shall continue to maintain on its books such Participant's Account without differentiation between Employers. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 66 (c) RIGHTS IN TRUST FUND. The maintenance of individual Accounts is only for accounting purposes, and a segregation of the assets for each Account shall not be required. Distributions and withdrawals made from an Account shall be charged to the Account as of the date paid. Sec. 9.10. VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each Participant's Accrued Benefit consists of that proportion of the net worth (at fair market value) of the Employer's Trust Fund which the net credit balance in his Account bears to the total net credit balance in the Accounts of all Participants. For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit is its value as of the Valuation Date immediately preceding the date of the distribution. Sec. 9.11. ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. A "Valuation Date" under this Plan is each Accounting Date and each interim valuation date determined by the ESOP Committee. As of each Valuation Date, the ESOP Committee must adjust Participant Employer Securities Accounts, Qualified Matching Contributions Account, and other accounts and to reflect net income, gain or loss since the last Valuation Date. The valuation period is the period beginning the day after the last Valuation Date and ending on the current Valuation Date. The ESOP Committee will allocate the Employer contributions, Participant Forfeitures, net income, gain or loss, if any, in accordance with Article III hereof. Sec. 9.12. INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of each Plan Year, but within the time prescribed by ERISA, and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit as of that date and such other information ERISA requires to be furnished the Participant or Beneficiary. No Participant, except a member of the ESOP Committee, shall have the right to inspect the records reflecting the Account of any other Participant. Sec. 9.13. ACCOUNT CHARGED. The ESOP Committee shall charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made. Sec. 9.14. UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require the ESOP Committee, the Employer, or the Company to search for, or to ascertain the whereabouts of, any Participant or Beneficiary. The ESOP Committee, by certified or registered mail addressed to his last known address of record with the ESOP Committee or the Employer, shall notify any Participant, or Beneficiary, that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section 9.14. If the Participant, or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the ESOP Committee within six (6) months from the date of mailing of the notice, the ESOP Committee shall treat the Participant's or Beneficiary's unclaimed payable Accrued Benefit as forfeited and shall reallocate and use the amount of the unclaimed payable Accrued Benefit to reduce the Employer's contribution for the Plan Year in which the forfeiture occurs. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 67 If a Participant or Beneficiary who has incurred a forfeiture of his Accrued Benefit under the provisions of the first paragraph of this Section 9.14 makes a claim, at any time, for his forfeited Accrued Benefit, the ESOP Committee shall restore the Participant's or Beneficiary's forfeited Accrued Benefit to the same dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted for any gains or losses occurring subsequent to the date of the forfeiture. The ESOP Committee will make the restoration during the Plan Year in which the Participant or Beneficiary makes the claim, first from the amount, if any, of Participant forfeitures the ESOP Committee otherwise would allocate for the Plan Year, then from the amount, if any, of the Income of the Trust Fund for the Plan Year and then from the amount, or additional amount, the Employer contributes to enable the ESOP Committee to make the required restoration. The ESOP Committee must direct the Trustee to distribute the Participant's or Beneficiary's restored Accrued Benefit to him not later than sixty (60) days after the close of the Plan Year in which the ESOP Committee restores the forfeited Accrued Benefit. The forfeiture provisions of this Section 9.14 apply solely to the Participant's or to the Beneficiary's Accrued Benefit derived from Employer contributions. END OF ARTICLE IX VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 68 ARTICLE X REPURCHASE OF EMPLOYER SECURITIES Notwithstanding any other provision herein, Article X does not apply if the Employer Securities held by the Plan are readily tradeable on an established market unless required by the Code and Treasury Regulations thereunder. Sec. 10.01. PUT OPTION. The Company will issue a "put option" to each Participant receiving a distribution of Employer Securities from the his Employer Securities Account. The put option will permit the Participant to sell the Employer Securities to the Company, at any time during two (2) option periods, at the current fair market value. The first put option period runs for a period of at least sixty (60) days commencing on the date of distribution of Employer Securities to the Participant. The second put option period runs for a period of at least sixty (60) days commencing on the first day of the subsequent Plan Year. If a Participant (Beneficiary) exercises his put option, the Company must purchase the Employer Securities at fair market value upon the terms provided under Section 10.04 hereof. The Company may grant the Trust an option to assume the Company's rights and obligations at the time a Participant exercises an option under this Section 10.01. Sec. 10.02. RESTRICTION ON EMPLOYER SECURITIES. Except upon the prior written consent of the Company, no Participant (or Beneficiary) may sell, assign, give, pledge, encumber, transfer or otherwise dispose of any Employer Securities now owned or subsequently acquired by him without complying with the terms of this Article X. If a Participant (or Beneficiary) pledges or encumbers any Employer Securities with the required prior written consent, any security holder's rights with respect to such Employer Securities are subordinate and subject to the rights of the Company. Certificates for Employer Securities distributed to Participants, Inactive Participants, Former Participants, or Beneficiaries thereof, shall contain the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE ONLY UPON COMPLIANCE WITH THE TERMS OF THE VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN, (THE "PLAN"), WHICH GRANTED VARI-LITE HOLDINGS, INC. (THE "COMPANY") A RIGHT OF FIRST REFUSAL. THE COMPANY WILL FURNISH TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE A COPY OF THE PLAN. THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES LAWS OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE IN VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 69 WHICH THEY HAVE BEEN SOLD. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. On the front of each such certificate, there may be placed the following notation in capital letters: RESTRICTIONS ON TRANSFER STATED ON REVERSE SIDE Sec. 10.03. LIFETIME TRANSFER AND RIGHT OF FIRST REFUSAL. If any Participant (or Beneficiary) who receives Employer Securities under this Plan desires to dispose of any of his Employer Securities under this Plan for any reason during his lifetime (whether by sale, assignment, gift or any other method of transfer), he first must offer the Employer Securities for sale to the Company. The ESOP Committee may require a Participant (or Beneficiary) entitled to a distribution of Employer Securities to execute an appropriate stock transfer agreement (evidencing the right of first refusal) prior to receiving a certificate of Employer Securities. In the case of an offer by a third party, the offer to the Company is subject to all the terms and conditions set forth in Section 10.04 hereof based on the price equal to the fair market value per share and payable in accordance with the terms of Section 10.04 hereof unless the selling price and terms offered to the Participant by the third party are more favorable to the Participant than the selling price and terms of Section 10.04 hereof, in the event the selling price and terms of the offer of the third party apply. The Company must give written notice to the offering Participant of its acceptance of the Participant's offer within fourteen (14) days after the Participant has given written notice to the Company or the Company's rights under this Section 10.03 will lapse. The Company may grant the Trust the option to assume the Company's rights and obligations with respect to all or any part of the Employer Securities offered to the Company under this Section 10.03. Notwithstanding any provision to the contrary herein, this first right of refusal may not be exercised if the fair market value at the time of exercise is higher than the last Valuation Date unless the ESOP Committee determines such action shall not have an effect on the qualification of this Plan. Sec. 10.04. PAYMENT OF PURCHASE PRICE. If the Company (or the Trustee, at the direction of the ESOP Committee) exercises an option to purchase a Participant's Employer Securities pursuant to an offer given under Section 10.03 hereof, the purchaser(s) must make payment in lump sum or, if the distribution to the Participant (or to his Beneficiary) constitutes a Total Distribution, in substantially equal installments over a period not exceeding five (5) years. A "Total Distribution" to a Participant (or to a Beneficiary) is the distribution, within one taxable year of the recipient, of the entire balance to the Participant's credit under the Plan. In the case of a distribution which is not a Total Distribution or which is a Total Distribution with respect to which the purchaser(s) will make payment in lump sum, the purchaser(s) must pay the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 70 Participant (or Beneficiary) the fair market value of the Employer Securities repurchased no later than thirty (30) days after the date the Participant (or Beneficiary) exercises the option. In the case of a Total Distribution with respect to which the purchaser(s) will make installment payments, the purchaser(s) must make the first installment payment no later than thirty (30) days after the Participant (or Beneficiary) exercises the put option. For installment amounts not paid within thirty (30) days of the exercise of the put option, the purchaser(s) must evidence the balance of the purchase price by executing a promissory note, delivered to the selling Participant at the Closing. The note delivered at Closing (as defined in Section 10.06 hereof) must bear a reasonable rate of interest, determined as of the Closing Date (as defined in Section 10.06 hereof), and the purchaser(s) must provide adequate security. The note must provide for equal annual installments with interest payable with each installment, the first installment being due and payable one year after the Closing Date. The note further must provide for acceleration in the event of thirty (30) days' default of the payment on interest or principal and must grant to the maker of the note the right to prepay the note in whole or in part at any time or times without penalty; provided, however, the purchaser(s) may not have the right to make any prepayment during the calendar year or fiscal year of the Participant (or Beneficiary) in which the Closing Date occurs. Sec. 10.05. NOTICE. A person has given Notice permitted or required under this Article X when the person deposits the Notice in the United States mail, first class, postage prepaid, addressed to the person entitled to the Notice at the address currently listed for him in the records of the ESOP Committee. Any person affected by this Article X has the obligation of notifying the ESOP Committee of any change of address. Sec. 10.06. TERMS AND DEFINITIONS. For purposes of this Article X: (a) "Fair market value" means the value of the Employer Securities (i) determined as of the date of the exercise of an option if the exercise is by a Disqualified Person, or (ii) in all other cases, determined as of the most recent Accounting Date. The ESOP Committee must determine fair market value of Employer Securities for all purposes of the Plan by engaging the services of an independent appraiser. The ESOP Committee may rely upon a determination of valuation of Employer Securities made by an independent party experienced in preparing valuations of closely-held corporations. (b) "Notice" means any offer, acceptance of an offer, payment or any other communications. (c) "Beneficiary" includes the legal representative of a deceased Participant. (d) "Closing" means the place, date, and time ("Closing Date") to which the selling Participant (or his Beneficiary) and purchaser may agree for purposes of a sale and purchase under this Article X, provided Closing must take place not later than thirty (30) days after the exercise of an offer under Section 10.03. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 71 Sec. 10.07. CERTAIN RIGHTS WITH RESPECT TO EMPLOYER SECURITIES. Any Employer Securities, if they are not publicly traded when distributed, or are subject to a trading limitation when distributed, must be subject to a put option. The put option is to be exercisable only by the Participant, the Participant's Beneficiary, and Alternate Payee, or by a person "including an estate or its distributee" to whom the Employer Securities pass by reason of a Participant's death. The put option must permit the Participant to put the Employer Securities to the Company. Sec. 10.08. TRUSTEE'S PUT OPTION. The Trustee shall have the right to put the shares of Employer Securities held by the Plan to the Company to be purchased by the Company at the then fair market value in the event that a distribution from a Participant's Account is to be made in cash or the Trustee expects to incur Plan expenses which will not be paid directly by the Employer and the Trustee determines that the Plan has insufficient cash to make the anticipated distributions or pay Plan expenses. END OF ARTICLE X VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 72 ARTICLE XI PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY Sec. 11.01. INSURANCE BENEFIT. The Company may elect to provide incidental life insurance benefits for Insurable Participants who consent to life insurance benefits by signing the appropriate insurance company application form. No incidental life insurance benefit for any Participant will be purchased prior to an allocation to the Participant's Account. If the Policy is on the joint lives of the Participant and another person, such Policy may not be maintained if that other person predeceases the Participant. The Company will direct the Trustee as to the insurance company and insurance agent through which the Trustee is to purchase the insurance Contracts, the amount of the coverage and the applicable dividend plan. Each application for a Policy, and the Policies themselves, must designate the Trustee as sole owner, with the right reserved to the Trustee to exercise any right or option contained in the Policies, subject to the terms and provisions of this Plan. The Trustee must be the named beneficiary for the Account of the insured Participant. Proceeds of insurance Contracts paid to the Participant's Account under this Article XI are subject to the requirements of Article V and of Article VI hereof. The premiums on any incidental benefit insurance Contract covering the life of a Participant will be charged against the Account of that Participant. All incidental benefit insurance Contracts issued under the Plan will be held as assets of the Trust created under the Plan. The aggregate of life insurance premiums paid for the benefit of a Participant, at all times, may not exceed the following percentages of the aggregate of the Employer's contributions allocated to any Participant's Account: (i) forty-nine percent (49%) in the case of the purchase of ordinary life insurance Contracts; or (ii) twenty-five percent (25%) in the case of the purchase of term life insurance or universal life insurance Contracts. If the Trustee purchases a combination of ordinary life insurance Contract(s) and term life insurance or universal life insurance Contract(s), then the sum of one-half (1/2) of the premiums paid for the ordinary life insurance Contract(s) and the premiums paid for the term life insurance or universal life insurance Contract(s) may not exceed twenty-five percent (25%) of the Employer contributions allocated to any Participant's Account. Sec. 11.02. LIMITATION ON LIFE INSURANCE PROTECTION. No life insurance protection for any Participant will be continued beyond his Annuity Starting Date (as defined in Section 1.65 hereof). If the Trustee holds any incidental benefit insurance Contract(s) on the life of a Participant when he terminates his employment (other than by reason of death), the following provisions apply: (a) If the entire cash value of the Contract(s) is vested in the terminating Participant, or if the Contract(s) will have no cash value at the end of the policy year in which termination of employment occurs, the Contract(s) to the VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 73 Participant will be transferred so as to vest in the Participant all right, title and interest to the Contract(s), free and clear of the Trust; subject however, to restrictions as to surrender or payment of benefits as the Issuing Insurance Company may permit and as the ESOP Committee directs; (b) If only part of the cash value of the Contract(s) is vested in the terminating Participant, to the extent the Participant's interest in the cash value of the Contract(s) is not vested, the Participant's interest in the value of his Account attributable to Trust assets other than incidental benefit insurance Contracts may be adjusted and may proceed as in Section 11.02(a) above, or a loan from the Issuing Insurance Company on the sole security of the Contract(s) for an amount equal to the difference between the cash value of the Contract(s) at the end of the Policy year in which termination of employment occurs and the amount of the cash value that is vested in the terminating Participant, and the Contract(s) endorsed must be transferred so as to vest in the transferee all right, title and interest to the Contract(s), free and clear of the Trust; subject however, to the restrictions as to surrender or payment of benefits as the Issuing Insurance Company may permit and the ESOP Committee directs; (c) If no part of the cash value of the Contract(s) is vested in the terminating Participant, the Contract(s) must be surrendered for cash proceeds as may be available. In accordance with the written direction of the ESOP Committee, any transfer of Contract(s) under this Section 11.02 will be made on the Participant's Annuity Starting Date (or as soon as administratively practicable after that date). No Contract under this Section 11.02 may be transferred which contains a method of payment not specifically authorized by Article VI hereof. In this regard, such a Contract must be converted to cash and the cash distributed instead of the Contract, or before making the transfer, require the Issuing Insurance Company to delete the unauthorized method of payment option from the Contract. Sec. 11.03. DEFINITIONS. For purposes of this Article XI: (a) "Policy" means an ordinary life insurance Contract or a term life insurance Contract issued by an insurer on the life of a Participant. (b) "Issuing Insurance Company" is any life insurance company which has issued a Policy upon application by the Trustee under the terms of this Plan. (c) "Contract" or "Contracts" means a Policy of insurance. In the event of any conflict between the provisions of this Plan and the terms of any Contract or Policy of insurance issued in accordance with this Article XI, the provisions of the Plan control. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 74 (d) "Insurable Participant" means a Participant to whom an insurance company, upon an application being submitted in accordance with the Plan, will issue insurance coverage, either as a standard risk or as a risk in an extra mortality classification. Sec. 11.04. DIVIDEND PLAN. The dividend plan is premium reduction unless the Company directs the Trustee to the contrary. All dividends from a Contract must be used to purchase insurance benefits or additional insurance benefits for the Participant on whose life the Issuing Insurance Company has issued the Contract. All Policies issued on the lives of Participants under the Plan must be arranged, where possible, to have the same premium due date and all ordinary life insurance Contracts to contain guaranteed cash values with as uniform basic options as are possible to obtain. The term "dividends" includes Policy dividends, refunds of premiums and other credits. Sec. 11.05. INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company, solely in its capacity as an Issuing Insurance Company, is a party to this Plan nor is the company responsible for its validity. Sec. 11.06. INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS. No insurance company, solely in its capacity as an Issuing Insurance Company, need examine the terms of this Plan nor is responsible for any action taken by the Trustee. Sec. 11.07. INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE. For the purpose of making application to an insurance company and in the exercise of any right or option contained in any Policy, the insurance company may rely upon the signature of the Trustee and is saved harmless and completely discharged in acting at the direction and authorization of the Trustee. Sec. 11.08. ACQUITTANCE. An insurance company is discharged from all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee, and is not obligated to see to the distribution or further application of any moneys it so pays. Sec. 11.09. DUTIES OF INSURANCE COMPANY. Each insurance company must keep such records, make such identification of Contracts, funds and accounts within funds, and supply such information as may be necessary for the proper administration of the Plan under which it is carrying insurance benefits. END OF ARTICLE XI VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 75 ARTICLE XII MISCELLANEOUS Sec. 12.01. EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. The ESOP Committee is fully protected in acting and relying upon any evidence described under the immediately preceding sentence. Sec. 12.02. NO RESPONSIBILITY FOR EMPLOYER ACTION. The ESOP Committee does not have any obligation or responsibility with respect to any action required by the Plan to be taken by the Employer, the Company, any Participant or Eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. The Plan does not require the ESOP Committee to collect any contribution required under the Plan, or to determine the correctness of the amount of any Employer contribution. The ESOP Committee need not inquire into or be responsible for any action or failure to act on the part of the others, or on the part of any other person who has any responsibility regarding the management, administration or operation of the Plan, whether by the express terms of the Plan or by a separate agreement authorized by the Plan or by the applicable provisions of ERISA. Any action required of a corporate Employer must be by its board of directors or its designate. Sec. 12.03. FIDUCIARIES NOT INSURERS. The ESOP Committee, the Plan Administrator, the Company, and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer and the Company do not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. Sec. 12.04. WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive the notice, unless the Code or Treasury regulations prescribe the notice or ERISA specifically or impliedly prohibits such a waiver. Sec. 12.05. SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee, the ESOP Committee, the Plan Administrator and their successors. Sec. 12.06. WORD USAGE. Words used in the masculine also apply to the feminine and neuter where applicable, and wherever the context of the Plan dictates, the plural includes the singular and the singular includes the plural. Whenever a noun, or pronoun in lieu thereof, is used in this Plan in plural form and there may be only one person within the scope of the word so used, or in singular form and there be more than one (1) person within the scope of the word so used, such word, or pronoun used in lieu thereof, shall have a singular or plural meaning, as the case may be. The words "herein," "hereof," and "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan, not to any particular provision or VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 76 Section. Reference to Plan or Trust (or both) means this Plan. Article and Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of the Plan. Sec. 12.07. STATE LAW. Texas law will determine all questions arising with respect to the provisions of this Agreement, such as (but not limited to) the execution, construction, administration and enforcement of the Plan, except to the extent superseded by Federal law. Sec. 12.08. EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Participant, Inactive Participant, Former Participant, or any Beneficiary any right to continue employment, any legal or equitable right against the Employer, the Company, or the Employee of the Employer, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement. Sec. 12.09. SEVERABILITY. Notwithstanding any provision contained in the Plan to the contrary, the provisions of this Plan shall be deemed severable and the validity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions thereof. Sec. 12.10. CONTRARY PROVISIONS. The provisions of this Article XII shall govern notwithstanding anything contained in the Plan to the contrary. Sec. 12.11. NOTICE TO EMPLOYEES. Notice of the Plan and of any amendments thereto, of eligibility of each Employee, and notice of such other matters as may be required by law or this instrument, shall be given by the Employer to the Employees in such form as the ESOP Committee may deem appropriate and reasonable and in conformity to lawful requirements. Sec. 12.12. AGREEMENT OF PARTICIPANTS. Each Participant, by becoming such, for himself or herself, and such Participant's heirs, executors, administrators, legal representatives and Beneficiaries, ipso facto, approves and agrees to be bound by the provisions of this Plan. Sec. 12.13. ACTION BY EMPLOYERS. Any written action herein permitted or required to be taken by an Employer shall be by resolution of its board of directors or by written instrument executed by a person or group of persons who has been authorized by resolution of its board of directors as having authority to take such action. Sec. 12.14. ADOPTION OF THE PLAN BY A CONTROLLED GROUP MEMBER. Any business enterprise which on or after the Effective Date is or becomes a member of a group of corporations described in Code Section 409(1) that includes the Company shall be authorized to adopt the Plan for the benefit of its eligible employees if approval of its board of directors is obtained. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 77 (a) METHOD OF ADOPTING THE PLAN BY AN AFFILIATE. In order to adopt the Plan, the board of directors of the adopting Employer must approve a resolution expressly adopting the Plan for the benefit of its Employees and the requirements set forth in Section 1.43 of the Plan must be satisfied. The Company may require the Employer to authorize the appropriate officer of such adopting Employer to contribute from time to time, for purposes of the Plan, such sum as may be determined by the board, to be such adopting Employer's Contribution for the benefit of Participants who are employed by such adopting Employer. (b) TRANSMITTAL OF RESOLUTION. Upon the Company's request, a certified copy of the adopting Employer's resolution shall be transmitted to the Company and approval of the Board of Directors shall be deemed to constitute the adoption of the Plan by adopting Employer as of the date specified in such adopting Employer's resolution or other agreement. Sec. 12.15. DISASSOCIATION OF ANY EMPLOYER FROM PLAN. Any Employer may withdraw from the provisions of this Plan at any time upon the expiration of thirty (30) days after deliver of written notice of its intent to do so to the ESOP Committee and the Board, and shall thereupon cease to be a party to this Plan. In such event, liability for further contributions for such Employer shall cease, and the money attributable to its then Participants and Former Participants shall either be distributed to the Participants or Former Participants, if it elects to terminate the Plan as to it, in the same manner as is provided in the case of the termination of the whole Plan, or shall be transferred to an independent successor plan and trust that it may establish for the benefit of its own employees, which shall be deemed a continuation of this Plan. Withdrawal from the Plan by an Employer shall not affect the continued operation of the Plan with respect to the Company and other Employers. Sec. 12.16. AUDIT. (a) If an audit of the Plan's records shall be required by ERISA and the regulations thereunder for any Plan Year, the ESOP Committee shall direct the Trustee to engage on behalf of all Participants any independent, qualified certified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards within a reasonable period after the close of the Plan Year, furnish to the ESOP Committee and the Trustee a report of his, her, or its audit setting forth his, her, or its opinion that each of the following statements, schedules or lists, or any other statements that are required by ERISA or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently: (1) Statement of the assets and liabilities of the Plan; (2) Statement of changes in net assets available to the Plan; (3) Statement of receipts and disbursements of all assets held for investment purposes; VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 78 (4) A schedule of all loans of fixed income obligations and defaults at the close of the Plan Year; (5) A list of all leases in default or uncollectible during the Plan Year; (6) The most recent annual statement of assets and liabilities of any bank common or collective trust fund in which the Plan assets are invested or such information regarding separate accounts or trusts with a bank or insurance company as the Trustee and ESOP deemed necessary; (7) A schedule of each transaction or series of transactions involving an amount in excess of three percent (3%) of Plan assets; and (8) Other schedules and statements necessary to render an opinion. All auditing and accounting fees shall be an expense of the Plan and may, at the election of the ESOP Committee, be paid from the Plan or by the Employer. (b) If some or all of the information necessary to enable the ESOP Committee to comply with ERISA is maintained by a bank, insurance company, or similar institution regulated, supervised, and subject to periodic examination by state or federal agencies, it shall transmit and certify the accuracy of that information to the ESOP Committee as provided in ERISA within one hundred twenty (120) days after the end of the Plan Year or such other date as may be prescribed under regulations of the Secretary of Labor. Sec. 12.17. BONDING. Every Fiduciary, for the faithful performance of its duties under the Plan to the extent required by ERISA, shall be bonded in the amount required under ERISA; provided, however, that the minimum bond shall be One Thousand and No/100 Dollars ($1,000). The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of the funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year or if there is no preceding Plan Year, then the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any and all loss by reason of acts of fraud or dishonesty by the Fiduciary, alone or in connivance with others. The security shall be a corporate security as the term is used in Section 412(a)(2) of ERISA, and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bond shall be an expense of, and may at the election of the Plan Administrator be paid from, the Plan or by the Employer. Sec. 12.18. NAMED FIDUCIARY. The "Named Fiduciaries" of this Plan are (1) the Trustee, (2) the Plan Administrator, and (3) any Investment Manager appointed hereunder. The Named Fiduciaries shall have only those specified powers, duties, responsibilities, and obligations as are specifically given them under this Plan. In general, the Employer shall have the sole responsibility for making the contributions provided for under the Plan. The Company shall have the sole authority to appoint and remove the Trustee and the Plan Administrator. The Plan VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 79 Administrator shall have the sole responsibility for the administration of the Plan. The Trustee shall have the sole responsibility for management of the assets held under the Trust except those assets, management of which have been delegated to an Investment Manager who shall be solely responsible for the management of the assets delegated to it or as specifically provided under this Plan. Each Named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be taken in accordance with the provisions of this Plan, authorizing or providing for such direction, information, or action. Each Named Fiduciary may rely upon any such direction, information, or action of another Named Fiduciary as being proper under this Plan and is not required under this Plan to inquire into priority of any such direction, information, or action. It is intended under this Plan that the Named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities or obligations under this Plan. No Named Fiduciary shall guarantee the Plan in any manner against investment lost or depreciation in asset value. Sec. 12.19. SECURITIES AND EXCHANGE COMMISSION APPROVAL. The Company may request an interpretative letter from the Securities and Exchange Commission stating that the transfers of Employer Securities contemplated thereunder do not involve transactions requiring a registration of such Employer Securities under the Securities Exchange Act of 1933. In the event a favorable interpretative letter is not obtained, the Company reserves the right to amend the Plan, to amend the Plan retroactively for an effective date to obtain a favorable interpretative letter, or to terminate the Plan. END OF ARTICLE XII VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 80 ARTICLE XIII EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION Sec. 13.01. EXCLUSIVE BENEFIT. Except as provided under Article III hereof, the Employer has no beneficial interest in any asset of the Trust and no part of any asset in the Trust may ever revert to or be repaid to an Employer, either directly or indirectly; nor, prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries. In the event the Commissioner of the Internal Revenue Service, upon the Employer's request for initial approval of this Plan, determined the Plan is not a qualified plan under the Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one (1) year after the date the initial qualification is denied, but only if the application for qualification is made by the time prescribed by law for filing the Employer's return to the taxable year in which the Plan was adopted or such later date as the Secretary of the Treasury may prescribe. The Plan and Trust will terminate upon the Trustee's return of the Employer's contributions. Sec. 13.02. AMENDMENT BY COMPANY. The Company has the right at any time and from time to time: (a) To amend this Agreement in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan under the appropriate provisions of Code Section 401(a); and (b) To amend this Agreement in any other manner. No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Company or Employer. The Company also may not make any amendment which affects the rights, duties or responsibilities of the Trustee, the Plan Administrator or the ESOP Committee without the written consent of the affected Trustee, the Plan Administrator or the affected member of the ESOP Committee. The Company must make all amendments in writing. Each amendment must state the date to which it is either retroactively or prospectively effective. (A) CODE SECTION 411(d)(6) PROTECTED BENEFITS. An amendment (including the adoption of this Plan as a restatement of an existing plan) may not decrease a Participant's Accrued Benefit, except to the extent permitted under Code Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6) protected benefits determined immediately prior to the adoption date (or, if later, the effective date) of the amendment. An amendment reduces or eliminates Code Section 411(d)(6) protected benefits if the amendment has the effect of either (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 81 in Treasury regulations), or (2) except as provided by Treasury regulations, eliminating an optional form of benefit. The ESOP Committee must disregard an amendment to the extent application of the amendment would fail to satisfy this paragraph. If the ESOP Committee must disregard an amendment because the amendment would violate clause (1) or clause (2), the ESOP Committee must maintain a schedule of the early retirement option or other optional forms of benefit the Plan must continue for the affected Participants. (B) EFFECTIVE DATE OF AMENDMENT. Any such amendment shall become effective as provided therein upon its execution except the amendments which are required to be made by provisions of ERISA or the Code, which if not made would disqualify the qualified status of the Plan and the amendment, shall be deemed to be made prior to the end of any retroactive amendment period provided for in ERISA or the Code. Sec. 13.03. DISCONTINUANCE. Any Employer has the right, at any time, to suspend or discontinue its contributions under the Plan. The Company has the right to terminate this Plan at any time. The Plan will terminate upon the first to occur of the following: (a) The date terminated by action of the Company; (b) The dissolution or merger of the Company, unless the successor makes provision to continue the Plan, in which event the successor must substitute itself as the Company under this Plan. Any termination of the Plan resulting from this paragraph (b) is not effective until compliance with any applicable notice requirements under ERISA. Sec. 13.04. FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of Plan contributions to the Plan, an affected Participant's right to his Accrued Benefit is one hundred percent (100%) Nonforfeitable, regardless of the Nonforfeitable percentage which otherwise would apply under Article V hereof. Sec. 13.05. MERGER AND DIRECT TRANSFER. The Company may not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer, the surviving plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Plan may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions. If the Plan accepts a direct transfer of plan assets, the ESOP Committee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions or Participant Forfeitures under the Plan until he actually becomes a Participant in the Plan. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 82 (A) ELECTIVE TRANSFERS. Unless a transfer of assets to this Plan is an elective transfer, the Plan will preserve all Code Section 411(d)(6) protected benefits with respect to those transferred assets, in the manner described in Section 13.02 hereof. A transfer is an elective transfer if: (1) the transfer satisfies the first paragraph of this Section 13.05 hereof; (2) the transfer is voluntary, under a fully informed election by the Participant; (3) the Participant has an alternative that retains his Code Section 411(d)(6) protected benefits (including an option to leave his benefit in the transferor plan, if that plan is not terminating); (4) the transfer satisfies the applicable spousal consent requirements of the Code; (5) the transferor plan satisfies the joint and survivor notice requirements of the Code, if the Participant's transferred benefit is subject to those requirements; (6) the Participant has a right to immediate distribution from the transferor plan, in lieu of the elective transfer; (7) the transferred benefit is at least the greater of the single sum distribution provided by the transferor plan for which the Participant is eligible or the present value of the Participant's accrued benefit under the transferor plan payable at that plan's normal retirement age; (8) the Participant has a one hundred percent (100%) Nonforfeitable interest in the transferred benefit; and (9) the transfer otherwise satisfies applicable Treasury regulations. An elective transfer may occur between qualified plans of any type. (B) DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(k). If the Plan receives a direct transfer (by merger or otherwise) of Elective Contributions (or amounts treated as Elective Contributions) under a Plan with a Code Sections 401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2) and (10) continue to apply to those transferred Elective Contributions. Sec. 13.06. COMPLETE TERMINATION. Upon termination of the Plan, the distribution provisions of Article VI hereof remain operative, with the following exceptions: (1) if the present value of the Participant's Nonforfeitable Accrued Benefit does not exceed Three Thousand Five Hundred Dollars ($3,500), the ESOP Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and (2) if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds Three Thousand Five Hundred Dollars ($3,500), the Participant or the Beneficiary, in addition to the distribution events permitted under Article VI hereof, may elect to have distribution of his Nonforfeitable Accrued Benefit commence as soon as administratively practicable after the Plan terminates. To liquidate the Trust, the ESOP Committee will purchase a deferred annuity contract for each Participant which protects the Participant's distribution rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit exceeds Three Thousand Five Hundred Dollars ($3,500) and the Participant does not elect an immediate distribution pursuant to Paragraph (2) of this Section 13.06. The Trust will continue until the Trustee in accordance with the direction of the ESOP Committee has distributed all of the benefits under the Plan. VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 83 On each Valuation Date, the ESOP Committee will credit any part of a Participant's Accrued Benefit retained in the Trust with its proportionate share of the Trust's income, expenses, gains and losses, both realized and unrealized. Upon termination of the Plan, the amount, if any, in a suspense account under Article III hereof will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or amendment to freeze all future benefit accrual, but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 13.06. Sec. 13.07. PARTIAL TERMINATION. Upon a partial termination of the Plan, the ESOP Committee shall notify each affected Participant. The rights of each Participant and Beneficiary affected by such partial termination to the amounts credited to his Account shall be fully vested and nonforfeitable as of the date of such partial termination as set forth in Section 13.04 hereof. Such amounts shall either be distributed to such affected Participants and Beneficiaries, as in the case of a complete termination of the Plan, or held, as in the case of a discontinuance of contributions, as directed by the ESOP Committee. Sec. 13.08. VALUATION OF TRUST. The Trust Fund must be valued as of each Accounting Date, and in addition, as of each transaction date with any Disqualified Person, to determine the fair market value of each Participant's Accrued Benefit in the Plan. The Trust Fund must also be valued on such other dates, as directed by the ESOP Committee. If a Valuation Date would otherwise occur on a Saturday, Sunday, or holiday, then the Valuation Date shall mean the preceding business day. For the purposes of each such valuation, the assets of the Trust Fund shall be valued at their respective current fair market value, and the amount of any obligations for which the Trust Fund may be liable, as shown on the books of the Trustee, shall be deducted from the total value of the assets. With respect to activities carried on by the Plan, an independent appraiser meeting requirements similar to those prescribed by Treasury Regulations under Code Section 170(a)(1) must perform all valuations of Employer Securities which are not readily tradeable on an established securities market. END OF ARTICLE XIII VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 84 IN WITNESS WHEREOF, the Company has executed this Plan in multiple copies in Dallas, Dallas County, Texas, on the 27th day of September, 1995, to be effective the 1st day of January, 1995. "EMPLOYER" and "COMPANY" VARI-LITE HOLDINGS, INC. By: /s/ H. R. Brutsche III ----------------------------- H.R. Brutsche III, President BRV/taq 230501/gw02 VARI-LITE HOLDINGS, INC. EMPLOYEES' STOCK OWNERSHIP PLAN PAGE 85 EX-10.24 16 EXHIBIT 10.24 $30,000,000 DOLLAR EQUIVALENT MULTICURRENCY CREDIT FACILITY FOR VARI-LITE HOLDINGS, INC. AND ITS WORLDWIDE SUBSIDIARIES PROVIDED BY BROWN BROTHERS HARRIMAN & CO. NBD BANK, N.A. COUTTS & CO. TRUST COMPANY BANK AND COMERICA BANK -- TEXAS AS LENDERS AND BROWN BROTHERS HARRIMAN & CO. AS AGENT MARCH 31, 1994 TABLE OF CONTENTS Page 1. CERTAIN DEFINITIONS; USAGE 1.1. Definitions . . . . . . . . . . . . . . . . . . . . 1 1.2. Usage . . . . . . . . . . . . . . . . . . . . . . . 1 2. THE CREDIT FACILITIES 2.1. Dollar Revolver Loans . . . . . . . . . . . . . . . 2 2.2. VLI Dollar Term Loan. . . . . . . . . . . . . . . . 3 2.3. Sterling Revolver Loans . . . . . . . . . . . . . . 3 2.4. Sterling Term Loan. . . . . . . . . . . . . . . . . 4 2.5. VLA Yen Term Loan . . . . . . . . . . . . . . . . . 5 2.6. Foreign Exchange Facility; Interest Rate Contracts. 5 3. BORROWING PROVISIONS APPLICABLE TO REVOLVING LOANS 3.1. Notice of Revolver Borrowing and Repayment. . . . . 7 3.2. Making of Revolver Loans. . . . . . . . . . . . . . 8 3.3. Use of Proceeds.. . . . . . . . . . . . . . . . . . 8 4. BORROWING PROVISIONS APPLICABLE TO TERM LOANS 4.1. Notice of Term Borrowing. . . . . . . . . . . . . . 10 4.2. Making of Term Loans. . . . . . . . . . . . . . . . 10 4.3. Use of Proceeds.. . . . . . . . . . . . . . . . . . 10 4.4. Provisions Applicable to Eurocurrency Rate Loans. . 10 4.5. Changes in Law Rendering Eurocurrency Rate Lending or Foreign Currency Lending Unlawful. . . . . . . . 13 4.6. Reimbursable Taxes. . . . . . . . . . . . . . . . . 14 4.7. Capital Adequacy. . . . . . . . . . . . . . . . . . 15 5. INTEREST AND FEES 5.1. Interest on Term Loans. . . . . . . . . . . . . . . 16 5.2. Interest on Revolver Loans. . . . . . . . . . . . . 16 5.3. Computation of Interest . . . . . . . . . . . . . . 16 5.4. Fees. . . . . . . . . . . . . . . . . . . . . . . . 17 5.5. Default Interest. . . . . . . . . . . . . . . . . . 18 6. PREPAYMENTS AND OTHER PAYMENTS 6.1. Repayment of Term Loans . . . . . . . . . . . . . . 19 6.2. Optional Prepayments. . . . . . . . . . . . . . . . 20 6.3. Prepayment Fee. . . . . . . . . . . . . . . . . . . 20 6.4. No Reborrowing on Term Loans. . . . . . . . . . . . 20 6.5. Reduction of Revolving Commitments. . . . . . . . . 21 6.6. Proportionality of Payments, Prepayments and Reductions in Commitments . . . . . . . . . . . . . 21 -i- 6.7. Place of Payments and Prepayments . . . . . . . . . 21 6.8. Taxes . . . . . . . . . . . . . . . . . . . . . . . 22 7. CONDITIONS 7.1. Conditions Precedent to Loans Made on the Closing Date. . . . . . . . . . . . . . . . . . . . . . . . 23 7.2. Conditions Precedent to Each Borrowing. . . . . . . 27 8. REPRESENTATIONS AND WARRANTIES 8.1. Existence . . . . . . . . . . . . . . . . . . . . . 29 8.2. Power and Authorization . . . . . . . . . . . . . . 29 8.3. Representations and Warranties in Any Loan Document. . . . . . . . . . . . . . . . . . . . . . 29 8.4. No Conflict or Resultant Lien . . . . . . . . . . . 29 8.5. Default . . . . . . . . . . . . . . . . . . . . . . 30 8.6. No Consent. . . . . . . . . . . . . . . . . . . . . 30 8.7. Binding Obligations . . . . . . . . . . . . . . . . 30 8.8. Financial Condition . . . . . . . . . . . . . . . . 30 8.9. Litigation. . . . . . . . . . . . . . . . . . . . . 31 8.10. Use of Proceeds; Margin Stock . . . . . . . . . . . 31 8.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . 31 8.12. Titles. . . . . . . . . . . . . . . . . . . . . . . 31 8.13. Insurance.. . . . . . . . . . . . . . . . . . . . . 32 8.14. ERISA . . . . . . . . . . . . . . . . . . . . . . . 32 8.15. Intellectual Property . . . . . . . . . . . . . . . 33 8.16. Compliance with Laws. . . . . . . . . . . . . . . . 33 8.17. Survival of Representations and Warranties. . . . . 33 9. AFFIRMATIVE COVENANTS 9.1. Compliance with Laws, Etc.. . . . . . . . . . . . . 34 9.2. Reporting and Notice Requirements.. . . . . . . . . 34 9.3. Accounting Systems. . . . . . . . . . . . . . . . . 36 9.4. Taxes and Other Liens . . . . . . . . . . . . . . . 36 9.5. Maintenance of Corporate Existence and Permits. . . 36 9.6. Maintenance of Assets . . . . . . . . . . . . . . . 36 9.7. Further Assurances. . . . . . . . . . . . . . . . . 37 9.8. Right of Inspection . . . . . . . . . . . . . . . . 37 9.9. ERISA Information and Compliance. . . . . . . . . . 38 9.10. Key-Man Life Insurance. . . . . . . . . . . . . . . 38 9.11. Insurance . . . . . . . . . . . . . . . . . . . . . 39 9.12. Compliance with Material Agreements . . . . . . . . 39 9.13. Chief Executive Officer . . . . . . . . . . . . . . 39 9.14. Bank Accounts . . . . . . . . . . . . . . . . . . . 39 9.15. Share Repurchase. . . . . . . . . . . . . . . . . . 40 9.16. Subordination of Intercompany Debt. . . . . . . . . 40 9.17 VLE Master Distributorship Agreement. . . . . . . . 41 10. VLH FINANCIAL COVENANTS 10.1. Minimum Fixed Charge Cover Ratio. . . . . . . . . . 42 -ii- 10.2. Earnings Ratio. . . . . . . . . . . . . . . . . . . 43 10.3. Tangible Net Worth. . . . . . . . . . . . . . . . . 43 10.4. Leverage Ratio. . . . . . . . . . . . . . . . . . . 44 10.5. Book Value. . . . . . . . . . . . . . . . . . . . . 45 11. NEGATIVE COVENANTS 11.1. Liens, Etc. . . . . . . . . . . . . . . . . . . . . 46 11.2. Debt. . . . . . . . . . . . . . . . . . . . . . . . 46 11.3. Liabilities of Subsidiaries . . . . . . . . . . . . 47 11.4. Dividends, Distributions, Etc . . . . . . . . . . . 47 11.5. Mergers, Etc. . . . . . . . . . . . . . . . . . . . 48 11.6. Investments, Loans, and Advances. . . . . . . . . . 48 11.7. Capital Expenditures. . . . . . . . . . . . . . . . 49 11.8. Use of Proceeds . . . . . . . . . . . . . . . . . . 49 11.9. Issuance of Shares. . . . . . . . . . . . . . . . . 49 11.10. ERISA . . . . . . . . . . . . . . . . . . . . . . . 50 11.11. No Change of Business . . . . . . . . . . . . . . . 50 11.12. No Modification of Master Distributorship Agreements. . . . . . . . . . . . . . . . . . . . . 51 12. EVENTS OF DEFAULT; REMEDIES 12.1. Events of Default . . . . . . . . . . . . . . . . . 52 12.2. Other Remedies. . . . . . . . . . . . . . . . . . . 55 13. THE AGENT 13.1. Authorization and Action. . . . . . . . . . . . . . 57 13.2. Agent's Reliance, Etc.. . . . . . . . . . . . . . . 57 13.3. Defaults. . . . . . . . . . . . . . . . . . . . . . 58 13.4. BBH and Affiliates. . . . . . . . . . . . . . . . . 58 13.5. Non-Reliance on Agent and Other Lenders . . . . . . 58 13.6. Indemnification . . . . . . . . . . . . . . . . . . 59 13.7. Successor Agent . . . . . . . . . . . . . . . . . . 60 13.8. Agent's and Lenders' Reliance . . . . . . . . . . . 60 13.9. Lender Notifications to Agent . . . . . . . . . . . 61 14. MISCELLANEOUS 14.1. Waivers, Voting, Amendment, Etc.. . . . . . . . . . 62 14.2. Reimbursement or Payment of Expenses. . . . . . . . 63 14.3. Notices . . . . . . . . . . . . . . . . . . . . . . 63 14.4. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF TRIAL BY JURY. . . . . . . . . . . . . . . . . . 64 14.5. Survival of Provisions of this Agreement. . . . . . 65 14.6. Counterparts. . . . . . . . . . . . . . . . . . . . 66 14.7. Separability. . . . . . . . . . . . . . . . . . . . 66 14.8. Descriptive Headings. . . . . . . . . . . . . . . . 66 14.9. Accounting Terms. . . . . . . . . . . . . . . . . . 66 14.10. Set-off . . . . . . . . . . . . . . . . . . . . . . 66 -iii- 14.11. Sale or Assignment. . . . . . . . . . . . . . . . . 67 14.12. Interest. . . . . . . . . . . . . . . . . . . . . . 68 14.13. Indemnification . . . . . . . . . . . . . . . . . . 69 14.14. Payments Set Aside. . . . . . . . . . . . . . . . . 70 14.15. Credit Agreement Controls . . . . . . . . . . . . . 71 14.16. Judgment Currency; Dollar Equivalents . . . . . . . 71 14.17. FINAL AGREEMENT . . . . . . . . . . . . . . . . . . 72 Exhibit 2.1(c) Form of Dollar Revolver Note Exhibit 2.2(b) Form of Dollar Term Note Exhibit 2.3(b) Form of Sterling Revolver Note Exhibit 2.4(b) Form of Sterling Term Note Exhibit 2.5(b) Form of Yen Term Note Exhibit 3.1 Form of Notice of Revolver Borrowing Exhibit 4.4(a) Form of Notice of Continuation/Conversion Exhibit 8.9 Litigation Exhibit 8.15 Intellectual Property Exhibit 9.10 Key-Man Life Insurance Exhibit 10.5 Excluded Leased Equipment Exhibit 11.1(c) Liens Exhibit 11.2(b) Debt Exhibit 11.12 Master Distributorship Agreements Exhibit 14.11(d) Form of Assignment and Acceptance Agreement Exhibit 14.16(a) Applicable Lending Offices -iv- CREDIT AGREEMENT Vari-Lite, Inc., a Delaware corporation ("VLI"), Showco, Inc., a Delaware corporation ("SHOWCO"), Vari-Lite Asia, Inc., a Japanese corporation ("VLA"), Classicforge Limited (to be renamed Vari-Lite Europe Limited) (registered in England No. 2876045), an English limited liability company ("VLE"), Codeal Limited (to be renamed Theatre Projects Lighting Services Limited) (registered in England No. 2876049), an English limited liability company ("THEATRE PROJECTS"), and Watchon Limited (to be renamed Brilliant Stages Limited) (registered in England No. 2876058), an English limited liability company ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite Holdings, Inc., a Texas corporation ("VLH"), Portquay Limited (to be renamed Vari-Lite Europe Holdings Limited) (registered in England No. 2874856), an English limited liability company ("VLEH") (VLH and VLEH are sometimes referred to herein individually as a "GUARANTOR" and collectively as "GUARANTORS"), Brown Brothers Harriman & Co., a New York limited partnership ("BBH"), Coutts & Co., an English unlimited liability company ("COUTTS"), NBD Bank, N.A., a national banking association ("NBD"), Trust Company Bank, a Georgia banking corporation ("TRUST CO.") and Comerica Bank - Texas, a Texas state banking association ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica each in their capacity as a lender hereunder, together with each and every future holder of any Note, as defined herein, are hereinafter individually referred to as a "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for the Lenders (in such capacity, the "AGENT") hereby agree as follows: 1. CERTAIN DEFINITIONS; USAGE. 1.1. DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings given to them in EXHIBIT A to this Agreement. 1.2. USAGE. (a) Whenever the singular number is used, the same shall include the plural where appropriate, and VICE VERSA; (b) "writing," "printing" and words of like import include all means of reproducing words in a tangible and permanent form; (c) "tax" and "taxes" mean all imposts, deductions, charges and withholdings whatsoever charged or collected by any taxing authority together with interest thereon and penalties with respect thereto, if any, and charges, fees and other amounts made on or in respect thereof; and (d) "Article," "Section" and "subsection", and "Exhibit" refer to Articles, Sections and subsections of, and Exhibits to, this Agreement. 1 2. THE CREDIT FACILITIES. 2.1. DOLLAR REVOLVER LOANS. (a) DOLLAR REVOLVER COMMITMENT. Upon the terms and conditions and relying upon the representations and warranties herein set forth, each Dollar Revolver Lender severally and not jointly agrees to make Dollar Revolver Loans, in Dollars, to VLI (each, a "VLI REVOLVER LOAN") and to Showco (each, a "SHOWCO REVOLVER LOAN") on any one or more Business Days prior to the Maturity Date in an amount not to exceed such Lender's Pro Rata Percentage of FOUR MILLION DOLLARS ($4,000,000) (such amount, as it may be reduced from time to time pursuant to SECTION 6.5, being the "DOLLAR REVOLVER COMMITMENT") in the manner provided in SECTION 3.2; PROVIDED that the aggregate amount of VLI Revolver Loans and Showco Revolver Loans outstanding from the Dollar Revolver Lenders at any time shall not exceed the Dollar Revolver Commitment. Within such limits and during such period and subject to the terms and conditions of this Agreement, VLI and Showco may borrow, repay and reborrow hereunder. (b) FUNDING. All VLI Revolver Loans and Showco Revolver Loans shall be made by the Dollar Revolver Lenders simultaneously and in their PRO RATA Percentage, it being understood that (i) no Dollar Revolver Lender shall be responsible for any failure by any other Dollar Revolver Lender to perform its obligation to make a Revolver Loan pursuant to SECTION 2.1(a), nor shall any Dollar Revolver Lender's PRO RATA Percentage of the Dollar Revolver Commitment be increased or decreased as a result of the failure by any other Lender to perform its obligation to make a VLI Revolver Loan or Showco Revolver Loan and (ii) no failure by any Dollar Revolver Lender to perform its obligation to make a Loan to VLI or Showco shall excuse any other Lender from its obligation to fund its PRO RATA Percentage of a VLI Revolver Loan or Showco Revolver Loan. (c) DOLLAR REVOLVER NOTES. Showco and VLI shall, jointly and severally, execute and deliver to each Dollar Revolver Lender to evidence the VLI Revolver Loans and Showco Revolver Loans made by such Dollar Revolver Lender pursuant to SECTION 2.1(a), a Revolver Note, which shall be (i) dated the Closing Date; (ii) in the principal amount of such Lender's PRO RATA Percentage of the Dollar Revolver Commitment; (iii) in substantially the form attached hereto as EXHIBIT 2.1(c), with the blanks appropriately filled; (iv) payable to the order of such Dollar Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence and continuance of an Event of Default. Any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest at the Default Rate. 2 (d) JOINT AND SEVERAL LIABILITY. VLI and Showco shall be jointly and severally liable for Revolver Loans made pursuant to the Dollar Revolver Commitment by the Dollar Revolver Lenders. 2.2. VLI DOLLAR TERM LOAN. (a) VLI TERM LOAN. Upon the terms and conditions and relying upon the representations and warranties herein set forth, the VLI Term Lenders severally and not jointly agree to make a Term Loan (collectively, all of such Term Loans being referred to herein as the "VLI TERM LOAN"), in Dollars, to VLI in an aggregate amount equal to FOURTEEN MILLION DOLLARS ($14,000,000), in accordance with such Lender's commitment to make the VLI Term Loan, in the amount specified on the signature pages to this Agreement (the "VLI TERM COMMITMENT"), in the manner specified in SECTION 4.2. No VLI Term Lender shall be responsible for any failure by any other VLI Term Lender to perform its obligation to fund its PRO RATA Percentage of the VLI Term Loan. (b) TERM NOTE. VLI shall execute and deliver to each VLI Term Lender to evidence the VLI Term Loan, a Term Note, which shall be (i) dated the Closing Date; (ii) in the principal amount of such VLI Term Lender's PRO RATA Percentage of the VLI Term Loan (iii) in substantially the form attached hereto as EXHIBIT 2.2(b), with the blanks appropriately filled; (iv) payable to the order of such VLI Term Lender in full on or before the Maturity Date; and (v) subject to acceleration upon the occurrence and continuance of an Event of Default. Any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest at the Default Rate. 2.3. STERLING REVOLVER LOANS. (a) STERLING REVOLVER COMMITMENT. Upon the terms and conditions and relying upon the representations and warranties herein set forth, the Sterling Revolver Lender agrees to make Revolver Loans, in Pounds Sterling, to the Sterling Borrowers, jointly and severally, on any one or more Business Days prior to the Maturity Date, up to an aggregate principal amount of Loans not exceeding at any one time outstanding ONE MILLION FIVE HUNDRED THOUSAND POUNDS STERLING (L1,500,000.00) (such amount, as it may be reduced from time to time pursuant to SECTION 6.5 being the "STERLING REVOLVER COMMITMENT"), in the manner provided in SECTION 3.2. Within such limits and during such period and subject to the terms and conditions of this Agreement, the Sterling Borrowers may borrow, repay and reborrow hereunder. (b) STERLING REVOLVER NOTE. 3 The Sterling Borrowers shall, jointly and severally, execute and deliver to the Sterling Revolver Lender to evidence the Revolver Loans made by such Sterling Revolver Lender pursuant to SECTION 2.3(a), a Revolver Note, which shall be (i) dated the Closing Date; (ii) in the principal amount of such Sterling Revolver Lender's Sterling Revolver Commitment; (iii) in substantially the form attached hereto as EXHIBIT 2.3(b), with the blanks appropriately filled; (iv) payable to the order of the Sterling Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence and continuance of an Event of Default. Any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest at the Default Rate. (c) JOINT AND SEVERAL LIABILITY. The Sterling Borrowers shall be jointly and severally liable for Revolver Loans made pursuant to the Sterling Revolver Commitment by the Sterling Lender. 2.4. STERLING TERM LOAN. (a) STERLING TERM LOAN. Upon the terms and conditions and relying upon the representations and warranties herein set forth, each Sterling Term Lender severally and not jointly agrees to make a Term Loan (collectively, all of such Term Loans being referred to herein as the "STERLING TERM LOAN"), in Pounds Sterling, to the Sterling Borrowers, jointly and severally, in an amount equal to such Lender's PRO RATA Percentage of FIVE MILLION TWO HUNDRED THOUSAND POUNDS STERLING (L5,200,000), in accordance with its commitment to make the Sterling Term Loan, in the amount specified on the signature pages to this Agreement ("STERLING TERM COMMITMENT") in the manner provided in SECTION 4.2. No Sterling Term Lender shall be responsible for any failure by any other Sterling Term Lender to perform its obligation to make its PRO RATA Percentage of the Sterling Term Loan. (b) TERM NOTES. The Sterling Borrowers, jointly and severally, shall execute and deliver to each Sterling Term Lender to evidence the Sterling Term Loan, a Term Note, which shall be (i) dated the Closing Date; (ii) in the principal amount of such Sterling Term Lender's PRO RATA Percentage share of the Sterling Term Loan (iii) in substantially the form attached hereto as EXHIBIT 2.4(b), with the blanks appropriately filled; (iv) payable to the order of such Sterling Term Lender in full on or before the Maturity Date; and (v) subject to acceleration upon the occurrence and continuance of an Event of Default. Any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest at the Default Rate. 4 2.5. VLA YEN TERM LOAN. (a) VLA TERM LOAN. Upon the terms and conditions and relying upon the representations and warranties herein set forth, the VLA Term Lender agrees to make a Term Loan (the "VLA TERM LOAN"), in Yen, to VLA in an amount equal to TWO HUNDRED MILLION YEN (Y200,000,000), in accordance with its commitment to make the VLA Term Loan, in the amount specified on the signature pages to this Agreement ("VLA TERM COMMITMENT"), in the manner provided in SECTION 4.2. (b) VLA TERM NOTE. In order to evidence and secure the VLA Term Loan, on each of the Borrowing Date, the fifth Quarterly Payment Date following the Borrowing Date and the subsequent Quarterly Payment Dates and (if any portion of the VLA Term Loan is prepaid pursuant to SECTION 6.2) on the day of such prepayment (in this SECTION 2.5, each of such dates being referred to as an "ISSUE DATE"), VLA shall execute and deliver to the VLA Term Lender a promissory note (YAKUSOKUTEGATA) payable at sight (ICHIRANBARAI), which shall be exchanged for the prior promissory note and shall be (i) in the form attached hereto as EXHIBIT 2.5(b), (ii) in an amount equal to the principal amount of the VLA Term Loan which will be outstanding immediately after the relevant Issue Date, (iii) signed by a representative director of VLA, with a seal impression as certified by a certificate issued by the Legal Affairs Bureau having the jurisdiction over the location of the registered office of VLA, and (iv) payable to the VLA Term Lender or its order at NBD - Tokyo. So long as no Event of Default shall have occurred and be continuing, any promissory note delivered to the VLA Term Lender pursuant to this SECTION 2.5 shall not be presented by the VLA Term Lender to VLA for payment, nor, except pursuant to SECTION 14.11(c), in any other manner will the VLA Term Lender transfer, assign, sell or negotiate any such promissory note to any Person unless and until it could be presented to VLA for payment in accordance with this sentence. 2.6. FOREIGN EXCHANGE FACILITY; INTEREST RATE CONTRACTS. (a) FX OBLIGATION. Upon the terms and conditions and relying upon the representations and warranties herein set forth, the FX Lender agrees to make available to VLI on any one or more Business Days prior to the Maturity Date, foreign exchange forward contracts of up to one year maximum maturity for currencies freely convertible from and into Dollars (each an "FX OBLIGATION") in an aggregate nominal amount not exceeding at any one time outstanding TEN MILLION UNITED STATES DOLLARS ($10,000,000)("FX FACILITY COMMITMENT"). No FX Obligation may expire beyond the Maturity Date. A Borrower desiring to place an order with the FX Lender pursuant to this Section shall execute and deliver to the FX Lender, not less than one (1) Business Day prior to the date of such order, the FX Lender's customary application (completed in a form acceptable to the FX Lender in all respects); PROVIDED that to the extent any of the terms and provisions of such application 5 are inconsistent with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall prevail. (b) INTEREST RATE CONTRACTS. VLI has entered into an agreement dated February 28, 1994 with BBH to swap: (i) payments equal to the interest that would be due on a portion of the VLI Term Loan if interest thereon were calculated at a fixed rate, for (ii) payments equal to the actual interest due on that portion of the VLI Term Loan (the "FIRST SWAP AGREEMENT"). Borrowers or Guarantors may, subsequent to the Closing, enter with BBH into other such swap agreements or into other Interest Rate Contracts having the effect of fixing or capping the apparent rate of interest on some or all of the Loans. It is understood that nothing in the First Swap Agreement nor in any similar, subsequent agreements shall reduce or modify Borrowers' duty to pay interest as specified in this Agreement, and in the event of any conflict between the terms of the First Swap Agreement and this Agreement, the terms of this Agreement shall prevail. (c) FAILURE TO FUND. If any FX Obligation, or any obligation of a Borrower to any Lender under an Interest Rate Contract, matures and such Borrower fails to fund the amount required thereunder immediately after the FX Lender or such other Lender makes demand therefor, such Lender shall be entitled to cause a loan to be made to such Borrower in the amount of the Actual Credit Exposure with respect to such FX Obligation or Interest Rate Contract, whether or not such Borrower is entitled to a loan pursuant to any other provision of this Agreement. Any such loan shall be payable on demand, and shall bear interest at the Default Rate. 6 3. BORROWING PROVISIONS APPLICABLE TO REVOLVING LOANS 3.1. NOTICE OF REVOLVER BORROWING AND REPAYMENT. (a) When VLI or Showco desires to borrow pursuant to SECTION 2.1(a), VLI or Showco, as the case may be, shall deliver to the Agent a notice thereof, either telephonically or in writing, no later than 10:00 a.m. (New York time) on the Business Day immediately preceding the proposed Borrowing Date, specifying, (i) the proposed Borrowing Date (which shall be a Business Day), (ii) the amount of the proposed Borrowing (which shall be in an aggregate amount of not less than $100,000, and increments thereof), (iii) the availability remaining under the Dollar Revolver Commitment (before such Borrowing is accounted for), and (iv) instructions for the disbursement of the proceeds of the Borrowing. Any written notice shall be in the form of EXHIBIT 3.1 attached hereto (a "NOTICE OF REVOLVER BORROWING"), and any telephonic notice shall be promptly followed by Showco's or VLI's (as the case may be) delivery to Agent of a Notice of Revolver Borrowing. Any telephone notice shall be deemed a representation and warranty by Showco (or VLI as the case may be) of the accuracy of the information which should be contained in a Notice of Revolver Borrowing. Any written Notice of Revolver Borrowing may be delivered by facsimile. The Agent shall not incur liability to the Borrowers in acting upon any telephonic notice which the Agent believes in good faith to have been given by VLI or Showco, or for otherwise acting in good faith under this SECTION. (b) When any of the Sterling Borrowers desires to borrow pursuant to SECTION 2.3(a), such Sterling Borrower shall deliver to the Sterling Revolver Lender a notice thereof, either telephonically or in writing, no later than 10:00 a.m. (London Time) on the Business Day immediately preceding the proposed Borrowing Date, specifying, (i) the proposed Borrowing Date (which shall be a Business Day), (ii) the amount of the proposed Borrowing (which shall be in an aggregate amount of not less than L50,000, and increments thereof), (iii) the availability remaining under the Sterling Revolver Commitment (before such Borrowing is accounted for), and (iv) instructions for the disbursement of the proceeds of the Borrowing. Any written notice shall be in the form of a Notice of Revolver Borrowing and any telephonic notice shall be promptly followed by such Sterling Borrower's delivery to the Sterling Revolver Lender of a Notice of Revolver Borrowing. Any telephonic notice requesting a Borrowing shall be deemed a representation and warranty by such Sterling Borrower of the accuracy of the information which should be contained in a Notice of Revolver Borrowing. The Sterling Revolver Lender shall not incur liability to the Sterling Borrowers in acting upon any telephonic notice which such Lender believes in good faith to have been given by one of the Sterling Borrowers. (c) When VLI, Showco or the Sterling Borrowers desire to repay all or any portion of a Revolver Loan, then such Borrower shall deliver to the Agent or the Sterling Revolver Lender, as the case may be, a notice thereof, either telephonically or in writing, no later than 10:00 a.m. (New York or London time, as the case may be) on the Business Day of the repayment, specifying the amount of such repayment. 7 (d) Neither the Agent nor the Sterling Revolver Lender, as the case may be, shall be obligated to accept more than one (i) Notice of Revolver Borrowing or (ii) repayment of a Revolver Loan during any calendar week. 3.2. MAKING OF REVOLVER LOANS. (a) Promptly after receipt of telephonic notice or of a Notice of Revolver Borrowing under SECTION 3.1(a), but in any event not later than 12:00 p.m. (New York time) on the day immediately preceding the proposed Borrowing Date, the Agent shall notify each Dollar Revolver Lender by telecopy, or other similar form of transmission, of the proposed Borrowing. The Dollar Revolver Lenders shall deposit their PRO RATA Percentage (based on the Dollar Revolver Commitment) of the amount of the Borrowing requested in the telephonic notice or Notice of Revolver Borrowing with the Agent at its office in New York, New York in immediately available funds on the Borrowing Date. Upon fulfillment of the conditions set forth in ARTICLE 7, the Agent shall disburse the proceeds of the VLI Revolver Loan or Showco Revolver Loan, as the case may be, in accordance with the disbursement instructions set forth in the respective telephonic notice or Notice of Revolver Borrowing. (b) Upon receipt of telephonic notice or of a Notice of Revolver Borrowing under SECTION 3.1(b) and upon fulfillment of the conditions set forth in ARTICLE 7, the Sterling Revolver Lender shall disburse the proceeds of the Sterling Revolver Loan in accordance with the disbursement instructions set forth in the telephonic notice or Notice of Revolver Borrowing. (c) Each Dollar Revolver Lender and Sterling Revolver Lender shall post on a schedule attached to each Revolver Note, (x) the date and principal amount of each Revolver Loan made under the Revolver Note and (y) each payment of principal thereon; PROVIDED, HOWEVER, that any failure of a Revolver Lender to so mark a Revolver Note shall not affect a Borrower's obligations thereunder; and PROVIDED FURTHER that there shall be a rebuttable presumption that a Revolver Lender's records as to such matters shall be correct whether or not the Revolver Lender has so marked a Revolver Note. 3.3. USE OF PROCEEDS. The Borrowers agree that the proceeds of the Dollar Revolver Loans and the Sterling Revolver Loans shall be used (a) for the acquisition of the Vari-Lite U.K. Assets, (b) for the production of equipment, including VL5's and VL6's and modification and upgrading of existing equipment, (c) to repay existing debt, and (d) for general corporate purposes (including, making intercompany advances and other Investments not prohibited by this Agreement). 8 4. BORROWING PROVISIONS APPLICABLE TO TERM LOANS 4.1. NOTICE OF TERM BORROWING. The applicable Borrower shall deliver to the Agent on or before 9:00 a.m. (New York time) the second Business Day prior to the Closing Date instructions for disbursement of the proceeds of each Term Loan on the Closing Date (which shall, for each Term Loan, be the Borrowing Date), including whether such Loans will be made as a Base Rate Loan or a Eurocurrency Rate Loan, and in the case of a Eurocurrency Rate Loan, the applicable Eurocurrency Interest Period. Subject to SECTION 4.4, the Sterling Term Loan and VLA Term Loan will be Eurocurrency Rate Loans. 4.2. MAKING OF TERM LOANS. Promptly upon receipt of the disbursement instructions under SECTION 4.1, the Agent shall notify the VLI Term Lenders, Sterling Term Lenders and VLA Term Lender, as applicable by telecopy, or other similar form of transmission, of the proposed Borrowings. The VLI Term Lenders shall deposit an amount equal to their VLI Term Commitment with the Agent at its office in New York, New York, in immediately available funds, on the Closing Date. The Sterling Term Lenders shall deposit an amount equal to their Sterling Term Commitment with such Sterling Term Lender designated by Agent to receive such amount in London, England in immediately available funds, on the Closing Date. The VLA Term Lender shall make an amount equal to the amount of its VLA Term Loan Commitment, available in Tokyo, Japan, in immediately available funds, on the Closing Date. Upon fulfillment of the conditions set forth in ARTICLE 7, the Agent (or such Sterling Term Lender designated by the Agent, or the VLA Term Lender, as aforesaid) shall disburse the proceeds of the Term Loans in accordance with the relevant Borrowers' disbursement instructions. 4.3. USE OF PROCEEDS. The Borrowers agree that the proceeds of the Term Loans shall be used (a) for the acquisition of the Vari-Lite U.K. Assets, (b) for the production of equipment, including VL5's and VL6's, and modification and upgrading of existing equipment, (c) to repay existing debt and (d) for general corporate purposes (including, making intercompany advances and other Investments not prohibited by this Agreement). 4.4. PROVISIONS APPLICABLE TO EUROCURRENCY RATE LOANS. (a) NOTICE OF CONTINUATION/ CONVERSION. If a Borrower desires at the expiration of a Eurocurrency Interest Period to continue such Loan as a Eurocurrency Rate Loan for a new Eurocurrency Interest Period, such Borrower shall give the Agent notice thereof, either telephonically or in writing, no later than 10:00 a.m. (New York, London or Tokyo time, as the case may be) on the second Business Day immediately preceding the last day of the then expiring Eurocurrency Interest Period, which shall specify the aggregate principal amount of the 9 Eurocurrency Rate Loan to be continued for a new Eurocurrency Interest Period and the new Eurocurrency Interest Period to be applicable thereto. Any written notice shall be in the form of EXHIBIT 4.4(a) attached hereto (each a "NOTICE OF CONTINUATION/CONVERSION"), and any telephonic notice shall be promptly followed by such Borrower's delivery to Agent of a Notice of Continuation/Conversion. If VLI desires at the expiration of a Eurocurrency Interest Period to convert all or part of the VLI Term Loan from a Eurocurrency Rate Loan to a Base Rate Loan, VLI shall give the Agent notice thereof, either telephonically or in writing (in the aforesaid manner), no later than 10:00 a.m. (New York time) on the second Business Day immediately preceding the last day of the then expiring Eurocurrency Interest Period, which shall specify the aggregate principal amount of the Eurocurrency Rate Loan to be converted to a Base Rate Loan. If VLI desires to convert all or a portion of the VLI Term Loan from a Base Rate Loan to a Eurocurrency Rate Loan, VLI shall give the Agent notice thereof, either telephonically or in writing (in the aforesaid manner), no later than the second Business Day immediately preceding the desired conversion date, which shall specify the aggregate principal amount of the Base Rate Loan to be converted to a Eurocurrency Rate Loan. (b) FAILURE TO DELIVER NOTICE OF CONTINUATION/CONVERSION. If the applicable Borrower shall have failed to properly deliver a Notice of Continuation/Conversion specifying a continuation or conversion pursuant to SECTION 4.4(a), such Borrower shall be deemed to have elected to continue such Eurocurrency Rate Loan for a Eurocurrency Interest Period of the same duration as the Eurocurrency Interest Period so expiring. (c) EUROCURRENCY DEPOSITS UNAVAILABLE OR EUROCURRENCY INTEREST RATE UNASCERTAINABLE OR UNECONOMICAL. In the event that, prior to the commencement of any Eurocurrency Interest Period for any Eurocurrency Rate Loan, by reason of circumstances affecting the eurocurrency interbank market generally, any one of the Lenders shall have reasonably determined in good faith (which determination shall be conclusive and binding upon all parties hereto) that (i) Dollar, Pounds Sterling or Yen deposits, as the case may be, of the relevant amount and for the relevant Eurocurrency Interest Period for such Eurocurrency Rate Loans are not available to such Lender in the applicable eurocurrency interbank market generally, or (ii) adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, LIBOR or TIBOR applicable to such Eurocurrency Interest Period, such Lender shall promptly give to Agent written, telegraphic, telex or telecopier notice of such determination setting forth, to the best of such Lender's knowledge, the circumstances giving rise to such determination, whereupon (x) any request for a Eurocurrency Rate Loan shall be deemed a request for a Loan based upon a rate of interest equal to the lesser of (A) such Lender's Base Rate, PLUS two percent (2.0%) or (B) the Highest Lawful Rate, and (y) each outstanding Eurocurrency Rate Loan from such Lender (unless such Lender subsequent to such determination of unavailability shall determine that such Dollar, Pound Sterling or Yen deposits are again available) shall be converted, without any additional notice to or from the affected Borrower, to a Loan based upon a rate of interest as specified in this SECTION (disregarding any requirements for a Notice of Borrowing 10 or a minimum aggregate principal amount) on the last day of the Eurocurrency Interest Period with respect thereto. (d) SPECIAL FEES IN RESPECT OF RESERVE REQUIREMENTS. Borrowers with Eurocurrency Rate Loans agree to pay to each Lender on any such Eurocurrency Rate Loans, as additional interest, such amounts as will compensate such Lender for any cost to such Lender (to the extent reasonably allocated to such Lender's Eurocurrency Rate Loans to Borrowers hereunder), from time to time, of any additional reserve or additional special deposit requirement against assets held by, or deposits in or for the amount of any loans by, such Lender which are imposed on, or deemed applicable by, such Lender, from time to time, under or pursuant to any Governmental Requirement respecting an Applicable Lending Office or any Eurocurrency Rate Loan. In connection herewith no Lender shall be required to prove that it actually funded any Eurocurrency Rate Loan, in whole or in part, with matching deposits in Dollars, Pounds Sterling or Yen, as the case may be, acquired by such Lender making such Eurocurrency Rate Loan from a prime bank in the applicable Eurocurrency interbank market, irrespective of whether such Lender has any such deposits. A certificate as to the amount of any such cost (including calculations, in reasonable detail, showing how such Lender computed and allocated such cost) shall be promptly furnished by said Lender to such Borrowers and shall, in the absence of manifest error, be conclusive and binding. (e) REASONABLE EFFORTS. Each Lender making Eurocurrency Rate Loans agrees that it will use all reasonable efforts, including ,without limitation, reasonable good faith efforts, to designate a different Applicable Lending Office to make or maintain any Eurocurrency Rate Loan, in order to avoid or to minimize, as the case may be, the payment by the Borrower of any additional amounts under the terms of SECTION 4.4(d), and that it will, as promptly as practicable, notify the Borrowers of the existence of any event which will require the payment by a Borrower of any such additional amounts; PROVIDED, that the Lenders shall not be obligated to make Eurocurrency Rate Loans hereunder at any office located in the United States to avoid or minimize such payments. (f) FUNDING LOSSES. If a Borrower makes any payment of principal on any Eurocurrency Rate Loan, or converts a Eurocurrency Rate Loan into a Base Rate Loan, on any day other than the last day of the Eurocurrency Interest Period applicable thereto, such Borrower shall reimburse each affected Lender within ten (10) Business Days after demand, for any resulting loss or expense actually incurred by it, including (without limitation) any loss incurred in obtaining, liquidating, employing or redeploying deposits or foreign currencies from third parties (including, without limitation, the amount of such Lender's Consequential Loss), for the period after any such payment or conversion through the end of such Eurocurrency Interest Period (the calculation of such loss or expense shall include a credit, not in excess of such loss or expense, for the interest that could be earned by such Lender as a result of redepositing such amount), together with interest thereon at the Federal 11 Funds Rate plus two (2%) percent from the date of demand until paid in full; provided that, such Lender shall have delivered to such Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. In connection herewith no Lender shall be required to prove that it actually funded any Eurocurrency Rate Loan, in whole or in part, with matching deposits in Dollars, Pounds Sterling or Yen, as the case may be, acquired by such Lender making such Eurocurrency Rate Loan from a prime bank in the applicable Eurocurrency interbank market, irrespective of whether such Lender has any such deposits. 4.5. CHANGES IN LAW RENDERING EUROCURRENCY RATE LENDING OR FOREIGN CURRENCY LENDING UNLAWFUL. In the event that after the date hereof any change in any Governmental Requirement should make it unlawful for any Lender, in the reasonable determination in good faith of such Lender, to make or maintain any Eurocurrency Rate Loan or Foreign Currency Loan hereunder, such Lender shall, upon the occurrence of such event, notify the affected Borrower or Borrowers, or any of them, thereof in writing, stating the reasons therefor; PROVIDED, however, that before giving any such notice, such Lender shall use reasonable good faith efforts to designate a different Eurocurrency Lending Office to make or maintain such Eurocurrency Rate Loan or Foreign Currency Loan if such designation will avoid the need for giving such notice and will not be otherwise materially disadvantageous to the Lender. Upon receiving a notice of any such event the affected Borrower or Borrowers shall have the following options, one of which must be exercised: (a) to prepay immediately, all of the Loans of such Lender which are affected by such Governmental Requirement and terminate such Lender's Commitment to make Loans which are affected by such Governmental Requirement; (b) to the extent the affected Loan is a Eurocurrency Rate Loan, convert all affected Eurocurrency Rate Loans from such Lender (including accrued interest thereon) to Loans based on the rate of interest and in the manner specified in SECTION 4.4(c); or (c) to designate another bank or other lending institution in accordance with SECTION 14.11 which is acceptable to the other Lenders to purchase the Note or Notes of such Lender and such Lender's rights hereunder, pursuant to an Assignment and Acceptance Agreement, for a purchase price equal to the outstanding principal amount thereof plus all interest accrued thereon and all other amounts owing to such Lender hereunder; and upon such purchase, such Lender shall no longer have any obligations hereunder (other than any obligation arising prior to the close of business on the date of such purchase). 12 4.6. REIMBURSABLE TAXES. Each Borrower covenants and agrees that, with respect to each Eurocurrency Rate Loan and Foreign Currency Loan: (a) Such Borrower will pay, when due (upon prior written notice by a Lender, and on an after-tax basis), all present and future income, stamp and other taxes, levies, costs and charges whatsoever imposed, assessed, levied or collected on or in respect of such Eurocurrency Rate Loan or Foreign Currency Loan; PROVIDED, however, that if such Borrower disputes in good faith any such taxes, levies, costs or charges and refuses to pay same pending resolution of such dispute, such Borrower shall so advise such Lender in writing and shall make the appropriate reserves therefor. Each Borrower's obligation pursuant hereto shall exclude, however, any such taxes, levies, costs or charges imposed or determined by reference to income of such Lender or any Lending Office by any jurisdiction in which such Lender or any such Eurocurrency Lending Office is located (all such non-excluded taxes, levies, costs and charges being collectively called "REIMBURSABLE TAXES" in this SECTION). Promptly after the date on which payment of any such Reimbursable Tax is due pursuant to applicable law, such Borrower will, at the request of such Lender, furnish to such Lender an official receipt issued by the relevant taxing authority showing the amount of such tax and its payment by such Borrower or such other evidence in form and substance satisfactory to such Lender that such Borrower has met its obligation under this SECTION. (b) Such Borrower will indemnify each Lender against, and reimburse each Lender on demand for, any Reimbursable Taxes paid by such Lender upon such Borrower's failure to pay such amounts in a timely manner after written notice by the Lender, and any loss, liability, claim or expense, including interest, penalties and reasonable legal fees, that such Lender may incur at any time arising out of or in connection with a failure by the appropriate Borrower to pay such Reimbursable Taxes. A certificate of such Lender as to the amount of any such Reimbursable Taxes and other amounts paid by such Lender shall be conclusive and binding in the absence of manifest error. (c) All payments on account of the principal of and interest on the Loans and all other amounts payable by such Borrower to the Lender hereunder shall be made free and clear of and without reduction by reason of any Reimbursable Taxes, all of which will be for the account of the Borrower and paid when due by such Borrower. (d) If such Borrower is ever required to pay any Reimbursable Tax with respect to any Eurocurrency Rate Loan, such Borrower may elect to convert all outstanding Eurocurrency Rate Loans to Loans based on the rate of interest in the manner specified in SECTION 4.4(c), but such election shall not diminish such Borrower's obligation to pay all Reimbursable Taxes theretofore imposed, assessed, levied or collected or to meet any obligation under an Interest Rate Contract. (e) Notwithstanding the foregoing provisions of this SECTION to the contrary, such Borrower shall have no obligation to pay to a Lender any amount payable by reason of the failure of such Lender to file, to the extent the Lender is legally entitled to file, any statement of exemption required by Treasury Regulation Section 1.1441-4(a) or any 13 subsequent version thereof promulgated under the Code, or any claim for relief from United Kingdom Inland Tax pursuant to Article 11 of the United States-United Kingdom Income Tax Treaty or comparable documents required in Japan. 4.7. CAPITAL ADEQUACY. With respect to each Lender's Commitment, the Borrowers shall pay directly to each Lender as set forth below, on request, such amounts as such Lender may determine to be necessary to compensate such Lender for any costs which it determines are attributable to the maintenance by such Lender, pursuant to a new Governmental Requirement implemented or effective after the date hereof or a change made in any Governmental Requirement after the date hereof, or any change in the interpretation, application or administration thereof, whether or not having the force of law, of capital in respect of such Lender's Commitment, such compensation to include, without limitation, an amount equal to any reduction of the rate of return on assets or equity of such Lender (or its parent holding company) which such Lender could have achieved with respect to such Commitment but for such new Governmental Requirement or change in a Governmental Requirement or any such change in the interpretation, application or administration thereof, whether or not having the force of law. Each Lender will notify the Borrowers of any event occurring after the date of this Agreement that will entitle such Lender to compensation pursuant to this SECTION as promptly as practicable after it obtains knowledge thereof. No Borrower will be responsible for any amounts as compensation pursuant to this SECTION accruing prior to one (1) year prior to the notice to such Borrower in accordance with the preceding sentence. In the event a Lender is entitled to such compensation, such Lender will furnish the Borrowers with a certificate setting forth the amount of each request by such Lender for compensation under this SECTION, with such certificate setting forth in reasonable detail the basis for determining, and the calculation of, such compensation. Determinations and allocations by a Lender for purposes of this SECTION of the effect of any Governmental Requirement pursuant to this SECTION, or of the effect of capital maintained pursuant to this SECTION, on such Lender's cost or rate of return of maintaining Loans or its obligation to make Loans, and of the amounts required to compensate such Lender hereunder, shall be conclusive absent manifest error. 14 5. INTEREST AND FEES 5.1. INTEREST ON TERM LOANS. (a) The VLI Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to: (i) if a Base Rate Loan, the lesser of (A) Agent's Base Rate, PLUS two percent (2.0%) or (B) the Highest Lawful Rate; and (ii) if a Eurocurrency Rate Loan, the lesser of (A) the Eurodollar Rate, PLUS four and one-half percent (4.5%) or (B) the Highest Lawful Rate. (b) The Sterling Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to the lesser of (A) LIBOR, PLUS three percent (3.0%) or (B) the Highest Lawful Rate. (c) The VLA Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to the lesser of (A) TIBOR, PLUS three and one half percent (3.5%) or (B) the Highest Lawful Rate. 5.2. INTEREST ON REVOLVER LOANS. The Revolver Loans shall bear interest on the unpaid principal amount thereof from time to time outstanding at an interest rate equal to the lesser of (a) the applicable Revolver Lender's Base Rate, PLUS two percent (2.0%) or (b) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date. 5.3. COMPUTATION OF INTEREST. Interest on (a) the VLA Term Loan, the Sterling Revolver Loan and the Sterling Term Loan shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 365 days, and (b) all other Obligations shall be computed on the basis of the actual number of days elapsed in the period during which interest accrues and a year of 360 days. Except as provided below, in computing interest on any Loan, the date of the making of the Loan, or the first day of a Eurocurrency Interest Period, as the case may be, shall be included and the date of payment or the expiration date of a Eurocurrency Interest Period, as the case may be, shall be excluded. Notwithstanding the foregoing, in computing interest on the VLA Term Loan, the date of the making of the VLA Term Loan, or the first day of a Eurocurrency Interest Period, as the case may be, and the date of payment shall be included. 15 5.4. FEES. (a) The Borrowers agree to pay a closing fee to the Agent and the Lenders on the Closing Date equal to the amount specified below: Agent/BBH $155,000.00 NBD $ 85,000.00 Coutts L 30,000.00 Comerica $ 15,000.00 Trust Co. $ 15,000.00 (b) The Revolver Borrowers agree to pay to the Revolver Lenders, a commitment fee on the average daily unused portion of such Lender's PRO RATA Percentage (which shall mean 100% in the case of the Sterling Revolver Lender) of the Revolver Commitment (the "COMMITMENT FEE") from the date hereof until the Maturity Date at the rate of one-half of one percent (0.50%) per annum, payable on (i) each Quarterly Payment Date, and (ii) the Maturity Date. (c) Commitment Fees payable to the Dollar Revolver Lenders shall be payable when due in New York, New York, in Dollars, in immediately available funds to the Agent for the account of each of the Dollar Revolver Lenders. Commitment Fees payable to the Sterling Revolver Lender shall be payable when due in London, England, in Pounds Sterling, in immediately available funds to the Sterling Revolver Lender. (d) The Borrowers agree to pay to the Agent an annual agency fee equal to $37,500.00, payable at the Closing and on or before each anniversary of the Closing Date until this Agreement terminates according to its terms. (e) The Fees described in this Agreement represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention, or forbearance of money, and the obligation of the Borrowers to pay each Fee described herein shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in this Agreement, and expenses otherwise described in this Agreement. All Fees including, without limitation, those referred to in this Section, shall be part of the Obligations hereunder, shall be nonrefundable, and shall, to the fullest extent permitted by law, bear interest, if not paid when due, at the Default Rate. 5.5. DEFAULT INTEREST. Notwithstanding the rates of interest specified in SECTIONS 5.1 AND 5.2, or elsewhere in this Agreement, from and after the occurrence of an Event of Default, and for as long thereafter as such Event of Default shall be continuing, unless such Event of Default shall have been waived or rescinded, the principal balance of all Loans shall bear interest at the Default Rate. On and after the Maturity Date, should any or all of the Loans remain unpaid, the unpaid principal balance of such Loan(s) and, to the extent permitted 16 by applicable law, the accrued and unpaid interest thereon, shall bear interest at the Default Rate, and shall be payable on demand. 17 6. PREPAYMENTS AND OTHER PAYMENTS. 6.1. REPAYMENT OF TERM LOANS. (a) Principal payments on the VLI Term Loan shall begin on the fifth Quarterly Payment Date following the date on which such Loan is made and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule (for purposes of this Agreement, March 31, 1994 shall not be considered a Quarterly Payment Date): Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates $ 0 Fifth through Nineteenth Quarterly Payment Dates $ 700,000.00 Maturity Date $3,500,000.00 (b) Principal payments on the Sterling Term Loan shall begin on the fifth Quarterly Payment Date following the date on which such Loan is made and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule: Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates L 0 Fifth through Nineteenth Quarterly Payment Dates L 260,000.00 Maturity Date L1,300,000.00 18 (c) Principal payments on the VLA Term Loan shall begin on the fifth Quarterly Payment Date following the date on which such Loan is made and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule: Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates Y 0 Fifth through Nineteenth Quarterly Payment Dates Y10,000,000.00 Maturity Date Y50,000,000.00 6.2. OPTIONAL PREPAYMENTS. The Borrowers shall have the right at any time and from time to time, upon no less than two (2) Business Days' prior written notice to the Agent (which the Agent shall promptly transmit to each Lender), to prepay the Term Loans, in whole or in part. Term Loans which are Eurocurrency Rate Loans may be prepaid (x) in whole or in part on the expiration date of the then applicable Eurocurrency Interest Period, upon no less than three (3) Business Days' prior written notice to the Agent (which the Agent shall promptly transmit to each applicable Lender) and (y) otherwise only upon payment of the amounts set forth in SECTION 4.4(f). In any case, each partial prepayment shall be in an aggregate principal amount of at least (a) $200,000, for the VLI Term Loan, (b) L100,000, for the Sterling Term Loan and (c) Y5,000,000 for the VLA Term Loan. 6.3. PREPAYMENT FEE. In addition to any amounts payable pursuant to SECTION 4.4(f), the Borrowers shall pay to the Agent, for the benefit of each Term Lender and in accordance with its PRO RATA Percentage of the Term Loans, a fee of one-half of one percent (.50%) of the prepaid amount for any Term Loan prepaid at any time during the period ending thirty-six months after the Closing Date. 6.4. NO REBORROWING ON TERM LOANS. The Borrowers shall have no right to reborrow any amount prepaid on the Term Loans. 6.5. REDUCTION OF REVOLVING COMMITMENTS. The Borrowers, upon no less than three (3) Business Days' prior written notice to the Agent (which the Agent shall promptly transmit to each Lender), shall have the right, at any time and from time to time, to permanently reduce, in whole or in part, the Commitments of the Lenders on the Dollar Revolvers or the Sterling Revolver, 19 PROVIDED that the Borrowers shall have made whatever payment may be required to reduce the applicable outstanding principal on the Revolving Loans with respect to the Commitment being reduced to an amount less than or equal to the Commitments after giving effect to such reduction. Any partial reduction shall be in an aggregate principal amount of at least (a) $200,000, for the Dollar Revolver and (b) L100,000, for the Sterling Revolver. Any reduction pursuant to this SECTION may be made without premium or penalty. 6.6. PROPORTIONALITY OF PAYMENTS, PREPAYMENTS AND REDUCTIONS IN COMMITMENTS. (a) All payments and prepayments shall be made proportionately to the applicable Lenders. Payments and prepayments on the Term Loans shall be made in a manner which will ensure that the same percentage of each of the VLI Term Loan, the Sterling Term Loan and the VLA Term Loan remains outstanding after such payment or prepayment. Proportionate payments shall in each such instance be made to the Agent (in the case of VLI), Coutts (in the case of Sterling Borrowers) and NBD (in the case of VLA). (b) Reductions in the Dollar Revolver Commitment shall be accompanied by a proportionate reduction in the Sterling Revolver Commitment, and vice versa, so that the relative proportion of each Lender with a Dollar Revolver Commitment or Sterling Revolver Commitment shall remain unchanged with respect to the combined amount of the Dollar Revolver Commitment and Sterling Revolver Commitment at any time available. (c) The Agent shall verify the compliance of the Borrowers with this SECTION. Should the Agent discover that any payment, prepayment or reduction of commitment has not been made in accordance with the terms hereof, the Agent may cause the necessary reallocation so that the terms hereof are fully complied with, and the Borrowers and Lenders agree to fully cooperate with the Agent in order to accomplish such compliance. 6.7. PLACE OF PAYMENTS AND PREPAYMENTS. All payments and prepayments made in accordance with the provisions of this Agreement shall be made to the applicable Lender or to the Agent (in the case of payments to be made to the Agent) in immediately available funds, delivered not later than 12:00 p.m. (local time) on the date and at the Applicable Lending Office of such Lender, to such account of the Lender (or the Agent, as aforesaid) as such Person may designate. Amounts received after 12:00 p.m. (local time) shall be deemed to have been paid on the next Business Day. Payments actually received by any Lender, in excess of amounts due it in respect of the applicable Loan, shall be paid by it to the Agent promptly upon receipt; and if not then due to another Lender, shall be promptly returned to Borrower. All payments due under this Agreement to (a) the Dollar Revolver Lenders and the VLI Term Lenders with respect to the Dollar Revolver and the VLI Term Loan shall be paid by the applicable Borrowers to the Agent in New York, (b) the Sterling Revolver Lender and the Sterling Term Lenders with respect to the Sterling Revolver Loan and the Sterling Term Loan 20 shall be paid by the Sterling Borrowers to Coutts in London, and (c) the VLA Term Lender with respect to the VLA Term Loan shall be paid by VLA to NBD - Tokyo in Tokyo, Japan. 6.8. TAXES. (a) All payments (whether of principal, interest, reimbursements or otherwise) under this Agreement or on the Notes shall be made by the Borrowers without set-off or counterclaim and shall be made free and clear of and without deduction for any present or future tax (excluding income taxes payable by the Lenders). If the making of such payments is prohibited by law, unless such a tax is deducted or withheld therefrom, the Borrowers shall pay to the Lenders, on the date of each such payment, such additional amounts as may be necessary in order that the net amounts received by the Lenders after such deduction or withholding shall equal the amounts which would have been received if such deduction or withholding were not required. (b) If Coutts, as agent for the Sterling Term Lenders, is obliged to make any deduction or withholding from any payment to the Sterling Term Lenders (an "agency payment"), which represents an amount or amounts received by Coutts from the Sterling Borrowers pursuant to this Agreement, the Sterling Borrowers shall pay directly to the Lenders such sum (a "compensating sum") as will, after taking into account any deduction or withholding which the Sterling Borrowers are obliged to make from the compensating sum, enable the Sterling Lenders to receive, on the due date for payment of the agency payment, an amount equal to the agency payment which the Sterling Lenders would have received in the absence of any obligation to make a deduction or withholding. 21 7. CONDITIONS. 7.1. CONDITIONS PRECEDENT TO LOANS MADE ON THE CLOSING DATE. The obligation of each Lender to make the initial Loans is subject to the following conditions precedent: (a) The Agent shall have received on or before the Closing Date the following, each dated as of the Closing Date and in form, substance, scope and number satisfactory to the Agent and Lenders: (i) LOAN DOCUMENTS. (A) AGREEMENT. This Agreement, duly executed by each of the Borrowers, the Guarantors, the Agent and each Lender. (B) REVOLVER NOTES. The Revolver Notes, for the account of each Lender with a Revolver Commitment, duly executed by the applicable Borrower and payable to the order of such Lender in the amount of such Lender's Revolver Commitment. (C) TERM NOTES. The Term Notes, for the account of each Lender with a Term Loan Commitment, duly executed by the applicable Borrower and payable to the order of such Lender in the amount of such Lender's Term Loan Commitment. (D) GUARANTIES. The duly executed Guaranties. (E) SECURITY DOCUMENTS. The Security Agreements and other Security Documents, duly executed by the applicable Borrower or Guarantor. (F) INTERCREDITOR AGREEMENT. The Intercreditor Agreement, duly executed by each Lender. (G) APPOINTMENT OF PROCESS AGENT. The letters of acceptance of the Process Agent accepting its appointment as agent for service of process under this Agreement, as required by SECTION 14.4 hereof. (H) SHARE CERTIFICATES. Share certificates representing one hundred percent (100%) of the issued capital stock of (v) VLA, (w) VLEH, (x) VLE, (y) Theatre Projects, and (z) Brilliant Stages, respectively, each including a signed stock power in blank. (I) VLA AGREEMENT ON BANK TRANSACTIONS. The VLA Agreement on Bank Transactions, duly executed by VLA. 22 (ii) CORPORATE CERTIFICATES. (A) BORROWERS' AND GUARANTORS' OFFICER'S CERTIFICATE. An Officer's Certificate for each Borrower and Guarantor certifying (1) the names and true signatures of the officers of such Person authorized to sign each Loan Document to which such Person is a party and the notices and other documents to be delivered by such Person pursuant to any such Loan Document; (2) the constitutive documents of such Person as in effect on the date of such certification; and (3) the resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance by such Person of each Loan Document to which such Person is a party, the notices and other documents to be delivered by such Person pursuant to any such Loan Document, and the transactions contemplated thereunder. (B) CERTIFICATES. If available under local law, certificates of appropriate governmental officials as to the existence and good standing of each Borrower and Guarantor in its jurisdiction of organization and any and all other jurisdictions where the property owned or the business transacted by such Borrower or Guarantor requires such Borrower or Guarantor to be qualified therein and where the failure to be so qualified would have a Material Adverse Effect. (C) RESOLUTIONS OF STERLING BORROWERS. A Director's Certificate for each of Classicforge Limited, Codeal Limited and Watchon Limited certifying the resolutions of its members which authorize the change of corporate names of such companies to VLE, Theatre Projects and Brilliant Stages, respectively. (iii) OPINION OF COUNSEL TO THE VARI-LITE CORPORATE GROUP. (A) GARDERE & WYNNE, L.L.P. The favorable opinion of Gardere & Wynne, L.L.P., U.S. counsel to the Vari-Lite Corporate Group, addressing such matters as any Lender through the Agent may reasonably request. (B) BAKER & MCKENZIE. The favorable opinion of Baker & McKenzie, English counsel to the Vari-Lite Corporate Group, addressing such matters as any Lender through the Agent may reasonably request. (C) KAMANO LAW OFFICE. The favorable opinion of Hiroyuki Kamano, Japanese counsel to VLA addressing such matters as any Lender through the Agent may reasonably request. (D) MORGAN & FINNEGAN. 23 The favorable opinion of Morgan & Finnegan, special Intellectual Property counsel to Borrowers, addressing (1) the title of Borrowers to and (2) perfection of the Liens of the Agent in, the Intellectual Property. (iv) OPINION OF COUNSEL TO AGENT AND LENDERS. The favorable opinion of Haynes and Boone, L.L.P., counsel to the Agent and Lenders, addressing the enforceability of the Loan Documents under New York law. (v) VOTING TRUST. The Voting Trust, in form reasonably satisfactory to the Lenders, together with any related documents as the Lenders may reasonably request. (vi) OTHER MATERIAL AGREEMENTS. A certified copy of each of the Master Distributorship Agreements and the Asset Purchase Agreement. (vii) INSURANCE MATTERS. (A) INSURANCE CERTIFICATES. Certificates of insurance for the U.S. and English members of the Vari-Lite Corporate Group which certify as to the amount and type of property and casualty insurance carried with respect to the Assets of such members of the Vari-Lite Corporate Group, and which name the Agent or Coutts, as the case may be, as the loss payee with respect to such insurance. (B) ACKNOWLEDGMENT LETTER. A letter from the issuer of the key man life insurance policy required by SECTION 9.10 for H.R. Brutsch III, pursuant to which such issuer agrees to accept premium payments from the Agent or the Lenders for such policy. (C) ASSIGNMENT OF POLICY. An assignment of the key man life insurance policy required by SECTION 9.10 for James Bornhorst. (viii) OTHER DOCUMENTS. Such other documents as the Agent may reasonably request. (b) ACTIONS AND EVENTS. (i) PAYMENT OF EXPENSES. Payment of all fees (including, without limitation, any Fee) and expenses of, or incurred by, (A) the Agent and counsel to Agent and Lenders, Haynes and Boone, L.L.P., to and including the Closing Date, (B) special Japanese counsel to Agent and Lenders, Anderson Mori, in an amount of up to $4,500.00 and (C) special English counsel to Agent and Lenders, Wilde Sapte, in an amount of up to 24 L15,250.00, in each case to the extent billed as of the Closing Date, in connection with the negotiation and closing of the transactions contemplated herein. (ii) REGULATORY APPROVALS. Evidence that all approvals necessary to consummate the transactions contemplated by any Loan Document have been obtained from each appropriate Governmental Authority. (iii) COMPLIANCE WITH LAWS. On the Closing Date, each Person that is a party to any Loan Document shall have complied with all Governmental Requirements (including, without limitation, Regulation G, Regulation T, Regulation U, or Regulation X) necessary to consummate the transactions contemplated by any Loan Document. (iv) NO PROHIBITIONS. No Governmental Requirement or order of any Governmental Authority shall, and no litigation shall, be pending or threatened which in the reasonable judgment of the Agent would, enjoin, prohibit, restrain, or have a Material Adverse Effect on the making of any Loan or the consummation of any transaction contemplated under any Loan Document. (v) EXISTING DEBT. Evidence that all Debt of the Vari-Lite Corporate Group owed to Chrysler Capital Corporation (other than the Penalty Note), CIT Group (other than certain equipment leases), Comerica and Vari-Lite Europe, Ltd. (registered in England No. 1842355), a wholly owned subsidiary of Samuelson Group plc has been, or will, on the Closing Date be, repaid in full or refinanced upon terms and conditions satisfactory to the Agent, together with duly executed releases or assignments of Liens securing such Debt. (vi) FINANCIAL STATEMENTS. The Agent shall have received sufficient copies for all Lenders of a pro forma consolidated balance sheet for the Borrowers and the Guarantors dated as of January 31, 1994 but giving effect to the transactions contemplated hereby and the organization and purchase of assets by VLE, Brilliant Stages and Theatre Projects, prepared by VLH, and certified by the chief financial officer of VLH as presenting fairly the consolidated financial position of the Vari-Lite Corporate Group as of the date indicated in conformity with GAAP, subject to changes resulting from year-end adjustments and purchase accounting adjustments, if any, and otherwise reasonably satisfactory to the Agent. (vii) MATERIAL ADVERSE CHANGE. No change shall have occurred with respect to the financial condition, business, properties, or operations of the Vari-Lite Corporate Group, since January 31, 1994 which has or is likely to cause a Material Adverse Effect, and the Agent shall have received a certificate to such effect from the chief financial officer of VLH. 25 (viii) REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in ARTICLE 8 of this Agreement shall be true and correct on and as of the Closing Date and, after giving effect to the Borrowings on the Closing Date, no Default or Event of Default shall exist or be continuing, and the chief executive officer of VLH shall have so certified in writing to the Agent. (ix) CONSENTS. Evidence that each of the Borrowers and Guarantors has obtained all consents necessary for the execution, delivery, and performance of each Loan Document to which it is a party and the transactions contemplated thereunder. (x) OTHER ACTIONS. The Borrowers and Guarantors shall have taken such actions and each Lender shall have received such other documents as the Agent may reasonably request. 7.2. CONDITIONS PRECEDENT TO EACH BORROWING. The obligation of each Lender to make a Loan on the occasion of any Borrowing (including, without limitation, the Borrowings on the Closing Date) shall be subject to the further conditions precedent that on the date of such Borrowing (i) the following statements shall be true and correct, and (ii) each of the giving of the applicable telephonic or written Notice of Borrowing and the acceptance by a Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by Borrower that on the date of such Borrowing such statements are true and correct: (a) The representations and warranties contained in ARTICLE 8 of this Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date. (b) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, which constitutes a Default or an Event of Default. (c) No material adverse change has occurred with respect to the financial condition, business, properties, or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to SECTION 9.2. (d) Such Borrower is duly authorized and empowered to make such Borrowing, and such Borrowing will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. (e) Such Borrower has delivered to the Agent an applicable telephonic or written Notice of Borrowing. 26 8. REPRESENTATIONS AND WARRANTIES. In order to induce Lenders to enter into this Agreement, each Borrower represents and warrants to Lenders, and with respect to SECTION 8.8 VLH represents and warrants to Lenders, that: 8.1. EXISTENCE. Such Borrower and each Subsidiary of such Borrower is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified or licensed to do business in all jurisdictions where the properties owned or the business transacted by it makes such qualification necessary and where the failure to be so qualified would have a Material Adverse Effect. 8.2. POWER AND AUTHORIZATION. Such Borrower is duly authorized and empowered to execute, deliver and perform its obligations under each Loan Document to which it is a party, and all such corporate action on its part requisite for the due execution, delivery, and performance of each Loan Document to which it is a party has been duly and effectively taken. Such Borrower is duly authorized and empowered to borrow under this Agreement and all corporate action on such Borrower's part requisite for borrowing by such Borrower hereunder has been duly and effectively taken. 8.3. REPRESENTATIONS AND WARRANTIES IN ANY LOAN Document. The representations and warranties contained in each Loan Document to which such Borrower is a party are true and correct in all material respects. 8.4. NO CONFLICT OR RESULTANT LIEN. The execution, delivery and performance by such Borrower of each Loan Document to which it is a party, the Borrowings hereunder by such Borrower as contemplated herein and the effectuation of the transactions contemplated by any Loan Document, do not and will not violate any provision of, or result in a default under, such Borrower's Articles or Certificate of Incorporation or other charter documents or By-laws or any material agreement or Governmental Requirement to which such Borrower is subject, or result in the creation or imposition of any Lien upon any properties of such Borrower, other than those in favor of the Lenders, as contemplated by the Loan Documents. 8.5. DEFAULT. Neither such Borrower nor any Subsidiary of such Borrower is in default under the provisions of any instrument evidencing any Debt or any other liability, contingent or otherwise, or of any agreement relating thereto or under any Governmental 27 Requirement, which default could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 8.6. NO CONSENT. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery, and performance by such Borrower of any Loan Document to which it is a party, the Borrowings hereunder as contemplated herein, or the effectuation of the transactions contemplated under any Loan Document, except for the filing of financing statements and certain other Security Documents. 8.7. BINDING OBLIGATIONS. Each Loan Document to which such Borrower is a party will constitute, when delivered hereunder, the legal, valid, and binding obligation of such Borrower enforceable against such Borrower in accordance with its respective terms, except as such enforceability may be (a) limited by the effect of any Debtor Laws, or (b) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding at equity or at law). 8.8. FINANCIAL CONDITION. The consolidated balance sheet of VLH at September 30, 1993, and the related consolidated statements of income and stockholder's equity and cash flow statements of VLH for the fiscal year then ended, copies of which have been furnished to each Lender, have been prepared in accordance with GAAP and in accordance with accounting practices consistently applied and fairly present the financial condition of VLH on a consolidated basis as at such date and the consolidated results of the operations of VLH for the period ended on such date, all in accordance with GAAP, and since September 30, 1993, there has been no material adverse change in the financial condition, business, properties or operations of VLH on a consolidated basis. As of the date hereof, there are no material liabilities, or Debts (including, without limitation, contingent and indirect liabilities, but excluding liabilities arising in the ordinary course of business) of any member of the Vari-Lite Corporate Group which (separately or in the aggregate) have not been disclosed in writing to the Agent. 8.9. LITIGATION. Except as may be described on EXHIBIT 8.9 hereof, there are no actions, suits, or proceedings pending or, to the knowledge of such Borrower, threatened against or affecting such Borrower or any Subsidiary of such Borrower which, if adversely determined, would have a Material Adverse Effect. Neither such Borrower nor any Subsidiary of such Borrower is in default under any order of any Governmental Authority, or is subject to, or a party to, any order of any Governmental Authority arising out of any action, suit, or proceeding under any Governmental Requirement respecting antitrust, monopoly, restraint of trade, unfair competition, or similar matters. 28 8.10. USE OF PROCEEDS; MARGIN STOCK. The proceeds of the Loans will be used by such Borrower in accordance with SECTIONS 3.3 AND 4.3. Such Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no proceeds of any Loan will be used (a) to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock; (b) to reduce or retire any Debt which was originally incurred to purchase or carry any such Margin Stock; (c) for any other purpose which might constitute this transaction a "purpose credit" within the meaning of Regulation D, G, T, U, or X; or (d) to acquire any security of any Person who is subject to SECTIONS 13 AND 14 of the Securities Exchange Act. Neither such Borrower, nor any person acting on behalf of such Borrower, has taken or will take any action which might cause any Loan Document to violate Regulation D, G, T, U or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act, in each case as now in effect or as the same may hereafter be in effect. 8.11. TAXES. Such Borrower and each Subsidiary of such Borrower has filed all federal, state and foreign income tax returns which are required to be filed, and has paid all taxes as shown on such returns or on any assessment received by it to the extent that such taxes have become due, except for such taxes and assessments as are being contested in good faith and for which adequate reserves have been provided. 8.12. TITLES. Such Borrower and each Subsidiary of such Borrower has good and indefeasible title to its Assets, free and clear of all Liens, except Liens permitted by SECTION 11.1 hereof. 8.13. INSURANCE. Such Borrower: (a) has complied with the insurance requirements set forth in this Agreement and each Security Document to which such Borrower is a party; and (b) maintains other insurance of such types as is usually carried by businesses of established reputation engaged in the same or similar businesses and similarly situated with insurance companies or associations with a Best rating of A or better (or, as to workers' compensation, or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdiction in which its operations are carried on) and in such amounts (and with co-insurance and deductibles) as such insurance is usually carried by businesses of established reputation engaged in the same or similar businesses and similarly situated. 29 8.14. ERISA. No Termination Event has occurred, or is reasonably expected to occur, with respect to any PBGC Plan or Multiple Employer Plan. Neither such Borrower nor any ERISA Affiliate has incurred nor is reasonably expected to incur any withdrawal liability under ERISA to any Multiemployer Plan. Neither such Borrower nor any ERISA Affiliate has engaged in any prohibited transaction within the meaning of Section 4975 of the Code or Section 406 of ERISA such that any material liability might be incurred by such Borrower or any ERISA Affiliate. The execution and delivery of each Loan Document, the consummation of the transactions contemplated thereby and the lending of funds pursuant to the provisions of this Agreement will not involve any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. No Plan established or maintained by such Borrower or any ERISA Affiliate or to which such Borrower has made contributions had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of the last day of the most recent Plan year of such Plan heretofore ended. No material liability, individually or in the aggregate, to the PBGC (other than required insurance premiums, all of which that are due have been paid) has been incurred (but not satisfied), or is reasonably expected to be incurred by such Borrower or any ERISA Affiliate with respect to any PBGC Plan or Multiple Employer Plan in respect of which such Borrower or any ERISA Affiliate is or has been an "employer" (as defined in Section 3(5) of ERISA) and there has not been any event or condition, in addition to a Termination Event, which presents a material risk of the termination of any such PBGC Plan under circumstances which, in the reasonable determination of the Agent, could result in a material liability to such Borrower. All accrued obligations that are either individually or in the aggregate material to such Borrower or to any ERISA Affiliate (but only if such ERISA Affiliate's accrued obligation could result in a material liability to such Borrower), whether arising by operation of law, by contract or by past custom or practice, for payments by any of them to any trust or other fund or to any Governmental Authority with respect to pension benefits, unemployment compensation benefits, social security or other benefits for employees or former employees of such Borrower or any ERISA Affiliate have been paid or adequate accruals therefor have been made, and none of the foregoing has been rendered not due by reason of any extension, whether at the request of such Borrower or any ERISA Affiliate, or otherwise. All accrued obligations that are either individually or in the aggregate material to such Borrower or to any ERISA Affiliate (but only if such ERISA Affiliate's accrued obligations could result in a material liability to such Borrower), whether arising by operation of law, by contract, by past custom or practice or otherwise, for salaries, vacation and holiday pay, bonuses and other forms of compensation payable to employees or former employees of such Borrower or any ERISA Affiliate have been paid or adequate accruals therefor have been made in the books and records of such Borrower or the appropriate ERISA Affiliate. For purposes of this SECTION, an obligation or liability shall be considered material if it results in a Material Adverse Effect. No Lien in favor of a Plan exists nor has there been any occurrence that with the passage of time could likely result in the imposition of a Lien in favor of any Plan. There has been no failure to comply with the continuing health care coverage requirements of Section 162(k) of the Code. 8.15. INTELLECTUAL PROPERTY. 30 Such Borrower and each Subsidiary of such Borrower owns, is licensed or otherwise has the lawful right to use all Intellectual Property (a) used in, or necessary for, the conduct of its business as currently conducted, and (b) the unavailability of which might have a Material Adverse Effect. Except as disclosed on EXHIBIT 8.15 hereof, to the best of its knowledge, the use of such Intellectual Property by such Borrower or any Subsidiary of such Borrower does not infringe on the rights of any Person, subject to such claims and infringements as do not, in the aggregate, give rise to any liability on the part of such Borrower or any Subsidiary of such Borrower which has, or is likely to have, a Material Adverse Effect. No event has occurred which permits or, after notice or lapse of time, or both, would permit, the revocation or termination of any Intellectual Property which might have a Material Adverse Effect. 8.16. COMPLIANCE WITH LAWS. The business and operations of such Borrower and each Subsidiary of such Borrower are in compliance (to the extent necessary so that any failure to comply would not have a Material Adverse Effect) with all Governmental Requirements (including, without limitation, the Securities Act, the Securities Exchange Act and state securities law or "Blue Sky" laws). 8.17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties in each Loan Document shall survive the delivery of the Notes and the making of any Loans. 31 9. AFFIRMATIVE COVENANTS. So long as any Obligations of any Borrower remain outstanding or any Lender shall have any Commitment to any Borrower hereunder, each Borrower and Guarantor agrees as follows, provided that, as to VLEH, the Sterling Borrowers and VLA, such agreement exists only so long as such Borrower or Guarantor has outstanding Obligations or a Lender has an existing Commitment to such Borrower: 9.1. COMPLIANCE WITH LAWS, ETC. Each Borrower and Guarantor will, and will cause each Subsidiary to, comply (to the extent necessary so that any failure to comply would not have a Material Adverse Effect) with all Governmental Requirements (including, without limitation, all laws, regulations, or directives with respect to equal employment opportunity and employee safety in each jurisdiction in which such Person does business); provided, however, that this SECTION shall not prevent any Borrower, Guarantor or any Subsidiary from, in good faith and with reasonable diligence, contesting the validity or application of any Governmental Requirement by appropriate legal proceedings. 9.2. REPORTING AND NOTICE REQUIREMENTS. VLH will furnish to each Lender: (a) MONTHLY FINANCIAL STATEMENTS As soon as available and in any event within thirty (30) days after the end of each calendar month (including September), unaudited consolidated and consolidating balance sheets of VLH as of the end of such month, consolidated and consolidating statements of income and consolidated cash flow statements of VLH for such month, setting forth in each case in comparative form corresponding consolidated figures for the corresponding period in the immediately preceding fiscal year of VLH, all in reasonable detail, and reasonably satisfactory in form, substance and scope to the Agent, and certified by the chief financial officer of VLH as presenting fairly the financial position of VLH as of the date indicated and the results of its operations for the period indicated in conformity with GAAP, consistently applied, subject to changes resulting from year-end adjustments; (b) ANNUAL FINANCIAL STATEMENTS As soon as available and in any event within ninety (90) days after the end of each fiscal year of VLH, audited consolidated statements of income and stockholder's equity and cash flow statements of VLH for such year, and audited consolidated balance sheets of VLH as of the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the immediately preceding audit, all in reasonable detail, together with the unqualified opinion of VLH's accountants or such other independent certified public accountants of recognized national standing as are 32 selected by VLH, stating that such financial statements fairly present the consolidated financial position of VLH as of the date indicated and the consolidated results of their operations and changes in financial position for the period indicated in conformity with GAAP, consistently applied (except for such inconsistencies which may be disclosed in such report), and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (c) COMPLIANCE REPORT Together with each delivery of financial statements pursuant to SECTION 9.2(a) AND 9.2(b), an Officer's Certificate of VLH (i) stating that the signer has reviewed the terms of this Agreement and the other Loan Documents, and has made, or caused to be made under the signer's supervision, a review in reasonable detail of the transactions and condition of the members of the Vari-Lite Corporate Group during the accounting period covered by such financial statements and that the signer does not have knowledge of the existence and continuance as at the date of such Officer's Certificate of any condition or event which constitutes an Event of Default or Default or, if any such condition or event exists, specifying the nature and period of existence thereof and what action is being taken or is proposed with respect thereto, (ii) demonstrating in reasonable detail compliance with the financial covenants contained in ARTICLE 10, and (iii) demonstrating compliance with SECTION 9.10, and (iv) containing such further information as may be required by the Agent from time to time; (d) MANAGEMENT REPORT As soon as possible, and in any event within ninety (90) days after the end of each fiscal year, a detailed management report containing (i) a review of the year end financial results of the Vari-Lite Corporate Group, (ii) an analysis of the Equipment and Inventory of the Vari-Lite Corporate Group, operations, prospects and results for such fiscal year, and (iii) a discussion of its business plans for the current fiscal year; (e) ASSET STATEMENT Within forty-five (45) days after the end of each fiscal quarter, an updated statement of all Equipment and Inventory of the Vari-Lite Corporate Group, listed by type, location and book value; (f) AGED RECEIVABLES Within thirty (30) days after the end of each fiscal quarter, an unconsolidated aging of accounts receivable for each member of the Vari-Lite Corporate Group; (g) NOTICE OF DEFAULT 33 Immediately upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and the action which the appropriate Borrower is taking or proposes to take with respect thereto; and (h) ADDITIONAL INFORMATION Promptly after any request therefor, such other information respecting the Assets, condition or operations, financial or otherwise, of any Borrower or any Subsidiary as any Lender may from time to time reasonably request. 9.3. ACCOUNTING SYSTEMS. VLH will, and will cause each other member of the Vari-Lite Corporate Group to, maintain, or cause to be maintained, a system of accounting established and administered in accordance with sound business practices to permit the preparation of financial statements in conformity with GAAP, and each of the financial statements described herein shall be prepared from such system and records. 9.4. TAXES AND OTHER LIENS. Each Borrower and Guarantor will, and will cause each Subsidiary to, pay and discharge, or will cause to be paid and discharged, promptly all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or Assets as well as all claims of any kind (including, without limitation, claims for labor, materials, supplies, and rent) which, if unpaid, might become a Lien upon any Asset; PROVIDED, HOWEVER, that it shall not be required to pay any Contested Claims. 9.5. MAINTENANCE OF CORPORATE EXISTENCE AND PERMITS. Each Borrower and Guarantor will, and will cause each Subsidiary to, maintain its corporate existence, and to maintain all permits and approvals from each Governmental Authority to the extent necessary so that any failure to maintain such permit or approval would not have a Material Adverse Effect. 9.6. MAINTENANCE OF ASSETS. Each Borrower and Guarantor will, and will cause each Subsidiary to, at all times maintain, preserve, protect and keep, or cause to be maintained, preserved protected and kept, its Assets in working order, and condition (ordinary wear and tear excepted) and, from time to time, will make, or cause to be made, all repairs, renewals, replacements, extensions, additions, betterments, and improvements to its Assets as are appropriate, so that (a) it maintains its current line of business, (b) the business carried on in connection therewith may be conducted properly at all times, and (c) its Assets are operated in compliance with all Environmental Laws; PROVIDED, HOWEVER, that nothing in this SECTION shall prevent any Borrower, Guarantor, or any Subsidiary thereof, from selling, abandoning, or otherwise disposing of any of its 34 property in the ordinary course of business or if such property is obsolete or is no longer of use in its business, if, in the opinion of its management, the transfer is not otherwise prohibited under any Loan Document and such sale, abandonment, or other disposition is in its best interest. VLI or Showco, as the case may be, shall continue to own the Intellectual Property rights currently owned by it, and all such future patents, trademarks and trade names developed within the Vari-Lite Corporate Group shall be registered in the name of VLI or Showco. 9.7. FURTHER ASSURANCES. Each Borrower and Guarantor will, whenever and as often as the Lenders may reasonably request, at such Borrower's or Guarantor's own expense, as the case may be, promptly execute and deliver all such further instruments (including, without limitation, security agreements and financing statements) and do such other acts, as Lenders may reasonably request for the purpose of protecting or perfecting any Lien created or granted, or intended to be created or granted, in connection with any Loan Document or any of the transactions contemplated thereby or in order to insure that any such Lien is of the priority contemplated in such Loan Document, or in order otherwise to carry out more effectually the purposes and intent of any Loan Document; and will at its own expense obtain and furnish to Lenders all such opinions of independent legal counsel for the Vari-Lite Corporate Group (who must be reasonably acceptable to Lenders) as Lenders may reasonably request in connection with any such security, instrument, or act. VLA covenants and agrees that (a) to the extent that there is developed within Japanese business practice a generally accepted method by which to perfect the Liens of the Lenders in the assets of VLA that does not have a negative impact upon the business operations of VLA, or (b) upon the occurrence of an Event of Default, VLA shall use its reasonable best efforts, at the request of Agent, to perfect such Liens. 9.8. RIGHT OF INSPECTION. Each Borrower and Guarantor will, and will cause each Subsidiary to, permit any officer, or employee of, or agent designated by, any Lender to visit and inspect any of its Assets, examine its corporate books or financial records, take copies and extracts therefrom and discuss its affairs and finances with its officers, all at such reasonable times and as often as the Lenders may reasonably desire. Lenders shall make their best efforts to coordinate any such visits, inspections and discussions with the Agent. 9.9. ERISA INFORMATION AND COMPLIANCE. (a) VLH will furnish to the Lenders (a) if requested by a Lender, promptly after the filing thereof with the Internal Revenue Service copies of each Schedule B (actuarial information) to the annual report with respect to each Plan; (b) promptly after becoming aware of the occurrence of any Termination Event in connection with any Multiple Employer Plan or PBGC Plan, a written notice signed by the chief executive officer of VLH specifying the nature thereof and any action VLH or appropriate ERISA Affiliate proposes to take with respect thereto; (c) promptly and in any event within ten (10) days after receipt thereof by VLH or any of its ERISA Affiliates from the PBGC, copies of each 35 notice received by VLH or any such ERISA Affiliate of the PBGC's intention to terminate any Multiple Employer Plan or PBGC Plan or to have a trustee appointed under Section 4042(b) or Section 4049 of ERISA to administer any PBGC Plan or Multiple Employer Plan in either event under circumstances which, in the reasonable judgment of the Agent, could result in material liability to VLH or any ERISA Affiliate; (d) promptly upon receipt of same a written notice in the event there is either a failure of VLH or an ERISA Affiliate to comply with the minimum funding requirements of Section 412 of the Code or Section 302 of ERISA or an application for a waiver from either or both of such standards is requested or received by VLH or an ERISA Affiliate with respect to a PBGC Plan or a Multiple Employer Plan and in either event the failure to comply or the application or grant of waiver is with respect to a material amount; and (e) promptly, and in any event within ten (10) days after receipt thereof by VLH or any of its ERISA Affiliates from a Multiemployer Plan sponsor, a copy of each notice received by VLH or any of its ERISA Affiliates concerning the imposition and the amount of withdrawal liability upon VLH or an ERISA Affiliate by a Multiemployer Plan pursuant to Section 4202 of ERISA. VLH will comply in all material respects with all applicable provisions of ERISA, the violation of which would have a Material Adverse Effect. (b) VLH shall, and shall cause each ERISA Affiliate to, establish, maintain and operate all employee benefit plans described in Section 3(3) of ERISA which is maintained or contributed to for the benefit of any foreign employees of VLH or any ERISA Affiliate and is not covered by ERISA pursuant to ERISA Section 4(b)(4) to comply in all material respects with all laws, regulations and rules applicable thereto and the respective requirements of the governing documents for such benefit plans, except for failures to comply which, in the aggregate, would not have a Material Adverse Effect. 9.10. KEY-MAN LIFE INSURANCE. VLH shall maintain, or shall cause to be maintained, key-man life insurance policies with respect to each Person identified on EXHIBIT 9.10 attached hereto and made a part hereof in the amount set forth opposite such Person's name on such EXHIBIT, issued by a reputable insurance company reasonably acceptable to the Agent, naming such Person's employer as beneficiary. From time to time, on request of the Agent, Borrower shall furnish to the Agent evidence that each such insurance policy is in full force and effect. The key man life insurance policy on Mr. Bornhorst shall be assigned to the Agent for the benefit of the Lenders. If, during the term of this Agreement, any proceeds shall be received by the Agent from such policy, then such proceeds shall, (a) if an Event of Default shall exist and be continuing, be used to reduce the Obligations of the Borrowers in the direct order of their maturity and in accordance with SECTION 6.6 hereof or, (b) if no Event of Default shall exist, be delivered by the Agent to VLI for the general corporate use of the Vari-Lite Corporate Group. 9.11. INSURANCE. Each Borrower and Guarantor will comply with the insurance requirements set forth in each Security Document to which such Person is a party. 36 9.12. COMPLIANCE WITH MATERIAL AGREEMENTS. Each Borrower and Guarantor will, and will cause each Subsidiary to, comply in all material respects with each material agreement to which it is a party or which affects any Assets of Borrower or such Subsidiary or the business of such Borrower or Guarantor or Subsidiary, if such Borrower's or such Guarantor's or such Subsidiary's noncompliance therewith would have a Material Adverse Effect. 9.13. CHIEF EXECUTIVE OFFICER. H.R. Brutsch III shall continue as the full-time Chief Executive Officer of VLH and VLI and the full-time Chairman of VLEH. No change in Mr. Brutsch 's position with VLH, VLI or VLEH shall be permitted without the prior written consent of all Lenders. 9.14. BANK ACCOUNTS. Each Borrower will use its reasonable best efforts to maintain the bank accounts it uses as its operating accounts with one of the Lenders. VLA shall open an account at NBD-Tokyo and shall maintain a daily average balance during each fiscal year of VLA in such account of at least Y50,000,000.00, which amount may be withdrawn from time to time by VLA so long as there does not exist a Default or an Event of Default. Upon the occurrence of a Default or an Event of Default, VLA shall deposit with NBD-Tokyo an amount, if any, which is needed to bring the balance in such account to Y50,000,000.00. Upon the occurrence and during the continuance of a Default or an Event of Default, VLA may not withdraw any funds from such account at NBD-Tokyo. 9.15. SHARE REPURCHASE. VLH will acquire the shares of its Class B Common Stock that it is required to repurchase from the Engineers under the terms of the Buy-Sell Agreement only through the issuance of a Share Repurchase Note. 9.16. SUBORDINATION OF INTERCOMPANY DEBT. Each Borrower and Guarantor covenants and agrees that, to the extent provided in this SECTION 9.16, the Intercompany Obligations shall be subordinate, junior and inferior in right, payment and collection to the prior payment and performance in full of the Obligations, and any Liens granted to secure the Intercompany Obligations shall be subordinate, junior and inferior in right to the Liens securing the Obligations. (a) Upon any distribution of assets of any Intercompany Debtor pursuant to or during (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relating to such Intercompany Debtor or its creditors, or to its assets, (ii) any liquidation, dissolution or other winding up of such Intercompany Debtor, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (iii) any 37 assignment for the benefit of creditors or any other marshalling of assets and liabilities of such Intercompany Debtor (any such case, proceeding, receivership, liquidation, reorganization, liquidation, dissolution, winding up or assignment of the type described in the preceding clauses (i) , (ii) or (iii) is referred to herein as a "Proceeding"), then in the event of any such Proceeding, the Lenders shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Obligations, or provision shall be made for such payment in cash before the applicable Intercompany Holder shall be entitled to receive any payment of any type on account of the Intercompany Obligations owed by such Intercompany Debtor, and to that end Lenders shall be entitled to receive, for application to the payment of the Obligations, any payment or distribution of any kind or character, whether in cash, property or securities which may be payable or deliverable in respect of Intercompany Obligations in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this SECTION 9.16(a), any Intercompany Holder shall have received any payment or distribution of assets of any Intercompany Debtor of any kind or character, whether in cash, property or securities which it is prohibited from receiving pursuant to this SECTION, such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of such Intercompany Debtor for application to the payment of all Obligations remaining unpaid, to the extent necessary to pay all Obligations in full, after giving effect to any concurrent payment or distribution to or for the holders of the Obligations. (b) Upon the occurrence of any Event of Default, until such Event of Default shall have been cured or waived or shall have ceased to exist and acceleration (if any) as a result thereof shall have been rescinded or annulled, no payment shall be made by any Intercompany Debtor or received by any Intercompany Holder on account of Intercompany Obligations. (c) Notwithstanding any provision of this Agreement to the contrary, at any time that the Intercompany Holders are prohibited from receiving payment on the Intercompany Obligations pursuant to SECTION 9.16(b) above, such Intercompany Holders shall be prohibited from taking any action towards the collection of Intercompany Obligations or the payment of any other amounts in respect thereof. Without limiting the foregoing, the Intercompany Holders shall be prohibited, during such period, from directly or indirectly, (i) suing for (including, without limitation, the commencement or joining with any other creditors of any Intercompany Debtor in the commencement of any bankruptcy, reorganization, receivership or insolvency proceeding against any Intercompany Debtor) any amounts due in respect of Intercompany Obligations, (ii) exercising any right of set off for the collection of any amounts due in respect of the Intercompany Obligations, or (iii) taking any action to enforce the Liens securing Permitted Intercompany Secured Debt. (d) If, notwithstanding the provisions of this SECTION 9.16, any payment or distribution of any character (whether in cash, securities or other property) or any security shall be received by any Intercompany Holder at any time that payment to or receipt by such Intercompany Holder is prohibited hereunder, then such Intercompany Holder shall immediately notify Agent of the receipt of such payment, distribution or security and such Intercompany Holder shall hold all payments received in contravention 38 of the terms hereof in trust for the benefit of, and shall immediately pay the same over or deliver or transfer the same to Agent for application to the Obligations until all Obligations have been paid in full. (e) To the extent any payment of Obligations is declared to be fraudulent or preferential, set aside or required to be paid to a trustee, receiver or other similar party under any applicable bankruptcy or insolvency law, then, if such payment is recovered by, or paid over to, such trustee, receiver or other similar party, the Obligations or part thereof originally intended to be satisfied shall be deemed to be reinstated and outstanding as if such payment had not occurred. 9.17 VLE MASTER DISTRIBUTORSHIP AGREEMENT. VLI and VLE shall, within thirty (30) days of the Closing Date, restate the VLE Master Distributorship Agreement, on terms and conditions reasonably satisfactory to Agent, to ensure that none of the provisions of such agreement conflict with the terms and conditions of this Agreement and the other Loan Documents. 39 10. VLH FINANCIAL COVENANTS. VLH covenants and agrees that it shall comply, and cause the other members of the Vari-Lite Corporate Group to comply, at all times, with the following covenants so long as any Commitments are outstanding and thereafter until payment in full of all of the monetary Obligations (other than indemnities under this Agreement which are not yet due and except to the extent waived by Majority Lenders): 10.1. MINIMUM FIXED CHARGE COVER RATIO. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBITDA minus (A) Capital Expenditures (excluding therefrom Capital Expenditures made in connection with the acquisition by the Sterling Borrowers of the Vari-Lite U.K. Assets) plus (B) prepayment penalties (to the extent deducted in determining EBITDA) paid on financing from Chrysler Capital Corporation and CIT Group by the Vari-Lite Corporate Group and non-cash writedowns of loan origination fees stemming therefrom, to (ii) Fixed Charges, on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: Period Ratio ------ ----- Beginning on the Closing Date 0.50 to 1 and ending on September 29, 1994 Beginning on September 30, 1994 0.80 to 1 and ending on September 29, 1995 Beginning on September 30, 1995 1.50 to 1 and ending on September 29, 1996 Beginning on September 30, 1996 1.50 to 1 and ending on September 29, 1997 Beginning on September 30, 1997 1.75 to 1 and ending on September 29, 1998 On and after September 30, 1998 1.75 to 1 40 10.2. EARNINGS RATIO. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBIT to (ii) Interest Expense, on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: Period Ratio ------ ----- Beginning on the Closing Date 2.00 to 1 and ending on September 29, 1994 Beginning on September 30, 1994 2.75 to 1 and ending on September 29, 1995 Beginning on September 30, 1995 3.00 to 1 and ending on September 29, 1996 Beginning on September 30, 1996 3.00 to 1 and ending on September 29, 1997 Beginning on September 30, 1997 3.00 to 1 and ending on September 29, 1998 On and after September 30, 1998 3.00 to 1 10.3. TANGIBLE NET WORTH. VLH shall not permit its Tangible Net Worth, on a consolidated basis, to be less than the amount indicated below at all times during the period set forth below: Period Amount ------ ------ Beginning on the Closing Date $11,900,000 and ending on September 29, 1994 Beginning on September 30, 1994 $12,500,000 and ending on September 29, 1995 Beginning on September 30, 1995 $15,500,000 41 and ending on September 29, 1996 Beginning on September 30, 1996 $20,500,000 and ending on September 29, 1997 Beginning on September 30, 1997 $25,500,000 September 29, 1997 and ending on September 29, 1998 On and after September 30, 1998 $30,500,000 10.4. LEVERAGE RATIO. VLH shall not permit its ratio of (i) Liabilities to (ii) Tangible Net Worth, on a consolidated basis, to be greater than the ratio indicated below at any time during the period set forth below: Period Ratio ------ ----- Beginning on the Closing Date 3.95 to 1 and ending on July 31, 1994 Beginning on August 1, 1994 3.80 to 1 and ending on September 29, 1994 Beginning on September 30, 1994 3.50 to 1 and ending on September 29, 1995 Beginning on September 30, 1995 2.90 to 1 and ending on September 29, 1996 Beginning on September 30, 1996 1.90 to 1 and ending on September 29, 1997 Beginning on September 30, 1997 1.50 to 1 and ending on September 29, 1998 On and after September 30, 1998 1.20 to 1 42 10.5. BOOK VALUE. VLH shall not permit (i) its ratio of (A) the book value of the Equipment and Inventory of the Vari-Lite Corporate Group located in the United States to (B) the outstanding principal indebtedness plus accrued and unpaid interest of VLI and Showco hereunder, on a consolidated basis, to be less than 0.9:1.0 at any time, or (ii) its ratio of (A) the book value of the Equipment and Inventory of the Vari-Lite Corporate Group wherever located in the United States, England and Japan to (B) the outstanding principal indebtedness and accrued plus unpaid interest of all members of the Vari-Lite Corporate Group hereunder, on a consolidated basis, to be less than 0.9:1.0 at any time. In computing compliance with this SECTION 10.5, the book value of any Equipment which is leased pursuant to the leases described in EXHIBIT 10.5 shall be excluded. 43 11. NEGATIVE COVENANTS. So long as any Obligations of any Borrower remain outstanding or any Lender shall have any Commitment to any Borrower hereunder, each Borrower and Guarantor agrees as follows, provided that, as to VLEH, the Sterling Borrowers and VLA, such agreement exists only so long as such Borrower or Guarantor has outstanding Obligations or a Lender has an existing Commitment to such Borrower: 11.1. LIENS, ETC. No Borrower, Guarantor, or any Subsidiary thereof will be permitted to grant, incur, permit, create, or suffer to exist, any Lien on any of such Person's Assets except: (a) Liens in favor of the Lenders, pursuant to any Loan Document; (b) Permitted Liens; (c) Liens existing on the date hereof and described on EXHIBIT 11.1(c) and Liens extending any such existing Lien; PROVIDED THAT the principal amount secured by such Lien is not increased and the extended Lien does not cover any Asset of such Person which is not covered by the existing Lien extended thereby; (d) Liens securing Debt described in SECTION 11.2(d); (e) Liens granted pursuant to distribution agreements to secure notes or advances not to exceed at any one time outstanding $1,500,000 payable to distributors of VLI's products located in Argentina, Australia, Hong Kong and Mexico; and (f) Liens securing Permitted Intercompany Secured Debt. 11.2. DEBT. No Borrower or Guarantor will create or suffer to exist, or will permit any Subsidiary to create or suffer to exist, any Debt except: (a) Debt to the Lenders evidenced by any Loan Document; (b) Debt existing as of the date hereof and described in EXHIBIT 11.2(b) and renewals, extensions or refinancings thereof currently contemplated by existing documents relating to such Debt; (c) Permitted Intercompany Debt; (d) Debt incurred upon acquisition or within 90 days thereof to finance the purchase or lease of fixed or capital assets (excluding lighting and sound 44 equipment and other equipment which is typically leased or rented by the Vari-Lite Corporate Group to its customers) up to a maximum aggregate amount for the consolidated Vari-Lite Corporate Group at any one time outstanding of $2,000,000; provided, however, that no greater than $500,000 of such Debt may be incurred in any fiscal year. (e) Debt representing advances by distributors and sub-distributors (other than a member of the Vari-Lite Corporate Group), not to exceed at any time outstanding the aggregate amount of $10,000,000.00, for products leased by such distributors; (f) Debt evidenced by the Subordinated Warrant Note in the event that Chrysler exercises its put rights contained in Section 14 of the Warrant Certificate; (g) Debt evidenced by the Share Repurchase Notes; (h) Debt evidenced by the Penalty Note; and (i) Any refinancing or renewal of the Debt permitted by this SECTION 11.2, provided that such refinancing or renewal does not increase the then current principal amount of such Debt. 11.3. LIABILITIES OF SUBSIDIARIES. (a) Liabilities of VLA, LESS the sum of (i) the Obligations of VLA to the Lenders hereunder plus (ii) the Permitted Intercompany Debt of VLA, shall not exceed, at any time, Y100,000,000.00. (b) Liabilities of VLEH and the Sterling Borrowers, taken as a whole, LESS the sum of (i) the Obligations of VLEH and the Sterling Borrowers to the Lenders hereunder PLUS (ii) the Permitted Intercompany Debt of VLEH and the Sterling Borrowers, each, taken as a whole, shall not exceed, at any time, L5,000,000.00. 11.4. DIVIDENDS, DISTRIBUTIONS, ETC. (a) VLH will not declare or make any dividend payment or other distribution of Assets, cash, rights, obligations, or securities on account of any shares of any class of capital stock of VLH, or purchase, redeem, or otherwise acquire for value any shares of any class of capital stock of VLH or any warrants, rights, or options to acquire any such shares, now or hereafter outstanding; PROVIDED THAT, so long as no Default or Event of Default is continuing: (i) VLH may pay dividends during each annual period set forth below in an aggregate amount not to exceed: (A) for the annual period commencing on the Closing Date and ending on March 31, 1995, the lesser of (1) $600,000.00 MINUS the net 45 positive difference, if any, between (x) all cash payments made in respect of the Share Repurchase Notes during such period and (y) all cash payments received by VLH during such period for the sale of its Class B Common Stock and (2) 50% of the result obtained by subtracting (x) all cash payments made during such period under the Subordinated Warrant Note from (y) consolidated Net Income of VLH for such period; and (B) for each annual period thereafter during the term hereof, the lesser of (1) $1,000,000.00 MINUS the net positive difference, if any, between (x) all cash payments made in respect of the Share Repurchase Notes during such period and (y) all cash payments received by VLH during such period for the sale of its Class B Common Stock and (2) 50% of the result obtained by subtracting (x) all cash payments made during such period under the Subordinated Warrant Note from (y) consolidated Net Income of VLH for such period. (ii) VLH may (A) repurchase the Chrysler Warrant in the event that Chrysler exercises its put option under the Warrant Certificate, but only in the event that such repurchase is made by the issuance by VLH of the Subordinated Warrant Note, and (B) repurchase shares of its Class B Common Stock as contemplated by the Buy-Sell Agreements, but, with respect to the shares of the Engineers, only by the issuance of Share Repurchase Notes. 11.5. MERGERS, ETC. No Borrower or Guarantor will, and no Subsidiary will be permitted to, merge or consolidate with or into, or convey, transfer, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets or capital stock of, any Person. 11.6. INVESTMENTS, LOANS, AND ADVANCES. No Borrower or Guarantor will, nor will it permit any Subsidiary to, make any Investment, except that: (a) the U.S. Companies and VLA may loan Permitted Intercompany Secured Debt to the Sterling Borrowers in an amount not to exceed, in the aggregate, the Dollar Equivalent of $2,000,000.00 at any one time outstanding; (b) any of the U.S. Companies may loan Permitted Intercompany Debt to each other; (c) VLEH and any of the Sterling Borrowers may loan Permitted Intercompany Debt to each other; (d) VLH may make an Investment in VLEH on or about the Closing Date in the approximate amount of $1,200,000; 46 (e) VLH may make Investments in VLI or Showco; (f) VLEH may make Investments in the Sterling Borrowers; (g) VLA, the Sterling Borrowers and VLEH may make Investments in, and loan Permitted Intercompany Debt to, the U.S. Companies; and (h) each Borrower, Guarantor and Subsidiary may own, purchase, or acquire Cash Equivalents. 11.7. CAPITAL EXPENDITURES. (a) Showco shall not make expenditures for fixed or capital assets during any fiscal year in an aggregate amount in excess of $1,000,000.00. (b) The Vari-Lite Corporate Group shall not make expenditures in an aggregate principal amount in excess of $2,000,000.00 related to the production and inventorying of AR500 and Mini Architectural lights. 11.8. USE OF PROCEEDS. No Borrower will use, nor permit the use of, all or any portion of any Loan for any purpose not permitted by SECTIONS 3.3 AND 4.3 hereof. 11.9. ISSUANCE OF SHARES. No Borrower or Guarantor will, and no Subsidiary will be permitted to, issue, sell, or otherwise dispose of any shares of its capital stock or other equity securities, or rights, warrants, or options to purchase or acquire any shares or equity securities, except that VLH may issue or sell its non-voting Class B Common Stock or one or more series of its preferred stock but only if (a) such stock is not convertible into the Class A Common Stock of VLH, (b) no mandatory dividend payments or mandatory redemption rights exist with respect to such stock, and (c) such stock shall not affect the existing voting structure for the currently issued and outstanding stock of VLH under the Voting Trust Agreement. In addition, VLH may issue shares of its Class A Common Stock or other voting Common Stock in a public offering of its shares, provided that the proceeds of such offering shall be used, in part to pay the Obligations in full. 11.10. ERISA. VLH will not, and will not permit any ERISA Affiliate to: (a) do any of the following, which in the aggregate would reasonably be expected to have a Material Adverse Effect: 47 (i) engage in any transaction which it knows, or has reason to know, could result in a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code; (ii) fail to make any payments when due to any Multiemployer Plan that VLH or any Subsidiary or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; (iii) incur withdrawal liability under ERISA to a Multiemployer Plan; (iv) voluntarily terminate or, in the case of a "substantial employer" as defined in Section 4001(a)(2) of ERISA, withdraw from any Plan if such termination or withdrawal could result in the imposition of a Lien on any Asset of VLH or any ERISA Affiliate under Section 4068 of ERISA; (v) subject to Section 412(m) of the Code, fail to make any required contribution when due to any Plan which with the passage of time would likely result in a Lien upon any Asset of VLH or any ERISA Affiliate; (vi) adopt any amendment to a Plan, the effect of which is to increase the "current liability" (as defined in Section 302(d)(7) of ERISA) under the Plan; or (vii) act or fail to act, and, as a result thereof, an event similar to any of those referred to in clauses (i) to (vi) would likely occur under the applicable laws of a foreign country; (b) permit the adoption, implementation, or amendment of any unfunded deferred compensation agreement or other arrangement of a similar nature whether or not such agreement or other agreement is subject to the funding requirements of ERISA which could reasonably be expected to have a Material Adverse Effect. 11.11. NO CHANGE OF BUSINESS. No Borrower or Guarantor will engage in any business other than those it is engaged in on the date hereof, and reasonably related business, including the line of business described in SECTION 11.7(b). Except for the sale of architectural products and the sale of assets permitted by SECTION 9.6, VLI will not convey, transfer or otherwise dispose of any material assets, including its lighting equipment; provided, however, that such restriction is not intended to prevent the VLH Corporate Group from conducting its business in the manner in which it has conducted its business to date through leases, rentals, distribution agreements or other similar arrangements. 48 11.12. NO MODIFICATION OF MASTER DISTRIBUTORSHIP AGREEMENTS. No member of the VLI Corporate Group which is a party to a Master Distributorship Agreement will permit any material modification of such Master Distributorship Agreement, except for (a) modifications to financial terms thereof and (b) the restatement, within thirty (30) days of the Closing Date, of the Master Distributorship Agreement between VLI and VLE on terms and conditions as provided in SECTION 9.17. 49 12. EVENTS OF DEFAULT; REMEDIES. 12.1. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF DEFAULT") shall occur and be continuing: (a) any Borrower shall fail to pay, repay, or prepay any principal of any Note or the VLA Term Loan, or payment under an Interest Rate Contract or FX Obligation, when the same becomes due and payable in compliance with this Agreement or any Borrower shall fail to pay when due any interest on any Note, the VLA Term Loan Interest Rate Contract or FX Obligation or any fee (including, without limitation, any Fee) or any other amount owing by it to the Agent or any Lender pursuant to any Loan Document to which such Borrower is a party within three (3) days after the due date thereof; (b) any representation, warranty, certification, or statement made by any Borrower or Guarantor herein or by any Borrower or Guarantor in connection with any Loan Document to which such Borrower or Guarantor is a party or any certificate, financial statement, or other document delivered pursuant to any Loan Document to which any Borrower or Guarantor is a party shall prove to have been incorrect in any material respect when made or when deemed made; (c) any Borrower shall fail to perform or observe (i) any term, covenant, or agreement contained in ARTICLE 10 or SECTIONS 9.13, 11.3, 11.4, 11.5, 11.7, 11.9, 11.11, 11.12, or 11.13, or (ii) any other term, covenant, or agreement contained in this Agreement (other than those referred to in ARTICLE 10 or SECTIONS 9.13, 11.3, 11.4, 11.5, 11.7, 11.9, 11.11, 11.12, or 11.13) on its part to be performed or observed and such failure shall remain unremedied for thirty (30) days after the earlier of (i) notice of such failure from Agent, or (ii) Agent is notified of such failure or should have been so notified pursuant to the provisions of SECTION 9.2(f) hereof; (d) any Event of Default shall occur and be continuing under any one of the Guaranties or any other Security Document; (e) any Borrower or Guarantor shall fail to pay any principal of or premium or interest on any Debt with an outstanding balance of $500,000.00 or more when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt and such failure shall not have been waived or consented to in accordance with the documents evidencing such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt and such event shall not have been waived or consented to in accordance with 50 the documents evidencing such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (f) any Borrower or Guarantor (i) admits in writing its inability to pay its debts or other obligations generally as they become due; (ii) generally fails to pay its debts or other obligations as they become due; (iii) files a petition or answer seeking for itself, or consenting to or acquiescing, in any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under, any Debtor Laws; or (iv) makes an assignment for the benefit of its creditors; (g) there is appointed a receiver, custodian, liquidator, fiscal agent, administrator or trustee of any Borrower or Guarantor or of the whole or any substantial part of its respective property, or any court enters an order approving a petition filed against any Borrower or Guarantor seeking reorganization, arrangement, composition, readjustment, administration, liquidation, dissolution, or similar relief under any Debtor Laws and either such order so filed against it is not dismissed or stayed (unless and until such stay is no longer in effect) within sixty (60) days of entry thereof or an order for relief is entered pursuant to any such law; (h) any order is entered in any proceedings against any Borrower or Guarantor decreeing the dissolution of such Borrower or Guarantor and such order remains unstayed and in effect for more than sixty (60) days; (i) any final order for the payment of money in the aggregate in excess of $500,000.00, or the Dollar Equivalent thereof, shall be rendered against any Borrower or Guarantor and such order shall continue unsatisfied and either (i) enforcement proceedings shall have been commenced by any creditor upon such order, or (ii) there shall be any period of thirty (30) consecutive days during which a stay of enforcement of such order, by reason of a pending appeal or otherwise, shall not be in effect; (j) any non-monetary order which reasonably could be expected to have a monetary effect of $500,000.00 or more shall be rendered against any Borrower or Guarantor which has or could reasonably be expected to have (i) a Material Adverse Effect, or (ii) a material adverse effect on the rights and remedies of the Agent or any Lender under any Loan Document, and either (A) enforcement proceedings shall have been commenced by any Person upon such order, or (B) there shall be any period of thirty (30) consecutive days during which a stay of enforcement of such order, by reason of a pending appeal or otherwise, shall not be in effect; (k) except pursuant to the express terms of any Loan Document, (i) any Loan Document shall, at any time after its execution and delivery and for any reason, cease to be in full force and effect in all material respects or be declared to be null and void in any material respect; or (ii) any Lien (x) granted pursuant to any Loan Document which has been perfected shall cease to be perfected and of first priority with respect to any material Asset of Borrower or any Guarantor (except for Liens permitted by Section 11.1(b)), or (y) any other Lien (except for Liens permitted by SECTION 11.1(b)) granted pursuant to any 51 Loan Document which has been perfected shall cease to be perfected and of first priority and shall not be reinstated to Agent's satisfaction within ten (10) days following the earlier of (1) a Borrower or Guarantor becoming aware of such Lien failure, or (2) the applicable Borrower or Guarantor receiving notice from Agent or any Lender of the failure of such Lien; or (iii) the validity or enforceability of any Loan Document shall be contested by any Person that is a party thereto (other than the Agent or any Lender); or (iv) any Person (other than the Agent or any Lender) shall deny that it has any, or any further, liability or Obligations under any Loan Document to which it is a party; or (v) the execution and delivery of any Loan Document or the effectuation of the transactions contemplated herein shall result in the creation or imposition of any Lien upon any properties of a Borrower or a Guarantor, other than those in favor of the Agent, Coutts and NBD for the benefit of each Lender, as contemplated by the Loan Documents; (l) the Voting Trust shall be amended in any material respect without the consent of the Lenders, or is terminated or otherwise rendered null and void for any reason; (m) (i) VLH, or any ERISA affiliate, or any of its agents or representatives shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which can be expected to result in a material liability to such Person; (ii) any material "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code), whether or not waived, shall exist with respect to any PBGC Plan or Multiple Employer Plan, if in the reasonable judgment of the Agent, such accumulated funding deficiency would give rise to a material liability of any Borrower or Guarantor; (iii) VLH or any ERISA Affiliate shall apply for or be granted a funding waiver under Section 302 of ERISA or Section 412 of the Code, which waiver or request for waiver is for a material amount; (iv) a Reportable Event (other than a Reportable Event not subject to the provision for thirty-day notice to the PBGC under applicable PBGC regulations) shall occur with respect to any PBGC Plan or Multiple Employer Plan, which Reportable Event is, in the reasonable opinion of the Agent, likely to result in the termination of such PBGC Plan or Multiple Employer Plan for purposes of Title IV of ERISA and to give rise to a material liability of any Borrower or Guarantor; (v) proceedings shall commence to have a trustee appointed or a trustee shall be appointed to terminate or administer a PBGC Plan or a Multiple Employer Plan which proceeding is, in the reasonable opinion of the Agent, likely to result in the termination of such PBGC Plan or Multiple Employer Plan and to give rise to a material liability of any Borrower or Guarantor with respect to such termination; (vi) a notice of intent to terminate a PBGC Plan or Multiple Employer Plan under Section 4041(c) is filed with the PBGC if such termination would give rise to a material liability of any Borrower, Guarantor or any ERISA Affiliate; (vii) any Multiemployer Plan is in reorganization or is insolvent and the circumstances are such that, in the reasonable opinion of the Agent, there could be a material liability incurred by or imposed upon any Borrower, Guarantor or any ERISA Affiliate; (viii) there is a complete or partial withdrawal from a Multiemployer Plan under circumstances which, in the reasonable opinion of the Agent, would likely subject any Borrower or any ERISA Affiliate to material liability; or (ix) any event or condition described in (i) through (viii) above (determined without regard to whether the event or condition taken alone would or could result in a material liability) shall occur or exist with respect to a PBGC Plan, a Multiple Employer Plan or a Multiemployer 52 Plan which individually or in combination with one or more of any events described in (i) through (viii) above (determined without regard to whether the event or condition taken alone would or could result in a material liability), if any, in the reasonable opinion of the Agent would likely, subject VLH or any ERISA Affiliate to any tax, penalty or other liability which could have a Material Adverse Effect on any Borrower or Guarantor; or (n) VLH shall acquire the Chrysler Warrant other than through the Subordinated Warrant Note; then, and except as provided below, in any such event, the Agent (i) shall at the request, or may with the consent, of Majority Lenders, by notice to the Borrowers, declare the several obligations of each Lender to permit Borrowings to be made by any Borrower to be terminated, whereupon the Commitments shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrowers, declare the entire unpaid principal amount of the Notes, all interest accrued and unpaid thereon, and all other amounts payable under any Loan Document, to be forthwith due and payable, whereupon the Notes, all such interest, and all such other amounts, shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind (including, without limitation, notice of intent to accelerate and notice of acceleration), all of which are hereby expressly waived by each Borrower; (PROVIDED, HOWEVER, that with respect to any Event of Default described in SUBSECTIONS 12.1(f), (g) OR (h), (A) the Commitments shall automatically be terminated, and (B) the entire unpaid principal amount of the Notes, all interest accrued and unpaid thereon, and all such other amounts payable under any Loan Document, shall automatically become immediately due and payable, without presentment, demand, protest, or any notice of any kind (including, without limitation, notice of intent to accelerate and notice of acceleration), all of which are hereby expressly waived by each Borrower. 12.2. OTHER REMEDIES. Upon the occurrence and during the continuance of any Event of Default, the Agent shall at the request, and may with the consent, of the Majority Lenders (subject to the provisions of the other Loan Documents), proceed to protect and enforce the rights of the Lenders either by suit in equity or by action at law or both, whether for the specific performance of any covenant or agreement contained in any Loan Document or in aid of the exercise of any power granted in any Loan Document; or may instruct Agent to direct the Collateral Agents to proceed to enforce the payment of the Obligations under any other Loan Document in the manner set forth therein or may instruct the Agent to direct the Collateral Agents to proceed to foreclose upon any Liens granted pursuant to any Security Document in the manner set forth therein; it being intended that no remedy conferred in any Loan Document is to be exclusive of any other remedy, and each and every remedy contained in any Loan Document shall be cumulative and shall be in addition to every other remedy given under such Loan Document or now or hereafter existing at law or in equity or by statute or otherwise. 53 13. THE AGENT. 13.1. AUTHORIZATION AND ACTION. Each Lender hereby appoints BBH as its Agent hereunder and irrevocably authorizes the Agent to take such action and to exercise such powers under any Loan Document as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. Without limitation of the foregoing, each Lender expressly authorizes the Agent to execute, deliver, and perform its obligations under each of the Loan Documents to which the Agent is a party, and to exercise all rights, powers, and remedies that the Agent may have thereunder. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act, or to refrain from acting (and shall be fully protected in so acting or refraining from acting), upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of any Note; PROVIDED, HOWEVER, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by any Borrower or Guarantor pursuant to the terms of any Loan Document. 13.2. AGENT'S RELIANCE, ETC. Neither the Agent nor any of its directors, partners, officers, agents, or employees shall be liable to any Lender for any action taken or omitted to be taken by it or them under or in connection with any Loan Document, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the original or any successor holder of any Notes as the holder thereof; (b) may employ and consult with legal counsel (including counsel for Borrower), independent public accountants, and other experts selected by it and shall not be liable to any Lender for any action taken, or omitted to be taken, in good faith by it or them in accordance with the advice of such counsel, accountants, or experts received in such consultations and shall not be liable for any negligence or misconduct of any such counsel, accountants, or other experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any opinions, certifications, statements, warranties, or representations made in or in connection with any Loan Document; (d) shall not have any duty to any Lender to ascertain or to inquire as to the performance or observance of any of the terms, covenants, or conditions of any Loan Document or any other instrument or document furnished pursuant thereto or to satisfy itself that all conditions to and requirements for any Borrowing have been met or that a Borrower is entitled to any Loan or to inspect the properties (including the books and records) of any Borrower or Guarantor; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of any Loan Document or any other instrument or document furnished pursuant thereto; and (f) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate, 54 or other instrument or writing (which may be by telegram, cable, telecopier, telex, or otherwise) believed by it to be genuine and signed or sent by the proper party or parties. 13.3. DEFAULTS. The Agent shall not be deemed to have knowledge of the occurrence of a Default unless the Agent has received notice from a Lender or a Borrower specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Lenders (and shall give each Lender prompt notice of each such nonpayment). Unless and until the Agent shall have received the directions referred to in SECTION 13.1, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable and in the best interest of the Lenders. Each Lender shall give Agent prompt notice of any Default under SECTION 12.1(a) of which such Lender is aware; provided, that in no case shall the failure to provide any such notice create any liability to such other Lenders hereunder. 13.4. BBH AND AFFILIATES. With respect to its Commitment, any Loans made by it, and the Notes issued to it, BBH shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include BBH in its individual capacity. BBH and its respective Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrowers, the Guarantors, any of their respective Affiliates and any Person who may do business with or own securities of the Borrowers, the Guarantors, or any such Affiliate, all as if BBH were not the Agent and without any duty to account therefor to Lenders. Each Lender, Borrower and Guarantor acknowledges and consents to the following: James Clark and John Maxson, each a shareholder of VLH, have entered into business transactions with BBH, and BBH has made loans to each, has performed trust services for each, and has provided other financial services to each, and may do so again in the future; James Clark is a member of the Board of Directors of Brown Brothers Harriman Trust Company of Texas; Thomas Clynes, a BBH Senior Manager, is expected to become a member of the Board of Directors of VLH; and Cullum Clark, son of James Clark, is employed by BBH. 13.5. NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Borrowers and the Guarantors and its own decision to enter into the transactions contemplated by the Loan Documents and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under any Loan Document. The Agent shall not be required to keep itself informed as to the performance or observance by Borrowers of any Loan Document or to inspect the properties or books 55 of the Borrowers or the Guarantors. Except for notices, reports, and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition, or business of the Borrowers or the Guarantors (or any of their Affiliates) which may come into the possession of the Agent or any of its Affiliates. 13.6. INDEMNIFICATION. Notwithstanding anything to the contrary herein contained, the Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the other Lenders against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of its taking or continuing to take any action. Each Lender agrees to indemnify the Agent, its officers, directors, partners, employees, agents and attorneys, and each of them (for purposes of this SECTION, the "INDEMNIFIED PARTIES") (to the extent not reimbursed by the Borrowers or Guarantors), according to such Lender's PRO-RATA Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Indemnified Parties in any way relating to or arising out of any Loan Document or any action taken or omitted by the Indemnified Parties under any Loan Document; PROVIDED THAT no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements resulting from the gross negligence or willful misconduct of the Person being indemnified; AND PROVIDED FURTHER THAT IT IS THE INTENTION OF EACH LENDER TO INDEMNIFY THE INDEMNIFIED PARTIES AGAINST THE CONSEQUENCES OF THE INDEMNIFIED PARTIES' OWN NEGLIGENCE, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT, OR CONCURRENT, ACTIVE OR PASSIVE. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its PRO RATA Percentage of any out-of-pocket expenses (including attorneys' fees) incurred by the Agent in connection with the preparation, administration, or enforcement of, or legal advice in respect of rights or responsibilities under, any Loan Document, to the extent that the Agent is not reimbursed for such expenses by the Borrowers or the Guarantors. 13.7. SUCCESSOR AGENT. The Agent may resign at any time as Agent under the Loan Documents by giving thirty (30) days advance written notice thereof to Lenders and the Borrowers and may be removed at any time with or without cause by all Lenders (other than Agent) acting jointly. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent, with the approval VLH, which approval shall not be unreasonably withheld, except that no approval of the Borrowers shall be necessary if the Majority Lenders appoint a successor Agent which is then currently a Lender. If no successor Agent shall have been so appointed by the Lenders, and shall have accepted such appointment, within thirty (30) days after the retiring Agent's giving of notice of resignation or the Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of 56 Lenders, appoint a successor Agent, with the approval of VLH, which approval shall not be unreasonably withheld, which shall be a bank organized under the laws of the United States of America or of any State thereof having a combined capital and surplus of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this ARTICLE shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. 13.8. AGENT'S AND LENDERS' RELIANCE. Each Borrower shall notify the Agent and each Lender in writing of the names of its officers and employees authorized to request a Borrowing on behalf of such Borrower and shall provide the Agent and each Lender with a specimen signature of each such officer or employee. The Agent and each Lender shall be entitled to rely conclusively on such officer's or employee's authority to request a Borrowing on behalf of a Borrower until the Agent and each Lender receives written notice from such Borrower to the contrary. Neither the Agent nor any Lender shall have a duty to verify the authenticity of the signature appearing on any Notice of Borrowing and, with respect to any oral request for a Borrowing, neither the Agent nor any Lender shall have a duty to verify the identity of any Person representing himself as one of the officers or employees authorized to make such request on behalf of any Borrower. Neither the Agent nor any Lender shall incur any liability to Borrowers or Guarantors in acting upon any telephonic notice referred to above which the Agent or such Lender believes in good faith to have been given by a duly authorized officer or other Person authorized to borrow on behalf of a Borrower or for otherwise acting in good faith. 13.9. LENDER NOTIFICATIONS TO AGENT. Each Lender agrees, from time to time as a change in any such rate may occur, to provide the Agent with such Lender's Base Rate then in effect for Base Rate Loans and such Lender's Eurodollar Rate, TIBOR or LIBOR then applicable to Eurocurrency Rate Loans. Each Lender further agrees to inform the Agent of any new Loans made and any increase in the principal amount outstanding on any existing Loans to a Borrower pursuant to this Agreement. 57 14. MISCELLANEOUS. 14.1. WAIVERS, VOTING, AMENDMENT, ETC. (a) No failure or delay on the part of the Lenders in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No course of dealing between the Borrowers, the Guarantors and the Lenders shall operate as a waiver of any right of the Lenders. No amendment, modification, waiver of or consent to any provision of this Agreement, the Notes or any other Loan Document nor consent to any departure by the Borrowers or the Guarantors therefrom shall in any event be effective unless the same shall be in writing, signed by the Majority Lenders; provided that no such amendment, modification, waiver or consent, as the case may be, which has the effect of (i) reducing the rate or amount, or extending the stated maturity or due date, of any sum payable by a Borrower to any Lender hereunder or under such Lender's Notes; (ii) increasing the amount, or extending the stated expiration or termination date, of a Lender's Commitment hereunder; (iii) changing SECTIONS 4.4, 4.6, 4.7, 6.6, 7.1 or this SECTION or the definitions of the terms "Commitment", "Majority Banks", or "PRO RATA Percentage"; (iv) releasing any Collateral; or (v) amending any provision within this Agreement that requires the consent of all the Lenders, shall be effective unless the same shall be signed by each Lender; and provided, further, that no such amendment, modification, waiver or consent, as the case may be, which has the effect of (x) increasing the duties or obligations of the Agent hereunder or under any other Loan Document, or (y) increasing the standard of care or performance required on the part of the Agent hereunder or under any other Loan Document, or (z) reducing or eliminating the indemnities or immunities to which the Agent is entitled hereunder (including any amendment or modification of this Section), shall be effective unless the same shall be signed by the Agent. Any amendment, modification or supplement of or to any provision of this Agreement, any waiver of any provisions of this Agreement, and any consent to any departure by the Borrowers or the Guarantors from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. No notice to or demand on the Borrowers or Guarantors in any case shall entitle the Borrowers or the Guarantors to any other or further notice or demand in similar or other circumstances. (b) Subject to SECTION 14.1(a), any action or agreement not to act hereunder by the Lenders may be taken by one or more of the Lenders on behalf of all the Lenders upon the affirmative vote of the Majority Lenders. (c) Upon notification by Agent of any event requiring the vote of the Lenders, each Lender shall respond to Agent not later than ten (10) Business Days after such notification. Failure to respond shall be deemed to be consent to the action for which the vote is being taken. 14.2. REIMBURSEMENT OR PAYMENT OF EXPENSES. 58 Any provision hereof to the contrary notwithstanding, and whether or not the transactions contemplated by this Agreement shall be consummated, the Borrowers agree to reimburse (a) the Agent for its reasonable out-of-pocket expenses, including the reasonable fees and expenses of counsel to the Agent, in connection with the negotiation, preparation, execution, modification and enforcement of this Agreement or any other Loan Document and (b) the Lenders for their reasonable out-of-pocket expenses, including the reasonable fees and expenses of counsel, in connection with the enforcement of this Agreement or any other Loan Document. The obligations of the Borrowers under this SECTION shall survive the termination of this Agreement and the payment of the Notes. 14.3. NOTICES. All notices and other communications provided for herein shall be in writing (except where telephonic notices are expressly authorized herein) (including telex, facsimile, or cable communication) and shall be deemed to be effective (a) if by hand delivery, telex, telecopy or other facsimile transmission, on the day and at the time on which delivered to such party at the address, telex or telecopier numbers specified below (and each telecopy notice shall be followed by mail delivery); (b) if by mail, on the day which it is received after being deposited, postage prepaid, in the United States registered or certified mail, return receipt requested, addressed to such party at the address specified below; or (c) if by Federal Express or other reputable express mail service, on the next Business Day following the delivery to such express mail service, addressed to such party at the address set forth below; or (d) if by telephone on the day and at the time communication with one of the individuals named below occurs during a call to the telephone number or numbers indicated for such party below: (a) If to the Borrowers or the Guarantors, to them through VLH, at: 201 Regal Row Dallas, Texas 75247 Tel: (214) 819-3144 Fax: (214) 819-3247 Attention: H.R. Brutsche III 59 with a copy to: Gardere & Wynne, L.L.P. 3000 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 Tel: (214) 999-4683 Fax: (214) 999-4667 Attention: Alan J. Perkins, Esq. (b) If to the Agent, to it at: Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Tel: (212) 493-8137 Fax: (212) 493-8232 Attention: Pieter J. Engel (c) If to Lenders, to them at the Domestic Lending office of such Lender as provided in EXHIBIT 14.16(a) or to such other address as shall be designated by such party in a written notice to the other party. Each Borrower and VLEH hereby irrevocably authorizes the Lenders to send all notices to be sent to them to VLH on their behalf. All notices to be delivered by Borrower, Agent or Lender with respect to Defaults or Events of Default may only be given by hand delivery, certified or registered mail or air courier. 14.4. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF TRIAL BY JURY. THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO BE CONTRACTS AND AGREEMENTS EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH BORROWER AND GUARANTOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURTS IN THE STATE OF NEW YORK, BOROUGH OF MANHATTAN AND ANY NEW YORK STATE COURT LOCATED IN THE BOROUGH OF MANHATTAN FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH BORROWER AND GUARANTOR HEREBY IRREVOCABLY APPOINTS THE PROCESS AGENT AS ITS AGENT TO RECEIVE ON BEHALF OF SUCH BORROWER OR GUARANTOR AND ITS ASSETS SERVICE OF 60 COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH ACTION OR PROCEEDING, SUCH SERVICE MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO SUCH BORROWER OR GUARANTOR IN CARE OF THE PROCESS AGENT AT THE PROCESS AGENT'S ABOVE ADDRESS, AND EACH BORROWER AND GUARANTOR HEREBY IRREVOCABLY AUTHORIZES AND DIRECTS THE PROCESS AGENT TO ACCEPT SUCH SERVICE ON ITS BEHALF. AS AN ALTERNATIVE METHOD TO SERVICE, EACH BORROWER AND GUARANTOR ALSO IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES OF SUCH PROCESS TO VLH AT ITS ADDRESS SET FORTH IN SECTION 14.3. EACH BORROWER AND GUARANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. EACH BORROWER AND GUARANTOR FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO ANY ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF FORUM NON CONVENIENS. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR GUARANTOR OR ITS ASSETS IN THE COURTS OF ANY OTHER JURISDICTIONS. EACH BORROWER, GUARANTOR AND LENDER HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, WHICH WAIVER IS INFORMED AND VOLUNTARY. 14.5. SURVIVAL OF PROVISIONS OF THIS AGREEMENT. (a) All representations, warranties and covenants contained herein or made in writing by the Borrowers or the Guarantors in connection herewith shall survive the execution and delivery of this Agreement and the Notes, and will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. No investigation at any time made by or on behalf of the Lenders shall diminish the Lenders' right to rely thereon. All statements contained in any certificate or other written instrument delivered by any Borrower, or by any person authorized thereby, under or pursuant to this Agreement or in connection with the transactions contemplated hereby shall constitute representations and warranties hereunder as of the time made by such Borrower. (b) The terms and provisions of SECTIONS 13.6 AND 14.4 AND 14.13 shall survive the termination of this Agreement and the payment of the Notes. 14.6. COUNTERPARTS. This Agreement may be executed in several counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original instrument, and all such separate counterparts shall constitute but one and the same instrument. 61 14.7. SEPARABILITY. Should any clause, sentence, paragraph, Section or ARTICLE of this Agreement be judicially declared to be invalid, unenforceable or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder will have the same force and effectiveness as if such part or parts had never been included herein. Each covenant contained in this Agreement shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 14.8. DESCRIPTIVE HEADINGS. The section headings in this Agreement have been inserted for convenience only and shall be given no substantive meaning or significance whatsoever in construing the terms and provisions of this Agreement. 14.9. ACCOUNTING TERMS. All accounting terms used herein which are not expressly defined in this Agreement, or the respective meanings of which are not otherwise qualified, shall have the respective meanings given to them in accordance with GAAP. 14.10. SET-OFF. Each of the Borrowers hereby gives and confirms to the Lenders a right of set-off of all moneys, securities and other property of such Borrower (whether special, general or limited) and the proceeds thereof, now or hereafter delivered to remain with or in transit in any manner to the Lenders, its correspondents or its agents from or for such Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise or coming into possession of the Lenders in any way, and also, any balance of any credits of a Borrower with, and any and all claims of security for the payment of the Notes and of all other liabilities and obligations now or hereafter owed by the Borrowers to the Lenders, contracted with or acquired by the Lenders, whether such liabilities and obligations be joint, several, absolute, contingent, secured, unsecured, matured or unmatured, and each Borrower hereby authorizes the Lenders at any time or times, WITHOUT PRIOR NOTICE, to apply such money, securities, other property, proceeds, balances, credits of claims, or any part of the foregoing, to such liabilities in such amounts as they may select, whether such liabilities be contingent, unmatured or otherwise, and whether any collateral security therefor is deemed adequate or not, PROVIDED, HOWEVER, that no Lender may exercise such rights against moneys or property of VLE, Theatre Projects, Brilliant Stages or VLA except to the extent of the Obligations of such Borrower. Any Lender exercising such rights shall notify the affected Borrower one (1) Business Day after taking such action. The rights described herein shall be in addition to any collateral security described in any separate agreement executed by any of the Borrowers. 62 14.11. SALE OR ASSIGNMENT. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except no Borrower may assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of all Lenders. (b) Any Lender may at any time grant to one or more banks or other institutions (each a "PARTICIPANT") a participating interest in its Commitment or any or all of its Loans. In the event of any such grant by a Lender of a participating interest to a Participant, such Lender shall remain responsible for the performance of its obligations hereunder, and Borrowers and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the Obligations hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement. An assignment or other transfer which is not permitted by subsection (c) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Lender may at any time, with the consent of VLH and the remaining non-assigning Lenders, which consents shall not be unreasonably withheld, assign to one or more lending institutions (each an "ASSIGNEE") all, or a proportionate part of all, of its rights and obligations under this Agreement and its Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Acceptance Agreement; provided, however, that the foregoing shall not be applicable in the case of, and this subsection (c) shall not restrict, an assignment or other transfer by any Lender to an Affiliate of such Lender or to a Federal Reserve Bank. Upon execution and delivery of such Assignment and Acceptance Agreement and payment by such Assignee to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such Assignment and Acceptance Agreement, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Lender, the Agent and Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to such Assignee and the transferor Lender. (d) The Agent shall maintain at its principal offices in New York, New York or at such other location as the Agent shall designate in writing to each Lender and Borrower, a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders, the amount of each Lender's PRO RATA Percentage and its Commitment, and the name and address of each Lender's agent for service of process in New York City (the "REGISTER"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrowers, the Agent and the Lenders may treat each person or entity whose 63 name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection and copying by any Borrower or any Lender during normal business hours upon reasonable prior notice to the Agent. A Lender may change its address and its agent for service of process upon written notice to the Agent, which notice shall be effective upon actual receipt by the Agent, which receipt will be acknowledged by the Agent upon request. Upon receipt of any Assignment and Acceptance Agreement the Agent shall, if such Assignment and Acceptance Agreement has been completed, fully-executed and is substantially in the form of EXHIBIT 14.11(d) hereto, (i) accept such an Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to Borrowers. 14.12. INTEREST. All agreements between the Borrowers and the Lenders, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of demand being made on the Notes or otherwise, shall the amount paid, or agreed to be paid, to the Agent or the Lenders for the use, forbearance, or detention of the money to be loaned under this Agreement or otherwise or for the payment or performance of any covenant or obligation contained herein or in any other Loan Document exceed the Highest Lawful Rate. If, as a result of any circumstances whatsoever, fulfillment of any provision hereof or of any of such documents, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable usury law, then, IPSO FACTO, the obligation to be fulfilled shall be reduced to the limit of such validity, and if, from any such circumstance, the Lenders shall ever receive interest or anything which might be deemed interest under applicable law which would exceed the Highest Lawful Rate, such amount which would be excessive interest shall be applied to the reduction of the principal amount owing on account of the Notes or the amounts owing on other obligations of the Borrowers to the Lenders under any Loan Document and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of the Notes and the amounts owing on other obligations of the Borrowers to the Lenders under any Loan Document, as the case may be, such excess shall be refunded to the Borrowers. All sums paid or agreed to be paid to the Agent or the Lenders for the use, forbearance, or detention of the indebtedness of the Borrowers to the Lenders shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full of the principal thereof (including the period of any renewal or extension thereof) so that the interest on account of such indebtedness shall not exceed the Highest Lawful Rate. The terms and provisions of this SECTION shall control and supersede every other provision of all agreements between the Borrowers and the Lenders. If, at any time and from time to time, (i) the amount of interest payable to the Agent or any Lender on any date shall be computed at the Highest Lawful Rate pursuant to this SECTION and (ii) for any subsequent interest computation period the amount of interest otherwise payable to the Agent or any Lender would be less than the Highest Lawful Rate, then the amount of interest payable to the Agent or such Lender, as the case may be, for such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate until the total amount of interest payable to the Agent or the Lender, as the case may be, shall equal the total amount 64 of interest which would have been payable to the Agent or such Bank if the total amount of interest had been computed without giving effect to this SECTION. 14.13. INDEMNIFICATION. The Borrowers agree to indemnify, defend, and save harmless the Lenders and their officers, directors, partners, employees, agents, and attorneys, and each of them (for purposes of this SECTION, the "INDEMNIFIED PARTIES"), from and against all claims, actions, suits, and other legal proceedings, damages, costs, interest, charges, taxes (other than income taxes of the Lenders), reasonable counsel fees, and other expenses and penalties which any of the Indemnified Parties may sustain or incur by reason of or arising out of (i) the making of the Loans hereunder, the execution and delivery of this Agreement, the Notes and the other Loan Documents and the consummation of the transactions contemplated thereby and the exercise of any of the Lenders' rights under this Agreement, the Notes and the other Loan Documents or otherwise, including, without limitation, damages, costs, and expenses incurred by any of the Indemnified Parties in investigating, preparing for, defending against, or providing evidence, producing documents, or taking any other action in respect of any commenced or threatened litigation under any federal securities law or any similar law of any jurisdiction or at common law or (ii) any and all claims or proceedings (whether brought by a private party, governmental authority, or otherwise) for bodily injury, property damage, abatement, remediation, environmental damage, or impairment or any other injury or damage resulting from or relating to (x) the release of any Hazardous Materials (whether or not the release of such Hazardous Materials was caused by a Borrower, a tenant, or subtenant thereof, a prior owner, a tenant, or subtenant of any prior owner or any other party and whether or not the alleged liability is attributable to the presence, handling, storage, generation, transportation, or disposal of any Hazardous Materials) or (y) the violation of any Environmental Law; PROVIDED, that no Indemnified Party shall be entitled to the benefits of this SECTION to the extent its own gross negligence or willful misconduct contributed to its loss; AND PROVIDED FURTHER THAT IT IS THE INTENTION OF THE BORROWERS TO INDEMNIFY THE INDEMNIFIED PARTIES AGAINST THE CONSEQUENCES OF THEIR OWN NEGLIGENCE. This Agreement is intended to protect and indemnify the Indemnified Parties against all risks hereby assumed by the Borrowers. Promptly after receipt by a Lender of notice of any claim or the commencement of any action, such Lender shall, if a claim in respect thereof is to be made against a Borrower or any Guarantor, notify VLH in writing of that claim or the commencement of that action. If any such claim or action shall be brought against a Lender, and it shall notify VLH thereof, the affected Borrower(s) and/or Guarantor(s) shall be entitled to participate therein and, to the extent that any such entity so wishes, to assume the defense thereof with counsel reasonably satisfactory to such Lender. After notice from the Borrower(s) or Guarantor(s) of its or their election to assume the defense of such claim or action, such Borrower(s) or Guarantor(s), as the case may be, shall not be liable to such Lender hereunder for any legal or other expense subsequently incurred by such Lender in connection with the defense thereof other than reasonable cost of investigation. Notwithstanding the foregoing, such Lender may thereafter retain its own counsel to defend such claim or action, and shall be entitled to be reimbursed for the expense thereof subject to the provisions and limitations of this SECTION, if in such Lender's reasonable judgment it is advisable for such Lender to be represented by separate counsel, or if such Borrower(s) or Guarantor(s), as the case may be, shall have 65 consented in writing to such representation. Neither any Borrower nor any Guarantor shall be liable for any settlement of any such claim or action affected without its written consent. The obligations of the Borrowers under this SECTION shall be notwithstanding any other provision of this Agreement to the contrary and shall survive any exercise of the power of sale granted in any Security Document to which the Borrowers are a party, any foreclosure of the Liens created by the Security Documents to which any of the Borrowers is a party, or conveyance in lieu of foreclosure, the repayment of the Notes, the discharge and release of any Person under any Loan Document and any termination of this Agreement. 14.14. PAYMENTS SET ASIDE. To the extent that the Borrowers make a payment or payments to the Lenders or the Lenders enforce any security interest or exercise their right of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other Person under any Debtor Laws or equitable cause, then, to the extent of such recovery, the Obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and shall continue in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 14.15. CREDIT AGREEMENT CONTROLS. If there are any conflicts or inconsistencies among this Agreement and any of the other Loan Documents, the provisions of this Agreement shall prevail and control. 14.16. JUDGMENT CURRENCY; DOLLAR EQUIVALENTS. (a) JUDGMENT CURRENCY. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or under the Guaranties from a currency (the "ORIGINAL CURRENCY") into another currency (the "OTHER CURRENCY"), the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase the Original Currency with the Other Currency at its offices in New York, New York on the second Business Day preceding that on which final judgment is given. The obligation of any Borrower or Guarantor in respect of a sum due in the Original Currency from it to any Lender or the Agent hereunder or under the Guarantees shall, notwithstanding any judgment in any Other Currency, be discharged only if and to the extent that on the Business Day following receipt by such Lender or the Agent of any sum adjudged to be so due in such Other Currency such Lender or the Agent, as the case may be, may in accordance with normal banking procedures purchase such amount of the Original Currency with such Other Currency at its Applicable Lending Office on the second Business Day preceding that on which the final judgment referred to in this SECTION 66 is given; if the amount of the Original Currency so purchased is less than the amount of the Original Currency which the Lender or the Agent, as the case may be, could have purchased on the second Business Day preceding that on which such final judgment is given, the Borrowers and the Guarantors agree, as a separate obligation and notwithstanding any such judgment, to indemnify the Lenders and the Agent against such difference. (b) DOLLAR EQUIVALENTS. Should any Borrower or Guarantor be unable to pay any Obligation in the currency in which such Obligation is due because of illegality, unavailability or otherwise, such portion shall be paid in the Dollar Equivalent of such currency. Any computations hereunder including multiple currencies (other than requirements for payments to be made on such currencies) shall be made in the Dollar Equivalent of such currency. 14.17. FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of March 31, 1994. BORROWERS: VARI-LITE, INC. ("VLI") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III President SHOWCO, INC. ("Showco") By: Michael P. Herman ---------------------------------- Michael P. Herman Vice President - Finance 67 VARI-LITE ASIA, INC. ("VLA") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III Chairman of the Board and Representative Director CLASSICFORGE LIMITED (To Be Renamed VARI-LITE EUROPE LIMITED) (registered in England No. 2876045)("VLE") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III Director CODEAL LIMITED (To Be Renamed THEATRE PROJECTS LIGHTING SERVICES LIMITED) (registered in England No. 2876049) ("Theatre Projects") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III Director WATCHON LIMITED (To Be Renamed BRILLIANT STAGES LIMITED) (registered in England No. 2876058) ("Brilliant Stages") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III Director GUARANTORS: VARI-LITE HOLDINGS, INC. ("VLH") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III President PORTQUAY LIMITED (To Be Renamed VARI-LITE EUROPE HOLDINGS LIMITED) (registered in England No. 2874856)("VLEH") By: /s/ H.R. Brutsche III ---------------------------------- H.R. Brutsche III Director AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. ("BBH") By: /s/ Pieter J. Engel ---------------------------------- Name: Pieter J. Engel Title: Deputy Manager LENDERS: Dollar Revolver Commitment PER PRO BROWN BROTHERS HARRIMAN & CO. $889,000.00 ("BBH") VLI Term Commitment $3,111,000.00 Sterling Term Commitment L900,000.00 FX Facility Commitment $10,000,000.00 By: /s/ Pieter J. Engel ---------------------------------- Name: Pieter J. Engel Title: Deputy Manager Dollar Revolver Commitment NBD BANK, N.A. ("NBD") $1,333,000.00 VLI Term Commitment $4,667,000.00 Sterling Term Commitment L1,800,000.00 VLA Term Commitment Y200,000,000.00 By: /s/ Jon P. Dady ---------------------------------- Name: John P. Dady Title: Vice President Sterling Revolver Commitment COUTTS & CO. ("Coutts") L1,500,000.00 Sterling Term Commitment L2,500,000.00 By: /s/ Kevin Falconer ---------------------------------- Name: Kevin Falconer Title: Manager Dollar Revolver Commitment COMERICA BANK - TEXAS $889,000.00 ("Comerica") VLI Term Commitment $3,111,000.00 By: /s/ Tom Frayer ---------------------------------- Name: Tom Frayer Title: Vice President Dollar Revolver Commitment TRUST COMPANY BANK ("Trust Co.") $889,000.00 VLI Term Commitment $3,111,000.00 By: /s/ F. McClellan Deaver, III ---------------------------------- Name: F. McClellan Deaver, III Title: Vice President By: /s/ Gregory L. Cannon ---------------------------------- Name: Gregory L. Cannon Title: Vice President EXHIBIT "A" CERTAIN DEFINITIONS As used herein, the following words and terms shall have the respective meanings indicated opposite each of them: "ACTUAL CREDIT EXPOSURE" as of any day means the actual credit exposure on such day, as reasonably determined by Agent, which would be due and owing to a Lender under the FX Obligation, the First Swap Agreement or under the other Interest Rate Contracts contemplated by Section 2.6(b). "AFFILIATE" means any Person controlling, controlled by or under common control with any other Person. For purposes of this definition, "control" (including "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or otherwise. If any Person shall own, directly or indirectly, beneficially and of record twenty percent (20%) or more of the equity (whether outstanding capital stock, partnership interests or otherwise) of another Person, such Person shall be deemed to be an Affiliate. "AGREEMENT" means this Credit Agreement, as the same may be amended, modified or supplemented from time to time. "APPLICABLE LENDING OFFICE" means, with respect to each Lender, such Lender's Eurocurrency Lending Office for Eurocurrency Rate Loans and such Lender's Domestic Lending Office for all Loans other than Eurocurrency Rate Loans. "ASSET" means any interest or right in any kind of property or asset, whether real, personal, or mixed, owned or leased, tangible or intangible, and whether now held or hereafter acquired. "ASSET PURCHASE AGREEMENT" means that certain Asset Purchase Agreement dated March 31, 1994 by and among the Sterling Borrowers and the Samuelson Group plc. "ASSIGNMENT AND ACCEPTANCE AGREEMENT" means the agreement and instrument contemplated by SECTION 14.11 hereof, pursuant to which a Lender may assign all or any portion of its rights and obligations hereunder, in the form of EXHIBIT 14.11(d) attached hereto. "BASE RATE" means, for any period and for a specified Lender, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the rate of interest announced publicly by such Lender at its Domestic Lending Office, as its base or prime rate. Each change in a Lender's Base Rate shall become effective without prior notice to the Borrowers automatically as of the opening of business on the date of such change in such Lender's base or prime rate. A-1 "BASE RATE LOANS" means all Loans which bear interest at a rate determined by reference to the Base Rate. "BORROWING" means the aggregate amount of the advances made on the same day by Lenders ratably under their respective Commitment. "BORROWING DATE" means the date requested by a Borrower in a Notice of Borrowing as the date on which a Loan is to be made to such Borrower. "BRILLIANT STAGES GUARANTY" means the Guaranty of even date herewith made by Brilliant Stages in favor of certain Lenders. "BUSINESS DAY" means a day, in the applicable local time, which is not a Saturday or Sunday or a legal holiday and on which banks are not required or permitted by law or a Governmental Requirement to close (i) in the case of Loans made by the Dollar Revolver Lenders or the VLI Term Lenders, in New York, New York, Dallas, Texas, Detroit, Michigan or Atlanta, Georgia and (ii) in the case of Loans made by the Sterling Revolver Lender or the Sterling Term Lenders, in London, England and (iii) in the case of Loans made by the VLA Term Lender, in Tokyo, Japan. "BUY-SELL AGREEMENT" means (a) the Buy-Sell Agreement dated September 30, 1988, as same may be amended from time to time, by and among VLH and the shareholders of VLH named therein, including the Engineers, and (b) such other repurchase agreements (written or otherwise) between VLH and other shareholders of the Class B Common Stock of VLH, each such agreement pursuant to which VLH is obligated, under the circumstances set forth therein, to repurchase the shares of the Class B Common Stock of VLH owned by such shareholders. "CAPITAL EXPENDITURES" means, for any period the aggregate of all expenditures (whether paid in cash or accrued as liabilities, but without duplication) during that period and including the capitalized portion of Capital Lease Payments (except to the extent entering into the underlying capitalized lease would be accounted for as a Capital Expenditure) made during such period that, in conformity with GAAP, are required to be included in or reflected on the property, plant or equipment or similar fixed asset accounts of the combined and consolidated balance sheet of the Vari-Lite Corporate Group (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by any member of the Vari-Lite Corporate Group to the extent of the gross amount of such purchase price less the book value of the equipment being traded-in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced. "CAPITAL LEASE PAYMENTS" means all payments arising under a lease of property (whether real, personal or mixed) by a Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such person. A-2 "CASH EQUIVALENTS" shall mean (a) marketable direct obligations issued or unconditionally guaranteed by the government in which the applicable Borrower is organized or issued by an agency thereof and backed by the full faith and credit of such government, in each case maturing within ninety (90) days after the date of acquisition thereof; (b) commercial paper maturing no more than ninety (90) days after the date of creation thereof and, at the time of acquisition, having the highest rating from the nationally recognized rating service(s) in the country of the applicable issuer and otherwise reasonably acceptable to the Agent; and (c) certificates of deposit or other time deposits maturing within ninety (90) days after the date of acquisition thereof issued by any Lender or any commercial bank organized under the laws of the United States of America, England or Japan having a rating of at least (x) B from Thompson Bankwatch, (y) Aa3 from Moody's Investors Service, Inc., or (z) AA- from Standard & Poor's Corporation; and (d) the 59 Wall Street Money Market Mutual Fund. "CHRYSLER" means Chrysler Capital Corporation. "CHRYSLER WARRANT" means the warrant to purchase 30,444 shares (subject to adjustment) of VLH's Class B Common Stock held by Chrysler and evidenced by the Warrant Certificate. "CLOSING DATE" means March 31, 1994. "CODE" means the Internal Revenue Code of 1986, as amended, as now or hereafter in effect, together with all regulations, rulings and interpretations thereof or thereunder issued by the Internal Revenue Service. "COLLATERAL" means the Assets of the Borrowers, Guarantors and any other Person covered by the terms of the respective Security Documents, together with the proceeds therefrom and products and accessions thereto. "COLLATERAL AGENTS" means the Lenders appointed as such under the applicable Security Documents and the Intercreditor Agreement. "COMMITMENT" means, for a specified Lender, the aggregate commitments of such Lender pursuant to the Dollar Revolver Commitment, the VLI Term Commitment, the Dollar Equivalents of the Sterling Revolver Commitment, the Sterling Term Commitment and the VLA Term Commitment, and the Actual Credit Exposure of a Lender under the FX Facility Commitment, the First Swap Agreement and any other Interest Rate Contract contemplated by SECTION 2.6(b) hereof. "CONSEQUENTIAL LOSS" means any loss or expense incurred by a Lender in redepositing the principal amount of a Eurocurrency Rate Loan on any day other than the last day of the applicable Eurocurrency Interest Period, including the sum of (a) the interest which, but for such payment, such Lender would have earned, in respect of such Eurocurrency Rate Loan so paid, for the remainder of the Eurocurrency Interest Period applicable to such Eurocurrency Rate Loan, reduced, if such Lender is able to redeposit such principal amount as paid for the balance of such Eurocurrency Interest Period, by the interest A-3 earned by such Lender as a result of so redepositing such principal amount, plus (b) any expense or penalty incurred by such Lender on redepositing such principal amount. "CONTESTED CLAIMS" means any claim or liability (i) the validity or amount of which is being contested in good faith by appropriate proceedings, (ii) for which adequate reserves, as required by GAAP, have been established, or for which adequate insurance therefor exists, (iii) with respect to which any right to execute upon or sell any assets of the Borrowers has not matured or has been and continues to be effectively enjoined, superseded or stayed, and (iv) as to which the Lenders have received adequate notice. "DEBT" means (a) any obligation for borrowed money (and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money) which would, in accordance with GAAP, be shown on a balance sheet as a liability, (b) any guaranty and (c) any other contingent liability (direct or indirect) in connection with the obligations, stock or dividends of any Person, and any obligation under any contract, which, in economic effect, is the substantial equivalent of a guaranty. "DEBTOR LAWS" means all applicable liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, administration, insolvency, reorganization, or similar laws, or general equitable principles from time to time in effect affecting the rights of creditors generally. "DEFAULT" means any of the events specified in SECTION 12.1, whether or not there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act. "DEFAULT RATE" means a rate which shall be equal to the lesser of (x) two percent (2.0%), PLUS the interest rate then in effect for such Loan or (y) the Highest Lawful Rate. "DOLLARS" and "$" means lawful currency of the United States of America. "DOLLAR EQUIVALENT" means the equivalent in Dollars of Yen or Pounds Sterling as determined by the Agent, using the quoted spot rate reported in THE WALL STREET JOURNAL for such currency two Business Days prior to the date on which such equivalent is to be determined. "DOLLAR REVOLVER" means the revolving credit facilities available to VLI and Showco pursuant to the Dollar Revolver Commitment. "DOLLAR REVOLVER COMMITMENT" has the meaning specified in SECTION 2.1(a). "DOLLAR REVOLVER LENDERS" means BBH, Comerica, NBD and Trust Co. and their respective successors and assigns. "DOLLAR REVOLVER LOANS" shall mean the Revolver Loans of the Dollar Revolver Lenders pursuant to SECTION 2.1(a) hereof. A-4 "DOMESTIC LENDING OFFICE" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on EXHIBIT 14.16(a) hereto or such other office of such Lender as such Lender may from time to time specify to Borrower and the Agent. "EBIT" means EBITDA LESS depreciation and amortization expense. "EBITDA" means, for any period, on a combined and consolidated basis for the Vari-Lite Corporate Group, the sum of the amounts for such period, of (i) Net Income, PLUS (ii) depreciation and amortization expense, PLUS (iii) Interest Expense, PLUS (iv) federal, state, local and foreign income taxes deducted in computing Net Income in accordance with GAAP, PLUS (v) tax distributions properly accrued which have been deducted in calculating Net Income plus extraordinary losses, as determined in accordance with GAAP, MINUS (vii) extraordinary gains, as determined in accordance with GAAP. "ENGINEERS" means the following four engineer employees of VLI which are shareholders of VLH and are parties to the Buy-Sell Agreement: James M. Bornhorst, John H. Covington, Brooks W. Taylor and Thomas E. Walsh. "ENVIRONMENTAL LAW" means (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.A. Section 9601 ET SEQ.), as amended from time to time, and any and all rules and regulations issued or promulgated thereunder ("CERCLA"); (b) the Resource Conservation and Recovery Act (as amended by the Hazardous and Solid Waste Amendment of 1984, 42 U.S.C.A. Section 6901 ET SEQ.), as amended from time to time, and any and all rules and regulations issued or promulgated thereunder ("RCRA"); (c) the Clean Air Act, 42 U.S.C.A. Section 7401 ET SEQ., as amended from time to time, and any and all rules and regulations issued or promulgated thereunder; (d) the Federal Water Pollution Control Act (as amended by the Clean Water Act of 1977), 33 U.S.C.A. Section 1251 ET SEQ., as amended from time to time, and any and all rules and regulations issued or promulgated thereunder; (e) the Toxic Substances Control Act, 15 U.S.C.A. Section 2601 ET SEQ., as amended from time to time, and any and all rules and regulations issued or promulgated thereunder; or (f) any other comparable federal, state or local law, statute, ordinance, rule, or regulation enacted in the United States, United Kingdom or Japan in connection with or relating to the protection or regulation of the environment or human health or safety and any rules and regulations issued or promulgated in connection with any of the foregoing by any governmental authority, and "ENVIRONMENTAL LAWS" shall mean each of the foregoing. "EQUIPMENT" means, with respect to a Borrower or any Subsidiary, all of such Person's now owned or hereafter acquired machinery, equipment, furniture, furnishings, fixtures, and all tangible personal property similar to any of the foregoing (other than Inventory), together with tools, machine parts, and motor vehicles of every kind and description, and shall include, in any event, all "equipment" (within the meaning of such term in the Uniform Commercial Code in effect in any applicable jurisdiction), and all improvements, accessions, and appurtenances thereto, and any proceeds (including, without limitation, insurance proceeds) and condemnation awards, and all other items included on A-5 the audited financial statements of the Vari-Lite Corporate Group under the heading "Equipment and other property." "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA AFFILIATE" means any Subsidiary or trade or business (whether or not incorporated) which is a member of a group of which any Borrower is a member and which is under common control within the meaning of Section 414 of the Code (such rules and regulations shall also be deemed to apply to foreign corporations and entities). "EUROCURRENCY INTEREST PERIOD" shall mean the period of time for which the Eurodollar Rate, LIBOR or TIBOR shall be in effect as to any Eurocurrency Rate Loan, commencing with the date of the Borrowing or the expiration date of the immediately preceding Eurocurrency Interest Period, as the case may be, applicable to and ending on the effective date of any rate change or rate continuation made as provided in SECTION 4.4 as a Borrower may specify in a Notice of Continuation/Conversion, subject, however, to the early termination provisions provided herein; PROVIDED, HOWEVER, that (i) any Eurocurrency Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Eurocurrency Interest Period shall end on the next preceding Business Day, (ii) each Eurocurrency Interest Period shall be one, two, three or six calendar months in length, or be of such other length as the Borrower and Agent may mutually agree; (iii) a Eurocurrency Interest Period may not be selected for any Loan if such period would terminate later than the Maturity Date; and (iv) a Eurocurrency Interest Period may not be selected for any Loan if such period would terminate beyond a date on which a scheduled payment of principal on such Loan is required. "EUROCURRENCY LENDING OFFICE" means the office specified as a Lender's "Eurocurrency Lending Office" opposite its name on EXHIBIT 14.16(a) (or, if no such office is specified, its Domestic Lending Office) or such other office of such Lender as such Lender may from time to time specify to the Borrowers. "EUROCURRENCY LIABILITIES" shall have the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "EUROCURRENCY RATE" means the Eurodollar Rate, LIBOR or TIBOR. "EUROCURRENCY RATE LOAN" means a Loan made at the Eurocurrency Rate. "EUROCURRENCY RESERVE PERCENTAGE" of a Lender for any Eurocurrency Interest Period for any Loan bearing interest at the Eurodollar Rate, LIBOR or TIBOR shall mean the reserve percentage applicable during such Eurocurrency Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Eurocurrency Interest Period during which any such percentage shall be so A-6 applicable) under regulations issued from time to time by the applicable Governmental Authority. "EURODOLLAR RATE" shall mean with respect to the applicable Eurocurrency Interest Period in effect for each Loan bearing interest at the Eurodollar Rate, the quotient obtained by dividing (a) the annual rate of interest determined by the Agent, at or before 10:00 a.m. (New York time) (or as soon thereafter as practicable), on the second Business Day prior to the first day of such Eurocurrency Interest Period, to be the annual rate of interest at which deposits of Dollars are offered to the Agent by prime banks in the London interbank market as may be selected by the Agent in its sole discretion, acting in good faith, at the time of determination and in accordance with the then existing practice in such market for delivery on the first day of such Eurocurrency Interest Period in immediately available funds and having a maturity equal to such Eurocurrency Interest Period in an amount equal (or as nearly equal as may be) to the unpaid principal amount of such Loan by (b) a percentage equal to 100% minus the Eurocurrency Reserve Percentage for such Eurocurrency Interest Period. Each determination of the Eurodollar Rate made by the Agent in accordance with this paragraph shall be conclusive except in the case of manifest error. "EVENT OF DEFAULT" means any of the events specified in SECTION 12.1, PROVIDED THAT there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act. "FEDERAL FUNDS RATE" means, on any day, a fluctuating interest rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the rated average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by each Lender from three (3) Federal funds brokers of recognized standing selected by it. "FEE" means the fees specified in SECTION 5.4. "FIRST SWAP AGREEMENT" means the swap agreement specified in SECTION 2.6(b). "FIXED CHARGES" means, for any period, on a combined and consolidated basis for the Vari-Lite Corporate Group, the amounts for such period of (i) Interest Expense, PLUS (ii) Required Principal Payments, PLUS (iii) the principal component of Capital Lease Payments, PLUS (iv) all cash payments made under the Subordinated Warrant Note, PLUS (v) all cash payments under the Stock Repurchase Notes. "FOREIGN CURRENCY LOAN" means a Loan in Pounds Sterling or Yen. "FX FACILITY COMMITMENT" has the meaning specified in SECTION 2.6. "FX LENDER" means BBH and its successors and assigns. A-7 "FX OBLIGATION" has the meaning specified in SECTION 2.6. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the American Institute of Certified Public Accountant's Accounting Principles Board and Financial Accounting Standards Board or in such other statements by such other entity as may be in general use by significant segments of the accounting profession as in effect on the date hereof (unless otherwise specified herein as in effect on another date or dates). "GOVERNMENTAL AUTHORITY" means any federal, state, county, municipal, parish, provincial, or other government, or any department, commission, board, court, agency (including, without limitation, the U.S. Environmental Protection Agency), whether of the United States of America or any other country, or any other instrumentality of any of them or any other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of, or pertaining to, government, including, without limitation, any arbitration panel, any court, or any commission. "GOVERNMENTAL REQUIREMENT" means any order, permit, law, statute, (including, without limitation, any Environmental Law), code ordinance, rule, regulation, certificate, or other direction or requirement of any Governmental Authority. "GUARANTIES" means, collectively, the VLH Guaranty, the VLEH Guaranty, the VLI Guaranty, the Showco Guaranty, the VLE Guaranty, the Brilliant Stages Guaranty, the Theatre Projects Guaranty and the VLA Guaranty. "GUARANTORS" means VLH, VLI, Showco, VLA, VLEH, VLE, Theatre Products and Brilliant Stages. "HAZARDOUS MATERIALS" means (a) any "hazardous waste" as defined by RCRA; (b) any "hazardous substance" as defined by CERCLA; (c) any flammables, explosives or radioactive materials; (d) petroleum, natural gas, drilling fluids, produced waters and other wastes associated with the exploration, development, and production of crude oil or natural gas; and (e) any other substance which, pursuant to any Environmental Law, requires special handling in its collection, use, storage, treatment or disposal. "HIGHEST LAWFUL RATE" means, with respect to the Lenders, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged, or received with respect to the Notes or on other amounts, if any, due to the Lenders pursuant to this Agreement or any other Loan Document, under laws applicable to the Lenders which are presently in effect, or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. "INDEMNIFIED PARTIES" has the meaning set forth in SECTION 14.14. "INTELLECTUAL PROPERTY" means, with respect to any member of the Vari-Lite Corporate Group, all of such Person's right, title, and interest in and to any of such Person's A-8 patents, patent applications, trademarks, trademark applications, trade names, franchise agreements, license agreements, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, formulae, recipes, trade secrets, other source and business identifiers, copyrights, and the like, whether now owned or hereafter acquired. "INTERCOMPANY DEBTOR" means any member of the Vari-Lite Corporate Group that is an obligor with respect to an Intercompany Obligation, whether as primary obligor, guarantor, surety or otherwise. "INTERCOMPANY HOLDER" means any member of the Vari-Lite Corporate Group that holds an Intercompany Obligation. "INTERCOMPANY OBLIGATIONS" means all debts, liabilities, claims and obligations of any type and no matter howsoever created or arising, now or at any time hereafter owing by any member of the Vari-Lite Corporate Group to any other member of the Vari-Lite Corporate Group, including, without limitation, all Permitted Intercompany Debt and Permitted Intercompany Secured Debt. "INTERCREDITOR AGREEMENT" means the Intercreditor Agreement of even date herewith by and among the Lenders. "INTEREST EXPENSE" means, for any period, the sum (determined without duplication) of the aggregate amount of interest paid or accrued during such period on Debt of the Vari-Lite Corporate Group, including the interest portion of any Capital Lease Payments and any expensed portion of capitalized interest. "INTEREST PAYMENT DATE" means (a) as to any Base Rate Loan, the last Business Day of each calendar month, beginning with April 30, 1994; (b) as to any Eurocurrency Rate Loan in which the Eurocurrency Interest Period with respect thereto is not greater than three (3) months, the date on which such Eurocurrency Interest Period ends; and (c) as to any Eurocurrency Rate Loan in which the Eurocurrency Interest Period with respect thereto is greater than three (3) months, the date on which every third month of such Eurocurrency Interest Period ends, and the date on which each such Eurocurrency Interest Period ends. "INTEREST RATE CONTRACT" means an interest rate protection agreement, interest rate future, interest rate option, interest rate swap, interest rate cap, collar or other interest rate hedge arrangement, to or under which any Borrower is or becomes a party, having terms and conditions, and having counterparties, reasonably satisfactory to the Agent. "INVENTORY" means, with respect to a Borrower or any subsidiary, all of such Person's now owned or hereafter acquired or created inventory in all of its forms and of every nature, wherever located, whether acquired by purchase, merger, or otherwise, and all raw materials, work in process therefor and finished goods thereof, and all supplies, materials, and products of every nature and description used, usable, or consumed in connection with the manufacture, packing, shipping, advertising, selling, leasing, furnishing, or production of such goods, and shall include, in any event, all "inventory" (within the A-9 meaning of such term in the Uniform Commercial Code in effect in any applicable jurisdiction), whether in mass or joint, or other interest or right of any kind in goods which are returned to, repossessed by, or stopped in transit by such Person, and all accessions to any of the foregoing and all products of any of the foregoing. "INVESTMENT" of any Person means any investment so classified under GAAP, and, whether or not so classified, includes (a) any direct or indirect loan advance made by it to any other Person; (b) any capital contribution to any other Person; and (c) any ownership or similar interest in any other Person; and the amount of any Investment shall be the original principal or capital amount thereof (PLUS any subsequent principal or capital amount) MINUS all cash returns of principal or capital thereof. "LIABILITIES" means Debts, together with trade payables and other obligations payable less than one year from the date of the creation thereof which would, in accordance with GAAP, be shown on a balance sheet as a liability. "LIBOR" means with respect to the applicable Eurocurrency Interest Period in effect for each Loan bearing interest at LIBOR, the quotient obtained by dividing (a) the annual rate of interest determined by Coutts, at or before 10:00 a.m. (London time) (or as soon thereafter as practicable), on the second Business Day prior to the first day of such Eurocurrency Interest Period, to be the annual rate of interest at which deposits of Pounds Sterling are offered to Coutts by prime banks in the London interbank market as may be selected by Coutts in its sole discretion, acting in good faith, at the time of determination and in accordance with the then existing practice in such market for delivery on the first day of such Eurocurrency Interest Period in immediately available funds and having a maturity equal to such Eurocurrency Interest Period in an amount equal (or as nearly equal as may be) to the unpaid principal amount of such Loan by (b) a percentage equal to 100% minus the Eurocurrency Reserve Percentage for such Eurocurrency Interest Period. Each determination of the Eurodollar Rate made by Coutts in accordance with this paragraph shall be conclusive except in the case of manifest error. "LIEN" means any claim, mortgage, deed of trust, pledge, security interest, encumbrance, lien, or charge of any kind (including, without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "LOANS" means any or all of the Revolver Loans and Term Loans. "LOAN DOCUMENTS" means this Agreement, the Notes, the Security Agreements, the Security Documents, the Guaranties, the Interest Rate Contracts, the First Swap Agreement and all instruments, certificates and agreements now or hereafter executed or delivered to the Lenders pursuant to any of the foregoing and the transactions connected therewith, and all amendments, modifications, renewals, extensions, increases and rearrangements of, and substitutions for, any of the foregoing. "MAJORITY LENDERS" means, at any time, Lenders holding more than fifty percent (50%) of (a) the Dollar Equivalent of the then aggregate unpaid principal amount of the A-10 outstanding Loans held by the Lenders, PLUS (b) the aggregate Actual Credit Exposure of the Lenders under the FX Obligations, the First Swap Agreement and the other Interest Rate Contracts contemplated under SECTION 2.6(b), PLUS (c) prior to the occurrence of an Event of Default, the Dollar Equivalent unfunded portion of the Revolver Commitments of the Revolver Lenders. "MARGIN STOCK" shall have the meaning assigned to such term in Regulation T, Regulation U or Regulation G. "MASTER DISTRIBUTORSHIP AGREEMENTS" means the distributorship agreements described in EXHIBIT 11.12, as same may be amended, varied or restated from time to time. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (a) the financial condition, business, properties, assets, prospects or operations of the Vari-Lite Corporate Group on a consolidated basis, taken as a whole, or (b) the ability of the Vari-Lite Corporate Group, on a consolidated basis, to perform their collective obligations under this Agreement or any other Loan Document to which they are a party on a timely basis. "MATURITY DATE" means March 31, 1999, or such earlier date as the Obligations shall become due through acceleration. "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, Section 414 of the Code or Section 3(37) of ERISA (or any similar type of plan established or regulated under the laws of any foreign country) to which any Borrower or any ERISA Affiliate is making or accruing, or has made or accrued an obligation to make, contributions. "MULTIPLE EMPLOYER PLAN" means any employee benefit plan within the meaning of Section 3(3) of ERISA, other than a Multiemployer Plan, subject to Title IV of ERISA, to which any Borrower or any ERISA Affiliate and an employer other than an ERISA Affiliate or any Borrower contribute. "NBD-TOKYO" means NBD Bank, N.A., Tokyo Branch. "NET INCOME" means net income as defined by GAAP, after payment of taxes but before payment of any dividends. "NOTES" means the Revolver Notes and the Term Notes, executed and delivered under this Agreement, and any note given in substitution therefor, or in modification, renewal, extension or restatement thereof, in whole or in part, as any of the same may be endorsed, amended, modified or supplemented. "NOTICE OF CONTINUATION/CONVERSION" has the meaning specified in SECTION 4.4(a). "NOTICE OF REVOLVER BORROWING" has the meaning specified in SECTION 3.1. A-11 "OBLIGATIONS" means all obligations of the Borrowers and the Guarantors, or any one or more of them, to the Agent and Lenders, or any one or more of them, under any Loan Document, including, without limitation, the Actual Credit Exposure of a Lender under the FX Facility, the First Swap Agreement and any other Interest Rate Contract contemplated by SECTION 2.6(b). "OFFICER'S CERTIFICATE" means a certificate signed in the name of one of the Borrowers by either its Chief Executive Officer, its Chief Financial Officer, its President, one of its Vice Presidents, its Treasurer, its Secretary or one of its Assistant Treasurers or Assistant Secretaries. "P&T COLLATERAL ASSIGNMENTS" means, collectively, the VLI P&T Collateral Assignment and the Showco P&T Collateral Assignment. "PBGC" means the Pension Benefit Guaranty Corporation. "PBGC PLAN" means any Plan subject to Title IV of ERISA. "PENALTY NOTE" means that certain promissory note in the original principal amount of $546,669.40, dated the Closing Date, made by VLH and payable to the order of Chrysler which promissory note represents the deferred portion of the prepayment premium owing to Chrysler by VLH as a result of the prepayment of its credit facility. "PERMITTED INTERCOMPANY DEBT" means intercompany Debt among Borrowers and Guarantors which is fully and unconditionally subordinated to the Obligations pursuant to SECTION 9.16 hereof. "PERMITTED INTERCOMPANY SECURED DEBT" means Permitted Intercompany Debt among Borrowers and Guarantors which is secured by a Lien, subordinate and inferior to the Liens of the Lenders, over the Assets of such Borrower or Guarantor. "PERMITTED LIENS" means: (a) Liens for current taxes, assessments, or other governmental charges which are not delinquent or remain payable without any penalty, or the validity or amount of which is contested in good faith by appropriate proceedings; PROVIDED, HOWEVER, that any right to seizure, levy, attachment, sequestration, foreclosure, or garnishment with respect to Assets of a Borrower or any Subsidiary by reason of such Lien has not matured, or has been and continues to be effectively enjoined or stayed; (b) non-consensual Liens imposed by operation of law including, without limitation, landlord Liens for rent not yet due and payable, and Liens for materialmen, mechanics, warehousemen, carriers, employees, workmen, repairmen, current wages, or accounts payable not yet delinquent and arising in the ordinary course of business; PROVIDED, HOWEVER, that any right to seizure, levy, attachment, sequestration, foreclosure, or garnishment with respect to Assets of a Borrower or any Subsidiary by reason of such Lien has not matured, or has been, and continues to be, effectively enjoined or stayed; A-12 (c) easements, rights-of-way, restrictions, and other similar Liens or imperfections to title which do not materially interfere with the occupation, use, and enjoyment by a Borrower and its Subsidiaries of the Assets encumbered thereby or materially impair the value of such Assets subject thereto and none of which are violated by existing or proposed improvements or land use of such Assets; (d) deposits for workers' compensation and unemployment insurance; and (e) Liens arising out of or in connection with any litigation or other legal proceeding which is being contested in good faith by appropriate proceedings; PROVIDED, HOWEVER, that any right to seizure, levy, attachment, sequestration, foreclosure, or garnishment with respect to Assets of a Borrower or any Subsidiary by reason of such Lien has not matured or has been, and continues to be, effectively enjoined or stayed; and PROVIDED FURTHER that the aggregate amount of all claims secured by such Liens shall not exceed $500,000 at any time outstanding. "PERSON" means an individual, partnership, joint venture, corporation, joint stock company, bank, trust, unincorporated organization and/or a government or any department or agency thereof. "PLAN" means an employee benefit plan as defined in Section 3(3) of ERISA in which any personnel of any Borrower or an ERISA Affiliate participate, excluding any Multiemployer Plan, but including any such plan established or maintained by Borrower or any ERISA Affiliate, or to which Borrower or any ERISA Affiliate contributes, under the laws of any foreign country. "PLEDGE AGREEMENTS" means, collectively, the VLH Pledge Agreement and the VLEH Pledge Agreement. "POUNDS STERLING" and "L" means the lawful currency of the United Kingdom. "PRO RATA PERCENTAGE" means: (i) with respect to any Dollar Revolver Lender making a Revolver Loan to VLI or Showco pursuant to the Dollar Revolver Commitment, a fraction (expressed as a percentage), the numerator of which shall be the amount of such Lender's Commitment to make Dollar Revolver Loans in the amount specified on the signature pages opposite its name, and the denominator of which shall be the Dollar Revolver Commitment; (ii) with respect to any Lender making a Term Loan to VLI pursuant to the VLI Term Commitment, a fraction (expressed as a percentage), the numerator of which shall be the amount of such Lender's Commitment to make a Term Loan to VLI in the amount specified on the signature pages opposite its name, and the denominator of which shall be the VLI Term Commitment; A-13 (iii) with respect to any Lender making a Term Loan to the Sterling Borrowers pursuant to the Sterling Term Commitment, a fraction (expressed as a percentage), the numerator of which shall be the amount of such Lender's Commitment to make a Term Loan to the Sterling Borrowers in the amount specified on the signature pages opposite its name, and the denominator of which shall be the Sterling Term Loan Commitment; and (iv) with respect to obligations among the Lenders, a fraction (expressed as a percentage), the numerator of which shall be the amount of a Lender's Commitment, and the denominator of which shall be the aggregate amount of all Lenders' Commitments. All calculations of PRO RATA Percentages shall be made on the basis of Dollar Equivalent values. "PROCESS AGENT" means CT Corporation System, whose address is 1633 Broadway, New York, New York 10009. "QUARTERLY PAYMENT DATE" means the last Business Day of each March, June, September and December excluding March 31, 1994. "REGULATION D," "REGULATION G," "REGULATION T," "REGULATION U" AND "REGULATION X" means Regulation D, G, T, U, or X, as the case may be, of the Board of Governors of the Federal Reserve System, or any successor or other regulation hereafter promulgated by said Board to replace the prior Regulation D, G, T, U, or X and having substantially the same function. "REPORTABLE EVENT" means any event described in Section 4043 (excluding subsections (b)(7) and (b)(9) of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the thirty-day notice to the PBGC under such regulations). "REQUIRED PRINCIPAL PAYMENTS" means payments of principal on the Term Loans (other than voluntary prepayments on the Term Loans pursuant to SECTION 6.2). "REVOLVER BORROWER" means a Borrower which is a beneficiary of a Dollar Revolver Commitment or a Sterling Revolver Commitment. "REVOLVER COMMITMENT" means, collectively, the Dollar Revolver Commitment and the Sterling Revolver Commitment; and, individually, either such commitment. "REVOLVER LENDER" means a Lender making Loans pursuant to the Dollar Revolver Commitment or the Sterling Revolver Commitment. "REVOLVER LOANS" means Loans made pursuant to the Dollar Revolver Commitment or the Sterling Revolver Commitment. A-14 "REVOLVER NOTES" means, collectively, the Notes made to the Lenders pursuant to the Dollar Revolver or the Sterling Revolver. "SECURITIES ACT" means the Securities Act of 1933, as amended to the date hereof and from time to time hereafter, and any successor statute. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended to the date hereof and from time to time hereafter, and any successor statute. "SECURITY AGREEMENTS" means, collectively, the VLH Security Agreement, the VLI Security Agreement, the Showco Security Agreement, the VLEH Security Documents, the VLA Agreement on Bank Transactions, the VLA Security Agreement, the VLE Security Documents, the P&T Collateral Assignments and the Pledge Agreements, as any of the foregoing may be amended or supplemented from time to time. "SECURITY DOCUMENTS" means, collectively, the Security Agreements, the Guaranties and any other security agreement, pledge agreement, hypothecation agreement, fixed charge agreement, floating charge agreement, deed of trust, mortgage, financing statement or any other agreement, in form and substance reasonably satisfactory to the Lenders, executed and delivered by a Borrower or Guarantor, or any other Person in connection with or pursuant to this Agreement for the purpose of creating a Lien on any of such Person's Assets, as the same may be amended, modified, or supplemented from time to time. "SHARE REPURCHASE NOTE" means a promissory note of VLH made and issued for the repurchase of its Class B Common Stock pursuant to the Buy-Sell Agreements. "SHOWCO GUARANTY" means the Guaranty of even date herewith made by Showco in favor of the Lenders. "SHOWCO P&T COLLATERAL ASSIGNMENT" means a collateral assignment of patents, trademarks and related intellectual property, in form and substance reasonably satisfactory to Agent, pursuant to which Showco assigns to Lenders a first priority security interest in its patents, trademarks and related intellectual property. "SHOWCO REVOLVER LOAN" has the meaning specified in SECTION 2.1(a). "SHOWCO SECURITY AGREEMENT" means a security agreement in form and substance reasonably satisfactory to Agent, pursuant to which Showco grants to Lenders a first priority security interest in and to the assets of Showco, to secure the Obligations. "STERLING BASE RATE" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the rate of interest announced publicly by Coutts in London, England, from time to time, as its base, prime or reference rate. "STERLING BORROWERS" means VLE, Theatre Projects and Brilliant Stages. A-15 "STERLING REVOLVER" means the Sterling overdraft facility available to the Sterling Borrowers pursuant to the Sterling Revolver Commitment. "STERLING REVOLVER COMMITMENT" has the meaning specified in SECTION 2.3(a). "STERLING REVOLVER LENDER" means Coutts, and its successors and assigns. "STERLING TERM COMMITMENT" has the meaning specified in SECTION 2.4. "STERLING TERM LENDERS" means BBH, Coutts, NBD, and their respective successors and assigns. "STERLING TERM LOAN" means the Loan made pursuant to the Sterling Term Commitment. "SUB-DISTRIBUTORSHIP AGREEMENTS" means those distributorship agreements between the distributors under the Master Distributorship Agreements and their customers, as amended from time to time. "SUBORDINATED WARRANT NOTE" shall have the meaning specified in the Warrant Certificate. "SUBSIDIARY" means any corporation of which any Borrower or any Guarantor, either directly or indirectly, owns at the time more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (whether or not at the time stock of any other class or classes of such corporation shall have, or might have, voting power by reason of the happening of any contingency), and shall include any such corporation which shall become a Subsidiary after the date hereof. "TANGIBLE NET WORTH" means, as of any date, the total shareholders' equity at stated value, additional paid-in capital and retained earnings (less any treasury stock), which would appear on a consolidated balance sheet of the Vari-Lite Corporate Group as of such date in accordance with GAAP; provided, however, that the following values shall be excluded from any calculation of Tangible Net Worth: (i) deferred charges, (ii) excess cost over book of any business acquired, including the Vari-Lite U.K. Assets, (iii) goodwill, (iv) patents, (v) trademarks and (vi) copyrights. "TERM LOAN COMMITMENT" means, collectively, the VLI Term Commitment, Sterling Term Commitment and the VLA Term Commitment. "TERM LOAN LENDER" means a Lender making a Term Loan pursuant to the Term Loan Commitment. "TERM LOANS" means Loans made pursuant to the Term Loan Commitment. A-16 "TERM NOTES" means, collectively, the Notes made to the Lenders pursuant to the VLI Term Loan, the Sterling Term Loan and the VLA Term Loan. "TERMINATION EVENT" means (a) a Reportable Event, or (b) the withdrawal of Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) the filing of a notice of intent to terminate a PBGC Plan or a Multiple Employer Plan or the treatment of a plan amendment as a termination under Section 4041(c) of ERISA, or (d) the institution of proceedings to terminate a PBGC Plan or a Multiple Employer Plan by the PBGC, or (e) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any PBGC Plan or a Multiple Employer Plan, or (f) the occurrence of an event described in Section 4068(f) of ERISA with respect to a PBGC Plan, or (g) any occurrence similar to any of those referred to in clauses (a) to (f) above under the applicable laws of a foreign country. "THEATRE PROJECTS GUARANTY" means the Guaranty of even date herewith made by Theatre Projects in favor of certain Lenders. "TIBOR" means with respect to the applicable Eurocurrency Interest Period in effect for each Loan bearing interest at TIBOR, the quotient obtained by dividing (a) the annual rate of interest determined by NBD, at or before 10:00 a.m. (Tokyo time) (or as soon thereafter as practicable), on the second Business Day prior to the first day of such Eurocurrency Interest Period, to be the annual rate of interest at which deposits of Yen are offered to NBD by prime banks in the Tokyo interbank market as may be selected by NBD in its sole discretion, acting in good faith, at the time of determination and in accordance with the then existing practice in such market for delivery on the first day of such Eurocurrency Interest Period in immediately available funds and having a maturity equal to such Eurocurrency Interest Period in an amount equal (or as nearly equal as may be) to the unpaid principal amount of such Loan by (b) a percentage equal to 100% minus the Eurocurrency Reserve Percentage for such Eurocurrency Interest Period. Each determination of the TIBOR Rate made by NBD in accordance with this paragraph shall be conclusive except in the case of manifest error. "U.S. COMPANIES" means VLH, VLI and Showco, taken as a whole. "VARI-LITE CORPORATE GROUP" means the Borrowers, the Guarantors and any Subsidiaries of the Borrowers and the Guarantors which are included in the consolidated financial statements of VLH. "VARI-LITE U.K. ASSETS" means the assets acquired by the Sterling Borrowers from the Samuelson Group plc pursuant to the Asset Purchase Agreement. "VLA AGREEMENT ON BANK TRANSACTIONS" means an agreement concerning VLA's bank account with NBD-Tokyo in form and substance reasonably satisfactory to NBD-Tokyo. A-17 "VLA GUARANTY" means the Guaranty of even date herewith made by VLA in favor of certain Lenders. "VLA SECURITY AGREEMENT" means one or more security agreements in form and substance reasonably satisfactory to Agent and NBD-Tokyo, pursuant to which VLA grants to Lenders a first priority security interest in and to the assets of VLA, to secure the Obligations. "VLA TERM COMMITMENT" has the meaning specified in SECTION 2.5(a). "VLA TERM LENDER" means NBD-Tokyo, and its successors and assigns. "VLA TERM LOAN" means the Loan made pursuant to the VLA Term Commitment. "VLE GUARANTY" means the Guaranty of even date herewith made by VLE in favor of certain Lenders. "VLE SECURITY DOCUMENTS" means one or more agreements in form and substance reasonably satisfactory to Agent and Coutts, pursuant to which VLE grants to Lenders a first priority security interest in and to the assets of VLE, to secure the Obligations. "VLEH GUARANTY" means the Guaranty of even date herewith made by VLEH in favor of certain Lenders. "VLEH PLEDGE AGREEMENT" means a stock pledge agreement in form and substance reasonably satisfactory to Agent, pursuant to which VLEH grants to Lenders a first priority security interest in and pledges to Lenders one hundred percent (100%) of the capital stock of VLE, one hundred percent (100%) of the capital stock of Theatre Projects and one hundred percent (100%) of the capital stock of Brilliant Stages, to secure the obligations of VLEH under the VLEH Guaranty. "VLEH SECURITY DOCUMENTS" means one or more agreements in form and substance reasonably satisfactory to Agent, pursuant to which VLEH grants to Lenders a first priority security interest in and to the assets of VLEH, to secure the Obligations. "VLH GUARANTY" means the Guaranty of even date herewith made by VLH in favor of the Lenders. "VLH PLEDGE AGREEMENT" means one or more stock pledge agreements in form and substance reasonably satisfactory to Agent, pursuant to which VLH grants to Lenders a first priority security interest in and pledges to Lenders one hundred percent (100%) of the capital stock of VLA, one hundred percent (100%) of the capital stock of VLEH, to secure the obligations of VLH under the VLH Guaranty. "VLH SECURITY AGREEMENT" means a security agreement in form and substance reasonably satisfactory to Agent, pursuant to which VLH grants to Lenders a first priority A-18 security interest in and to the assets of VLH, other than the stock of Showco and VLI, to secure its obligations under the VLH Guaranty. "VLI GUARANTY" means the Guaranty of even date herewith made by VLI in favor of the Lenders. "VLI P&T COLLATERAL ASSIGNMENT" means a collateral assignment of patents, trademarks and related intellectual property, in form and substance reasonably satisfactory to Agent, pursuant to which VLI assigns to Lenders a first priority security interest in its patents, trademarks and related intellectual property. "VLI SECURITY AGREEMENT" means a security agreement in form and substance reasonably satisfactory to Agent, pursuant to which VLI grants to Lenders a first priority security interest in and to the assets of VLI, to secure the Obligations. "VLI REVOLVER LOAN" has the meaning specified in SECTION 2.1(a). "VLI TERM COMMITMENT" has the meaning specified in SECTION 2.2(a). "VLI TERM LENDERS" means BBH, Comerica, NBD and Trust Co., and their respective successors and assigns. "VLI TERM LOAN" means the Loan made pursuant to the VLI Term Commitment. "VOTING TRUST" means that certain Voting Trust and Shareholders' Agreement dated as of March 31, 1994 by and between VLH, Messrs. Brutsch , Clark and Maxson, and their respective spouses and Clark Partnership, Ltd. "WARRANT CERTIFICATE" means Warrant Certificate No. 1 dated October 14, 1988, issued by VLH to Chrysler pursuant to the terms of the Warrant Purchase Agreement of even date therewith by and between VLH and Chrysler. "WARRANT PAYMENT" means the payment by VLH of the purchase price of the Chrysler Warrant pursuant to VLH's obligation to repurchase such Warrant contained in Section 14 of the Warrant Certificate, which payment may only be made in the form of the Subordinated Warrant Note. "YEN" and "Y" means the lawful currency of Japan. "YEN LENDER" means NBD and its respective successors and assigns. A-19 EXHIBIT 14.16(a) APPLICABLE LENDING OFFICES BROWN BROTHERS HARRIMAN & CO. DOMESTIC AND EUROCURRENCY LENDING OFFICE: 59 Wall Street New York, New York 10005 Attention: Pieter J. Engel Tel: (212) 483-1818 Fax: (212) 493-7903 NBD BANK, N.A. DOMESTIC LENDING OFFICE: 611 Woodward Avenue Detroit, Michigan 48226 Attention: Jon P. Dady Tel: (313) 225-2390 Fax: (313) 225-1586 EUROCURRENCY LENDING OFFICE: 28 Finsbury Circus London EC2M 7AU Attention: Leslie Singleton Tel: (071) 920-0921 Fax: (071) 638-0093 TOKYO LENDING OFFICE: Tokyo Branch Togin Building, 5th Floor 4-2, Marunouchi 1-chome Chiyoda-ku, Tokyo 100 Japan Attention: Andrew W. Strait Tel: 81-3-3214-7301 Fax: 81-3-3214-2529 COUTTS & CO. EUROCURRENCY LENDING OFFICE: Media Banking 440 Strand London WC2R 0QS Attention: K. Falconer Tel: (071) 753-1000 Fax: (071) 753-1059 EX-10.25 17 EXHIBIT 10.25 [AMENDMENT NO. 1] July 1, 1994 Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attn: Pieter J. Engel Coutts & Co. 440 Strand London WC2R 0QS Attn: K. Falconer NBD Bank, N.A. 611 Woodward Avenue Detroit, Michigan 48226 Attn: Jon P. Dady Trust Company Bank 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: F. McClellan Deaver Comerica Bank-Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: Tom D. Frayer Re: Credit Agreement dated as of March 31, 1994 (the "Credit Agreement"), by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("Showco"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited (f/k/a Classicforge Limited) ("VLE"), Theatre Projects Lighting Services Limited (f/k/a Codeal Limited) ("Theatre Projects") and Brilliant Stages Limited (f/k/a Watchon Limited ("Brilliant Stages"), (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant States are sometimes referred to herein individually as a "Borrower" and collectively as "Borrowers"), Vari-Lite Holdings, Inc. ("VLH") and Vari-Lite Europe Holdings Limited (f/k/a Portquay Limited) ("VLEH"), (VLH and VLEH are sometimes referred to herein collectively as "Guarantors"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("Coutts"), NBD Bank, N.A. ("NBD"), Trust Company Bank ("Trust Co.") and Comerica Bank-Texas ("Comerica") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as a "Lender" and collectively as "Lenders"), and BBH in its capacity as agent for the Lenders (in such capacity, the "Agent"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. July 1, 1994 Page 2 Gentlemen: As you are aware, certain of the Borrowers propose, from time to time, to enter into Long-Term Equipment Leases (as defined below) with various third parties. As you are also aware, certain prospective Lessees (as defined below) have been unwilling to enter into such Long-Term Equipment Leases because of the grant by the Borrowers, pursuant to the Security Agreements, of a Lien against all of the Borrowers' rights under such Long-Term Equipment Leases and the Equipment covered thereby, and the resulting inability of such Borrowers to (a) represent and warrant to a Lessee that the Equipment covered by such Long-Term Equipment Lease is free and clear of all Liens, and (b) agree that they will not assign or encumber the Long-Term Equipment Lease. As used herein, "Long-Term Equipment Lease" means a lease of Equipment by any Borrower, as lessor, to any other Person, as lessee (a "Lessee"), for a term of at least five years and pursuant to which substantially all required rentals are paid prior to or shortly after the beginning of the lease term, or financed by the Borrower on terms economically as advantageous as if all required rentals were paid prior to or shortly after the beginning of the lease term. It is our belief that the Lessees' concerns can be addressed by the Lenders' agreement to not disturb the Lessees' possession and right to possession of the Equipment during the term of a Long-Term Equipment Lease, provided that the Lessee is not in default thereunder. Accordingly, subject to the terms and conditions set forth herein, the Borrowers and Guarantors hereby request that the Agent and Lenders execute this letter in the space indicated below to evidence their consent, authorization and agreement to (a) the execution and delivery by the appropriate Collateral Agent to the appropriate Borrower(s) of a letter substantially in the form of EXHIBIT A attached hereto (the "Non-disturbance Letter") and the subsequent delivery by any Borrower of the Non-disturbance Letter to any Lessee, to the extent that such Borrower, in its sole discretion, deems the same to be necessary or advisable, and (b) within five days of a request by any Borrower, the execution and delivery by the appropriate Collateral Agent to any Lessee as may be designated by such Borrower, of a Non-disturbance Agreement substantially in the form of EXHIBIT B attached hereto (a "Non-disturbance Agreement"). The Borrowers and Guarantors hereby acknowledge that the agreements contained herein are subject to the following terms and conditions: 1. By prior written notice to any Borrower and all Lenders, the appropriate Collateral Agent may, in its sole discretion, (a) prohibit such Borrower from thereafter delivering a copy of the Non-disturbance Letter to any prospective Lessee, or (b) terminate its obligation to execute and deliver in favor of any prospective Lessee a Non-disturbance Agreement; provided, that such notice shall not in any way apply to or affect any Long-Term Equipment Lease with respect to which a copy of the Non-disturbance Letter or a Non-disturbance Agreement has been delivered to the Lessee prior to the date on which such notice is received by such Borrower. 2. No amount in respect of any Equipment which is subject to a Long-Term Equipment Lease with respect to which a copy of the Non-disturbance Letter or a Non-disturbance Agreement has been delivered to the Lessee shall, during the term of such Long-Term Equipment Lease, (a) be included in the asset portion of any balance sheet required to be furnished to each Lender pursuant to Section 9.2 of the Credit Agreement, or (b) be included as an asset of any Borrower for purposes of determining the compliance by such Borrower with the financial covenants set forth in Article 10 (including Section 10.5) of July 1, 1994 Page 3 the Credit Agreement. 3. Borrowers shall not enter into a Long-Term Equipment Lease unless the aggregate lease payments payable thereunder are equal to or greater than the net book value of the equipment that is the subject of such Long-Term Equipment Lease. Furthermore, the aggregate lease payments payable (without regard to when such payments are actually made) under all Long-Term Equipment Leases executed in each fiscal year of the Borrowers shall not exceed the "Maximum Amount." As used herein, the "Maximum Amount" shall mean (a) $10,000,000 with respect to fiscal year 1994, (b) $10,000,000 with respect to fiscal year 1995, and (c) for each fiscal year after fiscal year 1995, the greater of (i) the Maximum Amount applicable with respect to the immediately preceding fiscal year (the "Preceding Year") and (ii) the Maximum Amount applicable with respect to the Preceding Year increased by the same percentage by which the aggregate gross revenues of all Borrowers for the Preceding Year exceeded the aggregate gross revenues of all Borrowers for the fiscal year immediately preceding the Preceding Year. 4. Within forty-five (45) days after the end of each fiscal quarter, each Borrower will furnish to each Lender an updated schedule of all Long-Term Equipment Leases to which such Borrower is a party, which schedule shall include, at a minimum, the names of the parties to, the date of, and the payment terms of each such Long-Term Equipment Lease. 5. Except as expressly provided otherwise in the Security Agreements, all Equipment will remain subject to a valid first and prior security interest in favor of the appropriate Collateral Agent and all Long-Term Equipment Leases will be validly assigned to the appropriate Collateral Agent. 6. Effective as of the date this letter is executed, Exhibit 10.5 to the Credit Agreement shall be amended to read in its entirety as set forth in EXHIBIT C attached hereto. Please execute this letter in the space indicated below to acknowledge your agreement to the terms and conditions contained herein. The agreements contained in this letter shall become effective when a counterpart of this letter has been executed by all parties listed below. It is not necessary that all signatures appear on the same counterpart. Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H. R. Brutsche III ------------------------------- H.R. Brutsche III President July 1, 1994 Page 4 SHOWCO, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President-Finance VARI-LITE ASIA, INC. By: /s/ H. R. Brutsche III ------------------------------------- H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED (f/k/a CLASSICFORGE LIMITED) By: /s/ H. R. Brutsche III ------------------------------------- H.R. Brutsche III Director THEATRE PROJECTS LIGHTING SERVICES LIMITED (f/k/a CODEAL LIMITED) By: /s/ H. R. Brutsche III ------------------------------------- H.R. Brutsche III Director BRILLIANT STAGES LIMITED (f/k/a WATCHON LIMITED) By: /s/ H. R. Brutsche III ------------------------------------- H.R. Brutsche III Director July 1, 1994 Page 5 GUARANTORS: VARI-LITE HOLDINGS, INC. By: /s/ H. R. Brutsche III ---------------------------------- H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED (f/k/a PORTQUAY LIMITED) By: /s/ H. R. Brutsche III ---------------------------------- H.R. Brutsche III Director ACKNOWLEDGED AND AGREED as of the 1st day of July, 1994 AGENT: BROWN BROTHERS HARRIMAN & CO. By: /s/ Peiter J. Engel -------------------------- Its: Deputy Manager -------------------------- LENDERS: BROWN BROTHERS HARRIMAN & CO. By: /s/ Peiter J. Engel -------------------------- Its: Deputy Manager -------------------------- COUTTS & CO. By: /s/ K. Falconer -------------------------- Its: Manager -------------------------- July 1, 1994 Page 6 NBD BANK, N.A. By: /s/ Jon P. Dady ----------------------- Its: Vice President ----------------------- TRUST COMPANY BANK By: /s/ F. McClellan Deaver, III ----------------------- Its: Vice President ----------------------- By: /s/ Jennifer L. McClure ----------------------- Its: Banking Officer ----------------------- COMERICA BANK-TEXAS By: /s/ Tom D. Frayer ----------------------- Its: Vice President ----------------------- EX-10.26 18 EXHIBIT 10.26 [AMENDMENT NO. 2] September 30, 1994 Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attn.: Jim Katzman Coutts & Co. 440 Strand London WC2R 0QS Attn.: K. Falconer NBD Bank, N.A. 611 Woodward Avenue Detroit, Michigan 48226 Attn.: Jon P. Dady Trust Company Bank 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn.: F. McClellan Deaver Comerica Bank -- Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn.: Tom D. Frayer Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited (f/k/a/ Classicforge Limited)("VLE"), Theatre Projects Lighting Services Limited (f/k/a Codeal Limited)("THEATRE PROJECTS") and Brilliant Stages Limited (f/k/a/ Watchon Limited)("BRILLIANT STAGES")(VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite Holdings, Inc. ("VLH") and Vari-Lite Europe Holdings Limited (f/k/a/ Portquay Limited)("VLEH")(VLH and VLEH are sometimes referred to herein collectively as "GUARANTORS"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. ("NBD"), Trust Company Bank ("TRUST CO.") and Comerica Bank-Texas ("COMERICA")(BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter September 30, 1994 individually referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, the Guarantors, the Lenders and the Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, VLI, Showco and Holdings have requested your approval to the reorganization of their corporate structure, effective September 30, 1994. In the reorganization (the "REORGANIZATION"), all of the assets and liabilities of the Creative Services division of Showco and the paid-in capital of Showco which is allocated to the Creative Services division will be transferred, as a capital contribution, to Vari-Lite Concerts, Inc., a Texas corporation and wholly-owned subsidiary of Showco ("CONCERTS"). Showco will distribute all of the capital stock of Concerts as a dividend to Holdings, the sole stockholder of Showco, and Concerts will thereby become a wholly-owned subsidiary of Holdings. Thereafter, Concerts will be reincorporated in Delaware by merging it into a newly-formed Delaware corporation, all of the stock of which will be owned by Holdings after the merger. In addition, all of the assets and liabilities of the Architectural Products division of VLI will be transferred by VLI, as a capital contribution, to Irideon, Inc., a newly-formed and wholly-owned Delaware subsidiary of VLI ("Irideon"), and the stock of Irideon will be distributed by VLI as a dividend to Holdings resulting in Irideon becoming a wholly-owned subsidiary of Holdings. Section 11.5 of the Credit Agreement provides that no Borrower or Guarantor will, and no Subsidiary will be permitted to, merge or consolidate with or into, or convey, transfer, lease, or otherwise dispose of all or substantially all of its assets to, or acquire all or substantially all of the assets or capital stock of, any Person. Section 11.6 of the Credit Agreement provides that no Borrower or Guarantor will, or will permit any Subsidiary to, make any Investment, in excess of certain permitted amounts set forth therein. Investment is defined to include any capital contribution to any other Person and any ownership or similar investment in any other Person. The Borrower and the Guarantors request that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 2") in the space indicated below to evidence their consent, authorization and agreement to the Reorganization. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Guarantors, the Lenders and the Agent agree as follows: -2- September 30, 1994 1. Subject to the terms, conditions and agreements set forth in this Amendment No. 2, the Lenders consent to the Reorganization. 2. Concerts shall be added as a Guarantor in the Credit Agreement and shall be included within the definition of Guarantor and the definition of Guarantors for all purposes. 3. Irideon shall be added as a Guarantor in the Credit Agreement and shall be included within the definition of Guarantor and the definition of Guarantors for all purposes. 4. The effectiveness of this Amendment No. 2 is conditioned upon the Agent receiving the following, each duly executed and dated as of September 30, 1994 and in form, substance, scope and number satisfactory to the Agent and the Lenders: a. Concerts Guaranty and Irideon Guaranty; b. Concerts Security Agreement and Irideon Security Agreement; c. Officer's Certificate for Concerts and Irideon, certifying (1) the names and true signatures of the officers of Concerts authorized to sign each Loan Document to which such Person is a party and the notices and other documents to be delivered by such Person pursuant to any Loan Document; (2) the constitutive documents of such Person as in effect on the date of certification; and (3) the resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance by such Person of each Loan Document to which such Person is a party, the notices and other documents to be delivered by such Person pursuant to any Loan Document, and the transactions contemplated thereunder.; d. Certificates of Existence and Good Standing from the appropriate governmental officials for each of Concerts and Irideon; e. Favorable Opinion of Gardere & Wynne, L.L.P., U.S. counsel to the Vari-Lite Corporate Group, addressing such matters as any Lender through the Agent may reasonably request; and f. Such other documents as the Agent may reasonably request. -3- September 30, 1994 5. The effectiveness of this Amendment No. 2 is subject to the further conditions that on the date hereof the following statements shall be true and correct, and the execution by the Borrowers and the Guarantors of this Amendment No. 2 constitute a representation and warranty by such Persons that on the date hereof: a. The representations and warranties of the Borrowers and VLH contained in ARTICLE 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the effective date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result, from the Reorganization or the execution of this Amendment No. 2 (and after giving effect to the provisions hereof) which constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties, or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to SECTION 9.2 of the Credit Agreement. d. Each of the Borrowers and Guarantors executing this Amendment No. 2 is duly authorized and empowered to execute this Amendment No. 2, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 6. Each of Concerts and Irideon represent and warrant to the Lenders that: a. It is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified or licensed to do business in all jurisdictions where the properties owned or the business transacted by it makes such qualification necessary and where the failure to be so qualified would have a Material Adverse Effect. b. It is duly authorized and empowered to execute, deliver and perform its obligations under each Loan Document to which it is a party, and all such corporate action on its part requisite for the due execution, delivery and performance of each Loan Document to which it is a party has been duly and effectively taken. -4- Setember 30, 1994 c. The execution, delivery and performance by it of each Loan Document to which it is a party and the effectuation of the transactions contemplated by any Loan Document, do not and will not violate any provision of, or result in a default under, such Person's Articles or Certificate of Incorporation or other charter documents or By-laws or any material agreement or Governmental Requirement to which such Person is subject, or result in the creation or imposition of any Lien upon any properties of such Person, other than those in favor of the Lenders, as contemplated by the Loan Documents. d. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by such Person of any Loan Document to which it is a party or the effectuation of the transactions contemplated under any Loan Document, except for the filing of financing statements and certain other Security Documents. e. Each Loan Document to which it is a party will constitute, when delivered hereunder, the legal, valid and binding obligation of such Person enforceable against such Person in accordance with its respective terms, except as such enforceability may be (1) limited by the effect of any Debtor Laws, or (b) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding at equity or at law). 7. Concerts and Irideon confirm and agree that so long as any Obligations of any Borrower remain outstanding or any Lender shall have any Commitment to any Borrower under the Credit Agreement, each of them shall comply with (a) the affirmative covenants contained in ARTICLE 9 of the Credit Agreement, (b) the negative covenants contained in ARTICLE 11 of the Credit Agreement and (c) any other provisions of the Credit Agreement applicable to the Guarantors. 8. The provisions of SECTION 9.6, SECTION 11.5 and SECTION 11.6, and any other provisions of the Credit Agreement or any Loan Document (including, without limitation, Section 5.b. of the Showco Security Agreement and Section 5.b. of the VLI Security Agreement) which could restrict the ability of the Borrowers from completing the Reorganization, are waived to the extent and only to the extent necessary to the permit the Reorganization. 9. Subsection (a) of SECTION 11.7 is amended to read in its entirety as follows: -5- September 30, 1994 (a) Showco and Concerts, taken together, shall not make expenditures for fixed or capital assets during any fiscal year in an aggregate amount in excess of $1,000,000.00. 10. Exhibit A to the Credit Agreement is hereby amended as follows: a. The definition of Guaranties shall be amended to read: "GUARANTIES" means, collectively, the VLH Guaranty, the VLEH Guaranty, the VLI Guaranty, the Showco Guaranty, the VLE Guaranty, the Brilliant Stages Guaranty, the Theatre Projects Guaranty, the VLA Guaranty, the Concerts Guaranty and the Irideon Guaranty. b. The definition of Security Agreements shall be amended to read: "SECURITY AGREEMENTS" means, collectively, the VLH Security Agreement, the VLI Security Agreement, the Showco Security Agreement, the VLEH Security Documents, the VLA Agreement on Bank Transactions, the VLA Security Agreement, the VLE Security Documents, the P&T Collateral Assignments, the Pledge Agreement, the Concerts Security Agreement and the Irideon Security Agreement, as any of the foregoing may be amended or supplemented from time to time. c. A new definition of Concerts Guaranty shall be added immediately after the definition of Commitment, reading as follows: "CONCERTS GUARANTY" means the Guaranty dated as of the date hereof made by Concerts in favor of the Lenders. d. A new definition of Concerts Security Agreement shall be added immediately after the new definition of Concerts Guaranty, reading as follows: "CONCERTS SECURITY AGREEMENT means a security agreement in form and substance reasonably satisfactory to the Agent, pursuant to which Concerts grants to Lenders a first priority security interest in and to the assets of Concerts, to secure the Obligations. e. A new definition of Irideon Guaranty shall be added immediately after the definition of Investment, reading as follows: "IRIDEON GUARANTY" means the Guaranty dated as of the date hereof made by Irideon in favor of the Lenders. -6- September 30, 1994 f. A new definition of Irideon Security Agreement shall be added immediately after the new definition of Irideon Guaranty, reading as follows: "IRIDEON SECURITY AGREEMENT means a security agreement in form and substance reasonably satisfactory to the Agent, pursuant to which Irideon grants to Lenders a first priority security interest in and to the assets of Irideon, to secure the Obligations. 11. The Credit Agreement, as amended by this Amendment No. 2, is ratified and confirmed and all of the rights and powers created thereby or thereunder shall be and remain in full force and effect. 12. The execution, delivery and effectiveness of this Amendment No. 2 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 13. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all attorneys' fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 2 and all other Loan Documents executed in connection herewith. 14. This Amendment No. 2 shall be deemed to be an agreement executed by the parties hereto under the laws of the State of New York, and shall be governed by, and shall be construed in accordance with, the laws of the State of New York and applicable federal law. 15. The agreements contained in this Amendment No. 2 shall become effective as of the date first written above when a counterpart of this Amendment No. 2 has been executed by all the parties. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 16. THIS AMENDMENT NO. 2, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -7- September 30, 1994 This Amendment No. 2 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 2 in the space indicated below. [signature pages to follow] -8- Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President SHOWCO, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED (f/k/a CLASSICFORGE LIMITED) By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director THEATRE PROJECTS LIGHTING SERVICES LIMITED (f/k/a CODEAL LIMITED) By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director -9- September 30, 1994 BRILLIANT STAGES LIMITED (f/k/a WATCHON LIMITED) By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director GUARANTORS: VARI-LITE HOLDINGS, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED (f/k/a PORTQUAY LIMITED) By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director VARI-LITE CONCERTS, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President IRIDEON, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President -10- ACKNOWLEDGED AND AGREED as of the 30th day September, 1994 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ Radford W. Kratz ------------------------------ Name: Radford W. Kratz Title: Senior Manager LENDERS: per pro BROWN BROTHERS HARRIMAN & CO. By: /s/ Radford W. Kratz ------------------------------ Name: Radford W. Kratz Title: Senior Manager COUTTS & CO. By: /s/ Kevin Falconer ------------------------------ Name: Kevin Falconer Title: Manager NDB BANK, N.A. By: /s/ Jon P. Dady ------------------------------ Name: Jon P. Dady Title: Vice President TRUST COMPANY BANK By: /s/ Jennifer L. McClure ------------------------------ Name: Jennifer L. McClure Title: Banking Officer By: /s/ F. McClellan Deaver, III ------------------------------ Name: F. McClellan Deaver, III Title: Vice President -11- September 30, 1994 COMERICA BANK-TEXAS By: /s/ Tom D. Frayer -------------------------------- Name: Tom D. Frayer Title: Vice President -12- EX-10.27 19 EXHIBIT 10.27 [Amendment No. 3] February 22, 1995 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R OQS Attn: A.D. Hills NBD Bank N.A. 611 Woodward Avenue Detroit, Michigan 48226 Attn: Jon P. Dady Trust Company Bank 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: F. McClellan Deaver Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: Tom D. Frayer Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite Holdings, Inc. ("VLH"), Vari- Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, the Guarantors, the Lenders and the Agent, and (b) that certain letter agreement dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Showco February 22, 1995 Page 2 Creative Services, Inc. ("SCSI") and Irideon, Inc. ("IRIDEON")(VLH, VLEH, SCSI and Irideon are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, as amended (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, (a) VLI and Showco have requested that the Dollar Revolver Commitment be increased to $9,000,000, (b) the Borrowers and the Guarantors have requested that the financial maintenance covenants contained in Sections 10.1 and 10.3 of the Credit Agreement be amended in certain respects, (c) the Borrowers and the Guarantors have requested that the definition of "U.S. Companies" contained in Exhibit A to the Credit Agreement be amended to include Irideon, SCSI and Concert Production Lighting, Inc., a Delaware corporation and a wholly owned Subsidiary of VLH ("CPL"), (d) the Borrowers, the Guarantors and CPL have requested that certain other definitions contained in Exhibit A to the Credit Agreement be amended and that certain additional definitions be added to the Credit Agreement to reflect that CPL will be a "Guarantor" under the Credit Agreement, and (e) the Borrowers and the Guarantors have requested that the covenant contained in Section 11.6 of the Credit Agreement be amended to permit VLH to make Investments in and loan Permitted Intercompany Debt to Irideon, SCSI and CPL. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 3") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree, subject to the satisfaction of each condition precedent set forth in Section 7 of this Amendment No. 3, to the following: 1. INCREASE IN DOLLAR REVOLVER COMMITMENT. a. The Dollar Revolver Commitment (as such term is defined in Section 2.1(a) of the Credit Agreement) shall be increased to $9,000,000; and b. The Commitment of each Dollar Revolver Lender to make Dollar Revolver Loans (as set forth opposite each Dollar Revolver Lender's name on the signature page to the Credit Agreement) shall be increased to the amount set forth opposite such Dollar Revolver Lender's name below: February 22, 1995 Page 3 Dollar Revolver Lender Dollar Revolver Commitment ---------------------- -------------------------- BBH $2,000,000 Trust Co. $2,000,000 Comerica $2,000,000 NBD $3,000,000 2. AMENDMENT TO FINANCIAL MAINTENANCE COVENANTS. Section 10.1 shall be amended to provide for the corresponding ratios and periods, and Section 10.3 of the Credit Agreement shall be amended to provide for the corresponding ratios and amounts, as provided below: a. Minimum Fixed Charge Coverage Ratios: Period Ratio ------ ----- Beginning on November 30, 1994 and (0.40) to 1 ending on February 27, 1995 Beginning on February 28, 1995 and (1.50) to 1 ending on April 29, 1995 Beginning on April 30, 1995 (1.00) to 1 ending on May 30, 1995 Beginning on May 31, 1995 (0.70) to 1 ending on July 30, 1995 Beginning on July 31, 1995 and (0.30) to 1 ending on November 29, 1995 Beginning on November 30, 1995 and 0.20 to 1 ending on February 28, 1996 Beginning on February 29, 1996 and 0.80 to 1 ending on June 29, 1996 Beginning on June 30, 1996 and 1.00 to 1 ending on September 29, 1996 Beginning on September 30, 1996 and 1.50 to 1 ending on September 29, 1997 On and after September 30, 1997 1.75 to 1 February 22, 1995 Page 4 (with numbers in parentheses being negative numbers). b. Tangible Net Worth Amounts: Period Amount ------ ------ Beginning on the Closing Date $12,400,000 and ending on September 29, 1994 Beginning on September 30, 1994 $13,000,000 and ending on September 29, 1995 Beginning on September 30, 1995 $16,000,000 and ending on September 29, 1996 Beginning on September 30, 1996 $21,000,000 and ending on September 29, 1997 Beginning on September 30, 1997 $26,000,000 and ending on September 29, 1998 On and after September 30, 1998 $31,000,000 3. ADDITIONAL DEFINITIONS. Exhibit A to the Credit Agreement shall be amended to include, in alphabetical order, definitions for the terms "CPL", "CPL Guaranty" and "CPL Security Agreement" which shall read in full as follows: "CPL" means Concert Production Lighting, Inc., a Delaware corporation and a wholly owned Subsidiary of VLH. "CPL GUARANTY" means the Guaranty dated February 22, 1995, of CPL in favor of certain Lenders. "CPL SECURITY AGREEMENT" means a security Agreement in form and substance reasonably satisfactory to Agent, pursuant to which CPL grants to Lenders a first priority security interest in and to the assets of CPL, to secure the Obligations. 4. AMENDMENTS TO DEFINITIONS. The definitions of Guarantors, Guarantees, Security Agreements and U.S. Companies contained in Exhibit A to the Credit Agreement shall be amended to read in full as follows: February 22, 1995 Page 5 "GUARANTORS" means VLH, VLI, Showco, VLA, VLEH, VLE, Theatre Projects, Brilliant Stages, SCSI, Irideon and CPL. "GUARANTEES" means, collectively, the VLH Guaranty, the VLEH Guaranty, the VLI Guaranty, the Showco Guaranty, the VLE Guaranty, the Brilliant Stages Guaranty, the Theatre Projects Guaranty, the VLA Guaranty, the Irideon Guaranty, the SCSI Guaranty and the CPL Guaranty. "SECURITY AGREEMENTS" means, collectively, the VLH Security Agreement, the VLI Security Agreement, the Showco Security Agreement, the VLEH Security Documents, the VLA Agreement on Bank Transactions, the VLA Security Agreement, the VLE Security Documents, the P&T Collateral Assignments, the Pledge Agreements, the Irideon Security Agreement, the SCSI Security Agreement and the CPL Security Agreement, as any of the foregoing may be amended or supplemented from time to time. "U.S. COMPANIES" means VLH, VLI, Showco, SCSI, Irideon and CPL, taken as a whole, and "U.S.Company" means any of VLH, VLI, Showco, SCSI, Irideon or CPL, individually. 5. AMENDMENT TO SECTION 11.6. Clause (e) of Subsection 11.6 of the Credit Agreement shall be, and hereby is, amended to read in full as follows: (e) VLH may make Investments in VLI, Showco, Irideon, SCSI and CPL; 6. AMENDMENT TO SECTION 11.7. Clause (b) of Subsection 11.7 of the Credit Agreement shall be, and hereby is, amended to read in full as follows: (b) The Vari-Lite Corporate Group shall not make expenditures in an aggregate principal amount in excess of $2,500,000.00 related to the production and inventorying of AR500 and Mini Architectural lights. 7. CONDITIONS PRECEDENT. Each of (a) the increase in the Dollar Revolver Commitment and in the Commitment of each Dollar Revolver Lender to make Dollar Revolver Loans as contemplated by Section 1 of this Amendment No. 3, (b) the amendments to Sections 10.1, 10.3 and 11.6 of the Credit Agreement as contemplated by Sections 2 and 5 of this Amendment No. 3, (c) the addition of the definitions of "CPL", "CPL Guaranty" and "CPL Security Agreement" to Exhibit A to the Credit Agreement as contemplated by Section 3 of this Amendment, and (d) the amendments to the definitions of "Guarantors", "Guarantees", "Security Agreements" and "U.S. Companies" as contemplated by Section 4 of this Amendment No. 3, is subject to the satisfaction of each of the following conditions precedent: a. Each Dollar Revolver Lender shall have received a modification and renewal Revolver Note jointly and severally executed and delivered by Showco and VLI which shall be (i) dated the date hereof; (ii) in the principal amount of such Dollar Revolver Lender's February 22, 1995 Page 6 PRO RATA Percentage of the Dollar Revolver Commitment as increased in this Amendment No. 3; (iii) be substantially in the form of EXHIBIT 1 to this Amendment No. 3 with the blanks appropriately filled; (iv) payable to the order of such Dollar Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each Dollar Revolver Lender of the modification and renewal Revolver Note to be delivered to it pursuant to this Section 7.a., such Dollar Revolver Lender shall return to VLI (for the benefit of VLI and Showco) the Revolver Note presently held by such Dollar Revolver Lender evidencing such Dollar Revolver Lender's PRO RATA Percentage of the Dollar Revolver Commitment prior to giving effect to this Amendment No. 3, duly marked "Replaced." b. The Agent shall have received the CPL Guaranty, each duly executed and dated as of February 22, 1995 and in form, substance, scope number as is satisfactory to the Agent and the Lenders. c. The Agent shall have received the CPL Security Agreement, duly executed and dated as of February 22, 1995 and in form, substance, scope and number as is satisfactory to the Agent and the Lenders. d. The Agent shall have received an Officer's Certificate for each of VLI and Showco certifying (i) to the name and true signatures of the officers of VLI and Showco authorized to sign the Revolver Notes to be executed by VLI and Showco pursuant to Section 7.a. of this Amendment No. 3; (ii) that neither the charter nor bylaws of either VLI or Showco has been amended, modified, revoked or repealed in any respect since March 31, 1994, except for amendments copies of which have been provided to Agent; and (iii) to resolutions of the Boards of Directors of VLI and Showco approving and authorizing the increase in the Dollar Revolver Commitment contemplated by Section 1 of this Amendment No. 3 and the execution, delivery and performance of this Amendment No. 3 and the new Revolver Notes to be executed and delivered by VLI and Showco pursuant to Section 7.a. of this Amendment No. 3. e. The Agent shall have received an Officer's Certificate for CPL certifying (i) to the name and true signatures of the officers of CPL authorized to sign the CPL Guaranty, the CPL Security Agreement and the other Loan Documents to be executed by CPL pursuant to this Agreement and the other Loan Papers, (ii) to the accuracy of copies of the Certificate of Incorporation and Bylaws of CPL attached thereto; and (iii) to resolutions of the Board of Directors of CPL approving and authorizing the execution and delivery by CPL of the CPL Guaranty and the CPL Security Agreement to be executed by CPL, and the other Loan Documents to be executed by CPL, and the performance by CPL of its obligations thereunder. f. The Agent shall have received Certificates of Existence and Good Standing from the appropriate governmental officials for CPL; February 22, 1995 Page 7 g. The Agent shall have received a favorable opinion of Gardere & Wynne, L.L.P., U.S. counsel to the Vari-Lite Corporate Group, addressing such matters as the Agent may reasonably request. h. The Agent shall have received such other documents as it may reasonably request. i. VLI and Showco shall have paid to the Agent for the account of the Dollar Revolver Lenders a commitment increase fee in the aggregate amount of $55,000 which shall be distributed by the Agent to the Dollar Revolver Lenders in accordance with the following table: Dollar Revolver Lender Commitment Increase Fee ---------------------- ----------------------- Trust Co. $10,000 Comerica $10,000 NBD $15,000 BBH $20,000 The fees described in this Section represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the Borrowers to pay such fees shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in the Agreement, and expenses described in the Agreement. All such fees shall be part of the Obligations and shall be nonrefundable. 8. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 3, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in ARTICLE 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 3 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to SECTION 9.2 of the Credit Agreement. February 22, 1995 Page 8 d. Each of the Borrowers and Guarantors executing this Amendment No. 3 is duly authorized and empowered to execute this Amendment No. 3, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 9. ADDITIONAL REPRESENTATIONS OF CPL. CPL represents and warrants to the Lenders that: a. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and is duly qualified or licensed to do business in all jurisdictions where the properties owned or the business transacted by it makes such qualification necessary and where the failure to be so qualified would have a Material Adverse Effect. b. It is duly authorized and empowered to execute, deliver and perform its obligations under each Loan Document to which it is a party, and all such corporate action on its part requisite for the due execution, delivery and performance of each Loan Document to which it is a party has been duly and effectively taken. c. The execution, delivery and performance by it of each Loan Document to which it is a party and the effectuation of the transactions contemplated by any Loan Document, do not and will not violate any provision of, or result in a default under, CPL's Certificate of Incorporation or other charter documents or By-laws or any material agreement or Governmental Requirement to which CPL is subject, or result in the creation or imposition of any Lien upon any properties of such Person, other than those in favor of the Lenders, as contemplated by the Loan Documents. d. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by CPL of any Loan Document to which it is a party or the effectuation of the transactions contemplated under any Loan Document. e. Each Loan Document to which it is a party will constitute, when delivered hereunder, the legal, valid and binding obligation of CPL enforceable against CPL in accordance with its respective terms, except as such enforceability may be (i) limited by the effect of any Debtor Laws, or (ii) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding at equity or at law). 10. CONFIRMATION OF OBLIGATIONS OF CPL AS GUARANTOR. CPL confirms and agrees that so long as any Obligations of any Borrower remain outstanding or any Lender shall have any Commitment to any Borrower under the Credit Agreement, CPL shall comply with (a) the affirmative covenants contained in ARTICLE 9 of the Credit Agreement, (b) the negative covenants February 22, 1995 Page 9 contained in ARTICLE 11 of the Credit Agreement and (c) any other provisions of the Credit Agreement applicable to the Guarantors. 11. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Dollar Revolver Commitment, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Dollar Revolver Commitment as increased pursuant to Section 1 hereof, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 12. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 3, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. 13. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 3 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 14. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 3 and all other Loan Documents executed in connection herewith. 15. GOVERNING LAW. THIS AMENDMENT NO. 3 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 16. COUNTERPARTS. This Amendment No. 3 shall become effective as of the date first written above when a counterpart of this Amendment No. 3 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. February 22, 1995 Page 10 17. COMPLETE AGREEMENT. THIS AMENDMENT NO. 3, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 3 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 3 in the space indicated below. [signature pages to follow] February 22, 1995 Page 11 Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche President SHOWCO, INC. By: /s/ Clay Powers ------------------------------------------ Clay Powers President VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III Director February 22, 1995 Page 12 THEATRE PROJECTS LIGHTING SERVICES LIMITED By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III Director BRILLIANT STAGES LIMITED By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III Director GUARANTORS: VARI-LITE HOLDINGS, INC. By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III Director February 22, 1995 Page 13 SHOWCO CREATIVE SERVICES, INC. By: /s/ John D. Maxson ------------------------------------------ John D. Maxson Chairman IRIDEON, INC. By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III President CONCERT PRODUCTION LIGHTING, INC. By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche III President ACKNOWLEDGED AND AGREED as of the 22nd day of February, 1995 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan III ------------------------------------------ Name: W. Carter Sullivan III Title: Manager LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan III ------------------------------------------ Name: W. Carter Sullivan III Title: Manager February 22, 1995 Page 14 COUTTS & CO. By: /s/ A. D. Hills ------------------------------------------ Name: A. D. Hills Title: Manager NBD BANK By: /s/ Jon P. Dady ------------------------------------------ Name: Jon P. Dady Title: Vice President TRUST COMPANY BANK By: /s/ Jennifer L. McClure ------------------------------------------ Name: Jennifer L. McClure Title: Bank Officer By: /s/ F. McClellan Deaver, III ------------------------------------------ Name: F. McClellan Deaver, III Title: Vice President COMERICA BANK-TEXAS By: /s/ Gary W. Orr ------------------------------------------ Name: Gary W. Orr Title: Senior Vice President EX-10.28 20 EXHIBIT 10.27 [Amendment No. 4] November 22, 1995 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R OQS Attn: A.D. Hills NBD Bank N.A. 611 Woodward Avenue Detroit, Michigan 48226 Attn: Jon P. Dady Trust Company Bank 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: F. McClellan Deaver Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite Holdings, Inc. ("VLH"), Vari- Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, the Guarantors, the Lenders and the Agent, (b) that certain letter agreement dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Showco Creative Services, Inc. ("SCSI") and Irideon, Inc. ("IRIDEON")(VLH, VLEH, SCSI, Irideon and Concert Production Lighting, Inc. are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, and (c) that certain letter agreement dated February 22, 1995 marked "[Amendment No. 3]" among the Borrowers, the Guarantors, the Lenders and the Agent, as amended (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, the Borrowers and the Guarantors have requested that the Minimum Fixed Charge Coverage Ratios contained in Sections 10.1 of the Credit Agreement be amended in certain respects. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 4") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree to the following: 1. AMENDMENT TO MINIMUM FIXED CHARGE COVERAGE RATIOS. Section 10.1 of the Credit Agreement shall be amended to provide for the corresponding ratio and period, as provided below: Minimum Fixed Charge Coverage Ratios: Period Ratio ------ ----- Beginning on September 30, 1995 and (0.50) to 1 ending on October 30, 1995 (with number in parentheses being a negative number). All periods and ratios in Section 10.1 of the Credit Agreement which are not changed by the above period and ratio shall remain as set forth in the Credit Agreement. 2. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 4, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in ARTICLE 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 4 (and after giving effect to the provisions hereof), which, absent this Amendment No. 4, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to SECTION 9.2 of the Credit Agreement. d. Each of the Borrowers and Guarantors executing this Amendment No. 4 is duly authorized and empowered to execute this Amendment No. 4, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 3. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Dollar Revolver Commitment, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Dollar Revolver Commitment, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 4. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 4, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. 5. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 4 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 6. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 4. 7. GOVERNING LAW. THIS AMENDMENT NO. 4 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 8. COUNTERPARTS. This Amendment No. 4 shall become effective as of the date first written above when a counterpart of this Amendment No. 4 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 9. COMPLETE AGREEMENT. THIS AMENDMENT NO. 4, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 4 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 4 in the space indicated below. [signature pages to follow] Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Brutsche III ----------------------------- H.R. Brutsche III President SHOWCO, INC. By: /s/ Clay Powers ----------------------------- Clay Powers President VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ----------------------------- H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED By: /s/ H.R. Brutsche III ----------------------------- H.R. Brutsche III Director THEATRE PROJECTS LIGHTING SERVICES LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director BRILLIANT STAGES LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director GUARANTORS: VARI-LITE HOLDINGS, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director SHOWCO CREATIVE SERVICES, INC. By: /s/ John D. Maxson ------------------------------------ John D. Maxson Chairman IRIDEON, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President CONCERT PRODUCTION LIGHTING, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President ACKNOWLEDGED AND AGREED as of the 22nd day of November, 1995 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan III ---------------------------------- Name: W. Carter Sullivan III -------------------------------- Title: Manager ------------------------------- LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan III ---------------------------------- Name: W. Carter Sullivan -------------------------------- Title: Manager ------------------------------- COUTTS & CO. By: /s/ A.D. Hills ---------------------------------- Name: A.D. Hills -------------------------------- Title: Manager ------------------------------- NBD BANK By: /s/ Jon P. Dady ---------------------------------- Name: Jon P. Dady -------------------------------- Title: Vice President ------------------------------- TRUST COMPANY BANK By: /s/ F. McClellan Deaver III ---------------------------------- Name: F. McClellan Deaver III -------------------------------- Title: Vice President ------------------------------- By: /s/ Ruth E. Whitner ---------------------------------- Name: Ruth E. Whitner -------------------------------- Title: Assistant Vice President ------------------------------- COMERICA BANK-TEXAS By: /s/ David Terry ---------------------------------- Name: David Terry -------------------------------- Title: Corporate Banking Officer ------------------------------- EX-10.29 21 EXHIBIT 10.29 [Amendment No. 5] December 18, 1995 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R OQS Attn: A.D. Hills NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Jon P. Dady SunTrust Bank, Atlanta 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: F. McClellan Deaver, III Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David B. Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "Borrower" and collectively as "BORROWERS"), Vari-Lite Holdings, Inc. (to be known as Vari-Lite International, Inc.) ("VLH"), Vari-Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank (the name of which is now SunTrust Bank, Atlanta) ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, the Guarantors, the Lenders and the Agent, (b) that certain letter December 18, 1995 Page 2 agreement dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Showco Creative Services, Inc. (to be known as Ignition! Creative Group, Inc., "ICG") and Irideon, Inc. ("IRIDEON")(VLH, VLEH, ICG and Irideon are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, (c) that certain letter agreement dated February 22, 1995 marked "[Amendment No. 3]" among the Borrowers, the Guarantors, the Lenders and the Agent, and (d) that certain letter agreement dated November 22, 1995 marked "[Amendment No. 4]" among the Borrowers, the Guarantors, the Lenders and the Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, the Borrowers and Guarantors have requested that (a) the Dollar Revolver Commitment be increased to $13,000,000, (b) the Sterling Revolver Commitment be increased to L3,000,000, (c) the margin on the pricing of certain of the Loans be reduced, (d) the financial maintenance covenants contained in Sections 10.1 10.2 and 10.4 of the Credit Agreement be amended in certain respects, and (e) the covenant restricting the increase of debt by the Borrower be modified to permit the lease financing transaction currently contemplated for the new U.S. corporate headquarters of the Vari-Lite Corporate Group. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 5") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree, subject to the satisfaction of each condition precedent set forth in Section 7 of this Amendment No. 5, to the following: 1. INCREASE IN DOLLAR REVOLVER COMMITMENT. a. The Dollar Revolver Commitment (as such term is defined in Section 2.1(a) of the Credit Agreement) shall be increased effective the date hereof to $13,000,000; and b. The Commitment of each Dollar Revolver Lender to make Dollar Revolver Loans (as set forth opposite each Dollar Revolver Lender's name on the signature page to the Credit Agreement) shall be increased effective the date hereof to the amount set forth opposite such Dollar Revolver Lender's name below: December 18, 1995 Page 3 Dollar Revolver Lender Dollar Revolver Commitment ---------------------- -------------------------- BBH $2,889,000 Comerica $2,889,000 NBD $4,333,000 Trust Co. $2,889,000 2. INCREASE IN STERLING REVOLVER COMMITMENT. a. The Sterling Revolver Commitment (as such term is defined in Section 2.3(a) of the Credit Agreement) shall be increased effective the date hereof to L3,000,000; and b. The Commitment of the Sterling Revolver Lender to make Sterling Revolver Loans (as set forth opposite the Sterling Revolver Lender's name on the signature page to the Credit Agreement) shall be increased effective the date hereof to the amount set forth opposite such Sterling Revolver Lender's name below: Sterling Revolver Lender Sterling Revolver Commitment ------------------------ ---------------------------- Coutts L3,000,000 3. MODIFICATION OF PRICING MARGINS. a. Section 4.4(c), addressing the rate of interest for Loans where eurocurrency deposits are unavailable or eurocurrency interest rates are unascertainable or uneconomical, shall be, and is hereby amended effective December 1, 1995, such that the reference therein to the "Lender's Base Rate, PLUS two percent (2.0%)" shall instead be a reference to the "Lender's Base Rate, PLUS one percent (1.0%)." b. Section 5.1 of the Credit Agreement shall be, and is hereby amended effective December 1, 1995, to read in full as follows: 5.1 INTEREST ON TERM LOANS. (a) The VLI Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to: (i) if a Base Rate Loan, the lesser of (A) Agent's Base Rate, plus one percent (1.0%) or (B) the Highest Lawful Rate; and December 18, 1995 Page 4 (ii) if a Eurocurrency Rate Loan, the lesser of (A) the Eurodollar Rate, PLUS three and one-half percent (3.5%) or (B) the Highest Lawful Rate. (b) The Sterling Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to the lesser of (A) LIBOR, PLUS two percent (2.0%) or (B) the Highest Lawful Rate. (c) The VLA Term Loan shall bear interest on the unpaid principal amount thereof from time to time outstanding, payable on each Interest Payment Date, in arrears, and on the Maturity Date, at a rate per annum equal to the lesser of (A) TIBOR, PLUS two and one half percent (2.5%) or (B) the Highest Lawful Rate. b. Section 5.2 of the Credit Agreement shall be, and is hereby amended effective December 1, 1995, to read in full as follows: 5.2 INTEREST ON REVOLVER LOANS. (a) The Dollar Revolver Loans shall bear interest on the unpaid principal amount thereof from time to time xoutstanding at an interest rate equal to the lesser of (a) Agent's Base Rate, plus one percent (1.0%) or (b) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date. (b) The Sterling Revolver Loans shall bear interest on the unpaid principal amount thereof from time to time outstanding at an interest rate equal to the lesser of (a) LIBOR, PLUS two percent (2.0%) or (b) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date. 4. AMENDMENT TO FINANCIAL MAINTENANCE COVENANTS. Sections 10.1, 10.2 and 10.4 shall be, and each is hereby amended effective the date hereof to read in full as follows: 10.1 MINIMUM FIXED CHARGE COVERAGE RATIO. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBITDA MINUS (A) Capital Expenditures (excluding therefrom Capital Expenditures made in connection with the acquisition by the Sterling Borrowers of the Vari-Lite U.K. Assets) PLUS (B) prepayment penalties (to the extent deducted in determining EBITDA) paid on financing from Chrysler Capital Corporation and CIT Group by the Vari-Lite Corporate Group and non-cash writedowns of loan origination fees stemming therefrom, to (ii) Fixed Charges, on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: December 18, 1995 Page 5 Period Ratio ------ ----- Beginning on September 30, 1995 (0.50) to 1 and ending on October 30, 1995 Beginning on October 31, 1995 (1.00) to 1 and ending on December 29, 1995 Beginning on December 31, 1995 (0.75) to 1 and ending on February 28, 1996 Beginning on February 29, 1996 (0.50) to 1 and ending on March 30, 1996 Beginning on March 31, 1996 (0.25) to 1 and ending on May 30, 1996 Beginning on May 31, 1996 0.10 to 1 and ending on June 29, 1996 Beginning on June 30, 1996 0.25 to 1 and ending on August 30, 1996 Beginning on August 31, 1996 0.50 to 1 and ending on September 29, 1996 Beginning on September 30, 1996 0.70 to 1 and ending on October 30, 1996 Beginning on October 31, 1996 1.00 to 1 and ending on February 27, 1997 December 18, 1995 Page 6 Beginning on February 28, 1997 1.25 to 1 and ending on November 29, 1997 Beginning on November 30, 1997 1.50 to 1 and ending on January 30, 1998 On and after January 31, 1998 1.75 to 1 (with numbers in parentheses being negative numbers). 10.2 EARNINGS RATIO. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBIT to (ii) Interest Expense, on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: Period Ratio ------ ----- Beginning on October 31, 1995 2.50 to 1 and ending on November 29, 1995 Beginning on November 30, 1995 2.25 to 1 and ending on December 30, 1995 Beginning on December 31, 1995 2.00 to 1 and ending on January 30, 1996 Beginning on January 31, 1996 1.50 to 1 and ending on March 30, 1996 Beginning on March 31, 1996 1.75 to 1 and ending on May 30, 1996 Beginning on May 31, 1996 2.00 to 1 and ending on July 30, 1996 December 18, 1995 Page 7 Beginning on July 31, 1996 2.50 to 1 and ending on August 30, 1996 On and after August 31, 1996 3.00 to 1 10.4 LEVERAGE RATIO. VLH shall not permit its ratio of (i) Liabilities to (ii) Tangible Net Worth, on a consolidated basis, to be greater than the ratio indicated below at any time during the period set forth below: Period Ratio ------ ----- Beginning on November 30, 1995 3.25 to 1 and ending on December 30, 1995 Beginning on December 31, 1995 3.50 to 1 and ending on January 30, 1996 Beginning on January 31, 1996 3.75 to 1 and ending on February 28, 1996 Beginning on February 29, 1996 3.85 to 1 and ending on March 30, 1996 Beginning on March 31, 1996 3.75 to 1 and ending on June 29, 1996 Beginning on June 30, 1996 3.50 to 1 and ending on July 30, 1996 Beginning on July 31, 1996 3.25 to 1 and ending on August 30, 1996 December 18, 1995 Page 8 Beginning on August 31, 1996 3.00 to 1 and ending on September 29, 1996 Beginning on September 30, 1996 2.90 to 1 and ending on October 30, 1996 Beginning on October 31, 1996 3.00 to 1 and ending on March 30, 1997 Beginning on March 31, 1997 2.75 to 1 and ending on June 29, 1997 Beginning on June 30, 1997 2.50 to 1 and ending on August 30, 1997 Beginning on August 31, 1997 2.25 to 1 and ending on March 30, 1998 Beginning on March 31, 1998 2.00 to 1 and ending on June 29, 1998 Beginning on June 30, 1998 1.90 to 1 and ending on August 30, 1998 Beginning on August 31, 1998 1.75 to 1 and ending on October 30, 1998 On and after October 31, 1998 1.20 to 1 December 18, 1995 Page 9 5. AMENDMENTS TO DEFINITIONS. a. The definition of Eurocurrency Interest Period shall be supplemented, such that paragraph (ii) thereof, addressing the alternatives available for the length of an interest period, shall be amended in its entirety to read as follows: "(ii) Each Eurocurrency Interest Period shall be one, two, three or six calendar months in length, or be of such other length (which, with respect to the Sterling Revolver Loans, may be one week in length) as either the Agent or the Sterling Revolver Lender, as the case may be, may mutually agree." b. The definitions contained in Exhibit "A" to the Credit Agreement shall be supplemented with the following definitions: "HEADQUARTERS LEASE FINANCING" means lease financing transactions (including the guaranty of such transactions by VLH) pursuant to which certain members of the Vari-Lite Corporate Group lease as lessee (a) certain unimproved real property in Dallas County, Texas which is acquired by the lessor of such real property for an approximate cost of $3,500,000 and (b) certain improvements to be constructed on the real property referenced in clause (a) of this definition for an aggregate cost not in excess of $14,000,000. "STERLING REVOLVER LOANS" shall mean the Revolver Loans of the Sterling Revolver Lender pursuant to SECTION 2.3(a) hereof. 6. AMENDMENT TO NEGATIVE COVENANTS. Article 11 of the Credit Agreement shall be, and hereby is, supplemented by adding a new Section 11.13 as follows: 11.13 LEASE OBLIGATIONS. VLH will not, and will not permit any of its Subsidiaries to, enter into transactions for the lease by VLH or any of its Subsidiaries as lessee of any real or personal property other than (a) capitalized leases (which are subject to Section 11.2 hereof), (b) the Headquarters Lease Financing; provided, that the members of the Vari-Lite Corporate Group shall not incur any obligations described in clause (b) of the definition of Headquarters Lease Financing until VLH completes an initial public offering of its common stock, and (c) other leases; provided, that members of the Vari-Lite Corporate Group shall not enter into leases pursuant to this clause (c) in any fiscal year which result in an increase of more than $1,000,000 in the annual aggregate obligations for rentals and other payments due under all leases to which members of the Vari-Lite Corporate Group are parties (other than Capital Lease Payments and obligations under the Headquarters Lease Financing) over the aggregate annual obligations for rentals and other payments due under such leases during the immediately preceding fiscal year. December 18, 1995 Page 10 7. CONDITIONS PRECEDENT. Each of the modifications and amendments set forth herein is subject to the satisfaction of each of the following conditions precedent: a. Each Dollar Revolver Lender shall have received a modification and renewal Revolver Note jointly and severally executed and delivered by Showco and VLI which shall be (i) dated the date hereof; (ii) in the principal amount of such Dollar Revolver Lender's PRO RATA Percentage of the Dollar Revolver Commitment as increased in this Amendment No. 5; (iii) be substantially in the form of EXHIBIT 1 to this Amendment No. 5 with the blanks appropriately filled; (iv) payable to the order of such Dollar Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each Dollar Revolver Lender of the modification and renewal Revolver Note to be delivered to it pursuant to this Section 7.a., such Dollar Revolver Lender shall return to VLI (for the benefit of VLI and Showco) the Revolver Note presently held by such Dollar Revolver Lender evidencing such Dollar Revolver Lender's PRO RATA Percentage of the Dollar Revolver Commitment prior to giving effect to this Amendment No. 5, duly marked "Replaced." b. The Sterling Revolver Lender shall have received a modification and renewal of the Sterling Revolver Note jointly and severally executed and delivered by each of the Sterling Borrowers which shall be (i) dated the date hereof; (ii) in the principal amount of such Sterling Revolver Commitment as increased in this Amendment No. 5; (iii) be substantially in the form of EXHIBIT 2 to this Amendment No. 5 with the blanks appropriately filled; (iv) payable to the order of such Sterling Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by the Sterling Revolver Lender of the modification and renewal Sterling Revolver Note to be delivered to it pursuant to this Section 7.b., the Sterling Revolver Lender shall return to VLI (for the benefit of the Sterling Revolver Borrowers) the Sterling Revolver Note presently held by the Sterling Revolver Lender evidencing such Sterling Revolver Commitment prior to giving effect to this Amendment No. 5, duly marked "Replaced." c. The Agent shall have received an Officer's Certificate for each of VLI, Showco and the Sterling Borrowers certifying to resolutions of their respective Boards of Directors approving and authorizing the increase in the Dollar Revolver Commitment and the Sterling Revolver Commitment, as the case may be, contemplated by Sections 1 and 2 of this Amendment No. 5 and the execution, delivery and performance of this Amendment No. 5 and the new Revolver Notes to be executed and delivered pursuant to Sections 7.a. and 7.b. of this Amendment No. 5. d. The Agent shall have received a favorable opinion of Gardere & Wynne, L.L.P., U.S. counsel to the Vari-Lite Corporate Group, addressing such matters as the Agent may reasonably request. December 18, 1995 Page 11 e. The Agent shall have received a favorable opinion of Baker & McKenzie, English counsel to the Vari-Lite Corporate Group, addressing such matters as the Agent may reasonably request. f. The Agent shall have received such other documents as it may reasonably request. g. The Borrowers shall have paid to the Agent for the account of each Lender an amendment fee which shall be distributed by the Agent to the Dollar Revolver Lenders in accordance with the following table: Lender Amendment Fee ------ ------------- BBH $ 8,890 Comerica $ 8,890 Coutts L15,000 NBD $13,330 Trust Co. $ 8,890 The fees described in this Section represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the Borrowers to pay such fees shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in the Agreement, and expenses described in the Agreement. All such fees shall be part of the Obligations and shall be nonrefundable. 8. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 5, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in Article 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 5 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to Section 9.2 of the Credit Agreement. December 18, 1995 Page 12 d. Each of the Borrowers and Guarantors executing this Amendment No. 5 is duly authorized and empowered to execute this Amendment No. 5, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 9. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor, after giving effect to the amendments set forth herein, hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Dollar Revolver Commitment, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Dollar Revolver Commitment as increased pursuant to Section 1 hereof and the Sterling Revolver Commitment increased by Section 2 hereof, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 10. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 5, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. 11. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 5 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 12. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 5 and all other Loan Documents executed in connection herewith. 13. GOVERNING LAW. THIS AMENDMENT NO. 5 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 14. COUNTERPARTS. This Amendment No. 5 shall become effective as of the date first written above when a counterpart of this Amendment No. 5 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same December 18, 1995 Page 13 counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 15. COMPLETE AGREEMENT. THIS AMENDMENT NO. 5, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 5 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 5 in the space indicated below. [signature pages to follow] December 18, 1995 Page 14 Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President SHOWCO, INC. By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President - Finance VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director December 18, 1995 Page 15 THEATRE PROJECTS LIGHTING SERVICES LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director BRILLIANT STAGES LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director GUARANTORS: VARI-LITE HOLDINGS, INC. (to be known as Vari-Lite International, Inc.) By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III Director December 18, 1995 Page 16 SHOWCO CREATIVE SERVICES, INC. (to be known as Ignition! Creative Group, Inc.) By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman Vice President - Finance IRIDEON, INC. By: /s/ H.R. Brutsche IIII ------------------------------------ s H.R. Brutsche III President CONCERT PRODUCTION LIGHTING, INC. By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche III President ACKNOWLEDGED AND AGREED as of the 18th day of December, 1995 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan -------------------------------- W. Carter Sullivan Manager December 18, 1995 Page 17 LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ------------------------------- W. Carter Sullivan Manager COUTTS & CO. By: /s/ A. D. Hills ------------------------------- Name: A. D. Hills Title: Manager NBD BANK By: /s/ Jon P. Dady ------------------------------- Name: Jon P. Dady Title: Vice President SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ Jennifer L. McClure ------------------------------- Name: Jennifer L. McClure Title: Banking Officer By: /s/ F. McClellan Deaver, III ------------------------------- Name: F. McClellan Deaver, III Title: Vice President COMERICA BANK-TEXAS By: /s/ David Terry ------------------------------- Name: David Terry Title: Corporate Banking Officer EX-10.30 22 EXHIBIT 10.30 [Amendment No. 6] May 20, 1996 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R OQS Attn: A.D. Hills NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Thomas A. Levasseur SunTrust Bank, Atlanta 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: Jennifer L. McClure Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David B. Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite International, Inc. ("VLH"), Vari-Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank (the name of which is now SunTrust Bank, Atlanta) ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, the Guarantors, the Lenders and the Agent, (b) that certain letter agreement dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Ignition! Creative Group, Inc. ("ICG") and Irideon, Inc. ("IRIDEON") (VLH, VLEH, ICG and Irideon are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, (c) that certain letter agreement May 20, 1996 Page 2 dated February 22, 1995 marked "[Amendment No. 3]" among the Borrowers, the Guarantors, the Lenders and the Agent, (d) that certain letter agreement dated November 22, 1995 marked "[Amendment No. 4]" among the Borrowers, the Guarantors, the Lenders and the Agent and (e) that certain letter agreement dated December 18, 1995 marked "[Amendment No. 5]" among the Borrowers, the Guarantors, the Lenders and the Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, the Borrowers and Guarantors have requested that (a) the Dollar Revolver Commitment be amended to allow Borrowings in Yen with a sublimit of $6,000,000 and (b) Section 2.6(a) of the Credit Agreement be amended to eliminate the requirement that FX Obligations have a maturity of no more than one year. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 6") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree, subject to the satisfaction of each condition precedent set forth in Section 3 of this Amendment No. 6, to the following: 1. AMENDMENTS TO DOLLAR REVOLVER COMMITMENT. a. DEFINITIONS. I. All references to the term "Dollar Revolver" in the Credit Agreement and the other Loan Documents shall be replaced by the term "Multicurrency Revolver", and in particular (without limitation) each of the following definitions in Exhibit A to the Credit Agreement shall be amended to reflect such change in nomenclature, as follows: Original definitions: "DOLLAR REVOLVER" means the revolving credit facilities available to VLI and Showco pursuant to the Dollar Revolver Commitment. "DOLLAR REVOLVER COMMITMENT" has the meaning specified in SECTION 2.1(a). "DOLLAR REVOLVER LENDERS" means BBH, Comerica, NBD and Trust Co. and their respective successors and assigns. "DOLLAR REVOLVER LOANS" shall mean the Revolver Loans of the Dollar Revolver Lenders pursuant to SECTION 2.1(a) hereof. May 20, 1996 Page 3 Amended Definitions: "MULTICURRENCY REVOLVER" means the revolving credit facilities available to VLI and Showco pursuant to the Multicurrency Revolver Commitment. "MULTICURRENCY REVOLVER COMMITMENT" has the meaning specified in SECTION 2.1(a). "MULTICURRENCY REVOLVER LENDERS" means BBH, Comerica, NBD and Trust Co. and their respective successors and assigns. "MULTICURRENCY REVOLVER LOANS" shall mean the Revolver Loans of the Multicurrency Revolver Lenders pursuant to SECTION 2.1(a) hereof. ii. The following definitions shall be added to Exhibit A: "EUROYEN INTEREST PERIOD" shall mean the period of time for which the Euroyen TIBOR Rate shall be in effect as to any Multicurrency Revolver Loan denominated in Yen, commencing with the date of the Borrowing, if applicable, or the expiration date of the immediately preceding Euroyen Interest Period and ending on the effective date of any rate change or rate continuation made as provided in SECTION 4.4 as a Borrower may specify in a Notice of Continuation/Conversion, subject, however, to the early termination provisions provided herein; PROVIDED, HOWEVER, that (i) any Euroyen Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Euroyen Interest Period shall end on the next preceding Business Day, (ii) each Euroyen Interest Period shall be ninety (90) days in length, or be of such other length as the Borrower and Agent may mutually agree; (iii) a Euroyen Interest Period may not be selected for any Loan if such period would terminate later than the Maturity Date; and (iv) a Euroyen Interest Period may not be selected for any Loan if such period would terminate beyond a date on which a scheduled payment of principal on such Loan is required. "EUROYEN TIBOR RATE" shall mean, with respect to any Euroyen Interest Period, the rate for Euroyen for a period comparable to the relevant Euroyen Interest Period which appears as the "Euro Yen TIBOR" rate on the Bloomberg Financial Markets service at TIBOEY ("Index" key) or, if the Bloomberg service is unavailable, the rate which appears on the Reuters Screen "TIJPY=" Page, each as of 10:00 a.m. New York time two (2) Business Days (which shall also be Business Days in London and Tokyo) preceding the first day of the relevant Euroyen Interest Period. b. Section 2.1(a) of the Credit Agreement shall be, and is hereby amended to read in full as follows: "2.1 MULTICURRENCY REVOLVER LOANS. (a) MULTICURRENCY REVOLVER COMMITMENT. May 20, 1996 Page 4 Upon the terms and conditions and relying upon the representations and warranties herein set forth, each Multicurrency Revolver Lender severally and not jointly agrees to make Multicurrency Revolver Loans, in Dollars or in Yen, to VLI (each, a "VLI REVOLVER LOAN") and to Showco (each, a "SHOWCO REVOLVER LOAN"), on any one or more Business Days prior to the Maturity Date in an amount not to exceed such Lender's PRO RATA Percentage of the Dollar Equivalent of THIRTEEN MILLION DOLLARS ($13,000,000) (such amount, as it may be reduced from time to time pursuant to SECTION 6.5, being the "MULTICURRENCY REVOLVER COMMITMENT") in the manner provided in SECTION 3.2; PROVIDED that the aggregate amount of VLI Revolver Loans and Showco Revolver Loans outstanding from the Multicurrency Revolver Lenders at any time shall not exceed the Multicurrency Revolver Commitment, and PROVIDED, FURTHER, that the aggregate outstanding Dollar Equivalent of VLI Revolver Loans and Showco Revolver Loans denominated in Yen shall not exceed SIX MILLION DOLLARS ($6,000,000) (the "MULTICURRENCY REVOLVER SUBLIMIT"). Within such limits and during such period and subject to the terms and conditions of this Agreement, VLI and Showco may borrow, repay and reborrow hereunder." c. Section 3.1(a) of the Credit Agreement shall be, and is hereby amended to read in full as follows: "3.1 NOTICE OF REVOLVER BORROWING AND REPAYMENT. (a) When VLI or Showco desires to borrow pursuant to SECTION 2.1(a), VLI or Showco, as the case may be, shall deliver to the Agent a notice thereof, either telephonically or in writing, no later than 10:00 a.m. (New York time) (i) in the case of Multicurrency Revolver Loans denominated in Yen, on the third Business Day immediately preceding the proposed Borrowing Date or (ii) in the case of Multicurrency Revolver Loans denominated in Dollars, on the Business Day immediately preceding the proposed Borrowing Date, specifying, (w) the proposed Borrowing Date (which shall be a Business Day), (x) the amount and the currency of the proposed Borrowing (which shall be in an aggregate amount of not less than $100,000, and increments thereof, or, if advanced in Yen, in an amount of Yen having a Dollar Equivalent, on the Borrowing Date, substantially equal to $500,000, and increments thereof), (y) the availability remaining under the Multicurrency Revolver Commitment (before such Borrowing is accounted for), and (z) instructions for the disbursement of the proceeds of the Borrowing. Any written notice shall be in the form of EXHIBIT 3.1 attached hereto (a "NOTICE OF REVOLVER BORROWING"), and any telephonic notice shall be promptly followed by Showco's or VLI's (as the case may be) delivery to Agent of a Notice of Revolver Borrowing. Any telephone notice shall be deemed a representation and warranty by Showco (or VLI as the case may be) of the accuracy of the information which should be contained in a Notice of Revolver Borrowing. Any written Notice of Revolver Borrowing may be delivered by facsimile. The Agent shall not incur liability to the Borrowers or other Lenders in acting upon any telephonic or facsimile notice which the Agent believes in good faith to have been given by VLI or Showco, or for otherwise acting in good faith under this SECTION." d. Section 3.2(a) of the Credit Agreement shall be, and is hereby amended to replace the phrase "on the day immediately preceding the proposed Borrowing Date" in the first sentence, with May 20, 1996 Page 5 the phrase "(i) in the case of Multicurrency Revolving Loans denominated in Dollars, on the day immediately preceding the proposed Borrowing Date and (ii) in the case of Multicurrency Revolving Loans denominated in Yen, on the third Business Day preceding the proposed Borrowing Date". e. Section 5.2 of the Credit Agreement shall be, and is hereby amended to read in full as follows: "5.2. INTEREST ON REVOLVER LOANS. (a) The Multicurrency Revolver Loans denominated in Dollars shall bear interest on the unpaid principal amount thereof from time to time outstanding at an interest rate equal to the lesser of (a) Agent's Base Rate, PLUS one percent (1.0%) or (b) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date. (b) The Sterling Revolver Loans shall bear interest on the unpaid principal amount thereof from time to time outstanding at an interest rate equal to the lesser of (a) LIBOR, PLUS two percent (2.0%) or (b) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date. (c) The Multicurrency Revolver Loans denominated in Yen shall bear interest on the unpaid principal amount thereof from time to time outstanding at an interest rate equal to the lesser of (i) the Euroyen TIBOR Rate, PLUS three and one-half percent (3.5%) or (ii) the Highest Lawful Rate. Interest shall be payable on each Interest Payment Date, in arrears, and on the Maturity Date." f. Section 6.5 of the Credit Agreement shall be, and hereby is, amended and supplemented by (a) changing the heading to read "REDUCTION AND PREPAYMENT OF REVOLVING COMMITMENTS," (b) lettering the existing paragraph in Section 6.5 as "(a)", (c) re-lettering the existing clauses "(a)" and "(b)" as "(i)" and "(ii)," and adding the phrase "the Dollar Equivalent of" before the figure "$200,000" in the clause currently lettered "(a)" and (d) adding new paragraphs "(b)" and "(c)" as follows: "(b) If the Agent determines that, as a result of fluctuations in exchange rates, the Dollar Equivalent of the outstanding principal amount of Multicurrency Revolver Loans denominated in Yen ever exceeds 100% of the Multicurrency Revolver Sublimit (a "SUBLIMIT EXCESS"), the Agent shall provide notice thereof to VLI and to Showco, and VLI and Showco shall make a mandatory principal prepayment, subject to Section 14.16(b), in Yen, of the amount of such excess within sixty (60) days after notice from Agent requesting such prepayment. Any Multicurrency Revolver Lender may request at any time that the Agent determine the Dollar Equivalent of the principal amount of all outstanding Multicurrency Revolver Loans denominated in Yen for the purposes of evaluating the need for prepayment under this SUBSECTION. If a Sublimit Excess exists, Borrower may make a request to the Agent that the Lenders enter into an amendment to the Loan Documents to increase the amount of the Multicurrency Revolver Sublimit. Lenders may elect to enter into such an amendment in their sole discretion. May 20, 1996 Page 6 (c) If, on any day, the sum of the aggregate outstanding and unpaid principal balance of the Multicurrency Revolver Loans exceeds the Multicurrency Revolver Commitment, then Borrowers shall pay such excess to the Agent, for the benefit of Lenders, in immediately available funds, no later than three (3) Business Days after notice of such circumstance is given to Borrowers by Agent." 2. AMENDMENT TO FX FACILITY. Section 2.6(a) of the Credit Agreement shall be, and is hereby amended to delete the words "of up to one year maximum maturity" in the first sentence. 3. CONDITIONS PRECEDENT. Each of the modifications and amendments set forth herein is subject to the satisfaction of each of the following conditions precedent: a. Each Multicurrency Revolver Lender shall have received a modification and renewal Revolver Note jointly and severally executed and delivered by Showco and VLI which shall be (i) dated the date hereof; (ii) in the principal amount of such Multicurrency Revolver Lender's PRO RATA Percentage of the Multicurrency Revolver Commitment; (iii) be substantially in the form of EXHIBIT 1 to this Amendment No. 6 with the blanks appropriately filled; (iv) payable to the order of such Multicurrency Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each Multicurrency Revolver Lender of the modification and renewal Revolver Note to be delivered to it pursuant to this Section 3.a., such Multicurrency Revolver Lender shall return to VLI (for the benefit of VLI and Showco) the Revolver Note presently held by such Multicurrency Revolver Lender evidencing such Multicurrency Revolver Lender's PRO RATA Percentage of the Multicurrency Revolver Commitment prior to giving effect to this Amendment No. 6, duly marked "Replaced." b. The Agent shall have received such other documents as it may reasonably request. c. The Borrowers shall have paid to the Agent for the account of each Lender an amendment fee which shall be distributed by the Agent to the Multicurrency Revolver Lenders in accordance with the following table: Lender Amendment Fee ------ ------------- BBH $6,000 NBD $6,000 Comerica $4,000 Trust Co. $4,000 The fees described in this Section represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the Borrowers to pay such fees shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in the Agreement, and expenses described in the Agreement. All such fees shall be part of the Obligations and shall be nonrefundable. May 20, 1996 Page 7 d. The Borrowers and Guarantors shall pay, at closing, all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 6, and all previously-invoiced fees, costs, and expenses. 4. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 6, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in Article 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 6 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to Section 9.2 of the Credit Agreement. d. Each of the Borrowers and Guarantors executing this Amendment No. 6 is duly authorized and empowered to execute this Amendment No. 6, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 5. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor, after giving effect to the amendments set forth herein, hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Multicurrency Revolver Commitment, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Multicurrency Revolver Commitment as redefined herein, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 6. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 6, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. 7. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 6 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. May 20, 1996 Page 8 8. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 6 and all other Loan Documents executed in connection herewith. 9. GOVERNING LAW. THIS AMENDMENT NO. 6 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 10. COUNTERPARTS. This Amendment No. 6 shall become effective as of the date first written above when a counterpart of this Amendment No. 6 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 11. COMPLETE AGREEMENT. THIS AMENDMENT NO. 6, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 6 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 6 in the space indicated below. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE(S) FOLLOW. Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Burtsche III ------------------------------------- H.R. Brutsche III President SHOWCO, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President - Finance VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III Director THEATRE PROJECTS LIGHTING SERVICES LIMITED By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III Director BRILLIANT STAGES LIMITED By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III Director Amendment No. 6 Signature Page GUARANTORS: VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III Director IGNITION! CREATIVE GROUP, INC. By: /s/ Michael P. Herman ------------------------------------- Michael P. Herman Vice President - Finance IRIDEON, INC. By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III President CONCERT PRODUCTION LIGHTING, INC. By: /s/ H.R. Brutsche III ------------------------------------- H.R. Brutsche III President ACKNOWLEDGED AND AGREED as of the 20th day of May, 1996 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ----------------------------- W. Carter Sullivan Senior Manager Amendment No. 6 Signature Page LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ----------------------------------- W. Carter Sullivan Senior Manager COUTTS & CO. By: /s/ A.D. Hills ----------------------------------- Name: A.D. Hills Title: Manager NBD BANK By: /s/ Thomas A. Lavasseur ----------------------------------- Name: Thomas A. Lavasseur Title: Vice President SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ John A. Fields Jr. ----------------------------------- Name: John A. Fields Jr. Title: Vice President By: /s/ Jeffrey A. Howard ----------------------------------- Name: Jeffrey A. Howard Title: Corporate Banking Officer COMERICA BANK-TEXAS By: /s/ David Terry ----------------------------------- Name: David Terry Title: Corporate Banking Officer Amendment No. 6 Signature Page EX-10.31 23 EXHIBIT 10.31 [Amendment No. 7] July 31, 1996 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R 0QS Attn: A.D. Hills NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Thomas A. Levasseur SunTrust Bank, Atlanta 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: Jennifer L. McClure Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David B. Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite International, Inc. ("VLH"), Vari-Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank (the name of which is now SunTrust Bank, Atlanta) ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, VLH and VLEH, as guarantors, the Lenders and the Agent, (b) that certain letter agreement July 31, 1996 Page 2 dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Ignition! Creative Group, Inc. ("ICG") and Irideon, Inc. ("IRIDEON") (VLH, VLEH, ICG and Irideon are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, (c) that certain letter agreement dated February 22, 1995 marked "[Amendment No. 3]" among the Borrowers, the Guarantors, the Lenders and the Agent, (d) that certain letter agreement dated November 22, 1995 marked "[Amendment No. 4]" among the Borrowers, the Guarantors, the Lenders and the Agent, (e) that certain letter agreement dated December 18, 1995 marked "[Amendment No. 5]" among the Borrowers, the Guarantors, the Lenders and the Agent, and (f) that certain letter agreement dated May 20, 1996 marked "[Amendment No. 6]" among the Borrowers, the Guarantors, the Lenders and the Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, the Borrowers and Guarantors have requested that, among other things, (a) the Multicurrency Revolver Commitment be increased to $23,000,000, (b) the VLI Term Loan be increased to $20,500,000, (c) the amortization of each of the Term Loans be modified and extended, (d) the Maturity Date be extended, (e) the prepayment penalty with respect to the Term Loans be modified, (f) the restriction on Debt incurred by the Borrowers to finance the purchase or lease of fixed or capital amounts be increased, (g) the restrictions on dividends and distributions be modified, (h) the limit on capital expenditures by Showco be increased, and (i) that Irideon Limited, an English limited liability company ("IRIDEON (UK)"), a newly formed subsidiary of VLEH, be added as a Sterling Borrower and that the assets and stock of Irideon (UK) be pledged to secure the obligations of the Sterling Borrowers and VLA under the Credit Agreement. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 7") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, including the issuance of the Lender Warrants (as hereinafter defined), the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree, subject to the satisfaction of each of the conditions precedent set forth in Section 12 of this Amendment No. 7, to the following: 1. AMENDMENTS TO DEFINITIONS. a. The following definitions contained in Exhibit "A" to the Credit Agreement shall be, and are hereby amended effective the date hereof to read in full as follows: July 31, 1996 Page 3 "GUARANTIES" means, collectively, the VLH Guaranty, the VLEH Guaranty, the VLI Guaranty, the Showco Guaranty, the VLE Guaranty, the Brilliant Stages Guaranty, the Theatre Projects Guaranty, the VLA Guaranty, the SCSI Guaranty, the Irideon Guaranty and the Irideon (UK) Guaranty. "MATURITY DATE" means June 30, 2001, or such earlier date as the Obligation shall become due through acceleration. "SECURITY AGREEMENTS" means, collectively, the VLH Security Agreement, the VLI Security Agreement, the Showco Security Agreement, the VLEH Security Documents, the VLA Agreement on Bank Transactions, the VLA Security Agreement, the VLE Security Documents, the P&T Collateral Assignments, the Pledge Agreement, the SCSI Security Agreement, the Irideon Security Agreement and the Irideon (UK) Security Agreement, as any of the foregoing may be amended or supplemented from time to time. "STERLING BORROWERS" means VLE, Theatre Projects, Brilliant Stages and Irideon (UK). "TANGIBLE NET WORTH" means, as of any date, the total shareholders' equity at stated value, additional paid-in capital and retained earnings (less any treasury stock), which would appear on a consolidated balance sheet of the Vari-Lite Corporate Group as of such date in accordance with GAAP; PROVIDED, HOWEVER, that the following values shall be excluded from any calculation of Tangible Net Worth: (i) deferred charges, (ii) excess cost over book of any business acquired, including the Vari-Lite U.K. Assets, (iii) goodwill, (iv) patents, (v) trademarks, (vi) copyrights and (vii) capitalized legal expenses. "VLEH PLEDGE AGREEMENT" means a stock pledge agreement in form and substance reasonably satisfactory to Agent, pursuant to which VLEH grants to Lenders a first priority security interest in and pledges to Lenders one hundred percent (100%) of the capital stock of VLE, one hundred percent (100%) of the capital stock of Theatre Projects, one hundred percent (100%) of the capital stock of Brilliant Stages and one hundred percent (100%) of the capital stock of Irideon (UK), to secure the obligations of VLEH under the VLEH Guaranty. "WARRANT PAYMENT" means the payment by VLH of the purchase price for the Chrysler Warrant pursuant to VLH's obligation to repurchase such Warrant contained in Section 14 of the Warrant Certificate, which payment may only be made in the form of the Subordinated Warrant Note if the purchase price therefor is in excess of US$260,000. b. The definitions contained in Exhibit "A" to the Credit Agreement shall be supplemented effective the date hereof with the following definitions: July 31, 1996 Page 4 "FISCAL YEAR" means the annual period commencing on October 1 and ending on September 30. "IRIDEON (UK)" means Irideon Limited, an English limited liability company, and a wholly-owned subsidiary of VLEH. "IRIDEON (UK) Guaranty" means the Guaranty dated as of July 31, 1996 made by Irideon (UK) in favor of certain Lenders. "IRIDEON (UK) SECURITY DOCUMENTS" means one or more agreements in form and substance reasonably satisfactory to Agent and Coutts, pursuant to which Irideon (UK) grants to Lenders a first priority security interest in and to the assets of Irideon (UK), to secure the obligations of the Sterling Borrowers. "LENDER WARRANT AGREEMENT" means the Warrant Agreement dated as of July 31, 1996 by and between VLH and the Lender Warrant Holders pursuant to which the Lender Warrant Holders have subscribed for, and VLH has issued, Lender Warrants. "LENDER WARRANT HOLDERS" means BBH, Comerica, NBD and Trust Co., and "Lender Warrant Holder" means any one of the Lender Warrant Holders. "LENDER WARRANTS" means the Warrants for shares of Class B non-voting common stock of VLH issued to the Lender Warrant Holders pursuant to the Lender Warrant Agreement. "TOTAL DEBT" means, without duplication, the sum of (a) Debt PLUS (b) the unpaid principal amount of the Loan (as defined in the Credit Agreement for the Headquarters Lease Financing), LESS (c) the Debt contemplated by Section 11.2(e) representing advances by distributors and subdistributors for products leased by such distributors. 2. INCREASE IN MULTICURRENCY REVOLVER COMMITMENT. a. The Multicurrency Revolver Commitment (as such term is defined in Section 2.1(a) of the Credit Agreement) shall be increased effective the date hereof to $23,000,000. b. The Commitment of each Multicurrency Revolver Lender to make Multicurrency Revolver Loans (as set forth opposite each of the Multicurrency Revolver Lender's names on the signature page to the Credit Agreement) shall be increased effective the date hereof to the amount set forth opposite such Multicurrency Revolver Lender's name below: July 31, 1996 Page 5 Multicurrency Revolver Lender Multicurrency Revolver Commitment ----------------------------- --------------------------------- BBH $5,111,000 Comerica $5,111,000 NBD $7,667,000 Trust Co. $5,111,000 3. INCREASE IN VLI TERM LOAN. a. The VLI Term Loan (as such term is defined in Section 2.2(a) of the Credit Agreement) shall be increased effective the date hereof to $20,500,000. b. The Commitment of each VLI Term Lender with respect to the VLI Term Loan (as set forth opposite such VLI Term Lender's name on the signature page to the Credit Agreement) shall be increased effective the date hereof to the amount set forth opposite such VLI Term Lender's name below: VLI Term Lender VLI Term Commitment --------------- ------------------- BBH $4,555,250 Comerica $4,555,250 NBD $6,834,250 Trust Co. $4,555,250 c. Upon Borrowers' satisfaction of each of the conditions precedent set forth in Section 12 of this Amendment No. 7, the VLI Term Lenders severally and not jointly agree to advance to VLI the unfunded amount of such Lender's VLI Term Commitment, in the manner specified in Section 4.2 of the Credit Agreement. No VLI Term Lender shall be responsible for any failure by any other VLI Term Lender to perform its obligations to fund its PRO RATA Percentage of the unfunded amount of the VLI Term Loan. 4. MODIFICATION OF REPAYMENT TERMS. Section 6.1 of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: 6.1. REPAYMENT OF TERM LOANS. (a) Principal payments on the VLI Term Loan shall begin on the fifth Quarterly Payment Date following the Closing Date and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule (for purposes of this Agreement, March 31, 1994 shall not be considered a Quarterly Payment Date): July 31, 1996 Page 6 Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates $ 0 Fifth through Ninth Quarterly Payment Dates $ 700,000.00 Tenth through Thirteenth Quarterly Payment Dates $ 500,000.00 Fourteenth through Twenty Eighth Quarterly Payment Dates $ 750,000.00 Maturity Date $7,250,000.00 (b) Principal payments on the Sterling Term Loan shall begin on the fifth Quarterly Payment Date following the Closing Date and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule (for purposes of this Agreement, March 31, 1994 shall not be considered a Quarterly Payment Date): Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates L 0 Fifth through Ninth Quarterly Payment Dates L 260,000.00 Tenth through Twenty Eighth Quarterly Payment Dates L 175,000.00 Maturity Date L 575,000.00 July 31, 1996 Page 7 (c) Principal payments on the VLA Term Loan shall begin on the fifth Quarterly Payment Date following the Closing Date and shall continue on each subsequent Quarterly Payment Date until the Maturity Date (or until sooner repaid), according to the following amortization schedule (for purposes of this Agreement, March 31, 1994 shall not be considered a Quarterly Payment Date): Scheduled Payment Amount ----------------- ------ First through Fourth Quarterly Payment Dates Y 0 Fifth through Ninth Quarterly Payment Dates Y 10,000,000.00 Tenth through Twenty Eighth Quarterly Payment Dates Y 7,000,000.00 Maturity Date Y 17,000,000.00 5. MODIFICATION OF PREPAYMENT FEE. Section 6.3 of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: 6.3. PREPAYMENT FEE. In addition to any amounts payable pursuant to SECTION 4.4(f), the Borrowers shall pay to the Agent, for the benefit of each Term Lender and in accordance with its PRO RATA Percentage of the Term Loans, a fee of (a) one-half of one percent (.50%) of the prepaid amount for any Term Loan prepaid at any time during the period commencing on the Closing Date and ending on March 31, 1997, and (b) one-quarter of one percent (.25%) of the prepaid amount for any Term Loan prepaid at any time during the period commencing on April 1, 1997 and ending on March 31, 1998. There shall be no prepayment fee on any prepayment of the Term Loans made on or after April 1, 1998. 6. AMENDMENT TO FINANCIAL MAINTENANCE COVENANTS. Article 10 of the Credit Agreement shall be, and is hereby amended effective the date hereof (with the exception that the amendment to Section 10.3 shall not be effective until September 30, 1996), to read in full as follows: 10.1. Minimum Fixed Charge Coverage Ratio. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBITDA to (ii) Fixed Charges (excluding the non-cash interest expense related to the amortization of the discount resulting from the issuance of the July 31, 1996 Page 8 Lender Warrants), on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: Period Ratio ------ ----- Beginning on June 30, 1996 1.80 to 1 and ending on October 30, 1996 Beginning on October 31, 1996 2.00 to 1 and ending on April 29, 1997 Beginning on April 30, 1997 2.50 to 1 and ending on October 30, 1997 Beginning on October 31, 1997 2.75 to 1 and ending on April 29, 1999 Beginning on April 30, 1999 3.00 to 1 and ending on June 29, 2000 Beginning on June 30, 2000 3.25 to 1 and ending on March 30, 2001 On and after March 31, 2001 3.50 to 1 10.2. EARNINGS RATIO. VLH shall not permit, for the twelve-month period ending on the date of the calculation thereof, its ratio of (i) EBIT to (ii) Interest Expense (excluding the non-cash interest expense related to the amortization of the discount resulting from the issuance of the Lender Warrants), on a consolidated basis, to be less than the ratio indicated below at all times during the period set forth below: Period Ratio ------ Beginning on June 30, 1996 1.80 to 1 and ending on October 30, 1996 Beginning on October 31, 1996 2.25 to 1 and ending on March 30, 1998 Beginning on March 31, 1998 2.50 to 1 and ending on April 29, 1999 July 31, 1996 Page 9 Beginning on April 30, 1999 3.00 to 1 and ending on June 29, 2000 Beginning on June 30, 2000 3.50 to 1 and ending on March 30, 2001 On and after March 31, 2001 4.00 to 1 10.3. TANGIBLE NET WORTH. VLH shall not permit its Tangible Net Worth, on a consolidated basis, at any time during each Fiscal Year, commencing with the Fiscal Year ending September 30, 1996, to be less than the sum of (a) $16,500,000, plus (b) sixty percent (60%) of the consolidated Net Income of VLH (with no reduction for losses) for each subsequent Fiscal Year, commencing with the Fiscal Year ending September 30, 1997, plus (c) sixty percent (60%) of the net proceeds received by VLH from any public offering of its common stock. 10.4. LEVERAGE RATIO. VLH shall not permit its ratio of (i) Liabilities to (ii) Tangible Net Worth, on a consolidated basis, to be greater than the ratio indicated below at any time during the period set forth below: Period Ratio ------ ----- Beginning on June 30, 1996 3.60 to 1 and ending on October 30, 1998 Beginning on October 31, 1998 3.00 to 1 and ending on July 30, 1999 Beginning on July 31, 1999 2.50 to 1 and ending on October 30, 2000 On and after October 31, 2000 2.00 to 1 10.5. BOOK VALUE. VLH shall not permit at any time (i) its ratio of (A) the book value of the Equipment and Inventory of the Vari-Lite Corporate Group located in the United States to (B) the outstanding principal indebtedness plus accrued and unpaid interest of VLI and Showco hereunder, on a consolidated basis, to be less than (x) 0.75:1.0 at any time from the date hereof to and including October 30, 1999, and (y) 1.0:1.0 at any time on or after October 31, 1999; or July 31, 1996 Page 10 (ii) its ratio of (A) the book value of the Equipment and Inventory of the Vari-Lite Corporate Group wherever located in the United States, England and Japan to (B) the outstanding principal indebtedness and accrued plus unpaid interest of all members of the Vari-Lite Corporate Group hereunder, on a consolidated basis, to be less than (x) 1.25:1.0 at any time from the date hereof to and including October 30, 1999, and (y) 1.75:1.0 at any time on or after October 31, 1999. In computing compliance with this SECTION 10.5, the book value of any Equipment which is leased pursuant to the leases described in EXHIBIT 10.5 shall be excluded. 10.6. CAPITAL EXPENDITURE COVERAGE RATIO. VLH shall not permit, for the twelve-month period ending on the date of calculation thereof, its ratio of (i) EBITDA to (ii) Capital Expenditures, on a consolidated basis, to be less than the ratio indicated below at all times during the periods set forth below: Period Ratio ------ ----- Beginning on June 30, 1996 0.90 to 1 and ending on February 27, 1998 Beginning on February 28, 1998 1.00 to 1 and ending on October 30, 1999 Beginning on October 31, 1999 1.25 to 1 and ending on May 30, 2001 On and after May 31, 2001 1.50 to 1 10.7. TOTAL DEBT TO CASH FLOW RATIO. VLH shall not permit its ratio of (i) Total Debt as of the last day of each month during the periods set forth below, to (ii) EBITDA for the 12-month period then ending, on a consolidated basis, to be greater than the ratio indicated below at any time during the periods set forth below: Period Ratio ------ ----- Beginning on June 30, 1996 2.50 to 1 and ending on October 30, 1998 On and after October 31, 1998 2.00 to 1 7. AMENDMENT TO LIMITATION ON DEBT. Section 11.2(d) of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: July 31, 1996 Page 11 (d) Debt incurred upon acquisition or within 90 days thereof to finance the purchase or lease of fixed or capital assets (excluding lighting and sound equipment and other equipment which is typically leased or rented by the Vari-Lite Corporate Group to its customers) up to a maximum aggregate amount for the consolidated Vari-Lite Corporate Group at any one time outstanding of $4,000,000; provided, however, that no greater than $2,000,000 of such Debt may be incurred in any fiscal year. 8. AMENDMENT TO RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS. Section 11.4 of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: 11.4. DIVIDENDS, DISTRIBUTIONS, ETC. VLH will not declare or make any dividend payment or other distribution of Assets, cash, rights, obligations, or securities on account of any shares of any class of capital stock of VLH, or purchase, redeem, or otherwise acquire for value any shares of any class of capital stock of VLH or any warrants, rights, or options to acquire any such shares, now or hereafter outstanding; PROVIDED THAT, so long as no Default or Event of Default is continuing: (a) VLH may pay dividends during each Fiscal Year, commencing with the Fiscal Year ending September 30, 1996, in an aggregate amount not to exceed thirty percent (30%) of the result obtained by subtracting (a) all cash payments made during such period under the Subordinated Warrant Note from (b) consolidated Net Income of VLH for such Fiscal Year; and (b) VLH may (i) repurchase the Chrysler Warrant (A) for cash, to the extent the purchase price does not exceed US$260,000 or, (B) through the issuance of the Subordinated Warrant Note, (ii) repurchase Lender Warrants and Warrant Shares (as defined in the Lender Warrant Agreement) upon the exercise of the right of first refusal granted in favor of VLH in the Lender Warrant Agreement and (iii) repurchase shares of its Class B Common Stock as contemplated by the Buy-Sell Agreements, but, with respect to the shares of the Engineers, only by the issuance of Share Repurchase Notes. 9. AMENDMENT TO CAPITAL EXPENDITURE RESTRICTION. Section 11.7(a) of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: (a) Showco shall not make expenditures for fixed or capital assets during any Fiscal Year in excess of the amount set forth below: Fiscal Year Amount ----------- ------ 1996 $2,000,000 1997 $2,000,000 1998 $3,000,000 July 31, 1996 Page 12 1999 $2,000,000 2000 $2,000,000 2001 $2,000,000 10. AMENDMENT TO EVENTS OF DEFAULT. Section 12.1 of the Credit Agreement shall be, and is hereby amended and supplemented effective the date hereof, by deleting the word "or" at the end of subparagraph (m), amending subparagraph (n) in its entirety, and adding a new subparagraph (o), the latter two of which shall read in full as follows: (n) VLH shall acquire the Chrysler Warrant in a manner other than as permitted by Section 11.4(d); or (o) VLH shall be in breach of any of its representations, warranties, covenants or other obligations under any of the Lender Warrants or the Lender Warrant Agreement, and any such breach shall continue beyond the period of grace, if any, set forth therein. 11. ADDITION OF IRIDEON (UK) AS A STERLING BORROWER. Effective the date hereof, Irideon (UK) shall be, and is hereby, a Sterling Borrower for all purposes. In consideration therefor, Irideon (UK) hereby: (a) Represents and warrants to Lenders that: (i) It is a corporation duly organized, validly existing, and in good standing under the laws of England and is duly qualified or licensed to do business in all jurisdictions where the properties owned or the business transacted by it makes such qualification necessary and where the failure to be so qualified would have a Material Adverse Effect. (ii) It is duly authorized and empowered to execute, deliver and perform its obligations under each Loan Document to which it is a party, and all such corporate action on its part requisite for the due execution, delivery and performance of each Loan Document to which it is a party has been duly and effectively taken. (iii) The execution, delivery and performance by it of each Loan Document to which it is a party and the effectuation of the transactions contemplated by any Loan Document, do not and will not violate any provision of, or result in a default under, its charter documents or by-laws or any material agreement or Governmental Requirement to which it is subject, or result in the creation or imposition of any Lien upon any of its properties, other than those in favor of the Lenders, as contemplated by the Loan Documents. (iv) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and July 31, 1996 Page 13 performance by it of any Loan Document to which it is a party or the effectuation of the transactions contemplated under any Loan Document, except for the filing of certain of the Security Documents. (v) Each Loan Document to which it is a party will constitute, when delivered hereunder, the legal, valid and binding obligation of Irideon (UK) enforceable against Irideon (UK) in accordance with its respective terms, except as such enforceability may be (A) limited by the effect of any Debtor Laws, or (B) subject to the effect of general principles of equity (regardless of whether such enforceability is considered in a proceeding at equity or at law). b. Confirms and agrees that so long as any Obligations of any Borrower remain outstanding or any Lender shall have any Commitment to any Borrower under the Credit Agreement, it shall comply with (a) the affirmative covenants contained in ARTICLE 9 of the Credit Agreement, (b) the negative covenants contained in ARTICLE 11 of the Credit Agreement and (c) any other provisions of the Credit Agreement applicable to the Sterling Borrowers and the Guarantors. 12. CONDITIONS PRECEDENT. Each of the modifications and amendments set forth herein is subject to the satisfaction of each of the following conditions precedent: a. Each Multicurrency Revolver Lender shall have received a modification and renewal Multicurrency Revolver Note jointly and severally executed and delivered by Showco and VLI which shall be (i) dated the date hereof; (ii) in the principal amount of such Multicurrency Revolver Lender's PRO RATA Percentage of the Multicurrency Revolver Commitment as increased in this Amendment No. 7; (iii) substantially in the form of EXHIBIT 1 to this Amendment No. 7 with the blanks appropriately filled; (iv) payable to the order of such Multicurrency Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each Multicurrency Revolver Lender of the modification and renewal Multicurrency Revolver Note to be delivered to it pursuant to this Section 12.a., such Multicurrency Revolver Lender shall return to VLI (for the benefit of VLI and Showco) the Multicurrency Revolver Note presently held by such Multicurrency Revolver Lender evidencing such Multicurrency Revolver Lender's PRO RATA Percentage of the Multicurrency Revolver Commitment prior to giving effect to this Amendment No. 7, duly marked "Replaced." b. Each VLI Term Lender shall have received a modification and renewal of the Term Note executed and delivered by VLI which shall be (i) dated the date hereof; (ii) in the principal amount of such VLI Term Lender's PRO RATA Percentage of the VLI Term Loan as increased in this Amendment No. 7; (iii) substantially in the form of EXHIBIT 2 to this Amendment No. 7 with the blanks appropriately filled; (iv) payable to the order of such VLI Term Lender in full on or before the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each VLI Term Lender of the modification and renewal VLI July 31, 1996 Page 14 Term Note to be delivered to it pursuant to this Section 12.c., the VLI Term Lender shall return to VLI (for the benefit of the VLI Term Borrowers) the VLI Term Note presently held by the VLI Term Lender evidencing such VLI Term Loan prior to giving effect to this Amendment No. 7, duly marked "Replaced." c. The Sterling Revolver Lender shall have received a modification and renewal Sterling Revolver Note jointly and severally executed and delivered by the Sterling Borrowers which shall be (i) dated the date hereof; (ii) in the principal amount of such Sterling Revolver Lender's PRO RATA Percentage of the Sterling Revolver Commitment; (iii) substantially in the form of EXHIBIT 3 to this Amendment No. 7 with the blanks appropriately filled; (iv) payable to the order of such Sterling Revolver Lender on the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by the Sterling Revolver Lender of the modification and renewal Sterling Revolver Note to be delivered to it pursuant to this Section 12.b., the Sterling Revolver Lender shall return to VLH (for the benefit of the Sterling Borrowers) the Sterling Revolver Note presently held by the Sterling Revolver Lender evidencing the Sterling Revolver Lender's PRO RATA Percentage of the Sterling Revolver Commitment prior to giving effect to this Amendment No. 7, duly marked "Replaced." d. Each Sterling Term Lender shall have received a modification and renewal of the Term Note jointly and severally executed and delivered by the Sterling Borrowers which shall be (i) dated the date hereof; (ii) in the principal amount of such Sterling Term Lender's Pro Rata Percentage of the Sterling Term Loan; (iii) substantially in the form of EXHIBIT 4 to this Amendment No. 7 with the blanks appropriately filled; (iv) payable to the order of such Sterling Term Lender in full on or before the Maturity Date; and (v) subject to acceleration upon the occurrence of an Event of Default. Upon receipt by each Sterling Term Lender of the modification and renewal Term Note to be delivered to it pursuant to this Section 12.d., the Sterling Term Lender shall return to VLH (for the benefit of the Sterling Borrowers) the Term Note presently held by the Sterling Term Lenders evidencing such Sterling Term Loan prior to giving effect to this Amendment No. 7, duly marked "Replaced." e. The Agent shall have received an Officer's Certificate for each of VLI and Showco certifying to resolutions of their respective Boards of Directors approving and authorizing the increase in the Multicurrency Revolver Commitment and the VLI Term Loan, as the case may be, contemplated by Sections 12.a. and 12.b. of this Amendment No. 7 and the execution, delivery and performance of this Amendment No. 7 and the new Notes to be executed and delivered pursuant to Sections 12.a. and 12.b. of this Amendment No. 7. f. The Agent shall have received the Security Agreement and other Security Documents, duly executed by Irideon (UK). g. The Agent shall have received an amendment and/or supplement to the VLEH Pledge Agreement which pledges thereunder the stock of Irideon (UK), as well as share July 31, 1996 Page 15 certificate(s) representing one hundred percent (100%) of the issued capital stock of Irideon (UK), which shall also include a signed stock power in blank. h. The Agent shall have received an Officer's Certificate for Irideon (UK) certifying to resolutions of its Board of Directors approving and authorizing it being named as a Sterling Borrower under the Credit Agreement, and its delivery of its respective Security Documents and Guaranty. i. The Agent shall have received an Officer's Certificate for VLEH certifying to resolutions of its Board of Directors approving and authorizing the pledge of the Irideon (UK) stock. j. The Agent shall have received a favorable opinion of Gardere & Wynne, L.L.P., U.S. counsel to the Vari-Lite Corporate Group, addressing such matters as the Agent may reasonably request. k. The Agent shall have received a favorable opinion of Baker & McKenzie, English counsel to the Vari-Lite Corporate Group, addressing such matters as the Agent may reasonably request. l. VLH and the Lender Warrant Holders shall have entered into the Lender Warrant Agreement, and VLH shall have issued to the Lender Warrant Holders their respective Lender Warrants. m. The Agent shall have received such other documents as it may reasonably request. n. The Borrowers shall have paid to the Agent for the account of each Lender a closing fee and an amendment fee which shall be distributed by the Agent to the Lenders in accordance with the following table: Lender Closing Fee Amendment Fee ------ ----------- ------------- BBH $44,440 $ 6,267 Comerica $44,440 $ 5,222 Coutts $0 $ 7,543 NBD $66,680 $11,296 Trust Co. $44,440 $ 5,222 The Borrowers shall also have paid to the Agent for its own account an origination fee of $50,000. The fees described in this Section represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of the July 31, 1996 Page 16 Borrowers to pay such fees shall be in addition to, and not in lieu of, the obligation of any Borrower to pay interest, other fees described in the Agreement, and expenses described in the Agreement. All such fees shall be part of the Obligations and shall be nonrefundable. o. The Borrowers and Guarantors shall pay, at closing, all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 7. 13. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 7, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in Article 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 7 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to Section 9.2 of the Credit Agreement. d. Each of the Borrowers and Guarantors executing this Amendment No. 7 is duly authorized and empowered to execute this Amendment No. 7, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 14. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor, after giving effect to the amendments set forth herein, hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guaranties and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Multicurrency Revolver Commitment or the VLI Term Loan, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Multicurrency Revolver Commitment and VLI Term Loan as redefined herein, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor July 31, 1996 Page 17 (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 15. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 7, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. From and after the date hereof, all references in the Credit Agreement to the Agreement shall be deemed to be references to the Credit Agreement after giving effect to this Amendment No. 7, and all prior Amendments. 16. LENDER WARRANTS. The Lender Warrants being issued to the Lender Warrant Holders pursuant to the Lender Warrant Agreement are being issued by VLH in consideration for the increase in the commitment of the VLI Term Lenders under the VLI Term Loan. As such, Coutts does hereby recognize and agree that it has no right to or interest in the Lender Warrants and does hereby disclaim any right, title or interest in and under the Lender Warrants and the Lender Warrant Agreement, and hereby further recognizes and agrees that all benefits under the Lender Warrants and the Lender Warrant Agreement inure solely for the benefit of the Lender Warrant Holders. 17. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 7 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 18. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel, subject to a fee cap (exclusive of disbursements or expenses) of (a) US$42,500 for Haynes and Boone, L.L.P. and (b) L10,000 for Wilde Sapte) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 7, the Lender Warrant Agreement and all other Loan Documents executed in connection herewith. 19. GOVERNING LAW. THIS AMENDMENT NO. 7 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. 20. COUNTERPARTS. This Amendment No. 7 shall become effective as of the date first written above when a counterpart of this Amendment No. 7 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. July 31, 1996 Page 18 21. COMPLETE AGREEMENT. THIS AMENDMENT NO. 7, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 7 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 7 in the space indicated below. REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE(S) FOLLOW. July 31, 1996 Page 19 Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H.R. Brutsche III ---------------------------------------- H.R. Brutsche III President SHOWCO, INC. By: /s/ Michael P. Herman ---------------------------------------- Michael P. Herman Vice President - Finance VARI-LITE ASIA, INC. By: /s/ H.R. Brutsche III ---------------------------------------- H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED By: /s/ H.R. Brutsche III ---------------------------------------- H.R. Brutsche III Director THEATRE PROJECTS LIGHTING SERVICES LIMITED By: /s/ H.R. Brutsche III ---------------------------------------- H.R. Brutsche III Director July 31, 1996 Page 20 BRILLIANT STAGES LIMITED By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III Director IRIDEON LIMITED By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III Director GUARANTORS: VARI-LITE INTERNATIONAL, INC. By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III President VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III Director IGNITION! CREATIVE SERVICES, INC. By: /s/ Michael P. Herman ------------------------------ Michael P. Herman Vice President - Finance July 31, 1996 Page 21 IRIDEON, INC. By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III President CONCERT PRODUCTION LIGHTING, INC. By: /s/ H.R. Brutsche III ------------------------------ H.R. Brutsche III President ACKNOWLEDGED AND AGREED as of the 31st day of July, 1996 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ------------------------------ W. Carter Sullivan Senior Manager LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ------------------------------ W. Carter Sullivan Senior Manager July 31, 1996 Page 22 COUTTS & CO. By: /s/ A. D. Hills ------------------------------ Name: A. D. Hills Title: Manager NBD BANK By:/s/ Thomas A. Levasseur ------------------------------ Name: Thomas A. Levasseur Title: Vice President SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ Jennifer L. McClure ------------------------------ Name: Jennifer L. McClure Title: Banking Officer By: /s/ John A. Fields, Jr. ------------------------------ Name: John A. Fields, Jr. Title: Vice President COMERICA BANK-TEXAS By: /s/ David Terry ------------------------------ Name: David Terry Title: Corporate Banking Officer EX-10.32 24 EXHIBIT 10.32 [Amendment No. 8] January 16, 1997 Brown Brothers Harriman & Co. 59 Wall Street New York, NY 10005 Attn: Jeffrey C. Lockwood Coutts & Co. 440 Strand London WC2R 0QS Attn: A.D. Hills NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attn: Thomas A. Levasseur SunTrust Bank, Atlanta 25 Park Place 24th Floor, Center 120 Atlanta, Georgia 30303 Attn: John A. Fields, Jr. Comerica Bank - Texas 8828 Stemmons Freeway, Suite 441 Dallas, Texas 75247 Attn: David B. Terry Re: Credit Agreement dated as of March 31, 1994, by and among Vari-Lite, Inc. ("VLI"), Showco, Inc. ("SHOWCO"), Vari-Lite Asia, Inc. ("VLA"), Vari-Lite Europe Limited ("VLE"), Theatre Projects Lighting Services Limited ("THEATRE PROJECTS") and Brilliant Stages Limited ("BRILLIANT STAGES") (VLI, Showco, VLA, VLE, Theatre Projects and Brilliant Stages are sometimes referred to herein individually as a "BORROWER" and collectively as "BORROWERS"), Vari-Lite International, Inc. ("VLH"), Vari-Lite Europe Holdings Limited ("VLEH"), Brown Brothers Harriman & Co. ("BBH"), Coutts & Co. ("COUTTS"), NBD Bank, N.A. (the name of which is now NBD Bank, a Michigan banking corporation)("NBD"), Trust Company Bank (the name of which is now SunTrust Bank, Atlanta) ("TRUST CO.") and Comerica Bank-Texas ("COMERICA") (BBH, Coutts, NBD, Trust Co. and Comerica are hereinafter individually referred to as "LENDER" and collectively referred to as "LENDERS"), and BBH in its capacity as agent for Lenders (in such capacity, the "AGENT"), as amended by (a) that certain letter agreement dated July 1, 1994, marked "[Amendment No. 1]", among the Borrowers, VLH and VLEH, as guarantors, the Lenders and the Agent, (b) that certain letter agreement dated September 30, 1994 marked "[Amendment No. 2]" among the Borrowers, VLH, VLEH, Ignition! Creative Group, Inc. ("ICG") and Irideon, Inc. ("IRIDEON") (VLH, VLEH, ICG and Irideon are sometimes referred to herein collectively as "GUARANTORS"), the Lenders and the Agent, (c) that certain letter agreement dated February 22, 1995 marked "[Amendment No. 3]" among the Borrowers, the Guarantors, the Lenders and the Agent, (d) that certain letter agreement dated November 22, 1995 marked "[Amendment No. 4]" among the Borrowers, the Guarantors, the Lenders and the Agent, (e) that certain letter agreement dated January 16, 1997 Page 2 December 18, 1995 marked "[Amendment No. 5]" among the Borrowers, the Guarantors, the Lenders and the Agent, (f) that certain letter agreement dated May 20, 1996 marked "[Amendment No. 6]" among the Borrowers, the Guarantors, the Lenders and the Agent, and (g) that certain letter agreement dated July 31, 1996 marked "[Amendment No. 7]" among the Borrowers (including the addition thereto of Irideon Limited, a newly formed subsidiary of VLEH as a Borrower), the Guarantors, the Lenders and the Agent (the "CREDIT AGREEMENT"). Unless otherwise defined herein, all terms used herein with their initial letter capitalized shall have the meaning given such terms in the Credit Agreement. Gentlemen: As you are aware, the Borrowers and Guarantors have requested the modification of the restrictions on Investments contained in Section 11.6 of the Credit Agreement in order to permit VLH to make certain Investments in and/or loans of Permitted Intercompany Debt to Vari-Lite Hong Kong and Vari-Lite Spain. The Borrowers and the Guarantors have requested that the Agent and Lenders execute this letter agreement (hereinafter, "AMENDMENT NO. 8") in the space indicated below to evidence their agreement to the modifications and amendments contained herein. For valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrowers, the Guarantors, the Lenders and the Agent agree to the following: 1. AMENDMENTS TO DEFINITIONS. a. The definitions contained in Exhibit "A" to the Credit Agreement shall be supplemented effective the date hereof with the following definitions: "VARI-LITE HONG KONG" means Vari-Lite Hong Kong Limited, a corporation organized under the laws of Hong Kong, and an indirect wholly-owned Subsidiary of VLH. "VARI-LITE SPAIN" means Vari-Lite Spain, SL., a corporation organized under the laws of Spain, and a wholly-owned Subsidiary of VLEH. 2. AMENDMENT TO FURTHER ASSURANCES COVENANT. Section 9.7 of the Credit Agreement shall be, and is hereby amended effective the date hereof, by adding thereto the following sentence as the last sentence of such section: "VLH covenants and agrees that, in the event that (a) the Investments and/or Permitted Intercompany Debt of the Vari-Lite Corporate Group in either Vari-Lite Hong Kong or Vari-Lite Spain, as the case may be, exceeds $1,000,000, or (b) the Assets minus Liabilities of Vari-Lite Hong Kong or Vari-Lite Spain, as the case may be, at any time exceed $2,000,000, then, in any such case, VLH shall cause such Subsidiary to become a party to the Agreement, and VLH shall deliver, or cause such Subsidiary to deliver, such Security Documents and other loan documents with respect to such Subsidiary as the Agent may reasonably require." 3. AMENDMENT TO RESTRICTIONS ON INVESTMENTS, LOANS, AND ADVANCES. Section 11.6 of the Credit Agreement shall be, and is hereby amended effective the date hereof, to read in full as follows: January 16, 1997 Page 3 11.6. INVESTMENTS, LOANS, AND ADVANCES. No Borrower or Guarantor will, nor will it permit any Subsidiary to, make any Investment, except that: (a) the U.S. Companies and VLA may loan Permitted Intercompany Secured Debt to the Sterling Borrowers in an amount not to exceed, in the aggregate, the Dollar Equivalent of $2,000,000.00 at any one time outstanding; (b) any of the U.S. Companies may loan Permitted Intercompany Debt to each other; (c) VLEH and any of the Sterling Borrowers may loan Permitted Intercompany Debt to each other; (d) VLH may make an Investment in VLEH on or about the Closing Date in the approximate amount of $1,200,000; (e) VLH may make Investments in VLI, Showco, Irideon, SCSI or CPL; (f) The Vari-Lite Corporate Group may make a combination of Investments or loans of Permitted Intercompany Debt, not to exceed $1,000,000 in the aggregate outstanding at any time, in Vari-Lite Hong Kong; (g) The Vari-Lite Corporate Group may make a combination of Investments or loans of Permitted Intercompany Debt, not to exceed $1,000,000 in the aggregate outstanding at any time, in Vari-Lite Spain; (h) VLEH may make Investments in the Sterling Borrowers; (i) VLA, the Sterling Borrowers and VLEH may make Investments in, and loan Permitted Intercompany Debt to, the U.S. Companies; and (j) each Borrower, Guarantor and Subsidiary may own, purchase, or acquire Cash Equivalents. 3. REPRESENTATIONS AND WARRANTIES. In order to induce each Lender to enter into this Amendment No. 8, each Borrower and each Guarantor hereby represents and warrants to each Lender as follows: a. The representations and warranties of the Borrowers and VLH contained in Article 8 of the Credit Agreement (except for those Sections or parts thereof which, by their terms, relate to a specified date) are true and correct in all material respects on and as of the date hereof, as though made on and as of such date. b. No event has occurred and is continuing, or would result from the execution of this Amendment No. 8 (and after giving effect to the provisions hereof), which, absent this Amendment, constitutes a Default or Event of Default. January 16, 1997 Page 4 c. No material adverse change has occurred with respect to the financial condition, business, properties or operations of the Vari-Lite Corporate Group, on a consolidated basis, since the date of the most recent financial statements delivered to the Agent pursuant to Section 9.2 of the Credit Agreement. d. Each of the Borrowers and Guarantors executing this Amendment No. 8 is duly authorized and empowered to execute this Amendment No. 8, and the execution hereof will not violate any Governmental Requirement, the violation of which would have a Material Adverse Effect. 4. REAFFIRMATION OF SECURITY DOCUMENTS AND GUARANTEES. Each Borrower and each Guarantor, after giving effect to the amendments set forth herein, hereby (a) reaffirms each Guaranty and each Security Document previously executed and delivered by such Borrower or Guarantor (as applicable), (b) acknowledges and agrees that, to the extent the Guaranties and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) guarantee, or secure payment of amounts outstanding under the Multicurrency Revolver Commitment or the VLI Term Loan, such Guarantees and Security Documents continue to secure payment of and guaranty (as applicable) amounts outstanding under the Multicurrency Revolver Commitment and VLI Term Loan as redefined herein, and (c) reaffirms and acknowledges that the Guarantees and Security Documents executed and delivered by such Borrower or Guarantor (as applicable) continue to evidence the valid, binding and enforceable obligation of such Borrower or Guarantor (as applicable), subject only to applicable Debtor Laws. 5. REAFFIRMATION OF CREDIT AGREEMENT. The Credit Agreement, as amended by this Amendment No. 8, is ratified and confirmed and all of the rights and powers created hereby or thereunder shall be and remain in full force and effect. From and after the date hereof, all references in the Credit Agreement to the Agreement shall be deemed to be references to the Credit Agreement after giving effect to this Amendment No. 8, and all prior Amendments. 6. NO UNINTENDED WAIVERS. The execution, delivery and effectiveness of this Amendment No. 8 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Credit Agreement, as amended hereby, or under any of the Loan Documents to which any Borrower or Guarantor is a party. 7. EXPENSES OF AGENT. The Borrowers and the Guarantors agree to pay all reasonable costs and expenses of Agent (including, without limitation, all reasonable fees, costs and expenses of Agent's legal counsel, subject to a fee cap (exclusive of disbursements or expenses) of US$1,250 for Haynes and Boone, L.L.P.) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment No. 8, Waiver Letter No. 5 and all other Loan Documents executed in connection herewith. Such fees and expenses shall be payable on the effective date of this Amendment No. 8. 8. GOVERNING LAW. THIS AMENDMENT NO. 8 SHALL BE DEEMED TO BE AN AGREEMENT EXECUTED BY THE PARTIES HERETO UNDER THE LAWS OF THE STATE OF NEW YORK, AND SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW. January 16, 1997 Page 5 9. COUNTERPARTS. This Amendment No. 8 shall become effective as of the date first written above when a counterpart of this Amendment No. 8 has been executed by all parties listed on the signature pages hereto. It is not necessary that all signatures appear on the same counterpart. Each such counterpart shall be deemed to be an original, and all counterparts, when taken together, shall constitute but one and the same instrument. 10. COMPLETE AGREEMENT. THIS AMENDMENT NO. 8, TOGETHER WITH THE CREDIT AGREEMENT, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This Amendment No. 8 has been executed by the duly authorized officers of the Borrowers and the Guarantors. Please acknowledge your agreement to the terms and conditions contained herein by executing this Amendment No. 8 in the space indicated below. Remainder of Page Intentionally Left Blank. Signature Page(s) Follow. Very truly yours, BORROWERS: VARI-LITE, INC. By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III President SHOWCO, INC. By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman Vice President - Finance VARI-LITE ASIA, INC. By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III Chairman of the Board and Representative Director VARI-LITE EUROPE LIMITED THEATRE PROJECTS LIGHTING SERVICES LIMITED BRILLIANT STAGES LIMITED IRIDEON LIMITED By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III Director GUARANTORS: VARI-LITE INTERNATIONAL, INC. IRIDEON, INC. CONCERT PRODUCTION LIGHTING, INC. By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III President Amendment No. 8 Signature Page VARI-LITE EUROPE HOLDINGS LIMITED By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III Director IGNITION! CREATIVE GROUP, INC. By: /s/ Michael P. Herman ----------------------------------- Michael P. Herman Vice President - Finance Amendment No. 8 Signature Page ACKNOWLEDGED AND AGREED as of the 16 day of January, 1997 AGENT: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ------------------------------ W. Carter Sullivan Senior Manager LENDERS: PER PRO BROWN BROTHERS HARRIMAN & CO. By: /s/ W. Carter Sullivan ------------------------------ W. Carter Sullivan Senior Manager COUTTS & CO. By: /s/ A. D. Hills ------------------------------ Name: A. D. Hills ------------------------- Title: Vice President ------------------------- NBD BANK By: /s/ Thomas A. Levasseur ------------------------------ Name: Thomas A. Levasseur ------------------------- Title: Vice President ------------------------- SUNTRUST BANK, ATLANTA (formerly known as Trust Company Bank) By: /s/ John A. Fields, Jr. ----------------------------------- Name: John A. Fields, Jr. ------------------------- Title: Vice President ------------------------- By: /s/ Trisha E. Hardy ----------------------------------- Name: Trisha E. Hardy ------------------------- Title: Corporate Banking Officer ------------------------- Amendment No. 8 Signature Page COMERICA BANK-TEXAS By: /s/ David Terry ----------------------------------- Name: David Terry ------------------------- Title: Assistant Vice President ------------------------- Amendment No. 8 Signature Page EX-10.34 25 EXHIBIT 10.34 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made as of August 28, 1995, by and between Vari-Lite Holdings, Inc., doing business at 201 Regal Row, Dallas, Texas 75247 (the "Company") and Mr. Jim Kinnu, residing presently at 3626 East Woodbine Road, Orange, California 92667 ("Kinnu"). W I T N E S S E T H: WHEREAS the Company is engaged in the business of designing and manufacturing sound, lighting and other entertainment-related equipment and providing related services; and WHEREAS Kinnu is experienced and knowledgeable in the management of business organizations providing technical services and products and has agreed to work for the Company as its Senior Executive Vice President and Chief Operating Officer; and WHEREAS the Company is interested in employing Kinnu and Kinnu is interested in working for the Company; and WHEREAS this Agreement will supersede and replace all prior consulting and/or employment agreements between the Company and Kinnu; NOW THEREFORE, in consideration of the mutual covenants and conditions herein contained, the parties hereto agree as follows: 1. EMPLOYMENT. Kinnu is hereby employed in the position of Senior Executive Vice President and Chief Operating Officer of the Company to render services in connection with the management of the Company. Kinnu hereby accepts such employment and agrees that he will at all times use his best efforts to discharge his duties and utilize his skills in the best interests of the Company. 2. DUTIES. (a) Kinnu will share the day to day responsibility with the President and Chief Executive Officer for the operation and management of the Company. (b) Kinnu will have specific responsibility on behalf of the Company and at the direction of the Chief Executive Officer of the Company on behalf of Irideon, Inc. to develop, implement and manage the four processes: Demand Creation, Develop Product, Manufacture Product and Service Product to enable the timely and successful completion of AR5/AR6, Virtuoso and VL7 programs and other engineering development projects. (c) Kinnu will perform other duties as assigned by the President and Chief Executive Officer and by the Company's Board of Directors. 3. LOCATION OF EMPLOYMENT. Kinnu's office and principal place of business in carrying out his duties hereunder shall be at the Company's corporate headquarters in Dallas. Kinnu's location of employment shall not be changed without Kinnu's written consent. Kinnu will give reasonable consideration to any proposed change in the location of his employment if such change would serve the best interests of the Company. If the Company does relocate Kinnu, it will provide him with adequate financial compensation to offset his moving expenses and any losses he incurs due to the relocation. 4. TERM. Kinnu's employment under this Agreement shall be for a term of three years commencing on August 28, 1995 (the "Commencement Date") and ending on August 31, 1998. This Agreement may be renewed if 30 days before the termination date of this Agreement the parties agree in writing to extend the Agreement to a specific date. The period beginning on the Commencement Date and ending August 31, 1998, or upon the expiration of any renewal period shall be referred to as the "Employment Term." 5. COMPENSATION. In consideration for the services to be performed by Kinnu herein, the Company shall pay Kinnu as follows: (a) BASE SALARY. The Company shall pay to Kinnu an annual base salary of $350,000. This salary shall be payable bi-monthly on the 15th and the last day of each month in equal installments. The Compensation Committee shall conduct an annual review of Kinnu's base salary; the first review shall be conducted on or about November 1, 1996, and the subsequent reviews shall be conducted on or about November 1 of the following years of the Employment Term. As part of the annual review the Compensation Committee shall make a recommendation to the Board of Directors regarding whether there should be an increase in Kinnu's base salary. Kinnu shall be entitled to such increases in his base salary, if any, that may be determined by the Board of Directors at its sole discretion. In no event shall Kinnu's base salary be reduced. (b) ANNUAL INCENTIVE COMPENSATION. In further consideration for Kinnu's services, Kinnu shall receive Annual Incentive Compensation in accordance with the established programs for Officers and Directors of the Company pursuant to the Annual Incentive Plan administered by Deloitte & Touche, L.L.P. The incentive compensation that shall be available varies between 10% of base salary and a maximum of 40% of base salary depending upon the actual year end performance of the Company. Kinnu shall receive incentive compensation in the amount of 10% of his base salary if the Company reaches threshold operating income which is defined as 80% of target. Kinnu shall receive incentive compensation in the amount of 20% of his base salary if the Company reaches target operating income. Kinnu shall receive the maximum amount of incentive compensation, 40% of base salary, if the Company reaches or exceeds maximum operating income which is defined as 140% of target operating income. The exact dollar amount of the incentive compensation will be based on the proportionate percentage that the Company's operating income exceeds its threshold operating income as calculated by Deloitte & Touche, L.L.P. (c) LONG-TERM INCENTIVE COMPENSATION. In further consideration for Kinnu's services, Kinnu shall purchase 10,000 shares of the Company's Class B Common Stock at book value as of July 31, 1995, and execute the Shareholder Buy-Sell Agreement, the Stock Purchase Promissory Note, and the Stock Pledge Agreement. The 2 forms of these documents are attached to this Agreement as Exhibit A-1, A-2 and A-3, respectively. (d) TAXES. All compensation paid to Kinnu hereunder shall be subject to applicable employment and withholding taxes. Kinnu shall be responsible for any taxes resulting from a determination that any portion of any benefits supplied to Kinnu hereunder may be reimbursing personal as well as business expenses. 6. EMPLOYEE BENEFITS. (a) BENEFIT PLANS OR OTHER ARRANGEMENTS. Subject to meeting eligibility provisions, Kinnu shall be entitled to participate in all employee benefit plans of the Company, and to receive such other employee benefits as are available to the Company's officers as such benefits may exist from time to time, including but not limited to group health, disability and life insurance benefits and participation in the Showco/Vari-Lite 401K Savings Plan, and the Company's profit sharing, stock purchase and stock option plans. A copy of the Company's Welfare Benefit Plan and 401K Savings Plan are attached to this Agreement as Exhibit B and are by this reference made a part hereof. Kinnu will be subject to any changes made to the aforesaid employee benefit plans. (b) VACATIONS AND SICK LEAVE. Kinnu shall be entitled to receive the same number of sick leave days as is maintained in the Company's sick leave plan. In addition, Kinnu will be entitled to four weeks of paid vacation per year beginning with the commencement date of this Agreement. Kinnu's vacation benefit will be a part of his base salary. Kinnu will earn one additional week of paid vacation for each quarter beginning on August 28, 1995, and ending on August 28, 1997. In the event Kinnu's employment terminates under Section 9 of this Agreement, Kinnu shall be entitled to receive the cash value of any earned but unused vacation. "Earned but unused vacation" shall mean one week of vacation for each quarter actually worked by Kinnu less any vacation actually taken in excess of four weeks. 7. RELOCATION EXPENSES. (a) Upon the effective date of this Agreement, the Company will provide a three-year interest-free loan of $200,000 to Kinnu as set forth in the Relocation Assistance Loan Promissory Note to be signed by Kinnu, that will be forgiven in equal amounts on a monthly basis during the term of this Agreement. The loan is to assist Kinnu with selling his house in California and cover other related expenses. A copy of the form of the "Relocation Assistance Loan Promissory Note" is attached to this Agreement as Exhibit C and is by this reference made a part hereof. (b) The Company will reimburse Kinnu for his family's relocation expenses listed below subject to a $25,000 maximum for all expenses listed below. Kinnu's family is defined to include all current members of his household, which include himself, his spouse, daughter, grandson and son-in-law. Within 30 days from the 3 signing of this Agreement Kinnu will submit a proposed budget to the Company for the expenses listed below. The Company will reimburse Kinnu within 30 days of his presentation to the Company of receipts reflecting actual expenses for the following: (i) Transportation of household goods to Dallas; (ii) Automobile transportation from California to Dallas; (iii) Air travel to Dallas from California until move has been completed; and (iv) Cost of title policy for purchase of a new house. 8. BUSINESS EXPENSES. (a) OUT-OF-POCKET EXPENSES. The Company shall reimburse Kinnu for all reasonable out-of-pocket expenses incurred by Kinnu in the conduct of the Company's business provided that Kinnu submits expense reports accompanied by receipts and vouchers within a month following the expenditures. The Company will reimburse Kinnu for his expenses within 30 days of its receipt of Kinnu's expense reports. (b) FIRST CLASS AIR TRAVEL. In connection with the performance of his duties hereunder, the Company shall provide Kinnu with domestic first class air travel via upgrade coupons when available and business class for overseas air travel. 9. TERMINATION. Kinnu's employment may be terminated during the Employment Term by either party at any time by giving written notice to the other party stating the grounds for such termination in accordance with the provisions of this Section 9. In the event of such termination, Kinnu's rights and entitlements shall be determined in accordance with the following provisions. (a) DISABILITY. The Company shall have the right to terminate this Agreement if Kinnu incurs a permanent disability during the Employment Term. For the purpose of this Agreement, "Permanent Disability" shall mean inability of Kinnu to perform the services required hereunder due to physical or mental disability which continues for either (i) a total of 180 working days during any 12-month period or (ii) 150 consecutive working days. In the event that either party disputes whether Kinnu has a permanent disability, such dispute shall be submitted to a physician mutually agreed upon by Kinnu or his legal guardian and the Company. If the parties are unable to agree on a mutually satisfactory physician, each shall select a reputable physician, who, together, shall in turn select a third physician whose determination of Kinnu's ability to perform his job duties shall be conclusive and binding to the parties. Evidence of such disability shall be conclusive notwithstanding that a disability policy or clause in an insurance policy covering Kinnu shall contain a different definition of "permanent disability." 4 If Kinnu suffers a permanent disability and the Company terminates his employment after the appropriate time period as cited above, the Company will pay to Kinnu the balance of his base salary under this Agreement pursuant to subsection (g) below until the end of the Employment Term less any disability payments which Kinnu is eligible to receive from any insurance company pursuant to a policy purchased by the Company. Kinnu also shall receive a prorated bonus under Section 5(b) as of the date this Agreement is terminated based on the actual results plus projected results for the Company's operating income for the current fiscal year end and the cash value of any earned but unused vacation time. (b) DEATH. If Kinnu dies during the Employment Term, the Company will pay to his estate the balance of his base salary under this Agreement pursuant to subsection (g) below. Kinnu's estate also shall receive a prorated bonus under Section 5(b) as of the date of his death based on the actual results plus projected results for the Company's operating income for the current fiscal year end and the cash value of any earned but unused vacation time. (c) "FOR CAUSE". If the Company terminates this Agreement "For Cause" as defined in this subsection, Kinnu shall not be entitled to any damages from the Company or its employees for such termination. If the Company terminates this Agreement for cause, Kinnu shall receive his base salary under Section 5(a) only through the date of termination. Kinnu also shall receive a prorated bonus under Section 5(b) as of the date of the termination based on the actual results plus projected results for the Company's operating income for the current fiscal year and any earned but unused vacation time. For purposes of this Agreement, "For Cause" shall mean the willful, continued and material failure by Kinnu to follow the reasonable and legitimate directions of the Board of Directors or of the President and Chief Executive Officer in connection with Kinnu's duties hereunder, but only after (i) the Chairman and Chief Executive Officer delivers a written notice to Kinnu specifically setting forth the manner in which he believes Kinnu has failed to follow such directions and providing at least 30 days to correct the deficiencies, and (ii) such willful and material failure to follow directions is not corrected within the designated time period; conviction of a felony; embezzlement from the Company; fraud; engaging in conduct contrary to the best interests of the Company; habitual absenteeism not related to disability or illness, but only after written notice from the Board of Directors followed by a repetition of such habitual absenteeism. (d) "WITHOUT CAUSE" AND CONSTRUCTIVE TERMINATION. If the Company terminates this Agreement without Cause or if Kinnu terminates this Agreement because of Constructive Termination as defined below, Kinnu shall receive the balance of his base salary under this Agreement pursuant to subsection (g) below, a prorated bonus under Section 5(b) as of the termination date based on the actual results plus projected results for the Company's operating income for the current fiscal year end and the cash value of any earned but unused vacation time. 5 If Kinnu's employment with the Company terminates pursuant to this subsection, he shall not be required to mitigate damages by seeking other employment or otherwise; however, the amount paid by the Company shall be reduced by any compensation earned by Kinnu from another employee or through consulting. For purposes of this Agreement "Constructive Termination" means the continued and material failure of the Company to comply with its covenants and obligations under this Agreement, but only after (i) Kinnu delivers written notice to the Company specifically setting forth the manner in which he believes the Company has so failed to comply with its covenants and obligations and providing at least 30 days to correct the deficiencies, and (ii) such material failures are not corrected within the designated time period. (e) CHANGE OF CONTROL. A Change of Control shall be deemed to have occurred if any of the following occur: (i) at any time during any period of 12 consecutive months, at least a majority of the directors serving on the Board of Directors of the Company ceases to consist of individuals who have served continuously on such Board of Directors since the beginning of such 12-month period, unless the election of directors during such period, or nomination for election by the shareholders of the Company, was approved by a vote of at least two-thirds of the members of such Board of Directors at such time still in office and who shall have served continuously on such Board of Directors since the beginning of such 12-month period (in any case disregarding any vacancy occurring during such 12-month period by reason of death or disability); or (ii) a merger or consolidation occurs to which either the Company or Vari-Lite, Inc. ("Vari-Lite") is a party unless following such merger or consolidation (1) more than 50% of the then outstanding shares of voting capital stock of the corporation surviving such merger or resulting from such consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding voting capital stock of the Company or Vari-Lite, as the case may be, immediately prior to such merger or consolidation in substantially the same proportions as their ownership, imediately prior to such merger or consolidation, of the outstanding voting capital stock of the Company or Vari-Lite, as the case may be, and (2) at least a majority of the members of the Board of Directors of the corporation surviving such merger or resulting from such consolidation were members of the Board of Directors of Vari-Lite or the Company, as the case may be, immediately prior to such merger or consolidation; or (iii) the sale of all, or substantially all, of the assets of the Company or Vari-Lite; or (iv) a person or entity who is not an owner of voting capital stock of the Company or Vari-Lite, as the case may be, as of the date of this Agreement acquires more than 50% of the voting capital stock of the Company or Vari-Lite, as the case may be. Notwithstanding the foregoing, however, a Change of Control shall not be deemed to have occurred upon the consummation of an Initial Public Offering of the capital stock of the Company. If after a Change of Control, as defined above, H.R. Brutsche III remains employed by the Company in the position of Chairman of the Board or Chief Executive Officer, then this Agreement shall remain in effect until its termination 6 date. If after a Change of Control, as defined above, H.R. Brutsche III does not remain in the position of either Chairman of the Board or Chief Executive Officer, then Kinnu shall have the right to terminate this Agreement. If Kinnu exercises his right to terminate his employment following a Change of Control, he shall receive the balance of this base salary under this Agreement, a prorated bonus under Section 5(b) as of the date of termination based on the actual results plus projected results for the Company's operating income for the current fiscal year end, and the cash value of any earned but unused vacation. (f) RESIGNATION. If Kinnu resigns from his employment during the Employment Term, he shall receive his base salary through his date of termination, a prorated bonus under Section 5(b) as of the date of termination based on the actual results plus projected results for the Company's operating income for the current fiscal year end, and the cash value of any earned but unused vacation. (g) TIME OF PAYMENT. The Company shall pay any bonuses due to Kinnu or his heirs under this section within 30 days from the date of Kinnu's termination. The payment of any balance of Kinnu's base salary due under this section will be made on the Company's regularly scheduled pay days through the expiration date of this Agreement. 10. ADDITIONAL OBLIGATIONS OF EMPLOYEE DURING AND AFTER EMPLOYMENT. (a) ACKNOWLEDGMENTS. Kinnu acknowledges that, as an officer and employee of the Company (including its subsidiaries and its affiliated companies) he will obtain information that derives independent value from not being generally known to the public. Kinnu also acknowledges that in addition to all other consideration being supplied by the Company in this Agreement, the Company is simultaneously agreeing to convey to Kinnu an interest in the shares of the Company. Kinnu acknowledges that part of the consideration for the covenant not to compete in Section 10 is supported by these factors. (b) NONCOMPETITION AND NONSOLICITATION. Until 24 months after the termination of Kinnu's employment hereunder for any reason, Kinnu will not, directly or indirectly, work for or provide any services to any employer or other business entity who competes with the Company. During such period of noncompetition, Kinnu shall not solicit business from any party who, on the date of termination of Kinnu's employment is, or within one year prior thereto was, a customer of the Company or to whom the Company has made, or from whom the Company has received, a written sales proposal within 24 months prior to such date of termination. Kinnu understands, acknowledges, and agrees that such customers are developed and maintained by the Company through use of confidential, proprietary, and trade secret information to which Kinnu may have access during his employment term. The requirement of this subsection does not extend to geographical locations in which the Company is no longer doing business. Kinnu also agrees that until 24 months after the termination of his employment for any reason, he will not directly or indirectly attempt to persuade or induce any 7 Company employee to leave his or her employment with the Company. (c) RECORDS. All records, files, documents, and the like, or abstracts, summaries, or copies thereof, relating to the business of the Company, which the Company or Kinnu shall prepare or use or come into contact with during his employment, shall remain the sole property of the Company and shall not be removed from the premises or disclosed to any person without written consent of the Company, and Kinnu shall promptly return all such records in his possession or under his control to the Company upon termination of his employment. (d) TRADE SECRETS AND CONFIDENTIALITY. During the course of Kinnu's employment, he will have access to and become familiar with various trade secrets and confidential information belonging to the Company, consisting of but not limited to, compilations of information, financial and operations records, technical specifications, sales procedures, customer requirements, pricing information, customer and supplier lists, methods of doing business, and business plans. Kinnu acknowledges that such confidential information and trade secrets exist and are owned and shall continue to be owned solely by the Company and that he shall not discuss or disclose any trade secrets or confidential information belonging to the Company to any person or entity except as is required for him to perform his duties under this Agreement. (e) RELIEF. In addition to its other remedies, the Company shall be entitled to equitable relief, including provisional and final injunctive relief, to enforce its rights under this section. 11. NOTICES. All notices required to be given hereunder shall be personally delivered to the signatories of this Agreement or shall be given by certified mail, return receipt requested, addressed to the party to which the notice is to be given at the address for that party first set forth above. 12. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement, except involving matters under Section 10 of this Agreement which will be resolved in the Texas State Courts, shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (a) Any party wishing to pursue a claim or controversy under this section must give the other party written notice of the claim or controversy within 180 days after the disputed event occurred. (b) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by two arbitrators so selected. In the event of their failure to agree on the third arbitrator, selection shall be made by the American Arbitration Association in Dallas, Texas where the arbitration shall take place. (c) The arbitrators shall follow the Employment Arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall 8 substantially comply with Texas rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; shall conduct a pretrial hearing; and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (d) In the event the Company terminates Kinnu's employment under Section 9(c) of this Agreement and Kinnu challenges the termination under this section, if the Arbitrator rules that the Company did not have cause to terminate Kinnu's employment, the maximum amount of damages that the Arbitrator may award to Kinnu is the balance of his base salary under this Agreement, a prorated bonus under Section 5(b) as of the date of Kinnu's termination, based on the actual results plus projected results for the Company's operating income for the current fiscal year, the cash value of any earned but unused vacation time, $25,000 for relocation expenses, and Kinnu's legal fees and expenses in bringing the arbitration. (e) The arbitrators shall complete their proceedings and render their decision within forty days after submission of the dispute to them, unless both parties agree to an extension. Each party shall cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (f) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and Kinnu shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (g) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (h) The Company and Kinnu hereby consent to the jurisdiction of the courts of the state of Texas for purposes of entering judgment with respect to an arbitration award. 13. INDEMNIFICATION. Kinnu will be subject to and provided the protection afforded in the indemnification provisions of the current provisions of the Company's Certificate of Incorporation and By-Laws and by the Indemnification Agreement attached to this Agreement as Exhibit D. 14. MISCELLANEOUS PROVISIONS. (a) ENTIRE AGREEMENT. This Agreement replaces and supplants all prior agreements, 9 oral or written, between the parties and constitutes the entire understanding of the parties; and no change, alteration or modification hereof may be made except by a writing signed by the parties hereto. (b) SUCCESSION. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation with which it may merge or consolidate subject to the provisions of Section 9(e) herein. (c) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Texas. (d) AMENDMENT. This Agreement may only be amended, or a new agreement substituted, by a written instrument duly authorized and executed by the Company and Kinnu. (e) WAIVER. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach hereof. (f) SEVERABILITY. The Company and Kinnu agree that each of the foregoing covenants shall be deemed a separate, severable an independent covenant, and in the event any covenant shall be declared invalid by any court of competent jurisdiction, such invalidity shall not in any manner affect or impair the validity or enforceability of any other unrelated part or provision of such covenant or of any other covenant contained herein. (g) MULTIPLE ORIGINALS. This Agreement may be executed in multiple originals, each of which shall be deemed an original IN WITNESS WHEREOF, the parties have executed this Agreement as of this 28th day of August, 1995. COMPANY: Vari-Lite Holdings, Inc. By:/s/ H. R. Brutsche III --------------------------------- President and Chief Executive Officer /s/ Jim Kinnu ------------------------------------ Jim Kinnu 10 EXHIBIT A-1 SHAREHOLDER BUY-SELL AGREEMENT This Shareholder Buy-Sell Agreement (this "Agreement") is made and entered into as of September __, 1995, by and between Vari-Lite Holdings, Inc., a Texas corporation (the "Company"), and Jim Kinnu (the "Shareholder") and the Shareholder's spouse. W I T N E S S E T H : WHEREAS, the Shareholder, contemporaneously herewith, is purchasing 10,000 shares of the Company's Class B Common Stock, $0.10 par value, from the Company (the "Shares") for a Stock Purchase Promissory Note, of even date herewith, in the aggregate principal amount of $132,900 payable to the Company (the "Note"), and, in connection therewith, has agreed to the imposition of the restrictions and obligations hereinafter set forth; and WHEREAS, pursuant to that certain Stock Pledge Agreement, of even date herewith, by and between the Company and the Shareholder and the Shareholder's spouse (the "Pledge Agreement"), the Shares are pledged to the Company to secure the repayment of the Note; NOW, THEREFORE, for and in consideration of the mutual covenants, agreements and understandings of the parties hereto, the parties do hereby agree as follows: 1. RESTRICTIONS UPON TRANSFER. Without first obtaining the written consent of the Company, the Shareholder shall not give, sell, assign, transfer, pledge or otherwise in any way encumber or dispose of any of the Shares or any right or interest therein, or permit or suffer any of the foregoing to occur, whether voluntarily or by operation of law or otherwise, except as set forth in the Pledge Agreement or as specifically provided herein. Any purported encumbrance or disposition of any of the Shares or any right or interest therein in violation of any provision of this Agreement shall be void and inoperative for all purposes. 2(a). SALE AND PURCHASE PRIOR TO THIRD ANNIVERSARY. At any time prior to August 31, 1998 (the "Third Anniversary"), in the event the Shareholder desires to sell any or all of his Shares, the Shareholder shall deliver to the Company a written notice to such effect (the "Notice") and the Company shall have the exclusive right and obligation to purchase from the Shareholder, and the Shareholder shall have the obligation to sell to the Company, all of the Shares owned by the Shareholder for a cash purchase price determined in accordance with Paragraph 7 hereof. Within 30 days after receipt of the Notice, the Company shall deliver to the Shareholder a written notice (the "Purchase Notice") which shall specify the price and designate the date upon which the consummation of such sale and purchase shall occur (which date shall not be more than 30 days after the date of the Purchase Notice) and the purchase shall be consummated on such designated date. The purchase price payable pursuant to this Paragraph 2(a) shall be payable as follows: (i) first, all accrued and unpaid interest under, and the principal amount of, the Note shall be cancelled and applied to reduce the amount due and owing and (ii) second, the balance of the purchase price shall be payable on the date designated in the Purchase Notice. 2(b). COMPANY PURCHASE ON THIRD ANNIVERSARY. If and to the extent the Shareholder owns any Shares on the Third Anniversary and the Company has not yet consummated an initial public offering, 1 the Company shall have the exclusive right and obligation to purchase from the Shareholder, and the Shareholder shall have the obligation to sell to the Company, all of the Shares owned by the Shareholder for a cash purchase price determined in accordance with Paragraph 7 hereof. Within 30 days after the Third Anniversary, the Company shall deliver to the Shareholder the Purchase Notice and the purchase shall be consummated on the date designated therein (which date shall not be more than 30 days after the date of the Purchase Notice). The purchase price payable pursuant to this Paragraph 2(b) shall be payable as follows: (i) first, the principal amount of the Note shall be cancelled and applied to reduce the amount due and owing and (ii) second, the balance of the purchase price shall be payable on the date designated in the Purchase Notice. Concurrently with the consummation of the purchase of the Shares pursuant to this Paragraph 2(b), the Company shall forgive, and the Shareholder shall not be obligated to pay, all accrued and unpaid interest under the Note. 3. PURCHASE UPON DEATH. At any time prior to the Third Anniversary, upon the death of the Shareholder, the heirs or legatees of the Shareholder (collectively, the "Heirs") may retain any Shares received from the Shareholder subject to this Agreement. No Shares so transferred to the Heirs shall be transferred on the stock transfer records of the Company and no certificates representing such Shares shall be issued to the Heirs unless and until the Heirs shall execute and deliver to the Secretary of the Company a counterpart of this Agreement amended only to reflect the Heirs as parties thereto, thereby agreeing to be bound by the terms and conditions hereof. All certificates representing Shares to be transferred to the Heirs shall have endorsed thereon the legend set forth in Paragraph 10 hereof. If the Heirs elect to sell the Shares upon the death of the Shareholder, the terms and provisions of Paragraph 2 hereof shall apply and the Heirs shall be treated as the Shareholder for purposes of this Agreement. 4. PURCHASE UPON DIVORCE. At any time prior to the Third Anniversary, if the Shareholder shall become divorced and the former spouse of the Shareholder shall be awarded any of the Shares in the divorce decree or in an agreement entered into an anticipation of, or pursuant to, such divorce decree, then, within 10 days thereafter, the Shareholder shall deliver to the Company a written notice of the occurrence of such an event (the "Notice of Divorce Decree/Agreement"), and the Company shall have the exclusive right and obligation to purchase from such spouse, and such spouse shall have the obligation to sell to the Company, all of the Shares awarded to such spouse for a cash purchase price determined in accordance with Paragraph 7 hereof. The consummation of such sale and purchase shall take place on the date designated in a written notice delivered to such spouse by the Company, which date shall not be more than 60 days after the Notice of Divorce Decree/Agreement shall have been received by the Company. 5. PURCHASE UPON TERMINATION OF EMPLOYMENT. At any time prior to the Third Anniversary, if the Shareholder shall no longer be an employee of the Company, its subsidiaries or an affiliate of the Company or its subsidiaries (for such reasons that include, but are not limited to, his permanent disability and voluntary or involuntary termination of his employment, whether with or without cause), then the Company shall have the exclusive right and obligation to purchase from the Shareholder and the Shareholder shall have the obligation to sell to the Company, all of the Shares owned by the Shareholder for a cash purchase price determined in accordance with Paragraph 7 hereof. The consummation of such sale and purchase shall take place on the date designated in a written notice delivered to the Shareholder by the Company (the "Termination Purchase Notice"), which date shall not be more than 60 days after the Shareholder shall cease to be an employee. "Affiliate," as used herein, means any corporation which directly or indirectly controls, is controlled by or is under common control with, the Company or its subsidiaries. For purposes of the preceding sentence, "control" means possession, directly or indirectly, 2 of the power to direct or cause direction of management and policies through ownership of voting securities, by contract, voting trust or otherwise. 6. OCCURRENCE OF CERTAIN EVENTS. At any time prior to the Third Anniversary, if the Shareholder shall: (a) breach any of his obligations hereunder, (b) become insolvent or file a voluntary petition under the U.S. Bankruptcy Code or any state insolvency act, (c) be adjudicated a bankrupt under the U.S. Bankruptcy Code or any state insolvency act, (d) have a final judgment for damages entered against him which shall not be discharged within 30 days after such judgment shall have become final, (e) suffer an attachment, sequestration or garnishment to be levied against any of the Shares and the same shall not be dissolved or such Shares replevied within 10 days thereof, or (f) makes a general assignment for the benefit of creditors, then, within 10 days thereafter, the Shareholder shall deliver to the Company a written notice of the occurrence of such an event (the "Notice of Event"), and for a period of 90 days commencing upon the date on which the Company shall have received the Notice of Event (hereinafter called the "Company Purchase Period"), the Company shall have the exclusive right and obligation to purchase, and the Shareholder shall have the obligation to sell to the Company, all of the Shares owned by the Shareholder for a cash purchase price determined in accordance with Paragraph 7 hereof. If the Shareholder shall fail to deliver the Notice of Event to the Company and the Company shall otherwise learn of the occurrence of an event specified hereinabove, then the Company Purchase Period shall extend for a period of 60 days after the Company shall deliver to the Shareholder a written notice of the occurrence of such an event (the "Company Notice") or the Company shall receive the Notice of Event from the Shareholder. The consummation of such sale and purchase shall take place on the date designated in a written notice delivered to the Shareholder by the Company, which date shall be prior to expiration of the Company Purchase Period. 7. PRICE. The price of the Shares to be sold pursuant to Paragraphs 2, 3, 4, 5 or 6 hereof shall be an amount equal to the book value of the Shares on the "Determination Day" (as defined below) minus the principal amount of, and all accrued but unpaid interest (unless forgiven pursuant to Paragraph 2(b)) on, the Note as of the Determination Date. As used herein, the "Determination Day" shall be the last day of the month immediately preceding (a) the date the Shareholder shall deliver the Notice to the Company, (b) the Third Anniversary, (c) the date the Shareholder shall deliver the Notice of Divorce Decree/Agreement to the Company, (d) the date the Company shall deliver the Termination Purchase Notice to the Shareholder or (e) the date the Shareholder shall deliver the Notice of Event to the Company or the Company shall deliver the Company Notice to the Shareholder, whichever shall be applicable. For purposes of the Agreement, the "book value" of the Shares shall be determined by dividing the consolidated shareholders' equity, as reflected on an audited or unaudited consolidated balance sheet of 3 the Company and its consolidated subsidiaries as of the relevant Determination Date, prepared in accordance with generally accepted accounting principles applied on a consistent basis, by the aggregate number of the then issued and outstanding shares of all classes of the common stock of the Company. 8. DELIVERY OF STOCK CERTIFICATES. At the closing of any purchase of any of the Shares hereunder, the Shareholder shall deliver to the Company a certificate or certificates representing the aggregate number of the Shares so purchased, together with such duly executed stock powers and other instruments as may, in the opinion of counsel to the Company, be required to transfer to the Company good title to such Shares, free and clear of all restrictions, liens, security interests and other encumbrances. 9. STOCK SUBJECT TO AGREEMENT. This Agreement shall govern the Shares now held by the Shareholder and any additional shares of capital stock of the Company, its affiliates or its successor entity hereafter acquired by the Shareholder, whether as a result of acquisition, stock dividend, stock split, merger, consolidation or otherwise, and the term "Shares" as used herein shall include such after-acquired shares. Any interest of the Shareholder's spouse in the Shares shall for all purposes of this Agreement be included in, deemed a part of and bound by the same terms as the interest of the Shareholder in the Shares, and any action taken or option exercised hereunder with reference to the Shares shall be applicable to any interest of such spouse in the Shares. 10. ENDORSEMENT ON STOCK CERTIFICATES. All certificates representing the Shares shall be endorsed as follows: "The shares of stock represented by this certificate are subject to a Shareholder Buy-Sell Agreement dated as of September __, 1995, a copy of which is on file at the principal office of the Company, and said shares may not be given, sold, transferred, assigned, pledged or otherwise in any way encumbered or disposed of except in accordance with the terms of such Agreement. A copy of such Agreement will be furnished without charge to the holder of this certificate upon receipt by the Company at its principal place of business or registered office of a written request from the holder requesting such a copy." 11. SPECIFIC PERFORMANCE. The parties hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to the personal representative of a party hereto by reason of a failure to perform any of the obligations under this Agreement. Therefore, if any party hereto or the personal representative of any party hereto shall institute any action or proceeding to enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not urge in any such action or proceeding the claim or defense that such remedy at law exists. 12. NOTICES. Any notice, consent, demand, request, approval or other communication to be given under this Agreement by either party to the other shall be in writing and shall be either (a) delivered in person, (b) mailed by registered or certified mail, return receipt requested, postage prepaid, or (c) delivered by overnight express delivery service or same-day local courier service to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section. If to the Company: Vari-Lite Holdings, Inc. 201 Regal Row 4 Dallas, TX 75247 Attn: Chief Financial Officer If to the Shareholder: James Kinnu 3626 E. Woodbine Rd. Orange, CA 92667 13. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provisions never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 14. MODIFICATIONS. No change or modification of this Agreement shall be valid unless the same shall be in writing and signed by all parties hereto. 15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, personal representatives, successors and assigns. 16. TERMINATION. This Agreement shall terminate upon the occurrence of any of the following events: (a) the bankruptcy, insolvency, receivership or dissolution of the Company; (b) the written agreement of the Shareholder and the Company to terminate this Agreement; and (c) the becoming effective of a registration of the Company's shares of common stock under the Securities Act of 1933, as amended. 17. GENDER AND NUMBER. Any word herein in the masculine shall be deemed to include in all circumstances where appropriate the feminine or neuter, and vice versa, and any word in the singular shall be deemed to include in all circumstances where appropriate the plural, and vice versa. 18. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the parties hereto with respect to the subject matter hereof, and supersedes any and all other agreements, either oral or in writing. Each party acknowledges that no representations, inducements, promises or agreements not embodied herein, either oral or otherwise, have been made to any party, or anyone acting on behalf of any party. 19. SPOUSE. By executing this Agreement, the spouse of the Shareholder agrees to be bound in all respects by the terms of this Agreement to the same extent as the Shareholder. The spouse of the Shareholder further agrees that should she predecease the Shareholder or should she become divorced from the Shareholder, any of the Shares which the spouse may own or in which she may have any interest shall 5 remain subject to all of the restrictions and to all of the rights of the Shareholders contained in this Agreement. 20. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first written above. VARI-LITE HOLDINGS, INC. By:/s/ H. R. Brutsche III ------------------------------------ H. R. Brutsche III, President /s/ James Kinnu --------------------------------------- James Kinnu I, the undersigned, being the spouse of the above-named Shareholder, hereby acknowledge that I have read and understand the Shareholder Buy-Sell Agreement, and I agree to be bound by the terms thereof, including, but not limited to, Section 19 thereof. Name Joyce Kinnu Signature /s/ Joyce Kinnu ---------------------------- 6 EXHIBIT A-2 STOCK PURCHASE PROMISSORY NOTE Dallas, Texas September 10, 1995 James Kinnu (the "Maker"), for value received, hereby promises to pay to the order of Vari-Lite Holdings, Inc., a Texas corporation (together with any successors or assigns, the "Payee"), at the time and in the manner hereinafter provided, the principal sum of One Hundred Thirty-Two Thousand Nine Hundred Dollars ($132,900.00), together with interest computed thereon at the rate hereinafter provided. This Note shall be payable at the office of the Payee at 201 Regal Row, Dallas, Texas 75247, or at such other address as the holder of this Note shall from time to time designate. The outstanding principal amount of this Note shall bear interest from the date hereof until the due date at a per annum interest rate equal to 8%, calculated on the basis of actual days over a 365 day year; provided, however, that in no event shall interest accrue at a rate higher than the highest lawful rate. The principal amount of this Note, plus all accrued but unpaid interest hereon, shall be due and payable on August 31, 1998; provided, however, that concurrently with the consummation of the purchase of the Maker's shares of Class B Common Stock of the Payee pursuant to Paragraph 2(b) of that certain Shareholder Buy-Sell Agreement, of even date herewith, between the Payee, the Maker and the Maker's spouse, the Payee shall forgive, and the Maker shall not be obligated to pay, all accrued and unpaid interest under this Note. All sums of principal and interest past due under the terms of this Note shall bear interest at a per annum interest rate equal to the lesser of twelve percent (12%) per annum or the maximum rate allowed by law from the due date thereof until paid. In the event of a default hereunder and this Note is placed in the hands of an attorney for collection (whether or not suit is filed), or if this Note is collected by suit or legal proceedings or through bankruptcy proceedings, the Maker agrees to pay in addition to all sums then due hereon, including principal and interest, all expenses of collection, including, without limitation, reasonable attorneys' fees. This Note may be prepaid in whole or in part at any time or from time to time at the option of the Maker without premium or penalty. Prepayment shall be credited first to accrued but unpaid interest to the extent thereof, and thereafter to unpaid principal in the inverse order that it becomes due. The Payee shall be entitled to accelerate this Note and declare all sums due hereunder immediately due and payable upon default by the Maker in any of its obligations hereunder or under the Stock Pledge Agreement (the "Pledge Agreement"), of even date herewith, by and between the Payee and the Maker. The Maker and any and all sureties, guarantors and endorsers of this Note and all other parties now or hereafter liable hereon, severally waive grace, demand, presentment for payment, notice of dishonor, protest and notice of protest, notice of intention to accelerate, notice of acceleration, any other notice and diligence in collecting and bringing suit against any party hereto and agree (i) to all extensions and partial payments, with or without notice, before or after maturity, (ii) to any substitution, exchange or release of any security now or hereafter given for this Note, (iii) to the release of any party primarily or secondarily liable hereon, and (iv) that it will not be necessary for the holder hereof, in order to enforce payment of this Note, to first institute or exhaust such holder's remedies against the Maker or any other party liable therefor or against any security for this Note. No delay on the part of the Payee in exercising any power or right under this Note shall operate as a waiver of such power or right, nor shall any single or partial exercise of any power or right preclude further exercise of that power or right. A security interest has been granted by the Maker to the Payee to secure the payment of this Note pursuant to the terms and conditions of the Pledge Agreement, and to secure the payment of any costs and expenses incurred by the Payee in the collection and enforcement hereof. The Maker understands that this Note may be pledged to secure certain obligations of the Payee and hereby consents to any such pledge. All agreements between the Maker and the holder hereof, whether now existing or hereafter arising and whether written or oral, are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of the maturity hereof, or otherwise, shall the amount paid, or agreed to be paid, to the holder hereof for the use, forbearance or detention of the funds advanced pursuant to this Note, or otherwise, or for the payment or performance of any covenant or obligation contained herein or in any other document or instrument evidencing, securing or pertaining to this Note exceed the maximum amount permissible under applicable law. If from any circumstances whatsoever fulfillment of any provision hereof or any other document or instrument exceeds the maximum amount of interest prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any such circumstances the holder hereof shall ever receive anything of value deemed interest by applicable law, which would exceed interest at the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note or on account of any other principal indebtedness of the Maker to the holder hereof, and not to the payment of interest, or if such excessive interest exceeds the unpaid principal balance of this Note and such other indebtedness, such excess shall be refunded to the Maker. All sums paid, or agreed to be paid, by the Maker for the use, forbearance or detention of the indebtedness of the Maker to the holder of this Note shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the actual rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this paragraph shall control and supersede every other provision of all agreements between the Maker and the holder hereof. This Note shall be governed by and construed in accordance with the laws of the State of Texas. All references to the Maker herein shall, and shall be deemed to, include its successors and assigns, and all covenants, stipulations, promises and agreements contained herein by or on behalf of the Maker shall be binding upon his heirs, successors and assigns, whether so expressed or not. MAKER /s/ James Kinnu -------------------------------- James Kinnu 2 EXHIBIT A-3 STOCK PLEDGE AGREEMENT This Stock Pledge Agreement (this "Agreement), dated as of September 10, 1995, is by and between James Kinnu, a resident of California (the "Pledgor"), and Vari-Lite Holdings, Inc., a Texas corporation (the "Secured Party"). WITNESSETH: WHEREAS, the Pledgor is the owner of 10,000 shares of Class B Common Stock, par value $0.10 per share, of the Secured Party (the "Pledged Shares"); and WHEREAS, the Pledgor has executed that certain Stock Purchase Promissory Note of even date herewith payable to the Secured Party in the aggregate original principal amount of $132,900 (as amended or modified from time to time, the "Stock Purchase Promissory Note"); and WHEREAS, the Pledgor and the Secured Party desire to have the Pledgor grant to the Secured Party a security interest in the Pledged Collateral (as hereinafter defined) to secure the payment of the Stock Purchase Promissory Note; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor and the Secured Party hereby agree as follows: ARTICLE I SECURITY INTEREST AND PLEDGE 1. SECURITY INTEREST AND PLEDGE. The Pledgor hereby pledges to the Secured Party, and grants to the Secured Party a security interest in, the Pledged Shares and the certificates representing the Pledged Shares, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares (the "Pledged Collateral"). 2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment of all obligations and liabilities of the Pledgor now or hereafter existing under the Stock Purchase Promissory Note, whether for principal, interest, fees, expenses (including, but not limited to, expenses incurred by the Secured Party to preserve and maintain the Pledged Collateral, collect any of the obligations herein described or enforce this Agreement) or otherwise, and all obligations of the Pledgor now or hereafter existing under this Agreement (all such obligations of the Pledgor being herein referred to as the "Obligations"). ARTICLE II AFFIRMATIVE AND NEGATIVE COVENANTS The Pledgor covenants and agrees as follows: 3. PERFECTION OF LIENS. All certificates or instruments representing or evidencing the Pledged Shares are hereby delivered to the Secured Party and are either in suitable form for transfer by delivery, or are accompanied by instruments of transfer or assignment duly executed in blank, all in form and substance satisfactory to the Secured Party. The Pledgor shall execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Secured Party may request, in order to perfect and preserve the security interest granted or purported to be granted hereby. 4. TRANSFERS AND OTHER LIENS. Without the prior written consent of the Secured Party, the Pledgor shall not (a) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, or (b) create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interest granted under this Agreement. 5. DISTRIBUTIONS. If the Pledgor shall become entitled to receive or shall receive (a) any stock certificate or voting trust certificate or (b) any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or issued in connection with any liquidation, reorganization, option or rights, whether as an addition to, in substitution of or in exchange for any of the Pledged Collateral, the Pledgor shall (i) accept the same as the Secured Party's agent, (ii) hold the same in trust for the Secured Party, and (iii) deliver the same immediately to the Secured Party in the exact form received, with an appropriate endorsement of the Pledgor and/or appropriate undated stock powers or assignments of stock certificate or voting trust certificate, duly executed in blank, to be held by the Secured Party as Pledged Collateral, subject to the terms hereof. 6. FURTHER ASSURANCES. The Pledgor agrees that, at any time and from time to time after the date of this Agreement, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further actions, that may be necessary or desirable, or that the Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to the Pledged Collateral or any portion thereof. 7. TAXES. The Pledgor agrees to pay or discharge prior to delinquency all taxes, assessments, levies and other governmental charges imposed on him or his property, except that the Pledgor shall not be required to pay or discharge any tax, assessment, levy or other governmental charge if (a) the amount or validity thereof is being contested by the Pledgor in good faith by appropriate proceedings diligently pursued, (b) such proceedings do not involve any danger of sale, forfeiture or loss of the Pledged Collateral or any part thereof or interest therein, and (c) adequate reserves therefor have been established in conformity with generally accepted accounting principles. 8. NOTIFICATION. The Pledgor shall promptly notify the Secured Party of (a) any lien, security interest, encumbrance or claim made or threatened against the Pledged Collateral and (b) the occurrence or existence of any Event of Default (as hereinafter defined) or the occurrence or existence of any condition or event that, with the giving of notice or lapse of time or both, would be an Event of Default. 2 ARTICLE III RIGHTS OF THE SECURED PARTY AND THE PLEDGOR 9. ATTORNEY-IN-FACT. The Pledgor hereby appoints the Secured Party as the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the discretion of the Secured Party, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to the Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. 10. VOTING RIGHTS AND DIVIDENDS. Except as otherwise provided in Section 15, the Pledgor shall be entitled to: (a) exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Stock Purchase Promissory Note; provided, however, that the Pledgor shall not exercise, or shall refrain from exercising, any such right if, in the Secured Party's judgment, such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof; and (b) receive and retain all cash dividends paid on or in respect of the Pledged Collateral. 11. THE SECURED PARTY MAY PERFORM. If the Pledgor fails to perform any agreement contained herein, the Secured Party may perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Pledgor under Section 18. 12. THE SECURED PARTY'S DUTY OF CARE. Other than the exercise of reasonable care in the physical custody of the Pledged Collateral while held by the Secured Party hereunder, the Secured Party shall have no responsibility for, or obligation or duty with respect to, all or any part of the Pledged Collateral or any matter or proceeding arising out of or relating thereto, including, without limitation, any obligation or duty to collect any sums due with respect thereto or to protect or preserve any rights against prior parties or any other rights pertaining thereto, it being understood and agreed that the Pledgor shall be responsible for preservation of all rights in the Pledged Collateral. Without limiting the generality of the foregoing, the Secured Party shall be conclusively deemed to have exercised reasonable care in the custody of the Pledged Collateral, if it takes such action, for purposes of preserving rights in the Pledged Collateral, as the Pledgor may reasonably request in writing; provided, however, that no refusal, failure, omission or delay by the Secured Party in complying with any such request shall be deemed to be a failure to exercise reasonable care. 13. THE PLEDGOR'S RIGHT TO SELL THE PLEDGED SHARES. At any time after Vari-Lite Holdings, Inc. has sold shares of its common stock in an initial public offering registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, the Pledgor may sell all or any portion of the Pledged Shares, provided that (a) the proceeds of such sale are used, first, to pay accrued but unpaid interest on the Stock Purchase Promissory Note and, second, to pay the outstanding principal amount of the Stock Purchase Promissory Note, and only after payment in full of the Stock Purchase Agreement may the Pledgor retain any additional proceeds of such sale, and (b) the Pledgor enters into such agreements 3 and takes such actions as the Secured Party requests to provide adequate assurance to the Secured Party that the Pledgor will comply with clause (a) above. ARTICLE IV DEFAULT 14. EVENT OF DEFAULT. As used herein, the term "Event of Default" shall mean the occurrence of any of the following events: (a) a default under the Stock Purchase Promissory Note, (b) the Pledgor's non-compliance with, or failure to perform, any agreement contained herein, (c) a default under that certain Shareholder Buy-Sell Agreement, of even date herewith, by and between the Pledgor and the Secured Party and the Secured Party's spouse, or (d) the making of any representation, statement or warranty of the Pledgor contained herein or given pursuant hereto that is untrue as of the date made; provided, however, that an Event of Default shall occur under (a), (b) or (c) only if the relevant event remains uncured for ten days. 15. VOTING RIGHTS AND DIVIDENDS AFTER AN EVENT OF DEFAULT. Upon the occurrence and during the continuance of an Event of Default, all rights of the Pledgor to exercise the voting and other consensual rights and to receive cash dividends in respect of the Pledged Collateral, which the Pledgor would otherwise be entitled to exercise or receive pursuant to Section 10, shall thereupon become vested in the Secured Party who shall thereafter have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends. 16. REMEDIES UPON DEFAULT. If any Event of Default shall have occurred and be continuing: (a) The Secured Party may exercise in respect to the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Texas Business and Commerce Code, as amended, in effect at that time, and the Secured Party may also, without notice except as specified below, sell the Pledged Collateral or any part thereof at public or private sale, at any exchange, broker's board or at any other place chosen by the Secured Party, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Secured Party shall not be obligated to make any sale of the Pledged Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Any cash held by the Secured Party as Pledged Collateral and all cash proceeds received by the Secured Party in respect of any sale of, collection from or other realization upon all or any part of the Pledged Collateral may, in the discretion of the Secured Party, be held by the Secured Party as collateral for, and/or then or at any time thereafter be applied in whole or in part by the Secured Party against, all or any part of the Obligations in such order as the Secured Party shall elect. Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Obligations shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. 4 (c) If the proceeds of the sale, collection or other realization of or upon the Pledged Collateral are insufficient to cover the costs and expenses of such sale, collection or realization and the payment in full of the Obligations, the Pledgor shall remain liable for any deficiency. ARTICLE V MISCELLANEOUS 17. RIGHT TO SELL. If the Secured Party shall determine to exercise its right to sell (other than in a public offering) all or any of the Pledged Collateral pursuant to Section 16, the Pledgor agrees that, upon request of the Secured Party, the Pledgor will, at his own expense, do or cause to be done all such other acts and things as may be necessary to make such sale of the Pledged Collateral or any part thereof valid and binding and in compliance with applicable law. The Pledgor acknowledges the impossibility of ascertaining the amount of damages which would be suffered by the Secured Party by reason of the failure by the Pledgor to perform the covenant contained in this Section and, consequently, agrees that if the Pledgor shall fail to perform such covenant, the Pledgor shall pay, as liquidated damages and not as a penalty, an amount equal to the value of the Pledged Collateral on the date the Secured Party shall demand compliance with this Section. 18. EXPENSES. The Pledgor will upon demand pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of counsel and of any experts and agents, which the Secured Party may incur in connection with (a) the administration of this Agreement, (b) the custody, preservation, sale or collection of, or other realization upon, any of the Pledged Collateral, (c) the exercise or enforcement of any of the rights of the Secured Party hereunder, or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. 19. ABSOLUTE SECURITY INTEREST. All rights of the Secured Party and the security interest hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any agreement or instrument relating hereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Stock Purchase Promissory Note; (c) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Obligations; or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, the Pledgor in respect of the Stock Purchase Promissory Note or the Obligations. 20. CONTINUING SECURITY INTEREST; TRANSFER OF THE STOCK PURCHASE PROMISSORY NOTE. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until payment in full of the Obligations, (b) be binding upon the Pledgor, his heirs, successors and assigns, and (c) inure to the benefit of the Secured Party and its successors and assigns. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer the Stock Purchase Promissory Note to any other person or entity, and such other person or entity shall thereupon 5 become vested with all the benefits in respect thereof granted to the Secured Party herein or otherwise. Upon the payment in full of the Obligations, the Pledgor shall be entitled to the return, upon his request and at his expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. 21. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement, nor consent to any departure by the Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 22. ADDRESSES FOR NOTICES. Any notice, consent, demand, request, approval or other communication to be given under this Agreement by either party to the other shall be in writing and shall be either (a) delivered in person, (b) mailed by registered or certified mail, return receipt requested, postage prepaid, or (c) delivered by overnight express delivery service or same-day local courier service to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section. If to the Pledgor: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, TX 75247 Attn: Chief Financial Officer If to the Secured Party: James Kinnu 3626 E. Woodbine Rd. Orange, CA 92667 Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Any such notice, consent or other communication shall be deemed given when delivered in person or, if mailed, when duly deposited in the mails. 23. TERMINATION. When all Obligations shall have been paid in full, or at such earlier time as the Secured Party may specify in writing, this Agreement shall terminate, and the Secured Party shall forthwith cause to be assigned, transferred and delivered, against receipt but without recourse, warranty or representation whatsoever, any remaining Pledged Collateral to the Pledgor. 24. HEADINGS. The headings and captions used herein are for convenience only and shall not affect the interpretation of this Agreement. 25. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by the Secured Party shall affect the representations and warranties or the right of the Secured Party to rely upon them. 26. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6 27. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement. 28. SUPREMACY. In the event of any conflict between the terms of this Agreement and the terms or provisions of the Stock Purchase Promissory Note, the terms or provisions of the Stock Purchase Promissory Note shall be controlling. 29. NUMBER AND GENDER. Whenever the context requires, references in this Agreement to the singular number shall include the plural, and the plural number shall include the singular, and words denoting gender shall include the masculine, feminine and neuter. 30. GOVERNING LAW AND VENUE. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas. If any action is brought to enforce or interpret this Agreement, venue for such action shall be in Dallas County, Texas. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed as of the date first above written. PLEDGOR /s/ James Kinnu --------------------------------------- James Kinnu SECURED PARTY VARI-LITE HOLDINGS, INC. By:/s/ H. R. Brutsche III ------------------------------------ H. R. Brutsche III, President To the extent that the undersigned (the Pledgor's spouse) has or may in the future have any interest in the Pledged Collateral, the undersigned hereby agrees, as of the date first above written, to be bound by the terms of this Agreement to the same extent as the Pledgor. /s/ Joyce Kinnu --------------------------------------- Joyce Kinnu 7 RECEIPT Vari-Lite Holdings, Inc. hereby acknowledges receipt from James Kinnu of stock certificate number __________, evidencing 10,000 shares of Class B Common Stock of Vari-Lite Holdings, Inc. VARI-LITE HOLDINGS, INC. By:/s/ H. R. Brutsche III ------------------------------------- H. R. Brutsche III, President 8 EXHIBIT C RELOCATION ASSISTANCE LOAN PROMISSORY NOTE September 10, 1995 $200,000.00 Jim Kinnu (the "Maker"), for value received, hereby promises to pay to Vari-Lite, Inc. (the "Holder"), the principal balance of $200,000.00, together with interest as provided for herein, at the times specified herein. The outstanding principal amount of this Note shall not bear interest from the date hereof, except in the event of default as provided herein. 1. PAYMENT OF PRINCIPAL. The Maker shall receive a reduction against the principal evidenced by this Note in an amount equal to $5555.56, for each full calendar month that the Maker remains in the employ of the holder, with the first reduction against principal on September 30, 1995 and continuing monthly successively thereafter until August 31, 1998 when the entire principal amount of this Note shall be paid in full. 2. WITHHOLDING. The Maker understands and agrees that the amounts of the reductions against principal described in this Note and amounts equal to interest on this Note are imputed and treated as compensation which will result in taxable income to the Maker, as to which Holder may, during the term of Maker's employment, withhold from Maker's base salary payments the amount required by the Internal Revenue Code of 1986, as amended. 3. EVENTS OF DEFAULT. Should any of the following events occur (an "Event of Default"), the Maker shall be in default hereunder: (a) If the Maker resigns from his position of employment with Vari-Lite Holdings, Inc. ("Holdings") prior to August 31, 1998; or (b) If the Maker is terminated "For Cause" as defined in Section 9(c) of that certain Employment Agreement by and between Holdings and Maker, dated as of August 28, 1995 ("Employment Agreement"). 4. ACCELERATION OF INDEBTEDNESS. Upon the occurrence of an Event of Default, the entire unpaid principal amount shall be due and payable in full at the option of the Holder. The unpaid principal shall bear an interest rate of 10% per annum, to be charged over the period of time the remaining principal is unpaid 30 days after the Event of Default. 5. CANCELLATION OF INDEBTEDNESS. If the Maker's employment with Vari-Lite Holdings, Inc. terminates pursuant to Sections 9(a), (b), (d) or (e) of the Employment Agreement between the parties hereto, then any remaining balance of this Note shall be cancelled and forgiven. 6. WAIVER. Except as expressly provided herein, the Maker and any other party ever liable for payment of any sums of money payable on this Note, jointly and severally, expressly waive all notices, demands for payment, presentations for payment, notices of intention to accelerate maturity, notices of acceleration of maturity and any other notices as to this Note and as to each, every and all installments or part payments hereof. 7. COLLECTION FEES. If an Event of Default occurs and this Note is placed in the hands of an attorney for collection (whether or not suit is filed), or if this Note is collected by suit or legal proceedings or through bankruptcy proceedings, the Maker agrees to pay in addition to all sums then due hereon, including principal and interest, all reasonable expenses of collection including reasonable attorneys' fees. 8. AMENDMENTS. This Note may be amended by written agreement of the Maker and the Holder. No waiver of the provisions hereof shall be effective unless agreed to in writing by the party against whom such waiver is asserted. 9. NOTICE. All notices to the Maker required or permitted by this Note shall be sufficient if given in writing and executed by the Holder of this Note. All such notices of the Maker shall be delivered by registered or certified mail, return receipt requested, or personally delivered, to the Maker at its principal place of business on the date of the execution of this Note as set forth under its signature hereto, or such other address as the Maker may designate by written notice to the Holder of this Note. 10. GOVERNING LAW; VENUE. This Note shall be deemed to be a contract made under the laws of the State of Texas, and for all purposes shall be governed by and construed in accordance with the laws of the State of Texas, exclusive of any such law under which the law of any other jurisdiction would apply. The parties hereto agree that venue of any action pertaining to this Note shall lie in Dallas County, Texas. 11. BINDING EFFECT. This Note and all the covenants, promises and agreements contained herein shall be binding upon and inure to the benefit of the respective legal and personal representatives, devisees, heirs, successors and permitted assigns of the Maker and the Holder. 12. LIMITATION. This Note shall not be construed as limiting the Holder's right to terminate Maker's employment at any time for any reason, with or without cause, nor as limiting the right of Maker's employment at any time for any reason. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES, THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed as of September 10, 1995. MAKER By: /s/James Kinnu ------------------------------- James Kinnu Address: 3626 East Woodbine Road Orange, California 92667 2 EXHIBIT D INDEMNIFICATION AGREEMENT This Agreement, dated as of August 28, 1995, is by and between Vari-Lite Holdings, Inc., a Texas corporation (the "Company"), and Jim Kinnu ("Indemnitee"). WITNESSETH: WHEREAS, the Company desires to have qualified persons serving as officers of the Company who are willing to make decisions that in their judgment are in the Company's best interest without any undue threat of personal liability; and WHEREAS, the Board of Directors has appointed Indemnitee to serve as an officer of the Company; and WHEREAS, the Articles of Incorporation (the "Articles of Incorporation") of the Company require indemnification of each director or officer of the Company in his capacity as a director or officer and, if serving at the request of the Company as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from (a) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (collectively, a "Proceeding"), (b) an appeal in such a Proceeding or (c) any inquiry or investigation that could lead to such a Proceeding, to the fullest extent permitted by the Texas Business Corporation Act (the "Act"), as the same exists or may be hereafter amended; and WHEREAS, the Company desires to grant to Indemnitee the maximum indemnification for any Loss (hereinafter defined) permitted under law; and WHEREAS, developments with respect to the terms and availability of directors' and officers' liability insurance and with respect to the application, amendment and enforcement of statutory, charter and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to persons intended to be protected thereunder; and WHEREAS, in order to resolve such questions and thereby induce Indemnitee to serve and continue serving as an officer of the Company, the Company has determined and agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's agreement to continue to serve as an officer of the Company, the parties hereto agree as follows: 1. Indemnity of Indemnitee. The Company shall indemnify Indemnitee in his capacity as an officer of the Company and, if serving at the request of the Company as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by Indemnitee in connection with or resulting from (a) any Proceeding, (b) an appeal in such a Proceeding or (c) any inquiry or investigation 1 that could lead to such a Proceeding, all to the fullest extent permitted by Article 2.02-1 of the Act, as the same exists as of the date of this Agreement or may hereafter be amended to broaden the indemnification which the Company may grant to its directors. All indemnity obligations and/or liabilities of the Company hereunder shall be without limit and without regard to the cause or causes thereof or the negligence or gross negligence of any person or persons (expressly including Indemnitee), whether such negligence or gross negligence of Indemnitee be sole, joint or concurrent, active or passive. 2. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding, any appeal in a Proceeding and any inquiry or investigation that could lead to a Proceeding, by reason of the fact that Indemnitee was serving in any capacity referred to herein. 3. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of notice of any claim against Indemnitee or the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the assertion of any such claim or the commencement thereof; but the omission so to notify the Company will not relieve it from any liability under this Agreement unless such delay in notification actually prejudiced the Company (and then only to the extent the Company was actually prejudiced thereby) and in addition, the Company shall not be relieved from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company will be entitled to participate therein at its own expense. (b) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in (ii) above. (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 2 4. ADVANCES OF EXPENSES. Reasonable expenses (other than judgments, penalties, fines and settlements) incurred by Indemnitee that are subject to indemnification under this Agreement (and not paid, reimbursed or advanced by others) shall be paid or reimbursed by the Company in advance of the final disposition of the Proceeding within 10 days after the Company receives a written request by Indemnitee accompanied by substantiating documentation of such expenses, a written affirmation by Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification under this Agreement and a written undertaking by or on behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately determined that he has not met those requirements or that such reasonable expenses do not constitute a Loss. The written undertaking described above must be an unlimited general obligation of Indemnitee but shall not be secured. Such undertaking shall be without reference to the financial ability of Indemnitee to make repayment. 5. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Upon the written request of Indemnitee to be indemnified pursuant to this Agreement (other than pursuant to Section 4 hereof), the Company shall cause the Reviewing Party (as hereinafter defined) to determine, within 45 days, whether or not the Indemnitee has met the relevant standards for indemnification required by this Agreement. The termination of a Proceeding by judgment, order, settlement or conviction, or on a plea of NOLO CONTENDERE or its equivalent, shall not of itself create a presumption that Indemnitee did not meet the requirements for indemnification required by this Agreement. If a determination of indemnification is to be made by Independent Legal Counsel (as hereinafter defined), such Independent Legal Counsel shall render its written opinion to the Company and Indemnitee as to what extent Indemnitee will be permitted to be indemnified. The Company shall pay the reasonable fees of Independent Legal Counsel and indemnify and hold harmless such Indemnitee against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to the engagement of Independent Legal Counsel pursuant hereto and the written opinion of such Independent Legal Counsel. 6. DEFINITIONS. The terms defined in this Section 6 shall, for purposes of this Agreement, have the indicated meanings: (a) "Reviewing Party" means (i) a majority of a quorum of directors of the Company who at the time of voting upon a determination of indemnification are not parties to that particular Proceeding to which Indemnitee is seeking indemnification or (ii) Independent Legal Counsel selected by a majority of a quorum of directors who at the time of selecting such Independent Legal Counsel are not parties to that particular Proceeding to which Indemnitee is seeking indemnification, or if such a quorum cannot be obtained, by a majority vote of a committee of the Board of Directors of the Company designated to select such Independent Legal Counsel by a majority vote of all directors of the Company, consisting solely of two or more directors who at the time of such selection are not parties in that particular Proceeding to which Indemnitee is seeking indemnification, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors of the Company. (b) "Independent Legal Counsel" shall mean an attorney, selected in accordance with the provisions of Section 6(a) hereof, who shall not have otherwise performed services for Indemnitee, the Company, any person that controls the Company, or any of the directors of the Company, within five years preceding the time of such selection (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who 3 has been sanctioned or censured for ethical violations of applicable standards of professional conduct. (c) "Loss" shall mean any and all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees) actually incurred by Indemnitee, after realization of or giving effect to all insurance, bonding, indemnification and other payments or recoveries (i) actually received by or for the benefit of Indemnitee, directly or indirectly, or (ii) to which Indemnitee is entitled, directly or indirectly. 7. ENFORCEABILITY. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Company. Neither the failure of the Company (including its Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances, because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or Independent Legal Counsel) that Indemnitee has not met such an applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 8. PARTIAL INDEMNITY; EXPENSES. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, and penalties, but not for the total amount thereof, the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an event subject to indemnification hereunder or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against expenses incurred for any Loss in connection with such Proceeding, issue or matter, as the case may be. 9. REPAYMENT OF EXPENSES. Indemnitee shall reimburse the Company for all reasonable expenses paid by the Company in defending any Proceeding against Indemnitee in the event and only to the extent that it shall be ultimately determined that Indemnitee is not entitled to be indemnified by the Company for such expenses under the provisions of this Agreement. 10. CONSIDERATION. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to serve and continue serving as an officer, and acknowledges that Indemnitee is relying upon this Agreement in serving in such capacity. 11. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any other agreement, vote of shareholders, as a matter of law or otherwise, but the indemnification provided for pursuant to the Articles of Incorporation or Bylaws of the Company is limited to any Loss. 12. SUBROGATION. If a payment is made under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of such Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights. 4 13. SEVERABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision thereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereto. 14. NOTICE. Any notice, consent or other communication to be given under this Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service or (d) delivered by telex or facsimile transmission to the address set forth beneath the signature of the parties below, or at such other address as may be designated by the parties from time to time in accordance with this Section. Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 15. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION; REIMBURSEMENT. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Texas. (b) This Agreement shall be binding upon Indemnitee and his heirs, executors, administrators, personal representatives and assigns and upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and his heirs, executors, administrators, personal representatives and assigns and to the benefit of the Company and its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. (d) If Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in bringing and pursuing such action. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the date first above written. VARI-LITE HOLDINGS, INC. By: /s/ H. R. Brutsche III, President ---------------------------------------- H. R. Brutsche III, President Address of Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Fax: (214) 630-5867 5 /s/ James Kinnu --------------------------------------------- James Kinnu Address of Indemnitee: 3626 Woodbine Rd. Orange, California 92667 6 EX-10.35 26 EXHIBIT 10.35 SEVERANCE AGREEMENT AND RELEASE This Severance Agreement and Release ("Severance Agreement") is entered into between Vari-Lite, Inc., its related and affiliated companies ("Vari-Lite"), and Jim Kinnu ("Kinnu") on September 30, 1996, and is intended to be a full and final resolution of all matters involving Kinnu's employment by Vari-Lite Holdings, Inc. WHEREAS, Kinnu has been employed by Vari-Lite Holdings, Inc. as Chief Operating Officer since August 28, 1996, pursuant to the terms of an Employment Agreement between Vari-Lite Holdings, Inc. and Kinnu dated August 28, 1996 ("Employment Agreement"); and WHEREAS, in support of Vari-Lite, Kinnu undertook, at the Chief Executive Officer's request, the additional responsibilities of Vice President for Product Development; and WHEREAS, both parties to the Employment Agreement have fulfilled their obligations and responsibilities pursuant to that Employment Agreement to this date; and WHEREAS, the Chief Executive Officer has made a determination that he is desirous of restructuring Vari-Lite's organization and eliminating the position of Chief Operating Officer at this time; THEREFORE, in consideration of the mutual covenants and conditions contained in this Severance Agreement, the parties hereto agrees as follows: 1. EMPLOYMENT: Kinnu's employment at Vari-Lite Holdings, Inc. shall be terminated as of close of the normal business day on September 30, 1996, pursuant to Section 9(d) of the Employment Agreement. This termination is being accomplished "Without Cause" and all the provisions of the Employment Agreement which pertain to termination under that condition shall apply except as they may be modified herein. 2. CONSULTANT SERVICES: Kinnu will provide consultant services to Vari-Lite on a "call" basis for a period of twenty-four (24) months from the date of termination at no cost to Vari-Lite except for costs as may be related to travel or other incidental expense reimbursement. The meaning of the term "call" in this context shall mean the establishment of a mutually acceptable time and place for the services after Vari-Lite notifies Kinnu of its need for his services. 3. EXHIBIT A-1, A-2 AND A-3 MODIFICATION: The parties agree that the amount specified in the Exhibits dated September 10, 1996, and made a part of the Employment Agreement for the value of the 10,000 shares being purchased by Kinnu is not $132,900 but rather $138,900 and that this latter amount shall be used as the "original principal amount" in calculating the change in value, if any, at the time of Vari-Lite's re-purchase of the stock from Kinnu upon termination. 4. RELOCATION ASSISTANCE LOAN PROMISSORY NOTE: Notwithstanding the provisions of paragraph 5 of Exhibit C to the Employment Agreement, the parties agree that rather than canceling the indebtedness as of the date of the termination of Kinnu's employment and declaring the unpaid balance as of that date ordinary income for Kinnu. Vari-Lite agrees to add an amount of $2,777.78 to each semi-monthly payment to Kinnu of the base salary payments, to reflect the continuing reduction of the principal until the total principal amount is paid in full as of August 31, 1998. 5. BONUS PAYMENT: The parties agree that the bonus payment provided for in paragraph 9(g) of the Employment Agreement shall be paid by Vari-Lite to Kinnu on or about December 1, 1996. 6. RELEASE: Kinnu, on behalf of himself and his heirs, executors or administrators, hereby releases, discharges and agrees not to sue or file any charges or claims against Vari-Lite, its directors, officers, agents, employees, parent corporations, affiliated corporations, or predecessor corporations, under any local, state, or federal law, for any type of claim, demand or action whatsoever arising out of or connected with his employment with Vari-Lite Holdings, Inc. Kinnu agrees not to make any claims or demands against Vari-Lite, its directors, officers, agents, employees, parent corporations, affiliated corporations, or predecessor corporations for wrongful discharge; unlawful employment discrimination on the basis of age or any other form of unlawful employment discrimination; retaliation; breach of contract; breach of the duty of good faith and fair dealing; violation of the public policy of the State of Texas; intentional or negligent infliction of emotional distress; promissory estoppel; defamation of character; duress; intentional misrepresentation or fraud; invasion of privacy; negligent hiring, retention, or supervision; any alleged act of harassment or intimidation; or any other intentional or negligent act of personal injury; or any alleged violation of the Age Discrimination in Employment Act of 1990; the Employee Retirement Income Security Act of 1974; the Fair Labor Standards Act; the Texas Commission on Human Rights Act; and the Texas Payday Law. 7. NONDISCLOSURE: Kinnu agrees that he will not directly or indirectly use or disclose to any person or business entity any financial information involving Vari-Lite or proprietary information involving Vari-Lite's products, vendors, marketing, sales, and operations. Kinnu agrees that all financial information involving Vari-Lite and all information involving Vari-Lite products, vendors, marketing, sales, and operations are the exclusive property of Vari-Lite and that he shall not retain any records, materials or other documents involving the above designated matters after signing this Severance Agreement. 8. NONDISPARAGEMENT: The parties agree that neither Kinnu nor Vari-Lite will engage in any conduct or take any action, written or oral, that will reflect negatively on or damage the good reputation of the other party. If one party believes that the other party has violated the terms of this paragraph, the party shall give a written notice to the other party describing the alleged violations and specifying what action is being requested to resolve the alleged violation. The party receiving the written notice shall respond in writing within thirty days and state a specific response to each alleged violation set out in the written notice. If the party who has sent the written notice is not satisfied with the response of the other party, then the dispute will be resolved pursuant to arbitration under paragraph 12 of the Employment Agreement. 9. SURVIVAL AND WAIVER: Should any provision of this Severance Agreement be declared or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and the illegal or invalid part, term or provisions shall not be deemed to be a part of this Severance Agreement. The parties agree to waive any notice provisions in the Employment Agreement that may be applicable to the termination of Kinnu's employment. 10. COMPLETE AGREEMENT: This Severance Agreement and the Employment Agreement with its Exhibits as modified by this Severance Agreement set forth the entire agreement between the parties regarding the conclusion of Kinnu's employment by Vari-Lite Holdings, Inc., and fully supersedes any and all earlier agreements or understandings between the parties pertaining to the subject matter of this Agreement. -2- 11. CONFIDENTIALITY: It is the express intent of the parties that the terms and conditions of this Severance Agreement shall be kept confidential. The parties agree that Kinnu may disclose the terms of this Severance Agreement only to his wife, his attorney and his financial advisors. Vari-Lite may disclose the terms of this Severance Agreement to its officers, its Board of Directors, and to any employees that are necessary to effectuate the terms of this Severance Agreement. 12. CERTIFICATION: By signing below, the parties certify and represent that they have carefully read and considered this Severance Agreement and fully understand the extent and impact of its provisions, and have executed this Severance Agreement voluntarily and without coercion, undue influence, threats, or intimidations of any kind or type whatsoever and that no other promises have been made for the purpose of signing this Severance Agreement. The terms and provisions set out in this Severance Agreement represent a full and final resolution of Kinnu's employment relationship with Vari-Lite. /s/ Jim Kinnu /s/ H. R. Brutsche III - ------------------------------------ ------------------------------------ Jim Kinnu Vari-Lite, Inc. -3- EX-10.36 27 EXHIBIT 10.36 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROUND LEASE AGREEMENT between BRAZOS BELTLINE DEVELOPMENT, INC. and VARI-LITE, INC., SHOWCO, INC., SHOWCO CREATIVE SERVICES, INC., CONCERT PRODUCTION LIGHTING, INC. and IRIDEON, INC. Dated as of December 21, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS GROUND LEASE AGREEMENT HAS BEEN ASSIGNED AS SECURITY FOR INDEBTEDNESS OF BRAZOS BELTLINE DEVELOPMENT, INC. SEE SECTION 18.10 This Ground Lease Agreement has been manually executed in six counterparts, numbered consecutively from 1 through 6, of which this is No. ___. To the extent, if any, that this Ground Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in Texas) no security interest in this Ground Lease Agreement may be created or perfected through the transfer or possession of any counterpart other than the original executed counterpart which shall be the counterpart identified as counterpart No. 1. GROUND LEASE AGREEMENT THIS GROUND LEASE AGREEMENT (this "GROUND LEASE") is made and entered into as of December 21, 1995, by and between BRAZOS BELTLINE DEVELOPMENT, INC., a Texas corporation ("BRAZOS"), and VARI-LITE, INC., SHOWCO, INC., SHOWCO CREATIVE SERVICES, INC., CONCERT PRODUCTION LIGHTING, INC. and IRIDEON, INC., each a Delaware corporation (collectively, "VARI-LITE"). W I T N E S S E T H: WHEREAS, on or about the date of this Ground Lease, Brazos will acquire by assignment all rights to purchase that certain tract of real property subject to that certain Contract of Sale dated August 15, 1995, by and between Cyril D. Kasmir, Trustee, as buyer, and MCDLF Holding Company, a California corporation, as seller, as amended by that certain letter agreement dated September 12, 1995, and as further amended by that certain Second Amendment of Contract of Sale date November 7, 1995, and as further amended by that certain letter agreement dated December 4, 1995 (together the "CONTRACT OF SALE"); and WHEREAS, upon reliance of and after acquisition of such real property by Brazos, Vari-Lite wishes to lease such real property under the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Brazos and Vari-Lite hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINED TERMS. For the purposes of this Agreement each of the following terms shall have the meaning specified with respect thereto: "ACQUISITION COST" means the amount of the Initial Advance made pursuant to the Credit Agreement under Tranche A plus the Brazos equity advanced for the acquisition of the Property. "ADDITIONAL RENT" has the meaning set forth in SECTION 6.3 hereof. "AFFILIATE" means any other person controlling, controlled by or under direct or indirect common control with any Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract, or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "APPROVED PURPOSE" means, if the Property is developed, general office use, light manufacturing, assembly work, repairs, sales, marketing, advertising, warehousing, storage and distribution. "ASSIGNEE" means any lender or agent for a lender under the Credit Agreement to which any part of Brazos' interest under this Ground Lease or in the Property shall at the time have been assigned, conditionally or otherwise, by Brazos pursuant to SECTION 18.10 hereof. "ASSIGNMENT" means each assignment or security agreement referred to in SECTION 18.10 hereof between Brazos and any lender or agent for a lender under the Credit Agreement, pursuant to which Brazos assigns or grants a security interest in any of its rights under this Ground Lease, as from time to time amended. GROUND LEASE AGREEMENT - Page 1 "BASIC RENT" means for each calendar month the amount computed by multiplying the following: (i) the Acquisition Cost of the Property as of the Effective Date with respect to the initial Basic Rent Payment Date and thereafter, as of the preceding Basic Rent Payment Date, by (ii) a fraction having a numerator equal to the number of days in such month and a denominator of 360, by (iii) 0.40% plus (A) if no BR Borrowings will be outstanding during the Computation Period (as defined below) the weighted average percentage cost per annum of LIBOR Borrowings outstanding at any time during the period from the first day of the month to and including the last day of the month (the "COMPUTATION PERIOD") for which Basic Rent is being computed; or (B) if no LIBOR Borrowings will be outstanding during the Computation Period, the weighted average cost per annum of BR Borrowings; or (C) if both BR Borrowings and LIBOR Borrowings are outstanding during the Computation Period, the cost as determined above with respect to each proportionate amount of the outstanding BR Borrowings and LIBOR Borrowings, plus, on the first Basic Rent Payment Date for which Basic Rent is due, an additional amount computed by multiplying (i) and (iii) above by a fraction having a numerator equal to the number of days from the Effective Date to the first Basic Rent Payment Date for which Basic Rent is due and a denominator of 360. If any LIBOR Borrowings are subject to an Interest Period (as defined in the Credit Agreement) which is due to expire prior to the next Basic Rent Payment Date, the cost per annum of the relevant LIBOR Borrowings or BR Borrowings two Business Days prior to such Basic Rent Payment Date shall be used for purposes of calculating the weighted average cost per annum of the relevant LIBOR Borrowings or BR Borrowings pursuant to (iii) above for the month. If the actual weighted average cost per annum of the relevant LIBOR Borrowings or BR Borrowings for such month is lower than the weighted average cost per annum of the relevant LIBOR Borrowings or BR Borrowings, the amount of Basic Rent which Vari-Lite overpaid shall be credited towards Basic Rent on the following Basic Rent Payment Date and, if the actual weighted average cost per annum of the relevant LIBOR Borrowings or BR Borrowings for such month is higher than the weighted average cost per annum of the relevant LIBOR Borrowings or BR Borrowings, the amount of Basic Rent which Vari-Lite underpaid shall be paid by Vari-Lite on the following Basic Rent Payment Date. "BASIC RENT PAYMENT DATE" means the first day of any calendar month during the Lease Term or Renewal Term of the Property or, if such day is not a Business Day, the next succeeding Business Day. "BBH&CO" means Brown Brothers Harriman & Co., a New York limited partnership. "BRAZOS" means Brazos Beltline Development, Inc., a Texas corporation which is a wholly-owned subsidiary of Brazos River Leasing, L.P., or any successor or successors to all of its rights and obligations hereunder and, for purposes of SECTION 10.1(c), shall include any corporation, trust, individual, or other person or entity which computes its liability for income or other taxes on a consolidated basis with Brazos or the income of which for purposes of such taxes is determined or affected directly or indirectly by the income of Brazos or its successor or successors. "BR BORROWINGS" means all borrowings by Brazos under the Credit Agreement which bear interest based on a base rate of interest specified by BBH&Co under the Credit Agreement. "BUSINESS DAY" means a day other than a Saturday, Sunday or other day on which commercial banks in Dallas, Texas or New York City, New York are authorized or required by law to close. "CODE" means the Internal Revenue Code of 1986, as amended. GROUND LEASE AGREEMENT - Page 2 "CONSENT" means each consent of Guarantor to an Assignment, pursuant to which, among other things, Guarantor consents to the terms of such Assignment insofar as they relate to this Ground Lease, as from time to time amended. "CONSTRUCTION AGREEMENT" means the construction agreement to be entered into by Brazos with a party designated by Brazos and acceptable to the Agent to construct the Facility. "CONSTRUCTION CONSULTANT" means, if the Property is developed, Fults Associates, Inc., a Texas corporation. "CONTRACTOR" means, if the Property is developed, the party appointed by Brazos, subject to acceptance of such party by the Agent, Vari-Lite and the Guarantor. "CREDIT AGREEMENT" means the Credit Agreement dated as of December 21, 1995 among Brazos, and BBH&Co as agent for the lenders related to the financing of the Property, as it may be amended, restated, modified or supplemented, from time to time. "EFFECTIVE DATE" means with respect to the Property, the date on which the Property is acquired by Brazos and leased hereunder by Brazos to Vari-Lite, as evidenced by this Ground Lease. "ENVIRONMENTAL CLAIM" means any third party (including government agencies and employees, Brazos, BBH&Co, the lenders under the Credit Agreement and their respective successors and assigns) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "ENVIRONMENTAL LAW" means all Legal Requirements arising from, relating to, or in connection with the Environment (as defined in 43 U.S.C. Section 9601(8) (1988)), health, or safety, including without limitation (i) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, and (ii) Legal Requirements relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposals, hazardous materials or wastes; (c) the safety or health or transportation; (d) exposure to pollutants, contaminant of the public or employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or waste. "EVENT OF DEFAULT" has the meaning set forth in SECTION 13.1 hereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and all regulations promulgated by the Securities and Exchange Commission thereunder. "FACILITY" means, if the Property is developed, all improvements of whatever kind or character now or hereafter located on, in or under or affixed to the Property, including, without limitation, the office building, any utilities, paving, signage or lighting, and all fixtures installed in such improvements, and all additions, replacements and subsequent replacements thereof which is leased pursuant to any Facility Lease, but excluding all parcels of land on which such Facility sits. "FACILITY LEASE" means any lease of the Facility acceptable to Brazos, BBH&Co, Vari-Lite and each of the lenders under the Credit Agreement. "GOVERNMENTAL AUTHORITY" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over any Bank, Brazos, the Guarantor, Vari-Lite, or any of their respective properties. GROUND LEASE AGREEMENT - Page 3 "GOVERNMENTAL REQUIREMENTS" shall mean all statutes, laws, ordinances, orders, writs, injunctions, decrees, rules and regulations of any Governmental Authority applicable to Brazos, Vari-Lite, the Ground or any Facility. "GROUND LEASE" means this Ground Lease Agreement. "GUARANTOR" means Vari-Lite Holdings, Inc., a Texas corporation having its principal office at 201 Regal Row, Dallas, Texas 75247, and its successors. "GUARANTOR CONSENT" means the Consent and Agreement dated as of December 21, 1995 among the Guarantor, Brazos and BBH&Co, as it may be amended or supplemented from time-to-time. "GUARANTY" means the Guaranty Agreement, dated as of December 21, 1995, by and between the Guarantor and Brazos, as it may be further amended, restated, modified or supplemented, from time to time, in accordance with the terms thereof. "INDEBTEDNESS" means, with respect to any Person, (a) all obligations of such Person for borrowed money, or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (d) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than accounts payable to suppliers incurred in the ordinary course of business and paid when due), (e) all obligations of such Person under leases required to be accounted for as capital leases under generally accepted accounting principles, (f) all obligations of such Person to reimburse the issuer of any letter of credit, (g) all guarantees of payment or collection of liabilities or obligations of the nature specified in clauses (a) through (f) above of another Person or similar arrangement pursuant to which such Person has assured a creditor of the other Person against loss and (h) all obligations of others of the types referred to in clauses (a) through (g) above secured by (or for which the holders of such obligations have an existing right, contingent or otherwise, to be secured by) any lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed. "INDEMNIFIED PERSON" has the meaning set forth in SECTION 10.1 hereof. "INSURANCE REQUIREMENTS" means all requirements of this Ground Lease with respect to insurance, all terms of any insurance policy covering or applicable to the Property, all requirements of the issuer of any such policy, all statutory requirements and all orders, rules, regulations and other requirements of any governmental body related to insurance applicable to the Property. "LEASE DOCUMENTS" means any Facility Lease, this Ground Lease, any Facility Leasing Record (as defined in the Facility Lease), and the Property Leasing Record (as defined in this Ground Lease) and all documents and instruments executed in connection therewith including, without limitation, the Guaranty, the Lessee Consent, the Guarantor Consent and the Construction Agreement. "LEASE TERM" has the meaning set forth in SECTION 5.1 hereof. "LEGAL REQUIREMENTS" means all laws, judgments, decrees, ordinances and regulations and any other governmental rules, orders and determinations and all requirements having the force of law, now or hereinafter enacted, made or issued, whether or not presently contemplated, and all agreements, covenants, conditions and restrictions applicable to the Property and/or the ownership, operation or use thereof, including, without limitation, all requirements of the Americans With Disabilities Act (P.L. 101-335) and environmental statutes, compliance with which is required at any time during the Lease Term and any Renewal Term, whether or not such compliance shall require structural, unforeseen or extraordinary changes to the Property or the operation, occupancy or use thereof. "LESSEE CONSENT" means the Consent and Agreement dated as of December 21, 1995 among Vari-Lite, Brazos and BBH&Co, as it may be amended or supplemented from time-to-time. GROUND LEASE AGREEMENT - Page 4 "LIBOR BORROWINGS" means all borrowings by Brazos under the Credit Agreement which bear interest based on the per annum rate of interest at which dollar deposits are offered by major banks in the London inter-bank market. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing). "LIEN OF RECORD" means, with the exception of the Lien of a lender or lender's agent under the Credit Agreement, any mechanics' or materialmen's lien for which retainage is held in amounts required by applicable law, lien securing the payment of taxes, assessments or governmental charges and levies which are due, payable and delinquent, judgment lien or any other filed, recorded, or docketed matter (whether or not the same shall constitute a Permitted Encumbrance or be the subject of a Permitted Contest) which (a) may result in a sale for satisfaction of same, a loss, forfeiture, reversion of title, or right of reentry with respect to the Property or (b) whether or not valid, is reasonably likely to interfere with the due and timely payment of any sum payable or the exercise of any of the rights or the performance of any of the duties or responsibilities of Vari-Lite under this Ground Lease. "MATERIAL ADVERSE CHANGE" means any circumstance or event that (a) can reasonably be expected to cause an Event of Default; (b) otherwise can reasonably be expected to (i) be material and adverse to the continued operation of Vari-Lite or (ii) be material and adverse to the financial condition, business operations, prospects or properties of Vari-Lite (provided consolidation of the Acquisition Cost for financial accounting purposes of Vari- Lite or the Guarantor shall not be a Material Adverse Change in financial condition); (c) could reasonably be expected to adversely affect the performance by Vari-Lite of its obligations under any Facility Lease or this Ground Lease; or (d) in any manner whatsoever does or can reasonably be expected to materially and adversely affect (i) the validity or enforceability of any Facility Lease or this Ground Lease or (ii) the fair market value of the Property. "MAXIMUM RATE" has the meaning set forth in SECTION 18.8 hereof. "PERMITTED CONTEST" has the meaning set forth in paragraph (a) of ARTICLE XVII hereof. "PERMITTED ENCUMBRANCES" means the following Liens and other matters affecting the title of the Property: (a) mechanics' and materialmen's liens incurred in good faith in the ordinary course of business and securing obligations that are junior to any Liens of Assignee not exceeding $100,000 in the aggregate which are not yet due or which are subject to a Permitted Contest; (b) Liens securing the payment of taxes, assessments and governmental charges or levies, either not delinquent or subject to a Permitted Contest; (c) zoning and planning restrictions, subdivision and platting restrictions, easements, rights-of-way, licenses, reservations, covenants, conditions, waivers, restrictions on the use of property, minor encroachments or minor irregularities of title which do not materially impair (i) the intended use of the Property by Vari-Lite or (ii) the value of the Property; (d) reservations of mineral interests, provided that the holders of such mineral reservations shall have waived the right to, or otherwise be precluded from, entering on the Property for the purpose of removing or extracting such minerals; and (e) the lien created contemporaneously with the acquisition of the Property pursuant to, and securing the obligations under, the Credit Agreement. "PERSON" means an individual, partnership, corporation, business trust, joint venture, joint stock company, trust, unincorporated association or Governmental Authority or other entity of whatever nature. "POTENTIAL DEFAULT" means any event which, but for the lapse of time, or giving of notice, or both, would constitute an Event of Default. "PROPERTY" means that certain parcel of land purchased by Brazos pursuant to the Purchase Contract and leased hereunder, as such land is more particularly described on EXHIBIT A attached hereto and incorporated herein by reference for all purposes and when leased subject to the respective easements, rights and appurtenances relating to such parcels of land, but excluding the Facility. GROUND LEASE AGREEMENT - Page 5 "PROPERTY LEASING RECORD" means an instrument evidencing the lease of the Property under this Ground Lease, as prepared and executed by Brazos, as lessor, accepted and executed by Vari-Lite, as lessee. "PURCHASE CONTRACT" means that certain Contract of Sale dated August 15, 1995, by and between Cyril D. Kasmir, Trustee, as buyer, and MCDLF Holding Company, a California corporation, as seller, as amended by that certain letter agreement dated September 12, 1995, and as further amended by that certain Second Amendment of Contract of Sale date November 7, 1995, and as further amended by that certain letter agreement dated December 4, 1995. "RENEWAL TERM" has the meaning set forth in SECTION 11.3 hereof. "REPORTS" has the meaning set forth in SECTION 2.5 hereof. "UNECONOMIC NOTICE" has the meaning set forth in SECTION 12.1 hereof. "UNECONOMIC PROPERTY" has the meaning set forth in SECTION 12.1 hereof. "UNITARY METHOD OF TAXATION" means a method of taxation under which the business income of individual corporations in a commonly controlled enterprise which may be deemed to operate in the same general line of business as a corporation or corporations subject to a state's taxing jurisdiction is aggregated regardless of whether the individual corporations have a tax nexus with, or presence in, such state and is then apportioned to such state based on an apportionment formula. "VARI-LITE" has the meaning set forth in the first paragraph of this Ground Lease. Section 1.2 FORMS. All forms specified by the text hereof or by reference to exhibits attached hereto shall be substantially as set forth herein, subject to such changes by Brazos and Vari-Lite by mutual consent that do not alter the substantive rights of the parties hereto or of the Assignees or as may be required by applicable laws hereafter enacted. Section 1.3 RECITALS, TABLE OF CONTENTS, TITLES, AND HEADINGS. The terms and phrases used in the recitals of this Ground Lease have been included for convenience of reference only and the meaning, construction, and interpretation of such words and phrases for purposes of this Ground Lease shall be determined solely by reference to SECTION 1.1 hereof. The table of contents, titles, and headings of the Articles and Sections of this Ground Lease have been inserted for convenience of reference only and are not to be considered a part hereof and shall not in any way modify or restrict any of the terms or provisions hereof and shall not be considered or given any effect in construing this Ground Lease or any provision hereof or in ascertaining intent, if any question of intent should arise. Section 1.4 INTERPRETATION. Unless the context requires otherwise, words of the masculine gender shall be construed to include correlative words of the feminine and neuter genders and vice versa, and words of the singular number shall be construed to include correlative words of the plural number and vice versa. This Ground Lease, and all the terms and provisions hereof, shall be liberally construed to effect the purposes set forth herein and to sustain the validity of this Ground Lease. ARTICLE II REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF VARI-LITE Vari-Lite represents and warrants to Brazos and agrees as follows: GROUND LEASE AGREEMENT - Page 6 Section 2.1 CORPORATE MATTERS. Each corporation constituting a lessee under this Ground Lease and named in the definition of Vari-Lite (i) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, (ii) has full corporate power and authority to own and operate its properties and to conduct its business as presently conducted and full corporate power, authority and legal right to execute, deliver and perform its obligations under this Ground Lease and any Consent, (iii) is in good standing in the State of Texas and any other jurisdiction where its activities require qualification; and (iv) is a wholly- owned subsidiary of Guarantor. Section 2.2 AUTHORIZATION; BINDING AGREEMENT. This Ground Lease has been duly authorized, executed and delivered by Vari-Lite and, assuming the due authorization, execution and delivery of this Ground Lease by Brazos, this Ground Lease is a legal, valid and binding obligation of Vari-Lite, enforceable according to its terms, subject, as to enforceability, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). Section 2.3 POWER AND AUTHORITY. The consummation of the transactions herein contemplated and the performance and observance of Vari-Lite's obligations under this Ground Lease and any Consent have been duly authorized by all necessary corporate action on the part of Vari-Lite. The execution, delivery and performance by Vari-Lite of this Ground Lease and any Consent will not result in any violation of any term of the certificate of incorporation or the by-laws of Vari-Lite, do not require stockholder approval or the approval or consent of any trustee or holders of Indebtedness of Vari-Lite except such as have been obtained prior to the date hereof and will not conflict with or result in a breach of any terms or provisions of, or constitute a default under, or result in the creation or imposition of any Lien (other than a Permitted Encumbrance on the Property as may be contemplated herein) upon any property or assets of Vari-Lite under any indenture, mortgage or other agreement or instrument to which Vari-Lite is a party or by which it or any of its property is bound where breach or default, singly or in the aggregate, could materially adversely affect (i) the financial condition or creditworthiness of Vari-Lite or (ii) its ability to perform its obligations under this Ground Lease, any Facility Lease, or the Consent executed by Vari-Lite of even date herewith, or any existing applicable law, rule, regulation, license, judgment, order or decree of any Governmental Authority or court having jurisdiction over Vari-Lite or any of its activities or properties. Section 2.4 CONSENTS, APPROVALS, AUTHORIZATIONS. There are no consents, licenses, orders, authorizations or approvals of, or notices to or registrations with, any Governmental Authority which are required in connection with the valid execution, delivery and performance of this Ground Lease that have not been obtained or made, except such permits and licenses as Vari-Lite will be required to obtain for the occupancy, use or operation of the Property and which, in the ordinary course of business, are not obtained until just prior to the commencement of such occupancy, use or operation, and any such consents, licenses, orders, authorizations, approvals, notices and registrations that have been obtained or made are in full force and effect. Section 2.5 FINANCIAL STATEMENTS. Vari-Lite has caused to be furnished to Brazos copies of Guarantor's most recent consolidated balance sheet, income statement and cash flow statement (the "REPORTS"). The financial statements contained in the Reports fairly present the financial position, results of operations and changes in financial position of Guarantor as of the dates and for the periods indicated therein. Section 2.6 CHANGES. Since the date of the most recent Reports delivered pursuant to SECTION 2.5, there has been no adverse change in the financial condition or business of Vari-Lite or the Guarantor which would materially impair the ability of Vari-Lite to perform its obligations under this Ground Lease or which would materially impair the ability of the Guarantor to perform its obligations under the Guaranty. Section 2.7 LITIGATION. Except as disclosed in the Reports, there is no action, suit, proceeding or investigation at law or in equity by or before any court, governmental body, agency, commission or other tribunal now pending or, to the best knowledge of Vari-Lite after due inquiry, threatened against or affecting Vari-Lite or the Guarantor or any property or rights of Vari-Lite or the Guarantor, which affects the Property, as to which there is a significant possibility of an adverse determination, and which if adversely determined, may have a material adverse impact on the financial condition or business of Vari-Lite or the Guarantor or which, if adversely determined, could materially impair the ability of Vari-Lite to perform its obligations hereunder or of the Guarantor to perform GROUND LEASE AGREEMENT - Page 7 its obligations under the Guaranty, or which, if adversely determined, may have a material adverse impact on the value or intended use of the Property and there is no action, suit, proceeding or investigation at law or in equity by or before any court, governmental body, agency, commission or other tribunal now pending or, to the best knowledge of Vari-Lite after due inquiry, threatened, which questions or would question the validity of this Ground Lease. Section 2.8 DELIVERY OF INFORMATION. Vari-Lite shall deliver to Brazos from time to time, (i) so long as Vari-Lite and the Guarantor are not subject to filing requirements under the Exchange Act, Vari-Lite's and Guarantor's most recent consolidated balance sheet, income statement and cash flow statement within 90 days of the end of each fiscal quarter, and upon becoming subject to such filing requirements, promptly upon filing under the Exchange Act or mailing to shareholders, copies of the Guarantor's Annual Reports on Form 10-K, the Guarantor's Quarterly Reports on Form 10-Q and any other reports the Guarantor files under the Exchange Act, and any report or mailing made to Guarantor's shareholders, (ii) promptly upon request, such other information with respect to Vari-Lite's and the Guarantor's operations, business, property, assets or financial condition as Brazos shall reasonably request, (iii) promptly after an officer of Vari-Lite obtains knowledge of any Event of Default hereunder or of any Potential Default, a certificate of an officer of Vari-Lite specifying the nature and period of existence of such Event of Default or Potential Default, and what action, if any, Vari-Lite has taken, is taking, or proposes to take with respect thereto, (iv) promptly after an officer of Vari-Lite obtains knowledge of any material adverse change in the financial condition or business of Vari-Lite or Guarantor or of any litigation of the type described in SECTION 2.7, a certificate of an officer of Vari-Lite describing such change or litigation as the case may be, (v) promptly after Vari-Lite obtains knowledge of any and all Liens, other than Permitted Encumbrances, or other matters, including any litigation affecting the Property, which may materially adversely affect the value or intended use of the Property, a detailed statement describing each such Lien or other matter and (vi) promptly after Vari-Lite obtains knowledge of any Environmental Claim, a detailed statement describing such Environmental Claim and what action, if any, Vari-Lite has taken, is taking, or proposes to take with respect thereto. Section 2.9 COMPLIANCE WITH LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS. The operation, use and physical condition of the Property comply in all material respects with the Insurance Requirements and are in full compliance with all Legal Requirements. Section 2.10 CONFIDENTIALITY. Brazos hereby agrees to maintain the confidentiality of all financial information submitted to it by Vari-Lite or by the Guarantor pursuant to SECTION 2.5 or 2.8 hereof. Vari-Lite hereby consents to a delivery of such information to the lenders under the Credit Agreement, Brazos' legal counsel and Brazos' auditors. ARTICLE III LEASE OF PROPERTY Section 3.1 LEASE. Subject to the terms and conditions hereof, Vari-Lite agrees to lease the Property from Brazos simultaneously upon Brazos' acquisition of the Property. Section 3.2 PROPERTY LEASING RECORD. The Property Leasing Record shall give a full legal description of the Property, the Acquisition Cost of the Property, the Lease Term for the Property, the location of the Property and such other details as Brazos, Vari-Lite and any Assignee may from time to time agree. Execution and delivery by Vari-Lite of the Property Leasing Record shall constitute (i) acknowledgment by Vari-Lite that the Property has been delivered to Vari-Lite in good condition and has been accepted for lease hereunder by Vari-Lite as of the Effective Date of the Property Leasing Record, (ii) acknowledgment by Vari-Lite that the Property specified in the Property Leasing Record is subject to all of the covenants, terms and conditions of this Ground Lease, and (iii) certification by Vari-Lite that the representations and warranties contained in ARTICLE II of this Ground Lease are true and correct in all material respects on and as of the Effective Date of the Property Leasing Record as though made on and as of such date and that there exists on such date no Event of Default or Potential Default. GROUND LEASE AGREEMENT - Page 8 Section 3.3 OPERATING LEASE. Brazos and Vari-Lite hereby declare that it is their mutual intent that for accounting purposes this Ground Lease be treated as an operating lease and not an instrument or evidence of indebtedness, and that the relationship between Brazos and Vari-Lite under this Ground Lease shall be that of lessor and lessee only. Title to and ownership of the Property shall at all times remain in Brazos and at no time become vested in Vari-Lite except in accordance with an express provision of this Ground Lease. Vari-Lite does not hereby acquire any right, equity, title or interest in or to the Property, except pursuant to the terms hereof. Vari-Lite hereby grants to Lessor a security interest in the Property and all proceeds thereof as collateral security for the payment and performance by Vari-Lite of Vari-Lite's obligations as Lessee hereunder. (a) Brazos and Vari-Lite intend that the transactions and arrangements contemplated by this Ground Lease have a dual, rather than a single form, and that (i) for financial accounting purposes with respect to Vari-Lite (A) this Ground Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards No. 13, as amended, and (B) Vari-Lite will be treated as the lessee of the Property, but (ii) for federal, state and local income tax purposes (A) this Ground Lease will be treated as a financing arrangement (rather than a "true lease"), (B) Brazos will be treated as a lender making a loan to Vari-Lite in an amount equal to the sum of the advances under the Credit Agreement, which amounts are secured by the Property, and (C) Vari-Lite will be treated as the owner of the Property and will be entitled to all tax benefits ordinarily available to an owner of property like the Property for such tax purposes. (b) Brazos and Vari-Lite further intend and agree that, for the purpose of securing Vari-Lite's obligations for the repayment of the advances under the Credit Agreement, (i) this Ground Lease shall also be deemed to be a deed of trust, mortgage, security agreement, assignment of rental and financing statement, and Vari-Lite hereby grants a lien and security interest upon and a collateral assignment of the Property and all proceeds thereof; (ii) the possession by Brazos or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iii) notifications to Persons holding such property, and acknowledgments, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Vari-Lite shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. Brazos and Vari-Lite shall, to the extent consistent with this Ground Lease, take such actions as may be necessary to ensure that, to the extent this Ground Lease is deemed to create a Lien on the Property in accordance with this SECTION 3.3, such Lien shall be deemed to be a perfected Lien of first priority under applicable law and will be maintained as such throughout the Lease Term. (c) Brazos and Vari-Lite further intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting Vari-Lite or Brazos, this Ground Lease shall be regarded as financial accommodations made by an unrelated third party to Vari-Lite for purposes of applicable bankruptcy and insolvency laws. ARTICLE IV DELIVERY AND ACCEPTANCE Section 4.1 ACCEPTANCE. Pursuant to this Ground Lease Vari-Lite shall accept the Property. Brazos shall not be liable to Vari-Lite for any failure to obtain, or delay in obtaining, the Property or any delay in the delivery of possession thereof to Vari-Lite. Vari-Lite has examined the title and other matters pertaining to the Property, including restrictive covenants requiring approvals of certain uses of the Property, easements, zoning and other matters and accepts the Property subject to all such restrictions, required approvals and other matters. Section 4.2 PAYMENTS FINAL. Each payment of Basic Rent, Additional Rent and any other amount due hereunder made by Vari-Lite shall be final, and Vari-Lite, without waiving any other remedies it may have, will not seek or have any right to recover all or any part of such payment from Brazos or any Assignee for any reason whatsoever. The making of payments under this Ground Lease by Vari-Lite (including payments pursuant to GROUND LEASE AGREEMENT - Page 9 ARTICLE X) shall not be deemed to be a waiver of any claim or claims that Vari-Lite may assert against Brazos or any other person. Brazos agrees to repay Vari-Lite amounts paid to Brazos to the extent such payments were in error and are not required by the various terms and provisions of this Ground Lease. Section 4.3 NO WARRANTIES OR REPRESENTATIONS. Notwithstanding any other provision contained in this Ground Lease, it is specifically understood and agreed that neither Brazos nor any Assignee nor any Affiliate of either, nor anyone acting on behalf of any of them makes any warranties or representations or has any responsibility to disclose any relevant information, or has any other responsibility or duty, nor, except as set forth in SECTION 18.11 of this Ground Lease, has Brazos or any Assignee or any Affiliate of either, or anyone acting on behalf of any of them made any covenants or undertakings, as to the accounting treatment to be accorded Vari-Lite or as to the U.S. Federal or any state income or any other tax consequences, if any, to Vari-Lite as a result of or by virtue of the transactions contemplated by this Ground Lease. Section 4.4 QUIET ENJOYMENT. During the Lease Term or Renewal Term, if any, so long as no Event of Default or Potential Default shall have occurred and be continuing, Brazos covenants that as between Brazos and Vari-Lite, Vari-Lite shall have the right to quiet enjoyment of the Property on the terms and conditions provided in this Ground Lease without any interference from Brazos. Vari-Lite agrees to attorn to any Assignee in the event such Assignee succeeds to Brazos' interest in the Property, and Vari-Lite will not hold the Assignee responsible for Brazos' obligations incurred in the period prior to the succession of the Assignee to Brazos' interest. Section 4.5 CONSTRUCTION OF THE FACILITY. Vari-Lite hereby agrees that, if the Property is developed, Brazos, the Construction Consultant, the Contractor, any subcontractors, architects, engineers and other personnel or agents of any of the foregoing parties may have access to and may exert control over the Property as may reasonably be required for the purpose of planning, constructing, furnishing and completing the Facility. ARTICLE V LEASE TERM Section 5.1 LEASE TERM. The "LEASE TERM" with respect to the Property shall commence on the Effective Date and shall end on December 21, 2000. The lease of the Property may be renewed for six (6) additional five year terms pursuant to, and in accordance with, SECTION 11.3. The Lease Term or any Renewal Term may be terminated earlier pursuant to ARTICLES XI, XII, XIII, XIV, OR XV hereof or otherwise pursuant to operation of any Legal Requirements. Section 5.2 TERMINATION. Notwithstanding anything contained in this ARTICLE V OR ARTICLE XI, this Ground Lease shall terminate on December 21, 2000, unless earlier terminated or renewed; PROVIDED that any obligations that, by their terms, survive this Ground Lease and any obligations that exist at the time of such termination shall not terminate upon any termination under this SECTION 5.2. ARTICLE VI RENT AND OTHER PAYMENTS Section 6.1 BASIC RENT. Vari-Lite hereby agrees to pay Brazos on each Basic Rent Payment Date, Basic Rent for the calendar month in which such Basic Rent Payment Date falls. Brazos shall notify Vari-Lite at least two Business Days prior to each Basic Rent Payment Date of the amount of the Basic Rent due on such Basic Rent Payment Date; but failure to notify shall not relieve Vari-Lite of its obligation to pay Basic Rent. Section 6.2 OTHER AMOUNTS. Vari-Lite hereby agrees to pay within ten (10) days of delivery of a statement therefor all amounts (other than Basic Rent) due hereunder, including, without limitation, all amounts payable to any Indemnified Person pursuant to ARTICLE X hereof. GROUND LEASE AGREEMENT - Page 10 Section 6.3 ADDITIONAL RENT. Vari-Lite shall pay to Brazos from time to time, on demand, as additional rent ("ADDITIONAL RENT") (i) amounts required to reimburse Brazos for its obligations, costs and expenses (not previously included in the formula for Basic Rent) incurred in planning, acquiring, constructing, financing and leasing the Property, which is intended to include all ordinary and extraordinary costs and expenditures under the Credit Agreement, but which shall not include general and administrative overhead expenses of Brazos, and (ii) to the extent legally enforceable, interest on each overdue amount not paid by Vari-Lite to Brazos as provided in this Ground Lease from the date such overdue amount was due until paid at the per annum rate of interest equal to the most recent rate of interest calculated pursuant to paragraph (iii) of the definition "BASIC RENT" plus two percent (2%). Vari-Lite shall also pay to Brazos on demand an amount equal to any reasonable expenses and attorneys' fees incurred by Brazos in collecting such unpaid sums and enforcing the obligations for such unpaid sums. Section 6.4 PAYMENT IN ADVANCE. Basic Rent and Additional Rent and any other amount payable by Vari-Lite to Brazos shall be paid sufficiently in advance of the date due to assure that immediately available funds in the full amount due are available on the date due, to such account of Brazos at such bank, or to such account of such other person at such bank, or otherwise as Brazos may from time to time designate. Section 6.5 CREDIT AGREEMENT LOSSES. In addition to all other payment obligations hereunder, if this Ground Lease is terminated for any reason prior to the end of the Lease Term or, if applicable, Renewal Term, then Vari-Lite shall pay to Brazos within three Business Days after receipt of the billing statement referred to below an additional amount compensating Brazos for all penalties, costs and expenses (including out-of-pocket costs and expenses) as are incurred by Brazos under the Credit Agreement in connection with such termination and as are set forth in a billing statement sent by Brazos to Vari-Lite containing the calculation thereof in reasonable detail. Section 6.6 NET LEASE; NO SETOFF; ETC. This Ground Lease is a net lease. Notwithstanding any term or provision of this Ground Lease, it is intended that Basic Rent and Additional Rent, together with any amounts due pursuant to SECTION 6.5, shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement, suspension, deferment, diminution or reduction. Except to the extent otherwise expressly specified herein, the obligations and liabilities of Vari-Lite hereunder shall in no way be released, discharged or otherwise affected for any reason including, without limitation, the following: (a) any defect in the condition, quality or fitness for use of the Property; (b) any damage to, removal, abandonment, salvage, loss, scrapping or destruction of or any requisition or taking of the Property by act of God or enemy, any other force majeure event or any cause whatsoever; (c) any restriction, prevention or curtailment of or interference with any use of the Property; (d) any defect in title to or rights to the Property or any Lien on such title or rights or on the Property; (e) any change, waiver, extension, indulgence or other action or omission in respect of any obligation or liability of Vari-Lite, Brazos or any other Person; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Vari-Lite, Brazos or any other Person, or any action taken with respect to this Ground Lease by any trustee or receiver of Vari-Lite, Brazos or any other Person, or by any court in any such proceeding; (g) any claim that Vari-Lite has or might have against any Person including, without limitation, Brazos or any lender under the Credit Agreement; (h) any failure on the part of Brazos to perform or comply with any of the terms hereof or of any other agreement; (i) any invalidity or unenforceability or disaffirmance of this Ground Lease against or by Vari-Lite or any provision hereof or the Ground Lease or any provision thereof; (j) any prohibition, limitation, restriction or prevention of Vari-Lite's use, occupancy or enjoyment of the Property by any Person; (k) any condemnation, confiscation, seizure, or requisition of use or title to all or any portion of the Property by any governmental authority under the power of eminent domain including, without limitation, a temporary event; (l) any prohibition, limitation, restriction or prevention of Vari-Lite's use, occupancy or enjoyment of the Property by any Person; (m) any eviction of Vari- Lite from, or loss of possession by Vari-Lite of, the Property or any part thereof, by reason of title paramount or otherwise; (n) the invalidity or unenforceability of any provision hereof or the impossibility of illegality of performance by Brazos or Vari-Lite or both; (o) any action of any Governmental Authority; or (p) any other cause or occurrence whatsoever, whether similar or dissimilar to the foregoing. Vari-Lite shall remain obligated under this Ground Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Ground Lease, notwithstanding any bankruptcy, insolvency, reorganization, liquidation, dissolution or other proceeding affecting Brazos or any other Person or any action with respect to this Ground Lease which may be taken by any trustee, receiver or liquidator or by any court. Except as GROUND LEASE AGREEMENT - Page 11 expressly permitted in this Ground Lease, Vari-Lite waives all rights to cancel, terminate or surrender this Ground Lease, or to any abatement, diminution or deferment of Basic Rent, Additional Rent or other sums payable hereunder, and also hereby waives any and all rights now or hereafter conferred by any Governmental Requirement or otherwise to modify or to avoid strict compliance with Vari-Lite's obligation under this Ground Lease. All payments made to or for the benefit of Brazos or any other Person hereunder as required hereby shall be final and Vari-Lite shall not seek to recover any such payment or any part thereof for any reason whatsoever, absent manifest error. Section 6.7 HOLDOVER RENT. Notwithstanding anything provided in this Ground Lease to the contrary, upon termination of this Ground Lease (whether by the expiration of the Lease Term or otherwise) and unless Vari-Lite purchases or has purchased the Property on such date, Vari-Lite must immediately vacate the Property, but if Vari-Lite fails to do so, then without the execution of a new lease by Brazos and Vari-Lite, Vari-Lite, at the option of Brazos, shall immediately become a tenant from month-to-month of the Property at a Basic Rent rate equal to the lesser of (a) one hundred fifty percent (150%) of the Basic Rent effective in the month immediately preceding termination of this Ground Lease or (b) the maximum amount of Basic Rent that may lawfully be charged to Vari-Lite under the circumstances, and under all other terms, conditions, provisions and obligations of this Ground Lease including, without limitation, payment of all Additional Rent. ARTICLE VII RESTRICTED USE; COMPLIANCE WITH LAWS Section 7.1 INSURANCE REQUIREMENT AND LEGAL REQUIREMENT. So long as no Event of Default shall have occurred and be continuing, Vari-Lite may use the Property in the regular course of its business for any lawful Approved Purpose or keep the Property idle. Vari-Lite will not do or permit any act or thing which is contrary in any material respect to any Insurance Requirement or which is contrary to any Legal Requirement or which might impair, other than in the normal use thereof, the value or usefulness of the Property subject to the right of access and control granted by Vari-Lite under SECTION 4.5. Section 7.2 FILINGS. Vari-Lite shall promptly and duly execute, deliver, file and record, at Vari-Lite's expense, all such documents, statements, filings and registrations, and take such further action as Brazos or any Assignee shall from time to time reasonably request in order to establish, perfect and maintain Brazos' or such Assignee's title to and interest in the Property and any Assignee's interest in this Ground Lease as against Vari-Lite or any third party in any applicable jurisdiction. Section 7.3 COMPLIANCE WITH OTHER REQUIREMENTS. Vari-Lite shall use every precaution which is commercially reasonable and which is usually employed by corporations engaged in a business which involves owning or operating similar property to prevent loss or damage to the Property and to prevent injury to third persons or property of third persons. Vari-Lite shall cooperate fully with Brazos and all insurance companies providing insurance pursuant to ARTICLE IX hereof in the investigation and defense of any claims or suits arising from the ownership, use, or occupancy of the Property, provided that nothing contained in this SECTION 7.3 shall be construed as imposing on Brazos any duty to investigate or defend any such claims or suits. Vari-Lite shall comply and shall cause all persons using or occupying the Property to comply with all Insurance Requirements and Legal Requirements regarding acquiring, titling, registering, leasing, insuring, using, occupying and operating the Property, and, if applicable, the licensing of operators thereof. Section 7.4 INSPECTION. Brazos or any Assignee or any authorized representative of either may during reasonable business hours from time to time inspect the Property and deeds, registration certificates, certificates of title and related documents covering the Property wherever the same may be located, but neither Brazos nor any Assignee shall have any duty to make any such inspection. Section 7.5 NO LIENS. Vari-Lite shall not permit or suffer to exist on the Property any Lien, other than Liens which are the subject of a Permitted Contest or Permitted Encumbrances and Liens placed thereon by, or arising from, Brazos' own actions or those of any Assignee or Affiliate of Brazos (provided, that any Liens of GROUND LEASE AGREEMENT - Page 12 Record, other than Liens placed thereon by, or arising from, Brazos' own actions or those of any Assignee or Affiliate of Brazos, may not exceed the amount of $100,000 with respect to the Property and any related Facility), nor may it assign any right or interest herein or in the Property. Vari-Lite shall not without the prior written consent of Brazos and Assignee, which consent shall not be unreasonably withheld, sublease or otherwise relinquish possession of the Property, except that Vari-Lite may otherwise relinquish possession of the Property to any contractor for use in performing work for Vari-Lite, provided that such relinquishment of possession shall in no way affect the obligations of Vari-Lite or the rights of Brazos hereunder and with respect to the Property. Brazos shall have the present and continuing right to collect and enjoy all rents and other sums of money payable under any such sublease, and Vari-Lite hereby irrevocably assigns such rents and other sums to Brazos for the benefit and protection of Brazos, provided that unless an Event of Default or Potential Default shall have occurred and be continuing hereunder, Vari-Lite shall be entitled to collect and enjoy such rents and other sums. Vari-Lite shall, within thirty (30) days after the execution of any such sublease, deliver a conformed copy thereof to Brazos. Nothing contained in this Ground Lease shall be construed as constituting the consent or request of Brazos, express or implied, to or for the performance by any contractor, laborer, materialman or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Property or any part thereof. Notice is hereby given that Brazos will not be liable for any labor, services or materials furnished or to be furnished to Vari-Lite, or to anyone holding the Property or any part thereof through or under Vari-Lite. Section 7.6 INTERFERENCE. If any Lien or charge of any kind or any judgment, decree or order of any court or other governmental authority (including, without limitation, any state or local tax lien affecting the Property), whether or not valid, shall be asserted or entered which is reasonably likely to interfere with the due and timely payment of any sum payable or the exercise of any of the rights or the performance of any of the duties or responsibilities under this Ground Lease or cause a Material Adverse Change, Vari-Lite shall, upon obtaining knowledge thereof or upon receipt of notice to that effect from Brazos, promptly take such action as may be necessary to prevent or terminate such interference. ARTICLE VIII MAINTENANCE OF PROPERTY Section 8.1 WARRANTIES. Brazos, so long as no Event of Default or Potential Default shall have occurred and be continuing, hereby assigns and agrees to make available to Vari-Lite any and all rights Brazos may have under any vendor's warranties or undertakings with respect to the Property. If any Event of Default shall have occurred and be continuing, the assignment of such rights from Brazos to Vari-Lite shall be deemed to be terminated. Section 8.2 COSTS AND EXPENSES. Vari-Lite shall pay all costs, expenses, fees and charges incurred in connection with the ownership, use or occupancy of the Property during the Lease Term and Renewal Term, if any. Except as otherwise provided in ARTICLE XII hereof, Vari-Lite shall at all times, at its own expense, and subject to reasonable wear and tear, keep the Property in good operating order, repair, condition and appearance. The foregoing undertaking to maintain the Property in good repair shall apply regardless of the cause necessitating repair, regardless of the availability or adequacy of insurance or condemnation proceeds and regardless of whether Vari-Lite has possession of the Property, and as between Brazos and Vari-Lite all risks of damage to the Property are assumed by Vari-Lite. The undertaking to maintain the Property in good repair shall include, without limitation, all common area maintenance including, without limitation, removal of dirt, snow, ice, rubbish and other obstructions and maintenance of sidewalks and landscaping. Vari-Lite hereby agrees to indemnify and hold Brazos and any Assignee harmless from and against all costs, expenses, claims, losses, damages, fines or penalties, including reasonable counsel fees, arising out of or due to Vari-Lite's failure to fulfill its obligations under this SECTION 8.2. Section 8.3 PAYMENT OF TAXES. Vari-Lite shall make all required reports to the appropriate taxing authorities and shall pay: (i) all taxes, assessments, levies, fees, water and sewer rents and charges, and all other governmental, quasi-governmental and nongovernmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, which are, at any time during the Lease Term or any Renewal Term hereof, imposed or levied upon or assessed against (A) the Property, (B) any Basic Rent, any Additional Rent or other sum payable GROUND LEASE AGREEMENT - Page 13 hereunder or (C) this Ground Lease, the leasehold estate hereby created, or which arises in respect of the ownership, operation, occupancy, possession or use of the Property; (ii) all gross receipts or similar taxes (I.E., taxes based upon gross income which fail to take into account all customary deductions (E.G., depreciation and interest)) imposed or levied upon, assessed against or measured by any Basic Rent, or any Additional Rent or other sum payable hereunder; (iii) all sales, value added, use and similar taxes at any time levied, assessed or payable on account of the acquisition, leasing or use of the Property; and (iv) all charges of utilities and communications services serving the Property. Vari-Lite shall not be required to pay any franchise, estate, inheritance, transfer, federal, foreign, state or local income or similar tax of Brazos (other than any tax referred to in clause (ii) above) unless such tax is imposed, levied or assessed in substitution for any other tax, assessment, charge or levy which Vari-Lite is required to pay pursuant to this SECTION 8.3; provided, however, that if at any time during the term of this Ground Lease, the method of taxation shall be such that there shall be levied, assessed or imposed on Brazos a capital levy or other tax directly on the rents received therefrom, or upon the value of the Property or any present or any future improvement or improvements on the Property, then all such taxes, assessments, levies, or charges, or the part thereof so measured or based, shall be payable by Vari-Lite, but only to the extent that such taxes would be payable if the Property affected were the only property of Brazos, and Vari-Lite shall pay and discharge the same as herein provided. Vari-Lite will furnish to Brazos, promptly after demand therefor, proof of payment of all items referred to above, the payment of which is the responsibility of Vari-Lite. If any such assessments may legally be paid in installments, Vari-Lite may pay or permit to be paid such assessment in installments. So long as, in the reasonable opinion of Vari-Lite's counsel, Vari-Lite shall have reasonable grounds to contest the existence, amount, applicability or validity of any tax Vari-Lite is required to pay pursuant to this Ground Lease, Vari-Lite may contest such tax pursuant to the provisions of ARTICLE XVII of this Ground Lease so long as adequate reserves therefor are maintained by Vari-Lite. Section 8.4 ENVIRONMENTAL REPORTS. At any reasonable time and from time-to-time, upon reasonable notice, Vari-Lite shall furnish Brazos a report prepared by a qualified independent consultant, at the expense of Vari-Lite, concerning the condition and status of the Property in respect of any Environmental Laws, provided that the party requesting such report has demonstrable evidence that the Property may be affected by a Hazardous Substance, a Hazardous Waste or an Environmental Claim not adequately addressed in any environmental assessment previously delivered to Brazos or any Assignee in connection with the Property. ARTICLE IX INSURANCE Section 9.1 LIABILITY AND PROPERTY DAMAGE. Vari-Lite shall, at its sole cost and expense, maintain such liability and property damage insurance with respect to the Property and insurance against loss or damage to the Property of the types usually carried by corporations engaged in the same or a similar business, of similar size as Vari-Lite, and owning similar property and which cover risks of the kind customarily insured against by such corporations and such other insurance as may be required by law or as may be reasonably requested by Brazos for purposes of assuring compliance with this ARTICLE IX, including, without limitation, the insurance described on the Schedule of Insurance attached hereto as EXHIBIT B. Such insurance shall be written by financially sound and reputable companies which are legally qualified to issue such insurance. Vari-Lite may, at its cost and expense, prosecute any claim against any insurer or contest any settlement proposed by any insurer, and Vari-Lite may bring any such prosecution or contest in the name of Brazos, Vari-Lite, or both, and Brazos will join therein at Vari-Lite's request, provided that Vari-Lite shall indemnify Brazos against any losses, costs or expenses (including reasonable attorneys' fees) which Brazos may incur in connection with such prosecution or contest. Section 9.2 ADDITIONAL INSUREDS; NOTICE. Any policies of insurance carried in accordance with this ARTICLE IX and any policies taken out in substitution or replacement for any such policies (i) shall name Brazos and Assignee as additional insureds, as their respective interests may appear (but without imposing upon any such person any obligation imposed on the insured, including, without limitation, the liability to pay the premium for any such policy), (ii) shall have attached thereto a lender's loss payable endorsement for the benefit of Brazos and Assignee as loss payees and (iii) shall provide that as against Brazos and Assignee the insurers shall waive any rights of GROUND LEASE AGREEMENT - Page 14 subrogation. Vari-Lite shall make a written request to the insurers, and provide evidence of such request to Brazos and Assignee, to give notice to Brazos and its assigns of any modification or cancellation of any insurance to be maintained under this Article. Vari-Lite shall give a copy to Brazos and any Assignee of any notice received by Vari-Lite regarding the cancellation or other termination of the insurance included in the Schedule of Insurance attached hereto as EXHIBIT B. Each liability policy (A) shall be primary without right of contribution from any other insurance which is carried by Brazos or Assignee with respect to its interest as such in the Property and (B) shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured. Section 9.3 APPLICATION OF PROCEEDS OF LOSS OR SUBSTANTIAL TAKING. Any insurance or condemnation proceeds received as the result of the occurrence of (i) any event of loss described in SECTION 14.3 hereof or (ii) any event of substantial Taking described in SECTION 15.1 shall be paid to Brazos, and disposed of as contemplated by SECTION 14.3 hereof. Section 9.4 APPLICATION OF PROCEEDS OF OTHER THAN LOSS OR SUBSTANTIAL TAKING. As between Vari-Lite and Brazos, if any insurance or condemnation proceeds received as a result of any loss or Taking, other than a loss described in SECTION 14.3 or an event of substantial Taking described in SECTION 15.1, is less than $100,000, it is agreed that such proceeds will be paid to Vari-Lite to be used for repairs, replacement, reconstruction or restoration in accordance with the terms of SECTIONS 14.2 AND 15.2 hereof. If the proceeds equal or exceed $100,000, then the proceeds shall be deposited in a special purpose account held by Assignee, to be used only for the purpose set forth in this paragraph, and Vari-Lite shall be entitled (i) to receive the amounts so deposited against certificates, invoices or bills in form satisfactory to Brazos and Assignee, delivered to Brazos and Assignee from time to time as such work or repair progresses, and (ii) to direct the investment of the amounts so deposited as provided in SECTION 9.5. Any moneys remaining in the aforesaid account after final payment for repairs has been made shall be paid to Vari-Lite. Section 9.5 INVESTMENT. Assignee, at Vari-Lite's instruction, shall invest the amounts deposited with Assignee pursuant to SECTION 9.4 in the following: (i) direct obligations of the United States Government; or (ii) interest-bearing time deposits at, or obligations of, any Assignee. Such investments shall mature in such amounts and on such dates so as to provide that amounts shall be available on the draw dates sufficient to pay the amounts requested by and due to Vari-Lite. Any interest earned on investments of such funds shall be paid to Vari-Lite. Brazos and Assignee shall not be liable for any loss resulting from the liquidation of each and every such investment and Vari-Lite shall be liable for such loss, if any. Section 9.6 APPLICATION IN DEFAULT. Any amount referred to in SECTIONS 9.3 AND 9.4 which is payable to Vari-Lite shall not be paid to Vari-Lite or, if it has been previously paid to Vari-Lite and not applied by Vari-Lite as provided in SECTIONS 9.3 OR 9.4, shall not be retained by Vari-Lite, if at the time of such payment an Event of Default or Potential Default shall have occurred and be continuing. In such event, all such amounts shall be paid to and applied by Brazos toward payment of any of such obligations of Vari-Lite at the time due hereunder as Brazos may elect. At such time as there shall not be continuing any Event of Default or Potential Default, all such amounts at the time held by Brazos in excess of the amount, if any, which Brazos shall have elected to apply as above provided shall be applied as provided in SECTIONS 9.3 AND 9.4. Section 9.7 CERTIFICATES. On or before the execution of this Ground Lease, and annually on or before the anniversary of the date of this Ground Lease, Vari-Lite will furnish to Brazos and Assignee certificates or other evidence reasonably acceptable to Brazos and Assignee certifying that the insurance then carried and maintained on the Property complies with the terms hereof. GROUND LEASE AGREEMENT - Page 15 Section 9.8 COVENANT TO KEEP INSURANCE IN FORCE. Vari-Lite covenants that it will not use or occupy the Property or permit the use or occupancy of the Property at a time when the insurance required by this ARTICLE IX is not in force. ARTICLE X INDEMNITIES Section 10.1 INDEMNIFIED PERSONS. Vari-Lite shall indemnify and hold harmless Brazos, any Assignee, any successor or successors, and any Affiliate of Brazos, and their respective officers, directors, incorporators, shareholders, partners (general and limited, including without limitation, the general and limited partners of the sole shareholder of Brazos), employees, agents, attorneys and servants (each of the foregoing an "INDEMNIFIED PERSON") from and against all liabilities, taxes, losses, obligations, claims, damages, penalties, causes of action, suits, costs and expenses (including, without limitation, reasonable attorneys' and accountants' fees and expenses) or judgments of any nature relating to or in any way arising out of: (a) The acquisition, title on acquisition, rejection, possession, titling, retitling, registration, reregistration, custody by Vari-Lite of title and registration documents, ownership, use, non-use, misuse, lease, operation, repair, control or disposition of the Property leased or to be leased hereunder, (i) except to the extent that such costs are included in the Acquisition Cost of the Property and (ii) except for any general administrative expenses of Brazos; (b) The assertion of any claim or demand based upon any infringement or alleged infringement of any right, by or in respect of the Property or any indemnification claim asserted against Brazos under the Contract of Sale; provided, however, that upon request of Vari-Lite, Brazos will make available to Vari-Lite Brazos' rights under any similar indemnification arising from any vendor's warranties or undertakings with respect to the Property; (c) All U.S. Federal, state, county, municipal, foreign or other fees and taxes of whatsoever nature arising from or relating to ownership of the Property, including but not limited to license, qualification, franchise, sales, use, gross income, gross receipts, ad valorem, business, personal property, real estate, value added, excise, motor vehicle, occupation fees and stamp or other taxes or tolls of any nature whatsoever, and penalties and interest thereon, whether assessed, levied against or payable by Brazos or otherwise, with respect to the Property or the acquisition, purchase, sale, rental, use, operation, control, ownership or disposition of the Property (including without limitation any claim by any governmental authority for transfer tax, transfer gains tax, mortgage recording tax, filing or other similar taxes or fees in connection with the acquisition of the Property by Brazos or otherwise in connection with this Ground Lease) or measured in any way by the value thereof or by the business of, investment in, or ownership by Brazos with respect thereto, provided that this indemnity shall not apply to (i) taxes that Vari-Lite is not required to pay under SECTION 8.3 and (ii) net income taxes or capital gains taxes imposed by any state or local taxing authority utilizing the Unitary Method of Taxation. (d) Any violation or alleged violation (other than an alleged violation alleged by Brazos) by Vari-Lite of this Ground Lease or of any contracts or agreements to which Vari-Lite is a party or by which it is bound or any laws, rules, regulations, orders, writs, injunctions, decrees, consents, approvals, exemptions, authorizations, licenses and withholdings of objection, of any governmental or public body or authority and all other Legal Requirements, including, without limitation, any Legal Requirements with respect to the environment or the regulation of hazardous materials or substances, or any breach of a representation or warranty by Vari-Lite under this Ground Lease; (e) Any Environmental Claim or requirement of Environmental Law concerning or relating to the Property, or the operations or business in respect of the Property; or (f) Any claim against Brazos' title or Assignee's interest in the Property to the extent such claim is not fully paid by title insurance. GROUND LEASE AGREEMENT - Page 16 Section 10.2 PAYMENTS. Vari-Lite shall reimburse any Indemnified Person for any sum or sums expended with respect to any of the items set forth in SECTION 10.1 or, upon request from any Indemnified Person, shall pay such amounts directly. Any payment made to or on behalf of any Indemnified Person pursuant to this ARTICLE X shall be increased to such amount as will, after taking into account all taxes imposed with respect to the accrual or receipt of such payment (as the same may be increased pursuant to this sentence), equal the amount of the payment, reduced by the amount of any savings in such taxes actually realized by the Indemnified Person as a result of the payment or accrual of the amounts in respect of which the payment to or on behalf of the Indemnified Person hereunder is made. Any Indemnified Person seeking indemnification under this ARTICLE X shall give Vari-Lite written evidence supporting the amount demanded, and such written evidence shall be deemed to be conclusive, absent manifest error. To the extent that Vari-Lite in fact indemnifies any Indemnified Person under the indemnity provisions of this Ground Lease, Vari-Lite shall be subrogated to such Indemnified Person's rights in the affected transaction and shall have a right to determine the settlement of claims therein. Section 10.3 CONTINUING INDEMNIFICATION. The indemnities contained in this ARTICLE X shall not be affected by and shall survive any termination of this Ground Lease . Section 10.4 LIMITATIONS. (a) Notwithstanding any provisions of this ARTICLE X to the contrary, Vari-Lite shall not indemnify and hold harmless any Indemnified Person against any claims and liabilities arising solely from the gross negligence (as between such Indemnified Person or an Affiliate of such Indemnified Person and Vari-Lite) or willful misconduct (as between such Indemnified Person or an Affiliate of such Indemnified Person and Vari-Lite) of such Indemnified Person, BUT SHALL OTHERWISE INDEMNIFY ANY INDEMNIFIED PERSON AGAINST ITS OWN NEGLIGENCE. (b) Brazos and Vari-Lite agree that the activities of Vari-Lite under this Ground Lease relating to the preparation or approval of any maps, drawings, opinions, reports, surveys, change orders, designs, or specifications relating to the Property is being done by Vari-Lite in its capacity as the lessee of the Property and not as the agent or employee of Brazos. Section 10.5 LITIGATION. If any claim, action, proceeding or suit is brought against an Indemnified Person with respect to which Vari-Lite would be required to indemnify such Indemnified Person, Vari-Lite shall have the right to assume the defense thereof, including the employment at its expense of counsel; provided that Vari-Lite shall not have such right to the extent that such Indemnified Person shall deliver to Vari-Lite a written notice waiving the benefits of the indemnification of such Indemnified Person provided by this ARTICLE X in connection with such claim, action, proceeding or suit. Notwithstanding the foregoing, if (i) any claim, action, proceeding or suit is brought against an Indemnified Person who is an individual, (ii) the action threatens to restrain or adversely affect the conduct of the business of the Indemnified Person, but not the business of Brazos' ownership of the Property under this Ground Lease, (iii) the claim, action, proceeding or suit seeks damages of more than $1,000,000, or (iv) independent counsel to an Indemnified Person shall conclude that there may be defenses available to the Indemnified Person which are different from, or additional to, and may conflict with those available to Vari-Lite, Vari-Lite shall not have the right to assume the defense of any such action on behalf of the Indemnified Person if such Indemnified Person chooses to defend such action, and all reasonable costs, expenses and attorneys' fees incurred by the Indemnified Person in defending such action shall be borne by Vari-Lite. Notwithstanding the assumption of its defense by Vari-Lite pursuant to this paragraph, any Indemnified Person shall have the right to employ separate counsel and to participate in its defense, but the fees and expenses of such counsel shall be borne by the Indemnified Person. In addition, Vari-Lite will not be liable for any settlement of any claim, action, proceeding or suit unless Vari-Lite has consented thereto in writing. Any decision by an Indemnified Person to employ its own counsel rather than counsel selected by Vari-Lite (whether or not at Vari-Lite's expense) shall in no way affect any rights of such Indemnified Person otherwise arising under this ARTICLE X. ARTICLE XI GROUND LEASE AGREEMENT - Page 17 RENEWAL AND TERMINATION Section 11.1 VARI-LITE'S RIGHT TO TERMINATE. So long as no Event of Default or Potential Default has occurred and is continuing, Vari-Lite shall have the right, at any time during the Lease Term or any Renewal Term, upon not less than thirty (30) days' written notice to Brazos and Assignee, to terminate on the Basic Rent Payment Date specified in such notice this Ground Lease with respect to the Property, if (a) indemnity payments to Brazos pursuant to SECTION 10.1(C) shall have been required and can be reasonably expected to occur subsequently and such payments are or would be in the aggregate (taking into account the recurring nature of the payments) sufficient in the reasonable judgment of Vari-Lite to render this Ground Lease uneconomic with respect to the Property, (b) due to a change in accounting rules or treatment, this Ground Lease is no longer treated as an operating lease for accounting purposes or (c) there exists an event of default under the Credit Agreement and the payment obligations of Brazos thereunder are declared to be immediately due and payable. Upon exercising its rights under this SECTION 11.1 Vari-Lite shall either (i) purchase, on the Basic Rent Payment Date stipulated in the written notice contemplated by this SECTION 11.1, the Property for cash at its Acquisition Cost or (ii) with the consent of Brazos, arrange, at its own cost and expense, for the Property to be sold for cash pursuant to SECTION 11.4 and with the consequences therein provided, except that such purchase and sale must occur on the Basic Rent Payment Date stipulated in the written notice contemplated by this SECTION 11.1. Section 11.2 BRAZOS' RIGHT TO TERMINATE. Brazos shall have the right upon at least thirty (30) days' prior written notice to Vari-Lite, to terminate the ground lease of the Property as of a Basic Rent Payment Date stipulated in such notice if at any time: (1) by reason of a nexus between a state or local taxing jurisdiction and the Property or the activities of any user (other than Brazos) of the Property, Brazos incurs, or, in its reasonable judgment, in the future would incur, a state or local tax based upon the Unitary Method of Taxation which, in its sole judgment, renders the Ground Lease uneconomic and Vari-Lite refuses to reimburse Brazos for such tax; or (2) any other instrument relating to this Ground Lease shall be held by a court of competent jurisdiction to require the payment or deemed to permit the collection of interest in excess of the Maximum Rate and any such interest in excess of such Maximum Rate cannot be spread and allocated either to the preceding or subsequent periods in which such excess interest is to be paid or collected pursuant to SECTION 18.8 of this Ground Lease. In the event of a termination of this Ground Lease with respect to the Property pursuant to this SECTION 11.2, Vari-Lite shall either (i) purchase, on the Basic Rent Payment Date stipulated in the written notice contemplated by this SECTION 11.2, the Property for cash at its Acquisition Cost or (ii) with the consent of Brazos, arrange, at its own cost and expense, for the Property to be sold for cash pursuant to SECTION 11.4 and with the consequences therein provided, except that such purchase and sale must occur on the Basic Rent Payment Date stipulated in the written notice contemplated by this SECTION 11.2. Section 11.3 RENEWAL. (a) Not later than twelve months prior to the end of the Lease Term or the first Renewal Term, if any, as applicable, Brazos shall give notice to Vari-Lite as to whether it desires to renew this Ground Lease with respect to the Property and the terms and conditions (including the rental amounts) of any such renewal. Not later than nine months prior to the end of the Lease Term or Renewal Term, as applicable, Vari-Lite shall give notice to Brazos as to whether it will renew or not renew the lease for the Property. Failure of Vari-Lite to give such notice with respect to the Property shall be deemed an election not to renew the lease for the Property. So long as (i) Vari-Lite elects to renew this Ground Lease, (ii) no Event of Default or Potential Default has occurred and is continuing, and (iii) Brazos shall have received a commitment for financing for the Property through the last day of the Renewal Term (as defined below) from the lender(s) under a then-existing Credit Agreement or from a third party (which commitment will be in the sole discretion of such lender(s) or third party), the lease shall be renewed for a term (the "RENEWAL TERM") equal to five years commencing on the first day following the last day of the Lease Term or Renewal Term, as applicable, thereof; provided, however, the Lease Term or Renewal Term, as applicable, shall not be renewed if on the first day of the new Renewal Term (a) the lender(s) under the Credit Agreement fails to fund under its commitment pursuant to the terms of such commitment or (b) a third party fails to fund under its commitment for any reason, or (c) if any terms of this Ground Lease must be modified in accordance with the commitment for financing, Vari-Lite does not agree to such modifications. GROUND LEASE AGREEMENT - Page 18 (b) In the event the lease for the Property is not being renewed, Vari-Lite shall, at its option, not later than eight months prior to the end of the Lease Term or Renewal Term, as applicable, give notice to Brazos either that it will (i) purchase the Property for cash at its Acquisition Cost during the period from one (1) month before the end of the Lease Term or Renewal Term, as applicable, to five (5) Business Days before the end of the Lease Term or Renewal Term, as applicable, or (ii) arrange, at Vari-Lite's own cost and expense, for the Property to be sold for cash pursuant to SECTION 11.4 and with the consequences therein provided during the period from six (6) months before the end of the Lease Term or Renewal Term, as applicable, to one (1) month before the end of the Lease Term or Renewal Term, as applicable. Any notice given by Vari-Lite pursuant to the preceding sentence shall be irrevocable, except that Vari-Lite may revoke the election to sell the Property to a third party if Vari-Lite purchases the Property. Section 11.4 SALES TO THIRD PARTIES. (a) If Vari-Lite exercises its right to arrange for a sale of the Property to a third party pursuant to SECTIONS 11.1, 11.2 OR 11.3: (i) if the proceeds of sale are greater than the Acquisition Cost of the Property, Brazos shall pay to Vari-Lite the amount by which such proceeds exceed such Acquisition Cost; (ii) if the proceeds of sale are equal to or less than the Acquisition Cost, but greater than or equal to 15% of the Acquisition Cost, Vari- Lite shall pay to Brazos an amount equal to (A) such Acquisition Cost less (B) the proceeds of such sale; and (iii) if the proceeds of sale are less than 15% of the Acquisition Cost, Vari-Lite shall pay to Brazos an amount equal to the sum of (A) 85% of such Acquisition Cost and (B) the amount by which the residual value of the Property has been reduced by wear and tear in excess of that attributable to normal use, plus the amount by which, in the good faith judgment of Brazos, the proceeds of sale for the Property has been reduced due to Liens attaching to the Property at the time of sale. For purposes of this SECTION 11.4, in connection with the sale of the Property, "proceeds of sale" shall mean the aggregate proceeds from the sale of the Property without reduction for any amounts paid by Vari-Lite. (b) All payments and credits referred to in paragraph (a) above shall be made on the date of the sale of the Property, and the parties shall account to each other for such payments and credits. In consideration for the receipt by Brazos of the proceeds of sale and all other amounts then due and owing hereunder, Brazos shall transfer title to the Property to the purchaser at the sale designated by Vari-Lite. In the event of a sale pursuant to this SECTION 11.4, neither Vari-Lite nor any Affiliate of Vari-Lite shall purchase the Property. If the Property is sold to a third party pursuant to this SECTION 11.4 the Property shall be free of any Liens at the time of sale, including Liens which would otherwise be Permitted Encumbrances if such Liens would reduce the value to the purchaser of the Property. (c) If the Property and any Facility thereon are sold to the same third party, the proceeds of sale shall be allocated pro rata between the Property and such Facility based on the Acquisition Cost of the Property and the Acquisition Cost (as defined in the Facility Lease) of such Facility. Section 11.5 ADDITIONAL PAYMENTS. In connection with any purchase or sale of the Property under this ARTICLE XI, on or before the date such purchase or sale occurs, Vari-Lite shall pay to Brazos, in addition to any purchase price payable, all Basic Rent payable (pro rated as of the date of purchase or sale), any Additional Rent, all amounts owing under SECTION 11.4, and other amounts owing hereunder. Section 11.6 TERMINATION OF GROUND LEASE. Upon receipt by Brazos of the purchase price payable in connection with any sale or purchase of the Property under this ARTICLE XI, together with all additional payments required under SECTION 11.5 with respect to the Property, this Ground Lease shall terminate . All representations and warranties contained in this Ground Lease or made in writing by or on behalf of Vari-Lite in connection herewith and all obligations of Vari-Lite pursuant to ARTICLE X shall survive termination of this Ground Lease. GROUND LEASE AGREEMENT - Page 19 Section 11.7 SURRENDER OF PROPERTY. Subject to the provisions of this ARTICLE XI AND ARTICLES XII, XIII, XIV AND XV hereof, upon termination of the ground lease of the Property hereunder, Vari-Lite shall surrender the Property to Brazos. In connection with the sale of the Property by Brazos, in consideration of the receipt of the purchase price and all other amounts which may be owing to Brazos under SECTION 11.5, Brazos shall execute and deliver all instruments of transfer necessary to convey Brazos' interest to the purchaser of the Property. Section 11.8 CONVEYANCE OF PROPERTY. Upon any sale or transfer of the Property by Brazos, the transfer shall be accomplished by a special warranty deed and bill of sale, "AS IS AND WITH ALL FAULTS," and without representations or warranties regarding the Property (other than warranties of title contained in the special warranty deed). ARTICLE XII ECONOMIC DISCONTINUANCE Section 12.1 UNECONOMIC PROPERTY. If, at any time prior to the end of the Lease Term, in the good faith judgment of Vari-Lite, the Property shall have become uneconomic for continued use and occupancy by Vari-Lite (the Property hereinafter sometimes called an "UNECONOMIC PROPERTY"), then Vari-Lite shall deliver to Brazos and Assignee a written notice (an "UNECONOMIC NOTICE") containing (i) notice of Vari-Lite's intention to terminate the Ground Lease to the Property as of a Basic Rent Payment Date specified in such notice, which Basic Rent Payment Date shall be within sixty (60) days of such notice, and (ii) a certificate of an officer of Vari-Lite stating that Vari-Lite has determined that the Property has become uneconomic for continued use and occupancy by Vari-Lite. Section 12.2 UNECONOMIC NOTICE. Simultaneously with the delivery of an Uneconomic Notice, Vari-Lite shall deliver to Brazos notice of Vari-Lite's intent to terminate this Ground Lease to the Property and either to purchase the Property at its Acquisition Cost on the Basic Rent Payment Date specified in such notice or to sell the Uneconomic Property on such date; provided, that if the proceeds of the sale of the Property are less than the Acquisition Cost of the Property, then in addition to the purchase price Vari-Lite shall pay to Brazos an amount equal to such Acquisition Cost less the proceeds of such sale. Section 12.3 PAYMENT. In connection with any purchase or sale pursuant to this ARTICLE XII, on the Basic Rent Payment Date upon which such purchase or sale occurs, Vari-Lite shall pay or cause the purchaser to pay to Brazos the purchase price, and Vari-Lite shall pay all Basic Rent payable and any Additional Rent and other amounts owing hereunder. Section 12.4 NO RIGHT TO USE. If Vari-Lite terminates this Ground Lease with respect to the Property pursuant to this ARTICLE XII, neither Vari-Lite nor any Affiliate of Vari-Lite shall have the right for one year following the date of such termination to use, and shall not use, the Property. ARTICLE XIII EVENTS OF DEFAULT Section 13.1 EVENTS OF DEFAULT. Any of the following events of default shall constitute an "EVENT OF DEFAULT" and shall give rise to the rights on the part of Brazos described in SECTION 13.2 hereof: (a) FAILURE TO MAKE PAYMENTS. Failure of Vari-Lite to pay amounts due to Brazos at the time of any scheduled sale of the Property hereunder, failure of Vari-Lite to pay Basic Rent or Additional Rent for more than five (5) days after such payment is due pursuant to ARTICLE VI hereof, or failure of Vari-Lite to pay any other amount payable by Vari-Lite hereunder within ten (10) days after written demand for such payment. (b) FAILURE TO MAINTAIN INSURANCE. Failure of Vari-Lite to maintain the insurance required by ARTICLE IX hereof, or default in the performance of the covenant contained in SECTION 9.4 hereof. GROUND LEASE AGREEMENT - Page 20 (c) OTHER DEFAULTS. Vari-Lite shall default in the performance or observance of any other term, covenant, condition or obligation contained in this Ground Lease or the other Lease Documents and such default shall (i) continue for fifteen (15) days after notice shall have been given to Vari-Lite by Brazos or any Assignee specifying such default and requiring such default to be remedied or (ii) if such default is of a nature that it is not capable of being cured within such 15-day period, Vari-Lite shall not have diligently commenced curing such default, proceeded diligently and in good faith thereafter to complete curing such default, or cured such default within forty-five (45) days. (d) BANKRUPTCY. (i) The entry of a decree or order for relief in respect of Vari-Lite or the Guarantor by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of Vari-Lite or the Guarantor or of any substantial part of Vari-Lite's or the Guarantor's property, or ordering the winding up or liquidation of Vari-Lite's or the Guarantor's affairs, and the continuance of any such decree or order unstayed and in effect for a period of thirty (30) consecutive days; or (ii) the general suspension or discontinuance of Vari-Lite's or the Guarantor's business operations, its insolvency (however evidenced) or its admission of insolvency or bankruptcy, or the commencement by Vari-Lite or the Guarantor of a voluntary case under the Federal bankruptcy laws, as now or hereafter constituted, or any other applicable Federal or state bankruptcy, insolvency or other similar law, or the consent by it to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of Vari-Lite or of the Guarantor of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the failure of Vari-Lite or the Guarantor generally to pay its debts as such debts become due, or the taking of corporate action by Vari-Lite or the Guarantor in furtherance of any such action. (e) PAYMENT OF OBLIGATIONS. A default or event of default, the effect of which is to permit the holder or holders of any Indebtedness of Vari-Lite or any Guarantor, or a trustee or agent on behalf of such holder or holders, to cause such Indebtedness to become due prior to its stated maturity shall occur under the provisions of any instrument evidencing Indebtedness in excess of $1,000,000 of Vari-Lite or any Guarantor (or under the provisions of any agreement pursuant to which such instrument was issued). (f) MISREPRESENTATIONS. Any representation or warranty made by Vari-Lite in this Ground Lease or any of the other Lease Documents or which is contained in any certificate, document or financial or other statement furnished under or in connection herewith or therewith proves to be false or inaccurate in any material respect when made or deemed made. (g) GUARANTY. Any representation or warranty made by the Guarantor in the Guaranty, any Consent or any document contemplated hereby or thereby proves to be false or inaccurate in any material respect when made or deemed made, or the Guarantor defaults in the performance of any term, covenant, condition or obligation contained in the Guaranty or any Consent, and such default shall not have been cured within any applicable grace or cure period. (h) OTHER AGREEMENTS. Vari-Lite or Guarantor shall default in any material respect in the performance or observance of any term, covenant, condition or obligation contained in any other written agreement between Vari-Lite or the Guarantor and Brazos and such default shall not have been cured within any applicable grace or cure period. (i) UNAUTHORIZED ASSIGNMENT. Any assignment, sale, conveyance or other transfer by Vari-Lite of any interest in this Ground Lease and any mortgage, pledge, encumbrance or other hypothecation by or on behalf of Vari-Lite, or all or any of its right, title, interest or privileges under this Ground Lease except for a pledge that is required by its lenders. (j) UNSATISFACTORY TITLE. If at any time title to the Property is not satisfactory to Brazos or Assignee by reason of any Lien or other defect not disclosed in writing at the time of any advance under the Credit Agreement GROUND LEASE AGREEMENT - Page 21 (even though the same may have existed at the time of any such advance), except the Permitted Exceptions, and such Lien, encumbrance or other defect is not corrected within thirty (30) days after written notice to Vari-Lite. (k) NON-COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. If Vari-Lite fails to comply with any requirement of any Governmental Authority with respect to the Property or to contest such requirement by means of a Permitted Contest under ARTICLE XVII (i) within thirty (30) days after notice in writing of such requirement shall have been given to Vari-Lite by such Governmental Authority or by Brazos or Assignee, or (ii) if such requirement is of a nature that it cannot be completely complied with within such 30-day period, if Vari-Lite shall fail after such notice either diligently to commence complying with such requirement or to proceed thereafter with reasonable diligence and in good faith to comply with such requirement; provided, however, that Vari-Lite shall in any event comply with such requirement prior to the date on which the Property may be seized or sold as a result of such non-compliance. Section 13.2 RIGHTS UPON DEFAULT. Upon the occurrence and continuation of any Event of Default either Brazos or any Assignee may, in either's sole discretion, declare this Ground Lease to be in default and do any one or more of the following: (a) Terminate this Ground Lease; (b) Whether or not any action has been taken under (a) above, sell the Property (with or without the concurrence or request of Vari-Lite); (c) Hold, use, occupy, lease or keep idle the Property, without any duty to account to Vari-Lite with respect to any such action or inaction or for any proceeds thereof; and (d) Exercise any other right or remedy which may be available under applicable law and in general proceed by appropriate judicial proceedings, either at law or in equity, to enforce the terms hereof or to recover damages for the breach hereof. Suit or suits for the recovery of any default in the payment of any sum due hereunder or for damages may be brought by Brazos from time to time at Brazos' election, and nothing herein contained shall be deemed to require Brazos to await the date whereon this Ground Lease or the term hereof would have expired by limitation had there been no such default by Vari-Lite or no such termination or cancellation. The receipt of any payments under this Ground Lease by Brazos with knowledge of any breach of this Ground Lease by Vari-Lite or of any default by Vari-Lite in the performance of any of the terms, covenants or conditions of this Ground Lease shall not be deemed to be a waiver of any provision of this Ground Lease. No receipt of moneys by Brazos from Vari-Lite after the termination or cancellation hereof in any lawful manner shall reinstate, continue or extend the Lease Term or any Renewal Term, or affect any notice theretofore given to Vari-Lite, or operate as a waiver of the right of Brazos to enforce the payment of Basic Rent or Additional Rent or other charges payable hereunder, or operate as a waiver of the right of Brazos to recover possession of the Property by proper suit, action, proceedings or remedy; it being agreed that, after the service of notice to terminate or cancel this Ground Lease, and the expiration of the time therein specified, if the default has not been cured in the meantime, or after the commencement of suit, action or summary proceedings or of any other remedy, or after a final order, warrant or judgment for the possession of the Property, Brazos may demand, receive and collect any moneys payable hereunder, without in any manner affecting such notice, proceedings, suit, action, order, warrant or judgment; and any and all such moneys so collected shall be deemed to be payments on account for the use, operation and occupation of the Property, or at the election of Brazos, on account of Vari-Lite's liability hereunder. Acceptance of the keys to the Property, or any similar act, by Brazos, or any agent or employee, during the term hereof, shall not be deemed to be an acceptance of a surrender of the Property unless Brazos shall consent thereto in writing. If, after an Event of Default shall have occurred, Vari-Lite fails to surrender promptly after written request by Brazos or converts or destroys the Property, Vari-Lite shall be liable to Brazos for all Basic Rent and Additional GROUND LEASE AGREEMENT - Page 22 Rent then due and payable with respect to the Property, all other amounts payable under this Ground Lease, the Acquisition Cost of the Property as of the date of such request, conversion or destruction and all losses, damages and expenses (including, without limitation, attorneys' fees and expenses) sustained by Brazos by reason of such Event of Default and the exercise of Brazos' remedies with respect thereto. If, after an Event of Default, Brazos repossesses the Property, notwithstanding any termination of this Ground Lease, Vari-Lite shall be liable for and Brazos may recover from Vari-Lite all Basic Rent accrued and any Additional Rent owing with respect to the Property to the date of such repossession, all other amounts payable under this Ground Lease, and all losses, damages and expenses (including, without limitation, reasonable attorneys' fees and expenses) sustained by Brazos by reason of such Event of Default and the exercise of Brazos' remedies with respect thereto. In addition, Brazos may sell Brazos' interest in the Property upon any terms that Brazos deems satisfactory, free of any rights of Vari-Lite or any person claiming through or under Vari-Lite. In the event of such sale, in addition to the amounts payable under the first sentence of this paragraph, Brazos shall be entitled to recover from Vari-Lite, as liquidated damages, and not as a penalty, an amount equal to the Acquisition Cost of the Property so sold, minus the net proceeds of such sale (deducting from the gross proceeds of such sale any reasonable legal expenses, commissions, sales taxes or other costs or expenses associated with such sale) received by Brazos; provided however, if the proceeds of such sale are in excess of the amount payable to Brazos pursuant hereto, such excess shall be the property of Vari-Lite. In lieu of such sale, in addition to the amounts payable under the first sentence of this paragraph, Brazos may cause Vari-Lite to pay to Brazos, and Vari-Lite shall pay to Brazos, as liquidated damages, and not as a penalty, an amount equal to the Acquisition Cost of any or all of the Property, and upon payment in full of all such amounts Brazos shall transfer all of Brazos' right, title and interest in and to the Property to Vari-Lite. Following an Event of Default, to the extent deemed necessary or advisable by counsel for Brazos, Brazos shall have the right, and is hereby granted the power by Vari-Lite, to sell all or any part of the Property at public venue pursuant to power of sale in accordance with the laws of the State. No remedy referred to in this SECTION 13.2 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Brazos at law or in equity, and the exercise in whole or in part by Brazos of any one or more of such remedies shall not preclude the simultaneous or later exercise by Brazos of any or all such other remedies. No waiver by Brazos of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. With respect to the termination of this Ground Lease as to the Property as a result of an Event of Default, Vari-Lite hereby waives service of any notice of intention to re-enter. Following an Event of Default, Vari-Lite hereby waives any and all rights to recover or regain possession of the Property or to reinstate this Ground Lease as permitted or provided by or under any statute, law or decision now or hereafter in force and effect. ARTICLE XIV LOSS OF OR DAMAGE TO PROPERTY Section 14.1 VARI-LITE'S RISK. Vari-Lite hereby assumes all risk of loss of or damage to the Property, however caused. No loss of or damage to the Property shall impair any obligation of Vari-Lite under this Ground Lease, which shall continue in full force and effect. Section 14.2 REPAIR. In the event of damage of any kind whatsoever to the Property (unless the same is determined by Vari-Lite to be damaged beyond repair) Vari-Lite, at its own cost and expense, shall place the same in good operating order, repair, condition and appearance. Section 14.3 PROPERTY DAMAGED BEYOND REPAIR. If the Property is seized, confiscated, rendered unfit for use or if any improvements thereon are destroyed or damaged beyond repair (in the reasonable judgment of Vari-Lite), or if the use of the Property by Vari-Lite or the use of any improvement by the party entitled thereto in GROUND LEASE AGREEMENT - Page 23 the ordinary course of business is prevented by the act of any third person or persons or governmental instrumentality for a period exceeding ninety (90) days (other than an act which is a Taking which is substantial as described in SECTION 15.1 of this Ground Lease), or if the Property is attached (other than on a claim against Brazos as to which Vari-Lite is not obligated to indemnify Brazos) and the attachment is not removed within ninety (90) days, or if a Taking which is substantial as described in SECTION 15.1 shall occur, then in any such event, (i) Vari-Lite shall promptly notify Brazos and Assignee in writing of such event, (ii) on the Basic Rent Payment Date following such event, unless such Basic Rent Payment Date occurs within ten (10) days of such event, in which case on the next Basic Rent Payment Date, Vari-Lite shall pay to Brazos an amount equal to the Acquisition Cost of the Property (after deducting any insurance proceeds received by Brazos in respect of such event or the net amount after Brazos' expenses of proceeds to Brazos from any award or sale made in connection with a Taking), provided that insurance or net Taking proceeds, if any, received by Brazos in excess of the Acquisition Cost of the Property shall be paid by Brazos to Vari-Lite, (iii) the Lease Term or Renewal Term of the Property shall continue until the Basic Rent Payment Date on which Brazos receives payment from Vari-Lite of the amount payable pursuant to this SECTION 14.3 and the Basic Rent and any Additional Rent and other amounts owing hereunder, and shall thereupon terminate and (iv) Brazos shall on such Basic Rent Payment Date transfer title to the Property to Vari-Lite, and Vari-Lite shall be subrogated to Brazos' rights in the affected transaction. ARTICLE XV CONDEMNATION OF PROPERTY Section 15.1 TAKING OF SUBSTANTIALLY ALL OF THE PROPERTY. If Vari-Lite or Brazos shall receive notice that the use, occupancy or title to all or substantially all of the Property is to be taken, requisitioned or sold in, by or on account of eminent domain proceedings or other action by any person or authority having the power of eminent domain (such events collectively referred to as a "TAKING"), and such Taking is substantial, then the Lease Term or Renewal Term shall terminate as provided in SECTION 14.3. A Taking shall be deemed substantial if the remainder of the Property is unusable for Vari-Lite's ordinary business purposes. Section 15.2 TAKING OF LESS THAN SUBSTANTIALLY ALL OF THE PROPERTY. If less than substantially all of the Property is subject to a Taking, then this Ground Lease shall continue in effect as to the portion of the Property not taken and Vari-Lite, at its own cost and expense, shall place the same in good operating order, repair, condition and appearance. Brazos and Vari-Lite each hereby waives any statutory or common law right allowing either of them to petition any court to terminate this Ground Lease in the event of a Taking of less than substantially all of the Property. In the event of a Taking as described in this SECTION 15.2, all proceeds from the Taking shall be payable to Brazos and held by Brazos pending their application in accordance with the direction of the Agent. Section 15.3 GRANT OF MINOR EASEMENTS. So long as no Event of Default or Potential Default has occurred and is continuing hereunder, Vari-Lite shall have the right (i) to grant minor easements for the benefit of the Property or which are deemed reasonably necessary for Vari-Lite's use of the Property; (ii) voluntarily to dedicate or convey, as required, portions of the Property for road, highway and other public purposes as required in the good faith judgment of Vari-Lite in order to obtain or maintain the use of all or part of the Property for the purposes intended by Vari-Lite; and (iii) voluntarily to execute petitions to have the Property or a portion thereof annexed to any municipality or included within any utility, highway or other improvement or service district, provided that no more than minor restoration is required. If Vari-Lite receives any monetary consideration for such easement or dedication, Vari-Lite shall promptly deliver such consideration to Brazos. Vari-Lite shall exercise the above power to grant without the joinder of Brazos, except that Brazos will cooperate, at Vari-Lite's expense, as necessary and join in the execution of any appropriate instrument. As a condition precedent to Vari-Lite's exercise of its powers under this Article, Vari-Lite shall give Brazos ten (10) days' prior written notice of the proposed action. Upon the giving of such notice, Vari-Lite shall be deemed to have certified that such action will not materially adversely affect either the market value of the Property or the use of the Property for its intended purpose, will not affect Brazos' or any Assignee's ability to exercise its rights and remedies under this Ground Lease and that Vari-Lite undertakes to remain obligated under this Ground Lease to the same extent as if Vari-Lite had not exercised its powers under this Article and Vari-Lite will perform all obligations under such instrument and shall prepare all required documents and provide all other instruments and certificates as Brazos may reasonably request. GROUND LEASE AGREEMENT - Page 24 ARTICLE XVI EXPENDITURES Section 16.1 EXPENDITURES BY VARI-LITE. Vari-Lite may expend its own funds for any purpose relating to the Property subject to this Ground Lease, including expenditures relating to the construction of any Facility to the extent Brazos is unwilling or unable to expend its funds for such purposes. ARTICLE XVII PERMITTED CONTESTS (a) Vari-Lite shall not be required, nor shall Brazos have the right, to pay, discharge or remove any tax, assessment, levy, fee, rent, charge, Lien or encumbrance, or to comply or cause the Property to comply with any Legal Requirements applicable to the Property or the occupancy, use or operation thereof, so long as no Event of Default or Potential Default exists under this Ground Lease with respect to the Property, and, in the opinion of Vari-Lite's counsel, Vari-Lite shall have reasonable grounds to contest, and shall be diligently contesting, the existence, amount, applicability or validity thereof by appropriate proceedings, which proceedings in the reasonable judgment of Brazos, (i) shall not involve any material danger that the Property or any Basic Rent or any Additional Rent would be subject to sale, forfeiture or loss, as a result of failure to comply therewith, (ii) shall not affect the payment of any Basic Rent or any Additional Rent or other sums due and payable hereunder, (iii) unless any criminal liability could result from a failure to comply therewith, could not reasonably be expected to cause either Brazos or any Assignee to incur civil liability which, in the sole judgment of Brazos or any Assignee, is not adequately indemnified (Vari-Lite's obligations under ARTICLE X of this Ground Lease shall be deemed to be adequate indemnification if no Event of Default or Potential Default exists and if such civil liability is reasonably likely to be less than $100,000), (iv) shall not cause a Material Adverse Change, (v) if involving taxes, shall suspend the collection of such taxes, and (vi) shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Vari-Lite or the Property is subject and shall not constitute a default thereunder. Vari-Lite shall conduct all such contests in good faith and with due diligence and shall promptly after the final determination (including appeals) of such contest, pay and discharge all amounts which shall be determined to be payable therein. Notwithstanding anything in this paragraph (a) to the contrary, Vari-Lite shall not be obligated to actively contest any mechanics' or materialmen's Lien or claim which does not exceed $25,000, provided that the failure to so contest does not violate clauses (i)-(iii) or (v) above, provided further, that such Lien is junior to any Lien of an Assignee on the Property, and provided further that Vari-Lite shall in any event diligently contest and defend against the enforcement of any such Lien or claim in good faith and with due diligence and shall promptly, after the final determination (including appeals of such contest), pay and discharge all amounts which shall be determined to be payable therein. (b) At least ten (10) days prior to the commencement thereof, Vari-Lite shall notify Brazos in writing of any such proceeding in which the amount in contest exceeds $25,000, and shall describe such proceeding in reasonable detail. If a taxing authority or subdivision thereof proposes an additional assessment or levy of any tax for which Vari-Lite is obligated to reimburse Brazos under this Ground Lease, or if Brazos is notified of the commencement of an audit or similar proceeding which could result in such an additional assessment, then Brazos shall in a timely manner notify Vari-Lite in writing of such proposed levy or proceeding. ARTICLE XVIII MISCELLANEOUS Section 18.1 SURVIVAL. All agreements, indemnities, representations and warranties, and the obligation to pay Additional Rent contained in this Ground Lease shall survive the expiration or other termination hereof. GROUND LEASE AGREEMENT - Page 25 Section 18.2 ENTIRE AGREEMENT. This Ground Lease, the Memorandum of Ground Lease and the Property Leasing Records covering the Property leased pursuant hereto and the instruments, documents or agreements referred to herein constitute the entire agreement between the parties and no representations, warranties, promises, guarantees or agreements, oral or written, express or implied, have been made by any party hereto with respect to this Ground Lease or the Property, except as provided herein or therein. Section 18.3 MODIFICATIONS. This Ground Lease may not be amended, modified or terminated, nor may any obligation hereunder be waived orally, and no such amendment, modification, termination or waiver shall be effective for any purpose unless it is in writing and is signed by the party against whom enforcement thereof is sought. A waiver on one occasion shall not be construed to be a waiver with respect to any other occasion. Section 18.4 GOVERNING LAW. THIS GROUND LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. ANY PROVISION OF THIS GROUND LEASE WHICH IS PROHIBITED BY LAW OR UNENFORCEABLE SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR UNENFORCEABILITY WITHOUT INVALIDATING THE REMAINING PROVISIONS HEREOF, AND THE PARTIES HERETO SHALL NEGOTIATE IN GOOD FAITH APPROPRIATE MODIFICATIONS TO REFLECT SUCH CHANGES AS MAY BE REQUIRED BY LAW, AND, AS NEARLY AS POSSIBLE, TO PRODUCE THE SAME ECONOMIC EFFECTS AS THE PROVISION WHICH IS PROHIBITED OR UNENFORCEABLE. TO THE EXTENT PERMITTED BY APPLICABLE LAW, VARI-LITE AND BRAZOS HEREBY WAIVE ANY PROVISION OF LAW WHICH RENDERS ANY PROVISION HEREOF PROHIBITED OR UNENFORCEABLE IN ANY RESPECT. Section 18.5 NO OFFSETS. The obligations of Vari-Lite to pay all amounts payable pursuant to this Ground Lease (including specifically and without limitation amounts payable due under ARTICLES VI AND X hereof) shall be absolute and unconditional under any and all circumstances of any character, and such amounts shall be paid without notice, demand, defense, setoff, deduction or counterclaim and without abatement, suspension, deferment, diminution or reduction of any kind whatsoever, except as herein expressly otherwise provided. The obligation of Vari-Lite to lease and pay Basic Rent, Additional Rent or any other amounts provided for in this Ground Lease is without any warranty or representation, express or implied, as to any matter whatsoever on the part of Brazos or any Assignee or any Affiliate of either, or anyone acting on behalf of any of them. NEITHER BRAZOS NOR ANY ASSIGNEE NOR ANY AFFILIATE OF EITHER, NOR ANYONE ACTING ON BEHALF OF ANY OF THEM, MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, AS TO THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE, MERCHANTABILITY, CONFORMITY TO SPECIFICATION, ENVIRONMENTAL CONDITION (INCLUDING THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS), OR ANY OTHER CHARACTERISTIC, OF THE PROPERTY, OR AS TO WHETHER THE PROPERTY OR THE OWNERSHIP, USE, OCCUPANCY OR POSSESSION THEREOF COMPLIES WITH ANY LAWS, RULES, REGULATIONS OR REQUIREMENTS OF ANY KIND. AS BETWEEN BRAZOS, ANY ASSIGNEE OR ANY INDEMNIFIED PERSON AND VARI-LITE AND TO THE EXTENT ALLOWED BY LAW, VARI-LITE ASSUMES ALL RISKS AND WAIVES ANY AND ALL DEFENSES, SET-OFFS, DEDUCTIONS, COUNTERCLAIMS (OR OTHER RIGHTS), EXISTING OR FUTURE, TO ITS OBLIGATION TO PAY BASIC RENT, ADDITIONAL RENT AND ALL OTHER AMOUNTS PAYABLE HEREUNDER, INCLUDING, WITHOUT LIMITATION, ANY RELATING TO: (A) THE SAFETY, TITLE, CONDITION, QUALITY, QUANTITY, FITNESS FOR USE, MERCHANTABILITY, CONFORMITY TO SPECIFICATION, OR ANY OTHER QUALITY OR CHARACTERISTIC OF THE PROPERTY, LATENT OR NOT; (B) ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, ABATEMENT, DEFENSE OR OTHER RIGHT WHICH VARI-LITE MAY HAVE AGAINST BRAZOS, ANY ASSIGNEE, OR ANY INDEMNIFIED GROUND LEASE AGREEMENT - Page 26 PERSON FOR ANY REASON WHATSOEVER ARISING OUT OF THIS OR ANY OTHER TRANSACTION OR MATTER; (C) ANY DEFECT IN TITLE OR OWNERSHIP OF THE PROPERTY OR ANY TITLE ENCUMBRANCE NOW OR HEREAFTER EXISTING WITH RESPECT TO THE PROPERTY; (D) ANY FAILURE OR DELAY IN DELIVERY OR ANY LOSS OR DESTRUCTION OF, OR DAMAGE TO, THE PROPERTY, IN WHOLE OR IN PART, OR CESSATION OF THE USE OR POSSESSION OF THE PROPERTY BY VARI-LITE FOR ANY REASON WHATSOEVER AND OF WHATEVER DURATION, OR ANY CONDEMNATION, CONFISCATION, REQUISITION, SEIZURE, PURCHASE, TAKING OR FORFEITURE OF THE PROPERTY, IN WHOLE OR IN PART; (E) ANY INABILITY OR ILLEGALITY WITH RESPECT TO THE USE, OWNERSHIP, OCCUPANCY OR POSSESSION OF THE PROPERTY BY VARI-LITE; (F) ANY INSOLVENCY, BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDING BY OR AGAINST VARI-LITE OR BRAZOS OR ANY ASSIGNEE; (G) ANY FAILURE TO OBTAIN, OR EXPIRATION, SUSPENSION OR OTHER TERMINATION OF, OR INTERRUPTION TO, ANY REQUIRED LICENSES, PERMITS, CONSENTS, AUTHORIZATIONS, APPROVALS OR OTHER LEGAL REQUIREMENTS; (H) THE INVALIDITY OR UNENFORCEABILITY OF THIS GROUND LEASE OR ANY OTHER INFIRMITY HEREIN OR ANY LACK OF POWER OR AUTHORITY OF BRAZOS OR VARI-LITE TO ENTER INTO THIS GROUND LEASE; OR (I) ANY OTHER CIRCUMSTANCES OR HAPPENINGS WHATSOEVER, WHETHER OR NOT SIMILAR TO ANY OF THE FOREGOING. VARI-LITE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS WHICH IT MAY NOW HAVE OR WHICH AT ANY TIME HEREAFTER MAY BE CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE, CANCEL, QUIT, RESCIND OR SURRENDER THIS GROUND LEASE EXCEPT IN ACCORDANCE WITH THE EXPRESS TERMS HEREOF. Section 18.6 NON-RECOURSE. Brazos' obligations hereunder are intended to be the limited obligations of the corporation. Notwithstanding any other provision of this Ground Lease, Vari-Lite agrees that the personal liability of Brazos shall be strictly and absolutely limited to the Property and the proceeds thereof and no recourse for the payment of any amount due under this Ground Lease, or for any claim based thereon or otherwise in respect thereof, shall be had against any other assets of the corporation or any incorporator, shareholder, officer, director or Affiliate (past, present or future) of Brazos, or of any Affiliate of either, or of any successor corporation to Brazos, it being understood that Brazos is a corporation entering into the transactions involved in and relating to this Ground Lease on the express understanding aforesaid. Section 18.7 NOTICES. (a) Any notice or request which by any provision of this Ground Lease is required or permitted to be given by either party to the other shall be deemed to have been given when delivered by hand (including, delivery by courier), when actually received by mail or, if promptly confirmed by mail or by hand-delivery, as provided above, when sent by telex, or other written telecommunication, addressed to the following specified addresses or to such other addresses as Brazos or Vari-Lite may specify by written notice to the other party: GROUND LEASE AGREEMENT - Page 27 If to Brazos: Brazos Beltline Development, Inc. 2911 Turtle Creek Blvd., Suite 1240 Dallas, Texas 75219 Attention: Gregory C. Greene telephone: (214) 522-7296 telecopy: (214) 520-2009 If to Vari-Lite: Vari-Lite, Inc. 201 Regal Row Dallas, Texas 75247 Attention: Michael Herman telephone: (214) 819-3172 telecopy: (214) 819-3247 With a Copy to: Brown Brothers Harriman & Co. 59 Wall Street New York, New York 10005 Attention: Chief Credit Officer telephone: (212) 493-7899 telecopy: (212) 493-7280 Cyril D. Kasmir, Esq. Kasmir & Krage, L.L.P. 2001 Bryan Tower, Suite 270 Dallas, Texas 75201-3059 telephone: (214) 969-7500 telecopy: (214) 220-0230 (b) Brazos shall within five (5) Business Days give to Vari-Lite a copy of all notices received by Brazos pursuant to the Credit Agreement and any other notices received with respect to the Property. Section 18.8 USURY. No provision of this Ground Lease or any other instrument relating to this Ground Lease shall require the payment or permit the collection of interest in excess of the maximum non-usurious interest rate under applicable law (the "MAXIMUM RATE"). If any excess interest in such respect is so provided for, or shall be adjudicated to be so provided for, the provisions of this SECTION 18.8 shall govern, and neither Vari-Lite nor its successors or assigns shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate. In determining the Maximum Rate, any interest shall be spread over the term of the Ground Lease to the extent permitted by applicable U.S. Federal or state law, notwithstanding the actual time for the payment of any rent or other amounts hereunder. It is expressly stipulated and agreed to be the intent of Brazos and Vari-Lite at all times to comply with applicable state law governing the Maximum Rate or the amount of interest payable pursuant to this Ground Lease (or applicable U.S. Federal law to the extent that it permits Brazos to contract for, charge, take, reserve or receive a greater amount of interest than under state law). If the applicable law is ever judicially interpreted so as to render usurious any amount called for under this Ground Lease or any of the other documents relating to this Ground Lease or any amount contracted for, charged, taken, reserved or received with respect to this Ground Lease, or if Brazos' exercise of any option herein or in any other document to accelerate the payment of amounts required hereunder results in Vari-Lite having paid any interest in excess of that permitted by applicable law, then it is Brazos' and Vari-Lite's intent that all excess amounts theretofore collected by Brazos be GROUND LEASE AGREEMENT - Page 28 credited on the remaining balance of payments due hereunder (or, if all amounts due hereunder have been or would thereby be paid in full, refunded to Vari-Lite) and the provisions of this Ground Lease shall immediately be deemed reformed in the amounts thereafter collectible hereunder and so reduced, without the necessity of the execution of any new documents, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and under any other document relating hereto. If at any time the amount of any interest for a year would, but for this SECTION 18.8, exceed the amount of interest that would have been accrued during such year if the Maximum Rate had from time to time been in effect, the total interest payable for such year shall be limited to the amount that would have been accrued if the Maximum Rate had from time to time been in effect, and to the fullest extent permitted by applicable law, such excess, shall be (i) spread and allocated to the preceding periods in which the interest paid was less than the interest that would have been accrued at the Maximum Rate or (ii) spread and allocated to subsequent periods in which the total payments on account of interest are less than the interest that would have accrued at the Maximum Rate. Section 18.9 NO MERGER. There shall be no merger of this Ground Lease or of the leasehold estate hereby created with the fee estate in the Property by reason of the fact that the same person acquires or holds, directly or indirectly, this Ground Lease or the leasehold estate hereby created or any interest herein or in such leasehold estate as well as the fee estate in the Property or any interest in such fee estate. Section 18.10 SALE OR ASSIGNMENT BY BRAZOS. (a) Subject to SECTION 18.13(b), Brazos shall not sell or assign its right, title, interest or obligations under this Ground Lease, except that Brazos shall have the right to finance the acquisition and ownership of the Property by selling, assigning or granting a security interest in its right, title and interest in this Ground Lease and any or all amounts due from Vari-Lite or any third party under this Ground Lease. (b) Upon the occurrence of an event of default under the Credit Agreement, any Assignee shall, except as otherwise agreed by Brazos and Assignee, have all the rights, powers, privileges and remedies of Brazos hereunder, and Vari-Lite's obligations as between itself and such Assignee hereunder shall not be subject to any claims or defense that Vari-Lite may have against Brazos. Upon written notice to Vari-Lite of any such assignment, Vari-Lite shall attorn to any Assignee, and Vari-Lite shall thereafter make payments of Basic Rent, Additional Rent and other sums due hereunder to Assignee, to the extent specified in such notice, and such payments shall discharge the obligation of Vari-Lite to Brazos hereunder to the extent of such payments. Anything contained herein to the contrary notwithstanding, no Assignee shall be obligated to perform any duty, covenant or condition required to be performed by Brazos hereunder, and any such duty, covenant or condition shall be and remain the sole obligation of Brazos. Section 18.11 INCOME TAXES. Brazos agrees that it will not file any Federal, state or local income tax returns during the Lease Term or Renewal Term, if any, with respect to the Property that are inconsistent with the treatment of Vari-Lite as owner of the Property for Federal, state and local income tax purposes. Section 18.12 TRANSFER ON AS-IS BASIS. In connection with the sale of the Property pursuant to this Ground Lease, when Brazos transfers title, such transfer shall be on an as-is, non-installment sale basis, without warranty by, or recourse to, Brazos, but free of the Lien created by the Credit Agreement. Section 18.13 RIGHT TO PERFORM FOR VARI-LITE. (a) If Vari-Lite fails to perform or comply with any of its covenants or agreements contained in this Ground Lease, and after knowledge or notice of such failure, Vari-Lite does not undertake to cure such failure, Brazos may, upon notice to Vari-Lite but without waiving or releasing any obligations or default, itself perform or comply with such covenant or agreement, and the amount of the reasonable expenses of Brazos incurred in connection with such performance or compliance shall be payable by Vari-Lite not later than ten (10) days after written notice by Brazos; and such amounts, if not timely paid, shall accrue interest at the current interest rate applicable to a BR Borrowing plus 4.5%. GROUND LEASE AGREEMENT - Page 29 (b) Without in any way limiting the obligations of Vari-Lite hereunder, Vari-Lite hereby irrevocably appoints Brazos as its agent and attorney at the time at which Vari-Lite is obligated to deliver possession of the Property to Brazos, to demand and take possession of the Property in the name and on behalf of Vari-Lite from whomsoever shall be at the time in possession thereof. Section 18.14 MERGER, CONSOLIDATION OR SALE OF ASSETS. (a) Vari-Lite may not consolidate with or merge into any other corporation or sell all or substantially all of its assets to any Person, except by and between Affiliates of the Guarantor. (b) Brazos may not consolidate with or merge into any other corporation or sell all or substantially all of its assets to any Person. (c) The terms and provisions of this Ground Lease shall be binding upon and inure to the benefit of Brazos and Vari-Lite and their respective successors and permitted assigns. Section 18.15 EXPENSES. Vari-Lite shall pay all of the out-of-pocket costs and expenses incurred by Brazos and any Assignee in connection with this Ground Lease, including without limitation the reasonable fees and disbursements of counsel to Brazos and counsel to any Assignee. Section 18.16 PAYMENT OF TAXES AND PURCHASER EXPENSES. In connection with the sale or purchase of the Property pursuant to this Ground Lease, Vari-Lite shall pay or shall cause the purchaser of the Property to pay, in addition to the purchase price, all transfer taxes, transfer gains taxes, mortgage recording tax, if any, recording and filing fees and all other similar taxes, fees, expenses and closing costs (including reasonable attorneys' fees) in connection with the conveyance of the Property to Vari-Lite or any purchaser; provided that Vari-Lite or any purchaser shall not be required to pay U.S. Federal net income or capital gains taxes or to pay state and local net income, franchise or capital gains taxes of Brazos. Section 18.17 RULE AGAINST PERPETUITIES. The parties hereto do not intend any interest created by this Ground Lease to be a perpetuity or to be subject to invalidation under the perpetuities rule, however, if the rule is to be applied, then the perpetuities period shall be twenty-one (21) years after the last to die of the currently living great-grandchildren and/or grandchildren of George H. W. Bush. Section 18.18 PROTECTION OF LESSOR'S MORTGAGEES. (a) SUBORDINATION AND NON-DISTURBANCE. As of the date hereof, Brazos, Vari-Lite and Assignee have entered into a Subordination Non-Disturbance and Attornment Agreement covering this Ground Lease. With respect to any future mortgage or deed of trust encumbering the Property, Brazos and Vari-Lite agree that the rights of Vari-Lite under this Ground Lease shall be subject and subordinate to each such future mortgage or deed of trust, as well as to all renewals, modifications, consolidations, replacements and extensions thereof but only if Brazos, Vari-Lite and the holder of any such future mortgage or deed of trust enter into a non-disturbance agreement (a "NON-DISTURBANCE AGREEMENT") reasonably satisfactory to Vari-Lite and the holder of any such mortgage or deed of trust. (b) NOTICE TO ASSIGNEE. In the event of any default by Brazos hereunder, Vari-Lite shall notify Assignee (and any other mortgagee with respect to whom a Non-Disturbance Agreement has been executed), by registered or certified mail, provided that Assignee or such mortgagee, or its trustee, shall have furnished Brazos with its mailing address. Assignee or such mortgagee shall thereafter have a reasonable opportunity (but no obligation) to cure Brazos' default, including time to obtain possession of the Property by power of sale or judicial foreclosure, if same should prove necessary in Assignee's sole judgment to effect a cure, before Vari-Lite may take any action against Brazos. Vari-Lite shall accept a cure of Brazos' default from Assignee or such mortgagee in the event that Assignee or such mortgagee tenders such cure. GROUND LEASE AGREEMENT - Page 30 (c) DIRECT PAYMENT OF AMOUNTS HEREUNDER. Brazos shall have the right, at its option, to direct Vari-Lite to pay any amounts due hereunder directly to Assignee, and upon such a request from Brazos, Vari-Lite hereby agrees to pay any amounts due hereunder to Assignee. The parties confirm that, by execution hereof, Vari-Lite has been directed as provided herein to pay all amounts due hereunder directly to Assignee. The final payment to Assignee of all amounts due to Brazos under this Ground Lease from Vari-Lite shall be a full and complete release, discharge and acquittance of Vari-Lite to the extent of any such amounts actually received by Assignee described below in this sentence, and no provision of this Ground Lease permitting or requiring Brazos to direct Vari-Lite to pay rent or other amounts due hereunder directly to Assignee shall relieve Brazos of its obligation to pay to Assignee any or all of the amounts due from Brazos to Assignee pursuant to any instrument or agreement evidencing or securing the indebtedness owed to Assignee by Brazos. (d) LENDER AS MORTGAGEE. Contemporaneous with the execution of this Ground Lease, Brazos has acquired the Property in part with the proceeds of advances under the Credit Agreement, which advances are secured by, among other things, a Lien and direct and absolute assignment of amounts owing hereunder. Brazos and Vari-Lite may agree to construct a Facility on the Property which Brazos may finance with proceeds of advances under the Credit Agreement. Notwithstanding anything in this Ground Lease, so long as the advances or any portion or renewal thereof, or any amount owing under the Credit Agreement remains unpaid, in whole or in part, (a) Assignee and its successors and assigns shall be third party beneficiaries of the provisions of this Ground Lease; (b) neither Vari-Lite nor Brazos shall enter into any agreements with any other mortgagee as contemplated in this SECTION 18.18 without the prior written consent of Assignee; (c) Brazos and Vari-Lite acknowledge that each has been sufficiently notified and apprised of Assignee's interest as mortgagee and its mailing address as contemplated in this SECTION 18.18 and any other provision of this Ground Lease; (d) this Ground Lease shall not be amended, modified or assigned (collaterally or directly), or the Property or any part thereof sublet (except as expressly permitted hereby) without the prior written consent of Assignee; and (e) Vari-Lite shall forward a copy of the documentation and information described in SECTION 18.18(B) to Assignee simultaneously with forwarding a copy of same to Brazos. Section 18.19 PURCHASE OR SALE OF FACILITY. Notwithstanding anything to the contrary herein, Vari-Lite shall not have the right to purchase the Property or arrange for the sale of the Property to a third party unless simultaneous with such purchase or sale any Facility which may hereafter be constructed or located on the Property is purchased by Vari-Lite or sold to a third party or unless such Facility is constructed solely at the expense of Vari-Lite with the prior written consent of Brazos and BBH&Co. Section 18.20 SEVERABILITY. In case one or more provisions of this Ground Lease shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected or impaired thereby. Section 18.21 LESSEE REPRESENTATION. Each of the corporations constituting Vari-Lite hereby appoints Vari-Lite, Inc. as its representative and authorizes Vari-Lite, Inc. to take any and all actions, give any and all consents, waivers or approvals and to generally represent the interest of each such corporation in connection with its interests under this Ground Lease. Each of the corporations constituting Vari-Lite further agrees that any party to any of the Lease Documents may rely upon any consent, waiver, approval, notice or other action by Vari-Lite, Inc. if the document or instrument communicating such action indicates on its face that Vari-Lite, Inc. is acting in its capacity as representative of such corporations as provided in this SECTION 18.21. Section 18.22 JOINT AND SEVERAL LIABILITY. Each of the corporations constituting Vari-Lite hereby agrees that all obligations of Vari-Lite under this Ground Lease are joint and several among such corporations. GROUND LEASE AGREEMENT - Page 31 IN WITNESS WHEREOF, Brazos and Vari-Lite have caused this Ground Lease Agreement to be executed and delivered by their duly authorized officers as of the day and year first above written. BRAZOS BELTLINE DEVELOPMENT, INC., a Texas corporation By: /s/Gregory C. Greene ------------------------------------ Gregory C. Greene, President VARI-LITE, INC., a Delaware corporation By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche, III, President and Chief Executive Officer SHOWCO, INC., a Delaware corporation By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman, Vice President Finance and Chief Financial Officer SHOWCO CREATIVE SERVICES, INC., a Delaware corporation By: /s/ Michael P. Herman ------------------------------------ Michael P. Herman, Vice President Finance and Chief Financial Officer CONCERT PRODUCTION LIGHTING, INC., a Delaware corporation By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche, III, President and Chief Executive Officer IRIDEON, INC., a Delaware corporation By: /s/ H.R. Brutsche III ------------------------------------ H.R. Brutsche, III, President and Chief Executive Officer GROUND LEASE AGREEMENT - Page 32 EXHIBIT A PROPERTY DESCRIPTION Being a tract of land situated in the CORDELIA BOWEN SURVEY, ABSTRACT NO. 56, City of Coppell, Dallas County, Texas, and being part of "Tract 1" as described by Deed to MCDLF HOLDING COMPANY, recorded in Volume 90150, Page 1511 of the Deed Records, Dallas County, Texas and being more particularly described as follows: BEGINNING at a 1/2" found iron rod for the intersection of the West line of Belt Line Road (a variable width right-of-way) and the North line of Lakeshore Drive (a 90 foot right-of-way at this point), a dedicated street in Northlake 635 Business Park, an Addition to the City of Coppell, Texas according to the plat recorded in Volume 85056, Page 3358, Deed Records, Dallas County, Texas; THENCE with the North, Northeast and East lines of said Lakeshore Drive the following: North 89 degrees 30 minutes 00 seconds West, 185.34 feet to a 1/2" found iron rod with Powell and Powell cap (1/2" found iron rod with cap) for the point of curvature of a circular curve to the left having a central angle of 12 degrees 50 minutes 19 seconds and a radius of 300.00 feet; With said curve in a Westerly direction an arc distance of 67.22 feet to a 1/2" found iron rod with cap for the point of reverse curvature of a circular curve to the right having a central angle of 12 degrees 50 minutes 19 seconds and a radius of 300.00 feet; With said curve in a Westerly direction an arc distance of 67.22 feet to a 1/2" iron rod with cap for the point of tangency (Lakeshore Drive a 60 foot right-of-way at this point); North 89 degrees 30 minutes 00 seconds West, 388.27 feet to a 1/2" iron rod with cap for the point of curvature of a circular curve to the right having a central angle of 52 degrees 53 minutes 07 seconds and a radius of 320.00 feet; With said curve in a Northwesterly direction an arc distance of 295.37 feet to a 1/2" found iron rod with cap for the point of tangency; North 36 degrees 36 minutes 53 seconds West, 398.49 feet to a 1/2" found iron rod with cap for the point of curvature of a circular curve to the right having a central angle of 37 degrees 06 minutes 53 seconds and a radius of 320.00 feet; With said curve in a Northerly direction an arc distance of 207.29 feet to a 1/2" iron rod with cap for the point of tangency; North 00 degrees 30 minutes 00 seconds East, 556.13 feet to a 1/2" set iron rod with yellow plastic cap stamped Halff Associates Inc. (Set iron rod with cap) for a corner at the intersection of said East line of Lakeshore Drive and a line 5 foot North of and parallel to the North line of a 50 foot open Channel Drainage Easement, a dedicated easement in said Northlake 635 Business Park; THENCE departing said East line and with said parallel line the following: South 89 degrees 30 minutes 00 seconds East, 629.41 feet to a 1/2" set iron rod with cap for the point of curvature of circular curve to the left, having a central angle of 27 degrees 17 minutes 51 seconds and a radius of 470.00 feet; GROUND LEASE AGREEMENT - Page 33 With said curve in an Easterly direction, an arc distance of 223.92 feet to a 1/2" set iron rod with cap for the point of reverse curvature of a circular curve to the Right, having a central angle of 27 degrees 17 minutes 51 seconds and a radius of 530.00 feet; With said curve in an Easterly direction, an arc distance of 252.51 feet to a 1/2" set iron rod with cap for the point of tangency; South 89 degrees 30 minutes 00 seconds East, 168.37 feet to a point for a corner at the intersection of said parallel line and the said west line of Belt Line Road, which bears North 00 degrees 30 minutes 00 seconds East, a distance of 30.00 feet from a 1/2" set iron rod with cap at the intersection of the center line of said 50 foot easement and the said West line of Belt Line Road. THENCE South 00 degrees 30 minutes 00 seconds West, 1235.26 feet, with the said West line of Belt Line Road, to a 1/2" set iron rod with cap for a corner; THENCE South 10 degrees 48 minutes 36 seconds East 56.09 feet, with the said West line of Belt Line Road, to the PLACE OF BEGINNING and containing 1,430,213 square feet or 32.8332 acres of land, more or less. GROUND LEASE AGREEMENT - Page 34 EX-10.37 28 EXHIBIT 10.37 GUARANTY As of December 21, 1995 Brazos Beltline Development, Inc. (the "LESSOR") 2911 Turtle Creek Boulevard, Suite 1240 Dallas, Texas 75219 Attention: Gregory C. Greene Re: Ground Lease Agreement (the "AGREEMENT") among Brazos Beltline Development, Inc. and Vari-Lite, Inc., Showco, Inc., Showco Creative Services, Inc., Concert Production Lighting, Inc. and Irideon, Inc. effective as of December 21, 1995 Gentlemen: 1. GUARANTY. For value received, and in consideration of your entering into the Agreement with VARI-LITE, INC., SHOWCO, INC., SHOWCO CREATIVE SERVICES, INC., CONCERT PRODUCTION LIGHTING, INC. and IRIDEON, INC., each a Delaware corporation (collectively, the "LESSEE"), and each a wholly-owned subsidiary of VARI-LITE HOLDINGS, INC., a Texas corporation (the "GUARANTOR"), Guarantor does hereby unconditionally, irrevocably, and absolutely guarantee (a) the full payment when due, whether at stated due date, by acceleration or otherwise, of any and all rent, indebtedness and other amounts of every kind; howsoever created, arising, or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing or owing to you by the Lessee pursuant to the Agreement including, without limitation, the payment obligations under Article XI thereof, and (b) the performance by the Lessee of its obligations under the Agreement pursuant to the terms of the Agreement (all such obligations being hereinafter collectively called the "LIABILITIES"). The Guarantor, as the parent corporation of the Lessee, hereby agrees that upon any default by the Lessee in the payment of any of the Liabilities when and as due or in the performance of its other obligations thereunder, it will forthwith pay the same immediately upon demand or perform or cause Lessee to perform such obligations. 2. GUARANTY CONTINUING, ABSOLUTE, UNLIMITED. This Guaranty is a continuing, irrevocable, absolute and unlimited Guaranty of payment as a primary obligor and not as a surety. This Guaranty shall apply to all Liabilities, without limitation as to either amount or period of time. The Liabilities shall be conclusively presumed to have been created in reliance on this Guaranty. You shall not be required to proceed first against the Lessee or any other person, firm or corporation or against any property securing any of the Liabilities before resorting to the Guarantor for payment. This Guaranty shall be construed as a guarantee of payment without regard to the enforceability of any of the Liabilities, the rejection of the Agreement in bankruptcy, OR any limitation of claims against the Lessee, and notwithstanding any claim, defense (other than payment or performance by the Guarantor) or right of set-off which the Lessee or the Guarantor may have against you, including any such claim, defense or right of set-off based on any present or future law or order of any government (DE JURE or DE FACTO), or of any agency thereof or court of law purporting to reduce, amend or otherwise affect any obligations of the Lessee, or any other obligor, or to vary any terms of payment, and without regard to any other circumstances which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. The Guarantor agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment to you of the Liabilities or any part thereof is rescinded or must otherwise be returned by you upon the insolvency, bankruptcy or reorganization of the Lessee, or otherwise, as though such payment to you had not been made. The Guarantor's obligation to fully pay or perform the Liabilities and any remedy for the enforcement thereof shall not be impaired, modified, released, or limited in any way by any impairment, modification, release, or limitation of the liability of Lessee or its bankruptcy estate, resulting from the operation of any present or future provision of the Bankruptcy Code or any Debtor Relief Law or from the decision of any court interpreting the same. 3. GUARANTY NOT AFFECTED BY CHANGE IN SECURITY OR OTHER ACTIONS. You may, from time to time, without the consent of or notice to the Guarantor, take any or all of the following actions without impairing or GUARANTY - Page 1 Brazos Beltline Development, Inc. As of December 21, 1995 Page 2 affecting the Guarantor's obligations under this Guaranty or releasing or exonerating the Guarantor from any of its liabilities hereunder: a. retain or obtain a security interest in any property to secure any of the Liabilities or any obligation hereunder; b. retain or obtain the primary or secondary liability of any party or parties, in addition to the Guarantor, with respect to any of the Liabilities; c. extend the time or change the manner, place or terms of payment of, or renew or amend any note or other instrument evidencing the Liabilities or any part thereof, or amend in any manner any agreement relating thereto; d. release or compromise, in whole or in part, or accept full or partial payment for, any of the Liabilities hereby guaranteed, or any liability of any nature of any other party or parties with respect to the Liabilities or any security therefor; e. subordinate the payment of all or any part of the Liabilities to the payment of any liability of the Lessee to creditors of the Lessee other than you or the Guarantor; f. enforce your security interest, if any, in all or any properties securing any of the Liabilities or any obligations hereunder in order to obtain full or partial payment of the Liabilities then outstanding; or g. release or fail to perfect, protect, or enforce your security interest, if any, in all or any properties securing any of the Liabilities or any obligation hereunder, or permit any substitution or exchange for any such property. 4. WAIVERS. The Guarantor hereby expressly waives: a. notice of acceptance of this Guaranty; b. notice of the existence or incurrence of any or all of the Liabilities; c. presentment, demand, notice of dishonor, protest, and all other notices whatsoever; d. any requirement that proceedings first be instituted by you against the Lessee; e. all diligence in collection or protection of or realization upon the Liabilities or any part thereof, or any obligation hereunder, or any collateral for any of the foregoing; f. any rights or defenses based on the Lessor's election of remedies, including any defense to the Lessor's action to recover any deficiency after a non-judicial sale; g. the occurrence of every other condition precedent to which the Guarantor might otherwise be entitled; and h. the benefit of division and discussion. GUARANTY - Page 2 Brazos Beltline Development, Inc. As of December 21, 1995 Page 3 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF GUARANTOR. The Guarantor hereby agrees and covenants that it will be bound by and comply with all of the representations, warranties and covenants set forth in Articles 8, 9, 10 and 11 of the Vari-Lite Credit Agreement as amended from time to time. Guarantor hereby makes as of the date hereof all of the representations and warranties set forth in Article 8 of the Vari-Lite Credit Agreement except that (i) references contained in the Vari-Lite Credit Agreement to "Loan Documents" shall be deemed to be references to this Guaranty and (ii) references contained in Section 8.8 of the Vari-Lite Credit Agreement to September 30, 1993 shall be deemed to be references to September 30, 1995. 6. DEFAULT. A "Default" shall exist hereunder if one of the following events shall occur and be continuing: a. Default shall be made in the payment of any amount due hereunder, and such default shall continue for a period of three (3) days; b. Default shall be made in the due observance or performance of any covenants, conditions or agreements on the part of the Guarantor referenced in SECTION 5 hereunder and such Default shall continue unremedied for a period of fifteen (15) days; c. Any representation or warranty contained herein shall have been false as of the date it was made or deemed to have been made; d. Any Event of Default occurs and is continuing under and as defined in the Credit Agreement; or e. Any Event of Default occurs or is continuing as defined in the Vari-Lite Credit Agreement. 7. PAYMENTS. Each payment by the Guarantor to you under this Guaranty shall be made by transferring the amount thereof in immediately available funds without set-off or counterclaim. 8. COSTS AND EXPENSES. The Guarantor hereby agrees to pay you all reasonable legal and other costs and expenses incurred by you in seeking to protect or enforce any of your rights or remedies with respect to the Liabilities or this Guaranty. 9. SUBROGATION. The Guarantor shall not be subrogated, in whole or in part, to your rights or those of any subsequent assignee or transferee of any of the Liabilities until all the Liabilities to you and every such subsequent assignee or transferee shall have been paid in full, and Guarantor hereby waives any and all such rights. The provisions of this SECTION 9 shall survive the termination of this Guaranty and any satisfaction and discharge of Lessee by virtue of any payment, court order, or law. 10. NO WAIVER. No delay on your part in the exercise of any right or remedy shall preclude the other or further exercise thereof or the exercise of any other right or remedy. 11. PARTIES. This Guaranty shall inure to the benefit of you and your successors, assigns or transferees, and shall be binding upon the Guarantor and its successors and assigns. The Guarantor may not delegate any of its duties under this Guaranty without the prior written consent of Lessor, the Agent and GUARANTY - Page 3 Brazos Beltline Development, Inc. As of December 21, 1995 Page 4 each of the Banks. You may assign your rights and benefits under this Guaranty or the Agreement to any financial institution providing financing to you in connection with the Agreement. 12. NOTICES. All notices, demands and other communications between you and the Guarantor under this Guaranty shall be in writing (which may include cable or telex) and shall be delivered or sent to the address or telex number shown below, or to such other address or telex number as either of us may designate by written notice to the other. Any such notice, demand or other communication shall not be effective until actually received. If to Brazos Beltline Development, Inc.: Brazos Beltline Development, Inc. 2911 Turtle Creek Boulevard, Suite 1240 Dallas, Texas 75219 Attention: Gregory C. Greene Telephone: (214) 522-7296 Telecopier: (214) 520-2009 If to the Guarantor: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Attention: Michael Herman Telephone: (214) 819-3172 Telecopier: (214) 819-3247 13. TERM. This Guaranty is not limited to any particular period of time, but shall continue in full force and effect until all of the Liabilities have been fully and finally paid or have been otherwise discharged by you, and the Guarantor shall not be released from any obligation or liability hereunder until such full payment or discharge shall have occurred. 14. GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of Texas. 15. DEFINITIONS. Capitalized terms used in this Guaranty which are not specifically defined herein shall have the meanings ascribed to them in the Credit Agreement dated as of December 21, 1995, between Lessor and Brown Brothers Harriman & Co., as agent; provided, however, that references contained in the Credit Agreement definition to the "Borrower" shall be deemed to be references to the Lessor for purposes of this Guaranty. "VARI-LITE CREDIT AGREEMENT" means that certain $30,000,000 Multicurrency Credit Facility for Vari-Lite Holdings, Inc., and its Worldwide Subsidiaries dated March 31, 1994, as amended. 16. INDEMNIFICATION. The Guarantor shall indemnify the Borrower, the Agent, the Banks, and each affiliate thereof and their respective directors, officers, partners, employees and agents from, and discharge, release, and hold each of them harmless against, any and all losses, liabilities, claims, actions, suits or other legal proceedings and other expenses and penalties to which any of them may become subject, sustain or incur, insofar as the foregoing shall arise out of or because of or result from or in connection with (i) any transaction, event or circumstance in any way connected with the Credit Agreement, the Agreement or the Credit Documents, (ii) any breach by the Guarantor of any provision of this Agreement or any other Credit Document, (iii) any investigation, litigation or other proceeding (including any threatened investigation or proceeding whether or not the Agent, any Bank or affiliate thereof or any director, officer, partner, employee or agent thereof is joined as a party therein) relating to the foregoing, or (iv) any Environmental Claim or requirement of Environmental Laws concerning or relating to the GUARANTY - Page 4 Brazos Beltline Development, Inc. As of December 21, 1995 Page 5 present or previously-owned or operated properties, or the operations or business, of the Guarantor or the Lessee, or demolition, renovation, construction, occupancy, operation, use and/or maintenance of the Property, regardless of whether the act, omission, event or circumstance constitutes a violation of any Environmental Laws at the time of its existence or occurrence, and the Guarantor shall reimburse the Agent, each Bank, and each affiliate thereof and their respective directors, officers, partners, employees and agents, upon demand, for any reasonable out-of-pocket expenses (including legal fees and expenses of attorneys and professional consultants) incurred in connection with any such claim, action, suit, investigation, litigation or other proceeding; AND SUCH INDEMNITY SHALL EXPRESSLY INCLUDE ANY LOSSES, LIABILITIES, CLAIMS, ACTIONS, SUITS OR OTHER LEGAL PROCEEDINGS, DAMAGES, EXPENSES AND/OR PENALTIES INCURRED BY REASON OF THE NEGLIGENCE OF THE PERSON BEING INDEMNIFIED, but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. Notwithstanding anything contained in this SECTION 16 to the contrary, the foregoing indemnities shall survive the payment in full the Notes and the termination of any or all of the Agreement and/or the Credit Documents and shall include, without limitation, any violation of any Environmental Law discovered after the date of any such payment or termination, but attributable to a violation occurring prior to such date. Nothing in this SECTION 16 or elsewhere in this Guaranty shall limit or impair any rights or remedies of the Banks against any third party under any Environmental Laws, including, without limitation any rights of contribution or indemnification. 17. CONDITION PRECEDENT TO TRANCHE B. Guarantor acknowledges on its own behalf and on behalf of the Lessee that any Advance under the Credit Agreement to the Borrower constituting moneys available under Tranche B shall be subject to a condition precedent, in addition to all other requirements of the Credit Agreement, as provided in this paragraph. The Guarantor must deliver to the Agent the Guarantor Certificate, a form of which is attached hereto as Exhibit A, at least ten (10) days prior to any notice for the first Advance under Tranche B. A "SUCCESSFUL IPO" shall mean a public offering in which no more than thirty percent (30%) of Guarantor (including equity and voting rights) is sold and shall be closed upon receipt by the Guarantor (after payment of all expenses related to such offering) of a minimum of $30,000,000 of new equity capital. 18. NEW GUARANTY. (a) In the event that (i) any Lease Document is rejected by a trustee or debtor-in-possession in any bankruptcy or insolvency proceeding involving the Borrower or (ii) any Lease Document is terminated as a result of any bankruptcy or insolvency proceeding involving the Borrower and, if within 60 days after such rejection or termination, the Agent or its designee shall so request and shall certify in writing to the Lessee that it intends to perform the obligations of the Borrower as and to the extent required under such Lease Document, the Guarantor will, unless prohibited by bankruptcy law, execute and deliver to the Agent or such designee a new Guaranty shall contain the same conditions, agreements, terms, provisions and limitations as such original Guaranty (except for any requirements which have been fulfilled by the Borrower and the Guarantor prior to such rejection or termination). References in this Guaranty to such "LEASE DOCUMENT" shall be deemed also to refer to such new Lease Document. (b) Upon written request by the Agent to the Lessee given on or after any foreclosure, trustee sale or conveyance in lieu thereof, the owner of the Mortgaged Premises, as landlord, and the Lessee, as tenant, shall execute a lease of the Mortgaged Premises containing all of the same terms, provisions, options and conditions as are contained in the Agreement, which lease shall be for the unexpired portion of the term of the Agreement, as to the Mortgaged Premises. Upon written request by Agent to Guarantor relating to the execution by Lessee of a new lease of the Ground or Facility, the Guarantor hereby agrees to execute a new guaranty agreement in form and substance substantially equivalent to this Guaranty which shall relate to each new lease. Sincerely yours, GUARANTY - Page 5 Brazos Beltline Development, Inc. As of December 21, 1995 Page 6 VARI-LITE HOLDINGS, INC., a Texas corporation By: /s/ H.R. Brutsche III ------------------------------------------ H.R. Brutsche, III, President and Chief Executive Officer ACCEPTED AND AGREED as of the date first above written: BRAZOS BELTLINE DEVELOPMENT, INC., a Texas corporation By: /s/ Gregory C. Greene --------------------------------- Gregory C. Greene, President GUARANTY - Page 6 EX-99 29 EXHIBIT 99 DEFERRED COMPENSATION AGREEMENT BETWEEN VARI-LITE HOLDINGS, INC. AND J. ANTHONY SMITH This Deferred Compensation Agreement (the "Agreement"), dated as of July 1, 1995, is by and between Vari-Lite Holdings, Inc. (the "Company") and J. Anthony Smith (the "Director"). W I T N E S S E T H: WHEREAS, the Director is a member of the Board of Directors of the Company ("Board"); and WHEREAS, the Company recognizes the valuable services heretofore performed for it by the Director and wishes to encourage his continued relationship with the Company and valuable services; and WHEREAS, the Director and the Company wish to provide the terms and conditions upon which the Company will pay deferred compensation to the Director (or his beneficiary after his death) on account of the valuable services heretofore performed for the Company by the Director; and WHEREAS, the parties hereto intend that this Agreement be considered an unfunded arrangement, maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); NOW, THEREFORE, in consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to the Company and to the Director because of the key business relationship which has existed between them, the Company and the Director agree as follows: 1. DEFERRED COMPENSATION AGREEMENT. The Company agrees to pay an annual amount of $167,000, payable in equal monthly installments on the first day of each month (the "Deferred Compensation Payments") to the Director (or, if the Director dies, to his beneficiary as provided in Section 4(a) of this Agreement) during the Term (as hereinafter defined). 2. TERM. The Director (or his beneficiary in the case of his death) will be entitled to the Deferred Compensation Payments for the period commencing on July 1, 1995, and ending June 30, 2001 (the "Term") , unless such payments terminate as a result of one of the terminating events set forth in Section 3 of this Agreement. 3. TERMINATION OF DEFERRED COMPENSATION PAYMENTS AND FORFEITURE OF RIGHTS. The Deferred Compensation Payments will cease immediately upon the occurrence of any of the events listed below in this Section 3 and all of the Director's rights and entitlements under this Agreement will be forfeited. (a) VOLUNTARY TERMINATION. Except as provided in Section 4 of this Agreement, the Deferred Compensation Payments shall terminate on the date that is the later of the date of the Director's voluntarily termination of his consulting relationship with the Company and the date of his resignation as a director of the Company. -1- (b) FOR CAUSE. The Company may terminate the Deferred Compensation Payments at any time, without any additional notice, for Cause (as hereinafter defined). For purposes of this Agreement, "Cause" shall mean (i) the willful, continued and material failure by the Director to follow the reasonable and lawful directions of the Board in connection with the Director's duties or to comply with any provision of this Agreement, but only after (1) the Chairman of the Executive Committee of the Board ("Executive Committee") (or, if the Director is the Chairman, another member of the Executive Committee elected by the member or members thereof other than the Director), pursuant to resolutions adopted by a majority of the members of the Executive Committee (excluding the Director if he is a member of the Executive Committee), delivers a written demand to the Director for substantial performance specifically setting forth the manner in which the Executive Committee believes the Director has failed to follow such directions or to comply with this Agreement and (2) the failure to follow such directions or to comply with this Agreement continues for a period of 30 days; (ii) the Director's gross negligence or intentional misconduct in the performance of his duties; (iii) the Director's conviction of a felony; or (iv) the commission by the Director of any act involving embezzlement or fraud. (c) CONFIDENTIAL INFORMATION; RECORDS. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any covenant, agreement or other obligation with the Company with respect to nondisclosure of confidential information or records of the Company, whether or not such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(c) of that certain Consulting Agreement dated as of July 1, 1995, by and between the Company and the Director (the "Consulting Agreement"). (d) NONCOMPETITION AGREEMENT. The Company may immediately terminate the Deferred Compensation Payments upon a breach by the Director of any noncompetition covenant or agreement with the Company, whether such covenant or agreement is in a consulting or other agreement with the Company, and including, but not limited to, Section 7(d) of the Consulting Agreement. 4. CONTINUATION OF DEFERRED COMPENSATION PAYMENTS. The Deferred Compensation Payments shall continue after the termination of the Director as a director of, and consultant to, and the Company under the following circumstances: (a) DEATH. If the Director dies, the Company shall pay the Deferred Compensation Payments to the beneficiary designated by the Director. The Director shall designate a beneficiary to receive the Deferred Compensation Payments in the event of his death, which designation, including any initial designation set forth in this Agreement, may only be changed by written notice from the Director to the Company. If the Director has not designated a beneficiary to receive the Deferred Compensation Payments who is surviving on the date of his death, the Deferred Compensation Payments shall be payable to the surviving spouse, if any, of the Director and, if none, to the estate of the Director or as otherwise directed by the duly appointed personal representative of the estate of the Director. The Director hereby designates ________________________________________________ as his beneficiary. -2- (b) DISABILITY. If the Director suffers a Permanent Disability (as hereinafter defined) and all of his services for the Company are terminated by reason thereof, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Permanent Disability" shall have the meaning given to it in Section 6(b) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (c) TERMINATION WITHOUT CAUSE. If the Director's consulting relationship with the Company is terminated by the Company without Cause, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. (d) CONSTRUCTIVE TERMINATION. If the Director's consulting relationship with the Company is terminated by the Director because an event of Constructive Termination (as hereinafter defined) occurs, and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Constructive Termination" shall have the meaning given to it in Section 6(d) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. (e) CHANGE OF CONTROL. If the Director's consulting relationship with the Company is terminated, whether by the Company or the Director, as a result of a Change of Control (as hereinafter defined), and even if the Director thereafter does not serve or continue to serve as a director of the Company, the Company shall continue to be obligated to pay the Deferred Compensation Payments. For purposes of this Agreement, "Change of Control" shall have the meaning given to it in Section 6(e) of the Consulting Agreement or any successor consulting agreement between the Company and the Director. 5. DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. Subject to the terms and provisions of this Agreement, the Executive Committee (excluding the Director if he is a member of the Executive Committee) shall have the discretion to make all benefit entitlement determinations under this Agreement. All of the following references to the Director in this Section 5 shall be deemed to include the Director or his duly authorized representative. (a) CLAIMS. Any claim for the benefits under this Agreement shall be made in writing to the Company, Attention: Executive Committee. If the Claim is accepted, the Executive Committee shall provide written notice to the Director. (b) NOTICE OF DENIAL OF CLAIM. When a claim for benefits under this Agreement is denied, the Executive Committee shall provide notice to the Director in writing of the denial within 90 days after the submission of the claim. The notice shall be written in a manner calculated to be understood by the Director and shall include: (i) the specific reason or reasons for the denial; (ii) specific references to the pertinent provisions of this Agreement on which the denial is based; -3- (iii) a description of any additional material or information necessary for the Director to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedures under this Agreement as may be adopted by the Board or the Executive Committee. If special circumstances require an extension of time for processing the initial claim, a written notice of the extension and the reason therefor shall be furnished to the Director before the end of the initial 90-day period, provided that in no event shall this extension exceed 90 days. (c) APPEAL OF DENIAL CLAIM. If a claim for benefits is denied or if the Director has received no response to such claim within 90 days of its submission (in which case the claim for benefits shall be deemed to have been denied), the Director, at the Director's sole expense, may appeal the denial to the Board within 60 days of the receipt of written notice of the denial or the date such claim is deemed to be denied. In pursuing such appeal the Director (i) may request in writing that the Board review the denial, (ii) may review pertinent documents and (iii) may submit issues and comments in writing. The decision on review shall be made within 60 days of receipt of the request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. If such an extension of time is required, written notice of the extension shall be furnished to the Director before the end of the original 60-day period. The decision on review shall be made in writing, shall be written in a manner calculated to be understood by the Director and shall include specific references to the provisions of this Agreement on which the denial is based. If the decision on review is not furnished within the time specified above, the claim shall be deemed denied on review. (d) ARBITRATION. If the Director still believes that his claim has been wrongfully denied or if there is any other controversy or claim arising out of or relating to this Agreement, it shall be settled by binding arbitration. Any such arbitration proceedings shall be conducted as follows: (i) Arbitration shall be conducted by three arbitrators, one to be selected by each of the parties and the third to be designated by the two arbitrators so selected. If the two arbitrators cannot agree on the third arbitrator, the American Arbitration Association in Dallas, Texas where the arbitration shall take place shall select the third arbitrator. (ii) The arbitration shall follow the standard rules and procedures of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with Texas rules of evidence, shall grant essential but limited discovery, shall provide for the exchange of witness lists and exhibit copies, shall conduct a pretrial hearing and shall consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. -4- (iii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party will cooperate with the arbitrators to comply with procedural time requirements, and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. (iv) The majority decision of the arbitrators shall contain findings of facts on which the decision is based, including any specific factual findings requested by either party, and shall further contain the reasons for the decision with reference to the legal principles on which the arbitrators relied. Such decision of the arbitrators shall be final and binding upon the parties, and accordingly the Company and the Director shall promptly comply with the terms of such award, and a judgment by a court of competent jurisdiction may be entered in accordance therewith. (v) The fees and expenses of the arbitrators in connection with the resolution of disputes pursuant hereto shall be borne by the party who does not prevail in the arbitration. (vi) The Company and the Director hereby consent to the jurisdiction of the courts of the State of Texas for purposes of entering judgment with respect to an arbitration award. 6. GENERAL PROVISIONS. (a) STATUS OF AGREEMENT. For the purposes of ERISA, this Agreement is an unfunded arrangement, sponsored by the Company and maintained primarily to provide deferred compensation benefits for the Director, a member of a select group of management or highly compensated employees of the Company. Nothing in this Agreement should be construed to mean that this Agreement is a funded deferred compensation plan, fund, program or agreement. Furthermore, nothing in this Agreement and no action taken by the Company according to this Agreement should be construed to create a trust of any kind or a fiduciary relationship between the Company and the Director, his designated beneficiary or any other person. (b) ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire agreement between the Company and the Director concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both the parties. (c) COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, or any arbitration proceeding is necessary pursuant to Section 5(d) of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. (d) NOTICES. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be in writing and shall be either (i) delivered in person, (ii) mailed by registered or certified mail, return receipt -5- requested, postage prepaid, (iii) delivered by overnight express delivery service or same-day local courier service or (iv) delivered by facsimile transmission, to the addresses set forth below. If to the Company: Vari-Lite Holdings, Inc. 201 Regal Row Dallas, Texas 75247 Facsimile: (214) 630-5867 If to the Director: J. Anthony Smith Hit & Run Music, Ltd. 25 Ives Street London SW3 2ND England Facsimile: 011-44-171-5845774 Notices delivered personally, by overnight express delivery, local courier or facsimile shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of three days after mailing. Any party may change its address for notice by written notice in accordance with this Section given to the other parties. (e) SUCCESSORS AND ASSIGNS. (1) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Director and the Director's legal representatives. This Agreement is personal to the Director and without the prior written consent of the Company shall not be assignable by the Director otherwise than by will or the laws of descent and distribution. (2) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Company and its successors and assigns. The Company shall have the right to assign this Agreement to a parent, affiliate or subsidiary corporation or to any corporation succeeding to substantially all of the assets and business of the Company whether by merger, consolidation, acquisition or otherwise. (3) The Company shall require any successor (whether direct or indirect, by merger, consolidation, acquisition or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise. (f) Partial Invalidity and Severability. If any one or more of the provisions contained in this Agreement for any reason is held to be illegal, invalid or unenforceable, the illegality, invalidity or unenforceability will not affect, impair or invalidate any other provision of this Agreement, which will be construed as if the illegal, invalid or unenforceable provision had not been contained in this Agreement and, in lieu of each illegal, invalid or unenforceable provision, there will be added -6- automatically as a part of this Agreement a provision as similar in terms to the illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. (g) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas to the extent not preempted by ERISA. The parties acknowledge and agree that this Agreement and the obligations and undertakings of the parties hereunder will be performable in Dallas, Dallas County, Texas. (h) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one agreement. [THE NEXT FOLLOWING PAGE IS THE SIGNATURE PAGE.] -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DIRECTOR: /s/ J. Anthony Smith --------------------------------------- J. Anthony Smith COMPANY: Vari-Lite Holdings, Inc. By: /s/ Michael P. Herman --------------------------------------- Michael P. Herman Vice President-Finance -8- EX-99.1 30 EXHIBIT 99.1 INDEMNIFICATION AGREEMENT This Agreement, dated as of February 5, 1996, is by and between Vari-Lite International, Inc., a Texas corporation (the "Company"), and C. Vincent Prothro ("Indemnitee"). WITNESSETH: WHEREAS, the Company desires to have qualified individuals serving on its Board of Directors who are willing to make decisions that in their judgment are in the Company's best interest without any undue threat of personal liability; and WHEREAS, the Board of Directors of the Company has elected Indemnitee to serve as a director of the Company; and WHEREAS, the Articles of Incorporation (the "Articles of Incorporation") of the Company require indemnification of each director or officer of the Company in his capacity as a director or officer and, if serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from (a) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (collectively, a "Proceeding"), (b) an appeal in such a Proceeding or (c) any inquiry or investigation that could lead to such a Proceeding, to the fullest extent permitted by the Texas Business Corporation Act (the "Act"), as the same exists or hereafter may be amended; and WHEREAS, the Company desires to grant to Indemnitee the maximum indemnification for any Loss (hereinafter defined) permitted under law; and WHEREAS, developments with respect to the terms and availability of directors' and officers' liability insurance and with respect to the application, amendment and enforcement of statutory, charter and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to persons intended to be protected thereunder; and WHEREAS, in order to resolve such questions and thereby induce Indemnitee to serve and continue serving as a director of the Company, the Company has determined and agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's agreement to serve and continue serving as a director of the Company, the parties hereto agree as follows: 1. INDEMNIFICATION OF INDEMNITEE. The Company shall indemnify Indemnitee in his capacity as a director of the Company and, if serving at the request of the Company as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by Indemnitee in connection with or resulting from (a) any Proceeding, (b) an appeal in any Proceeding or (c) any inquiry or investigation that could lead to any Proceeding, all to the fullest extent permitted by Article 2.02-1 of the Act, as the same exists as of the date of this Agreement or may hereafter be amended to broaden the indemnification which the Company may grant to its directors. All indemnity obligations and/or liabilities of the Company hereunder shall be without limit and without regard to the cause or causes thereof or the negligence or gross negligence of any person or persons (expressly including Indemnitee), whether such negligence or gross negligence of Indemnitee be sole, joint or concurrent, active or passive. 2. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding, any appeal in any Proceeding and any inquiry or investigation that could lead to any Proceeding, by reason of the fact that Indemnitee was serving in any capacity referred to herein. 3. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of notice of any claim against Indemnitee or the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the assertion of any such claim or the commencement thereof; but the omission so to notify the Company will not relieve it from any liability under this Agreement unless such delay in notification actually prejudiced the Company (and then only to the extent the Company was actually prejudiced thereby) and, in addition, the Company shall not be relieved from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company will be entitled to participate therein at its own expense. (b) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized in writing by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in clause (ii) above. (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 2 4. ADVANCES OF EXPENSES. Reasonable expenses (other than judgments, penalties, fines and settlements) incurred by Indemnitee that are subject to indemnification under this Agreement (and not paid, reimbursed or advanced by others) shall be paid or reimbursed by the Company in advance of the final disposition of the Proceeding within 10 days after the Company receives a written request by Indemnitee accompanied by substantiating documentation of such expenses, a written affirmation by Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification under this Agreement and a written undertaking by or on behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately determined that he has not met those requirements or that such reasonable expenses do not constitute a Loss. The written undertaking described above must be an unlimited general obligation of Indemnitee but shall not be secured. Such undertaking shall be without reference to the financial ability of Indemnitee to make repayment. 5. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Upon the written request of Indemnitee to be indemnified pursuant to this Agreement (other than pursuant to Section 4 hereof), the Company shall cause the Reviewing Party (as hereinafter defined) to determine, within 45 days, whether or not Indemnitee has met the relevant standards for indemnification required by this Agreement. The termination of a Proceeding by judgment, order, settlement or conviction, or on a plea of NOLO CONTENDERE or its equivalent, shall not of itself be determinative that Indemnitee did not meet the requirements for indemnification under this Agreement. If a determination of indemnification is to be made by Independent Legal Counsel (as hereinafter defined), such Independent Legal Counsel shall render its written opinion to the Company and Indemnitee as to what extent Indemnitee will be permitted to be indemnified. The Company shall pay the reasonable fees of Independent Legal Counsel and indemnify and hold harmless Indemnitee against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to the engagement of Independent Legal Counsel pursuant hereto and the written opinion of such Independent Legal Counsel. 6. DEFINITIONS. The terms defined in this Section 6 shall, for purposes of this Agreement, have the indicated meanings: (a) "Reviewing Party" means (i) a majority of a quorum of directors of the Company who at the time of voting upon a determination of indemnification are not named defendants or respondents in that particular Proceeding as to which Indemnitee is seeking indemnification, (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the Board of Directors of the Company, designated to act as the Reviewing Party by a majority vote of all directors of the Company, consisting solely of two or more directors who at the time of such selection are not parties in that particular Proceeding to which Indemnitee is seeking indemnification, (iii) Independent Legal Counsel selected in accordance with clause (i) or (ii) above, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors of the Company or (iv) the shareholders of the Company in a vote that excludes shares held by directors who are named defendants or respondents in that particular Proceeding. (b) "Independent Legal Counsel" shall mean an attorney, selected in accordance with the provisions of Section 6(a) hereof, who shall not have otherwise performed services for Indemnitee, the Company, any person that controls the Company or any of the directors of the Company, within five years preceding the time of such selection (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who 3 has been sanctioned or censured for ethical violations of applicable standards of professional conduct. (c) "Loss" shall mean any and all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees) actually incurred by Indemnitee, after realization of or giving effect to all insurance, bonding, indemnification and other payments or recoveries (i) actually received by or for the benefit of Indemnitee, directly or indirectly, or (ii) to which Indemnitee is entitled, directly or indirectly. 7. ENFORCEABILITY. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Company. Neither the failure of the Company (including its Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of an action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or Independent Legal Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 8. PARTIAL INDEMNITY; EXPENSES. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the expenses, judgments, fines, and penalties, but not for the total amount thereof, the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an event subject to indemnification hereunder or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against expenses incurred for any Loss in connection with such Proceeding, issue or matter, as the case may be. 9. REPAYMENT OF EXPENSES. Indemnitee shall reimburse the Company for all reasonable expenses paid by the Company in defending any Proceeding against Indemnitee in the event and only to the extent that it shall be ultimately determined that Indemnitee is not entitled to be indemnified by the Company for such expenses under the provisions of this Agreement. 10. CONSIDERATION. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to serve and continue serving as a director of the Company, and acknowledges that Indemnitee is relying upon this Agreement in serving in such capacity. 11. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any other agreement, vote of shareholders, as a matter of law or otherwise, but the indemnification provided for pursuant to the Articles of Incorporation or Bylaws of the Company is limited to any Loss. 12. SUBROGATION. If a payment is made under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights. 4 13. SEVERABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision thereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereto. 14. NOTICE. Any notice, consent or other communication to be given under this Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service or (d) delivered by telex or facsimile transmission to the address set forth beneath the signature of the parties below, or at such other address as may be designated by the parties from time to time in accordance with this Section. Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 15. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION; REIMBURSEMENT. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Texas. (b) This Agreement shall be binding upon Indemnitee and his heirs, executors, administrators, personal representatives and assigns and upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and his heirs, executors, administrators, personal representatives and assigns and to the benefit of the Company and its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. (d) If Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in bringing and pursuing such action. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VARI-LITE INTERNATIONAL, INC. By: /s/ H. R. Brutsche III ----------------------------------- H.R. Brutsche III, Chairman of the Board, Chief Executive Officer and President Address of Vari-Lite International, Inc. 201 Regal Row Dallas, Texas 75247 Fax: (214) 630-5867 /s/ C. Vincent Prothro ---------------------------------------- C. Vincent Prothro Address of Indemnitee: 4401 South Beltwood Parkway Dallas, Texas 75244 Office Fax: 214-450-0433 Home Fax: 214-522-6164 6 EX-99.2 31 EXHIBIT 99.2 INDEMNIFICATION AGREEMENT This Agreement, dated as of April 22, 1996, is by and between Vari-Lite International, Inc., a Texas corporation (the "Company"), and John R. Rettberg ("Indemnitee"). WITNESSETH: WHEREAS, the Company desires to have qualified individuals serving on its Board of Directors who are willing to make decisions that in their judgment are in the Company's best interest without any undue threat of personal liability; and WHEREAS, the Board of Directors of the Company has elected Indemnitee to serve as a director of the Company; and WHEREAS, the Articles of Incorporation (the "Articles of Incorporation") of the Company require indemnification of each director or officer of the Company in his capacity as a director or officer and, if serving at the request of the Company as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from (a) any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (collectively, a "Proceeding"), (b) an appeal in such a Proceeding or (c) any inquiry or investigation that could lead to such a Proceeding, to the fullest extent permitted by the Texas Business Corporation Act (the "Act"), as the same exists or hereafter may be amended; and WHEREAS, the Company desires to grant to Indemnitee the maximum indemnification for any Loss (hereinafter defined) permitted under law; and WHEREAS, developments with respect to the terms and availability of directors' and officers' liability insurance and with respect to the application, amendment and enforcement of statutory, charter and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to persons intended to be protected thereunder; and WHEREAS, in order to resolve such questions and thereby induce Indemnitee to serve and continue serving as a director of the Company, the Company has determined and agreed to enter into this Agreement with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's agreement to serve and continue serving as a director of the Company, the parties hereto agree as follows: 1. INDEMNIFICATION OF INDEMNITEE. The Company shall indemnify Indemnitee in his capacity as a director of the Company and, if serving at the request of the Company as a director, officer, trustee, employee, agent or similar functionary of another foreign or domestic corporation, trust, partnership, joint venture, sole proprietorship, employee benefit plan or other enterprise, in each of those capacities, against any and all liability and reasonable expense that may be incurred by Indemnitee in connection with or resulting from (a) any Proceeding, (b) an appeal in any Proceeding or (c) any inquiry or investigation that could lead to any Proceeding, all to the fullest extent permitted by Article 2.02-1 of the Act, as the same exists as of the date of this Agreement or may hereafter be amended to broaden the indemnification which the Company may grant to its directors. All indemnity obligations and/or liabilities of the Company hereunder shall be without limit and without regard to the cause or causes thereof or the negligence or gross negligence of any person or persons (expressly including Indemnitee), whether such negligence or gross negligence of Indemnitee be sole, joint or concurrent, active or passive. 2. CONTINUATION OF INDEMNITY. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed Proceeding, any appeal in any Proceeding and any inquiry or investigation that could lead to any Proceeding, by reason of the fact that Indemnitee was serving in any capacity referred to herein. 3. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Indemnitee of notice of any claim against Indemnitee or the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the assertion of any such claim or the commencement thereof; but the omission so to notify the Company will not relieve it from any liability under this Agreement unless such delay in notification actually prejudiced the Company (and then only to the extent the Company was actually prejudiced thereby) and, in addition, the Company shall not be relieved from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company will be entitled to participate therein at its own expense. (b) Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his own counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized in writing by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of the defense of such action or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in clause (ii) above. (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. Neither the Company nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 2 4. ADVANCES OF EXPENSES. Reasonable expenses (other than judgments, penalties, fines and settlements) incurred by Indemnitee that are subject to indemnification under this Agreement (and not paid, reimbursed or advanced by others) shall be paid or reimbursed by the Company in advance of the final disposition of the Proceeding within 10 days after the Company receives a written request by Indemnitee accompanied by substantiating documentation of such expenses, a written affirmation by Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification under this Agreement and a written undertaking by or on behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately determined that he has not met those requirements or that such reasonable expenses do not constitute a Loss. The written undertaking described above must be an unlimited general obligation of Indemnitee but shall not be secured. Such undertaking shall be without reference to the financial ability of Indemnitee to make repayment. 5. RIGHT OF INDEMNITEE TO INDEMNIFICATION UPON APPLICATION; PROCEDURE UPON APPLICATION. Upon the written request of Indemnitee to be indemnified pursuant to this Agreement (other than pursuant to Section 4 hereof), the Company shall cause the Reviewing Party (as hereinafter defined) to determine, within 45 days, whether or not Indemnitee has met the relevant standards for indemnification required by this Agreement. The termination of a Proceeding by judgment, order, settlement or conviction, or on a plea of NOLO CONTENDERE or its equivalent, shall not of itself be determinative that Indemnitee did not meet the requirements for indemnification under this Agreement. If a determination of indemnification is to be made by Independent Legal Counsel (as hereinafter defined), such Independent Legal Counsel shall render its written opinion to the Company and Indemnitee as to what extent Indemnitee will be permitted to be indemnified. The Company shall pay the reasonable fees of Independent Legal Counsel and indemnify and hold harmless Indemnitee against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to the engagement of Independent Legal Counsel pursuant hereto and the written opinion of such Independent Legal Counsel. 6. DEFINITIONS. The terms defined in this Section 6 shall, for purposes of this Agreement, have the indicated meanings: (a) "Reviewing Party" means (i) a majority of a quorum of directors of the Company who at the time of voting upon a determination of indemnification are not named defendants or respondents in that particular Proceeding as to which Indemnitee is seeking indemnification, (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the Board of Directors of the Company, designated to act as the Reviewing Party by a majority vote of all directors of the Company, consisting solely of two or more directors who at the time of such selection are not parties in that particular Proceeding to which Indemnitee is seeking indemnification, (iii) Independent Legal Counsel selected in accordance with clause (i) or (ii) above, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors of the Company or (iv) the shareholders of the Company in a vote that excludes shares held by directors who are named defendants or respondents in that particular Proceeding. (b) "Independent Legal Counsel" shall mean an attorney, selected in accordance with the provisions of Section 6(a) hereof, who shall not have otherwise performed services for Indemnitee, the Company, any person that controls the Company or any of the directors of the Company, within five years preceding the time of such selection (other than in connection with seeking indemnification under this Agreement). Independent Legal Counsel shall not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be any person who 3 has been sanctioned or censured for ethical violations of applicable standards of professional conduct. (c) "Loss" shall mean any and all judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses (including attorneys' fees) actually incurred by Indemnitee, after realization of or giving effect to all insurance, bonding, indemnification and other payments or recoveries (i) actually received by or for the benefit of Indemnitee, directly or indirectly, or (ii) to which Indemnitee is entitled, directly or indirectly. 7. ENFORCEABILITY. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Company. Neither the failure of the Company (including its Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of an action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or Independent Legal Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 8. PARTIAL INDEMNITY; EXPENSES. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for a portion of the expenses, judgments, fines, and penalties, but not for the total amount thereof, the Company shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Proceedings relating in whole or in part to an event subject to indemnification hereunder or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against expenses incurred for any Loss in connection with such Proceeding, issue or matter, as the case may be. 9. REPAYMENT OF EXPENSES. Indemnitee shall reimburse the Company for all reasonable expenses paid by the Company in defending any Proceeding against Indemnitee in the event and only to the extent that it shall be ultimately determined that Indemnitee is not entitled to be indemnified by the Company for such expenses under the provisions of this Agreement. 10. CONSIDERATION. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to serve and continue serving as a director of the Company, and acknowledges that Indemnitee is relying upon this Agreement in serving in such capacity. 11. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any other agreement, vote of shareholders, as a matter of law or otherwise, but the indemnification provided for pursuant to the Articles of Incorporation or Bylaws of the Company is limited to any Loss. 12. SUBROGATION. If a payment is made under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights. 4 13. SEVERABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision thereof shall be held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereto. 14. NOTICE. Any notice, consent or other communication to be given under this Agreement by any party to any other party shall be in writing and shall be either (a) personally delivered, (b) mailed by registered or certified mail, postage prepaid with return receipt requested, (c) delivered by overnight express delivery service or same-day local courier service or (d) delivered by telex or facsimile transmission to the address set forth beneath the signature of the parties below, or at such other address as may be designated by the parties from time to time in accordance with this Section. Notices delivered personally, by overnight express delivery service or by local courier service shall be deemed given as of actual receipt. Mailed notices shall be deemed given three business days after mailing. Notices delivered by telex or facsimile transmission shall be deemed given upon receipt by the sender of the answerback (in the case of a telex) or transmission confirmation (in the case of a facsimile transmission). 15. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION; REIMBURSEMENT. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Texas. (b) This Agreement shall be binding upon Indemnitee and his heirs, executors, administrators, personal representatives and assigns and upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and his heirs, executors, administrators, personal representatives and assigns and to the benefit of the Company and its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. (d) If Indemnitee is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse Indemnitee for all of Indemnitee's reasonable fees and expenses in bringing and pursuing such action. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VARI-LITE INTERNATIONAL, INC. By: /s/ H. R. Brutsche III --------------------------------------- H.R. Brutsche, Chairman of the Board, Chief Executive Officer and President Address of Vari-Lite International, Inc. 201 Regal Row Dallas, Texas 75247 Fax: (214) 630-5867 /s/ J. R. Rettberg -------------------------------------------- John R. Rettberg Address of Indemnitee: 79-165 Montego Bay Dr. Bermuda Dunes, California 92201 6 EX-23.1 32 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Vari-Lite International, Inc. and Subsidiaries on Form S-1 of our report dated November 22, 1996 (October , 1997, as to the first paragraph of Note F) on the consolidated financial statements, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus, which is part of this Registration Statement. Dallas, Texas October , 1997 ------------------- The consolidated financial statements of Vari-Lite International, Inc. and Subsidiaries appearing in the above Prospectus are presented to give effect to the Company's reincorporation in Delaware and the Company's recapitalization, in which the shares of Class A and Class B Common Stock will be converted into shares of the Company's new common stock and a class of preferred stock will be authorized, as described in Note F to the consolidated financial statements. On the effective date of the Registration Statement, the above consent is in the form that we will sign upon the effectiveness of such events assuming that, from November 22, 1996 to the effective date of such events, no other material events have occurred which would affect the consolidated financial statements and notes thereto. Deloitte & Touche LLP Dallas, Texas August 13, 1997 EX-27 33 EX-27
5 1,000 YEAR 9-MOS SEP-30-1996 SEP-30-1997 OCT-01-1995 OCT-01-1996 SEP-30-1996 JUN-30-1997 2,633 0 0 0 11,418 13,626 (348) (448) 2,395 2,996 16,914 18,801 104,691 122,501 (47,982) (55,947) 77,573 89,925 17,560 18,323 29,922 37,593 0 0 0 0 0 0 24,538 27,560 77,573 89,925 11,397 10,688 71,138 67,088 7,783 7,409 34,208 29,751 34,481 29,808 348 94 3,095 2,692 5,357 4,837 2,238 2,054 8,449 7,529 0 0 0 0 0 0 3,119 2,783 0 0 0 0 EPS-Primary unknown EPS-Diluted unknown
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